The Entrepreneur Forum | Startups | Entrepreneurship | Starting a Business | Motivation | Success

Remove ads while supporting the Unscripted philosophy...become an INSIDER.

AlanBayWalker

Contributor
Read Millionaire Fastlane
I've Read UNSCRIPTED
Jun 9, 2019
19
26
21
New Orleans, Louisiana
Hey guys I've been doing some research on house hacking for the past 3 months and I think I'm ready to get my feet wet.

A little about me. I just turned 21 two months ago, I have a FICO credit score of 759 and I make 100k a year through w2 salary. I work as a software engineer in a pretty stable company so I'm not super concerned with losing my job. Even if I did, my expenses right now are pretty low and I am confident that I could use my skills to pay some of the property expenses myself if I had a high vacancy for some reason.

I just recently moved to Milwaukee, WI to live near my mentor. The opportunity cost of staying in Houston became too much.


MY GOALS:
  • I don't want to pay rent anymore
  • I want to have at least a few hundred dollars of positive cash flow
  • I want to build on an asset instead of throwing rent money away building someone else's
  • I want to gain experience as a landlord and a property investor
  • I want to live in a relatively safe area
  • I want to live in an up and coming neighborhood
  • I want the property to have some kind of added value potential, meaning I can fix it up a little bit and not pay a premium on a turn-key property
PREAPPROVED LOAN DETAILS:
  • 30 Year Fixed FHA
  • Purchase Price: $350,000
  • Down Payment Required: $12,250
  • Base Loan Amount: $337,750
  • (Damn I can't find my rate. what kind of rate should I be looking for?)

PROPERTY I AM LOOKING AT:
  • Purchase Price: $219,000
  • Property Type: Triplex
  • Year Built: 1902
  • Unit 1: 3bd 1 1/2 bathrooms
  • Unit 2: 3bd 1 bathroom
  • Unit 3: 2bd 1 bathroom
  • Location: Brewer's Hill, Milwaukee
  • Estimated SQ FT: 3,216
  • Owner pays: water, sewage
  • Tenant pays: gas, heat, electricity

The property is sitting on a double lot and has a full basement. Unit 1 is currently occupied at $1000 rent, Unit 2 is occupied at $900 rent, and Unit 3 on the third floor is currently vacant but if I lived here I'd be living in the 3rd unit which is the smallest, and get a roommate in the 2nd bedroom for around $400 a month.

THE PROPERTY EVALUATION:

- Purchase Price: $219,000
- Gross Potential Income (GPI): $27,600 | Sum rents multiplied by 12 months
- Vacancy loss: $1,380 | GPI multiplied by 5% as a fund in case there's unit vacancy
- Gross Operating Income (GOI): $26,220 | GPI - Vacancy loss. This is the property cashflow after potential losses
- Property Taxes: $4,905 | Purchase price * 2.24% Milwaukee county property tax
- Net Operating Income (NOI): $20,260 | GOI - Taxes. Income after all expenses not including mortgage
- Replacement Reserves Account (RRA): $7,000 | Long term repairs and costs. This is honestly just an arbitrary figure I threw in here. I have no idea how to calculate this (someone help)
- Mortgage payment: $1,540
- Before Tax Cash Flow (BTCF): $11,720 | NOI - RRA - Mortgage. equals to the cash flow the property will produce before taxes

(Note: These numbers aren't accounting for some operating expenses such as maintenance and utilities)

Now, these next set of values are calculated without taking into account I am using an FHA loan. The calculations are made using 25% as the downpayment. The reason for this is to crunch the numbers as if it were a normal real estate investment, so I can get a more accurate picture.

- Capitalization Rate: 9.251232877 | (NOI / Property Price) calculates return on investment
- Cash on cash return: 21.4063926941 | (BTCF / 25% of Purchase Price) return on investment assuming you used leverage
- Debt coverage ratio: 13.15597403 | (NOI / Mortgage)

If anyone is wondering where I got this formula from, it's called the S.E.O.T.A formula from a book called "Buy it, Rent it, Profit". This is a "dumbed" down version of that formula.

I failed math two years out of the four years that I went to high school. If someone could do a double check on these numbers I would greatly appreciate it. Also if you guys see anything that looks funny or know of a simpler formula I could use to evaluate properties please let me know.

I scheduled a showing tomorrow. I'm going to give the property a walk around with my roommate who is a home contractor. I'm hoping he can help me spot some red flags. The plan is, if everything checks out I am going to put an offer at asking price and do my due diligence during the inspection period. I'm hoping everything checks out and maybe I can find a few cosmetic things that can help me negotiate the price right now. Or I might just back out completely if I don't like it.

A FEW THINGS I AM CONCERNED ABOUT:

- It seems like in a lot of markets homes are at an all-time high, I'm thinking it's still worth it to buy even if I pay a little bit of a premium.
- I'm a little worried about the moratoriums on evictions that were placed during covid allowing tenants to not pay rent
- By purchasing this property I am basically inheriting 2 units full of people. I need to do my due diligence to find out who these people are and how long they have left on their leases. I have no idea how much effort the current landlord put into screening these tenants.
- The property only has street parking on a street that has a few bars down from the property. I'm a little worried about the parking situation for a triplex that has 8 bedrooms.
- I'm not super sure about what things are going to need fixing on the property, there seems to be a lot of slumlords out here in this county. But I guess I won't find out until I get there and check it out - I think I'm gonna need a CPA cause Idk what I'm doing at all

MY PERSONAL FINANCES:

- $10k in savings
- $1k in actual cash
- $17k in bitcoin (give or take at current price)
- $3k in silver
- $2k in a Capital One Roth IRA savings account (I did this by accident thinking it was a normal Roth IRA. I'm hoping I can liquidate this towards the house purchase and not pay taxes on it)
- $3k in a Roth IRA (I know this looks weird. I just don't know wtf I'm doing lol)

I'm probably going to need to have a way bigger nest egg in case anything goes wrong or happens to the property, my job, or me while I own a home.

I would appreciate any advice you guys have on what I wrote above or tips on how to inspect the property, what to look for, etc.

