Did I make a good deal?

[txguy79]

Hello All! I just typed for 15min on a post and it didnt go through. I will try to give the short version.
This is my first deal.
42,500 Purchase Price (Cash)
534 Penalty for breaking CD
634 Ins. for 6 mos.
1000 Util for 6 mos
1050 Taxes for 6 mos.
338 Closing Costs
75 Insp from contractor friend
4500 Repairs to be rent ready... 9000 for resale
=50631 money in the deal


ARV 75000-80000
SFH 2/2/2


This being my first deal, I want to hold for 6 mos and get the 6.5% APR for primary residence rate, and rent right after that.
Refinance numbers:
42500 PP
534 Penalty
3000 Closing costs (give or take)
= 47034.00

I should only have 3597.00 in the deal after 6 mos.


750 Rent
337.50 OE
312.50 P&I
100 Cashflow

I will apply the 100.00 cashflow every month to the principal and take a 30yr loan to 18yrs.

Sorry I didnt elaborate more but after that first post that didnt go through I dont have much time.
I was wondering what the veteran investors think abnout this deal. All input and advice is welcome.
Thanks.

Matt

[campbellgroup]

What the heck, Looks good to me. Its only money.

[propertymanager]

txguy79,

I'm having a little trouble following your logic.  I'm assuming that you are going to hold this property vacant for 6 months so that it will be seasoned.  Then, you plan to get owner-occupant financing even though this is an investment property.

If that is correct, I would say - don't do it.  Representing the property on a loan application as owner occupied when it is a rental (to get a lower rate) is insurance fraud.  I would not do that.

In addition, I don't quite understand your math.  If you buy the property, hold it vacant for 6 months, and then refinance it, you will be in the deal for $50,631 + $3,534 = $54,165.

Therefore, to look at the numbers for this deal:

Acquisition costs (including refinance):  $54,165

Gross Rents:  $750
Operating Expenses:  $375
NOI:  $375
Mortgage Payment:  (30 yr, 6.5%, $54,165):  $342

Cash Flow:  $33

This is not a terrible deal, but it's just not a good deal with these numbers.  You should have positive cash flow, but it's lower than my personal $100/ month minimum.

This would be a better deal if you simply got the financing at the beginning and cut out the penalties, double closing costs, and 6 months of lost rent and carrying costs.

Mike

[txguy79]

Sorry for the confusion. And yes my math is off a little. The 534 penalty would only be a one time charge but I would have to add the 3000 closing costs to it.
  It was my understanding that as long as the property is owner occupied at the time of  refinance then it doesnt matter what you do with it after that. I do know that on the next property I will have a higher rate.
Couldnt I refinance at a price that would give me the $100 min. cashflow and just keep 5-6k in the deal?
Also, what do you think about me not taking the profit and applying the $100 to the principal for the early mortg. payoff.
I am using 45% of gross rents for my OE.

Thanks for your advice
matt

[bizarrefun]

it depends on the zip code...do some more research,,,,most neighborhoods ARV will be 10-20% withing 2 years,,,,,u will need to deduct 10-20% off your ARV...

i would pass....not enough cash flow.....not a great holder



my 2 cents

Robert A. Doncaster, Jr.
Import/Export Entrepreneur & Investor
*** DO YOUR HOMEWORK ***

Chicago Illinois USA
& sometimes Salzburg, Austria

[Bluemoon06]

Hello Matt,

I am in Houston also.  In general a 2 bedroom is what I call an obsolete house.  The market for 3 bedrooms is much greater than 2 and the market for 4 bedrooms is not that much more than 3.  That is why I look for 3/2/2.

With these numbers you can get this house 100% financed with a PITI of about $600/month and with a $750/month rent be positive $150/month without taking the risk of breaking your CD or lying on the credit application.  This means that you can do 6 of these per year for the next 3 years and end up with an income of $2500/month.  If you use your cash then you will run out of money before you run out of deals. 

Remember why you are doing real estate in the first place.  You are not doing deals for deals sake.  You are trying to create multiple streams of income that will replace your job and allow you to own your lifestyle.  It is not about the money it is about the lifestyle.
 

