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REAL ESTATE Pick apart this idea please

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rcardin

Contributor
Oct 30, 2007
512
48
32
Arlington, TX
First time poster so here is a little background. I am a full time teacher in middle school. My dad got into REI a few years ago. I have learned alot from his successes and mistakes. I have done a rehab for him each of the last 3 summers.

I currently own 2 properties.

House #1

My first was a house we bought to live in. 1200 sq ft. During the 6 years I have owned it I refinanced it to a 15 year note at 5%. I owe 11 years on it. 61,000 payoff. 89,900 on the tax roles. Current mortgage is 935 a month PITI and I was owner financing it over a 40 year note at 8.5 % for a payment of 964.83 from the current tenant. In my purchase contract it states that if my tenant is ever late on a payment she automatically reverts to a lease status and loses all down payment and tax benefits unless she pays a 400.00 fee to retain her ownership in the property.

House #2

I bought this through a deal my dad was involved in. Built in 1996, 2280 sq ft Paid 125k (30 year note at 5.375%) for it and is on tax roles at 156.9k. Should appraise for around 160k. I owe 111k on it.

Credit card debt 24k

Here is our idea. We want to cash out as much equity as possible. we are hoping we can get 45k between the 2 houses. Use 25 to pay off credit debt. this frees up about 700.00 a month in payments. More than makes up for increase in house payments. Take the other 20k and put 10% down on rehab property leaving at least 10 k for rehab and monthly cost of holding until sold. We are looking at buyin a 70k house for around 45k. My dad still has contacts with the we buy ugly home boys in town. Due to some past financial help he has given I can get a deal from them barely above what they are paying. Looking to make between 5 and 10 k off of the property.



What am I missing in my thought pattern?
 

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JScott

Legendary Contributor
EPIC CONTRIBUTOR
Speedway Pass
Aug 24, 2007
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Are you sure you want to leverage yourself so much to purchase a rehab in this RE market?

I would recommend writing down your plan in detail (including worst case scenarios and contingencies for those scenarios), and if it still seems like a good idea, go for it...
 

Adam

New Contributor
Aug 12, 2007
68
15
20
Minneapolis
First, while I am not an attorney, I would have one look into your contract on house #1. In MN, if she defaulted, and you executed the contract as you have described, I am pretty sure that you would be subject to an equity stripping and (maybe) predatory lending-type lawsuit. You have to be very careful in CD and lease-to-own situations, the gov't is eating people alive in court right now.

In situation #2, I wouldn't leverage myself at ALL to only have an income potential of $5-10k. The risk is not communsurate with the return.

Personally, I try to find projects that create a decent return WITHOUT eating up my liquidity in the process. In your situation, I think you are running youself thin by not leaving enough contingency funds available during the project. Leaving only $10K for the rehab is risky. If you were to move forward, I would suggest you pay off the cc debt after the project is finished. If the project goes as planned, you may have made an extra payment or two, but if the project goes bad (odds always lean this way) you will have extra money available to dig yourself out.

Ask yourself, "Is there an easier way to make $10K than buying, holding, rehabing and selling a home?"
 

rcardin

Contributor
Oct 30, 2007
512
48
32
Arlington, TX
The market around dallas is not too bad. Houses are still selling. I am looking at the 70,000 to 80,000 range of houses. I think this range will appeal to more people in this area.

I can easily rehab a house for 5-7k as long as the foundation is ok and the roof. New carpet, tile , texture, fixtures, refinish the tubs, and paint. I have already rehabbed 4 houses including the one we rent out.

I like the idea of paying the credit cards after the deal is done. If I knew of an easier way to make 10k without busting my butt on a rehab after teaching all day I would do it. I have to start somewhere to build capital for future deals. We thought about renting it out after the rehab and just taking the cashflow on the property but that would be the only deal we could do because our capital would be tied up in the deal.

thanks for the replies!
Rick
 

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