Also if you currently live in the Milwaukee area feel free to hit me up. I am currently working on a startup here with 3 colleagues and would love to network with you guys.
 

Don't like ads? Remove them while supporting the forum. Subscribe.

alexkuzmov

Silver Contributor
Read Millionaire Fastlane
I've Read UNSCRIPTED
Speedway Pass
Sep 20, 2019
480
638
258
Bulgaria
Hey guys I've been doing some research on house hacking for the past 3 months and I think I'm ready to get my feet wet.

A little about me. I just turned 21 two months ago, I have a FICO credit score of 759 and I make 100k a year through w2 salary. I work as a software engineer in a pretty stable company so I'm not super concerned with losing my job. Even if I did, my expenses right now are pretty low and I am confident that I could use my skills to pay some of the property expenses myself if I had a high vacancy for some reason.

I just recently moved to Milwaukee, WI to live near my mentor. The opportunity cost of staying in Houston became too much.


MY GOALS:
  • I don't want to pay rent anymore
  • I want to have at least a few hundred dollars of positive cash flow
  • I want to build on an asset instead of throwing rent money away building someone else's
  • I want to gain experience as a landlord and a property investor
  • I want to live in a relatively safe area
  • I want to live in an up and coming neighborhood
  • I want the property to have some kind of added value potential, meaning I can fix it up a little bit and not pay a premium on a turn-key property
PREAPPROVED LOAN DETAILS:
  • 30 Year Fixed FHA
  • Purchase Price: $350,000
  • Down Payment Required: $12,250
  • Base Loan Amount: $337,750
  • (Damn I can't find my rate. what kind of rate should I be looking for?)

PROPERTY I AM LOOKING AT:
  • Purchase Price: $219,000
  • Property Type: Triplex
  • Year Built: 1902
  • Unit 1: 3bd 1 1/2 bathrooms
  • Unit 2: 3bd 1 bathroom
  • Unit 3: 2bd 1 bathroom
  • Location: Brewer's Hill, Milwaukee
  • Estimated SQ FT: 3,216
  • Owner pays: water, sewage
  • Tenant pays: gas, heat, electricity

The property is sitting on a double lot and has a full basement. Unit 1 is currently occupied at $1000 rent, Unit 2 is occupied at $900 rent, and Unit 3 on the third floor is currently vacant but if I lived here I'd be living in the 3rd unit which is the smallest, and get a roommate in the 2nd bedroom for around $400 a month.

THE PROPERTY EVALUATION:

- Purchase Price: $219,000
- Gross Potential Income (GPI): $27,600 | Sum rents multiplied by 12 months
- Vacancy loss: $1,380 | GPI multiplied by 5% as a fund in case there's unit vacancy
- Gross Operating Income (GOI): $26,220 | GPI - Vacancy loss. This is the property cashflow after potential losses
- Property Taxes: $4,905 | Purchase price * 2.24% Milwaukee county property tax
- Net Operating Income (NOI): $20,260 | GOI - Taxes. Income after all expenses not including mortgage
- Replacement Reserves Account (RRA): $7,000 | Long term repairs and costs. This is honestly just an arbitrary figure I threw in here. I have no idea how to calculate this (someone help)
- Mortgage payment: $1,540
- Before Tax Cash Flow (BTCF): $11,720 | NOI - RRA - Mortgage. equals to the cash flow the property will produce before taxes

(Note: These numbers aren't accounting for some operating expenses such as maintenance and utilities)

Now, these next set of values are calculated without taking into account I am using an FHA loan. The calculations are made using 25% as the downpayment. The reason for this is to crunch the numbers as if it were a normal real estate investment, so I can get a more accurate picture.

- Capitalization Rate: 9.251232877 | (NOI / Property Price) calculates return on investment
- Cash on cash return: 21.4063926941 | (BTCF / 25% of Purchase Price) return on investment assuming you used leverage
- Debt coverage ratio: 13.15597403 | (NOI / Mortgage)

If anyone is wondering where I got this formula from, it's called the S.E.O.T.A formula from a book called "Buy it, Rent it, Profit". This is a "dumbed" down version of that formula.

I failed math two years out of the four years that I went to high school. If someone could do a double check on these numbers I would greatly appreciate it. Also if you guys see anything that looks funny or know of a simpler formula I could use to evaluate properties please let me know.

I scheduled a showing tomorrow. I'm going to give the property a walk around with my roommate who is a home contractor. I'm hoping he can help me spot some red flags. The plan is, if everything checks out I am going to put an offer at asking price and do my due diligence during the inspection period. I'm hoping everything checks out and maybe I can find a few cosmetic things that can help me negotiate the price right now. Or I might just back out completely if I don't like it.

A FEW THINGS I AM CONCERNED ABOUT:

- It seems like in a lot of markets homes are at an all-time high, I'm thinking it's still worth it to buy even if I pay a little bit of a premium.
- I'm a little worried about the moratoriums on evictions that were placed during covid allowing tenants to not pay rent
- By purchasing this property I am basically inheriting 2 units full of people. I need to do my due diligence to find out who these people are and how long they have left on their leases. I have no idea how much effort the current landlord put into screening these tenants.
- The property only has street parking on a street that has a few bars down from the property. I'm a little worried about the parking situation for a triplex that has 8 bedrooms.
- I'm not super sure about what things are going to need fixing on the property, there seems to be a lot of slumlords out here in this county. But I guess I won't find out until I get there and check it out - I think I'm gonna need a CPA cause Idk what I'm doing at all

MY PERSONAL FINANCES:

- $10k in savings
- $1k in actual cash
- $17k in bitcoin (give or take at current price)
- $3k in silver
- $2k in a Capital One Roth IRA savings account (I did this by accident thinking it was a normal Roth IRA. I'm hoping I can liquidate this towards the house purchase and not pay taxes on it)
- $3k in a Roth IRA (I know this looks weird. I just don't know wtf I'm doing lol)

I'm probably going to need to have a way bigger nest egg in case anything goes wrong or happens to the property, my job, or me while I own a home.

