I have reedited this thread again… my next question has to deal with L/O. I have a lil over 40k that I would like to use for an investment property. I dont plan on going through the bank at all so I am interested in going the L/O way…
However does going this way actually give the seller more leverage in the deal since your using cash? and is it possible for any of you veterans to share some of your first buys using the L/O strategy?
Jay,
You wrote two paragraphs but didn’t say much of anything useful. Operating rental properties is all about the cash flow. You should learn about cash flow issues and operating expenses before you buy anything. Try doing a search on this site for operating expenses, cash flow, 2% rule, and 50% rule. That should help.
Good Luck,
Mike
ok thats what I need to know… stuff I dont lol. Can you give me a brief summary of the 2% rule or direct me to a page in the site? I an still new to the club lol
All real estate (just like all politics) is local. What works where you are is what you should do. I can’t go against the advice of you mentor, but in general the way to find a deal is to find a property that is distressed in some way or another. In other words I never worry about the market appreciating because I create my own appreciation by taking a property that needs work and must be sold at a discount and put the work into it. The difference is my forced appreciation. For example I find a house that all the other houses just like it have sold in the last 6 months for $100k. It needs $10k worth of work to get it to be just like the ones that sold for $100k. But because it needs that $10k of work I can buy it for $60k. That means I can buy it for $60k put $10k (plus acquisition expenses) into it and have it for $75k. Since it is now worth $100k I have just made $25k instantly.
Now if the property is not distressed because of deferred maintenance, then it must be distressed somehow to get a discount that makes it worth buying.
I think I understand… so your saying that in order for me to get a discount I should try to find some types of problems with a property? and ultimately look to create your own value?
oh yeah and propertymanager I have found some info in this forum in regards to cape rate versus 2 percent rule.
Which is best in your opinion?
I don’t know who gave you that advice. It could have been me. This is the my reasoning:
In this market, you have a pretty good chance of finding a desperate seller. With lots of properties for sale, the buyers are going to pass on any that needs work.
The house that needs paint and landscaping gets passed over and the seller gets more desperate.
If you get a house tht is in really good condition structurally, and just needs new paint, new carpet, and the lawn mowed, you have a pretty good chance of knowing what it will cost to fix it up.
If you buy a wreck and you do not have rehab experience, the chances that you will get into a very expensive repair that you didn’t anticipate is pretty likely.
Once you have done a couple of easy rehabs, you have a much better idea of what everything costs and of what might go wrong. Then you are ready to try a more difficult rehab.
In a market where prices are going up fast, it is difficult to buy a cosmetic rehab. There are too many buyers for them, and the price won’t go low enough to make them worthwhile.
But in a market where pricees are dropping, you have a good chance of getting a cosmetic fixer, so you might as well take advantage of the opportunity to get a much easier project and learn the art of rehab in smaller steps.
The property in better shape for less initial cost might be less expensive than the really cheap property with a lot of fix up cost and a couple of really big expensive surprises. You have to run the figures and projected costs and values. Each house is a different deal, and each deal is going to be different.
By the way, if you are planning to hold for a long time, pay extra attention to the surrounding areas and whether or not the area is on the way up or on the way down.
My opinion is that no matter how cheap it is, no property is a good investment if the meth houses are moving into the area by the dozen, and the street has just had it’s first drive-by shooting.
You want to find a good bargain, but if you plan to buy and hold, then you also want to buy a property that is one you want to own.
Thanks so much for the clarity… I definetly understand what you are saying…
so how important is market rent?
I dont want to cancel out mortgage cost, operating expenses or taxes for that matter… is it a matter of “balancing the scales” in order to cash flow?