Would you buy this house?

[Charmed Angel]

Just curious what kind of different views we all have here, and how much or even if your style of investing has changed.

I've noticed that I have become a bit trigger shy due to the current economy being in such an uncertain state. Anyone else?

First. This is not a real deal, so please don't ask questions like "how do you know that is property is valued at $xxx?"
Thanks.


Sale price 35k

Worth 70k

Property is in "good" condition. In other words, its not the "pick of the litter" but it is more like something someone would "settle for."

Good area that is growing. (new businesses coming in, good schools, ect.)

Rent 650/mo

Buy this property with cash, then refi to get your 35k investment back out. No more, just the 35k

This property breaks even every month after all operating expense and loan servicing.


Would you buy? Right now, with everything going on with the economy, bail outs, job loses, lending industry all f'd up?
Why?

 

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[Runum]

Nope, I have looked at a bunch of OK deals in the last year. If I had bought them, many would have become and alligator by now. Our booming drilling industry is slowing down due to market conditions and unemployment/vacancies are rising. The only deals I spend a lot of time looking at are smoking deals, buying 40-50% FMV due to distressed owner or REO. Why spend your time chasing a break even deal? Am I missing something?

 

[Charmed Angel]

Ok, Good points!
Let's make it 35k.
Would that make it worth looking at, even if it still broke even in cashflow?

 

[Runum]

I might buy it at $35K. That's 50% of what you said was FMV. You propose it's breaking even now but the job outlook is positive, rents could rise. What is the current vacancy rate in the area? Lot's of competition?

 

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[Charmed Angel]

Let's say that the current vacancy rate is 8%
Not much competition, it would not be hard to find a tenant.
Just assume all factors not stated are average.

Thanks for participating!

 

[Runum]

You're welcome. It's looking better. Deferred maintenance? Unpaid taxes? Landmines?:smx2:

 

[kwerner]

I would absolutely buy this one, as long as the area / location is good.

When you're buying a property at a 50% discount, you have a multitude of options available to you that can utilize to "make it work".

Depending on your plan and goals: you could sell it at a slight discount for quick sale, rent it out, lease/option it to a tenant/buyer, sell with owner financing, etc.

It's like picking up the "You found a great deal!" card in the Cashflow game.

 

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[Charmed Angel]

You're welcome. It's looking better. Deferred maintenance? Unpaid taxes? Landmines?:smx2:

Now your just trying to get me going!! :fryingpan:

 

[Charmed Angel]

I would absolutely buy this one, as long as the area / location is good.

When you're buying a property at a 50% discount, you have a multitude of options available to you that can utilize to "make it work".

Depending on your plan and goals: you could sell it at a slight discount for quick sale, rent it out, lease/option it to a tenant/buyer, sell with owner financing, etc.

It's like picking up the "You found a great deal!" card in the Cashflow game.

Thanks for participating!!
Would you say that your outlook and strategy on investment properties has stayed relatively the same with all the changes in the market or have they changed?

 

[kwerner]

My area hasn't really been affected by the national real estate downturn, other than people having difficulty getting financing - due to the credit freeze. It's pretty much FHA or nothing right now.

But, like I said, if you're buying at 50% of FMV and the area is decent and the house is in good shape, you've got a lot of room for error to work with to make it a profitable deal.

I'd take as many of these as I could get in my area.

 

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[biophase]

I would pay cash and forget about the refi and collect the $680/mo cf minus taxes and insurance. But most of all, it would have to be in a decent neighborhood.

 

[Dhappy]

When everyone else is running for he hills, I,m doing alot of buying,selling and renting in this market. I look for and find killer deals. My last one sold in nov after being on the market for 14 days. I paid 12k for it and put 10k in it. Comps showed it was worth 75k,but I sold it for a fast 60k cash. Everybody is crying around here because nothing is selling. If you buy it right and price it below comps it will sell. Also add some extra cheap wow factors and stage it.

 

[CVentures1B12]

I agree with JScott. But yes, I would definitely buy it. Mainly, because I am trying to find these deals and it is very hard...

I think this calls for a new thread...

-Josh

 

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[Charmed Angel]

If it's really worth $70K (meaning you can find a buyer at this price), why don't you buy it today for cash and sell it tomorrow for a quick $35K profit?

100% return in a few days better annualized ROI than you're likely to get by holding it as a rental for a few years, and you can use the cash you make to invest in a property that will provide a better longer-term ROI by renting.

This is probably (to me) the most Ideal thing to do. But, this scenario may not work. Unless you have a cash buyer. Which brings up another question.

In the past, before the lending industry tightened up, I have tried to sell properties that didn't have seasoning, ie. I had only held them for about 2-3 months. It was hard to find a buyer because most lenders would not lend on a property that had just sold a couple of months ago.
Has anyone encountered this recently? How are the banks dealing with this?

 

[CVentures1B12]

Even though I can only speak from basically no experience; I have a lender who does not care about when a house sold, etc. It is a local bank, however, and they tend to get a bit more creative when it comes to working with people. They create relationships. That is why I have to get a deal soon because he is actually breathing down my neck to lend!! Seriously...

Local banks are the way to go.

Best,
Josh

 

[hatterasguy]

Nah, their isn't enough money in it to interest me. If my partner and I don't see at least $100k we don't buy it, but the equivalent house in my area is probably $300k. Say its worth $70k, well thats realitive you won't get that.

Say you pay $35k cash for it. Figure $1,500 worth of closing costs, so $36,500. Now you have to clean it up a bit to sell, so put $5k into it, which is nothing. $41,500 your into it for now. Listed for $69,900. The sellers beat you down a bit, and ask for some stuff so you'll be lucky to get $60k-$65k for it. Lets say $65k. Subtract 5% ($3,250) for the agents. So all in all you will walk away with $20,250 after flipping it. By yourself if you don't do any work really thats not a bad profit. But if you have a partner like I do thats cut in half.