[txguy79]

Bluemoon,

Thanks for your reply. The reason I used cash is because I couldnt find a traditional lender who would go as low as 42500.00. I almost used hardmoney but after I ran the numbers it just didnt make sense. The cost of money was too high.I originally was going to buy and sell. My biggest mistake was not looking over the comps throughly enough. In this particular area there had only been one 2/2/2 sale in the last 6 mos. and it was for 89900.00, or so I thought. The sq. footage was wrong on the comp and they had the third bedroom listed as a dining room on the MLS. It didnt click until I had already given 2000.00 earnest money and was too far in the deal. I bought it from an auction with a pro-seller contract. This is a rookie mistake, I know, but this being my first deal it slipped by me. I still think I can make this deal work and get most of my cash out so I can move on to the next deal.

Question: If I havent rented the house out after 6 mos. when I refinance, am I really commiting fraud or just beating the system on this one?

Thanks for your advice

Matt

[propertymanager]

With these numbers you can get this house 100% financed with a PITI of about $600/month and with a $750/month rent be positive $150/month without taking the risk of breaking your CD or lying on the credit application.

What?  That must be some of that fuzzy math.  Rent - PITI does not equal cash flow  -  not even close.  Are there no operating expenses in Texas?

Couldnt I refinance at a price that would give me the $100 min. cashflow and just keep 5-6k in the deal?

Yes, you could put enough cash into the deal to get $100 minimum cashflow, but that doesn't change the character of this deal.  You would simply be paying up front to get the cash flow and losing the use of the money you put down. 

This isn't a horrible deal, it's just not a good one.  However, since it is positive cash flow (even at 100% financing), you should not be hurt by this deal (unless you make additional significant mistakes). 

Mike

[txguy79]

Mike

Thanks for your advice. I read your book and I do believe that OE run 45-50% of gross rents.

I guess I will just leave about 5k in the deal, take the $100.00 a mo. cashflow, move on and hope to make a better deal next time.

One more thing; Is there ever a time when you can claim some of the operating expense build up from one property as profit?   lets say after five years you have a model tenant who hasnt given you any problems, pays on time- every time, and doesnt plan on going anywhere any time soon, and the house  hasnt needed any major work?

Thanks again guys for all of your advice...

Matt

[propertymanager]

txguy79,

You are right that the OE run 45% to 50% of the gross rents.  I always use 50% when evaluating a property just to be on the conservative side, but it is not unreasonable to use 45% as you have done.

If you don't have a lot of operating expenses for a given property in a given year  -  yes, you will have more profit.  However, when you have a bad year with high expenses for a given property, then you could have a substantial loss for that year.  The best I can tell from my business, it is all random.  I have a few really low income rentals that have never been vacant and have the original tenants in them.  I have had other low income rentals that have had tenants from hell (or at least they were pure evil).  I have a couple of really nice SFHs that have had a lot of turnover and evictions, including one rental that had two evictions in two consecutive months (both tenants passed my thorough screening).  I was absolutely shocked.  I have other SFHs that have had excellent long-term tenants. 

Once again, I want to stress that you haven't made a terrible deal or even a bad deal!  That is not what I'm saying.  It will be fine for your first deal and is lightyears ahead of the first deals that most new investors make.  The numbers indicate that it will have a positive cash flow.  It just doesn't meet my personal $100/month minimum with 100% financing.  Rentals can be significant hassle and I like to be paid enough to make it worth while. 

Good Luck,

Mike

[txguy79]

Thank you for the advice Mike and good luck to you as well.

Matt

[Jeffelite]

Mike how much do you put down on a property?  As close to 0 as possible?

[propertymanager]

Mike how much do you put down on a property?  As close to 0 as possible?

YES, 0 on most deals.

Mike

[txguy79]

Mike

Lets say you find a house that needs 10k in repairs and it wont qualify for conv. financing; Would you use a HML, do the repairs, and then do a cash out refi with a traditional, leaving no money in the deal?

Matt

[propertymanager]

Lets say you find a house that needs 10k in repairs and it wont qualify for conv. financing; Would you use a HML, do the repairs, and then do a cash out refi with a traditional, leaving no money in the deal?

Absolutely not!  First, I would never use hard money for a rental.  The margins are too tight to pay uncle guido's extortion rates and fees.  Also, I won't do a deal unless I have at least 30% equity at closing.  I'm trying to make money and build wealth.  Zero equity = zero wealth.

Mike