First Deal. Whatcha think?

Rehabbing, Fix and Flip, Rental Properties
1

I have been shown a deal from a wholesaler that appears to be a decent deal. I can buy the house for $61k and let his crew do the $8k in repairs (itemized receipts provided), so I am all in for $69k. This guy has an appraiser that can tell him the ARV value. He has done hundreds of homes and has never missed. He assigned an ARV to this home at $103k.

I can pay the $69k in cash and then refi at 80% and take about $10k out. That will go in the bank for mx/repair issues. The property will cash flow around $350/mo.

You guys tell me what flags should be going off. I am leaning toward doing the deal and addidng additional properties through this outlet.

2

How are you coming up with cash flow of $350 per month?
Can you list your calculations? It sounds as though you are keeping this to rent. What are rents in the area? How much will your mortgage be per month after you refi?

3

I have the $70k in a mmkt account for the initial purchase. Rent will be $1050 to $1095/mo. I am getting a 6.75% int rate and my PITI will be in the $700/mo range. I don’t have my sheet in front of me. I have considered going to 20yr financing but I would like to keep as mush cash flow as possible for any unexpected expenses.

This is a very good rental market and properties don’t linger unrented for very long.

4
I have considered going to 20yr financing but I would like to keep as mush cash flow as possible for any unexpected expenses.

In the interest of cash flow I would suggest that you use 30 year financing. If your cash flows better than expected you can always make additional payments toward the principal balance.

5

Trust me (and others will comment as well), if you have a $1050 income and PITI is $700, you do NOT have a $350/month PCF!!!

Keith

6

kdhastedt, elaborate…are you referring to mx costs and such or am I overlooking something?

7

What about your Taxes, Insurance, Maint, vacancy & reserves costs. If you pay the utilities, there’s another expense. Her’e what it looks like to me.

Gross Rents- $1095
Vacancy (10%) $110-
Reserves- $100-
Prop. Taxes $150 (estimate)
Insurance- $100 (estimate)
Mortgage- $700-
Utilities?? ?

Total $1160

It looks like you have a (-$65) negative cashflow. If you have to pay the utilities, you have to deduct those too. I may be missing something but why is the mortgage $700?? That seems high for a $70,000 loan. I paid that much per month for my $105,000 home. Even with a 20 yr. note that seems high. I work nights and just woke up, so I could be missing something.

8

PITI is $726.04…that encompasses property taxes and insurance. We are putting a years worth of reserves in the back when we refi.

Utilities are obtained in the tenants name and paid for by the tenant.

I live in Memphis and it is a very good rental market, probably because we lead the nation in bankruptcies. 30days is a long time in Memphis to go unrented, usually have renters in place within a week to ten days.

9

Those numbers seem like a good deal. But you still have to put in reserves each month for next year. You want to already have the money in case something comes up. Also, be careful how much you leverage with the refi. You don’t want to be more than 80% LTV as a cushion. Will you be managing it youself or will you hire a property manager?

10

I’ll be managing it myself. I plan on doing that until I accumulate somewhere between 5-10 properties or until it becomes too much for me to handle.

I also just found out that the wholesaler will be making about $15k on the deal. That seems a little bit rich, but, I guees it is fair as long as I am getting a good deal as well.

11

You need to find out what you would pay (as a percentage of rental income) to have it effectively/efficiently managed, regardless of whether you will do it yourself or not. These numbers should be factored into your equation. There are several reasons for this:

(1) Many do not like to manage their own

(2) If you want to manage your own, that is fine but you wouldn’t do it for someone else for free

(3) We are all subject to, what I refer to as, “getting hit by a bus” at any point…what happens if you are laid up physically for a long duration

(4) Someday, you will want to _______________ (fish, golf, sail, travel - fill in the blank) and will have the appropriate management amount accounted for.

My two cents.

Keith

12

Thanks Keith!

I am actually paying myself out of the cash flow for the time spent managing the property(s). The wholesaler will manage it for me for 8% of the total lease price. I can certainly hand it over to them at any time for that fee.

My goal is to accumulate enough properties to eventually start a management company to manage mine and other properties. Not sure how many that will take to make it cost effective…time and experience will tell.

13

bwstone,

Keith is absolutely right. This is not a good deal if you take $10K out and borrow about 80%.

Throughout the United States, operating expenses run 45% to 50% of the gross rents.

Here is how I see this deal:

Gross rents: $1,050
Operating Expenses: $525
NOI: $525

Mortgage Payment (30 yr, $80,000, 7%, NOO): $532

Monthly Loss: $7

It is a better deal if you only borrow $69K. It would be a good deal at about $52,000.