I would appreciate any advice you guys have on what I wrote above or tips on how to inspect the property, what to look for, etc.

Also if you currently live in the Milwaukee area feel free to hit me up. I am currently working on a startup here with 3 colleagues and would love to network with you guys.
Hey Alan,
I`m not from the US so things for me are a bit different, so keep that in mind.

My first thought is, you have way too little in savings to justify the downpayment (holy crap is it small, I cant believe how good your loan conditions are in the US).
Lets round it to $10k, well you pay the downpayment and you are out of cash basically.
What about taxes?
What about maintenance?
What about insurance?
What if something happens and you have to sell it?

My advice is that at minimum you should have the downpayment + first year expenses covered with cash.
Otherwise you are taking way too big of a risk.

With that said, I started dabbling into real estate at the begining of the year: RANT - Savour the Pain

I`m going to be furnishing the second apartment which is already bought (not owned by me personally, but I`ll be doing everything to get it ready for tenants, long story...)

Here are a few tips which I hope can help you:

0. This should go without saying, hence why its at 0.
Find a good property, good location, good view, standart door sizes, standart ceiling height, good heat insulation, in a good neighborhood etc.
This is an investment, so the higher cost to buy will be justified with higher rent.

1. Dont leave things to someone else, you`ll lose time and money in the proccess.
You can find your own tenants, your own furniture, you can find someone for the handy work (electrical stuff, bathroom tiles, kitchen installing etc.)
Make sure to organize everything.
How much work you have to do will depend on the state of the real estate offcourse.

2. Ask for discounts and buy with the intent to use a tax write off.
Dont waste money if you dont have to. Dont be afraid to haggle, read this: Never Split the Difference
If you hire a workman (dont know the proper term in english) talk with them, be pleasent, they are sure to know where to find good cheap materials and they can probably buy them for you with a discount.
If you dont have your own company, ask a friend to buy stuff for you so they can get a tax write off and you`ll spend less money on what you buy (at least thats how it works in my country, stores sell with 20% over the actual price because of government tax, which doesnt apply for VAT registered companies)
Go around and find the best deals on the stuff you want to buy.
Example: You have to spend $10k on electrical appliances or drive 2 hours to a store which sells them at $6k?
Well, guess you are driving my friend.
When you dont have money, you spend time, thats how it goes.

3. As soon as the real estate is presentable, start looking for tenants.
You dont know who will come when, so do this as early as possible, sign a contract if you can.
Think of it as finding clients for your "product" before its ready.

4. Dont pay comission to anybody unless they are actually saving you time and effort.
Real estate brokers are mostly useless.
Very few of them are actually time savers.
 

AlanBayWalker

Contributor
Read Millionaire Fastlane
I've Read UNSCRIPTED
Jun 9, 2019
19
26
21
New Orleans, Louisiana
Hey Alan,
I`m not from the US so things for me are a bit different, so keep that in mind.

My first thought is, you have way too little in savings to justify the downpayment (holy crap is it small, I cant believe how good your loan conditions are in the US).
Lets round it to $10k, well you pay the downpayment and you are out of cash basically.
What about taxes?
What about maintenance?
What about insurance?
What if something happens and you have to sell it?

My advice is that at minimum you should have the downpayment + first year expenses covered with cash.
Otherwise you are taking way too big of a risk.

With that said, I started dabbling into real estate at the begining of the year: RANT - Savour the Pain

I`m going to be furnishing the second apartment which is already bought (not owned by me personally, but I`ll be doing everything to get it ready for tenants, long story...)

Here are a few tips which I hope can help you:

0. This should go without saying, hence why its at 0.
Find a good property, good location, good view, standart door sizes, standart ceiling height, good heat insulation, in a good neighborhood etc.
This is an investment, so the higher cost to buy will be justified with higher rent.

1. Dont leave things to someone else, you`ll lose time and money in the proccess.
You can find your own tenants, your own furniture, you can find someone for the handy work (electrical stuff, bathroom tiles, kitchen installing etc.)
Make sure to organize everything.
How much work you have to do will depend on the state of the real estate offcourse.

2. Ask for discounts and buy with the intent to use a tax write off.
Dont waste money if you dont have to. Dont be afraid to haggle, read this: Never Split the Difference
If you hire a workman (dont know the proper term in english) talk with them, be pleasent, they are sure to know where to find good cheap materials and they can probably buy them for you with a discount.
If you dont have your own company, ask a friend to buy stuff for you so they can get a tax write off and you`ll spend less money on what you buy (at least thats how it works in my country, stores sell with 20% over the actual price because of government tax, which doesnt apply for VAT registered companies)
Go around and find the best deals on the stuff you want to buy.
Example: You have to spend $10k on electrical appliances or drive 2 hours to a store which sells them at $6k?
Well, guess you are driving my friend.
When you dont have money, you spend time, thats how it goes.

3. As soon as the real estate is presentable, start looking for tenants.
You dont know who will come when, so do this as early as possible, sign a contract if you can.
Think of it as finding clients for your "product" before its ready.

4. Dont pay comission to anybody unless they are actually saving you time and effort.
Real estate brokers are mostly useless.
Very few of them are actually time savers.
Thank you very much, this is solid advice. I'd be liquidating my assets if I purchased this. At least my bitcoin.
 

WJK

Platinum Contributor
Speedway Pass
Oct 9, 2017
1,286
2,963
657
Nikiski, Alaska
Hey guys I've been doing some research on house hacking for the past 3 months and I think I'm ready to get my feet wet.

A little about me. I just turned 21 two months ago, I have a FICO credit score of 759 and I make 100k a year through w2 salary. I work as a software engineer in a pretty stable company so I'm not super concerned with losing my job. Even if I did, my expenses right now are pretty low and I am confident that I could use my skills to pay some of the property expenses myself if I had a high vacancy for some reason.

I just recently moved to Milwaukee, WI to live near my mentor. The opportunity cost of staying in Houston became too much.


