Question, for all of you experienced REI experts out there. I am still researching everything I can before I jump into the REI pool, but the question I have is do I rehab and keep or do I sell?
This is what I think, please feel free to smack me in the head to put me in the right direction. I don’t have enough cash in savings to own a few rentals just yet ( for those great tenants everyone is always talking about) late payments, eviction cost, You all know…
My plan is to rehab and sell until I have enough funds to fall back on and then start to purchase rentals as I go. Am I wrong in thinking this?
To have a “good” amount of positive cash flow in rentals it seems you need to own a fair amount of them. Correct???
You have to look at this question in 2 distinctive and different ways. First what does my lifestyle cost and second how much money can I make. First decide what are you trying to do? Remember it is not about the money it is about the lifestyle. Money for money’s sake is being a miser. I am doing this to maintain a desired lifestyle that I have built without trading time for money. I call that state of being rich. In order to be rich I have to look at my lifestyle costs, and my income. I used my job to establish a lifestyle that I am happy with and my real estate to maintain it.
All real estate is local. Some local markets the houses can’t be bought less than $200k but they can’t rent for more than $1200. These markets require down payments to bring the PITI down enough to cash flow. Some markets like Houston (where I am) houses regularly rent for $1000 and these houses can be bought for $60k to $75k. What I do is buy houses with a rehab loan and fix them up using very little to none of my own money. I use a trust to “sell” the house to my tenants. The price the tenant agrees to pay me at the end of the term (strike price) is at least $20k over what I have into the houses. I average $40k over right now. I check the prospect out credit criminal background and rental history. I charge them about 5% of the strike price up front (nominally $5000) and charge them monthly PITI plus $200 to $350. The trust makes them responsible for the maintenance (I do provide them with a home warranty policy) and start with everything new. Since new things don’t break and if they do they are under warranty, my expenses are very low. I end up making an average of $200/month on each of my houses. I am headed for 20 houses I am a little over half way there now. At 20 houses I will have taken in $100,000 in up front money (over 2 years), and positive cash flow at a rate of around $45,000/year. If the “tenant” actually buys the house I will realize the $20,000 for each house. If I “sell” 2 per year that will make my income about $85k/year. If the tenants don’t buy them I don’t keep them more than 3 years and I sell them to an investor or natural buyer and replace them in the portfolio.
In New Your city $85,000 would have me eating cat food living in a 300sqft apartment, but here in Houston I have a 3,000 sqft house with pool and home theatre, a 2500 sqft lake house and 3 relatively new cars. All this was obtained with money from my job. But that also enabled me to be effectively debt free. Therefore my monthly expenses are around $3,000. I am actually at the point when I am working for the fun of it. I can pay my monthly expenses with my real estate and quit but I am having too much fun. My definition of being rich is to be able to live whatever lifestyle you want without having to trade time for money at a job. That is freedom. My real estate is going to get me there as soon as my job stops being fun.
So now you have to do your homework. What do you want to do, and how can you get there? What can be done where you are? What kind of resources (credit, cash, partners, etc) do you have to get you there?
First of all, how much do I owe you for all of that?! Thank you very much. That was above and beyond helpful. Actually you have responded to a few of my post and have always been helpful. Thanks again.
I’m the guy retiring from the military next June that is looking at Conroe, The woodlands area to retire at if that jogs a memory.
I totaly agree about the lifestyle, it’s not about having money just to have it. My lifestyle…Pretty simple. I have all of the toys I need, BMW, boat, 1942 Harley flathead, tools etc. The military gave me the opportunity to travel all over while I was stationed in Germany for 12 years. There are a few places left I would to check off of the list though. The wife is easy to please, as long as we are together it doesn’t matter what we do.
I will work another job parallel to rei until I can do it full time. My wife is a math teacher which will help and I will have my Army retirement check each month. The lifestyle will still be new to us though after being in for 20 years, but I’m sure it will be a modest one. Long term goals: To be able to travel at will and rely on rei income at some point.
I definitely like the way you have done business. It gives me ideas on how to set my goals. Thanks again!! In fact, don’t be surprised if it mirrors it!!!
Although, I am prepared to tough it out for a few years until I get into full swing of things and learn the ropes. I am really starting all over for a second time…I lost a $750,000 European home in a nasty divorce about 5 years ago, but I got to keep my retirement pay untouched.
As far as credit I am sitting in the 770’s range. I have never had a credit problem.
I do have another question - Do you have your units under a LLC or corp?
Each house is in a trust. The trustee for each trust is my LLC and as president of the LLC I am defacto the trustee. But let your lawyer figure that stuff out for you.
Ahhh! Leads me right into my next question. I ran across a web site that was selling the “How to’s” of setting up an LLC. It seemed to be very informative, but I am the newbie here.
I don’t remember if I can say the web sites name or mention his product here so I wont.
Any ideas on these types of media as a learning tool?
The deals I do are like the old contract for deeds. But in the state of Texas the legislature has passed laws making executory contracts (like contract for deeds lease purchase, etc) basically unmanageable. So what I do is use personal property instead of real property for the transaction. What I do is place the deed of the house into a trust. I own part of the trust they own part of the trust. And then we can carry out the same functions as a contract for deed on personal property (the trust) instead of real property the actual deed. That is why I need a trust.
