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Real Estate Steps to Successfully Buying Your First Investment Property

Discussion in 'Real Estate Investing' started by Runum, Mar 12, 2008.

  1. Runum
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    Runum Platinum Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass Summit Attendee

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    [FONT=&quot]Many first time RE investors want to get started but they don’t know what to do. Here are some steps to buying your first single family home(SFH) investment property that I hope can save you some money and will contribute to your future success. These steps can be done in various sequences relative to your expertise. If you analyze enough properties and do enough deals you will be able to complete this checklist in a very short time and be ready to make a bid on the property.[/FONT]


    [FONT=&quot]In order to spend as little time on each property as possible I do these steps before I attempt to enter the property.[/FONT]


    [FONT=&quot]1. Where do you look to find your diamond in the rough?[/FONT]
    [FONT=&quot]•[/FONT][FONT=&quot]Online Multiple Listing Service(MLS)[/FONT]
    [FONT=&quot]•[/FONT][FONT=&quot]Realtor[/FONT]
    [FONT=&quot]•[/FONT][FONT=&quot]Classified ads[/FONT]
    [FONT=&quot]•[/FONT][FONT=&quot]Word of mouth(friends & acquaintances)[/FONT]
    [FONT=&quot]•[/FONT][FONT=&quot]Real Estate Investors(REI)clubs[/FONT]
    [FONT=&quot]•[/FONT][FONT=&quot]Driving neighborhoods[/FONT]
    [FONT=&quot]2. Don’t be fooled by the first impressions of a property. You will literally look at hundreds of properties before you find one that will work. A property that may look good visually may not work mathematically and visa versa.[/FONT]
    [FONT=&quot]3. Once you find a property of interest to you will need to know the fair market value(FMV) for this property. You can find that number by comparing this property to similar properties(comps) within the same area.[/FONT]
    [FONT=&quot] Sources:[/FONT]
    [FONT=&quot]•[/FONT][FONT=&quot]Classified ads[/FONT]
    [FONT=&quot]•[/FONT][FONT=&quot]Realtors[/FONT]
    [FONT=&quot]•[/FONT][FONT=&quot]MLS listings[/FONT]
    [FONT=&quot]•[/FONT][FONT=&quot]Your knowledge of the neighborhood.[/FONT]
    [FONT=&quot]•[/FONT][FONT=&quot]Zillow.com(data may be out of date and unreliable)[/FONT]
    [FONT=&quot]4. You will need to know rental rates for comparable properties.[/FONT]
    [FONT=&quot]Sources:[/FONT]
    [FONT=&quot]•[/FONT][FONT=&quot]Classified ads[/FONT]
    [FONT=&quot]•[/FONT][FONT=&quot]Realtors[/FONT]
    [FONT=&quot]•[/FONT][FONT=&quot]MLS listings[/FONT]
    [FONT=&quot]•[/FONT][FONT=&quot]Your knowledge of the neighborhood.[/FONT]
    [FONT=&quot]5. You need to know the taxable value and the real estate taxes.[/FONT]
    [FONT=&quot] * Your source will be your local taxing authority.[/FONT]
    [FONT=&quot]* This is public information.[/FONT]
    [FONT=&quot]* It may also be online.[/FONT]
    [FONT=&quot]* Zillow.com[/FONT]
    [FONT=&quot]6. You will need to know insurance rates. Your source will be insurance agents.[/FONT]
    [FONT=&quot]7. Take your possible gross rent and subtract your possible expenses.[/FONT]
    [FONT=&quot](Monthly gross rent) – (Monthly taxes) – (Monthly Insurance) – (other expenses) = Net rent[/FONT]​
    [FONT=&quot]8. You then figure your finance costs and deduct that from your net rent. I use my financial planner tool on my Quicken software to figure the amortization(finance costs) of the possible loan. There are also many webpages that provide this service for free.[/FONT]
    [FONT=&quot](Net rent) – (finance costs) = your monthly cash flow [/FONT]​
    [FONT=&quot]9. If the look good so far, then you take a tour of it and note any damage(other expenses).[/FONT]
    [FONT=&quot]10. Make a formal offer. I do this through my RE agent. I also get and submit a conditional pre-approval letter concerning my finances. This can be procured from your banker or a mortgage broker.[/FONT]
    [FONT=&quot]11. When a price is agreed upon you will submit earnest money and you will have a short period of time to inspect the property. Time is of the essence during this time.[/FONT]
    [FONT=&quot]12. Hire an inspector o go over the property. You need to go with him to see what he looks at. Wear work clothes so you can crawl all over and under the house.[/FONT]
    [FONT=&quot]13. Figure any repairs that will have to be made and resubmit another offer with the repairs discounted.[/FONT]
    [FONT=&quot]14. If your offer is accepted you will go to closing(may last as long as a month)[/FONT]
    [FONT=&quot]With the previous steps you should be ready to look at potential SFH investments. Most beginning RE investors mainly look at cash flow. That is OK to look at but it’s not the Fastlane way.[/FONT]
    [FONT=&quot]You want to buy your property as far under FMV as possible(I aim for 40-60% under FMV). That is what is known as buying or capturing equity. This strategy will usually give you cashflow and equity. If you do this you may be able to sell the property and make tens of thousands of dollars on each investment. Then you can rinse and repeat.[/FONT]
    [FONT=&quot]I hope this wasn’t too long and I hope it helps someone to avoid some common mistakes. If I left out anything please let me know. Good luck to all and happy hunting.:cheers:[/FONT]
     
