I have been watching a house sit on the market for about six months, it is priced too high, but the agent stressed to me that they are looking at all offers. I can give the numbers and need help figuring out if it is worth pursuing, I want to try and do it zero down because I am about to get into a total rehab on another project. I can get a rehab loan for zero down which will give me the money to buy it, fix it, and then I can refi it with no penalties, can I do that to where I don’t have to put any of my own money into it?
The details on the house are as follows, it is a 2/1, needs about 10k in repairs, asking 59k, should rent for 625/month, ARV is 75-80k.
Thanks Mike, I am learning how to figure income property, I couldn’t make this one work, I can’t find anything so far that fits your criteria. That doesn’t mean I won’t keep looking though!! Right now flips seem to be the thing to do around here, central Texas area, I am starting to get into a few good leads for flipping, that is my goal. Fix and flip properties for a quick sale, but pick up really good income properties along the way in areas that I think appreciation will be good over the next ten years.
As a side note, every Realtor says their client is looking for all offers. That really doesn’t mean anything. But Property Manager said not to offer more then 31K, so what’s stopping you from putting a bid of 31k in on the property?
I would bid 31k seller financing for 5 years at 8%. Then you will own the property in 5-years and save $4-5,000 in closing costs by seller financing.
Why dont you take your time and buy with the formula rent divide by .02 for purchase price/ total investment, fix if needed, rent and refi to pull your money out. That is how you build wealth.
Even if you use the rent/.02 formula, you still need to do a cash flow analysis to be sure that you will have adequate cash flow. Some deals even when purchased using the 2% rule will not have $100 per unit per month cash flow.
you would know better than I as you have more experience but I havent run into any yet luckily so far that havent cashflowed using that formula. I am sure I will though thanks for the advice
Traditionally, there has been a general rule that you need to buy rental properties so that the gross rents are at least 1% of the purchase price. Unfortunately, buying paying 1% of the purchase price will generally not allow a landlord to have a positive cash flow in the real world. In fact, I have found that you need to receive about 2% of the cost of the property (purchase price + rehab cost) to get most rentals to cash flow.
Therefore, you need the gross rents of a property to be 2% of the purchase price.
Expressed as an equation: Gross rents (needed) = .02 X Purchase Price (including rehab)
If you know the gross rents for the building, you can re-write the equation to solve for Purchase price:
Max Purchase Price = Gross rents/.02
That’s it! I came up with this “formula” as a simple way to determine maximum purchase price. It is one of the criteria that I use to determine the maximum price I will pay for a rental property.
Four years of your tax payer dollars paid off…I still can’t look at an ‘equation’ and figure it out. I was expecting something very complicated and difficult…
For everyone who wasn’t able to shield your profit from the tax collector, I am sorry for further wasting your money! lol
BTW, thanks for the reply, I can’t tell you and everyone else how much I appreciate the help.
Can you please explain this to me more clearly, I don’t see how this thing would cashflow with that type of payment schedule. My numbers say that would be a mortgage payment plus interest of $658.98 a month, I don’t even want to figure the negative cash flow on that using real world numbers, fyi I am a student of Mike’s. I think that if I would do this on a few properties I would be in the poor house after one year of operation. Please correct me if I am wrong, I am still learning. Thanks for the reply.
amortize the loan over 30 yr and make it a 5 year ballon (payment would be about $295/mn). re-fi into conventional loan in 5 years and possible pull cash out. You’ll owe about $23k at that point.
You are thinking correct but are definitely wrong. If you buy it for $31,000 it would be $629 a month with zero down, but you will save $5,000 in closing cost by seller financing for the 5 years. So instead of paying $5,000 in closing costs you would just put the $5,000 down, so your mortgage would be $527/month.
If you receive $625/month in rent then there would only be a small negative. You would have the property paid off in 5 years and instead of wasting $5,000 in closing costs, you actually put the $5,000 to good use by putting it down.
Think of it this way. If you were to save $5,000 in closing costs. Wouldn’t you think it would be ok to spread that savings out over 5-years. So you would actually have an additional $84 a month ($5,000/60). So your revenue would be $625 + the $84 a month you saved by not having to waste money on closing costs, with a $527 mortgage. By not pissing away $5,000 in closing costs you can add that $84 month savings to the total. The $5,000 that would go to closing costs doesn’t just disappear, you have to add it to benefits of using seller financing.
I was under the impression that you should pass on any deal that has negative cashflow. I guess it is the saying “how many properties can you afford that have positve cashflow - as many as you can find”, and you can only afford negative cashflow deals until your broke. So by saying it would only be a small negative doesn’t make the deal any better. I don’t know - just my opinion.
I agree with you completely. Yes, if you have cash and can afford the negative cash flow, you could put $5,000 down or $10,000 down or $20,000 down and pay for this in any time period you liked. The question is how many deals can you do if you’re losing money on them every month? If I was putting $5,000 down and losing sever hundred dollars each month for each property, I couldn’t afford to do many rentals. Instead of doing that, I prefer to buy each property at a minimum 30% discount using none of my own money and have a positive cash flow.
By doing it my way, I am rapidly building equity and cash flow. The more deals I do, the more cash and equity I have.
BTW, I don’t know how you are saving $5,000 in closing costs by owner financing a $31K house. I can’t imagine what bank would charge $5,000 in closing costs on a $31K loan!!! Maybe $1,500, but certainly not $5K.
This approach would be great for a person who had distroyed their credit or a person who was willing to work a little harder for a few years in order to retire. Not everyone can go into a bank and get a 100% commercial loan for 6.5% like you. There are those who need to think outside the 30 year fixed bank loan box. Isn’t you who always tells people they might have to get 2 or 3 jobs for the first few years? Plus if you buy this for $31,000 where are you going to get a loan for that small amount if you don’t have money? You get it through seller financing.
Example:
If I you were to purchase 5-7 of these types of deals I would have a negative cash flow about a $1,000 a month. So if you are 28 years old like me that means I could work an extra part-time job to pay for the neg. cash flow and then retire in 5-years from both jobs with 5-7 properties paid off.