MY GOALS:
  • I don't want to pay rent anymore
  • I want to have at least a few hundred dollars of positive cash flow
  • I want to build on an asset instead of throwing rent money away building someone else's
  • I want to gain experience as a landlord and a property investor
  • I want to live in a relatively safe area
  • I want to live in an up and coming neighborhood
  • I want the property to have some kind of added value potential, meaning I can fix it up a little bit and not pay a premium on a turn-key property
PREAPPROVED LOAN DETAILS:
  • 30 Year Fixed FHA
  • Purchase Price: $350,000
  • Down Payment Required: $12,250
  • Base Loan Amount: $337,750
  • (Damn I can't find my rate. what kind of rate should I be looking for?)

PROPERTY I AM LOOKING AT:
  • Purchase Price: $219,000
  • Property Type: Triplex
  • Year Built: 1902
  • Unit 1: 3bd 1 1/2 bathrooms
  • Unit 2: 3bd 1 bathroom
  • Unit 3: 2bd 1 bathroom
  • Location: Brewer's Hill, Milwaukee
  • Estimated SQ FT: 3,216
  • Owner pays: water, sewage
  • Tenant pays: gas, heat, electricity

The property is sitting on a double lot and has a full basement. Unit 1 is currently occupied at $1000 rent, Unit 2 is occupied at $900 rent, and Unit 3 on the third floor is currently vacant but if I lived here I'd be living in the 3rd unit which is the smallest, and get a roommate in the 2nd bedroom for around $400 a month.

THE PROPERTY EVALUATION:

- Purchase Price: $219,000
- Gross Potential Income (GPI): $27,600 | Sum rents multiplied by 12 months
- Vacancy loss: $1,380 | GPI multiplied by 5% as a fund in case there's unit vacancy
- Gross Operating Income (GOI): $26,220 | GPI - Vacancy loss. This is the property cashflow after potential losses
- Property Taxes: $4,905 | Purchase price * 2.24% Milwaukee county property tax
- Net Operating Income (NOI): $20,260 | GOI - Taxes. Income after all expenses not including mortgage
- Replacement Reserves Account (RRA): $7,000 | Long term repairs and costs. This is honestly just an arbitrary figure I threw in here. I have no idea how to calculate this (someone help)
- Mortgage payment: $1,540
- Before Tax Cash Flow (BTCF): $11,720 | NOI - RRA - Mortgage. equals to the cash flow the property will produce before taxes

(Note: These numbers aren't accounting for some operating expenses such as maintenance and utilities)

Now, these next set of values are calculated without taking into account I am using an FHA loan. The calculations are made using 25% as the downpayment. The reason for this is to crunch the numbers as if it were a normal real estate investment, so I can get a more accurate picture.

- Capitalization Rate: 9.251232877 | (NOI / Property Price) calculates return on investment
- Cash on cash return: 21.4063926941 | (BTCF / 25% of Purchase Price) return on investment assuming you used leverage
- Debt coverage ratio: 13.15597403 | (NOI / Mortgage)

If anyone is wondering where I got this formula from, it's called the S.E.O.T.A formula from a book called "Buy it, Rent it, Profit". This is a "dumbed" down version of that formula.

I failed math two years out of the four years that I went to high school. If someone could do a double check on these numbers I would greatly appreciate it. Also if you guys see anything that looks funny or know of a simpler formula I could use to evaluate properties please let me know.

I scheduled a showing tomorrow. I'm going to give the property a walk around with my roommate who is a home contractor. I'm hoping he can help me spot some red flags. The plan is, if everything checks out I am going to put an offer at asking price and do my due diligence during the inspection period. I'm hoping everything checks out and maybe I can find a few cosmetic things that can help me negotiate the price right now. Or I might just back out completely if I don't like it.

A FEW THINGS I AM CONCERNED ABOUT:

- It seems like in a lot of markets homes are at an all-time high, I'm thinking it's still worth it to buy even if I pay a little bit of a premium.
- I'm a little worried about the moratoriums on evictions that were placed during covid allowing tenants to not pay rent
- By purchasing this property I am basically inheriting 2 units full of people. I need to do my due diligence to find out who these people are and how long they have left on their leases. I have no idea how much effort the current landlord put into screening these tenants.
- The property only has street parking on a street that has a few bars down from the property. I'm a little worried about the parking situation for a triplex that has 8 bedrooms.
- I'm not super sure about what things are going to need fixing on the property, there seems to be a lot of slumlords out here in this county. But I guess I won't find out until I get there and check it out - I think I'm gonna need a CPA cause Idk what I'm doing at all

MY PERSONAL FINANCES:

- $10k in savings
- $1k in actual cash
- $17k in bitcoin (give or take at current price)
- $3k in silver
- $2k in a Capital One Roth IRA savings account (I did this by accident thinking it was a normal Roth IRA. I'm hoping I can liquidate this towards the house purchase and not pay taxes on it)
- $3k in a Roth IRA (I know this looks weird. I just don't know wtf I'm doing lol)

I'm probably going to need to have a way bigger nest egg in case anything goes wrong or happens to the property, my job, or me while I own a home.

I would appreciate any advice you guys have on what I wrote above or tips on how to inspect the property, what to look for, etc.

Also if you currently live in the Milwaukee area feel free to hit me up. I am currently working on a startup here with 3 colleagues and would love to network with you guys.
It's a good jumping-off point for you. Are you handy? Can you learn to do your own repairs? Can you fix up unit #3 to rent it for more money? What can you do in the other two units to raise their rental income when you get done with #3? Are you willing to mow the lawn and pull the weeds? Your goal will to make your property shiny clean and neat. You want to have the best property on the block. You must live on the property in order to obtain the FHA loan, so you might as well take good care of it.

Here's another issue that you should address. FHA loans have a 30-year term. Especially during the first years, almost ALL of those payments go toward the interest. You can cut that 30-year payment schedule in half by making extra principal payments. I have always paid loans off early -- it's an easy way to save thousands of dollars. You will be paying MMI, a type of mortgage insurance (since you are making a small down payment). It an included cost of getting of getting an FHA loan. If you can pay your loan balance down enough, you'll be able to refinance in the conventional lender market and save yourself that charge. You will need to have at least 20% equity to qualify without being required to carry MMI or PMI (private mortgage insurance).

