So, I’ve started looking very aggressively/seriously and getting my feet wet in rental property REI. I’m based in TX. I’m currently looking at MOSTLY multi-family properties (2-5 unit plex’s, condos) and also foreclosure single family homes in the area.
I just have a few questions.
I pulled my credit report today and my score is about 688 on average. If I go into rental property investing, what are my loan options? I would prefer to put little to no money down. I’ve also already got a house (that I live in). I want to basically know what loan/financing options I’ve got and also want to make sure I will be able to QUALIFY for these loans before I get to serious with making offers and looking at places, etc…
Since I’m starting to look at properties and make offers, I assume now would be a good time to get lease contracts setup and and cover myself legally (setup LLC possibly, get full legal lease contracts setup)? Should I find/contact a REI lawyer now?
I suppose I also need to work on getting at least one maintenance person to do or assist me with upkeep/maintenance of my properties? I do have a full time job(that requires about 75% travel currently), so I don’t know that I could do the maintenance myself. Plus, at this point, I’m not to ‘home repair savvy’…
Just to clear up one point also, I hear of a few people on here making several offers on properties at the same time (like 20 offers at a time). My realtor was telling me, if they accept your offer you have to pay the option fee if you decide to back out (unless it’s a foreclosure). So, has anyone run into the problem of having multiple offers being accepted at one time? For someone like me (being new to REI), I wouldn’t think I would be able to accept all accepted offers…How do you guys handle this or do you mostly just shop foreclosures?
Thank you everyone…Sorry for the newb questions. I just want to make sure I cover all the angles I need to cover before actually buying.
Is there anyway I can boost my credit score?? I’m confused about it. I was under the assumption that since I bought my house, my score would have gone up some?? That was about 1 year ago. There are a few blemishes from late credit card payments back in 2005, but I’m not sure that I can clear those (already tried to call my credit card companies to clear them). Are there any other ways to make my credit higher?
I wouldn’t pay too much attention to a credit score if I got it off of some Internet site. There are a number of ways to look at credit:
Mortgage lenders look at whether you pay your mortgage or rent on time.
Auto dealers are interested if you make your car payments on time.
Potential landlords want to know if you have paid your rent on time.
I have never seen the credit report from one of those Internet sites to correspond with the credit report I pull.
To get a better read on your credit you may want to have someone in the mortgage industry pull your credit.
I ran across a company from Colorado that did a pretty good job of getting ones credit scores up. I think they charged about $75.00. If you are interested I will try to find their material.
You should be able to get a loan with a 688 credit score. I always recommend using a small local bank. Ask the successful rental property owners in your area who they recommend and then go talk to them. It is always a good idea to have your financing lined up before you actually find a property.
Yes, you should fully understand all the basic facets of operating rental properties before you buy one. This includes getting all your forms and contracts together. If you are committed to running a rental property business, then I would also start your LLC and place your new rental directly into that LLC.
Yes, you will need to have either a maintenance man or a list of contractors that you will use. You also may need a management company if you are going to be out of town 75% of the time. MOST IMPORTANTLY, you need to do a careful cash flow analysis of any property you buy to be sure that you have a positive cash flow with paid management and paid maintenance. This is where most new investors fail.
I would not make 20 offers at a time. That’s just plain ridiculous. Simply throwing out random offers is a waste of time (in my opinion). Find desperate sellers and then only make offers on properties that you have a reasonable chance of getting at your price. If you back out of a contract, then you lose your deposit, not your option fee. Option fees and earnest money deposits are two different things. Keep studying until you completely understand these things.
Hi Balgum, your credit score is fine, as far as property management goes as Mike said make sure the property cashflows enough to pay for property management and just remember no one can do the things they want done like they want it except for themselves.
