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REAL ESTATE Now good as time as any to buy rental properties - Cincinnati Pos

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MJ DeMarco

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Now good as time as any to buy rental properties
[SIZE=-1]Cincinnati Post, OH - 40 minutes ago[/SIZE]
[SIZE=-1]"When I buy a piece of real estate, my first question is what's my cash flow? What's my rental income from the property? A property is only worth its rent. ...[/SIZE]

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andviv

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Re: Now good as time as any to buy rental properties - Cincinnati

It looks like not all the newspapers are looking at REI as the worst thing ever these days.

Home prices fell 1.7 percent in the third quarter of this year, according to the S&P Case/Shiller Home Price Index and many experts, including Kiyosaki, are predicting a continued decline.
Start small. Lucier suggests a duplex that will allow you the ability to live in one side and rent out the other. Even Kiyosaki, who says he now only buys apartment buildings with more than 300 units, started with a small condo on the island of Maui, Hawaii.
Focus on cash flow. The key to making money off of your investment properties is thinking in terms of cash flow rather than capital gains, says Kiyosaki. "When I buy a piece of real estate, my first question is what's my cash flow? What's my rental income from the property? A property is only worth its rent."
 

yveskleinsky

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Re: Now good as time as any to buy rental properties - Cincinnati

I suppose it all goes back to what your plan is. I would think this would be a bad time for capital gainers (flippers), but a fine time for us cashflowers. All markets have cycles, the time to buy is when it fits your plan.

I wish all these "experts" would clarify that when they post their Chicken Little articles- although I bet that most REI don't pay much attention (or at least weight it accordingly) to articles written by people who don't have the same plan as they do.
 

AroundTheWorld

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Re: Now good as time as any to buy rental properties - Cincinnati

All markets have cycles, the time to buy is when it fits your plan.
I was thinking about this recently - as it relates to hard money lending.

I've got an aquaintence that is a hard money lender. I saw him in October at a meeting and was curious to talk to him.... how is his hard money lending business going now that many flippers are out of the game?

One year ago, flippers had been his primary customer.

He has adapted his plan (his one trick pony, if you will) to the current market cycle.

He now helps REI investors get into investment property's that will be held for cashflow.

They buy the property at a discount and use his hard $ to finance the purchase.
Then, they refi - and are able to get into the property with 0 down, because the refi is based on appraisal - not on purchase price.

He - and many hard money lenders that have been around the cycle a time or two - knew how to adapt his plan for the current cycle.

I say all this - because once again - I am tempted by the amazing opportunity we see now in SFR.... but it is not in our "one trick pony"... What to do, what to do.
 

phlgirl

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Re: Now good as time as any to buy rental properties - Cincinnati

This reminds me of a book I read years ago - Grow Rich with the Property Cycle, by Kieran Trass.

It was a great explanation of just this topic - adapting to the conditions in the market and working with the Property Cycle (as opposed to being a victim of it).

I have had this on my 'to-read again' list for months but keep letting other books jump in line! With all the changes going on, I just know I would learn something from picking it up again. Back to the top of the list. :)

Our company is currently buying SFRs in exactly the format you describe, ATW. We use hard money now & then and the guys we work with say that we (and a few others like us) are the only faces they are seeing these days. A great example of how the ability to adapt can make or break a business. The market will not come to you.... you must go to it.
 

AroundTheWorld

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Re: Now good as time as any to buy rental properties - Cincinnati

This reminds me of a book I read years ago - Grow Rich with the Property Cycle, by Kieran Trass.
This sounds REALLY interesting! I am going to order it today! Thanks.
 

yveskleinsky

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Re: Now good as time as any to buy rental properties - Cincinnati

They buy the property at a discount and use his hard $ to finance the purchase.
Then, they refi - and are able to get into the property with 0 down, because the refi is based on appraisal - not on purchase price.
I have a paranoia with appraisers- has anyone else encountered buying a home for under FMV, only to have it appraise close to purchase price? The justification I got from the appraiser was basically, he just needed to get to the PP. I bet it is totally different when you pay cash, because they can't see what you just paid for it and have to actually give you a real estimation of real value. Hmm...something to consider if this deal we are working on goes thru.
 

andviv

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Re: Now good as time as any to buy rental properties - Cincinnati

Yes, it does happen. They take the easy route, and appraise it close to what the contract says. This gives them good reputation with lenders.

Try to order the appraisal without providing the contract details, so they can give you a more realistic value.
 

yveskleinsky

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Re: Now good as time as any to buy rental properties - Cincinnati

How would I refuse to provide contract details when they are just going to pull it off the MLS anyways? I'm guessing that the refi technique is best used when conventional financing is not in place. ...Although I suppose it just depends which area of the country you are in. When I was in CA, appraisers just did drive bys and the margin of error was 3-5%. Big difference when you are looking at $700k homes!
 

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Re: Now good as time as any to buy rental properties - Cincinnati

my mistake. I thought you were mentioning when appraising during the purchase process, not after you bought it and then want to refi.
 

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phlgirl

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Re: Now good as time as any to buy rental properties - Cincinnati

The appraisal is critical and you have to be sure that you have an appraiser who knows your area well and understands your business model (especially if that model includes buying property severely under market value).

