I have 30K in cash…703 Credit Score…no Primary residence (had one, just sold my house and walked away with the 30K)…and I’m from NY…I’m looking at 2 Condo Conversions in Fla…supposidly I’m getting on the ground floor (before being offered to the public) for about 15K lower than the expected appraisal…it could be more…properties in these areas (St. Augustine and Orlando) have been appreciating around 20% avg over the last few years.
I am forced to put 5% down using a 5/1 ARM at 5.65%…We are writing this up as 2 second homes, no PMI, no pre-penalty fees…with closing costs this is about 29K out of pocket (so there goes my capital)…They are both occupied with leases for the next 6 months where I will have the optiion to renew the lease or sell the property for hopefully a quick profit. They are currently collecting rents at 800 and 1300/month…both properties together will leave me with approx. a negative 500 cash flow…I am forced to hold on to these properties for 18 months or until the seller sells out, which ever comes first.
So my question is…Does this sound like it is worth it? The idea that I’m getting in before the general public does (not becasue I’m special but becasue a friend of the family is hooking me up)…Yes I may be 30K ahead of the game and low balling the appreciation at even 10% can potentially bring me a profit close to or near 60K when I turn around and sell but what about capital gains (15% if i wait a year), what about the 30K out of pocket (closing costs and down payment), what about commison costs (5% in Fla), what about the (-500) a month for negative cash flow for one year…according to my math…I would NET $61,390 and my total out of pocket expenses will total $66,973…(30K down, 22K( RE Commision upon selling), 9K capital gains & 6K Capital Gains) …I would lose 5K!!!
Can this be right??? Do I need to hold on to these properties longer for it to make sense?? I woudl totaly be relying on appreciation whcih is one notch above playing blackjack
And I must tell all this is the best deal that has come my way…Ive looked in AZ, Vegas and NY…None of the major home builders are selling to investors…NONE NOWHERE…everything is overpriced that can only produce a negative cashflow…Everyone is selling in NY, rediculously overpriced.
What do you think guys??? Should I pull the trigger on these 2?? I have the contracts sitting in front of me…I’ll have 15 days to back out of the appraisals do not come back as desired.
This sounds Like a great buy and hold! If you are looking for a long term investment as far as a 6 month deal I would really recommend looking at the whole picture a little longer I know that Fl. is a great investment.
So this is a pro’s and con’s thing they are both there! are you willing to hold for two years or so?
After reading your letter 3 times I realized you are counting your initial downpayment as an expense!
If your net profit that you stated did not include this then great. However, waiting only for appreciation while losing money is not my cup of tea. Even if you know someone, it doesn’t gaurantee a good investment, as you probably already know.
If you are trying to flip the properties, do you have an exit strategy if they depreciate for a period of time.
Why are you using a 5/1 to flip them ?
If you can avoid (defer) the capital gains it has (15%)more potential. This is why selling short term is challenging. It’s similar to trading stocks.
Your rate sounds high for a decent credit score. I just got 5.25/no points on a 3/1 and 5.375 on a 5/1. This might save you some $$.
I’ll give you a contact name if you e-mail me directly.
Remember your fudge factor or (% of error).
Negative cash flow is a shaky start. I do have some other potential investments (Florida) that are similar without negative cash flow.
Hope this helps,
Ed
I am viewing my original down payment and closing costs as an out of pocket expense that affects my bottom line
5.65% (with 0 points and no PMI) was the best I can do for 2 2nd homes…if you know someone that can do better I woudl love to talk to them…If you have a better deal than these Id love to hear more about them.
The co I am using does not offer 3/1 ARMs
I have no exit plan…other than to hold and cross my fingers or sell and cut my losses
To defer capital gains is to invest in another property in an alloted amount of time correct?
Orlando (3 miles from Disney) 180K (valued at 195K) (1 Bedroom 1 Bath)…estimated monthly upkeep around 1200/month…currently occupied collecting 800/month rent…so I’d be producing negative cash flow…I think the big selling point here is how close it is to Disney and I have the option to use it as a vacation rental
St Augustine-215K (valued at 230K) (3 Bedroom 2 Bath)…estimated monthly upkeep around 1400/month…not occupied but can expect to get 1300-1350/month rent…basically break out even…This is more of a relaxation spot by the beach…something I may even want to keep long term.
Should I jump on Both? and take a negative cash flow or Just St. Augustine and break out even.
If I just do one I will still have some remaining capital (about 17K) to do other things with if a better oportunity comes along.
guys, once again thanks for all your help…I actually made a major error in my calculations for my original 2 potential investments…I was factoring in my 5% down payment (Dr. Ed pointed this out to me) as an expense for each property…I was also miscalcualting my net gains…so in actuallity, factoring a 20K above buying price apprasial value (this is the X factor that I will find out in the next week) and low balling the expected appreciation value of 15% (these areas have increased over 30% for each of last 2 years. I can poteantially walk away with 54K in one year (in pocket minus capital gains and commision costs)…This of course is the ideal case senerio…I can potentially make more if this year is anything like last…even in a worse case senerio (10K above buying appraisal adn 5% growth) I woudl still walk away with 3K. 3K is nothing of course but more importantly it will be nearly impossibel to lose unless the larket totally craps out, and if that happens I’ll hang on to them and rent adn eat the 400/month negative cash flow. So I am felling much better about them.
