Thread: when deals drop in your lap

Sounds great Rick. Hope it works out for you.

How are you going to make money on this? Based on your post it doesn't sound like you are picking up any equity. Will it cashflow? I'm just wondering where's the profit?

It is a long term hold. We pick up about 3k in equity and someone elses loan. No profit except depreciation and maybe 25.00 a month until it sells.

If I can find a lease option person I can get at least 2k down as an option fee. I can charge them rent on the washer dryer and fridge. Who wouldn't pay an extra 20.00 a month for complete appliances. Basically a rent to own.

Also, our daughter is 11 and will need a place to live when she goes to college. Perfect alternative to a dorm.

When we cash out it will add to the liquid cash we need to move to the coast and finish our careers. All part of the retirement plan.

rcardin,
I hope you will not take what I'm about to say the wrong way. I'm trying to be helpful.

Originally Posted by rcardin

She knows she can never sell her property for what she owes with the foreclosures driving the prices down in her neighborhood.

Why are you buying it for what she owes on it? Thats what you are doing by taking over her loan. You are bailing her out. The little bit of potential positive cash flow and possible $3k in equity are nowhere near enough upside to take on this obligation.

Again, I'm not trying to be critical. But, you can probably walk around the block and find several deals better than this one. Don't let your desire to make a deal lead you into making a bad one.

Best wishes.

tbsells,
I am always looking for the downside of any deal and appreciate the input.

Everybody in every real estate book preaches OPM. This is the truest form OPM and OPC (other peoples credit) No money out of my pocket. Granted there is no cash flow or very little at best but it does build the portfolio. It is a 10 year hold minimum. Cash on the back end.

Originally Posted by rcardin

tbsells,
I am always looking for the downside of any deal and appreciate the input.

Everybody in every real estate book preaches OPM. This is the truest form OPM and OPC (other peoples credit) No money out of my pocket. Granted there is no cash flow or very little at best but it does build the portfolio. It is a 10 year hold minimum. Cash on the back end.

I think youre missing an interesting point though bud. Although buying property is indeed a great retirement nest egg if you can make the numbers work, you can make money on almost ANY property if youre willing to hold it for 10 years ("MINIMUM"). It is said that within 10 years most properties on average will almost double in value. I think what tbsells is saying is that even though you may be building your portfolio, in todays devastating housing market there are sooooo many deals out there with equity already built in (ie; properties selling for MUCH less then they may be worth in only a couple years as this market re-adjusts), that you could be doing much better for yourself by buying more carefully (i hope this makes sense). In other words, you should be looking to make money on both the front AND back ends, as you are buying in a housing market that will SURELY appreciate in the next 10 years, with sellers that are DESPERATE to unload and walk away. So you could be picking up a property that would casfhlow NOW, but will also appreciate, rather then a property that does nothing for you now except provide an assett in your net worth.

I am just trying to help so I hope you didnt take offense to my response! From what you have posted it just seems like you may be able to do better thats all.

No offense taken guys, I posted to get feedback whether positive or negative.

I totally agree that this is not a sweetheart of a deal. I am sure there are other houses that would be a better deal but this came out of nowhere. Absolutely no work on my part. It is just an asset in the net worth column making at best 1k a year in principal pay down and maybe 500 in cash.
Since it is a long term hold though in 10 years I should be able to make about 20k with appreciation and pay down. Not a huge amount but a chunk to pay down one of the other houses.
The main thing is it allows for learning though. I have never bought "subject to" properties. With guidance from my dad this will be a learning experience. I now know that people in this neighborhood are walking away from their homes. With an aggressive bandit sign campaign I should be able to pick up a couple more of these over the summer that might have a little more equity. With the way the market is this summer may be a prime opportunity to pick up more than I want to deal with.

We have around 5k saved and are awaiting a gas lease bonus check for another 5k. when we have our cash in hand we are open to multiple properties that will cashflow nicely. Just a matter of having our ducks in a row to bid on the REO's.

Great responses. RC and I talked about this deal earlier. What he says is true about the deal. Here's a summation as I understand it. They are giving him the property with the note with no money out of his pocket. Through the paperwork he is assuming the note but his name will not be on the note so it doesn't count as a mortgage against him. He finds a renter that pays the monthly mortgage. Yeah, it's not fast but it is all upside for him and it doesn't pull any resources from him. I tried to find a flaw in it and the only thing I came up with is it's half a duplex and it's slow. Anything else I'm not seeing?

OK, now I have a question. What happens if they come back in 5 years and want to reinstate? How does subject to stop that?

Good luck Rick.

Originally Posted by Runum

OK, now I have a question. What happens if they come back in 5 years and want to reinstate? How does subject to stop that?

Good luck Rick.

The only thing tying them to the property is the mortgage. I own the deed. If they really wanted to come back we could always negotiate a buyback price.

when deals drop in your lap....

Make sure they fit in with the overall PLAN!!

Originally Posted by Runum

I tried to find a flaw in it and the only thing I came up with is it's half a duplex and it's slow. Anything else I'm not seeing?

Some things that come to mind:
1) Responsibility. For payments, taxes, insurance, maintenance, etc. There is long list of responsibilites you take on when you buy a property. Make sure you are being fairly compensated for the extra burdens you are taking on.
2) Vacany and collection losses. These can turn a small positive cash flow to a money out of pocket situation quickly.
3) Taxes and insurance always go up over time. So do HOA fees. Again small positive cf into negative cf quickly.
4) Repairs, evictions, phone calls, etc. Its a hassle to own rental property. Make sure you are compensated for it.
5) Risk. Primarily of loss of value in this case. It could happen.