You should have a knowledgable appraiser lined up before purchase and ensure that they are approved by the bank, with which you plan to refinance.
 

yveskleinsky

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Re: Now good as time as any to buy rental properties - Cincinnati

my mistake. I thought you were mentioning when appraising during the purchase process, not after you bought it and then want to refi.
I must be missing something here. Appraisers in my area will pull comps either before a purchase or for a refi- they know what I spent either way- and hold it against me. :(
 

phlgirl

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Re: Now good as time as any to buy rental properties - Cincinnati

I must be missing something here. Appraisers in my area will pull comps either before a purchase or for a refi- they know what I spent either way- and hold it against me. :(

It sounds like you need to start looking for a new appraiser. There is nothing wrong with the appraiser knowing what you paid for the property - chances are the bank will ask for this information somewhere along the line anyway (and of course it is all public record). You should be able to explain to the appraiser that you purchased the property severely under market value and it is not a 'typical' buy/sell transaction. Again, it is extremely important, in my opinion, that your appraiser understand your business model. If the majority of properties in the area have sales/purchase prices substantially above your transaction price, it is this average which should be represented on the appraisal.

If however the area is experiencing a significant number of foreclosures, your average may be legitimately be affected.
 

Jakko

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Re: Now good as time as any to buy rental properties - Cincinnati

He now helps REI investors get into investment property's that will be held for cashflow.

They buy the property at a discount and use his hard $ to finance the purchase.
Then, they refi - and are able to get into the property with 0 down, because the refi is based on appraisal - not on purchase price.
Hi ATW (or anyone else),

Can you further explain in detail how this works?

For example, say I buy a 3/2 500k property at ARV for 75% of that value at 375k. Then, I go to a hard money lender and they finance that deal at 375k for about 10% and charge me 3 points. So it takes me conservatively about 6 months to bring the property back in shape. By then, I've taken off about 30k from the 125k equity that I had by carrying the mortgage. If I try to refinance now, my LTV is about 81% if the value of the price doesn't drop and the appraisal can be 500k. So can I even refinance if the LTV isn't 80%? Or would that rule not apply if I carry a PMI? I think even at 405k and 81% under market value, it would be hard to rent that property around my area (CA) because the new monthly payment at 30 year fixed would be around 2,672 and it would be hard to find a renter that would rent at this rate.

Unless I use lease option? Can I ever make a SFR to cashflow right in Cali without putting in any of my money or getting it wayyy under the market? Also, did the above example make sense? how can I make it so that when I let the hard money lender finance the deal, I cash out 8 months or more of payments from the property's equity so that I can use them as mortgage payment to pay back the HML?

Thank you very much! :notworthy:
 

phlgirl

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Re: Now good as time as any to buy rental properties - Cincinnati

Here is an example of how this type of deal works in our area. This is a rough estimate of a transaction we are currently refinancing:

Purchase price - 55k
Rehab costs - 7k
Closing costs - 4k

Total Cost - 66k

We used our own money but if you were to add hard money costs, they would be aproximately 3500 for 65k at 3 points and 15% (for a 2 month period, which is longer than we need). This would bring your new total to 69,500.

The property appraises for $105,000 and rents for $825 a month. If we were to take 75% LTV, it would be a cash out of $78,750.

At 7.25% on a 30 yr fixed this equates to a monthtly payment of approximately $538 per month. Add $200 (conservative) to cover tax and insurance and you have a total monthly payment of $738. The property rents for $825 a month so you have a cash flow of $87.

Note that in this scenario, we have taken over $9,000 more in the cash out refi than you had originally invested. If you did not pocket that extra cash, you would instead have a monthly payment of $475 (675 with tax and insurance) and an even better cash flow of $150.

Hope this makes sense.
 

Jakko

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Re: Now good as time as any to buy rental properties - Cincinnati

Yes, I think that made sense.

One thing I noticed is that you were able to buy the property at $66k and get it appraised at $105k. So I assume that you bought it at 63% under the market? Does that really happen in your market? Do you use the formula 70% - Repair - closing costs = MAO ?
In my scenario, I forgot to add in repair and closing costs.

Also, you say that it would take $3500 as hard money costs. How do you structure it so that it doesn't come out of your pocket? I mean can you pay them after the refinance with the $9,000 you cashed out with or how does it work? Or is the $9,0000 for rainy days in case something happens?

TY!
 

phlgirl

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Re: Now good as time as any to buy rental properties - Cincinnati

Well, we had to move over 800 miles but, yes, this really does exist in our market. We buy 2-3 properties each month and we pass on at least as many. We are often buying directly from the banks/REOs.

We have a few rules which we abide by.... and one of them is that we must be able to pull at least 5k extra and still meet the 1% rule, at a minimum.

When we use hard money, the points are taken right off the top. So, for example, if we have a 70k loan amount, the $2100 is deducted at the get-go. We actually walk with 67,900. You can then use that money to make your monthly payments until the refinance takes place and the hard money is paid off.

What you do with the excess (9k) is really up to the individual. If you have other streams of income, it might be smart to take less (which would mean more monthly cash flow) and use this as reserves for any maitenance issues which might occur. If you need to sustain your living, you might use this as income. We do a combination of both - a portion goes back into the business into a reserve account for the property and the rest is distributed to partners for living.
 

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