I wouldn’t bother, Condos are being built at excellerated rate and within a few short years, there will be more supply than demand. Than you can pick these things up for what they are worth.
Would you be out by October? If not I would not buy because I believe the crap will hit the fan by then. Expecially in markets that have a poor economy.
Mmmm I love newb investors. First off, the first rule of investing is previous gains does not mean future return. Just because something went up big over the past few years does not mean it will continue. Economy also plays a big difference, what kind of jobs are out there? Are wages going up? Are rents going up? If not how can the values keeping holding up? The more speculation, higher the bubble gets, and harder the fall is going to be. What will happen in October, probably nothing, but you have pretend something will. If you see nothing but an upside, that you are looking at the market in Rose tinted glasses. My advice when doing “deals” like that is to get and get out as fast as possible, make the quick buck and take the money and run. Cause can you afford to sell your condos at 85K or rent them out until the market is back up again?
I am doing as much homework as I can…The spot in Orlando is 3 miles from Disney in a newly renovated gated community and the spot in St. Augustine is supposed to be a beautiful area, new contruction and gated.
Have I completed all my homework, I’ll admit that I have not.
A big part of this is the trust that I have with my realtor, a friend of the family who is also investing in these properties. He is experienced and has a proven track record.
I am not putting all my eggs in the “previous gains” basket…the truth is, this being my 1st investment, I really don’t want to lose any money. I want something safe. Accorinding to my calcualtions:
Worst Case Senerio (10K apprasied above selling price and 5% appreciation over one year)…I would still make 3K
Best Case Senerio (20K apprasied above selling price and 15% appreciation over one year)…I would walk away with 54K
This is after all out of pocket expenses…
The way I look at it is…unless the market takes a serious dive over the next year I can’t lose money…the only question will be how much I can make.
If you check Dan’s last 10 replies you may notice a trend of condescending bitter answers similar to the tone he used with you David. The good news is he is skeptical and cautious which is a sign of an analytical mind. Read between the lines. He is attempting to help you.
Other’s experience can be very helpful, however opinions with little basis are just opinions. Keep up the good work.
Since your planning to hold for a year, your worse case scenario could be different, what if you could only sell for 120K? Could you still hold and be profitable by renting it out? Rent is the key here. Don’t buy because a friend is in the business. If he was a true friend he would get you in at the real bottom, like 100K, that way you would have a greater upside potential and a lower risk.
well if i could only sell it for 120 I would also venture to guess that everyone on this discussion board would be in a similar boat…what specific to my poteintal purchase would cause the property to drop 25% or more that wouldnt be a global issue to all investors? Unless of course Disney World blew up.
Isnt the potential for a drastic market change really a risk for any property?
And if it does happen I do not see any issues renting it. There is currently a waiting list of potenital renters to get in. I also have no issues holding on to it till the market rebounds.
Maybe I’m blind but I see minimal risk here…and by the way my goal is to get in and out as soon as I can
Bubbles are usually local and saying that the potential risk for a down market is for any property is true. But when you have 33% yearly appreciation in a area where jobs are not increasing, rents are not increasing and debt is increasing. I would stay clear and watch the fireworks. Florida is known for it’s real estate booms and busts. It’s Florida! The rents do not look that great and you would be running a loss for the 18months you have to hold. A lot can change in 18 months, I would say this is too risky for the little upside that it has. If I have to hold for 18 months, ask your Realtor friend to see if you can get in lower, because he already has! Besides once you ignore the fundamentals, you are no longer investing you are gambling. All on black!
Another good example why negative cash flow from the start is questionable investing. Speculating is a much better word in this case. 18 months is from where ? There have been flat periods for years. That’s why negative cash kills you. Any investor has to be ready for worst case scenarios, yours seem a little positive.
Also, if there are people waiting in line for these places then the rent should be increased appropriately. The area is based on the tourism mainly, but bumps in the economy, over building and growth do play a major part here still.
Increasing debt means a lot less, job growth (specific types) is important.
Check the vacancy rate trends, population growth, middle school growth, and higher tech jobs if you really want to know long term, but I don’t think that’s what we’re talking about here. I’m with Dan on the realtor friend. However there are parts of Florida which have grown consisitantly. And, as far as Florida’s Booms and Busts…Show me the stats. It is exploding due to very logical and documentable reasons.
Cross your fingers…
Ed
OK well we can throw out the negative cash flow and potential 18 month waiting period…Appraisal Came back…only 3K above selling price :(…Orlando is out
But I think I am still going to follow through with St Augustine (215K) with zero negative cash flow…My research shows that similar condos (3/2) in the area are selling for about 10-20K higher.