Please help with your advice/opinion

General Real Estate Investing
1

I didn’t get any replies from my first post, but I think it’s because I didn’t word my question right, so I’ll try again.

I’m choosing between three different 4 units to have as a rental…assuming all the price/cash flow numbers/condition of the property and everything else is the same, I was wondering…

  1. Is it more important to have a place closer to the desirable part of the city, but on a very busy street with a lot of noise? Or is a property that is on a little quieter street at least 10 more miles farther away better?

Is it a big advantage to have a one story over a two story?

Is a house built in 1965 an advantage over one built in 1935 (just thinking the long term with the property)?

Thanks in advance to anyone that replies.

2

…assuming all the price/cash flow numbers/condition of the property and everything else is the same, I was wondering…

1. Is it more important to have a place closer to the desirable part of the city, but on a very busy street with a lot of noise? Or is a property that is on a little quieter street at least 10 more miles farther away better?

Concern yourself with the numbers including rent amount if this is a rental or ARV if it is a flip. You are not being very specific with helpful details about what you are looking for. This is likely why there were no responses. We have to know about the properties to give you advice. The numbers are what matters with an “investment”. And I know for sure that the price/cash flow numbers/condition are not the same! You are focused on superficial things when you should be focused on making money.

Is it a big advantage to have a one story over a two story?

There is an advantage of multiple units under one roof but no “significant” advantages of how many stories a property is.

Is a house built in 1965 an advantage over one built in 1935 (just thinking the long term with the property)?

The condition of a house built in 1965 can be worse than one in 1935. The only advantage I can think of is sometimes on the historic houses you can get some local and federal tax benefits.

Now take your focus off these insignificant things and start thinking about the numbers.

3

I concur with Hooch and also suggest that you look at your long term goals. Cash flow is king, but a good long term investment can pay nice dividends as well.

4

I think the answer to the question is …it depends.

If the street is busy , is it a good type of busy or a bad type of busy?

Are there nice shops etc in the area? Or ghetto businesses?

For the year built , some tenants like older buildings that have style. The year built doesn’t mean much if the architect was crappy…etc…

I think you might be thinking about it too hard…

The important part is the numbers as the others mentioned…especially for rental property.

For Single Family Homes that you would be selling to owner occupants these other questions are more important.

I saw you posted in another thread as well…I’m wondering why you don’t want to share the numbers. The rents, expenses,etc?

5

Thanks for the responses. The cash flow/price/condition of properties is about the same and I can calculate that I think. And I agree with you that’s more important, but the things I asked can be important too.

I mean, if I was renting a property, I’d rather live in a one story so I wouldn’t have to hear neighbors above me, but I also wouldn’t want to live on a busy street with a lot of noise. So when comparing these properties, these questions I asked help/advice on would help me figure out which would be the better rental property to buy.

The noise is bad noise…ghetto neighborhood. Thanks again for the responses. Anything else? Any help is greatly appreciated.

6

Okay, I posted the numbers below, but I still don’t think it’s necessary to post the rents, etc. because I’m wondering about these other factors. I don’t really know a lot about construction but my thinking in preferring 1965 over 1935 is that everything else being equal, the 1965 place would be more structurally sound and less likely to have problems down the line than one 30 years older.

Property A: South Los Angeles. $265. Two 2 bed, 1 bath, two 1 bed, 1 bath. Ghetto neighborhood, located on busy street. Gross rents $3600 a month. Built 1965, 2 story.

Property B: Long Beach. $272. 4 1 bed, 1 bath. Gross rents $3600 a month. Built 1935, one story.

Both properties are in similar condition, and expenses are roughly the same.

I like that (A) is closer to downtown LA, has 2 two bedrooms, and is built in 1965.

But I like that (B) is on a quieter street (still in a ghetto area, but a little nicer ghetto than (A)) and is one story.

Again, thanks so much for the help!

7

Okay, I posted the numbers below, but I still don’t think it’s necessary to post the rents, etc.

There are 2 primary things that matter. What the rent is and what the repairs are. Which give you what to pay for the property. It IS necessary. And if I had two properties that were the same price and one was in bad getto and the other was in good getto I would always pick good ghetto over the other with no consideration of when the house was built. A house built in 1965 is NOT necessarily better built or more sound in any way than one built in 1935.

