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Author Topic: My first deal  (Read 48855 times)

Offline WTSinvestor

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My first deal
« on: February 12, 2011, 06:49:24 am »
Hello Everyone,

After reading every article on this site, I moved on to the forums and was amazed at hom much information and great advice was here free of charge with no gimmicks.  This and the last thread I read about the lack of participation lately spurred me to write instead of just soaking up all the free advice. 

     Two months ago I purchased a Duplex for 55K cash.  Since then my wife and a hired contractor have done about 10K worth of work to date and still have a few minor projects to complete to get the house ready for rent.  The duplex is a 3/1 side by side and was built approx 1910.  So we had the electrical re-done, the walls, ceilings, new kitchens, new bathrooms and we will refinish or carpet the floors (probably a mix of both).  The roof is ok but will probably need to be replaced in the next 3-5 years and the windows are all old but are holding fine.
     Based on my market research on craigslist I believe we should be able to get good tenants into this place for about 900-1000 per month.  I came with with this figure because I sublet my house right now due to deployement for half that per room and also I have family that owns a house a few blocks away that collects 1450 per month on a 4/1 single family.
     I wish to capitalize on the down market and continue to purchase additional properties but I have put all my investment capital into this place so I thought I could refinance and pull out about 65% equity to help fund future deals and pretty much have a positive cashflow property and the oppertunity to purchase additional properties.
     So what do you all think?  Did I make a good investment?  What do you think about my plan? Is it feasable?  All comments are appreciated I have developed a thick skin so dont worry about my feelings.
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Offline CLTinvestor

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Re: My first deal
« Reply #1 on: February 12, 2011, 07:01:15 am »
If you can rent both sides at that rent amount, you should have a good deal. I would add up all your fix up costs plus your acquisition cost of $55k to finalize exactly how much you have in the property and then once you get it rented, determine your overall return on investment for year 1. That should give you a pretty good indication based on cash flow vs. the money you put in on how well the investment is now and in the future.

Once you refinance, the numbers will change b/c less of your 'own' money is on the table. In either case, you can look at your yearly cash flow profits vs. what you've put in of your own money to determine your ROI and can then clearly see how well the investment is doing.

Of course, if the neighborhood appreciates in time, thats even better but as long as its paying you month after month, you're in good shape.

Hope that helps....
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Offline d1beard

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Re: My first deal
« Reply #2 on: February 12, 2011, 04:16:16 pm »
Your purchase sounds good.  I like to get 30% gross rent returns (annual rent / total all-in costs) in C class areas, or 40% if I'm paying for gas/heating.  For you, $21,600 of gross rents divided by ~70K all-in costs = 31%.  Looks good assuming tenants pay their own gas/electric.

You probably would like to get a conventional 30-year fixed rate mortage to lock in the low rates.  However, a cash-out refinance based on a new appraisal will require you to have owned the property (called the title seasoning period) for at least 6 mths, some lenders as long as 12 mths.  You will then be able to finance 70% of the appraised value.  So you've got some waiting to get this type of loan.  That may be fine in your situation, especially since you're still working on it.  If you need the income to qualify for the loan based on your Debt-to-Income ratios, then that will be problematic.  Many conventional lenders want you to have a couple years of landlording experience (proved through your Sch. E) to be able to qualify any rental income from investment property, and at a minimum you'll have to have tenants in there with signed leases in hand to get credit.  You'll also need a 720 credit score, generally.  (Conventional loans are limited in how many total loans you can have, which is 4 for most of these types of lenders.)

By contrast, a local/community bank will often do cash-out refinances (based on your purchase price + rehab expenses, or they may use a new appraisal after a specified period of time) without any title seasoning requirements, but the rates will be a little higher and they will not lock the rate for longer than 5 years, typically.  Due to the flexibility, however, most landlords with lots of properties will work with a local bank, so call around and see what they offer.  Just tell them you're looking for in-house or portfolios loans, not conventional loans. 

Offline WTSinvestor

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Re: My first deal
« Reply #3 on: February 13, 2011, 02:40:27 am »
d1beard:  thanks for the refi info.  I could def work with a 6 month title seasoning requirement just hurts to watch the mortgage rates go up on what seems to be a daily basis.  I will look into the local banks.  Although I tried to finance this place through a local bank and we got into a difference of opinion which caused us to walk away from their financing.

I think my area is def a solid B just with relatively small towns the good and bad areas are so close to each other its almost not the area but the house itself.

