All Forum Posts by: Zachary Stoll

Thanks @Jeffery Holst, @Thomas S., @David Zheng, and @Andrew Johnson for your feedback!

Sounds like I need to save up some more $ before diving in. It seems I'm probably "chasing" deals and could put myself in a bad situation.

I realize this is the top of the market, sooooo.... better deals will present themselves in a buyer's market?

As an update, I did consider putting in an offer after adjusted my strategy to borrow only $20,000 for a 5% downpayment (plus closing costs) using an FHA loan. I considered living in lowest price unit and renting out the other 3 (total rent would be $2,065 for the 3 combined).

My lender told me I could use funds from anywhere as long as they "season" in my account for 2 months, as this is how far back the banks check.

I'd have no problem increasing rents to market value and believe the current rents are under priced. Lots of simple things could be done to increase value as well (hardwood/tile floors, new cabinets, counter tops, paint). I estimated ~ $3,200/mo from all 4 units after renovations. But this would be a few years away after I lived in one unit for a year (and fixed it up) then made my way around fixing up the others as tenants turned over.

Still, many thanks for all the great advice here. As anxious as I am to get into the game, it sounds like saving up for a downpayment over the next year may yield a safer strategy. I just worry a bit about interest rate increases over the next 12 months. Seems like the FED will increase rates about 1.0 to 1.25%, which (from my simple calculations) would increase my mortgage payments by the same amount as ditching PMI (through a refi after an LTV of 78% was reached).

Thank you everyone for your help! Through all your collective responses I've decided not to make an offer on the property. 

@Brent Coombs this was my gut feeling as well but glad to hear someone else say it.

@Rod Hanks, I've lightened up my calculations and have been seeing quite a few more deals (Funny how that works!).

@Billie Miller, I will have to dig more into points up front but would like to keep the interest rate as low as possible. Thanks for the advice about double checking rent rolls and calling property managers!

@Chris Seveney

Thanks for the response! Unfortunately most properties around here look much worse than that. I estimated a cash flow of $450-750 depending on if rents were raise for not. But it's great to here others feel a bit hesitant as well. 

My backup plan was to stack cash at the rate mentioned above and hopefully have enough for a downpayment (or part of a downpayment + outside investments) in a couple years.

For comparison, what do good deals look like in your area?

Hey Bigger Pockets!

I’m looking at my first property and it will be a buy and hold. It’s a 4-plex in a diserable area, and it will cash flow now and after upgrades (more on that later).  This is assuming I go with a conventional loan. 

Going with an FHA will put me at a cash flow disadvantage because of the PMI. List price is $310K (considered high for the area) and I am targeting a price of $285K (not interested in it too much above this) but the mortgage + PMI and PITI will leave me at about 0 cash flow each month (will break even after saving for expenses, which I estimate are about half of the rent). Rent would bring in $2,750/mo.

Also, if I went with FHA and had PMI I know I could refinance if I got my LTV below 78% but this might not be to my advantage since interest rates are increasing and multi family rates will be relatively high. I'm guessing 6-7% in a couple of years. I've calculated that id pay more with the refinance than just continuing to pay PMI.

Just to keep my options open, I've reached out to a friend who is an investor and we've worked out a deal where he could lend the 25% downpayment and I would pay him back over the span of 2.5 years at 10%. This would allow me to avoid PMI and the place would cash flow very well after the investor was paid off.

This gets to the other part of my dilemma and the reason for this post, which is to ask the community if they think I’d be borrowing too much.

Again, this will be my first property. I make a good wage as an engineer and work is stable and don’t really see that changing over this time frame.  It’s a newer gig for me and just finished paying off student loans so don’t have anything to contribute to the down payment. I’d use the amount I’ve been paying off my debt with (~$1,500/Mo) to pay off the investor, along with the cash flow from the property so that the agreement above was satisfied. 

I’ve lived on my current budget for several years (essentially living like a grad student) and know my living situation is comfortable enough and paying this amount is sustainable for me. 

So, is it considered too risky to borrow the downpayment of $~75,000 + interest and hustle paying it off in 2.5 years? 

The house has a brand new roof and is structurally in great shape. New wood floors and tile have been put in recently. It has stable tentants (retired/older folks) in a great area. If the current tenants move out I would rehab the place lightly (cabinets, some new hardware, paint, etc) and increase the rent. Rent is waaaaaaay under based on comparable rates this area. I live about 3 blocks away and am charged $1.10/sqft. I’ve done my due diligence and know this is a fair rate for the area.   We’re at the base of the mountains in ABQ on the hiking and biking trails (again, highly desirable area and virtually no crime). The current units are rented at under $0.8/sqft and my realtor agrees this is very low and can easily be increased.  