    Kai, CEBenz, Rickson9 and 5 others like this.
  2. Eric
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    Eric New Contributor

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    How do you get the price down to 40-60% under FMV? Even if you could get the seller to agree to that, they would have to have at least that much equity into the property to even sell it, or they would have to pay off the difference of what they owe the bank and what they sold it to you for.

    But if they have that much equity in the property, why would they take a offer so low?

    I'd love to buy a 200k house for 80-120k, but that seems like a one in a million opportunity. How hard would it be to do over and over and over again?
     
  3. RaisingWealth
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    RaisingWealth New Contributor

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    I think he may have meant 4-6% under... because that would be in the $10,000 range like he mentioned...
     
  4. Runum
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    Runum Platinum Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass Summit Attendee

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    Thanks for reading guys. I did mean 40-60%. In this environment it is even more possible. The farther under FMV the better the deal. You are looking for properties that may be in distress(fixer upper) that you can see the repairs will not eat up all of the equity. You are also looking for properties whose owners are having difficult times. Some of the properties may be foreclosures(REO's). However, most of the REO's I have seen are priced closer to FMV. You may have to look out of your geographic area. If your market has a lot of upside down mortgages you are probably still early to the dance.

    I am not a book seller but I've read most of the popular RE books and I was skeptical too. I have put this into practice and it does work. You are looking for the needle in the haystack and you have to know your haystack well. I didn't say it was easy. It is time consuming. Also, when you do find it you better be ready financially to lock it up because if you aren't ready someone else will get it. Good luck and happy hunting.:cheers:

    PS: Eric, I see you are in Phoenix. You should have come to the meet up. We could have met up and discussed this further. Make plans now to attend next year. I don't know when or where yet but if you come you won't be sorry.
     
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  5. slim_jim
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    slim_jim Contributor

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    Thanks for providing your process for rooting out deals.

    speed ++
     
  6. rcardin
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    rcardin Contributor

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    We looked at an REO last weekend. Asking price 63k needed paint and carpet. Taxable value 97k. Unfortunately we didn't have our financing in order yet and it went under contract. The deals are out there.

    Another great resource is the "We buy ugly homes" people. Find your local franchise and ask to see their weekly list of what they are getting rid of. It cost a ton of money to run one of those franchises in monthly advertising costs. They turn alot of properties. You should be able to pick one up from them at 70-75% LTV.
     
  7. Bilgefisher
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    Bilgefisher Bronze Contributor Read Millionaire Fastlane

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    Two small suggestions that merely piggyback on what you stated.

    When I price properties, I use 3 sources.

    Zillow.com
    County assessor - may be different for your state, but there is a public listing for every prop.
    cyberhomes.com - gives specific area details and market information.

    Also, I jump over to biggerpockets.com quite often, they have some very useful links.

    In general, I take the average of the three. The best feature on zillow and cyberhomes is not the estimated value, but the recent sales in that area. Compare bed/bath, square footage and features. When we sold our investment property, we noted the similar house across the street sold for 183k very quickly while the builder homes are still empty at 200k. Use your best judgment.
     
  8. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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  9. MrPink
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    MrPink Contributor

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    Hey Runum,

    Thanks for the insightful summary +rep. You have posted that you own 7 properties.

