All Forum Posts by: Timothy Smith

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

Purchase price: $68,000
Cash invested: $35,000
Sale price: $134,000

4/4 duplex in stable Class B-/C neighborhood. Bought it off-market, updated all the windows, kitchens/baths, fixtures, floors, cosmetics. Rented each unit for $975 and $875 to long-term tenants. On paper this was a home run in every way, but we decided to sell and focus our energies on opportunities closer to our neighborhood and properties without a crawl space! This was purchased as replacement property in our first 1031 Exchange, so we are now identifying property to replace this one.

What made you interested in investing in this type of deal?

This was the first property we bought after learning how to formally analyze NOI, financing, and contracting the entire rehab. The cash flow and debt service coverage was great.

How did you find this deal and how did you negotiate it?

This deal was brought to me off-market by a savvy young agent wanting to build a relationship. I was not familiar with the area but did some quick research and knew that it could be in the path of progress, especially with a new Tesla battery-manufacturing plant less than a mile away. The seller was out-of-country, and was tired of dealing with managing it from across the border. There was a long-term squatter in one unit that was rehoused by the seller's agent, and the other unit was vacant.

How did you finance this deal?

Commercial construction loan with a local bank.

How did you add value to the deal?

Fully rehab of the kitchens and baths, new floors (LVP and refinishing wood floors), paint, fixtures, and cosmetics.

What was the outcome?

This property cash flowed roughly $800/mo after expenses, which for an all-in of $105K was pretty good. The real value of this property was that it carried the holding costs on two other rehabs, and appreciated over 30% in two years. We sold it after holding for two years and will be exchanging for 1-2 more rehab projects that will be worth at least double what this property was worth.

Lessons learned? Challenges?

Lesson learned: don't get involved in inter-house civil issues. Tenants did NOT like each other, and I managed to get involved. This was also the only time I used a leasing agent, rather than advertising and screening myself. The tenant selected did not treat the property or neighbor with respect, though paid in full and on time. I also learned that crawl spaces suck.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Yes I did. The lender we did this with has now financed 3 more rehab projects, and will most likely be doing our next 2.

Agreed with @Matthew Irish-Jones on all points above. I almost froze at your cabinet and countertop budget. That's way overpriced for the property you are describing -- either you are getting ripped off or seriously overspending. Given your rent numbers and ARV, you should be doing the kitchen cabinets and countertop for well under $3K. If you are only supplying a stove and fridge, rather than a full 4-piece kitchen, my assumption is that this is a C or B class neighborhood, so there is no need for solid surface countertops or anything above builder grade cabinets. This is not to diss the tenant base at all! But simply put, you need to build to the market rather than overspend on something that isn't going to A) increase your return via rent, or B) increase your ARV significantly.

My advice is to research local chains (we have Barton's Bargain Outlet here in Buffalo) and find materials comparable with the Home Depot "Hampton Bay" line. Honestly, the prefab countertops at the back of Home Depot are probably the way to go for this place. Again, I'm not saying to "cheap out" but these are places you are overspending and won't see a return. Often times new, clean, and bright looks $$$ but it's not.

@Kaja Baum and Robert -- welcome! Buffalo is a great place that has managed to stay off the national radar for quite a while. I keep hearing that we are getting an influx of people that left NYC during the pandemic, but have yet to witness it myself. I've been investing and rehabbing locally for about 4 years now. There is a lot to understand about the local neighborhoods and some really great opportunities if you buy right -- but that goes for anywhere. There is a monthly BP Meet-Up; I believe the 2nd Wednesday of each month. I've missed the last few but prior to that, made some great connections (including Khaled above) and it's definitely helped us grow. 

Happy to connect if you'd like, and we also have a local BP facebook group. I think a simple search will find it. Best wishes!

Joe,

About to start this process here in Buffalo myself. Where is your property and what kind of property is it? We can take this convo offline, if you'd prefer. Thanks.

