Chopping Block: Judge my deal

Hope everyone is doing well. Anyway here’s a deal i just started work on. I think its a pretty good deal, and like to run my numbers by the community and get your opinions :cool

Purchase Price:--------------------$88,000
Total Loan Amount including
finance charges (hard-money)–$114,000–($88,000 for purchase + $20,000 for repair+ about
$10,000 in fees :cussing) (brought about $3,500 to closing)
ARV: $165,000-$175,000 ---------------------( house was purchased for $175,000 in 05’, i bought from
another investor who got it outta foreclosure)

I’m fixing the house up and then i’ll do an 85% cash out refinance and come away with 25-35k (tax-free). After that I’m going to rent it out and hopefully have a 200-300 dollar cashflow.

What do you guys think?

P.S. I’m a 22year old college student and nobody believed i could do this when i told everyone i wanted to be a real estate investor 2-3 years ago. I’m hard-headed so i never listened and its finally paying off. So anybody hearing “that only works on those infomercials!” or encountering any other flak from people “looking out for your best interest”. Pay them no mind and never stop trying.

If your numbers are correct, it looks good to me. I’m assuming that you are going to rehab and retail it.


Looks good from a rehab prospective. Now to analyze it as a rental what are market rents in your area for this type of property?

looks like a good deal, but as a rental, if you want to cash flow $200/mn, then your rent better be around $2000/mn (that’s off the top of my head). I’ll take a wild guess and say it will only rent for $1300/mn which means your are definately negative.

Why so high? Rents in the Are are 900-1200 a month.

I punched the numbers into my BA II+ calculator and the payments on my new loan were looking to be about $450.00+ i figured another $200.00 for taxes and insurance. So I’m thinking my cost to be no more than $700 a month. I’m also looking at some I/O loans and Option ARMS since i plan on reselling the property within 2-5 years.

Am i missing something here?..

There are two schools of thought on this forum.

Some guy’s (and I’m not saying their wrong) won’t look at a house that doesn’t positive cash flow. That includes as close to 100% financing as they can get. Now in the market I’m in (Southern New England) these guy’s won’t be buying much of anything. I’m not saying that’s bad.

The other guy’s will buy properties and put a few hundred dollars every month in them and look at it as a forced savings plan. Both of these methods can work. Markets are completely different in areas and you have to understand where your market is. I purchased a shack near the beach years ago for $140,000. I put money into that house EVERY month. It Never had positive cash flow for 5 years. It is now worth almost $1,000,000. People will tell you that I got lucky and bought when the market was bad. Yep, absolutely right. My question is… How is the market now and how do you think it will be 2 years from now? My bet is the next few years will get very bad. And, the people who buy THEN will be the people who GOT LUCKY 10 years from now!

you said your were going to a 85% cash out refi so borrowing about $140k. That a payment of at least $900/mn. I/O is really no so great right now since you get the same rate on a 30yr fixed and you have a long time horizon. IMHO, Pay Option should only be used for flips; too risky for long term holds as you pay a high rate and put yourself at risk to be underwater.

Even on the initial loan of $114k you at $700/mn for debt service. If you can pull $1200 in rent then you might be close to breakeven (that assumes you know how to get good tenants and operate the property in a cost effective manner); the downside, I bet $1200/mn is the top end of the rent market and you could have considerable vacancy. Remember, even empty, it will cost you a $1000/mn. Do you have the resources to handle 6 months of vacancy?

if you want to buy and hold, I would advise against the cash out refi. Yes, you are leaving a lot of equity tied up, but you guard against getting upside down.

Also, you proposed you would raise rents 30% over 5 yrs. Not likely in my experience. Usually you get to raise rents when you have turnover which on a property like this will probably only be once every few years (if you get a good tenant). That said, your rent increases will be small.

Arc I would flip that property its doenst look like a good rental. You wont be positive, unless you take that money you get from the refi and put it into a couple of nice cash flowing properties to feed any negatives on this property. There will be times no matter how good your cash flow is where you will have one property having to feed another due to vacancies etc.,etc. that is why its important to make sure if you keep it the cash flow will work to your advantage.

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Also, you proposed you would raise rents 30% over 5 yrs. Not likely in my experience. Usually you get to raise rents when you have turnover which on a property like this will probably only be once every few years (if you get a good tenant). That said, your rent increases will be small.

Well i didn’t propose a 30% raise in rents…but my calculations were off. I forgot to clear my calcualtor :biggrin

Having said that, the area the house is in is close to downtown Atlanta and i predict that in the next few years that area will definetly appreciate more. (There are already new homes and entire subdivisions being built not far from it). I’d planned on renting it or Lease/optioning it (which is what i’ll aim for). I’m also considering section 8.

I figured the money from the refi would help cover any vacancies, but most importantly I’d use some of it to purchase another house which I’d rehab and retail. Hopefully i can wholesale one or two before then also…Thats my plan, thanks for the input guys.

Do you really think I/O and ARMS are that bad if im only holding for 2 years. And like i said, I’m trying to minimize any cashflow problems until my next flip?

From a financing standpoint, you would need to seek a loan program that allowed for a min. ARV/FMV of 70 (higher if you want to roll in your closing costs & finance this project 100%).

Not knowing your credit history/tradeline depth and other factors, it’s difficult to determine if you could go conventional, but that is an option available as well.

There is a conventional investor rehab loan that allows for an ARV/FMV allowance of 80% that could potentially allow you to finance the acquisation cost + rehab costs + closing costs without any money required from you at closing.

As to you other questions, as another poster has already indicated, the savings between I/O and a fully amortized payment is so modest, it’s really not worthy of consideration regardless of your exit strategy (rates are similar between these two loan products, but you will benefit from modest equity appreciation going with a fixed version with your intended exit strategy).

As for the option ARM, I wouldn’t entertain this type of loan program in this market enviroment (depreciation + raising interest rates = big recast/lots of neg. amortization) unless you are intimately familar with the downside potential of using this loan program incorrectly (I still don’t recommend it for this market).


Scott Miller

(Re: 30% increase in rents) my bad, I mixed up your deal with another that on this board

Yep, from what I know about Atlanta, there will definately be increasing demand on homes closer to work centers due to massive sprall and build-out in the past 10 yrs.

As for using adjustable fianancing, I would not do anything less than 5 yr I/O; you plan on 2 yr and then sell, but who knows what the market might be doing and also house can take a long time to sell, you might change your mind, etc. IMHO, PayOption is not good becuase the rate will be high and ultimately mean more money out of pocket. I like to minimize risk on the fiancing side and give myself lots of options so I don’t get back into a corner and have to sell/re-fi or come out of pocket with cash at an inconvenient time.

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Thanks for the repsonses guys. When i get really rich I’ll have to take ya’ll out for a beer :beer.

One last thing: Mr. Scott Miller, I’ve already purchased the house using hard money. So I’m not worried about that right now. But you also mentioned a conventional loan that offers an 80% ARV allowance. If you can could you please tell elaborate on this. Because if i can find a loan like this, providing there are no pre-payment penalties, i would be extremly grateful. I probably wouldn’t qualify for it alone but i have a couple of partners that could…