    Could you describe what you learned in the process of buying the properties (something from 1 to 2 to 3 etc...) or did you have a plan totally in place before you started? Thanks again!

    Mr. Pink
     
  10. Runum
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    Runum Platinum Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass Summit Attendee

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    Thanks Mr. Pink. I actually own 7 units over 3 properties. What I have posted has been the results of lessons learned.

    My first purchase was 3 SFH on one lot. I wanted to get into my first investment in the worst way. When I saw this property I and my wife wanted it too much. We paid much too close to FMV for it. It does cash flow but I didn't get much equity in the deal.

    My next purchase was a SFH. It was a much better deal. It cash flows and I got about $15K equity in the deal.

    My last deal is a 3 unit deal. It was an REO. I have been working on it for several months now. Kinda got messed with by a contractor. Having to go back and redo some things. The goal for this property is to have absolutely zero of my money into it and it will still cashflow very well.

    Also in between all of these deals I missed several buying opportunities. They were all SFH REO's and the worst one had the potential for getting $20k equity. All of them could have been spruced up and rented out or flipped.

    My next direction is to solve a couple of minor challenges and I've already started learning about buying into apartment deals.

    The reason I wrote the above post is to assure newby's that the deals are out there and they are more common than you think. It's kind of like when you buy a new red car. All of the sudden you are very aware of every red car around you. The more you get into RE the more you will see buying opportunities.
     
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  11. phlgirl
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    phlgirl Bronze Contributor Read Millionaire Fastlane

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    This is SOOOO true. Great info in this thread, Runum. +++

    I drive by a placard sign on Rt 1 in my neighborhood. Each week they post a new inspirational tidbit. This week it reads 'Happiness begins with understanding what is possible'.

    The deals are totally out there. We pass on deals weekly because we can only do so many. Do your research and make informed decisions but know that if you are ready, this is an unbelievable market......40-60% below market all day!
     
  12. hakrjak
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    hakrjak Bronze Contributor Read Millionaire Fastlane

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    Here's a thought to ponder... If hunting for deals at 40-60% below FMV is like hunting for a needle in a haystack, and could take over a year or maybe 2 to find 1 -- and your time is very valuable... How about buying at 30% under FMV, and being able to close 2,3, or 4 of these deals a year.

    I've been doing this for 8 years now, and I've never come across anything discounted more than 35%. Your experiences might be different -- But if they aren't, don't wait for that 1 perfect deal to pull the trigger. Don't be afraid to buy at a smaller discount if necessary.

    - Hakrjak
     
  13. imirza
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    imirza Contributor

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    When you talk about homes 40-60% below FMV are you saying that you can get a home for 40-60% below what an appraiser would appraise the home at in the current market ?

    Example : You can pick up a property for $100,000 and the appraiser is able to appraise it at $200,000 ( without using tricks to inflate value) ?

    When you say 40-60% below market value , what about the costs of repairs ? After taking repairs into account how much below FMV is the property ?

    I see deals at 30-50% below market value but most of them are fixer uppers or homes that have functional obsolescence i.e. 1 car garage when the requirement is atleast 2 or 1 bathroom in a 3 bedroom house instead of 2. After you factor in repair costs, most of these homes are more like 20% below FMV.

    Also how do you determine what fair market value is ? In todays market atleast in the Phoenix area, prices are all over the place. One day someone picks up a home for $300k which previously sold for $450k and the home down the street that is exactly the same sells for $250k a month later. Its really hard to get a proper gauge of true market value. A bunch of investors and RE investment companies are in trouble here because prices dropped so sharply and the market is so illiquid that they are losing money on homes that they ostensibly bought for 30-40% below market value. Even when you get a great deal, the problem is that there are no buyers out there unless you are selling homes for under $250k. ( avg. Phx price is 260k while nicer areas are higher). Obviously the best strategy in this market is to buy for cash flow.

    Prices in parts of the Phoenix area are off by 50-60% from the peak in 2005-2006. The challenge is that everyone seems to be getting homes for way below market value. So how do you get an appraisal that will reflect fair market value when everyone is getting houses for 30-40% below ? Take that $100k house example again. You feel FMV is 200k but it turns out the guy down the street also got a smoking deal and bought a similar house for $120k . Now what do you do ? Try to negotiate that house you think is worth $200k down to 60k ? Because the appraisal is going to reflect a $120k value based on that recent sale. Its a case of everyone getting deals below market value which continues to drop prices even further because everyone wants a deal 30-60% below market value. Eventually in this market they will probably have to pay people to buy homes :smxB:
    " This home is worth $500k but I will pay you $250k to have it" :smx4:
     
  14. hakrjak
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    hakrjak Bronze Contributor Read Millionaire Fastlane

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    FMV = Fair market value today... Not 5 years ago.