Tim

@Kyle Alberry welcome to the BP community! If you haven't already done so, check out the local meetups that happen the second Wednesday of each month. There is one this coming Wednesday on Hertel Ave though I'm unable to attend. This at least helps to build your network with fellow investors, contractors, and lenders. I must say I wish that I had your financial appetite when I was your age -- congrats on taking control of your financial future now, starting with this first step. 

Have you spoken with any lenders regarding your situation yet? To me, that's the best place to start. Your status as full time student/part time worker might close some doors for you, but without knowing all the options out there, I don't want to comment much further on that one. One thought I have off the bat is to use a private money lender to buy the property, then you can count the rental income from the other unit(s) as income when applying for a traditional mortgage. 

The other idea is owner financing. Find someone to sell you the property and hold the mortgage for a few years -- there is a lot of information here on how to approach a seller and pitch favorable terms. 

Lastly, getting out of your current rental to move to a cheaper area will save you more downpayment money. You're spending over $1000/mo, which is reasonable for most, but given your goals, you may need to tighten up to secure a heftier savings. 

Many people on this forum would be able to give you better advice! But, those are my initial thoughts after reading your post. 

You just did. 

@Nicholas Bossert congrats on your discipline and jumping into this with your eyes wide open. You have some great questions here, and hopefully we can meet at one of the upcoming BP events here in town. Some quick thoughts for you:

I'm not crazy about the "per person" rental idea. It's a lot of turnover, and then you get to deal with the issues of tenants not getting along. For some LL's, this works out really well, but I just don't want to be bothered with it. If you want to be more hands-on and manage the turnover on a yearly or more basis, go for it. 

You won't be able to get an FHA loan with an LLC. Once you use an LLC you are into commercial loan territory, with higher interest rates, usually 20-25% downpayment (or more if you are getting into 5+ unit buildings, depending on the lender), and the loan will be approved moreso on the income approach of the building than on your personal financials. Granted, each lender is a bit different. If you use the FHA, I believe you need to live in the property for 1 or 2 years before moving out and turning it into a total rental property. Plenty of info out there about this.

Regarding the house-hack, I think your numbers look pretty good. Remember, house-hacking isn't necessarily meant to turn a profit, but cut your expenses considerably. I have a significant mortgage payment on our SFH, but we also have a garage apartment that cuts that in half. I'd call that a successful house-hack. 

My advice on what you should do? Explore residential construction loans and buy yourself a "fixer upper". You get a taste of the renovation process, and the bank will evaluate your ARV based on your scope of work. If you're in over your head, they will let you know. A few banks around here offer this product, including Alden State, Lakeshore, and I think Bank on Buffalo. You will typically need 20% down on the purchase price and 20% of the construction/rehab costs. For example, you find a $100K property that needs $50K in rehab. You bring $20K to closing (plus closing costs if the bank doesn't wrap them in) then put $10K of your own cash towards the rehab. If you do it right, you will have equity left in the property when you are done. So using the same example, let's say that property is now worth $180K after you rehab it. You are into it for $30K of your own cash, and you have a $120K mortgage. AND you have $60K in equity. Plus (what I think is especially important in the current climate) you are only leveraged at 66% which is not overexposed at all. 

Just my $.02

Same here. Just refi'd our primary with 1st Priority Mortgage and it was a disastrous process. We did our first investment property with them and it was rough, but for some reason I went back to them! The rate was great, but almost not worth the headache and 1,000,001 verifications they needed from my employer. 

Look into Lakeshore, Alden State, and Upstate Bank, for starters. The bigger banks are not as flexible (I'm looking at you, M&T) and don't seem to care as much about building a long term relationship.

I’m living and investing in Buffalo. Total sellers market right now, so be prepared for bidding wars and lower returns unless you’re willing to rehab — and even then you’ll be in multiple offer situations. 

Best recommendation is find an agent who has access to off-market deals, like @Matthew Irish-Jones and @Khaled Morad

@Matthew Irish-Jones I'm going to start looking into this for two of our  properties that used to have rear houses -- one we just demolished in March. Do you have any contacts that would be good to discuss with? I was thinking Bernice as she knows the zoning laws quite well.