HI everybody! Im a fellow newbie in this business and I have in my face a deal that an experienced investor Ive networked with is willing to pass on to me for my first deal. This is how it looks… his payoff amount is near 29,000 to 30,000 dollars and he is currently having it appraised and the projected amount is to be near $38,000. He has tenant-buyers in the home now that have been there for a couple of months now and they pay $600 a month and have the option to buy at the $38,000 . Ive talked to a loan officer that says I can get 100% financing so really I wouldnt be coming out of pocket and my payments would be about $300 a month, so thats $300 cash flow. The investor says that if it is appraised at the $38,000 and I can come up with the money, that he would give me a discount of the purchase price, that way I can make a little more money if and when the current tenants cash me out in a year or two. Does this sound like the right track to take or am I going the wrong way with this… PLEASE HELP!!!
dj,
Unfortunately, your math is WAY off. If you recieve $600 in rent and have a $300 mortgage payment, you certainly DO NOT have a $300 per month cash flow!!! NOT EVEN CLOSE! I know that many people put in their lease-option that the tenant is responsible for taxes, insurance, maintenance, etc. That isn’t worth the paper it’s written on and is generally meaningless.
The truth is that the vast majority of lease-options and land contracts are never purchased by the tenant (buyer). Renters are renters. They are unreliable. They are on the lower tier of society. They don’t follow through. That’s why they are renters.
So what happens is that the tenant-buyer doesn’t do the things that they’re supposed to do. They don’t do the maintenance (they don’t have the money). They may not pay the taxes and insurance. When they finally move out, you’re stuck with all the deferred maintenance that they were supposed to do. Moreover, you have all the other expenses that comes with any rental. Evictions, vacancies, legal fees, court costs, capital expenses, damage caused by angry tenants, unpaid utility bills, etc, etc, etc, are all expenses that are common with lease-options.
Why haven’t you heard that frrm the gurus?
Mike
mike,
So do you not encourage the lease-option method of real estate investing? And I do realize that by actually purchasing through a lender, that I'll end up having to deal with taxes and insurance, and the maintenence that goes along with renting. I appreciate you reply. thanks. Any other thoughts?
I appreciate the point that Mike makes...I talked to an old timer who has landlorded his own properties for years, he made the point: "the reason people rent is either because they don't have any money or they have bad credit, or both." I believe that it is a good idea to manage your own properties when you start so that you learn more about the business. Screening tenants is a good way to avoid some of the hassles that Mike mentioned, but dealing with those hassles is also part of the work.
I don't believe Mike was discouraging the lease-option method of real estate investing, often times lease option tenants pay higher rents. He just said that they probably won't buy the property.
I don't know if you were just making a general point and therefore not discussing specifics, but when you calculate cash flow on a real estate deal, expenses can include taxes, insurance, repairs, maintenance, utilities (often times owner pays garbage, water, stormdrain service, homeowner's association fees), you might want a property manager, or a gardener. You still haven't brought up the fact that these properties could go vacant for months on end while you lose money advetising them in the newspaper. When someone moves out, you have maid service, painting and carpet cleaning usually.
The upside is leverage, appreciation, depreciation and the cash flow that remains after expenses.
DJ,
I’m not against lease optioning property. I do this with some regularity. The advantage is that you get a non-refundable option premium when the lease is signed. You get to keep this and normally the tenant will not buy the property. My only point is that you should go into these deals knowing all the facts and understanding the expenses you will incur. Rent minus mortgage payment does not equal cash flow - not even close.
Mike
I prefer to use the term “left over” rather than positive cash flow. This is when I am speaking to someone about a loan on a property. I usually tell them there is “X” amount "left over after they pay thier PITI (principal, interest, taxes and insurance) on the property. That leaves them in a position to see what amount of money is left for other expenses attributed to the property.
A friend of mine does Lease with the option to buy all the time. However his intention is just looking to rent the property to someone for a year, colelct some rental income and sell it for a higher amount a year later. He negotiates the price and the rental amount up front and leaves them with the option at the end of the year. This is to free up his cash in the property to invest it into another peoperty.