    There are no guarentees homes will ever return to levels of 5 years ago, so you guys need to erase those figures from your minds.

    - Hakrjak
     
  15. Runum
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    Runum Platinum Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass Summit Attendee

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    Good points imirza. As I said you have to know your haystack. In my last deal I bought it at 50% of FMV and paid cash. It was a quick close REO. After rehab I will be into it around 70% of FMV. I plan to cash out and get 100% of my money out. In the last year I missed 6 deals that would have worked like that. My market is losing value but not at the rate that Phoenix is. I believe I know my market well enough to know what a $100k house looks like here. I also agree values can't keep going down. That's OK, I plan to move into other areas of RE before the values start climbing.

    Right now you do have to be careful of the hype. The popular press is telling everyone how terrible the RE market is. All I can see is opportunities to prosper.

    As far as how many deals can you find in a year? I don't know the answer to that. I don't mind doing spreadsheets and running numbers a few hours a week. My personal expenses are fairly low and my cashflow deals can put groceries in the fridge. Then I would be free to do as many equity deals as possible.

    hakrjak I agree. I am just trying to get people to understand that cashflow is great but will not get you ahead of the game by itself. Capturing equity is like a supercharger. Some say you can either have one or the other. I have seen you can have both. I don't have to buy a property at 50% of FMV but I will if the opportunity exists. Each of us will have to determine will work for us. Good luck.
     
  16. imirza
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    imirza Contributor

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    Agree with you Runum.

    Situation I have is I got an offer accepted for a home at $490k. The home would have easily appraised at close to $1 million 2 years back. It sold 3 years back for $780k. Recent sales in the area were at $750-800k. So I felt i was getting a steal until I find out that the exact home 2 doors down sold for $530k a few weeks back. I am sure this was a 'distressed' sale and the buyer got a smoking deal. But now this effects me. The appraiser thinks the home will appraise for $650k. I was looking at more like $700k.

    The home in question needs no repairs and is in pristine condition and was likely never lived in. But I don't like the fact that the exact same model sold for $530k 2 weeks back. 2 other sales in the last 6 months were between $750-800k. So I went from thinking I was getting this great deal 30% below FMV to now thinking that this home is worth more like $530k - only 40k more than I am paying for it. If I complete this purchase, the home will cash flow and I will be acquiring it for 0 down. Thats the good part. But the lack of equity doesn't go down well with me.
     
  17. phlgirl
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    phlgirl Bronze Contributor Read Millionaire Fastlane

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    All good questions.

    Yes, 40-60% below what an appraiser would (and does) appaise the homes for in the current market. No tricks. The appraisers for our properties are selected by an automated system, at the banks, with whom we do our cash out refis.

    I should specify and say that the majority of our homes fall in the 50-60% range. That said, we have been buying, consistantly, for the past two years and deals are getting deeper and deeper (headed towards 40%) as of late.

    After repairs, closing & carrying costs (to the time a tenant takes over payment), we average an all-in cost in the low 60's percentage wise. We actually take out cash above and beyond our initial investment and still remain below 70% LTV across the portfolio.

    I agree - fair market value is tough to define right now. Numbers are ALL OVER the place. We use Realquest, MLS and our own street knowledge of the area. I would NOT want to be attempting to sell homes in this market. We buy for a hold position of 5-7 yrs. While there are comp sales in the area, which allow for the values we are getting on the appraisals, it is a very slow sale market. Houses are selling but they are taking forever to sell. I would not want to be buying for resale in this market (at least not in this city)!

    As long as the rent covers the the mortgage, tax and insurance, I try not to focus too much on the market value of the property. The area is growing and so is the tenant pool. There are many factors to be considered; however, as long as the property cash flows, there should not be a need to sell. If and when the market comes back, it will be icing on the cake. :)
     
  18. Runum
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    Runum Platinum Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass Summit Attendee

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    Wow imirza. That is a very volatile market. If the values are falling and have that much farther that they can fall maybe you need to pull back and try another market. Do you have money in the deal now that you will lose?

