All Forum Posts by: Ryan Jones

Have ability to lock in a condo using cash reserves and an etrade LOC.

current tenants have been in for 6 years. Currently they’re 4-500 $/month below market rent. I could bring that up to 3-400 $/month below market.

Will take approximately 9-12 months of aggressively paying back my LOC for the unit to cash flow from an operating and interest payment perspective. Would wait for rates to fall to do a cash out refinance.

What would you do or consider?

Hello,

Currently in position to lock in an all-cash offer on a condo- today! Plan is to pay cash using savings and etrade LOC and then refinance/cash out when mortgage rates are lower. Until then, will pay down the LOC aggressively.

Good price on home (~25% below original list price 45 days ago). The thing is - the current tenant has been there for 6 years which is great but the rent they pay is ~4-500 $/month below market. I can raise it to be ~3-400 $/month below market.

With aggressive LOC paydown, I could be cashflow positive in ~9 months for reference.

What do you think? Worth locking in a property with long-term value if willing to cover costs for the short-term? I will admit, although this isn't my first home purchase, this would be my first time paying cash, first time using my LOC so there are some nerves involved.

Here are the details: $155,000 list price; 2 bed, 1 bath, ~1,000 sq ft. Very well kept and upgraded, owner-occupied since 1994. Similar unit rented recently for $1495 however I would think that rate was a little high had I not been able to view it on Zillow history and going off rental market in ~2 weeks.

$155,000 purchase; 30 year loan 4% interest 25% down. Assume no repairs, total cash: $43,750 with closing costs.

Rent: $1,495

HOA: $285

Insurance: $65

Property Management: $100

Maintenance/Repairs: $50

Property Tax: $159

NOI: $716/month --> $8,598 annual

Mortgage: $555

Cash Flow w/o vacancy: $281/month --> $3,374 (7.7% Cash on Cash)

Cash flow w 8% vacancy: $162/month --> $1,938 (4.4% Cash on Cash) 

Thoughts on this deal?

Also, although the unit itself is upgraded and very nicely kept - it's truly move in ready and looks like 2020s upgrades, we noticed what appears to be mold in the hallway ceiling area. It's dry but I'm pretty sure it was mold. Unless someone looks up they'll miss it and think this condo is amazing. I'm expecting a bidding war and am prepared to offered cash at asking price with flexibility on move out/lease back. This mold concern seems so out of place given how well everything else was! Is this something that we need to make initial offer ignoring and then make sure it's inspected and fully remediated? 

@John Timmerman

I'm with @James Hamling - you're not ready to be buying these properties. Unless you're an eccentric billionaire. I think there have been several responses so far on this thread that question all your numbers. 400-800k range and wanting to "just pick a number". You need to hit the breaks. Hard.

I think others have already commented on some of the items, but one thing I noticed - you keep calling these cash flowing properties. They MAY be cash flowing for the current owner (who doesn't have financing cost that you will have) but that doesn't mean they'll cash flow for you.

You're here for BP advice - here it is: Know your numbers. If you were on Shark Tank, they would kick you out. Advice and help isn't always going to make you feel good. Reality hits hard.

This may end up being a nice opportunity but based on the information on in your posts you have no idea if it is or not. And for that reason - I'm out.

I believe this thread has run it's course and wanted to close it out with a final comment. Thank you to Michael and Max for your responses.

I must say I've read Joe's response multiple times since it was posted and still cannot make sense of it. It sounds nonsensical to me. I also read posts he's made on other forum topics in an attempt to understand his position/thinking. In those threads, others' have called him out for nonsensical posts. He appears to not understand the value of % or a "payback period". It's a great shame to the reputation of BiggerPockets someone like Joe, with a glaring lack of financial and investment acumen, can present himself as a knowledgeable person, post over 10,000 times, and influence others' decisions. Best of luck to him and his approach, I do not recommend it.

@Joe Villeneuve

Thank you for your response. I believe there's a balance between looking at percentages, which normalizes data, and absolute dollars. I would recommend looking at both for an acceptable opportunity review.

Per recovery of "cash in" concept, please don't forget "year 1" numbers will change over time - and hopefully "year 1" is the worst. With a 2% annual increase of rent and variable operating costs the actual "recovery" timeline would be 16 years, at a 3% increase it would be less than 14 years, etc.

Also the principal pay down and property appreciation during that time period can be very valuable. Over a 16 year timeline, the property will have generated ~40k cash flow, ~49k in principal payment, and ~29k in equity appreciation (assuming 1% appreciation) which makes a total net worth increase of ~118k. Total equity at year 16 will be $112k including the initial 20% down. Agree, not amazing - we're talking a small purchase with small net flow.

