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REAL ESTATE Am I doing this right? (Real estate basics)

offroadaz

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Feb 5, 2008
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I do not have any cash on hand for purchasing an investment property. I thought I could borrow the money with an unsecured loan at a higher interest rate. After a few months I would refinance the house and pay back that loan. Am I going about this the right way?

Heres my quick plan

1. Borrow down payment money using a site like propser.com
2. Purchase REO house or town home at below market value with traditional mortgage.
3. Rent out home
4. Refinance and pay back prosper.com loan

Am I making a mistake by borrowing money for my down payment or is this a normal thing to do?

Last question, should I stay away from condos and town homes and focus only on single family residences or are both okay? Anything I should be aware of?

Thanks for the help
 

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biophase

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i assume your are looking in phoenix. do you plan to get positive cashflow on your rental?
 
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offroadaz

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Feb 5, 2008
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i assume your are looking in phoenix. do you plan to get positive cashflow on your rental?

Yep I'm in Phoenix, there are hundreds of REO owner properties available right now. As for cash flow, I wouldn't purchase the property if it would lose money. I'm hoping to generate around $100-200 each month from it.
 

MJ DeMarco

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There are a lot of variables ... you should whip out a spreadsheet and run an analysis. The key metrics will be

1) Market rents
2) Average time to rent
3) Fix up costs (if any)
4) Holding costs (Prosper loan, mortgage, insurance, etc.)
5) Acquisition cost

I'd run a financial analysis on 5 scenarios:

1) Best case (Example: Home is rented immediately, property acquired at 30% discount, etc.)
2) Good case
3) Ok case
4) Bad case
5) Worse case (Example: Home takes 5 months to rent, $xxxx in fix it costs, etc)

Only then will you really know if your numbers work.
 

ChrisS417

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Sep 24, 2007
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offroadz,

This might help in determining profitablility: 5 year analysis

punch in the price, rent, taxes, insurance, maintenance, utilities, etc and it spits out cap rate, cash on cash return, and cashflow.
 
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offroadaz

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Feb 5, 2008
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Peoria, AZ
Heres what I am looking at right now. Its a 2bed 1 bath in south phoenix. I looked at the pictures and it needs repairs. I went to the website www.rentometer.com and the average rental price in that area is $895 per month

I would borrow the money for the down payment and repair costs using an unsecured loan from a site like www.propser.com that way I do not have to spend any of my own money. 20% down is 8,800 and I estimated the repairs at $5,000. I would get a loan for $15,000 from prosper to cover closing and repair costs. Once the property is purchased I would refinance and pay off the personal loan.

The property would have a positive cash flow of $474 each month after the prosper.com loan is paid off. (Mortgage $326, rent $800)

Best case scenario
Repair time 30 days
Vacancy 30 days
Year end repairs after tenant $400
Year end profit $4,162

Good case
Vacancy 60 days
Year end repairs after tenant $800
Year end profit $3,288

Worst case
Vacancy 90 days
Year end repairs after tenant $1,600
Year end profit $1,688
 

rcardin

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Oct 30, 2007
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The problem I see is that you are going to refinance in a short amount of time. this means you will be paying closing fees twice in the matter of about a year. Even if it is rolled into the refinance I think you might put yourself out of cash flow to a maybe break even point.

What if you looked at it from a different angle? Use the money from prosper to fund a hard money loan. Buy the property, find renter then re-fi after 6 months of title seasoning. This way you are only paying closing once.

this is the first I have ever heard of prosper. interesting site.
 

phlgirl

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Offroadz,

You will want to factor in both insurance and taxes for your monthly payment, when determining cash flow. Do you know what these figures will be?

Also, I would add the the carrying costs from prosper (if that is the route you choose), closing costs for both the purchase and refinance of the property. In my opinion, these items plus all construction costs should all be rolled into the final mortgage amount.

Have you lined up a bank, which is willing to do a cash out refi on an investment property, based on appraised value (not purchase price)? Make sure they do not have any seasoning requirements (unless you intend to wait 6+ months). You will need to know what LTV they will finance and how your property is likely to appraise, given the current market.

