I’m 21 years old and found my first property to start my investing career, dont worry havent quit my 5200/month job yet. :smile Currently im living in a house purchased last October for 174000 and down to 155000 and renovating the house to sell for around 200000. Im moving to a larger city with more potential.
Planning on a Lease/Option, and renting the property out…
PROS –
- FSBO
- 3 bed, 2 bath
- Nice neighborhood
- Extremly good shape, older couple…
- 25,000 under median sold, MLS in 2007
- Asking 152,900 – Median 178,000
- Houses like this rent from 900 to 1200 a month in the area
CONS –
- 900 miles away…im moving there in January
- talking by e-mail…wanted to take my first deal slow, getting the feet wet so to speak.
I wanted to purchase two homes in the next couple months with nothing down, lease to own both of them until my home sells. Keeping the profit i get from my home as reserves for the next venture.
Your input is greatly appreciated…
Mike is definitely the expert re: rentals in this forum so any advice that he gives is usually pretty good.
One thing to keep in mind re: L/Os is that you can throw “market rent” out of the window. You are the bank in this deal. You need to charge what a bank would charge for a mortgage of your sale price (175k) plus a little extra since you are taking the risk on the t/b. Ex) 175k mortgage @ 10% = 1550/mo. I would charge the t/b 1450-1550/mo. with 3-5% down. Keep in mind that their credit is shot so they have very few options. Sometimes you are their only hope for owning a home. Always remember that you are helping them. Good Luck
Misunderstanding… the house i own now (174000) i am going to list and sell…
the house im trying to L/O is for 152,900, which was the one i was going to rent out for 1200 a month…
probably the same deal though cause i should be looking for houses for wholesale prices instead of retail. im guessing the 100000 range right?
beside the potential money losing rental two, you have two more immediate problems.
first, you state what the median priuce sold is for the area, but what are comparable sales telling you the value of the house is?. Median value of property sold tell you absolutely noithing as to whteher this property is priced correctly.
Second, you are out of step with reality if you thing you are going to purchase non-owner occupied properties with zero down. I doubt lenders will even accept a 20% owner carry back on top of a conventional 80% first deed in this market.
just curious, but why couldn’t he buy it with 0 down?
Frank,
If the house is worth 150k definitely get 5% down from your t/b. This deal can work but you just need to make sure that you get enough $ down to cover your payments for a month or two if the buyer flakes out (which at least half do). That should give you enough time to find another buyer.
My idea is…
buying the house from the owner for 150000 with owner financing with zero down not sure what kind of intrest they would offer…
or with a L/O deal over a four year lease or less…
im going to turn around and rent the property out for 1000 to 1200 per month letting the renters pay the payment…
negative cash flow is not a problem considering i havent quit my job yet…
before going through with the deal i am going to build a renters list knowing that i can rent it out for that much so i dont get stuck in a hole…
Im not sure what the comps are in the area…
my goal is to do at least two deals like this every year until i have twenty houses then sell ten and own ten free and clear…if stuff happens faster then good if not i should be able to do two a year no problem…
Would this be a smart deal to start up on or go after cheaper properties?
Thank you so much…but a couple more questions cause i dont have the “lingo” down yet…
NOI??
Operating expences…meaning insurance and…
And the equations you used to get those numbers…
Operating expenses are all those expenses that are associated with operating rentals, except the debt service. Advertising, taxes, insurance, maintenance, vacancies, entity maintenance, legal expenses, management, evictions, court costs, damage done by tenants (in excess of the deposit), utilities paid by the owner, etc, etc, etc, I could go on and on.
The equations.
Gross rents - operating expenses = NOI (net operating income).
NOI - mortgage payment (debt service) = cash flow
even while the Kool-aid drinking of the lending world was still in progress, doing 100% for a NOO was pretty difficult. These days I would have to guess that its pretty much impossible, but a loan broker could probably answer that with some certainty.
As for owner financing, sure it is possible, but only a fool would carryback the entire amount of the purchase.
Tyfrank,
My personal opinion is your “deal” is definitely not a “deal” at all. However, that is not to say you are not thinking the right way. Take it slow like you said. Don’t jump into a bad deal…that’s a fast way to bring your real estate career to a screeching halt before it ever get’s started.
Just because the numbers don't work on this one, don't be afraid to post the next "deal" you come across on this board for advice. Most people won't look at your post and scream your "deal" is a TERRIBLE DEAL or a HUGE LOSER or that your idea is a TERRIBLE IDEA or anything similiar to that kind of response.
Most people won't look at your post and scream your "deal" is a TERRIBLE DEAL or a HUGE LOSER or that your idea is a TERRIBLE IDEA or anything similiar to that kind of response.
I’m not aware of ANYONE on this forum that would tell someone their deal is a terrible deal or a huge loser without looking at it and giving their honest opinion.