That is why I always tell people to see a lawyer when you are doing any of this stuff.
Given the shakeup in the mortgage industry, one needs to measure their exit strategy prior to entering into a P&S—given the state of affairs in NOO financing, real estate investors should be leaning towards the buy and hold.
I have to ask…are you Robert Kiyosaki? Your posts are so similar to the advice in his books. LOL I have read many of his books and learned so much. You definetly know your stuff.
We are looking for contacts in Texas such as a Lawyer, CPA, Property Management Company, Apprasier. Can you send us your contacts info.
You may have already had your question answered, but I just came across your post now, and wanted to add my two cents. What I love about this forum is that you can get several different opinions on various questions. I completely agree with what has been written in response to your original question, but hopefully my insight can assist as well.
Investing in real estate is a lot like investing in the stock market, and managing your property portfolio and investing strategy should be similar as well. I completely understand your question, as several of my real estate mentees have had similar issues. You should look at your resources as a whole, and decide how much to devote to “hold” and how to devote to “sell” properties. Now, lots of investors make very good livings off of devoting their efforts to one or the other, but I personally believe the way to profit from any real estate market is to shift your focus accordingly. I’ve written an article about my real estate company’s approach to diversifying its portfolio. If you’re interested in more on this, you can check it out here if you’re interested.
Bluemoon I understand your plan except how do you use a rehab loan to make this work? usually the loans are short term correct? Not 3 years? Are you refinancing each one after rehab?
Yes. I get a rehab loan for 3 months and they refinance to a permanent loan. This is a lot like a construction loan that you take out to build a house. It is a 2 time close which is actually pretty expensive. That is another reason I look for a deep discount when I buy…I have to feed my pet mortgage broker.
Bluemoon’s approach is pretty much the only way to buy investment property with no money down due to today’s “credit crunch”. My RE company started using these rehab loans about a year and a half ago, and they’re great. It’s actually easier to use them now because there are more deep discounts available (buying on a steep discount is crucial to making the rehab loan work with no money down – you have to fit all of your costs inside 80% of future value, which is only possible by buying smart on the front end). If you’re interested, I’ve written more about our usage of the rehab loan here .
thanks! So far i have paid cash for fix up and 20% down on my properties. I knew about hard loans just heard they can break deals like you mention. On the other hand The way you explained this it is almost like a safety net, so you dont over buy a property
You know, I had never thought of it that way, but you’re exactly right – you do have a built in safety net. Having your entire project come in for less than 80% of appraised value will definitely assure you a much greater chance of success.
One caveat, though – in today’s market more than ever, appraisals and actual market value have a tendency to be two entirely different things. We recently re-fi’d a rental property of ours, and the appraisal came back with an appraised value of $255,000, which we know for a fact we couldn’t sell it for over $200,000. That’s a big difference. Now, if you’re buying to renovate and hold, then it’s a lot less of a concern, because those valuations will come back a little more in line sometime in the future, but if you’re buying to flip, I would definitely involve some serious research into comparable SOLD prices.
VMAX you are right it does act as a second set of eyes with an interest in you not messing up the deal. The first house I did using the rehab loan the appraisal came in at $125k for a house I know won’t sell for more than $115k. I bought it for $84k and ultimately was to have $94k in it after fix up, so I didn’t really care. But you need to know the deal and not rely on the appraiser for your values. Use recent sold comps to figure out what the house is worth and the appraisal just to get the loan (beware of your morgage broker tempting you with padding the loan for pocket money only finance what you need not all that the house will support).
But if you use my favorite leverage example where you buy a house for $100k with $10k down. The house appreciates 10% to $110k. It makes you $10k on your $10k invested and that is a 100% return. Supposed you have that same house that you bought for $100k that goes up 10% to $110k and you make $10k with no money in the deal. That is dividing by zero…that is a return of infinity.
Putting down $10k on each deal I will run out of money before I run out of deals. With this rehab loan using leverage my only limitation is available time to do rehabs and finding deals. That is why I say the without leverage real estate is no better than any other investment, but with leverage it is magical.
All I can say is time to learn! I found the right place!
Would this be easier (for a flip) to be in good with a bank or banker and do some sort of interest only loan with enough collateral (cars, your own house. equity in rentals ect) and good credit to get a loan for a rehab long enough to finish and sell the property? I would imagine this would be much cheaper than a hard money loan. I know it would not be easy finding a good bank canidate, but when you do it could be nice.
I don’t know how to flip houses in Houston. You have to get advice from somebody that knows how. What I have found in Houston is for flipping to work you can’t just find a house cheap, but you also have to have appreciation to get your profit in line. Houston doesn’t appreciate enough to flip. We appreciate only 5% to 7% per year. You may get $15k on a flip if you do a very very good job doing it. Houston has a market problem with flips. If you look for deep discounts the houses usually fall in the under $100k area. That area has a very few natural buyers to flip to. The market over $150k has more natural buyers but not as many discounts because they are highly leveraged and you can’t get a deal. I have heard people say that The Heights is a nitch neighborhood where the marketing works, but I don’t know