All Forum Posts by: Tyler Wehrung

No problem! Yes, you still need a separate pot for repairs and maintenance because you will save your capex funds for large repairs.  The 2% rule doesn't work in every market, I use the 1% rent-to-value rule and my market with the criteria focused on at least $200 a month in cash flow.  I wouldn't focus on the yearly cash flow since most of your expenses are on a monthly basis. I know the anxiety your feeling to get started, but don't rush into a bad deal.  I would keep networking and letting friends, family, and people you meet that you are an investor looking for a property and you might be surprised who knows someone that is selling.

Good luck my friend!

@Nicholas Armstrong After looking into it a little more, you are right it does have to be owner occupied.. and its 203k, not 403k; I think  I wrote that post before I had my coffee this morning.

@John D. Since you were planning on 6-8 months, you could possibly still qualify for the 203k.  I believe the owner occupied requirement is 12 months.  It might be too much of a headache, that was just the first thing that came to mind when I read your post. 

Brandon,

If I understand this right, you are borrowing $15,200 at 10% interest for the 20% down payment. In my opinion that is a pretty high cost of capital and will likely make this deal not worth your time. I think your ahead of most new investors with your thought process and trying to account expenses. However, I think your not accounting for a large expense - CAPEX. This is typically around 10% and accounts for big ticket items, such as new roof, HVAC, etc. 5% for reserves is probably a little light also, but I like to think worse case scenario to ensure my properties cash flow.

Typically people use loans for down payments simply because they don't have the capital up front to get into deals.  It can be worth it if the numbers are right, but I think your spread is too thin on this one.  Maybe consider a lower purchase price, smaller down payment that isn't financed, or a lower interest rate than 10% on the financed down payment.

I hope this is of some value to you, Good Luck!

John Daniello,

Look into 403k loans; they give you the ability to finance rehab costs into the mortgage.  I'm not sure how it would work if your purchasing the house in cash, but it could be worth checking out.  I'm not an expert on 403k, but have a few friends who have had success with them. 

Good Luck!

@Lisa R. I Just happen to look back at this post, but if you want someone to be notified that you ask them a question in the future use the @ symbol and their name. Your question could be answered 100 different ways or could be summed up as: it depends. I assume 8% for vacancy (1 month of turnover out of 12) 8% maintenance, 10% CAPEX which is big ticket items, 10% property management. Everything above that is what your true cashflow is. and the percentages are off of your gross rent. Your maintenance should be lower in the beginning since it is a new home. Please do some research on rates in your area. Some people use the 50% rule where they assume that expenses will be 50% of the gross rent and the other 50% will go towards debt services. You'll have to find what works for you.

Lisa,

First off congrats on purchasing a home! What you are doing is often referred to as "House Hacking" and is a popular strategy for those just getting into the the game. If you are making money above your mortgage payment that you will be setting aside to invest, then that would be your cash flow. You should keep some of that money in a reserve account for maintenance, vacancies, etc. Since it is a new house, the maintenance category will likely be lower than normal. I wouldn't focus a lot on upgrades because most renters aren't overly concerned with them. There also isn't a great rental ROI for upgrades meaning renters generally wont pay you enough extra a month to make it worth your time. However, if you are considering selling in a few years then focus your upgrades on the kitchen and bathroom and still I wouldn't go crazy with them.

A conservative average appreciate rate is 4% per year and I don't know what you paid for the house, but should go up in the neighborhood of 20-25% over the next 5-6 years.  Also without knowing the numbers, I would guess that you will pay your mortgage down between 15-20k during this time.  Assuming there isn't a downturn in the market, these factors alone should put you in a good position to sell for a profit, leverage your equity, or use a 231 exchange to trade up to a larger property - All could be great options!

Good luck with what ever you decide!

Congrats on your first deal!

Just a few things that come to mind are: even know there are tenants occupying the property, ask for rental history in the form of bank statements or tax records to ensure they didn't just slap bad tenants in there to make the property more appealing.  Along with rental history I would ask about their tenant selection process and ensure each tenant passed a background check. Perform the rest of your due diligence on the property like you would any other investment: inspection, title search, ensure taxes are up-to-date.

Lastly, even though you are managing the property yourself, I would consider 8-10% in property management fees and pay yourself or leave that money in a reserve account. When you go to sell this property, property management fee will be figured into the CAP rate which will determine appraisal/property value.

Overall the numbers look good and I'm sure you'll do great.  Good luck!

Ben,

It sounds like you are well positioned with a ton of potential and are just having capital issues.  Have you considered portfolio loans?  I think you could get a much lower interest rate on a portfolio loan which would decrease your 10% cost of capital, which sounds pretty high.  Below are some pretty popular portfolio lenders that you might want to check out.

It sounds like you might have to play the balance of growing and paying yourself right away.  If you can manage, it could pay dividends to reinvest into growth rather than pulling money out for yourself. 

Just some thoughts that I hope help you out.  Good Luck!

1. B2R Finance

2. Colony American Finance

3. Dwell Finance

4. First Key Lending

5. Lima One Capital

Nick,

@Jonathan Towell has some great points with regard to owner financing and the tax hit she would take if she took it all at once. If she sounds reluctant to owner financing, just ask if she has spoken with her accountant about the taxes she would incur.

With regard to your other comments, you should negotiate EVERYTHING that needs to be repaired or updated.  I would make a list including everything that you would do to the property and include an itemized cost estimate along with a total. It sounds like some big ticket items would be the roof- $2700, cabinets- around $4000, new bathroom- 5k-10k.

With respect to realtors you subtract the entire 6% because she will have to pay both the 3% to your agent and 3% to the list agent.  You wouldn't come out of pocket for these cost so she would incur the entire 6% so that's another 15k off of the list price.

Lastly, I wouldn't focus too much on the price per square foot as a rule of thumb since your dealing with a large variance there.  If the house has an emotional appeal it might be worth paying a little more, but also use that as a negotiating tool.  If she has been there a long time, I'm sure she would rather sell to someone that would raise a nice family in the house instead of a stranger who will flip it or who knows what else.

I hope this is of some value to you. Good luck with what ever you end up deciding to do!

Pat,

A quick numbers crunch doesn't look like this would be a great deal. You would be close to breaking even on cash flow every month with the $2,100 gross rent that you posted. Keep in mind with a FHA loan, the building has to be owner occupied so you would have to move in for at least a year I believe, which would decrease cash flow and would not make this deal worth while.

However if you were able to acquire this deal with 20% down and keep all of your tenants, the deal looks a little more appealing. Rough numbers look like 5.6 Cap Rate, 8% Cash on Cash, and 35% ROI. These numbers aren't bad, but not great either. I would consider different purchasing options: Owner Finance, syndication, etc. and keep crunching numbers to see what works. You might find that a much lower offer is necessary, but I think an FHA loan is out of the question. Good luck with what ever you decide!