Just seems like it’s a good opportunity but I could also be missing something important. 

Thanks in advance!

Zach

Colleen,

Thanks for the reply!

Rents are in the $400-$500 area for most of the units in the area. Some get into the $600-$700 range. 

I learned today the current owners bought the building for $117,000 a year ago and it was not livable-all boarded up before. So unfortunately the current rents are what we have to go by. 

I wouldn’t consider the area up and coming but I’m no Oracle! My guesstimate is based on the fact that there really isn’t anything to catalyze any growth there. The existing strip malls do fairly well and don’t see them going out of business any time soon so can’t really see anyone else moving into the local space. Bad news is that they’re not the most desirable businesses (Dunken and Walmart and Ross, etc.). Not Starbucks, Whole Foods and an Apple store. 

SFHs in the area to for about $150K for a 3BD/2BA if that helps. 

What other factors do you tend to consider?

Mark,

Yes I'd be living in the unit as a house hack because the FHA loan requires owner oxcupied for at least a year I believe. How much does this change rates? I think I assumed a 4.375%.

Sorry about the purchase price number. I had $245,000 I believe. That’s only about 1.18% following the above rule you stated, so the cash flow really isn’t there. 

Hey there BP Community. I'm a relatively new member. Been mostly creeping the forums, devouring podcasts and running numbers on properties. Probably ran the numbers on 75-100 properties and this is the first to actually cash flow. 

Here are the #s from the BP property estimator.

 $2,900.00 MONTHLY INCOME

$2,468.77 MONTHLY EXPENSES

$431.23 MONTHLY CASHFLOW

7.89% PRO FORMA CAP

$19,340.00 NOI

$16,803.50 TOTAL CASH NEEDED

30.80% CASH ON CASH ROI

7.89% PURCHASE CAP RATE

I assumed I'll do an FHA loan at 3.5% (or maybe 5%) and would pay closing costs out of pocket. Rents are $800 and $600 for the 2Bd and 1 BD, respectively. No W/D hookups though. Water, sewer, trash was at $175 combined for all 4 units. There is an unfinished large shed out back with water and electric hook ups. Not sure about sewer but believe there is because the previous owner wanted to rent it out. The owner didn't develop this because it would have pushed the property into the commercial realm at 5+ units and he wanted the next owner to have the flexibility to decide this. I haven't included any potential cash flow from this 5th potential unit in my calcs. There is a school a block away and a Walmart, Ross, Harbor Freights, Dunken Donuts and Goodwill in the adjacent areas (all 0.5 miles away).

This property was stripped down to the studs and has been completely redone with granite counter tops, stainless steel appliances, new carpet, tile, heaters, HVAC system, water pipes and electric wire. I even spotted a brand new master electric control panel outside. There is a new wood fence that encloses the backyard, which is shared by all tenants. A brand new roof was installed 6 months ago, not just shingles but all the rafters too I believe. Because of the improvements, i assume no repairs were needed.

So here is the kicker. This place is really nice. All 4 units were updated (2 x 2BD/1BA + 2 x 1BD/1BA) and it is fully occupied. My main hesitation is that it is in a lower-income area. It is not crime-ridden but other properties are much less appealing. Rough Zillow estimates and previous purchase price histories show places going for > $200,000, which puts the asking price at ~ 25% of the area. 

Because of the area, I assume that i'll have a property manager (costs included in my estimates at 10% of rent). Speaking with the current manager, he says there is demand for the units and when first renting out was getting 5 applications per day until filled, but that only 1 tenant in about 25-30 applicants was qualified. He states their screening process is rigorous and he seems nice, but know this is speculative. Is this a lot of applications or normal?

Rents in the adjacent 4-plex building (pending a deal at $225,000 but not updated) are $410 and $500 for the 1BD and 2BD units, respectively. Is it common to have such a high discrepancies in rent for an area? Are there any implications of this?

I am curious if others think this is a good deal and to jump on it or if it doesn't make sense (if so, what am I missing?). I like all the updates and cash flow but am worried about potential tenant headaches. I know this can be mitigated with a good management company but also realize these can be difficult to find.

Thanks in advance,

Zach