Lately have been questioning my focus on this specific area due to the fact that there are no middle age or young houses in the area.  Majority of the houses are from 1880 - 1910, I would venture a guess of about 70 percent.  The new or houses built in early 2000s are near 200k.  The issue with these older homes is that they never fit into the neat rehab that people write about.  its always the same story.  Needs electrical, new everything inside, new roof, new windows, def new bathrooms and kitchen. 

My question is:  Should I be in this area or should I be looking at a bigger city where I can find houses from the 60s and 70s? 

there is a huge plus side in my area of focus though.  I know the population will grow approx 15% in the next couple of years minimum and its evident that big business, i.e. walmart and the like have noticed it recently.  Also my potential tenant market is largely military with a reliable housing allowance that plays well into collecting very competitive rates for the investment.
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Offline justin0419

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Re: My first deal
« Reply #4 on: February 13, 2011, 09:17:30 am »
Most of our houses are around 50-60 years old.  We have a couple close to 80 years old.  Some of the older houses are very solid.  We've had to do electrical updates to most of ours, although some of them were bought with new circuit breaker panels in place.  The age of the house has basically nothing to do with the age of the roof since you can only expect 20 or a few more years for the life of the roof.  We bought an older home (REO) that had really solid HW floors throughout, probably about 7-8 yr old roof, 2 yr old central HVAC system, updated electrical panel, etc for dirt cheap.  Needed a lot of drywall work, siding, and extensive porch repair, but has been a really great deal. 
Judge the houses for what they are and what they'll cost you, not how old they are.
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Offline WTSinvestor

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Re: My first deal
« Reply #5 on: February 13, 2011, 09:51:45 am »
Justin, very good point on the age thing.  I didnt think of it quite that way and it has been eating away at me. 
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Offline WTSinvestor

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Re: My first deal
« Reply #6 on: February 17, 2011, 11:43:14 pm »
As we near completion of the project I realize that we have done nothing on the outside of the house to improve its appearance.  I dont think my future tenants will care that the house is the ugliest houes on the block from the outside (slight exageration) because on the inside it is fantastic.  But I am concerned that this may influence my appraisal and limit the amount I am able to cash-out in order to do future projects. 

What do you all think?  Should I get a power washer and just re-paint with a different color scheme or do I do vinyl siding? or do nothing? 
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Offline justin0419

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Re: My first deal
« Reply #7 on: February 18, 2011, 12:05:09 am »
I just got done repainting a little 2 bd place that we've had for a couple years.  I bought a paint sprayer a couple years ago thinking I'd use it a lot more than I actually have.  This house has asbestos siding.  I love that stuff because it's so durable.  I wire brushed the spots where the previous paint was peeling and then scraped all the wood trim.  Once I got done with the prep work, it only took  about 2.5 hours to spray the entire place.  I then repainted all the windows, trim, and foundation.  I didn't specifically keep track of my time, but it took me probably the equivalent of 3 weekends of work to complete.  The house looks great now and I've had compliments from a few neighbors so far.
We paid to have siding installed on another house.  After my wife and I scraped on that house for an hour, we decided to check into siding.  It cost about 2500 installed for an 1050 sq ft house.
I guess it depends on your budget and what the house currently has on it.  If you've put all the effort into making the inside nice, I'd at least do something to the outside if you think it needs it.
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Offline WTSinvestor

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Re: My first deal
« Reply #8 on: February 18, 2011, 07:01:33 am »
I am partial to vinyl siding.  It seems to be very durable and does not require the maintanence that I think painting would require.  Do you paint every 2-3 years?  This house is in upstate NY (waaay upstate) near Canada so we get alot of snow and I dont know how well the paint will hold up.

THis is going to be a rental property. Its 2350 sq/ft which based on your example would cost approx $5600 to do the vynil siding.  I have no idea about paint but I think 1200 would cover it.
What do you all suggest?
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Offline moellerryan

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Re: My first deal
« Reply #9 on: February 19, 2011, 04:04:59 am »
Very good start for a number of reasons.  First, you are going for cash flow first instead of risky deals to try to get rich quick.  You are also not spinning your wheels and stuck doing nothing, instead you are learning by doing.  Next you are looking to build and improve on what you have done and you are humble enough to seek advice from other experts.  My congratulations to you, you are on your way.

I do recommend using leverage.  You can significantly improve your cash on cash return.  Whether it is bank financing, hard or private money it can really skyrocket your monthly positive cash flow.  Find 10 more deals as good and better than the one you did and cherry pick the best ones.  You will have to look at around 200 deals to do this so you will have to create a system to quickly filter out the duds and a system to evaluate the prospects in 10 mins or less.  If you don't have the means to do the deals, you can easily wholesale them to other investors as long as the deals you find are good enough.  Do this and you will have learned the basic fundamentals of real estate:  Finding and evaluating deals, marketing and finding buyers, negotiating and closing deals.

