Steps to Successfully Buying Your First Investment Property

[NoMoneyDown]

Comparison of properties

Property one : Purchase price $250,000

Loan $ 250,000
Interest Only loan @ 6.5% : $1354.17
Taxes ( 1%) : $208.334
Insurance ( estimated ) : $60
HOA : $100
Management : $75 ( flat fee)
Total costs : $1,797.5

Property would rent for $1500 (at most)

Cash flow would be $1500 - $1797.5 = ($297.5)


Property 2: Purchase price $ 490,000

Loan $490,000 I/O@ 6.75% = $2,756.25
Taxes (1%) = $408.33
Insurance(estimate): = $100
HOA : = $150
Management = $75 (flat fee)
Total cost = 3,489.58


Rent conservatively for $3500 - 3,489.58 costs = $10.42 cash flow

Are you saying you can get 100% financing at 6.5% - 6.75% for investment properties?

 

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[phlgirl]

Imirza -

I had no idea this deal was SO tight, nor did I know you were planning on using an interest only loan. $10 a month, on a half a million dollar property is not enough cash flow (in my opinion). You will be paying into this deal on a monthly basis.

You are entitled to your opinion and can do with your money/serviceability what you like but I would highly recommend that you slow down and really consider the feedback from Snowbank and Biophase, earlier in this thread.

In my opinion, appreciation is NOT the best reason to invest in RE. In fact, for me, it is almost the last reason to invest in RE. This property has neither cash flow nor a pay down in principal, so you are truly investing only for the appreciation. Even considering your knowledge of the market - this is speculation - the very thing that got so many investors into trouble in this last surge.

You absolutely need to consider maintenance and repairs - the nicer the property, the more expensive the upkeep. It does not matter how new the property is or what clauses you put in the lease. Regardless of how good the rental market is, there will almost always be transition period between tenants. You also need to factor in your closing costs and a vacancy factor.

I use the 1% rule where I invest......and JAX is a rapidly growing area. It's not stupid.... it's fabulous.

What you are talking about doing with RE is NOTHING like what Buffett does with stocks. Buffett buys companies, at a discount, because he knows he can make key changes to the organization and eventually turn a Profit! You cannot make this house turn a profit.

I really think you are on the right path here and I would bet that if you were to keep searching, you will be able to find something that works - for cash flow, pay down of principal AND hopefully, appreciation.

I wish you the best of luck.

 

[imirza]

Somewhere in the 6.5-7% range.


Bio,

I understand how buying properties with equity in them and getting cash out etc screwed people over a few years back when prices were near a peak. But you have to remember the real estate market has done a 180 in the last 2 years. The real estate market in Phoenix has gone to hell. No buyers out here and its nearly impossible to get financing. People are walking away. Just yesterday I met someone who was planning to walk away from his home.


The house in question I am looking to purchase is already down nearly 50% from its peak price from 2 years back. How much further can it fall ? When you talk about your condo losing value its because you bought near a peak. If you had bought with equity near a bottom the story would be different. I believe the real estate market in Phoenix is very close to a bottom. Its the REOs and foreclosures that are screwing up and depressing prices here. Once these properties are off the market within say 18 months to 2 years I think RE prices will move up sharply. I see no reason why prices here don't increase sharply in the coming years. 100,000 people are moving to Phoenix every year.
These people need houses to live in and apartments to rent. Right now most choose renting because of the problems in the housing and credit markets. Eventually they will come off the sidelines and become buyers. To get a gauge of the market I like to look at the number of building permits especially for SFRs. You can see them here
http://www.census.gov/const/www/C40/table3.html#monthly

In Phoenix/Marciopa county SFR permits issued were 1010 in January 2008 from 2709 in Jan 07 and 3593 in Jan 2006. This is the lowest amount of SFR permits issued since 1991. So going forward fewer and fewer homes are going to be built. Already developers are walking away from their land. I know of two home builders in my area that recently walked away from their land. Things like this happen at closer to a real estate market bottom then a peak. To me thats another positive reason to buy.


PhlGirl,

The cashback I am getting from this transaction is going to be invested and the return will be high enough to cover any negative cashflow and additional expenses. All I care about is breaking even and having the ability to hold this property for atleast 3 years. Appreciation will take care of the rest. An identical home in the area is currently listed at $769,000. A recent expired MLS listing was for $799,000. Appraiser feels its atleast $640k. So thats $150k equity I am walking into.

