Author Topic: Should I take the Real Estate plunge?  (Read 3041 times)

warehouse

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Should I take the Real Estate plunge?
« on: November 23, 2016, 11:01:02 AM »
Hi everyone,

I am considering investing in some rental properties and would like to hear some of your points of view. Is this a good situation to start investing in real estate?

I've been connected, through a friend, to a real estate agent who has started a property management company. His fee ranges from 5-10% of rents based upon the location of the property. Essentially the more urban is 10% where is the more suburban is 5%. He sets his rate prior to purchase. There is a program at a local bank where they are offering 10% down loans to new real estate investors. You can buy up to 4 properties at 4 units or less each within this program. This program could stop at any time. The numbers break out as below for one of the properties I am considering.

Purchase price $220,000 (4 unit property)
25 year loan
5% interest rate
10% down

Monthly Rents $3150
Taxes $6000
Water $2000
Insurance $1600
Utilities $700
Management fee 10%
Maintenance kitty 10%
Vacancy kitty 5%

He has a spreadsheet that shows with the numbers above the annual cash flow would be $4160 if you use the entire kitty and $9830 without dipping into the kitty at all. When maintenance needs to be done the guy charges $15 an hour for his crew plus parts costs +10% markup. As I understand it this is inexpensive vs other property management companies. He also will fill vacancies for $130 (posting ad, background check, showings, etc).

This feels like a great return considering I would be putting $23k down. I would be earning $4-$9k a year not including the principal paydown. From what this guy is saying, and my friend, getting a 10% down loan on an investment property is rare and is making this opportunity very lucrative. 

What questions should I be asking? Any other information I can provide let me know.

piethief

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Re: Should I take the Real Estate plunge?
« Reply #1 on: November 23, 2016, 11:35:46 AM »
It might or might not be depending on what you want to do, how much risk tolerance you have, and so on.  Do you know the area well?  That's probably the most important thing, IMO.  Even if you hire out management, you should know the type of neighborhood you are buying into.

Certainly, getting a 10% investment loan is not typical, and could make things interesting.  Do you have PMI with a 10% loan?  You'll have to factor that in.  What kind of a loan is it, 30 year fixed?

What are your total cost to close?  (Lender fees, appraisal, inspection, points, title company junk, etc.).  I'd assume another several thousand dollars not mentioned here.  You say you would have 23K down, but 10% is 22K.  It will be a lot more than $1000 to close.  Just the appraisal and inspection will be that much.

Do you have any repairs / make ready to do?  Make sure you account for that too.

3150   Rents
-500   Taxes
-167   Water
-134   Insurance
-59   Utilities
-315   Mgmt
-315   Maintenance
-158   Vacancy

That leaves $1502 per month, before you pay your Principal + Interest (+ PMI if applicable).

A quick loan calculator for a 30 year mortgage of 198,000 (220k * 90%) @ 5% is almost $1000 per month, without PMI.

I'd personally start getting nervous if I was only clearing $100 or less per door, but I tend to try to assume worst case, and if it's still a good deal in that case, then I do it.

Also, it can take months after you close on a property and start being on the hook for the mortgage, to the point at which you have any money coming in.  Just make sure you have reserves.  If you are in a comfortable spot, then it might be something worth going for.

adamcollin

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Re: Should I take the Real Estate plunge?
« Reply #2 on: November 25, 2016, 01:14:10 AM »
I would suggest you to research thoroughly before finalizing the deal.

Linea_Norway

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Re: Should I take the Real Estate plunge?
« Reply #3 on: November 25, 2016, 01:23:16 AM »
Do I understand it right that you need to borrow money for doing this? I would only consider it if I could buy the houses without taking up a mortgage.

NoNonsenseLandlord

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Re: Should I take the Real Estate plunge?
« Reply #4 on: November 25, 2016, 07:49:37 AM »
Without looking at all the numbers in detail, you need to make sure you account for a vacancy rate, management rate and maintenance.  It is great you did that.  It may be a great investment, worse case you sell.  You risk is mitigated.

At some point, you need to jump in.  Or stay out.  Your friend, or a referral of a friend,  being a property manager may be OK, or a disaster.  Learn how to screen tenants for your self.  Read my blog if you need help with that. 

Know what his approach is, and what the PMs eviction rate is.  If he evicts more than 5% of tenants, he doesn't know how to screen tenants.


sokoloff

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Re: Should I take the Real Estate plunge?
« Reply #5 on: November 25, 2016, 08:36:58 AM »
This program could stop at any time.
Completely disregard this from your evaluation process and heavily discount the advice of anyone who pushes this point excessively.

