Deal Analysis 6/26/2017 431 Lynnhurst Avenue W, Saint Paul

431 Lynnhurst Avenue W, Saint Paul

Built in 1885

4 Units, 2 Garage

$254,900 price

2 days on the market

I'm thinking about it in terms of making it a rental property house-hacking style with a 3.5% FHA loan, 4% interest, 30 years fixed.

My analysis is the following:

Expenses: 

Principal and Interest - $1175

Property Taxes - $415

Property Insurance - $100

Mortgage Insurance - $100

Utilities - $300

Vacancies - $265

Repairs and Maintenance - $132

Capital Expenditures - $132

Property Management fees - $265

Total Expenses - $2884

Income

Unit 1- $700

Unit 2- $525

Unit 3- $850

Unit 4- $575

Cashflow after moving out of the property and hiring property management company - negative $234

So basically according to my analysis this is not a great deal at the current price but I'm curious to see what you guys think about the analysis. 

thank you,

Bruno Franco Netto

#10 - On How You Can and Should Live Rent-Free in the Twin Cities

For most young people living in the Twin Cities, or any other major city in the United States for that matter, rent is one of their biggest expenses. The purpose of this post is to demonstrate that this expense can be avoided to a great extent by buying and renting out a property in the right manner. We will consider two different scenarios in which this can be accomplished. The first one involves buying a single-family home (which would also apply for condos or townhomes), and the second one will explore the acquisition of a multi-family home.


The Single Family Scenario

Let's start with the single-family home scenario. In this example we will take into account a generic, $200.000 single-family home somewhere in Minneapolis, preferably close to the University of Minnesota. In today's market that is a reasonably standard price for a decent single-family home in that area. Let us assume then that we pay $200.000 for the house, which has 3 bedrooms and a finished basement.

Using a FHA loan, we will pay 3.5% of the value of the home as a down payment ($7000) and we will ask the seller to pay for the closing costs. We will then finance the rest of the value of the home ($193.000) at a 4% annual interest rate for 30 years. This means that we will only have to bring about $7000 to the closing table in order to buy the house and gain control over a $200.000 financial asset.

Ok, so now we have a $200.000 single-family home in Minneapolis, we move in and start paying into our own mortgage instead of someone else's. (That alone would be reason enough to buy the house.)
We will also need to start paying for the related monthly expenses or PITI payments in real estate jargon. Those will be, in this case, something like this:

• Principal & Interest - $921.41
• Property Taxes - $208.33
• Operating Expenses (water, gas, internet, electricity, etc...) - $300
• Property Insurance - $100
• Mortgage Insurance - $100
• Total Expenses - $1629.74  

Fortunately, we now have a 3 bedroom house of which we only really need to occupy one of them. So we can rent out the other 2 bedrooms for, say, about $500 each. We also have a finished basement that we can rent out to a student or to a young professional for about $500. In total, we can take in about $1500 per month in rent.

We can then conclude from this example that our net monthly payments every month would only be $129.74 after we subtract our total expenses from our total income. ($1500-$1629.74 = -$129.74) Considering that renting a room in Minneapolis would cost us about $500 and renting a small place would cost us about $1000, paying little more than $100 per month would be a steel!

Not only that, we also have to take into account that, over the years, the natural tendency is for payments to remain stable and for rents to go up, which means that we would eventually reach a point when we would either start to make a profit or would have to rent out fewer bedrooms in order to cover the mortgage.


The Multi-Family Scenario

Let's now look at a scenario in which we are buying a multi-family home instead of a single-family home. Let's use a duplex as our example. A duplex is basically a 2-unit apartment complex and when you buy a duplex you can live in one unit and rent out the other unit or rent out both units to different tenants.

Since duplexes are typically more expensive than single-family homes, we will consider in this case a $250.000 property with 2 units, each one having 2 bedrooms and with one of the units having a finished basement.

Once again, we will use a FHA loan and put the minimum 3.5% as a down payment. We will, once more, ask the seller to cover our closing costs. We will finance the rest at a 4% annual interest rate and will pay around $4000 annually in property taxes. This will lead to the following monthly expenses:

• Principal & Interest - $1151.76
• Property Taxes - $333.33
• Operating Expenses - $300
• Mortgage Insurance - $100
• Property Insurance - $100
• Total Expenses - $1985.10

As you can see our expenses have increased a bit in this case but fortunately our income will also increase if we have a duplex since we have an extra unit we can use in order to generate more income. In this case we can rent out the extra, 2 bedroom unit, for about $1000. We can also rent out the spare bedroom as well as the basement in the unit we are occupying. That would bring our income to a total of $2000 and our net income to $14.90 ($2000-$1985.10). In other words, we would live for free and have our tenants help us pay our mortgage.