I know some realtors that wuld drop you like a rock if you just put in multiple low-ball offers and never closed on anything. Its a waste of time and energy, find a property you want, one that makes numbers sense an make your offer. If accepted great! If not then move on to the next.
your credit is fine; you should be able to get a loan at most banks. if you go low down, (say 5%) you probably will need to work with a broker. Small, local banks can sometimes be useful. There are a few 100% NOO programs out there, but very few and the rates are not very good.
focus on cash flow anlysis of the property. anyone making 20 offers at a time is not serious about buying and hold good properties.
you will need a GOOD property management company being out of town all the time coupled with the lack of handyman skills. In my last job I was in the same boat with tons of travel. ( currently have 4 different property mgmt co. working for me) Expect to pay 6-10% of gross rent collect. I would avoid companies that want placement fees for finding tenants. Also, I prefer companies with their own handyman staff and charge a flat fee per hr to the the owner or have a good list of local handyman. If they are always calling licensed contractors for every job, your cost will be higher. Finally, bigger is not better with prop. mgmt. One of the key things to look for is their “pipeline of potential tenants”. Ask them how many calls a day they get and their typical time to re-rent a place. Vacancy and/or a weak pool of applicants to rent can be two killers for a rental property operation.
While many people complain about the cost of prop. mgmt, GOOD prop. mgmt helps you to avoid the learning curve that you will go thru of picking bad tenants who trash your place, chase deadbeats who don’t pay, and trying to navigate the array of tenant friendly laws that exist. Grant prop. mgmt is not perfect, but even avoiding one bad tenant can save you thousands of dollars and countless hours of headaches.
While many people complain about the cost of prop. mgmt, GOOD prop. mgmt helps you to avoid the learning curve that you will go thru of picking bad tenants who trash your place, chase deadbeats who don't pay, and trying to navigate the array of tenant friendly laws that exist. Grant prop. mgmt is not perfect, but even avoiding one bad tenant can save you thousands of dollars and countless hours of headaches.
I don’t know why everyone must go through a learning curve that will cost them money. I hear it all the time, but I don’t understand that idea. It’s not like new investors are blazing a new trail. Thousands of successful people have gone before and in my opinion there is absolutely no excuse to go into this with ignorance. There are a myriad of sources from which to get this information; books, courses, YOUR LOCAL REIA MEMBERS, this forum, etc. What possible excuse could there be for not doing it right from the very first day - except laziness? I just don’t get it.
I had a score around that about a year ago. Now it is around 760. You can get those lates removed, it just takes time and persistance. It took me almost a year to get my discover late off. I tried every trick in the book. One day I decided to just call over and over again until I got a CSR that would help me. Finally one hinted to me that they have a policy that if you never recieved your statement they would take it off. Hung up and called again (like the 10th time that day) and told them I didn’t get my statement, they took it right off. Couldn’t believe it!, brought my score up almost 50 points. Point is you can get that score up higer with some persistance, and that persistance will pay off big time with the interest savings as i’m sure you know.
Check out www.creditboards.com , they have a forum that is great, just be careful you don’t post questions that have already been asked, as they don’t have a lot of patience for that. Use the search.
Thanks everyone for the responses! Sorry for just now replying.
I think I was able to raise my credit score by simply calling my credit card company(at least that’s what they told me). I’m currently working on finding a lawyer to help me w/my LLC and contracts/forms. I think it’ll do me some good to get a lawyer just to get general legal advice before buying anyway. I was reading the forums and found a post regarding naming conventions of your LLC?? The guy that posted it was saying how important it is to name your LLC something very generic (like ‘consulting’) and associate it with consulting or something like that because it’s easier to get approved for loans due to high default rates in REI? Is this about right or are there other things possibly that should be added here?
I think you guys are right about the property management aspect. There are repairs I still need to do on my own house that I haven’t had time to get to. I need to find a decent company in TX that isn’t going to rake me over the coals… Am I correct in saying also that property management companies help me to find tenants and do the background checks, etc…?
So basically to summarize the breakdown of finances on buying property, I should only make offers on property that are about 70% of market value, 10% comes directly off the top for property management/maintenace, and another 10% for misc (such as no tenants, etc…)? After all this, I should be left w/positive cash flow. Correct?