    I will tell you that I have looked at a whole bunch of properties in the last year. A lot of those were REO's priced near FMV. I didn't buy them but someone did. I wouldn't want to be those guys. Those deals didn't make sense to me but they did to someone else or they didn't do their DD.
     
  19. imirza
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    imirza Contributor

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    Thanks Phlgirl

    Runum the market here in Phx is crazy. There are homes that are seriously being given away for free. If someone is willing to pull the trigger and buy some quality homes in good locations they will make a killing 3-5 years down the road. There is an area here where homes that were selling for $300k 2 years back are now being sold for $100k . And they are all built after 2003.

    The home that I mentioned previously is built by the luxury home builder Toll Brothers. Even in the current market they would never be able to build a 5000 sq ft home and price it at under $500k. Even today Tollbros sell their home at $150 -200+ per sq ft. At the market peak these homes were priced at $220 per sq ft. At $490k I feel this home is below its replacement cost. I will not lose money if I back out of this deal so I can always drop it. I am waiting to see if I can get the financing I need in place. If so I will likely buy it since I can cash flow.
     
  20. slim_jim
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    slim_jim Contributor

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    We saw it on the SteveO apartment complex tour, this past weekend. As you were walking through the complexes, you were thinking, "I wouldn't live here", but somebody is at the time in their life, that this apartment/house is right for them.

    And buying right is very possible. There are plenty of circumstances that would make them motivated sellers, e.g. who are upside down in their mortgage, who have lost their job, who are getting a divorce, someone has died. They just want out from under it and are willing to price it appropriately.

    It is possible, you can get cash flow and equity in the same deal. You just have to look hard.

    Great thread

    Yes, come to the "Beer & Pancakes". You won't be sorry.
     
  21. Runum
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    Runum Platinum Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass Summit Attendee

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    Thanks Slim Jim. I hope everything is going well for you.

    Hey imirza I just realized something. All of my properties are located in the DFW area. Also, all of my properties together in Texas, including my residence, do not add up to the value of the one house you are trying to buy. We never had the run up in values that your area did. Maybe one day we will. Good luck with your deal.
     
  22. snowbank
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    snowbank Platinum Contributor Speedway Pass

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    what does this rent for?
     
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  23. Runum
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    Runum Platinum Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass Summit Attendee

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    imirza I have been thinking about this all day and snowbank's question reminded me of this. $490K is a whole lot of money to borrow for one house. You probably need to consider some "what if" scenarios if you already haven't. How much will it rent for? What is the net cash flow? What is the cash on cash return? Will you be able to cover the mortgage if it is vacant for 3 months? What happens if you are upside down on the note? What is your exit strategy? What will happen if your tenant trashes the place and you have to pay to fix it to rent it? If you can answer these questions truthfully you will minimize your risk. If you can't answer these then you are not investing, you are gambling. I'm really not trying to talk you out of this, just trying to help you cover all bases. I do wish you good luck on your decision.:cheers:
     
  24. imirza
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    imirza Contributor

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    Snowbank - it rents for over $3500 a month. There are not a lot of luxury rental homes on the market so it should rent pretty quick - no more than 3 months. There is a demand for luxury rentals because qualifying for a loan is harder so people rent or lease to purchase instead of buying. You have plenty of upper middle class white collar professionals here who have moved here recently and choose to rent first before buying. I can also offer them a lease to own option.

    Runum,
    The advantage of buying a luxury home is that the likelyhood of getting a 'good' tenant( who does not thrash the place) is a lot higher. The tenant I am attracting with this home is an upper middle class white collar professional who works in finance, medicine or law. Also the rental company that I intend to use has people sign 2 year leases. So that works to my advantage - get a quality long term tenant.
    If you are trying to attract quality renters, then you need to target neighbourhoods and houses that will attract quality tenants. If you buy what looks to be a 'great' deal in a not so good neighbourhood, you are unlikely to have good tenants and more likely to have headaches. I look for quality homes in quality neighbourhoods so that I can attract quality tenants.
    As far as covering the mortgage, I can cover the mortgage if the home remains vacant for a year or more. I have no problem with that. Worst case scenario, I move into the house and rent out my current home.
    This home will cash flow so the exit strategy is to hold on for 3 to 5 years and sell for higher prices. I expect this house will be worth $750k + within 3 years ( very conservative estimate). With no money down my cash on cash return will be infinite.
     
  25. Runum
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    Runum Platinum Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass Summit Attendee

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    Great strategy imirza. Sounds like you are covering your bases. Good luck.
     

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