All Forum Posts by: Steven Loveless

I was specifically talking about how to get into a property for a low % of the homes value. One way to do this is the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy that is often mentioned here on BP.

If you buy a home that is pretty much market ready, then you have to plop down a down payment, and you have that amount of equity in the house - but you also have that much cash into it. Ex: I am looking at a $100k property, I finance with 20% down. So I have 20% equity, but I also have $20k cash into it.

Let's say I can buy some other home that needs work for $60k, put $20k of work into it in rehab, and it is now worth $100k. Since total puchase + rehab was $80k, but now it is worth $100k, I just forced $20k of equity in the home. I could now refinance it with a 80% LTV, and pull out all of the money that I have into it.

Both cases you end up with a $100k house and an $80k mortgage. But the second you have zero cash in it vs the $20k you have tied up in the first house. A lot of people think this is the way to go, just keep in mind that you have to be able to accurately forecast and manage the rehab cost, holding cost, etc.

I don't know all of your situation, but I'll tell you what I wish I had done when I was your age @Account Closed as a buy and hold strategy. 

If you don't currently own a home buy a personal residence first. If it's a 2-4 unit even better. There is no better way to finance a property than a 5% owner occupant mortgage (except maybe special products like VA/USDA/etc.) If you just buy a property with the intent of eventually renting it out, rinse and repeat every 2 years, by the time you are 30 you will have four properties by this method. And you will have only 5% DP requirement for each of them. Compare that to what you have to do if you want and buy solely as investment properties, you are going to either have to force equity or pay 20-25% down.

If you have extra resource to buy other properties as well, that's just gravy. Good luck!

Glad you are discussing with the pros @Ben Morris. Only advice I can give is to sit down and really look at the numbers, and what actions make the most sense. Always keep in mind the big picture, for issues like this I find an IRR calculation to really help me understand my options. My worst investment decisions have always been when I get emotional about an investment without really crunching the numbers and looking at fundamentals.

Best of luck to you!

There is also a heavy dependence on where you live. I live in North Texas where we quite often have damaging winds and hail. I fully expect to have a weather-related claim (roof, windows, etc.) about every 4-8 years on my home. My provider has weather deductibles based on a % of property value. The issue is that as property values increase the deductible has been going up faster than the premium and the actual cost of the items to be replaced.

My deductible over the past few years has gone up almost $2k, but the cost to replace the roof hasn't increased that much. Which means I'm paying a $5k deductible on a ~$8k claim. I have projected it to save me money to go to a lower deductible if I expect an event in the next 10 yrs or so.

In the end it's a projection & risk tolerance problem.

Looks like if you include commissions, closing costs, and taxes you will have to come to the table with over 50K to get rid of this thing.

That's more than 5 years worth of paying $800 a month in negative cash flow. And most of that looks to be principle, so it's not really lost money, it's just increased equity. Do you think the cash flow or appreciation situation will improve over the next 5 years? If so, it sounds to me like getting rid of it is the wrong choice to make.

If you think it will be worth less and flowing less, get rid of it. But if someone asked me if I could pay 50 grand right now or $800 a month in a deferred savings for the next decade, I'd take the latter.

@Sean Ray I'll give you my perspective as a newbie, which is possibly less wise than some of the other advice you have been given, but possibly from a vantage point closer to your own.

I've been actively looking in DFW for the past 6 months or so, and am finally under contract on a home. It is a >1% deal on purchase price, but including all the rehab needed it will be a ~0.9-0.95% home. The reason I am okay with it is that it is in a B+/A- neighborhood, not the best ISD, but feeds the best schools in that ISD. It is on the small to average side for square footage, so fits in the neighborhood well. It needs enough work that retail buyers want no part, but not so much it's overwhelming. It isn't directly in the path of growth, so I don't feel the neighborhood has been run up as much as many in the Plano/Allen/Frisco areas, but is only a ~15-25 minute drive from much of the new corporate developments in the Plano area. In the end, I feel safer with my likely tenant pool in this neighborhood than in the neighborhoods I could actually find a 1% deal in. 

