This is a 1200sq ft 3/1/1 fsbo single family house in Garland (average area). Talked to the owner who owes 45k. Repairs needed are paint, carpet, possibly tile she said, and the garage is currently setup as a bedroom (possibly converting back to garage??? not sure…)
Purchase price: 45k + 5k repairs
Mortgage: $366/month (50k @ 8% Do I need to figure closing costs in here also???)
Rents in the area: 850-1000 (need to do a little more research to narrow down the rent rate, but I was thinking of rent for $925)
Well after talking to other investors, they seem to think that in the area a 4br instead of a garage with 3br would be better anyway. I haven’t actually seen the place yet so there will most likely be more repairs I’m thinking. Paint/carpet shouldnt be a big deal. I can paint myself. Carpet, not sure…never done. Tiling I can do myself if I need to.
BUT, I’m not sure I will be able to get the $925/month for rent that I would NEED for $100/month cash flow. Well, after down payment, it would be…But just using the 50% rule without down payment, cash flowing $100/month I think will be cutting it somewhat close. I was debating on a rental or just wholesaling it depending on how the place looks…
Ok, so I need help in determining if this is still a good deal or not. I just got home from looking at the house. It needs more repairs than what the lady told me (I figured…). It will need:
paint/carpet through the house
possibly new linoleum or tile in kitchen and bathroom if the current cant be cleaned.
possibly updated or painted kitchen countertops/cabinets
new bath tub (or possibly cleaned somehow??) / bath tub wrapping against the wall
about 3-5 new doors
need to repair or replace the backyard fence (its falling over and destroyed in some areas)
some of the walls/sheetrock has holes in it and needs to be patched/fixed.
some of the sheetrock has large holes and will need new pieces to cover it up and fix it.
some of the ceilings had water damage marks BUT the owner said after the put up a new roof in 2002 it stopped leaking.
new kitchen stove
So this seems mostly cosmetic, but I need help in determining how much it will cost to make these repairs because it’s very close. Here are the numbers again:
price: 45k (also they owe 4 months of mortgage payments, about 2k)
repairs: 5k? If I do the work myself?
rental comps in the area: 900/month
It does seem very marginal and my lack of knowledge at evaluating repairs is a bottleneck here…
If I did the repairs myself (except maybe carpet) would it be about 5k? 10k? for the list I put?
I was planning on doing a conventional loan with 20% down so I guess that would increase my cash flow as a rental. I was also thinking about wholesaling it, but there doesn’t seem to be much room for that either!! As far as finding deals in my area, I have had a HELL OF A TIME finding deals that meet the 50% rule. IN FACT, all of the investors I talk to at my local rei group meetings (even the teachers) are not evaluating with 50% rule as a guide. They are simply subtracting rent - mortgage to evaluate cash flow!! I haven’t found any local investors yet that have a set rule.
ballgum - this is exactly my experience here. When I mentioned that I want to buy properties using the 50% “rule” they look at me as if I was from another planet. Just this past week I was in a subgroup meeting of my local REIA and one of the investors shared a deal he was working on - he was considering 25% for expenses. I changed my strategy slightly - now I am calculating my maximum offer price considering that I am going to flip the property. My plan is to rent it out and see if I can cash flow - if not I will sell it as originally planned.
Ok, I found out the owner of the house filed bankruptcy and hasn’t paid her mortgage for about 4 months or so. She says she pays 5 something/month for mortgage. ASSUMING her info was accurate (45k owed on loan and 4 months mortgage unpaid) what would be needed to close the deal if I wanted to wholesale this?? WOuld the buyer need to pay the backpayments (around 2k) + the 45k owed to clear the title? Would there be anything clouding the title if she hadn’t paid for 4 months?
I was thinking of having her call her mortgage co and get a payout statement to show me so I know what is owed on the mortgage and what she hasn’t paid before I sign the contract… what else can I do?
ballgum - this is exactly my experience here. When I mentioned that I want to buy properties using the 50% "rule" they look at me as if I was from another planet. Just this past week I was in a subgroup meeting of my local REIA and one of the investors shared a deal he was working on - he was considering 25% for expenses.
This is EXACTLY why the vast majority of newbies fail! There is NO WAY that operating expenses for a rental are 25%. If you don’t believe me, start adding them up yourself.
IN FACT, all of the investors I talk to at my local rei group meetings (even the teachers) are not evaluating with 50% rule as a guide. They are simply subtracting rent - mortgage to evaluate cash flow!! I haven't found any local investors yet that have a set rule.
Rent - mortgage = cash flow??? What do these “teachers” do about all the other expenses? Pretend they don’t exist? RIDICULOUS! I think you need to find a new REIA - the teachers there don’t have a CLUE! (Are these “teachers” selling properties to newbies?)
Maybe I just havent hooked up with the right people there yet...
You got that one right!!! What do they tell you when you ask about maintenance, advertising, management, legal fees, evictions, utilities (at least during vacancies), insurance, etc, etc, etc. Are the “teachers” telling you that these things don’t exist? All I can say is that you should RUN, far and fast, away from any “teacher” that tells you that cash flow = rent - mortgage! They are either completely ignorant or they are lying. NEITHER IS GOOD!
I’m getting the same reaction in my area when I inquire about a property. Its the same thing over and over. I use the 50% rule as a “filter” to see if its worth a deeper look. So far, I’m finding these sellers are not flexible or motivated. I’m also seeing a LOT of properties being sold that don’t fit the 50% rule. These properties are usually back on the market within a year. These are also properties that I would have bought before I joined this site. EVERY ONE OF THESE LANDLORDS ARE NOW MOTIVATED SELLERS! These properties won’t cashflow because they believed the :bs of ACTUAL cashflow. I’m having a hard time finding deals that truly cashflow, but I’m happy knowing that I’m on the right track. Don’t deviate from the 50% rule. When you do that, you’re “talking yourself” into buying a property that doesn’t fit your criteria. I’m learning “the easy way” that REI is not only about the deals you do, but also the deals you DON;T do. Good luck.
Yea sometimes it’s hard, because I see alot of people evaluating without a formula whatsoever. For instance, I was at a landlording meeting and one guy owned 9 properties and when I talked to him about how he purchases, he told me he just subtracts mortgage from rents and THAT’S his cash flow. He told me he’s been making about $1200/month profit from these 9 properties…
BUT my problem isn’t with the rule, the numbers, or walking away from a property. My problem at this point is that my lack of experience in evaluating the cost of repairs. It is making my numbers inaccurate.
Go price the materials at your local store. For the stuff you can do yourself, the cost ends there with purchasing the materials. For the stuff you can’t do, try to get a few competing price quotes so you’ll have a better idea of total project cost. Don’t forget to estimate carrying costs for how long it may take you to get things done if you can only work on it in your spare time.
Maybe I just havent hooked up with the right people there yet…