All Forum Posts by: David Faulkner

Yep ... rental certification would be a problem and you'd have to be willing and able to "fly under the radar" on that one. That could have insurance and other liability implications as well. Financing may also be an issue, depending on how picky the bank wants to be. FHA would be a no-go for sure ... traditional MAY be ok, but only on appraised value (based on original conforming floorplan), and you wouldn't be able to put the extra rental income towards your DTI calculation. My Dad buys all cash, essentially self insures, and flies under the radar, so not an issue for him, though not the business model I personally prefer as mentioned.

Take the classes needed to get a RE license, pass the test, hang your hat under a RE broker, build up a client base, and start buying and selling RE for them to get hands on experience. You can do this full or part time, right now, after you graduate, or any time in the future after that. It doesn't cost much and you can earn while you learn, and stash away as much of the proceeds as you can for investing in RE later. 

As for major ... I agree with the poster above ... business with a concentration in Finance would be my first pick ... it applies well to RE, and it also "travels well" if you decide to initially pursue a job outside of RE ... RE majors obviously apply to RE, but they don't "travel well" if you want/need a job outside of RE. At this point in your life, you want to keep your options open rather than boxing yourself in IMO.

My Dad likes to buy these types of properties and turn them into rentals to collect the extra cash flow from the non-conforming units ... double bonus if it is in an area with college rentals (that tend to rent by the room) or airbnb. I prefer to not touch them, as I think there is extra liability from renting out non conforming units and they have limited exit strategies, but if I did buy one I not only wouldn't pay extra for the non-conforming additions, but I'd also want a bigger discount such that converting to original and flipping as a single family was a profitable exit, thus restoring this as one of my exit strategy.

How about buying sub-to existing mortgage, down payment + owner financing in 2nd for the rest ... trade purchase price for loan terms.

One thing you are not considering is that cash flow is rarely constant over time ... so when you say you want to maximize your cashflow, the very next thing you need to specify is over what time period. If you need the cash flow right now, then you want to maximize immediate cash flow, in which case those markets listed for high cash flow. However, the problem with most of those markets is that they do not have high rates of rent increases, and in some cases those rates of rent increases may even be below inflation. On the other hand, the markets with high rates of rent increases, thus increasing cash flow over time, will likely have low initial cash flow. Frankly, if your goal is to maximize LONG TERM cashflow, then you are probably best off staying put investing right where you are currently living, as it has incredibly high rates of rent increases and there are huge advantages that you get by staying local that you give up investing remotely. $25k won't cut it for investing in your market, though, as I'm sure you know. If the issue is that you are unable to invest more per property, vs unwilling to, then have you considered physically moving to a more affordable market so that you can both save more and invest more and get better deals and more control on what you invest in?

This is a FANTASTIC conversation guys! ... using similar calculations as Justin I have come to the same conclusion that in some cases lower value assets can be less profitable even with higher rent-to-value ratios for the very reason that CapEx doesn't scale with rent, though like Justin I don't claim to have longterm experience with these assets but believe the CapEx math though it may seem unbelievable to some ...

One thing NOT mentioned, though, is that the CapEx vs time is NOT linear, though the calculations suggested linearize them ... this means that there are "sweet spots" to be exploited, and exploiting these sweet spots becomes especially important in the lower value assets. Specifically, what would make sense to me for the lower value stuff would be to buy at appropriate discount and do all the major CapEx items up front, as JD recommends, but then if they are these less expensive units, I think you are not screwed Austin, but I do think you need to consider rotating the inventory you hold to sell and/or 1031 and repeat at the 7-10 year mark, or whatever a detailed analysis tells you that "sweet spot" is right before you have the next big rounds of CapEx come and eat up a bunch (or perhaps all) of your profits. This is less of an issue, but still a viable strategy, for higher value and/or appreciating assets, but seems to me to be essential for the lower value ones (based on my analysis, but admittedly I don't have first hand experience in these assets over the long term). Food for thought and discussion ...

Forget about CAP rates ... 4-plexes are residential property, and residential property is valued off of sold comps sale price, not CAP rate comps ... CAP rates only apply to valuation of commercial property, which are 5 units and up.

Look at the supply and demand fundamentals of the market, what is driving those, and if those things are durable or not. In the simplest form, you can look at long term historical pricing to see if/how long/how steady the history of price and rent appreciation is ... there WILL be some fluctuation as RE is somewhat cyclical and nothing ever goes up in a straight line always, but does the neighborhood and surrounding neighborhoods have a long term track record, spanning several up/down cycles of appreciation and rent increase?

What is driving supply? How easy would it be for a developer to come in and build a bunch of housing to meet increased demand? Are there lots of vacant, buildable lots in or around the neighborhood? How easy does the city make it to build? Are there natural or unnatural boundaries that limit growth? Oceans, mountains, rivers, lakes, national forest, etc?

For demand, what is the average income and earning power (education level, etc.) of the residence? Are new jobs being created? At what rate are people moving there and is that persistent and sustainable? Is the employer base diverse or concentrated in one employer or industry? What sort of jobs are there? Blue collar? White collar? Is there a top notch university nearby? Steady, well paid government jobs? How many and what types of small business start ups are there. Are there boarded up and vacant houses? Blight? If so, do they stay boarded up and vacant or get snatched up as quickly as they hit the market, remodeled, and filled?

Other supply and demand metrics to watch the value and trend ... population growth, unemployment rate, vacancy rate, affordability, etc.

I think of things in terms of a "quad chart" ... on one axis you have demand: Low and High. On the other axis you have supply: limited and ample. The quadrants are:

I - Low Demand, Limited Supply & III - High Demand, Ample supply: Prices and rents will tend to keep up with inflation. Mid to low initial cash flow that is steady over time.

II - Low Demand, Ample Supply: Prices and rents will tend to NOT keep up with inflation. High initial cash flow that decreases over time.

IV - High Demand, Limited Supply: Prices and rents will tend to exceed inflation. Low to negative initial cash flow that increases over time.

Is the land zoned to permit this kind of use? That would be the first question to answer. The city planning and zoning department could answer this question. Another hint to the answer may be are there other multi-family properties already built in the adjacent lots? If it is surrounded by single family homes, then it is not likely. No sense in looking for construction loans if the city is not going to allow you to build what you'd like to build there ...

 Only Russians from Ohio call them a mother in law suit ... everyone else in the Southwest calls them a "casita" ... hahaha!