All Forum Posts by: Thomas Lo

@Thomas Lo 65% of ARV - repairs.

@Thomas Lo the BRRRR strategy can be a tricky one if you do not structure accordingly in the beginning with the intent to pull out most of your money. There are different constraints for cash out or refi after 3 months but before 6 months and then after 6 months. ARV can be used after 3 months and considered a delayed purchase but cost is still determined as a limiter to total cash out. Meaning you can get up to 100% of your cost out as long as the ARV is below 75% if you are an experienced investor (5 or more deals in last 3 years) If you have done less than that the ARV is limited to 70%. After 6 months, cost is not consideration and can be cashed out at 75% ARV. Hope this helps and happy to chat further.

@Thomas Lo Is there a reason you are focused on the Phoenix market? Yes, you may get the appreciation that David and Nicole mentioned...but you may not. investing for appreciation is speculation. I wasn’t in real estate in 2008-9, but I recall that Phoenix values were hit particularly hard when the bubble burst. If the initial refi and cash flow don’t return your investment quickly enough then you won’t be able to continue investing.

You should calculate your Cash on Cash return with the money you leave in the deal. So, in your example you put $43k in (25% of $175k purchase) plus $30k in closing costs and rehab. If it then appraised for $250k you are able to pull out about $175k. You would get your initial $43k back and your first lender would be paid off, but you wouldn't get the $30k back - so that is the second ‘Cash' in the Cash on Cash return. Now add up the actual cash flow you will get on the property in the first year (after mortgage, taxes, insurance, maintenance, management, capex) and divide that by the $30k. (The BRRRR calculator also shows you this number.) personally, I won't do a deal with less than 100% CoC, but I prefer much higher.

It's hard to buy a chicken coop in Phoenix and surrounding areas for under $200,000.

But you put in $30,000-$40,000 in it and hold for a year and sale it for $300,000.

Welcome to the Phoenix and surrounding area's.

The economy and need for housing is so great!

@Thomas Lo as mentioned above, it’s the appreciation that makes it worth it in Arizona. The equity in the homes will grow quickly. Don’t think of it as being sidelined. Allow the investments to make your profit then reinvest

Tom, you have to look at total return on your investment. If your business plan focuses solely on one aspect, say cashflow, then yes Ohio makes sense. But for the total return on a long term investment in the area didn't make sense with the numbers we were getting. 

For example, let's take Taledo as it's supposed to be one of the great up-coming areas. Still has negative population growth and also job growth. It's closely tied with Detroit, which is experiencing the same decline year-over-year, but hopes of that turning the corner someday. It's currently a buyer's market, which is great if you're tired of bidding wars in other areas, but looking at it from a 5-10-20yr lens, what are the indicators that it will turn around? Taledo has always been rental over ownership, so the housing market for the foreseeable future is on a downward trend. Housing affordability back in 2018 was that the average household had almost 3x the income needed to purchase, but it still stays a rental friendly area. When you look at rating the neighborhoods, the areas of growth in the downtown area of Toledo unfortunately also are the lowest areas in terms of schools, home values, employment rates, income, etc. 

So its a very risky play as far as total return on investment. You may get into the investment for cheap and experience good cashflow for a few years, but if population/job/rent growth continues to decline over time, you'll find that decreases over time as well. In addition when you exit the value of the asset will most likely have decreased as well, or even if you break even you'll be at a loss when you factor in inflation, depreciation, time value of money, etc. 

Rent growth is what you plan for, appreciation is also what you like to see. While you never bank on appreciation, it's more like a large bonus at the exit (the cherry on top of the sundae) if the value of your acquisition does go up over time. We just don't see it in numbers for the markets in Ohio that we've looked at so far, and none of them hold a candle to Phoenix's markets.

@Kyle Johnson, it all depends, how much do you know about the various Ohio markets? As mentioned previously there are different appreciation and rental rates for each area. Do you know enough to feel comfortable investing that money? 

We're still finding good deals here in the Phoenix and surrounding areas for various investments, and are playing the long game. 

We've looked at various markets in Ohio and Colorado, having some experience in various cities in each area and understand some of the factors that affect those markets, and weighing all the factors we're still focusing most of our efforts here in Arizona.