So basically to summarize the breakdown of finances on buying property, I should only make offers on property that are about 70% of market value, 10% comes directly off the top for property management/maintenace, and another 10% for misc (such as no tenants, etc...)? After all this, I should be left w/positive cash flow. Correct?
That is absolutely WRONG! I would strongly suggest that you do a search of “cash flow” with the search button of this forum. Paying 70% of the market value would mean that you have equity in the property but means absolutely NOTHING about cash flow.
Mike, are you referring to the fact that cash flow comes from rent payments? You need to find out what rent’s go for (in a rental property) for the unit’s you want to buy and in the area/neighborhoods your looking to buy. For instance, if you want to buy a property to rent, you need to make sure your monthly rent income on this property is enough to cover mortgage, taxes, insurance, 10% property management, HOA(if there is any), and 10% misc (no tenants, etc…). After all this, you need to make sure you’ve got positive cash flow or it’s not worth buying.
So, for an example. You want to buy a house for 100k to rent out. Let’s say this 100k property costs you about $1000/month in mortgage, taxes, and insurace. Let’s also say that rent in this area goes for about $1400/month for your SFH. So directly off the top that’s $400 you’re left with. Then you take 10% for maintenance and management and another 10% for miscellaneous. That leaves you with $320 profit per month. In this example, your positive cash flow (or profit) per month would be $320.
Mike, thanks for your responses. I appreciate the help…I know I’m a newb here. :smile I apologize for the ignorant questions…Believe me, I’ve been on these boards like crazy recently using everything I can think of in ‘search’.
When I mentioned that example, I was simply trying to show what cash flow is or at least what I THINK it is. When you say my numbers are all wrong, do you mean that in actuality for 100k property the numbers I hypothetically mentioned would be to far off or do you mean I didn’t figure in some portion of the “cash flow” equation so my dollar amount of $320 is wrong?
I did find a post of yours that I found informative on this post. It kind of puts cash flow into perspective when trying to determine the actual amount of cash flow needed on a mortgage amount to be successful. http://www.reiclub.com/forums/index.php/topic,11824.0.html
Throughout the United States, operating expenses run 45% to 50% of the gross rents. Operating expenses include, but are not limited to: taxes, insurance, management, maintenance, advertising, vacancies, legal fees, evictions, utilities paid by owner, office supplies, court costs, damage done by tenants, capital expenses, etc, etc, etc…
Cash flow is determined by subtracting your mortgage payment (P & I only) from the NOI (net operating income). NOI is determined by subtracting the operating expenses from the gross rents.
Therefore in your example:
Gross rents are $1,400
Operating expenses $700
Mortgage payment $665 (P & I only)
I would highlight that the 50% figure an AVERAGE number ;however, most property will fall between 35-65% from my experience. Some obviously things that adjust that number is whether you do your own prop. mgmt (8-10%), age and condition of the property, tax and insurance rate in your area, whether you pay for things like water, trash removal, yard maintenance, etc.
However, even under good circumstances for a SFH, you will be AT LEAST 35% of gross rent. So in your scenario, of $1400/mn gross rent and $1000/mn P&I, at BEST you will be breakeven and more likely negative a few hundred dollars a month. Realize when people talk about cash flow numbers, it s an AVERAGE. Rental properties are not an ATM that spits $150 each month on the 1st day of the month.
Perhaps a bigger issue is you need to have some reserve (or credit) to handle big expenses that might pop up. Good examples are blown heat pump compressors, hot water heaters, digging up sewer lines due to massive back ups (I’ve had all three happen in the past 2 years across a large number of properties). Of ocurse, you could rent out a house for years and never have one of those expenses, but you should realize they could and will happen.
I need to find a decent company in TX that isn’t going to rake me over the coals… Am I correct in saying also that property management companies help me to find tenants and do the background checks, etc…?