Conclusion

So really, now that you know that you can live for free in the Twin Cities, what's stopping you from buying your first property? Not only is it a great way to avoid an unnecessary expense (rent) but it is also an amazing way to start building considerable wealth in the form of equity in the property. You will be acquiring an income-generating asset that will appreciate in value as time goes by and you will be increasing your equity every month with each monthly payment to the bank and the best thing is that your tenants will be paying for most of it!

#9 - On Financial Independence

Financial independence means achieving a point in life where one does not need to work anymore in order to pay for one's life expenses. It means that one can choose not to work for a living if one one chooses to do so. In other words, financial independence is really everyone's dream.

The one million dollar question (literally) then is "how does one go about achieving financial independence?" The answer to this very important question is actually deceptively simple. You need to build enough passive income to cover your life expenses. Passive income differs from active income since it is income that does not originate from active labor but rather from one's income-generating-assets. Examples of passive income are rent from properties, dividends from stocks or bonds or profit from privately owned businesses.

Hence, it follows from the above that the key to financial independence is the act of acquiring, maintaining and managing income-generating assets. One could argue that the acquiring step is the one that presents the biggest challenge for most people since it demands a considerable investment of initial capital, something many people, especially young people, lack.

However, it is easy overestimate the amount of capital needed to start the journey towards financial independence and simply use that apparently insurmountable difficulty to give up on it altogether. Real estate specifically, and even more so in the United States, is actually extremely accessible to those who want to buy it when you understand all the financing options available to buyers currently. Today a young person or couple living in the United States can easily acquire a property by paying only 3.5% of the total price of the property as a down payment. That means you can acquire a $200.000 property by investing only $7000 initially and finance the rest at considerably low interest rates. This is why, among other reasons, I believe that real estate is the best type of asset young investors can invest in right now, particularly at a time when down payments and interest rates are near a historical low. (even though they are on the rise)

The main reason, however, why I believe real estate investing is the fastest and surest way to financial independence has to do with cashflow, that is, the ability to generate considerably high income in proportion to the capital invested. For example right now in Minneapolis you can expect at least $1000 of monthly revenue if you decide to rent out a $200.000 property. That is equivalent to a 0.5% per month and a 6% yearly return on investment in cashflow alone, without even taking appreciation into account. Most stocks for example will only give you a 2.5% yearly dividend or something similar to that.

The practical applications of real estate's great capacity to generate income are quite incredible in terms of our assumed goal of financial independence. Taking once more into account the conservative estimate of $1000 dollars net rent for a $200.000 property in Minneapolis, that would mean that by owning such a property you would be able to easily generate $1000 per month in passive income, enough to cover the basic expenses of a thrifty person. That also means that if the same person had two properties instead of one, the amount of passive income generated would go up to $2000 dollars per month or $24.000 per year, that is, a full salary (not a great one admittedly but enough for most people to live on).

This is why rental properties are a great way to achieve the coveted goal of financial independence. While other income-generating assets such as stocks, bonds or privately-owned businesses are also great ways to pursue financial freedom, I truly believe real estate is the best way to do it due to its accessibility, stability and enormous potential to generate cashflow without hindering its appreciation potential at the same time.

And yet why is financial independence so important after all? Isn't working hard one's entire life the American way? Isn't hard work a virtue in itself? Many, I'm sure, would argue in such a manner.

I am not, however, saying we shouldn't work hard. If anything, I'm saying the exact opposite. The difference is that I believe that we should work hard for ourselves, and not for heartless, faceless, profit-obsessed corporations. Too many of us end up selling our lives to companies in order to buy big houses and fancy gadgets. This is not what we should be doing, we should be trying to change things. I believe that we should be trying to build a society driven by ideals and passions rather than aimless profit and bottomless greed. In order to change things, however, we need to educate ourselves financially and understand how the game is played.

I'm here to tell you that financial independence should be a priority for you and that it can be achieved even by the most humble of people, at least in the United States. All it takes is hard work, lots of determination and discipline and, of course, some financial knowledge. I believe that investing in all of that is a fair price to pay for your economic freedom and the chance to determine the course of your life. So what are you waiting for to get started?