After several months of intrepidation, trying to learn, analysis paralysis etc. I feel I need to make the leap and start with a property even if it is not a great DEAL. Here is what I am looking at – do you think this is a reasonable on to start with?
Central location. SFR 2100 sq ft. Listed for 124K, I will offer no more than $115-118K. Tax Appraisal is 136K, sales comps are ~136K. Rental in the area are $1300-1400/mo. Taxes are at $4200. Insurance I am guessing $500-600. immaculate interiors, needs resodding of the yard (which I have no idea what that would cost – any estimates?). Seem like I should cash flow $150/month with 20% down.
I have so far been operating under the motto – it is better to miss ten good deals than to make one bad deal especially if it is your first deal. But I need to get started – is this a reasonable one? Pls. advise.
If feasible, buy a duplex instead. For less than 50% more, you’ll get two units instead of one. With that same logic, 4 units are better than 2 units. Guess what, 8 unit ones are better than 4 units, but you’ve now jumped to commercial property as it’s 5 units or more.
I am a proponent of low-income S.F. homes, though, that you can pick up dirt cheap. Here in Milwaukee I can pick up a decent 2 bedroom, 1 bath 1000 sq ft single family home in a sketchy neighborhood for $35,000. It rents out for about $600 a month, meaning it’ll cash flow about $150 a month on a 10 year fixed rate mortgage with 20% down. If cash flow is your primary desire, then it’ll earn about twice that ($300 a month) on a 30 year fixed.
Property taxes are driven primarily by square footage and the value of the structure itself. So these smaller 1000 sq ft properties worth less than $40,000 will cost you much less than $1000 a year in taxes.
If you’re out in California or down in Florida, though, $35,000 won’t buy you anything. The market is in transition from just a ridiculous seller’s market about a year ago to what is considered a pretty good buyer’s market right now, nationwide. This means that there will be many more homes on the market overall, and with the interest rates inching higher every month, fewer qualified buyers. This means that you, the buyer, has the upper hand and much more leverage… so continue being patient as the ball is in your court. Find a house that’s been on the market over 180 days and throw them a bid, albeit far below what they are asking. 9 in 10 offers will be shot down, hell, maybe even 19 in 20, but that one that is accepted will save you 25% off of asking price.
Also… remember that the BEST deals never even make it to the MLS. Keep your eyes and ears open, and work on networking.
Good points by Visual. I would start with a smaller property. If you do make a mistake in buying a property would you rather have a mortg. on a 70K piece of property or a 118K property? Make lots of offers as its a total numbers game. The more offers you make the better your odds of one getting accepted. A formula that is widely seen is FMV x 70% minus rehab costs equals your offer. Also get an investor friendly realtor on your side that understands investors and what they are trying to accomplish. I have two that I deal with that will write any offer and all of them are low ball offers on properties that are on the MLS. I do ALOT of offers off the MLS so don’t be afraid of that. While short sales or preforeclosures will probably make you more money than a MLS listed property I like using the MLS. I have made decent money off the MLS. Just keep your options open, make sure your offers make sense, and get off your duff and make it happen!
Guys – first of all, thanks so much for your advice. Visual – WHat you says makes sense and I prefer/looked at duplexes but the rents from duplexes in the areas I am looking are not even 1% of the purchase price/sales comps. On the cheap houses though, I have decided not to go for low income housing for several reasons. Also, since I am a beginner I have decided not to go for fixer uppers EXCEPT only paint and carpet (since I don’t know how to estimate repairs and don’t want to depend on others estimates until I form a network of reliable people).
I am focused on good areas with houses for middle income folks within a 15-20 mile distance from where I live. I don’t know if this strategy will work but I want to try it if the financials make sense and in this case they seem to. gordo–I would love to offer 70% of ARV but I am being realistic – 3 exact same floorplan houses in the same subdivision sold in the last 6 months for above the list price for this property. So I will ask my realtor to low ball but I don’t think it will go anywhere. Does the 70% strategy only apply to fixer uppers?
