I have had two opportunities in the last week to get the deed to high-end property, but was scared away by the prospect of negative cash flow. Having run into two of these, I am convinced there are more. If I could figure out a way to profit on them, I could probably do a couple dozen a year in my town.
Both are around $160K in neighborhoods where that is the upper end price. Both have piti of about $1400, and they might be able to sustain $1200 in rent.
In one case the owner essentially had $0 equity, in the other they had maybe $10k. Both have been trying to sell with no real results. Both would be willing to deed me the property with nothing down, but I question if I could rent them for enough to cover the piti. I don’t want to get into the business of losing $200/month on a house to get the potential equity increase. And a vacancy in either would kill me.
Neither would give me an option if they had to keep making payments, they both said they would keep trying to sell it themselves. And neither is willing to cover the negative cash flow if they deed it to me.
I don’t think that it is a good idea for a new investor to go buying zero equity properties, especially if they can’t afford to make the payment(s) on them.
That said, from my figures, you’d do better to refinance the property than accept it with it’s current note. $160K financed for 30yrs at 6% is only $960/month.
Raj
Consider a negative amortization loan if holding short term.
Raj-
Actually their current PI is less than that. When you add the taxes & insurance it comes out higher. Also, I don’t know of any 0 down investor loans at 6%. If you know of any, I’ll take a dozen! Even with 10% down (which I won’t do) investor rates are over 7%.
Taxes and insurance is $500+ a month!!!
Well, I think that we’ve found the problem. They need to find better insurance.
Assuming tax value is the FMV you quoted, and assuming that 1/2 of the $500 is for taxes, then they would be paying about $2 per $100 in value in taxes. That’s HIGH.
Of course, assuming the above, that means that they would be paying $3000 a year in insurance premiums. That’s unheard of.
As far as the investor loan goes, you’re right. Since the last interest rate bump, my investor loans jumped to 6.25% from 5.8%. But we’re not talking about investor loans, we’re talking about subject to financing. The seller would refinance and you’d make the payments.
Personally, however, I still don’t see the “deal” here. You’re right. If you could figure out how to profit from them, you could do as many as you like. Zero equity properties are a dime a dozen. The problem is finding the profit. There is some there, but it’s HIGH risk for little return.
One example (just so I don’t leave you hanging):
Take the property sub2, sell it on a 2 year contract for deed for $175K (this assumes a 5% annual appreciation rate), $15K down, balance financed for 9%, 30year amortization. You’ve made $15K upfront, the buyers have roughly a $1275/month payment. Of course, they’ll be responsible for taxes and insurance, so add that $500 into that payment for $1775/month, equals a positive of around $375/month.
Raj
I m new to this but, if you can finde theses deals all the time, can you go buy the Maaco philosphy, of charge a little but do more. Maaco only makes about $75.00 per car. could you do this in Rei. Just do more hous. If you only make $200.00 per house if you do 6 house your making money? Right? PLEASE- tell me if I wrong, Because I am new and still seeking answers…thanks
These would not be making money…they would be losing money.
But even if they did make $200/month, there is huge risk. One month vacancy would wipe out 7 months income. Also, since they have no equity there is even the danger of going into negative equity.
I would prefer a good equity position and good cash flow. If I can’t get both, I at least need to get one or the other.
These deals would have neither.
I suspect these will eventually foreclose and the owners will lose their houses, their investment, and their credit. Sad.
bcrider,
Glad to meet you.
This is where the true meaning of Creative Real Estate Investing comes in. As long as it is fully explained what can happen should an investor decide to help people like this, that the investor will do their best to help them in the situation they are in, then it should turn out a win/win for everyone.
I have done many deals like the one you describe and never did I not help someone or not make money on the deal, I have an attitude that I am the best at what I do and if anyone can help them I can, because I am a creative real estate investor.
However, before I decide to help them, I do a complete marketing study of the area the property is located in. This way I know how much to sell the property for, how long it will be on the market before it sells, how much to ask down and what the payments should be. Since I do not sell with a lease/option I don’t have to be concerned with renters, rents in the area and the rest of the negatives some folks look at. Their are plenty of folks who want the American Dream of home ownership, so there are buyers.
There are other factors I look at when helping someone who needs help, so it does not have to be “sad” for the folks who need help if you understand what “creative” really means.
John $Cash$ Locke