I mentored a young man a few years ago who bought small units like you are getting ready to do. He move into each set of units for a couple of years and he systematically fixed the up out of pocket. He then saved up his money and bought more properties as he was financially able. He's now close to being financially independent. I'm really proud of him.
 

MJ DeMarco

Administrator
Staff member
EPIC CONTRIBUTOR
FASTLANE INSIDER
Read Millionaire Fastlane
I've Read UNSCRIPTED
Summit Attendee
Speedway Pass
Jul 23, 2007
30,935
114,503
3,751
Fountain Hills, AZ
Seems like a deal too good to be true, but I'm not a real estate guy.

This type of analysis is up these guys' alley...

@Envision @SteveO @biophase @JScott --
 

AlanBayWalker

Contributor
Read Millionaire Fastlane
I've Read UNSCRIPTED
Jun 9, 2019
19
26
21
New Orleans, Louisiana
Seems like a deal too good to be true, but I'm not a real estate guy.

This type of analysis is up these guys' alley...

@Envision @SteveO @biophase @JScott --
Oh wow MJ! I just bought my cofounders your book TMFL, I'm a really big fan.

A few notes on the Milwaukee market. Homes are dirt cheap compared to other markets and rents are fairly average which makes it a perfect playing field for house hacking.

We had a showing yesterday and the electric systems seemed new as well as the boilers. The units were absolutely massive and I can already tell the rents for those units are a little bit under market value.

This property has a lot of add value potential, where I can do a small face lift and up the rents. Also because the units are so massive I talked to the Agent and even the tenants and we all agreed that it would be fairly easy to turn some of that space into more bedrooms. I'd have to get a contractor in there to take a better look but this triplex has a lots of potential for the future.

I was only able to meet the tenants in Unit #2 and I was super happy with them, they kept the place clean and well maintained. I asked if anything needed fixing and they said just some insulating of the windows for winter and some snaking of the pipe system in the bathrooms.

CONCERNS:

My concerns right now are that I haven't met the tenants in unit #1 (unit #3 is unoccupied btw and I'd be living there).

I was also warned to be super thorough on inspection by people in the area because the house is pretty old, and to specifically pay close attention to foundation problems.

Last and the biggest one is I might lose this deal because it won't qualify for an FHA loan. We found this out after my agent got back with my lender on the property. I'd have to fix the exterior paint on the building, which is a lot of paint peeling, fix some rotten wood issues, and add a few handrails to some stairs that are missing them. As well as anything else they bring up during appraisal.

I asked if I could purchase through an FHA 203k loan but the lender said the interest rates are horrible on them right now.


I'm not sure what my options are.
 

AlanBayWalker

Contributor
Read Millionaire Fastlane
I've Read UNSCRIPTED
Jun 9, 2019
19
26
21
New Orleans, Louisiana
It's a good jumping-off point for you. Are you handy? Can you learn to do your own repairs? Can you fix up unit #3 to rent it for more money? What can you do in the other two units to raise their rental income when you get done with #3? Are you willing to mow the lawn and pull the weeds? Your goal will to make your property shiny clean and neat. You want to have the best property on the block. You must live on the property in order to obtain the FHA loan, so you might as well take good care of it.

Here's another issue that you should address. FHA loans have a 30-year term. Especially during the first years, almost ALL of those payments go toward the interest. You can cut that 30-year payment schedule in half by making extra principal payments. I have always paid loans off early -- it's an easy way to save thousands of dollars. You will be paying MMI, a type of mortgage insurance (since you are making a small down payment). It an included cost of getting of getting an FHA loan. If you can pay your loan balance down enough, you'll be able to refinance in the conventional lender market and save yourself that charge. You will need to have at least 20% equity to qualify without being required to carry MMI or PMI (private mortgage insurance).

I mentored a young man a few years ago who bought small units like you are getting ready to do. He move into each set of units for a couple of years and he systematically fixed the up out of pocket. He then saved up his money and bought more properties as he was financially able. He's now close to being financially independent. I'm really proud of him.
Hi WJK!

Thank you for your insight. I am ready to get my hands dirty with this property. At the moment I don't know much about being handy but I am confident I can learn through friends and youtube. Part of the appeal of starting this process is to gain experience as an on-site landlord and pick up new skills along the way.

As far as REFI into a conventional loan I was thinking that with a small facelift I could get the property reappraised and build a little bit more equity. I do understand that my goal is to get to 20% and get rid of that insurance, but that's just going to be a cost I will have to pay for right now to get the opportunity.

Thanks again, very helpful.
 

Envision

Platinum Contributor
FASTLANE INSIDER
Read Millionaire Fastlane
I've Read UNSCRIPTED
Summit Attendee
Speedway Pass
May 5, 2014
780
4,867
1,135
26
Id get it under contract asap. Set yourself up with a decent due diligence time frame for inspection and financing. That deal looks like its a good one. If you're lender cant do FHA see if they can do low down conventional. Like 5% and if they cant find a new lender. Stop looking for reasons to not do the deal. Ive structured my deals for my lenders before because they kept telling me no, they're working with only the picture they can see - you're job is to build out the complete image.

I have a triplex with slightly higher rents but almost the exact same specs (1900 build, your units are bigger, 2k sq ft) in Boise that I paid 450k for and it cash flows. My gross rental income is $3650 and I feel like I stole it and yours isnt far off that. So at 219k id buy that yesterday.

But that also depends on the market where you're living and your personal financing situation.

Given that you make 100k/yr I am thinking you should have more savings? But i would sell the bitcoin and buy the property (this comment might come back to haunt me) because of the immediate impact it will have to your life. If you can eliminate your rent payment, create cash flow, and have other people paying down your debt that is all positive. If you really make 100k/yr even if the tenants dont pay you you can still pay the mortgage.

Managing tenants is easier than you think. You just need to screen them or pay someone to screen them for you. I manage all my own tenants but I pay a local property manager $600 to find all my tenants, screen them, show the property, and bring them to me. I get amazing tenants for $600 one time and then I manage them going forward cutting out the 8% I would have to pay them monthly. The result, all my tenants pay me on time and increasing every year and I get maybe 1 call per year per property.
 
