Newbie Taking Action, 4 Unit Owner/occupied Plan, Thoughts?
I am exploring two avenues in my real estate career along with my wife. The first avenue is working on flips and short sales, as an ongoing business endeavor, that will fund the purchase of rentals.
That being said, we are considering purchasing a 4 unit property that we believe to be worth around $680,000. We are ready to put 5% down with a 'piggy back' set of loans, to avoid the PMI.
The property has approximately $4000 per month in rental income. Expenses including the mortgage of $3700 run about $4400 per month in year one.
We would like to leverage this property's equity (based upon a 5% appreciation, this gives us a property with almost $200,000 in equity) into another multi family property 3 years out from now. By our estimation, this property will be cash flow positive in 3-4 years at a 5% rental increase rate.
This is our first home, our first real estate investment, and we are looking to ladder this into other investment properties, so that in 9 years (we started studying real estate, and the local market a year ago) we can choose to work for ourselves.
We have done a few things to prep for this purchase, such as setting up an LLC to hold this property, we have joined the local rei (where we have a mentor), we have retained a local financial planner, we also have an accountant, we have been reading up on the local laws here in MA, and we have been working with a buyer's broker in this search over the last few months.
We are nervous, and very excited at the same time. We expect to have at least two months of reserves in hand to help cushion any vacancies.
Can you offer us any questions to consider after reading our post? Are there some holes in our strategy, both short term and long term. Do you need more questions answered, so that you have enough info to help us.
We are committed to doing this long term, and we appreciate the resource that all of you are on this website.
Thanks so much!
I like the idea of wholesaling houses to
finance the purchase of rental units. I don't like the idea of taking a monthly
negative every month.
What are you purchasing the units for?
What type of loan are you putting on it?
Jeffrey Adam
[addsig]
We haven't nailed the financing down yet, at the same time I imagine it will be a 30 year fixed rate.
We are purchasing the units for the reasons mentioned above and for a few other reasons:
1) We currently rent, and we want to start building equity right away.
2) We feel that this property allows us to spread our costs out moreso than the 2 family properties that we started investigating.
3) Many of the areas that we have found to be cash flow positive in year 1, tend to be in areas that aren't as safe.
Also, we want to live in this property so that we can start paying ourselves rent while building equity. We are 'negative cash flow' right now, and we have no equity build up. At least here, we suck it up for the first year or two, and then the prop will start to pay for itself from a cash standpoint.
Thanks for the help!
I am working with a few buyers now who are in the same exact position. The difference is that we are wholesaling a rehabbed property to them at a discount in the 10-15% range. Like I said they are doing everything exactly the same as you except they will be getting the property at a better price. You should look into contacting some experienced rehabbers in your area and explore a wholesale transaction. You bring your credit worthiness, a solid buyer and guaranteed profit for them with a short turn time. You get a property where, when and how you want it and at a discount. This could very well be a great catalyst for you.
Best of success.
Phil
[addsig]
Ron LeGrand would tell you to take care of your short term cash flow needs (flipping) before you start taking on the long term liability of rentals.
How many deals exactly like this one could you do in a year? Sounds like one...maybe two. Then what??? Then it's time to either build up your reserves or find another way to invest.
If you want to get into REI for the long haul, you should invest in a way that makes you MORE able to buy more properties with each deal, not less.
I'd recommend this deal over no deal at all and never investing in RE, but there seem to be some very big red flags. I don't love it.
Value: How much could you turn around and sell it for within 90 days? You say that there's $200K in equity in it...based on the rents, I'd guess that it should be priced around $400K. How did you determine the FMV of the property??? Are you sure you're not buying it at FMV now? If that's the case, why don't you flip this one??? Pocket $150K or so, and move on to deal #2. 5% appreciation sounds nice, but don't rely on appreciation to make your money. As Kiosaki says, make your money when you BUY not when you sell.
I'd be afraid of anything that gives you a negative cash flow from the beginning....UNLESS you have an exit strategy that is sound, resources that will accomodate it, and it's a great deal (like 70% LTV deal).
If you are walking into equity, and you can tolerate a negative cf, love the deal, etc, it seems that you're not going to be able to do other properties just like this right after that. Why can't you buy this AND do shorts and flips on the side? Afterall, you are just waiting for the grass to grow, aren't you? (ie, appreciate)
Shoot for deals that give you positive cash flow NOW...unless, like I said, you can take it and you're sure of the equity.