Yes, there are very occasionally time-limited programs, but for the most part they aren't and people using language like that are trying to apply pressure and urgency.

SwordGuy

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Re: Should I take the Real Estate plunge?
« Reply #6 on: November 25, 2016, 08:39:17 AM »
... the annual cash flow would be $4160 if you use the entire kitty and $9830 without dipping into the kitty at all.

Stop.  Just stop.  Do not think that way. 

This is the correct way to think about this topic:

"...the annual cash flow would be $4160 if all is well, and significantly less than that if it isn't."

Every single day something in that building is wearing out.  You just haven't gotten the bill for it yet. 

That maintenance kitty is to pay for it the day the bill arrives.   If you have not yet saved enough to pay for a new roof, or a new HVAC system, or a new gas line to the street, or to repair the totally trashed apartment a non-paying tenant left behind, you'll have to take the difference out of your personal savings or the regular cash flow.

Also, $2000 for water is a lot of money!  How much would it cost to put separate meters on each apartment so the tenants pay for their own water?   That might pay for itself fairly quickly.

How much will it cost to get the units in rent-ready condition?   How old is the HVAC or the roof?  The plumbing?  That will show you how likely it is to get a big repair bill early on.

Car Jack

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Re: Should I take the Real Estate plunge?
« Reply #7 on: November 25, 2016, 02:55:11 PM »
My take:  If you search relatively hard, you can find a 5 year CD that will return more than this.  You won't have to have money saved for repairs.  You won't get calls at 3am that sewage is coming up into the apartment.  You just buy the CD and collect money in 5 years.

warehouse

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Re: Should I take the Real Estate plunge?
« Reply #8 on: November 25, 2016, 07:07:59 PM »
It might or might not be depending on what you want to do, how much risk tolerance you have, and so on.  Do you know the area well?  That's probably the most important thing, IMO.  Even if you hire out management, you should know the type of neighborhood you are buying into.

Certainly, getting a 10% investment loan is not typical, and could make things interesting.  Do you have PMI with a 10% loan?  You'll have to factor that in.  What kind of a loan is it, 30 year fixed?

What are your total cost to close?  (Lender fees, appraisal, inspection, points, title company junk, etc.).  I'd assume another several thousand dollars not mentioned here.  You say you would have 23K down, but 10% is 22K.  It will be a lot more than $1000 to close.  Just the appraisal and inspection will be that much.

Do you have any repairs / make ready to do?  Make sure you account for that too.

3150   Rents
-500   Taxes
-167   Water
-134   Insurance
-59   Utilities
-315   Mgmt
-315   Maintenance
-158   Vacancy

That leaves $1502 per month, before you pay your Principal + Interest (+ PMI if applicable).

A quick loan calculator for a 30 year mortgage of 198,000 (220k * 90%) @ 5% is almost $1000 per month, without PMI.

I'd personally start getting nervous if I was only clearing $100 or less per door, but I tend to try to assume worst case, and if it's still a good deal in that case, then I do it.

Also, it can take months after you close on a property and start being on the hook for the mortgage, to the point at which you have any money coming in.  Just make sure you have reserves.  If you are in a comfortable spot, then it might be something worth going for.

I live within a 35 minute drive of the areas I'd be buying, the properties would be in some good and some okay areas. The property manager described some of the tenants as being "rough" but that the returns are higher in this type of area. The rental units are not a place I would ever consider living.

I am compiling an email with questions to the agent, I added PMI question to the list. It's a 25 year loan but it has to be refinanced after 5 years, is that unusual? I have not met with the bank yet so I don't have all of the details. I mistyped that $23K down, I meant $22K.

I passed on this specific property for now as I wasn't ready to make an offer, but I want to know the questions to ask when the next one comes up. Thanks for your response!

warehouse

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Re: Should I take the Real Estate plunge?
« Reply #9 on: November 25, 2016, 07:08:50 PM »
Do I understand it right that you need to borrow money for doing this? I would only consider it if I could buy the houses without taking up a mortgage.

You would only invest in real estate if you can buy all the properties in cash? Is that usual practice for people in this forum?

warehouse

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Re: Should I take the Real Estate plunge?
« Reply #10 on: November 25, 2016, 07:10:08 PM »
Without looking at all the numbers in detail, you need to make sure you account for a vacancy rate, management rate and maintenance.  It is great you did that.  It may be a great investment, worse case you sell.  You risk is mitigated.