[b]Property A: South Los Angeles. $265. Two 2 bed, 1 bath, two 1 bed, 1 bath. Ghetto neighborhood, located on busy street. Gross rents $3600 a month. Built 1965, 2 story.

Property B: Long Beach. $272. 4 1 bed, 1 bath. Gross rents $3600 a month. Built 1935, one story.[/b]

Those properties are worth $108,000 minus needed repairs so you have 2 loser deals that won’t even cash flow. Even if you used the 2% rule for better neighborhoods they would be only worth $180,000 minus repairs. NOW do you know WHY posting rent DOES matter?

8

Thanks for your response. Really? $3600 in rents a month, but it’s only worth $108k? At $265k or $272k, I calculated at least a 10% cap rate. I’m looking to hold long term. What calculations make it worth only $108,000?

9

You don’t buy a property in the ghetto for a 10% capitalization rate. Check for yourself. Do an ARV on rental houses around there. See what the recent sales prices were that are very near by. You will find that they are NOT at a 10% cap rate. Unless LA is one of the worst places an investor could ever buy due to an extreme over saturation of investors, which I doubt. Especially in these times.

Low income property in a great deal of the country can be found at rent X 30 minus repairs. You have to actually look for the deals though. From time to time they pop up on MLS but for the most part you have to go out and get them.

Most investors around here buy property using the 2% rule which would be equivalent to rent X 50 minus repairs. And that is 180K. I personally ONLY suggest that for middle class neighborhoods.

These “deals” that you want won’t even cash flow and why would you buy a property that will make NO money and will end up COSTING you money each month unless you put down a massive amount of cash to MAKE the numbers work.

Go here to learn about real estate valuation and THEN make your offers because you were just walking down the path of making a REAL bad decision.
http://www.reiclub.com/forums/index.php/topic,43281.0.html

10

Pay less attention to what year something was built and focus on the type of construction and condition of the property. I recently walked thru a property that was about 30 yrs old that had mostly squishy floors and lots of other problems. I have an 80 yr old house that’s in MUCH better condition structurally than that other property. You also kinda answered your own question about one story vs. two story. You have the potential for more noise complaints/problems in a two story property.

11

Thanks again for your responses. Yeah, I’ve already done an ARV and only two other properties have a cap rate as good as this one, it might be cause it’s LA that these numbers are higher than what you are used to. The property at $265k, sold for $650k 3 years ago.

Honestly, I don’t understand how you would find someone willing to sell that would be willing to cut the price their place over $150k to sell it. Can you please explain one of the ways that is possible?
Of course if you find something that you have to buy all cash that needs $100k of work, then maybe, but your still paying very near that market value of $150k when you factor in repair costs. It just sounds too good to be true that I’d be able to find a property that recent comps show to be work at least $275k for $108k. How?

Maybe I’ll describe my investment strategy a little more, to see if it makes more sense to you. The property needs very little work, if any. I am getting an FHA loan and will only put 3.5% of the purchase price down. Even with 3.5%, the property cashflows. For my calculations I am using rent, vacancy, expense estimates for that area from credible publications. The IRR of a 10 year hold on this property is about 30%! How is this a bad investment/overpriced?

Thanks so much for your input and I look forward to your response.

12

I would NOT use expense estimates from publications to base my expense numbers from. That makes about as much sense as saying Zillow has the property valued at $1MM so this must be a good deal. How do you know the estimates for those other places are for properties where the owner doesn’t pay any utilities, but for yours you have to pay water/sewer/trash/electric/gas? Everyone wants properties in good shape that will cash flow with little to no money down. Most of us have to find good deals and then repair the property to make it rentable. I’m just trying to tell you not to underestimate your expenses. If you know the property needs certain repairs, get a few estimates of what it will cost you if you’re not doing it yourself. You can at least nail down the property tax amount and get some quotes for insurance for the building. Check into the price difference to bump up the liability coverage from whatever they’re quoting you (maybe 300k or so) to 500k or 1MM. The premium increase probably won’t be that much considering the extra coverage you’ll have if you need it.

13

Are you saying that each unit will rent for $1200 per month? Sounds a bit too high for a 1BR ghetto property, but I am on the east coast so what do I know?

14

Gross Income: $3,600/mth = $43,200 annual (sounds high to me too but I’m east coast as well)
Expenses (50% rule of thumb) -21,600
NOI: $21,600
275,000k@7%/20yrs: -$25,584 (I know you guys on the west coast are doing 60 year mortgages but you better find out what it is for rental property, things are a changing. Regardless, how is it an investment when you have it paid off when your dead?)
Yearly Cash Flow $- 3,984 OUCH, NEGATIVE CASH FLOW!