I'm not trying to talk you out of this. Like ATW said only you can determine if it fits in with the plan. I just hate to see people take on risk and responsibility without making sure they are paid for it. You break even when you get up in the morning, why take on additional risk and responsibility without being well compensated for it?

For what I understand, this "deal" does fit you plan.
And that is the problem.
I see you have a great opportunity to grow and make it big time.

You jobs allow you free time (the greatest of resources)
You have the best mentor you could possibly have (your dad IS your Rich Dad)

And you are looking to just pick up a property or two and hold them for ten years and/or until retirement?

Of course I am biased, as I have a bigger plan in the works. But I hate to see people with great opportunities, tools and knowledge in hand and think really that slow. Specially long time members from this site like you.

Sorry to be too critical. (As an excuse I can only tell that three different opportunities landed on my lap today, and two were ignored as they were not fast enough so they don't fit in my plan).

rant_off

Oh, and after criticizing your plan, now I do answer the question... the risk (big time risk) is vacancies. Your property barely cash flows with no vacancy. But we all know that 100% occupancy only means your rents are too low. One week of vacancy and your year is gone, now instead of making money you just lost real money.

I don't have much to add here, but wanted to reiterate a couple points that others have already made (on both sides):

- First, if this properties fits your plan, and you are comfortable that your plan is truly the way you want to go with RE investing, then it's not a horrible deal. This assumes that you're comfortable with the local market, the future market growth, and your ability to keep the place rented;

- But, again, there are a bunch of assumptions there:

First, we're assuming that your plan is well-defined and that this property fits it. Is that true? Have you made the conscious decision that you want to focus on long-term buy-and-hold of small-cash-flow properties with little/nothing down? If so, what's your reasoning? Is it difficult to find higher cash flows in your area? Is zero-down a necessity? There's no right or wrong answer to what your plan is, as long as it's well-defined and gets you to where you want to be.

Second, does the market support your plan for this property? As Andviv and tbsells both pointed out, while the numbers may work for this year, do they take into account the likely changes in future years? Does your plan take into account the likelihood of increased expenses (inflation), any deferred maintenance, market trends (possible increased vacancy or lower rent averages), etc? Those things very well may not be an issue -- and in fact, perhaps things are likely to improve -- but you should do enough analysis to be comfortable one way or the other.

Third, while you can acquire the place with no money and no credit, the one thing you will have to put in is *effort*. You'll need to get it rented, keep it rented, deal with tenants, deal with maintenance, deal with possible evictions, etc. While you'd have to do this with any property, keep in mind that your short-term return on this one is small, so it may feel like you're working for free for quite a while.

Again, if you've considered those things and are still comfortable with the deal, don't let anyone talk you out of it. But, I think what I'm seeing on this thread is people trying to make sure that you've actually *seriously* considered these things before moving forward.

Good luck with whatever you decide!!!

Great Summary. My wife and I sat down and worked out how this fits in our 10 year plan. It is still a little rough around the edges but is really coming together. The immediate goal is to own 10 rentals in the next 5 years. I think we may be able to do it much faster though.

Originally Posted by JScott

First, we're assuming that your plan is well-defined and that this property fits it. Is that true? Have you made the conscious decision that you want to focus on long-term buy-and-hold of small-cash-flow properties with little/nothing down? Part of the long term plan yes.
If so, what's your reasoning? Long term holds create the cash at the end. All part of the exit strategy. We plan on moving to the coast in 10-12 years. That will be when we cash out the smaller low cash flow properties. At that point the cash can be redirected to our beach house or used to pay off one of the other houses, creating more cash flow.

Is it difficult to find higher cash flows in your area? Is zero-down a necessity? Zero Down is not a necessity as much as a bonus. But with the mortgage market these days it is getting more difficult to get financing without 10% down.

There's no right or wrong answer to what your plan is, as long as it's well-defined and gets you to where you want to be.

Second, does the market support your plan for this property? As Andviv and tbsells both pointed out, while the numbers may work for this year, do they take into account the likely changes in future years? Does your plan take into account the likelihood of increased expenses (inflation), any deferred maintenance, market trends (possible increased vacancy or lower rent averages), etc? Those things very well may not be an issue -- and in fact, perhaps things are likely to improve -- but you should do enough analysis to be comfortable one way or the other. The property is 2 blocks form the High School and 6 blocks from the Elementary and Middle Schools. Fortunately every big ticket item has been replaced in the last 2-5 years. With a 5% increase in rent every year it should keep up with increased costs.

Third, while you can acquire the place with no money and no credit, the one thing you will have to put in is *effort*. You'll need to get it rented, keep it rented, deal with tenants, deal with maintenance, deal with possible evictions, etc. While you'd have to do this with any property, keep in mind that your short-term return on this one is small, so it may feel like you're working for free for quite a while. Time is my biggest asset right now.

Again, if you've considered those things and are still comfortable with the deal, don't let anyone talk you out of it. But, I think what I'm seeing on this thread is people trying to make sure that you've actually *seriously* considered these things before moving forward.

Good luck with whatever you decide!!!

While not exactly "fastlane" it is still one step ahead of slowlane.