At some point, you need to jump in.  Or stay out.  Your friend, or a referral of a friend,  being a property manager may be OK, or a disaster.  Learn how to screen tenants for your self.  Read my blog if you need help with that. 

Know what his approach is, and what the PMs eviction rate is.  If he evicts more than 5% of tenants, he doesn't know how to screen tenants.

Thanks for the post. The PM showed me his system that he uses to screen people which was essentially a background check and credit report. He showed me what was a good tenant and what was a bad. I added asking what his eviction rate is to my list of questions.

warehouse

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Re: Should I take the Real Estate plunge?
« Reply #11 on: November 25, 2016, 07:12:31 PM »
This program could stop at any time.
Completely disregard this from your evaluation process and heavily discount the advice of anyone who pushes this point excessively.

Yes, there are very occasionally time-limited programs, but for the most part they aren't and people using language like that are trying to apply pressure and urgency.

Good point, I should not consider this in my decision making process. I did not feel pressured from him, I think he is genuinely not sure when the bank will stop the program. He thinks the bank is crazy for offering this 10% down thing and he's wondering when they are going to figure it out.

warehouse

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Re: Should I take the Real Estate plunge?
« Reply #12 on: November 25, 2016, 07:15:03 PM »
... the annual cash flow would be $4160 if you use the entire kitty and $9830 without dipping into the kitty at all.

Stop.  Just stop.  Do not think that way. 

This is the correct way to think about this topic:

"...the annual cash flow would be $4160 if all is well, and significantly less than that if it isn't."

Every single day something in that building is wearing out.  You just haven't gotten the bill for it yet. 

That maintenance kitty is to pay for it the day the bill arrives.   If you have not yet saved enough to pay for a new roof, or a new HVAC system, or a new gas line to the street, or to repair the totally trashed apartment a non-paying tenant left behind, you'll have to take the difference out of your personal savings or the regular cash flow.

Also, $2000 for water is a lot of money!  How much would it cost to put separate meters on each apartment so the tenants pay for their own water?   That might pay for itself fairly quickly.

How much will it cost to get the units in rent-ready condition?   How old is the HVAC or the roof?  The plumbing?  That will show you how likely it is to get a big repair bill early on.

GOOD POINT! I will stop thinking that way. The maintenance money will be spent, whether today or tomorrow.

I thought the $2k for money was a lot too! But it was a 4 plex so I thought.. what do I know. The roof, furnace and siding was new in this property but the inside needed cosmetic work. The agent said he can fix up for $3-4K per unit as there was turnover with new carpet, paint, light fixtures, kitchen floor, etc.

warehouse

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Re: Should I take the Real Estate plunge?
« Reply #13 on: November 25, 2016, 07:16:00 PM »
My take:  If you search relatively hard, you can find a 5 year CD that will return more than this.  You won't have to have money saved for repairs.  You won't get calls at 3am that sewage is coming up into the apartment.  You just buy the CD and collect money in 5 years.

I will not manage the property myself, I wouldn't even know anything that's going on, I would just get an invoice at the end of each month and a deposit of rents collected.. but I take your point!!

marty998

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Re: Should I take the Real Estate plunge?
« Reply #14 on: November 25, 2016, 08:53:27 PM »
Is this a serviced apartment? For short term holiday/business type letting?

Sounds like your agent will be the only one making money out of this deal. I bet he's getting a commission on it, which is built into your purchase price.

These types of places can also be very hard to sell as well. If it's such a good deal, why isn't anyone else keen on it?

Google the shit out of the agent and his company, until you feel comfortable that you are buying an investment, and not being sold a product.

warehouse

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Re: Should I take the Real Estate plunge?
« Reply #15 on: November 25, 2016, 09:53:53 PM »
Is this a serviced apartment? For short term holiday/business type letting?

Sounds like your agent will be the only one making money out of this deal. I bet he's getting a commission on it, which is built into your purchase price.

These types of places can also be very hard to sell as well. If it's such a good deal, why isn't anyone else keen on it?

Google the shit out of the agent and his company, until you feel comfortable that you are buying an investment, and not being sold a product.

It is for one year leases. The guy is definitely making money, and he should because I wouldn't do anything after purchasing the property. He manages everything. His company is new, about a year old. Nothing about him on Google that's bad. Only positive reviews, when I was at his office I got the impression he had about 25 clients, including a circle of referrals of 9 people at the large corporation I work for. So a lot of people are keen on it. He told me no pressure on this particular property as more will come up. He will get a commission on selling the property to me as the real estate agent. Note he also owns 50 rental units himself and that's why he started the management company.