Hope this makes sense. Feel free to post more detail about the numbers and we can determine a better estimate as to what your cash flow might look like.

**ChrisS417 - just saw your spreadsheet. +++ That should be helpful, Offroadz. Just zero out all but the first unit.
 
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JScott

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Sounds like you are thinking about all the right things...now you just need to make sure you're on top of the details...

- As phlgirl pointed out, make sure you factor in all the "hidden" costs of loans and financing.

- Make sure you're comfortable with the rental rates in the area and for this particular property. Don't just trust that rentometer.com will accurate assess the rent for this property; those numbers may or may not be correct for the location, and may or may not be correct for that particular proprety.

- Assess vacancy in the area. Are there lots of empty rentals sitting on the market? If so, adjust rent downwards, and figure in higher income loss in the numbers.

- Are you sure you can rehab for $5000? A lot of repair cost estimates come in lower than actual costs. What happens when $5000 turns into $10,000? Can you still afford? Does it still cashflow?

- Figure maintenance into the expenses. Will you spend $100/year on repairs or $1000 per year? What condition is the place in?

Once you figure out all the details (and verify them!), if the numbers still work, go for it!
 

biophase

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Heres what I am looking at right now. Its a 2bed 1 bath in south phoenix. I looked at the pictures and it needs repairs. I went to the website www.rentometer.com and the average rental price in that area is $895 per month

I would borrow the money for the down payment and repair costs using an unsecured loan from a site like www.propser.com that way I do not have to spend any of my own money. 20% down is 8,800 and I estimated the repairs at $5,000. I would get a loan for $15,000 from prosper to cover closing and repair costs. Once the property is purchased I would refinance and pay off the personal loan.

The property would have a positive cash flow of $474 each month after the prosper.com loan is paid off. (Mortgage $326, rent $800)
So you are talking about a $44,000 house/condo in south Phoenix? I have a tough time believing that it would rent for $895. I don't see how you get a mortgage of $326. Did you account for taxes, HOA and insurance? You will have a tough time getting a bank loan for $32,000.

If I were you and I wanted to get into single families, I'd look at nicer condos in Phoenix and Scottsdale that are asking $120k-$150k and try to get one for $80k. Those rent for $800/mo all day and would break even monthly but I believe there is much more upside to them than at $44k condo or house in south phoenix.
 

Yankees338

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Jul 24, 2007
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Keep in mind, from what I understand, Rentometer.com only takes into account ASKING rents. As JScott stated, make sure you verify these numbers (with either property managers, realtors, or others with knowledge of the market). You're going to want to make sure you have as few surprises as possible if you decide to make the deal.
 

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offroadaz

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Feb 5, 2008
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Peoria, AZ
So you are talking about a $44,000 house/condo in south Phoenix? I have a tough time believing that it would rent for $895. I don't see how you get a mortgage of $326. Did you account for taxes, HOA and insurance? You will have a tough time getting a bank loan for $32,000.

If I were you and I wanted to get into single families, I'd look at nicer condos in Phoenix and Scottsdale that are asking $120k-$150k and try to get one for $80k. Those rent for $800/mo all day and would break even monthly but I believe there is much more upside to them than at $44k condo or house in south phoenix.
I havent done any more research on the rent yet other then what I found online. The house I was looking at is owned by Country Wide and is a foreclosure property.

I know south phoenix isnt exactly the best area, lots of lower income families. Im still looking around right now.

As for the mortgage I used the online calculator at bankrate.com and based it off 7% interest over 30 years. That number is before property tax and insurance
 

Sid23

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Aug 9, 2007
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do you know of any other online sources for finding rental rates?
Check craigslist (see what others are asking for similar properties), rent.com and any other places you know landlord's list homes/apts for rent. These are your guide.

Another thing we do is to call around to large complexes and get their going rates for 1-bd, 2-bd, etc. Most leasing agents will give you that info over the phone.
 

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