2 months of reserves isn't much if the property is bleeding you every month.
As for financing...how do you know what the cash flow will be if you don't even know what rate and terms you'll be getting on your loan??? 1% will make a huge difference.
Expenses. How did you figure them??? They will be higher than what the seller told you they are. Hazard insurance has taken a huge hike on apts. I wouldn't be surprised if it tripled from what the current owner is paying. Make sure you calculate your own numbers and don't rely on the numbers that you've been told by ANYONE! That includes your realtor, loan officer, seller, etc. They get paid when you close NOT when you get positive cashflow and sell for your equity.
hope this helps.
I agree with the post above. I too believe in the ideas of "Rich Dad, Poor Dad" (Kiosaki). And one of the key elements I did not see mentioned is to start small. Your deal sounds like it would make me nervous and excited too, and I've done quite a few transactions already.
This deal could be a fantastic deal, but it sounds like a long turn-around time.
All the deals I have ever done have turned out as expected -- positive or negative cash flow from the beginning. BUT, the expenses on all deals have always crept up (which I try to account for). Since this is your first deal, I would try to start with a positive CF or a Flip. But, if you love the property and you're going to live there, that has to be taken into consideration. For example, my first property was low profit, but I lived there and it had an ocean view and it was a nothing down deal. So you must judge other factors besides profit, since you'll be living there.
My advice, start small and try to buy very low on your first deal. Usually, the money is made on the BUY not the SELL. And never count on appreciation -- that should be icing on the cake.
Best of Luck. This is a great business.
Kevin
First off, thanks so much to everyone that posted the encouraging words, and the insightful comments/questions.
We decided to forego this deal, because as many of you said -- 'make the money when you buy' and it's clear that this deal would not have made us cash flow positive from day 1. So we turned our back on this 4 family property.
As it turned out, we made and had our offer accepted on a 2 family yesterday, that is so much more of a value, AND it is cash flow positive from day 1. We lined up our terms today, and we are set to close in 3 weeks. The rate that we got was well under 6, and we may even (if the rates dip again) be able to get a rate lower than 5.5.
It turns out that the legwork we did for the 4 family allowed us to move very quickly on this two family that went on the market and closed all within 12 hours.
We can now count ourselves among those that 'walk the walk, rather than talking the talk.'
We are starting small (with this 2 family, rather than the highly leveraged 4 family), and getting our experience built up for the next deal which may come sooner than we think!
Thanks to so many of you that helped to critique our approach, as I think your words encouraged us to keep ourselves open to this other opportunity.
Success to you all!
Congrats on your deal...Are you living in one half and renting out the other or using it wholly as rental?
Now go find #2...
Q
Congratulations on the purchase of your new duplex.
Just out of curiosity, are you managing the property, or have you located a property management company to manage the property for you?
In addition to property maintenance issues, managing tenants and dealing with their personal problems can take up a great deal of your time. My wife and I managed a fourplex for a year and a half and we never had a free weekend (not to mention the arguments we had over how to manage it).
Also, there are advantages and disadvantages to living next door to your tenants. The advantage is that you can keep a close watch on your property and address any problems when they occur; the disadvantage is that your tenants know where you live; and if they like to whine or complain about anything they find wrong with the property, you can bet that you will be hearing their complaints every day (I just thought I would share this information with you since it so easy to get caught up in the numbers that we forget about the stress that certain investments bring into our lives).
Also, if you find that it is difficult to handle the stress of being a landlord; or if you find that your situation prevents you from being able to effectively manage the property, than I would seriously consider hiring an experienced property manager. Even at the 9 - 12% rate that management charges, there are so many reasons for hiring a property management company.
Many landlords, for example, find it difficult to give rent increases to long term tenants, and as a result, they find that they are making less market rent than they could have made with property management. Also a property manager's familiarity with a rental area and the way to market rental properties can provide you with significant savings in preparing a property for rental. (This is just food for thought, but you can probably think of many other reasons, if you haven't already, for hiring property management. The reasons will certainly become more clear when you start receiving continuous phone calls from tenants compaining about defective appliances, coolers, plumbing, or your poor tenant selections.
One last thought, if you do live on the property and manage it, have you figured out a way to preserve your anonymity? The last thing that you want to do is inform your tenants that you are the actual owner of the property. Can you imagine how much this would increase your chances of being involved in a potential lawsuit?
Anyway, these are just a few issues you may want to think about in learning to, as you say, "walk the walk."
I wish you best of luck on your new adventure.