Good work and best of luck going forward!
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Offline furnishedowner

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Re: My first deal
« Reply #10 on: February 19, 2011, 10:07:16 am »
WTSinvestor,
If you are in a growth area with a lot of military, why not look into furnishing one or both of those units?

You can double or triple your rental income with a furnished unit.  You pay the utilities.  If you only have a couple of units and your wife helps this is very easy to do.

You will get quality professionals as tenants.  Check out your local hotels and suites and find out their rates.  You need to be near that or just under it.  Also, consider putting in a fence for a dog--that is where the money lies.

Good luck, you are on the right track and nice to have a new poster who is actively doing something.

Furnishedowner

Offline WTSinvestor

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Re: My first deal
« Reply #11 on: February 21, 2011, 12:59:22 am »
Furnished -
     I dont think your business model would work in my specific area, here is why.
Military is the #1 employer.  The first thing married Soldiers or those that are senior enough to live outside the barracks do is buy furniture.  Once they have their furniture they can get it moved around the country wherever they get assigned free of charge by the Military. 
Military coming in for short time to the area can stay up to 60 days free in a hotel or can even stay for 60 days free if they choose to hunt for housing.

I was thinking of splitting up the duplexs 3 bedrooms and renting out the rooms but I am pretty sure the turn-over would be very high and I would have to pay the utilities which would eat up most of the profit for such a plan.  Actually I know this part from experience since I have been deployed all year I did exactly that to my primary home and between turnover and the outrageouse utility bill it worked out to about 200 more per month than if I rented the entire house to a family but it felt like running a mini hotel.  I dont think its worth it for an extra 200 per month.  Alot more risk due to the characters that are looking for this kind of arrangement in my area. 

Somewhere like NYC which is where I am originally from this would work well but in this small town in Northern NY its not ready.  In my opinion of course.

oh and keep posting dude you have some great ideas.  Your post about looking in the alleys for rocks and that table you found gave me some great ideas. 
I m thinking when the duplex is ready i will not furnish it complete I will do like a 30-50% furnish with some things I can find cheap or free so it will give the rentals a staged effect and add value to them.  Of course if the tenant signs the lease and then does not want the stuff I have access to storage at my primary so I can save them for staging the next one.
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Offline justin0419

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Re: My first deal
« Reply #12 on: February 21, 2011, 01:52:41 am »
I couldn't imaging running a boarding house.  Too much potential for conflict, complaints, accusations, etc.  It's one thing if a few friends want to rent a house, but much different when you rent bedrooms out to complete strangers.

Back to your questions about painting and siding...  You're right about the siding.  Vinyl siding is durable and will last a long time.  Just have to pressure wash it every now and then.  I got my house done super cheap for labor.  If you want to go that route, get several quotes.  A couple months ago, we also had siding installed on our apartment building.  It's 3300 sqft.  It is connected to another building so we only had to do 3 sides.  The materials for that were about $1800 or so.  Had a friend install that for $1700.
If you want to paint, materials won't cost much.  I only had about $120 invested in painting our little house. 
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Offline furnishedowner

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Re: My first deal
« Reply #13 on: February 21, 2011, 08:08:51 am »
WTSinvestor,
Just to satisfy my curiosity, can you find out what is the military per diem (daily rate) charged by the hotels in upstate NY?

Furnishedowner

Offline WTSinvestor

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Re: My first deal
« Reply #14 on: February 21, 2011, 09:26:49 am »
Furnished,

My pleasure I happen to know this off the top of my head having used it when I first arrived on post in 09. 

It is $70 per night.  Its not really a hotel charge though.  That is what the military will pay the Soldier to stay in a hotel per night.  The hotels are free to charge whatever they want but since the Soldiers will not stay at a hotel that charges more than 70/night to avoid going out of pocket all the hotels in the area have this rate for Soldiers that present the voucher.

This is different from a military discount at the same hotels.  The 70 rate is only when the Soldier stays on the Military dime.  If the Soldier just wants a room then its just a small 10% discount from normal rates. 

Justin,
I thought so too when I initially thought about it.  But it has worked out very well.  Not many issues except that normal turn-over seems to be about every 4 months.  Rent is collected by the wife in person so peer pressure works in our favor.

I guess I will have to take the plunge on the Vinyl siding.  I was also thinking maybe stucco.  Well fortunately I have a few months to decide.
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