Last edited:

AlanBayWalker

Contributor
Read Millionaire Fastlane
I've Read UNSCRIPTED
Jun 9, 2019
19
26
21
New Orleans, Louisiana
Id get it under contract asap. Set yourself up with a decent due diligence time frame for inspection and financing. That deal looks like its a good one. If you're lender cant do FHA see if they can do low down conventional. Like 5% and if they cant find a new lender. Stop looking for reasons to not do the deal. Ive structured my deals for my lenders before because they kept telling me no, they're working with only the picture they can see - you're job is to build out the complete image.

I have a triplex with slightly higher rents but almost the exact same specs (1900 build, same size units, 2k sq ft) in Boise that I paid 450k for and it cash flows. My gross rental income is $3650 and I feel like I stole it and yours isnt far off that. So at 219k id buy that yesterday.

But that also depends on the market where you're living and your personal financing situation.

Given that you make 100k/yr I am thinking you should have more savings? But i would sell the bitcoin and buy the property (this comment might come back to haunt me) because of the immediate impact it will have to your life. If you can eliminate your rent payment, create cash flow, and have other people paying down your debt that is all positive. If you really make 100k/yr even if the tenants dont pay you you can still pay the mortgage.

Managing tenants is easier than you think. You just need to screen them or pay someone to screen them for you. I manage all my own tenants but I pay a local property manager $600 to find all my tenants, screen them, show the property, and bring them to me. I get amazing tenants for $600 one time and then I manage them going forward cutting out the 8% I would have to pay them monthly. The result, all my tenants pay me on time and increasing every year and I get maybe 1 call per year per property.
Envision! Dude, I was really hoping you'd catch some wind of this.

I'm taking action on everything that you wrote right now. I want this house! I'm gonna do some research and give my lender the run down and if she won't play I'll find someone who will.

I think the selling the bitcoin is a good idea, maybe I'd hold on to it if I had more savings but it's not worth the risk. I'm gonna be honest my savings being low is mostly my fault, I need to do better and when I get this house I'm gonna have to really crack down on this nest egg in case anything happens.

I'm just not sure how to liquidate my bitcoin or if it will hurt the buying process if I do it wrong. Also does anyone know if I pay taxes on the capital gains of the bitcoin immediately or when I file my taxes. I bought that at 9k lol.

Man you really inspire me. Thank you so much for taking the time out of your day to contribute to this wonderful forum.
 

Jon L

Platinum Contributor
FASTLANE INSIDER
Read Millionaire Fastlane
Speedway Pass
Aug 22, 2015
1,556
4,019
1,016
Bellevue, WA
This sounds really good to me, too.

Definitely get it inspected by a competent home inspector. Not just someone that is certified, but look around for someone that has experience building homes. You want to know what problems you're buying.

$50k worth of foundation trouble (or whatever) will put a dent in your otherwise amazing deal.
 

Sethamus

Bronze Contributor
FASTLANE INSIDER
I've Read UNSCRIPTED
Summit Attendee
Speedway Pass
Sep 13, 2019
266
484
223
Northshore area, New Orleans
If thinking of rehab potential, would it not be better to get another full or half bath in the 3/1 rather than a spare bedroom? Compare current rents and resale potential for multi with with 3/2's against a 4/1 in your area and see how they compare.
 

Don't like ads? Remove them while supporting the forum. Subscribe.

AlanBayWalker

Contributor
Read Millionaire Fastlane
I've Read UNSCRIPTED
Jun 9, 2019
19
26
21
New Orleans, Louisiana
Hey guys! Quick update, I looked into what envision said and it looks like lenders will only do a 15% downpayment on a conventional loan because it's a triplex and I make over $65,000 a year.

So right now I am looking at two options.

OPTION #1:

Finance the property under an FHA 203k loan. Basically borrowing the money to make the repairs. This would get me past the failing FHA requirements.

The problem with this is that it seems like it could be a little bit of a pain for everyone. But I will get this done if I have to go with this option. I found a lender that said she could structure it and make it smooth as butter. Got a call scheduled with her this morning.

OPTION #2:

Put the money for repairs in a repair escrow and purchase the property through a typical FHA loan. Basically promising that I will use the money from that account to make the repairs within 60 days of the purchase.

This would be a better option. I would avoid all the hassle of the 203k loan.

I was warned by a lender that I won't be able to put money into the repair escrow for safety repairs like the handrails and the peeling paint (For led contamination possibilities).

PLAN OF ACTION:

I found a lender that says she can do the 203k loan and has a ton of experience in it. I'm going to get her to break down what the 203k loan will cost be vs the typical FHA.

And I'm gonna work with the lender that says he can do the repair escrow and have the 203k lender as a backup plan.

I've gotta get a contractor to give me a bid on what the repair expenses are going to look like for this property.

Guys, please let me know if you have any more insight. I'm taking notes on every reply here, so feel free to grill me. Also, there is a third option. I could make the repairs on the property before the appraiser gets involved and skip this entire process. But I'd be making repairs on a property that isn't mine. The lenders say that this is pretty common, but it just seems super risky to give up that control.
 

WJK

Platinum Contributor
Speedway Pass
Oct 9, 2017
1,286
2,963
657
Nikiski, Alaska
Hey guys! Quick update, I looked into what envision said and it looks like lenders will only do a 15% downpayment on a conventional loan because it's a triplex and I make over $65,000 a year.

So right now I am looking at two options.

OPTION #1:

Finance the property under an FHA 203k loan. Basically borrowing the money to make the repairs. This would get me past the failing FHA requirements.

The problem with this is that it seems like it could be a little bit of a pain for everyone. But I will get this done if I have to go with this option. I found a lender that said she could structure it and make it smooth as butter. Got a call scheduled with her this morning.

OPTION #2:

Put the money for repairs in a repair escrow and purchase the property through a typical FHA loan. Basically promising that I will use the money from that account to make the repairs within 60 days of the purchase.

This would be a better option. I would avoid all the hassle of the 203k loan.