The 1% rule doesn't work in fast growth areas like California, Manhattan and most of Phoenix. I have stated before that I tried to use the 1% rule in Los Angeles in 2002 and failed miserably.

 

[imirza]

For those who say appreciation is gambling and cashflow is the only way to go I pose this question .

" If real estate prices across the US had stayed flat over the last 30 years, how many real estate millionaires would there be ? "

Cashflow allows you to hold the properties so that eventually appreciation kicks in and you can make big money. In my case I have the financial ability to hold the property. In addition I am getting cashback which essentially means nothing comes out of my pocket. So the cashback I get is essentially the same as cashflow because it gives me the ability to hold the property indefinately as I wait for appreciation to kick in which it will due to several factors thats I have already listed in my previous posts on this thread.

 

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[phlgirl]

I, for one, am not saying that cash flow is the only way to go. If this is what you want to do, great - if you think this is the best use of your money/serviceability. Just acknowledge what you are doing and that it is purely for appreciation. Not cash flow and not pay down of principal.

If RE is your investment of choice, you would prefer to stay local and this is truly the best deal you can find, then maybe this is right for you. I hope this means that you have looked at 100’s of deals – in many price ranges. Not just completed mortgages on them but actually researched the market yourself. J

The equity is awesome and I think it is a great time to buy.

No one here wants to see you fail. That is why everyone is pointing out the possible downsides (I know you know this). I realize that you have been looking, for a while, in what sounds like several different markets. Just make sure this is really what you want from an investment. If I were going to commit to a larger investment like this, I would more than one exit strategy. In this case, you have locked yourself out from all but one.

I would keep up my relations with the banks and try to work myself into seeing the REO deals first (if you aren't already). There are amazing opportunities out there and they seem to get better by the day.

 

[biophase]

Bio,
When you talk about your condo losing value its because you bought near a peak. If you had bought with equity near a bottom the story would be different.

Actually, I bought before the run up. If I had bought it near its peak I would be down about $250k on it now and really really hurting.

I purchased a few homes before the run up. Suprisingly the condos have weathered the downturn (down only 15k from peak) but the SFH are getting killed. Luckily I sold most of them and only have one right now.

I bought a SFH for $238k which ran up to $450k, during the decline I saw investors buy at $420, $400, $380, $350. After $350, people stopped buying. Now there is one asking $250k and nobody is buying. Glad I sold it for $390k. Would I pick up that home for $250 today? No way. I would probably buy it for $150k though could it would rent for $1700/mo and if I was wrong I have cashflow to hold it.

The home I mentioned in the previous post I paid $360k for which ran up to $599k. It might sell at $360k today. My big mistake on this one was that it was negative cashflow and I didn't sell when I should have. I was living in it at the time of the peak and didn't have anywhere to move. In hindsight I should have sold and rented to lock in gains.

Your purchases right now are based on market timing. If you're right, you'll make alot of money. If you are wrong you will holding a cash draining asset for many years. All I'm saying is that you need to make sure you are really buying at the market bottom if you are using this strategy.

 

[NoMoneyDown]

Somewhere in the 6.5-7% range.

Really? This is for 100% financing? Most brokers are quoting me those rates for the first 80%, but higher for the remaining 20%. Unless you plan to buy at or below 80% LTV and then immediately refi, which then means double closing costs. Sorry if you already mentioned this earlier as I came on this thread late.

 

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[Rickson9]

Comparison of properties

Property one : Purchase price $250,000

Loan $ 250,000
Interest Only loan @ 6.5% : $1354.17
Taxes ( 1%) : $208.334
Insurance ( estimated ) : $60
HOA : $100
Management : $75 ( flat fee)
Total costs : $1,797.5

Property would rent for $1500 (at most)

Cash flow would be $1500 - $1797.5 = ($297.5)


Property 2: Purchase price $ 490,000

Loan $490,000 I/O@ 6.75% = $2,756.25
Taxes (1%) = $408.33
Insurance(estimate): = $100
HOA : = $150
Management = $75 (flat fee)
Total cost = 3,489.58


Rent conservatively for $3500 - 3,489.58 costs = $10.42 cash flow

In example 2, I estimated the rate to be higher due to a higher loan amount. I am actually working to qualify for a program where I will be getting cash back. A years worth of payments will be covered via this cashback feature.In the first example I am using $1500 as the rent though this is a best case scenario. Even with this estimate the 2nd example looks better. The interest only feature will be for 5 years. I could also do it for 7 or 10 if I want. The goals is to sell the home within 5 years for a higher price.


