Keith,
Do you do 100% finance or do you put 20% down of your own money and get it back later with refiance or some other ways? The reason I am asking the question is that Bluemoons said he did 90% finance, and I was wondering PMI is required in that case.
What do you think 80/20 loan with 7% and 11% interest rate?
Thanks,
JW
I buy cash and can close within a week. Once I’m done with the fefurb and get ready to finance, the appraisal is at the high-end of comps because all the work is new and fresh. The refi is at 80% of the appraisal.
I personally think that an 80/20 at 7/11 is a little high but if that’s waht it takes to “do the deal”, and it has a POSITIVE CASHFLOW, so be it.
Keith
Me too.
This works in Houston, I found a subdivison in the direction from town that the town is growing (towards Katy). This neighborhood is older, but the houses still look like the newer construction (build around 1979 - 1983). The rents are high because the people want to live in that area, but the houses are cheaper because the owneres are moving out. These is another subdivision headed out north of town that fit also. Most of these houses are 3-2-2 1200 to 1400 sqft, and sell for $69k to $79k. Rents go for $850 to $1100 averge around $950. These houses can be bought with a PITI of around $650 with 10% down and ~$800 with 100% financing. That is $300 positive to $150 positive.
Bluemoon06,
For these type of houses, if there are two options 1). $650 with 10% down (interest rate 7%, and I think PMI may be required in this case)
2). 100% finance, 80/20 and interest rate is 7/11, which option would you choose? or you don’t like either, and there are some other options you may like?
Thanks,
JW
JW, You need to make sure your strategy fits your economic position. My strategy is in flux right now. My original strategy, which I am still in, was to maximize my cash flow by putting 10% down out of my pocket, and paying PMI, but getting higher cash flow. That would be case #1. My mortgage broker is getting me to look at the 80/20 100% financing which gets us out of PMI, but the main reason is to preserve my cash. We are starting to explore the stance that I should put as little of my money into the deals as possible. I do not really need the cash flow now since I have a job and really should be focusing on wealth building as opposed to income generation. But since I have the cash (my job generates enough cash to do a 10% deal every month), why not put it into the houses and maximize the cash flow. My new approach will still require a positive cash flow, but not attempt to maximize it.
As a matter of fact, I am looking at a house right now that we are looking to do 100% 80/20 finance on, but we are looking to fix it up and sell it. So I still have not looked at doing this for a rental.
This house is 3000 sqft 4-2 ½ - 2 with a pool that comps at $170k. Repairs are estimated at $8k and the seller is asking $139k. We are looking to finance $147k for purchase and fix-up and sell it for $170k for a spread of $23k. With carrying and selling costs of $13k that leaves about $10k (a little thin) for my pocket. That is why the deal is not done yet, I need the seller to take $129k so that I have $20k for my pocket, and he is balking at it.
Great stuff, Bluemoon6. Thank you so much for sharing.
JW
i concur, great info for this newbie 
Bluemoon06,
Good luck on the deal you are working on!!!
Do you usually look at any pre - foreclosure, foreclosure when you look for rental properties? I have not purchased any investment property yet, but the impression I have is that I may get more discount (or easier to negotiate) on any pre-foreclosure and foreclosure properties. In addition, these type of properties on internet or recored in the county courthouse. It also seems to me that I may get substantial discount from some motivated sellers, but these leads will mostly come from real estate agent or networks. What channels bring your more sucessful deals than others in terms of advertising on the local news paper, relying on real estate agents, pulling records from the county courthouse …?
Thanks,
JW
I have tried to build a real estate business that can be managed instead of building a real estate job that I will have to work in. The reason for that is when I decide to quit my job and do this full time, I don’t want to work harder than what I am working now. Because of that I tried to focus on a steady stream of deals with the path of least resistance. I have been dealing with real estate agents. I look for properties that regularly come on the market that sell for cheap enough for me to make money off of. I want properties that are lower retail to wholesale priced. I want only properties that require new carpet and paint, appliances, minor repairs. My definition of wholesale is if I can buy it for 10% - 20% of the 12 month comps that is retail. 20% of the sales comps for the past 12 months, I call wholesale (foreclosures are wholesale; this is where I usually purchase). Pre foreclosures are in the 30%-40% of 12 month comps. Rehabs start at 50% of 12 month comps, they take more than new carpet and paint, and get back on the market slower. I have created a definition in my business. Basically if it will cash flow, I rent it out. If I put $10k or more into it, I sell it, because if I put $10k to $20k into a house, I want that money back in months not years. The decision is how much I can sell it for versus the cash flow potential.
Very well, Bluemoon06. Thanks again.
Hi, bluemoon06 and Keith,
What kind of loan do you use in financing? 30 year fixed?
How much cost you put in the expense calculation for property management? 8%?
Thanks!
Dennis
rainerblue,
1) What kind of loan do you use in financing? 30 year fixed?
I use 80% LTV, 30 year fixed – if you are a long-term buy and hold, it’s the only way to go (IMO)…
2) How much cost you put in the expense calculation for property management? 8%?
I use 7% because that’s what I can get efficient management for here in this area. You area may be a little higher – it usually runs 7-10%. I always figure management in for two reasons:
(1) My time is worth something (maybe I should use 1% – LOL!)
(B) Someday I will want to do something else and with the management figured in already, I know what my expenses will be.
Keith
Thx, that helps. I do like the strategy of paying it down, paying if off as long as it generates great returns.
I think some investors recommends to build 20 SFH portfolios first (each with $200+ CF) before going for commercial properties. For undervalued property, it usually needs some fix work. It might takes 3 month or so to finish and rent it out or sell. So it will take 5 years to own 20 SFH. Is this the right expectation? or It will be much faster in aquiring properties after the first year?
Thanks!
Our goals are to do 4 - 5 houses a year for the next 10 years. This will give us a portfolio of 40-50 homes each generating $200+ a month positive with someone else managing them…The $100-120K a year (in today’s dollars) coupled with my other retirements (military, government, and maybe even Social Security) and investments should allow us to live indoors AND eat.
Personaly, we chose the 4-5 a year because it’s what’s comfortable for us.
Keith
Keith, are you full time investor now or this is your part time investment? I have to relocate if I am going to follow this strategy. So maybe hard to keep a job then.
I am part-time…as is my wife. We both have other jobs.
Are you in Washington State?
Keith
I am in san francisco area. so kinda impossible to do the same strategy as you and bluemoon did. Investors here mostly expect profits from the appreciation.
My opinion – it is somewhere between tough and impossible to make a decent cashflow in any of the “blue” states with just a very few pockets of exception…especially on the west coast…
Keith
Yep. People here use 3 year interest only loans and still hard to breakeven. Some analysts predict a dramatic foreclure increase if california markets cools down or turn south in 3 years.