I was warned by a lender that I won't be able to put money into the repair escrow for safety repairs like the handrails and the peeling paint (For led contamination possibilities).

PLAN OF ACTION:

I found a lender that says she can do the 203k loan and has a ton of experience in it. I'm going to get her to break down what the 203k loan will cost be vs the typical FHA.

And I'm gonna work with the lender that says he can do the repair escrow and have the 203k lender as a backup plan.

I've gotta get a contractor to give me a bid on what the repair expenses are going to look like for this property.

Guys, please let me know if you have any more insight. I'm taking notes on every reply here, so feel free to grill me. Also, there is a third option. I could make the repairs on the property before the appraiser gets involved and skip this entire process. But I'd be making repairs on a property that isn't mine. The lenders say that this is pretty common, but it just seems super risky to give up that control.
Your risk aversion is well-founded.
 

AlanBayWalker

Contributor
Read Millionaire Fastlane
I've Read UNSCRIPTED
Jun 9, 2019
19
26
21
New Orleans, Louisiana
Hey guys, came back with an update.

I decided to pull the trigger on the Repair Escrow option. I'm not entirely sure how that is going unravel but I'll find out when we get to that point.

I put in an offer at asking price and the owner accepted.

I've got an inspection team scheduled for 3pm on Saturday. So I'll probably update you guys again later that day.

What do you guys think of the 1% rule within real estate? Good or BS?

Meaning $2,300 in rental income from all tenants / Purchase price

I think the plan is to try to stay at 1%. Which means I would want the cost of the home to not exceed $230,000. With repairs and closing costs included.

I'm going to see what I find out during inspection and then negotiate from there.

If anyone has any tips on inspection or anything else, feel free to post a comment. Hopefully in the future this thread can help one or two people.
 

WJK

Platinum Contributor
Speedway Pass
Oct 9, 2017
1,286
2,963
657
Nikiski, Alaska
Hey guys, came back with an update.

I decided to pull the trigger on the Repair Escrow option. I'm not entirely sure how that is going unravel but I'll find out when we get to that point.

I put in an offer at asking price and the owner accepted.

I've got an inspection team scheduled for 3pm on Saturday. So I'll probably update you guys again later that day.

What do you guys think of the 1% rule within real estate? Good or BS?

Meaning $2,300 in rental income from all tenants / Purchase price

I think the plan is to try to stay at 1%. Which means I would want the cost of the home to not exceed $230,000. With repairs and closing costs included.

I'm going to see what I find out during inspection and then negotiate from there.

If anyone has any tips on inspection or anything else, feel free to post a comment. Hopefully in the future this thread can help one or two people.
You are very focused on getting the numbers right -- as you should. Penciling out the deal is the jumping off point. I can also tell you that real estate deals and owning rentals creates a messy life. Just be ready for all the twists and turns. Things pop up day by day. And the problems come one after another -- when they are least expected. I have a bunch of residential rentals and some days get really crazy. We do a lot of preventative maintenance, but we can't prevent everything.
 

AlanBayWalker

Contributor
Read Millionaire Fastlane
I've Read UNSCRIPTED
Jun 9, 2019
19
26
21
New Orleans, Louisiana
You are very focused on getting the numbers right -- as you should. Penciling out the deal is the jumping off point. I can also tell you that real estate deals and owning rentals creates a messy life. Just be ready for all the twists and turns. Things pop up day by day. And the problems come one after another -- when they are least expected. I have a bunch of residential rentals and some days get really crazy. We do a lot of preventative maintenance, but we can't prevent everything.
Thank you for taking the time to write me on here.

I understand that I'll have some days were I really won't know what I'm doing, I'm sure I'll get frustrated sometimes. But I really do want to learn, I'll be doing this along my fast lane journey.

Something that really got brought to my attention through all of this is that I have to start saving more. Now I have a clear goal in my head as to why I'm saving money. Instead of just saving money because I should, I am now saving money because I want to provide a safe and quality service.

I'm going to liquidate the bitcoin sometime in the near future. I know it could go up even higher but I won't feel good about taking that risk with tenants. I want to have reserves in case anything goes south.
 

WJK

Platinum Contributor
Speedway Pass
Oct 9, 2017
1,286
2,963
657
Nikiski, Alaska
Thank you for taking the time to write me on here.

I understand that I'll have some days were I really won't know what I'm doing, I'm sure I'll get frustrated sometimes. But I really do want to learn, I'll be doing this along my fast lane journey.

Something that really got brought to my attention through all of this is that I have to start saving more. Now I have a clear goal in my head as to why I'm saving money. Instead of just saving money because I should, I am now saving money because I want to provide a safe and quality service.

I'm going to liquidate the bitcoin sometime in the near future. I know it could go up even higher but I won't feel good about taking that risk with tenants. I want to have reserves in case anything goes south.
Good thinking. I call my reserves my strutting money.

I keep money on hand for unexpected situations. I live in Alaska where we have blizzards every winter, volcanoes (we've had a few), big earthquakes (the last one was 7.2), and other mishaps (like fires). We just had a 3-day wind storm off of the Pacific Ocean (we're one mile from the coast). It was so strong that upended huge trees and peeled back some of our metal roofs. And then, of course, there are all the furnaces, water heaters, fridges and kitchen stoves that go out at the worst times. The good part is that I can pay for the repairs or the appliances without getting my jammies in a bunch.

I guess what I'm saying is that being the property owner is NOT glamorous. It's a boot-strap method of gaining wealth while the rest of the world is partying. One day you look up and you've left the rest of the world in your dust.
 

JScott

Legendary Contributor
EPIC CONTRIBUTOR
Speedway Pass
Aug 24, 2007
4,570
10,027
2,451
A few things to keep in mind as you move forward and are finalizing numbers:

- I've flipped about 60 houses in and around Milwaukee. If that property is 120 years old, there is almost certainly a lot of deferred maintenance. I would ensure that you get a realistic assessment of the cost to renovate, and ensure that these capex costs are added to the purchase price when calculating your returns (cap rate and cash on cash).