Tell me what your interest rate will be for sure (won’t be the same as personal property, especially if it is a commercial loan) and how long you are going to drag out your loan.

15

Thanks so much for the responses!:

Justin0419, it’s not like it’s zillow. What I meant is credible sources, I researched it by going around the neighborhood to see what rents were, checking sites online, knowing what the taxes are for the county, what the vacancy rate is for that neighborhood, etc. But thanks for the input to not underestimate expenses. It needs little work to me, but I still have to investigate plumbing, etc. so I will definitely get a good property inspection if I continue the purchase.

Dave, no, I didn’t say they will rent for $1200 each…it’s a 4 plex, the two 1 bedrooms will rent for 800-850, the two 2 bedrooms will rent for 1000.

Hooch, since this property is a 4 plex, I qualify for residential financing and since I work in that field, I will get an interest rate around 5.5% on a 30 year fixed. Of course, interest rates could go up or down.
I find your 50% expenses rule of thumb too high. The lender who will be financing 96.5% (265,375) of the purchase price uses 25% for expenses, I calculated them to be roughly the same, but lets use 30%. Maybe an inspection will reveal more work to be done with plumbing/gas/electric that I can’t judge, but besides that, the property needs minimal work, if any at all.
The purchase price would be $265k, there would be a 10k credit for closing costs. The tax rate is 1% of the purchase price.

Gross Income: 43,200
-Vacany5%: 2,160
-Expenses30%: 12,960
265,375@5.5/30 yrs: 18,081
Cash Flow: $10,000
Basically, I get all my cash back in the first year of the deal.

There’s a possibility I might have to make my decision on this property by tomorrow so I really appreciate more responses. Thank you.

16

You mentioned that you’d be using an FHA loan with 3.5% down. Are you planning on living in the building, because 99% of FHA loans are for owner occupied properties. if you’re not going to be living there, then most likely you won’t be using FHA, and then you’re traditional DP is going to be 10-20% of the loan value, not 3.5%, obviously making a huge difference for cash out of pocket.

17

You said that you want to use FHA financing and just pay 3.5% down. In order to use FHA financing, you MUST occupy one of the units as your primary residence, meaning that there are only 3 units available to generate rental income. I was wondering if you took the owner occupancy requirement into account when you claimed $3600 in monthly rental income since you will only have three properties producing rent.

With only three properties generating rental income, how does this change the deal for you?

18

I find your 50% expenses rule of thumb too high. The lender who will be financing 96.5% (265,375) of the purchase price uses 25% for expenses, I calculated them to be roughly the same, but lets use 30%.

Just be careful here when you are going outside of the national average which IS 50%. And what the lender uses is completely irrelevant. You know that they don’t care if the house cash flows. They typically want a DCR of 1.5% and that is it. You have to look out for you, because the lender will only be looking out for themselves. It is smart anyways to look at things from a worst case scenario and if it turns out better than that is more money in your pocket. But if it takes that turn for the “average” or worse than you are really screwed.

I NEVER TRY to make the math work. If it works I will buy it, if it doesn’t I will buy another. No big deal. Houses for sale not on the MLS are a dime a dozen and I will just find another.

19

Really? Do you have any links that show 50% as the national average? I searched but I couldn’t come to that conclusion. But I think you definitely have more experience with me, but this property is really move in ready.

I think the lender does care as guidelines have gotten really strict. In fact, they have a guideline that an appraiser has to estimate rents and if the property isn’t self-sufficient with what the appraiser estimates and their calculations, they will not approve the loan.

I’m not trying to make the math work, I’m using fair, if not conservative numbers for what the interest rate will be, rents, expenses, vacancy, etc. I guess I can agree that it is not a home run deal, but with only 3.5% down, little to no work on repairs, and great investment return I still feel it is a great investment.

Thanks again guys, any other input?

20

The National Apartment Association conducts studies of thousands of properties nationwide. Here’s a link to a report:
http://www.naahq.org/SiteCollectionDocuments/Industry%20Resources/2005%20Income%20Expense%20Executive%20Summary.pdf
Granted it’s from 2005, but it’s late and I don’t feel like searching much more right now.