Regarding appreciation, I think this is the best reason to own real estate. Why would you buy real estate if the value was not going up ? Has anyone made millions let alone billions in real estate via cash flow and depreciation alone ? The wealthiest real estate investors live in areas like California and NYC which have also had the fastest rates of appreciation over the last 50+ years. California and NYC are some of the worst markets for cash flow but its the appreciation that has made these investors the money.

Although the numbers appear tight I would love to hear an update considering that I am also purchasing investment property in Phoenix, AZ!

Best regards.

 

[Excalibur]

I expect to sell the property for atleast 150k more than I payed for it in 2011.

Any update? I am curious to see how it turned out.

 

[Bozigian]

Cashflow allows you to hold the properties so that eventually appreciation kicks in and you can make big money.

Crap, I cant believe I didnt think of RE investing like that. My first initial thought was just to buy a mobile home and rent it out and just collect the monthly cash flow. But I hear that mobile homes dont appreciate much.

I just thought of residential RE as just cashflow. But if you have a property that your collecting monthly cash flow from and it appreciates then you make even bigger bang for buck

I live in CA, and Im a newbie still.:bartmoon:

 

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[PeteLife]

WOW ...AWESOME Thread. Cant believe I am just seeing this. The feedback and constructive critiques from snowbank, biophasee, phlgirl, Imirza etc is the reason I love and respect this forum.

Always a delight to see the thought process behind potential deals nd finding ways to weed out any problems as a lack of due diligence.
Imirza seemed to have a well thought out process and it was challenged from all angles possible.

Its now 4 years later, I would love to see how this deal turned out (if Imirza actually closed the deal)

 

[Yussef]

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.

To piggyback off of a statement that cashflowdepot made about avoiding section 8 and low income tenants, how important is it to consider the possibilities that you will only attract sec 8 tenants in these properties sitting around with all of this equity in them? Wouldn't one need to project cost and time for future evictions, rehab and vacancies as well?

I agree that you could find that diamond in the rough with all the right numbers on paper but how important is it to factor in the environment where the houses are?

 

[NJRealEstate]

did you buy the house?

what happened if you did?

your area has gone way back up recently, were you able to hold on with low cashflow?

 

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[Runum]

did you buy the house?

what happened if you did?

your area has gone way back up recently, were you able to hold on with low cashflow?

Not sure who you are talking to?

It is interesting to go back in time and see what I have posted 4 years ago. This was one of my first attempts to adding value to my membership here. So much has changed.

I do still own many cashflowing rentals. Some SFH, small MFH, and mobile homes. I am always looking for a deal that suits me but I am a little less aggressive now. I get 2-3 emails and several calls a day offering properties for me to buy. Birddogs are everywhere in DFW.

I usually have an average annual vacancy of around 6%. This year my turnover has been very high for various reasons.

Most days REI is good to me. There are days where I just want to pull the covers over my head though. Same for any other type of investment.

 

[Rickson9]

Hey Runum what kind of gross and operating margins are you seeing 1) in your RE portfolio and 2) in the DFW market? Thanks!

 

[NJRealEstate]

Not sure who you are talking to

sorry for the mix up talking to imirza, wondering if he ever bought, rented, and/or sold the luxury rental in Phoenix.
i am also curious to hear how others have fared over the past 4 years, thoughts on your individual areas place in the market cycle? What kind of numbers people were seeing then, and how it has changed since

 

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[NaPal]

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?

I have the perfect example. My wife and I purchased our first house about 4 months ago. We're just starting out and our budget was $110K.

Our realtor deals with an attorney on a regular basis. The attorney comes to her to sell properties. He needed to list a SFH for someone who had just passed. Turns out this lady who had passed, disowned her entirely family. Attorney wanted to get rid of the property asap and did not want the burden. He was in charge of all this ladies assets. Home was built in 2004 with nothing needed.

Home appraises $175K conservatively. We bought it for $110K.
I could easily cashflow or sell for $30-$40k cash in the pocket.

Also got a brand new washer/dryer, and some furniture that I just sold for cash on craigslist.

The deals are out there! It's a win-win, your happy with the purchase price, and our realtor gets double the commission.