Mike is in an area where you can buy homes for $25,000 to $30,000, and rent them for $700/month
There is NO WAY your buying for that kind of money in the Northeast. Figure a 3 bedroom single family home in a decent neighborhood will bring $1500/month. In order to buy that kind of house your going to spend around $125,000. AND THAT’S AN OUTRIGHT STEAL! So if you were to use Mike’s number’s up here in New England…YOU WOULDN’T OWN ANY PROPERTY!
In that type of market you buy homes that are underpriced and resell them for a profit. Then you take SOME of those profits and use them for down payments so you basically have someone paying off your home which is worth $175,000 and you have $25,000 of your own money into it. Remember the house cost YOU $125,000 because you bought at a discount. Therefor your mortgage is $100,000.
You can’t use Mike’s numbers in every part of the country. I’ve been doing this for 20 plus years. Some of my BEST properties didn’t cash flow for crap when I purchased them, but having someone else pay off a waterfront home for you that your into for $30K (My money) ain’t bad in my book. Especially when it’s worth almost seven figures 15 years after you bought it!
Different markets require different methods. What works in Ohio may not work in Boston.
FD Jake I am wondering isn’t what you stated above kind of like speculation. You might have made a lot of money from that one investment but who is to say that you would make that amount in the next twenty years? I think what property manager is trying to get across is that if you arent in an area where you can MAKE MONEY MONTHLY off your rentals than it is not a business to get into. There are a lot of other facets of real estate too. I am a noob too so the above might be BS.
Thanks Yucky. I was wondering if you guysthink speculation is a bad or good thing? Isn’t technically all investments to a certain degree speculative because cash flows are never 100 percent definite? Thanks for the help I am just trying to learn the difference between investing and speculating if there is one sorry to budge into his post I can create a new one if needed.
I don’t have any delusions about knowing everything. However, unlike you, my full time business is the rental property business and I do know something about it. I completely agree that there is more than one way to invest in rentals, but contrary to the silly assertions otherwise, THE MATH DOES NOT CHANGE BECAUSE OF WHERE YOU LIVE.
Tyfrank asked for opinions of his proposed deal, and I correctly said that it was TERRIBLE, which it is. Now, if your idea of a good deal is one that loses about $450 per month, that doesn’t surprise me. However, in my opinion, that is a terrible deal and I said so. It does not do a new investor any good to sugar coat the truth.
All I have to say is WOW…thanks for the input, on my terrible deal i’ve been reading a lot of books on real estate investment and found a house just needed some real world input on the stupid questions i had and i thought this was a “PROFESSIONAL” site i could get some…not some high school girls drama blog.
Didn’t mean to start a catfight but thanks anyway. Hopfully my next question contains answers and input on possitive things like butterflys and baby puppies lol…
-Tyson
P.S. - The area i have been researching, houses are priced between 100,000 and 215,000 so im gonna go after the diamonds in the rough, just after 3 bd 2 bath…rent goes anywhere from 500 (one bdrms or junkie 2 bds) to 1400 (4 or 5 bd 2 or 3 bath)…
I was wondering if you guysthink speculation is a bad or good thing? Isn't technically all investments to a certain degree speculative because cash flows are never 100 percent definite?
Speculation is neither good or bad. It is just a different type of investing that involves more risk.
When I buy a rental, I am absolutely certain that it will cash flow. Unless there is some catastrophy or an act of God, the cash flow is a mathmatical certainty.
When you buy a property to speculate, you are hoping that something will occur. This could be that there will be high appreciation or that a new highway is constructed next to your property. Your “investment” is really a bet that something is going to happen.
We have just gone through an unprecedented real estate boom. Many people made money by purchasing a house and selling it a month or two later at a highly appreciated price. Of course, many people that were speculating have also lost their butt as a result of the real estate bust.
That’s the difference between speculating and investing.
You’re right, there is a bit of specualtion built into ALL real estate investing. My point is this…If your in a market that does not allow you to buy property for NO MONEY out of your pocket (100% financed) then your only alternative is to buy at a discount and put some of your own money in. Did I speculate buying that property on the water 15 years ago?? Sure did! It was 1992. Remember what the ecomony was like then? It SUCKED! So was I REALLY speculating? It’s the same story now. I buy real estate when no one else wants to, and wait out the overreaction.
It has worked without fail for me on over 50 properties in a 20+ year span. It’s a slow, boring way to make a lot of money.
I’ve read Mike’s book. It’s excellent, unfortunitley I can’t buy houses with the spreads Mike usues here in New England. So, I have to do it slightly different. I HAVE to put more of my money in.
Mike is right though, you can’t buy property that costs you money every month and stay in business. To over come that fact I put in some of my own money. Buying 100% financed cash flowing rental property is NOT the norm in my market. Mike has his market down cold and luckily for him he’s not in New England. I have no doubt he would make money here, he would just have to play a different game.