Keith – The ridiculous taxes are for the great state of texas. I got the estimated taxes from the tax appraisal. But it looks like you like the nos. (which is great news). PLus if I can get it for 118K I will have built-in equity of 18K based on sales comps right? Is there a way I can cash out this equity if I pay cash for the property using a HELOC? BTW is 7% pretty easy to get? My bank quoted me higher for NOO…I just talked to a mortgage broker yesterday so maybe he can get me a better rate
A few additional questions for you guys. The tenant pays for all utilities including water/trash etc.? What about expenses for taking care of the yard?
If someone offered me a deal like that here in California, I would jump on it. It sounds like you have done your due dilligence. I would go with fescue grass seed with peat moss on top instead of sod. It will take you a month to grow, but you will save thousands. The only other concern I would have would be the vacancy rate. From the numbers you're giving it looks like a break even in a worst case senario. When you make your first deal and realize that, with a conventional mortgage, as the principal balance goes down, the amount of money that you lose in interest also goes down and the amount of money that the tenent puts in your pocket goes up. There are hidden financial gains to be made when you do your taxes and have your tax accountant depreciate the property. Ask your mortgage broker if you can continue to make deals if you make this one. I totally agree with the strategy of avoiding the bad parts of town. Usually, they have a lot of deferred maintenence. A leaky roof or a dead air conditioner can seriously eat into your time and cash. Besides, you don't want to get shot while picking up the rent check.
Just my opinion. The number sound right but ONLY YOU would know the real numbers. Estimate high to compensate for overages just in case, basically round up. Since this is a rental and it sounds like you would keep it then I would calculate for a long-term fixed loan if you can afford it. Interest rates are only going up and to lock in for 30 years fixed would be awesome. Then you would have cash flow from this property for a very long time or you can put lease/option buyer-tenants in then they can cash you out after a while but it’s LEAST likely that a buyer-tenant will actually cash you out based on common statistics.
this appear to be not a horrible deal and probably a reasonable starter (probably has a reasonable exit thru sale if things don’t work out as rental). question is how confident are in the rental income and can you get it rented fairly quickly. Vacancy is a real killer.
I agree with on the financing side of doing a 30 yr fixed; the rates are such that it makes senses the days.
Since you are just starting out it is VERY important for your first investment property to be a profitable deal! Most new investors have the same thought process you have, they are so eager to get that first deal that they sometimes sign up for a deal that isn’t profitable, end up losing money, then give up rei because they think it doesn’t work. DO NOT ever do a deal you are unsure about, better safe then sorry. Larry Goins stresses this same point in almost all his seminars, listen to a good one here http://www.screi.com/contact.html (on the right column, scroll down a bit).
This property you are referring to does seem to work, if your numbers are accurate, but I would try for a smaller property for a first deal.
my only question is, how much money do you have to handle the worst case scenario - ie unforeseen needed improvements - contractor costs (include time it takes to get one to do the work), higher insurance costs, vacancy, tenant destruction of property, advertising, legal (evictions), etc. ???
that is my biggest obstacle right now.
if you’re putting down 20% (23,600 - on the 118k purchase price)…
what does that leave you with? Are you planning on refi’ing and taking out equity to “cover yourself”…all you’re doing there is increasing your debt and giving yourself less room to make an easier sale if need be…
i would say…and of course i’m conservative because i’m suffering from “analysis paralysis”…but i’d say you need three times your down payment amount in NONBORROWED funds to comfortably manage this property you speak of.
So that’s 70K in your business account, and I would say NO LESS than 60K.
With that, you can “take a little money out” of the property on a refi, pocket some cash and continue to rent it, because you have money to MANAGE the property already - IE. Repairs, Closing Costs, Legal, Advertising, etc. refi would be a bonus - not a dependence issue for operating funds…
just my two “sense” and i only own one property - my grandmother’s who I’m transferring title to sister and she’s refiing to pay me off (tax free money ;D