The concept of recovery is a whole other topic but remember the investor is not losing the money and therefore it needs recovered. It's equity (levered) that yes, you must sell the asset to access but the same goes for stock investing, etc. Also, if an investor were to take out the equity via refi to fund another asset, yes the financials of this unit in isolation would be very poor but that's not the right way of looking at it. Those funds are generating a return elsewhere in another investment - an investment that potentially was $0 cash because all funds came out of appreciation and principal pay down. It's the portfolio that matters.

So yes, not an outstanding opportunity. These are all financial forecasts and any significant event or downturn in the neighborhood would dash all these numbers pretty quickly. That's the risk - and for risk considerations I encourage to look toward the percentages not the absolutes.

Hello,

I'm based in Bakersfield, CA and recently put an offer in on a condo. Unfortunately I was beat out by an all-cash offer but this one was the first "deal" I saw that actually had respectable forecasted returns. I'd like to hear your thoughts on my analysis, specifically if you view this as a good deal (as I thought it was) or not and your thoughts on my assumptions - too conservative on vacancy impact?

• Offer price: $170,000
• 20% conventional, 30 years, assume 4.5% interest for rental property
• Assume down payment, closing, minor fixes = $40,000 cash
• Mortgage & Interest: $689
• Property Tax: $218
• HOA: $241
• Insurance: $60
• Property Management: $100
• Maintenance: $50 <-- efficient ~1,000 sqft condo, HOA covers all exterior (also water and basic cable)
• Vacancy: 8.33% ($131)

Total average monthly cost: $1,358

Total average monthly cost w/ vacancy factor: $1,489

Expected rent: $1,575

Averaged expected cash flow: $86 w/ vacancy impact; $217 w/o vacancy impact

Cash on Cash: 2.58% w/vacancy; 6.50% w/o vacancy <-- how does that "feel" for California? This is best I've seen from my analysis of local deals and is hard to understand how others seek 15-20% deals.

Return on Investment - Year 1

• Cash on Cash: $1,032 (2.58%) w/vacancy impact; $2,601 (6.5%) w/o vacancy
• Principal Paydown: $2,149 (5.4%)
• Appreciation: $1,700 (4.3%) <-- assume 1% appreciation after last year's market & that it's a condo
• Total ROI for year one: $4,876 - $6,450 --> 12.2 - 16.1% w/ and w/o vacancy impact

Thank you!

There is a small, historic area of town where I live with a lot of real estate activity handled by one firm - a legacy father, son duo. They commonly handle off market sales in this area. Which is fine.

Then, when they're on one side of a traditional sale and they want to justify either their clients offer or the list price in this small, historic part of town, they post the off market deals retroactively with the listing description as "comp only" to MLS and all the websites (Zillow, Redfin, etc).

I know this because I was a buyer represented by the son on a house that eventually fell through post inspection. To justify the contract price (post bidding war) he posted a “comp only” deal so the appraiser could use it as a comp.

Are they influencing a micro market? Is this ethical?

The seller has agreed to pay to have the roof replaced prior to close of escrow at the original purchase price / appraised value (which itself is about 3% above original asking due to other interested buyer). This would essentially roll the new roof into the mortgage on the house.

The question is - would you do this - include the roof in the mortgage? Or would you ask to lower the purchase price and replace the roof yourself later? The lower purchase price would result in lower monthly mortgage and property tax payments (~3%).

The roof is "double roofed" and not showing any signs of leaking but the older roof is warped and likely would need replaced within a few years.

I've never dealt with a roof before - Thanks!

Also, would the seller need to pay for any cost overruns if there are any surprises during the replacement?

Recently had a home appraisal come back low compared to contract price. Once I looked at the report I realized the listed contract price on the appraisal was incorrect. It was listed at 15k lower than what it actually is. This lower price is what the appraisal came back at (no doubt influenced by incorrect contract price).

We are currently awaiting to see if this can be corrected and change the appraisal.

In the mean time, the home inspection revealed the roof is nearing its end of life. The seller agreed to pay for a new roof as part of escrow. It happens the roof comes out to 15k. The roof is not actively leaking, it’s just known to be in need of replacement in the near term.

Additionally, my offer was accepted above asking price due to a few bidders. Coincidentally, I waived 15k above appraisal to seal the deal.

This creates a situation where- only because the roof and the clerical error are equal - an option exists for me to “accept” the lower appraisal, skip the roof replacement and close at the appraised price (happens to be original list price). This would lower the mortgage payment, closing costs, and property taxes. Then, in a couple years I could replace the roof at my discretion.

On the flip side, if the appraisal does get revised, I could continue as originally negotiated essentially rolling a new roof into the low rate 30 year mortgage loan.

The more I consider it the more the lower closing price and payment sounds desirable with the exception of needing a new roof literally hanging over my head.

What would you do?