Good Luck,

Mike

14

One of the things wholesalers like these don’t tell you are costs for advertising, vacancies, maintenance and the like. Positive cash flow is not Gross Rents minus PITI. There is much more to it than that, for instance, you also have the interest carrying costs off your loans while the rehab is in process, so you need to have a solid idea of how long the rehab will take (2 weeks, 6 months?) I would say you have a negative cash flow at the numbers you talk about. Many people would have done something similar to this a couple years ago and did well, since rampaging property values would make you a lot of money. That is generally not the case now.

The second thing is how much have you checked up on what this wholesaler has said. Is it just the wholesaler who is telling you about how many deals he has done and how dead on he is on all the costs and the ARV and the rehab costs? Or have you checked with other investors, especially those who have bought into his properties and can tell you the quality of the rehab and the accuracy of the ARV? While there are some very smart and reliable people working these days, there are a bunch of idiots fed on “flip this house” who talk a good talk and leave you in the dust. Again, if you have checked him out with third parties then fine. If not, start checking.

As far as the $15k - his wholesale fee should be as much as the deal works for you. If there is a deal with the profit I need worked in then I don’t care what his profit is. If he bought it for $10k and is selling it to ne for $69k, and I can make a killing on it, who cares? He brought you a profitable deal. His profit means nothing. Your profit means everything. He is not skimming from your profit if it is a profitable deal. Your profit is what to worry about.

That said, for me, these numbers would not work. I’d see the numbers like this:

From a rehab standpoint:

$103k ARV
$8k Rehab costs
$12k Presumed purchasing and carrying costs, misc and “Bad XXXX happens reserve”
$69k Purchase Price
$15k Best case equity.

So I would be buying a $103k house for a total of $$88k and then have to rehab it. In today’s market, could I buy a $103k house for $$80k and not have to worry about the rehab?

From a rental standpoint:

$1094 Gross Rents
$500 Total Expenses (could be higher or a bit lower)
$594 NOI

  • $726 Mortgage Service
    ($132) Negative cash Flow.

Sure, the first few months may be fine, and you even have a bit of positive cash flow. The trouble is, then vacancies and maintenance start hitting, yopu have to evict someone and spend two months of lost revenue and $1500 in repairs repairing the walls the tenants tore out and knocked holes in. Then your apparent positive cash flow will quickly reveal itself to be a negative one.

I’d be really interested at it around $52k and I’d look hard at it for $56k. AT $69k I’d smile, say thank you but no thanks, and walk away.

15

Thanks to everyone! I love the feedback.

One thing…the $8k rehab cost is in the purchase price. I am paying cash for the house and paying cash for the rehab. All in I will be at $69k with no carrying costs and the rehab is guaranteed to be 2-3weeks. The way this guy operates is he gets a renter in prior to people who use hard money lenders having to make the first payment. If he doesn’t have it rented, he will make the payment for you. He says that he has only had to do that a handful of times in the last 10yrs that they have been in this business.

I have done a lot of “word of mouth” checking on the company and they have a good reputation. I think I will ask for a couple references before we ink the deal.

One thing that is unique about my area is that it is a very good rental market. Hardly any properties stay on the market for very long without having a tenant placed. Thirty days would be very much out of the ordinary.

So, I would actually be buying a $103k house for $69k and levering up to 80% to put some cash on reserves. I want to do it that way to cover any costs that come along in the short term before I can build up reserves via cash flow. I plan to do that with the first several houses until I can rely more on the cash flow to take care of operating expenses. At some point I will not have to do it and can improve the cash flow on subsequent properties.

Actually, I would like to have a portfolio of at least 100 properties within five years. I know that is aggressive, but that is the way I structure my goals.

Again, THANKS FOR THE FEEDBACK!!! and certainly share anything else you feel is relevant.

16

My spidey sense is tingling. This wholesaler is doing “everything” for you but screening your tenants and signing your notes. His crew is going to do the rehab? What happens on convenient cost overruns?
Who are his referrals? Have other REI members done deals with him and/or his crew?

I’m a newbie, but it seems too good to be true to me.

17

They are actually screening the tenants for me as well. I will have final say on who it rents to. Costs are guaranteed to be within the budget. That tells me he has 10-15% built in to the px.

They are well known in my area and actually own and run the largest REIA in our area. Seem to be good people. I am scheduled to meet with one of his long time clients tomorrow. I’ll report back.

Thanks

18

Not all areas have rent control regulations, correct?

19

As long as you are making your share, it really shouldn’t matter what they are making.

I see you have mentioned what the wholesaler thinks its worth, what do you feel it is worth? Did you come up with the rental #s or did they?

20

They have guaranteed the appraisal and the deal is subject to it. Also, they stated the rent range, but I have verified it with other people. So far they have been very straight shooters.