- Depending on the condition of the property, I would make sure that you talk to a good insurance agent sooner rather than later. You don't want to get caught two days before closing and find out that there are things that make the property uninsurable (for example, old wiring, roof in bad condition, foundation issues, etc).

- Make sure you check the leases of your existing tenants. Are they month to month at this point? If so, and the owner for permission to talk to the tenants, and find out if they are willing to sign 1-year leases. One of the downsides of Milwauee is that, if a tenant leaves in the November/December timeframe, it can take a few months to get a new tenant (due to weather). For that reason, I'd bump up your vacancy estimate (perhaps 8%) and make sure that your tenants are current on rent, aren't looking to go anywhere anytime soon and are in a financial position where they will be able to continue to pay.

- Your expense list was missing a number of items. To calculate NOI, you need to factor in property taxes, insurance, maintenance, utilities, turnover costs, lawn care/snow removal, etc. I also like to factor in property management -- even if you don't plan to use it, you might change your mind at some point, and you want to ensure that the numbers work. Also, while technically not above the NOI line, I like to include capex reserves in the NOI calculation.

- A good rule of thumb is that about 50% of your anticipated income will go away to expenses, vacancy/rent loss and capex (drop to 40% if you're doing your own property management). So, if market rent for the three units was about $3000, you could reasonably assume your NOI is somewhere in the $1800/month range. This is probably higher than you expect, which it should be. There are a lot of little costs you aren't thinking about that will creep in over time. For example, you're not planning for that first eviction (where the tenant stops paying, destroys the property and you need to hire an attorney to get them out), but if you own the property long enough, this *will* happen.

- That $1800/month NOI estimate above is based on full occupancy, but it sounds like you'll be seeing about $600 less than full market rent because you'll be occupying half a unit. So, actual NOI will be closer to $1200/month.

- If your mortgage payment is $1540/month, you'll actually be losing a few hundred dollars each month based off these estimates. Again, that estimate of 50%/40% of market rent being your NOI is just an estimate. It could be a little higher or lower. But, if you're getting a number that's much lower than 50% (or 40% if you're doing the PM), you're probably either missing something or your underestimating your costs.

Long story short, I'm not saying you're necessarily going to lose money on this property every month, but I think it's *highly* unlikely you're going to make $1000/month as you're currently projecting.

I would recommend this book:

https://www.amazon.com/dp/B018UTI2DO/?tag=tff-amazonparser-20

And here's a rental property spreadsheet that I created a decade ago that you might find helpful:

 

JScott

Legendary Contributor
EPIC CONTRIBUTOR
Speedway Pass
Aug 24, 2007
4,570
10,027
2,451
What do you guys think of the 1% rule within real estate? Good or BS?

To give you an idea of what the 1% rule means in terms of returns in real life...

If your property is making 1% of the purchase price in rent every month, that means you're making 12% of the purchase price every year. By definition, that means that your cap rate would be 12%.

BUT!

That 1% in rent doesn't factor in expenses, rent loss, vacancy and capex reserves. Like I discussed above, a good rule of thumb is that 50% of your income goes away every month to all these costs. So, your NOI is actually about .5% of the purchase price each month.

That means your cap rate is 6%.

In fact, when I do my first pass analysis of a rental property, if I see that rents are about 1% of my all-in price (which is pretty typically these days), my assumption is that the property will generate about a 6% cap rate, and given where interest rates are these days, will generate about an 8% cash-on-cash return (using a 80% LTC and 25 year amortization).
 

Envision

Platinum Contributor
FASTLANE INSIDER
Read Millionaire Fastlane
I've Read UNSCRIPTED
Summit Attendee
Speedway Pass
May 5, 2014
780
4,867
1,135
26
Envision! Dude, I was really hoping you'd catch some wind of this.

I'm taking action on everything that you wrote right now. I want this house! I'm gonna do some research and give my lender the run down and if she won't play I'll find someone who will.

I think the selling the bitcoin is a good idea, maybe I'd hold on to it if I had more savings but it's not worth the risk. I'm gonna be honest my savings being low is mostly my fault, I need to do better and when I get this house I'm gonna have to really crack down on this nest egg in case anything happens.

I'm just not sure how to liquidate my bitcoin or if it will hurt the buying process if I do it wrong. Also does anyone know if I pay taxes on the capital gains of the bitcoin immediately or when I file my taxes. I bought that at 9k lol.

Man you really inspire me. Thank you so much for taking the time out of your day to contribute to this wonderful forum.
Thanks man! Glad to hear it.

Liquidating your bitcoin depends on how long you've held it for. It ccould be short term or long term capital gains tax somewhere probably around 15-20%. I would say its still worth it because it would be on the gain (10k) and the net on that is still more useful to you on the real estate side of things.
 

Sponsored Offers

  • Sticky
MARKETPLACE Fox Web School "Legend" Group Coaching Program 2020
My friend was just looking for this information. Thanks
  • Sticky
MARKETPLACE Lex DeVille's - Advanced Freelance Udemy Courses!
If you read the last message then you know I'm removing my courses from Udemy next month. You...
  • Sticky
MARKETPLACE You Are One Call Away From Living Your Dream Life - LightHouse’s Accountability Program ⚡
This program helped me to triple my revenue over 7 months while also moving to a new city in the...
  • Sticky
MARKETPLACE Grow Your Business With a Book (An Unorthodox Marketing Strategy That Built One of the Largest...
PS. what do you think about the idea of setting up live Busking experiences on Air BNB? I could...
  • Sticky
FEATURED! Introducing... WEALTH EXPO$ED, A Short Story By MJ DeMarco
Hi Mj, I just bought it. And reading it. I think is a great idea to write using the stories to...
  • Sticky
MARKETPLACE Kill Bigger Incubator
@Kak Thanks for the reply. Whats interesting is that I have an idea that's been cooking which...



Forum Sponsor

sponsor

New Topics

Fastlane Insiders

View the forum AD FREE.
Private, unindexed content
Detailed process/execution threads
Monthly conference calls with doers
Ideas needing execution, more!

Join Fastlane Insiders.

Top Bottom