Tri-Investing

Ginny wrote me, giddy, she found THE investment for her. What she found--and I have no idea why the agent put it in the multi-family unit section of the MLS--was three individual rental homes for sale. If you added up the prices of the homes, you had the number the seller wanted. And, it was a lot.

But it wasn't a tri-plex. It was three homes for sale. It was three mortgages to qualify for. It was three properties to individually evaluate. It was three down payments. It was three times the challenge she could expect.

Because she asked me what I thought, I gave her my most neutral answer. I didn't know what the CAP rate would be because I didn't know her mortgaged amount, and what did she want for a CAP rate? If she was analyzing these properties based on cash-on-cash rate it would depend upon how much she put down ("I know you are aware you will need 20% for a down payment. However, that is about $90k more than you told me you had. Will you be able to obtain those funds?"). And, as she can see, her gross rent multiplier can't be factored because the agent put in pro-forma rents. And which method was she using to analyze this deal?

By the way, "pro-forma" rents are pretend rents that the seller thinks the property can rent for. What it really means is the property is vacant and in this case the owner is optimistic.

The rest of the jargon on the above paragraph you don't need to know. I am guessing Ginny doesn't know it either. But if she is serious about doing this, she will need to learn.

I also reminded her if she were to buy three homes in one subdivision, nobody moving in could qualify for an FHA loan at that point. So, that means there would be more investors buying in that neighborhood and that might change the values and the socio-economic makeup of the neighborhood when time came to sell.

I suggested starting with one home. Heck! Even a townhome! Just start small and work her way up. Or, if she wants three properties, buy three townhomes. I really want to help Ginny. I have a soft spot for investors. This is where I started in real estate, working with investors. However, I don't think Ginny is ready for this.