In my (very conservative) analysis, this is a slightly negative cash flow property (like $10-50/mo) - but my costs estimates are usually way higher than just about everyone else I see on BP (I leave room for 65-70% of gross rents in expenses).

I, like you and some other posters, am somewhat nervous that we are closer to the peak of a cycle than the trough. However, I am better at predicting myself than markets, and I know that if I always worry about market cycles, contractions, or apocalyptic events I'll end up going home and just reading forums instead of actually getting in the game. If your plan is to slowly acquire properties over a long time horizon, go ahead and get started - just do it conservatively. At the end of the day, I can be afraid of the cycle - or I can get started and see how things pan out.

No problem @Nima Patel, if I can provide any value (even if it is just a newbie's perspective) then I'm doing something right. I'll PM you my agent's name - he's a colleague from my 9-5 job who does RE on the side.

Most of the deals I'm looking at are from MLS - just REO's or properties that need some work so that I can get somewhat of a discount. Rent/retail ready property inventory is just so low that there doesn't seem to be much opportunity.

I have not delved into the off-MLS/wholesaler markets at this point. I think those areas operate mostly all cash. Then neighborhoods I'm looking at mostly preclude me from buying cash and still having enough reserves to make me feel comfortable.

I hear a lot of people saying that you can find awesome deals still, you just have to look harder. For me, I have resigned myself to buying a good neighborhood at a decent price and learning the business. It probably won't be a slam dunk, but it should also be less risky for my first investment property. Just my $0.02.

@Nima Patel As a fellow new investor in DFW (hopefully will have my first accepted offer tonight!), I completely understand what you are looking for, as it was what I originally was looking for ~9 months ago when I started. (At least SFRs, haven't looked at MF much) A/B I think is very subjective, but let's just say these are nicer neighborhoods where you would be happy to live there if you were renting.

I'll skip the cap rate term and just say your target of close to 10% of purchase as NOI is going to be very hard to hit - especially with the properties you are describing. Only cosmetic, solid A-B houses is pretty much what I see on MLS here; competition is tough and prices are high. With conservative projections of expenses, I am seeing closer to 3-4% type NOI/price deals on MLS. Maybe wholesalers find these properties, but I bet the competition there is pretty fierce too.

Not saying they don't exist, but I just haven't seen them. Not trying to rain on your parade either, obviously I am still excited about the prospects of DFW rentals in solid B+ areas because I have offers out. I just run numbers very conservatively. Start analyzing a whole lot of deals like most folks suggest, and then see what realistic goals are. 

Good Luck!!

I'll echo @Josh Mitchell, save up during remainder of your lease, then start shopping. If I could go back in time ~7 years (before wife and kids) I would do exactly what your Plan A is - buy an owner-occupied duplex with a 3.5%-5% down loan and house hack. Rinse and repeat every time you have the reserves available to get a new home, until you are at your conventional mortgage cap. That way you can ease into the process with slightly lower risk all while getting into the properties with less money down. (All assuming you can find cash flow positive properties of course.)

Once you get to a point where you can't move around (without really pissing off a spouse), saving up for those 20-20% down payments (plus reserves) makes a much higher capital requirement barrier. I would personally suggest conventional over FHA products - when I have compared they are less expensive over the life of the loan, and the extra 1.5% down payment really isn't that big of a burden.

@Paul Winka Since I'm a newbie myself, this is how I understand cap rates (maybe one of these other guys will chime in if I'm wrong.)

CAP rate is effectively the yield (return excluding any valuation change) on the investment if you bought it with all cash. You use it just like you would with stocks - I expect similar assets (ie. assets in the same market) to all be valued consistently, and that valuation should be based on the return of the asset. If AT&T is going to make me a 4% yield, why would I buy Verizon at a yield of 3% if I expected their net profit to be identical?

It's a measure for a given market at a given time to compare assets on an equal footing. It takes into consideration the "fly in the ointment" you mentioned. In your example, for a property where the landlord pays utilities, that is going to reduce the NOI of that property vs. if you didn't have to pay utilities. So at the same cap rate, the price should be lower. It is a market-based tool for valuating inherently different assets (irrespective of financing) based on the income they produce, nothing more.