Hi. My name is Jesse M. Holmes, and it's been so long since I've posted here at BP, I thought a reintroduction was necessary.
Maybe some of you remember this fourplex I was trying to buy. As it turns out, my entitlements were miscalculated by our loan officer—most people don't actually go out and try to buy a pricey second home with their VA loan—and the deal fell through. I'll post a few things I learned in that process in another thread.
Five, six, maybe seven months later, we have finally closed on a duplex—our first. We looked at so many properties, and the central motif is poor craftsmanship and corner-cutting. Some of the homes we visited weren't even square! Since we were so new to the process, it came as a shock to us that people could be so careless. Our last trip took us to a development in Waynesville, MO, just outside of Fort Leonard Wood. The builder developing that area seemed to know what he was doing.
The first problem was the size of the units. To this point, only two-bedroom units were built, and the builder didn't plan on dropping the three-bedroom units until later on. We negotiated for a few weeks, and the result was a newly constructed three-bedroom unit for $235,000—well within the limits of our entitlements. The hardest part of the entire process was waiting.
Here are the numbers we used:
Two units at $950 a piece, or $1,900 monthly rents.
We used 40% for expenses instead of 50% based on some research involving posts like this one.
Initially, our interest rate was 3.5%! Our estimated debt service was going to be $1,100. At 40% expenses, this would leave us with $1,140 - $1,100 = $40! That's $20 a door! In a perfect world, I'd only need … thousands of these deals to be free. Still, in all my time in the forums, I do remember this post that says breaking even on your first deal isn't the worst case scenario. Mission accomplished—until our interest rate changed to 4.25%. Now our debt service is roughly $1,300. The new math puts us at $80 a door. $80 in the wrong direction. Whoops!
We closed on this property with $0 out of pocket which may cause some mixed feelings in the group. Thanks to some PM frustrations on our property in NY (the one I can't wait to get rid of), we were grateful to get back $3,000 at closing. We also received a brand new iPad, 4th generation, something we don't need. We should grab another $450 from selling that thing online.
Also, if you're brand new, which means you have about one or two months less experience than I do, one of the things I'd like to reiterate is that numbers are fluid. Home insurance could increase, rents could decrease, the estimated 40% for expenses will increase every few years as the property ages—as will the cash reserves for maintaining the property, and eventually something will have to be done increase the cashflow. Every deal you do will need some form of ongoing evaluation until the property entirely belongs to someone else or burns to the ground! Am I right?
What are your thoughts, opinions, scoldings, corrections, suggestions, and questions?