I'm not used to dealing with houses that cheap, I'd probably buy it and hold it. 50% of FMV is pretty good.

 

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[rcardin]

buy and hold. You could refi but then you have a mortgage payment. If it sits empty and is paid for you are not losing money out of pocket due to a mortgage, only losing money you could be making. Also leaves you open for some negotiation on rent price.

 

[Charmed Angel]

This is Great!
I'm seeing some of you would buy and then resell for a profit, and others buy and rent, but not refi.
Would you take the 16.8% ROI (after all expenses) and not refi it? Or is it better to refi so you can put that money into the next property?

The way I see it. If you only have say 40k(ish) to work with, you pretty much can't buy anything else until you build up some more capital. But, if you refi it, you can keep that money rolling, and your return in infinate, because you just keep building on it.

Thoughts?

 

[biophase]

The way I see it. If you only have say 40k(ish) to work with, you pretty much can't buy anything else until you build up some more capital. But, if you refi it, you can keep that money rolling, and your return in infinate, because you just keep building on it.

Thoughts?

You don't want to overleverage yourself. If you only had $40k, then you should use the cashflow to build up a cushion for a year. I would let this property feed itself. Find the money for the next deal another way.

 

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[Dhappy]

Every book out there teaches you to leverage. I don't like leverage, It can get you in alot of trouble. I only pay cash and then after some time your cashflow starts to build on itself. You can use that money to buy more assets and it begins to snowball. Freedom ,time and family mean the most to me. I know this a unpopular plan but, I would much rather have 10 free and clear houses then 30 leverage houses.

 

[kwerner]

The way I see it. If you only have say 40k(ish) to work with, you pretty much can't buy anything else until you build up some more capital. But, if you refi it, you can keep that money rolling, and your return in infinate, because you just keep building on it.

Thoughts?

You don't want to overleverage yourself. If you only had $40k, then you should use the cashflow to build up a cushion for a year. I would let this property feed itself. Find the money for the next deal another way.

This is one of the seldom times that I would have to disagree with Bio. My take on it is similar, but different - but either way I think we would both be trying to accomplish the same objective.

In my opinion, if you "only" had $40k to work with and were purchasing the property with the cash, my strategy would be to either flip the property and move on to the next deal or to purchase it, lease-option it, pull out my cash with the refi, then move on to the next deal - keeping your cash churning, in essence.

There is no sense in tying up all of your cash in one property at this stage of the game.

 

[AroundTheWorld]

The way I see it. If you only have say 40k(ish) to work with, you pretty much can't buy anything else until you build up some more capital. But, if you refi it, you can keep that money rolling, and your return in infinate, because you just keep building on it.

Thoughts?

You don't want to overleverage yourself. If you only had $40k, then you should use the cashflow to build up a cushion for a year. I would let this property feed itself. Find the money for the next deal another way.

Leverage is an interesting tool. I love leverage, but it really is a double edge sword.

It is easy to say that, and to believe that intellectually, but another thing entirely to respect it and make your decisions based on that respect.

Leverage is absolutely needed to build wealth quickly. But, it also requires some liquidity. The more leverage you use, the more liquidity you need.

So, would I buy? (first of all: no. Just because it is SFR and I'm done w/ that game, but that aside...)

It depends. If this is my first investment property (or only current investment property?) Yea... I would buy. But, I wouldn't count on finding a buyer. Not in this market. I would buy to hold. Now, don't get me wrong.... if a buyer came along, I wouldn't say no. But, the "plan" would be to hold.

If on the other hand, I already have 5 or more properties, then no... I wouldn't buy. Not if I only have 40K in the bank.

Assuming I buy, would I refi out? It depends. Do I have cashflow from elsewhere that can cover the debt if need be? Do I have prospects of raising $ from somewhere else? Then, yes... I would refi out. If my cashflow isn't adequate to cover the debt if I go vacant for a long period of time, then no... I wouldn't get cash out.

So, pretty much my answer is a big fat IT DEPENDS!!! LOL

 

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[hatterasguy]

Well the return is low, if you buy with cash you get to make money off the property. Its really one half dozen or the other, either way works.

My uncle loves paying cash for rentals and enjoying the cash flow. You may say its mot such a good return buying a $225k house with cash and renting it for $1,500 a month. On the face of it no, but if you have 30-50 that rent for say between $1,000-$4k a month, well than it starts to become a nice monthly nugget. However his business is condusive to that, he makes large chunks of cash at once and needs a place to put it. Also in this market having vacancies or having to reduce the rent isn't killing him, he can afford to do that.

How you purchase and hold rentals really depends on your business model.

 

[rcardin]

Just for discussions sake.....

Lets assume you are a first time investor. You came across 40k in an inheritance. Would this be a good way to invest your money?

Most new investors buy 1 or 2 properties using credit. All it takes is 3 months of vacancy on 1 or both and they are ready to get out.

If you spent the 40k and did nothing more than use the cashflow to supplement your income for the next 30 years........

$234,000 possible income based on 650 a month no increase in rent
assume 8% vacancy over the 30 period
assume 20% in maintenance taxes and insurance (might be kinda low but this is hypothetical)

still leaves you with a house that has appreciated for 30 years and a net income over the period of $168,480

Add in a modest 2% appreciation factor and your 40k house that was worth 70k is now worth approx 127k- 40k initial cash leaving 80k and change profit if sold after 30 years.

So a 40k buy and hold house over 30 years (assuming you are young enough to hold out for 30 years) would be 250k total in the end

All for a 40k investment. It's been a long day so my numbers may not be completely accurate. What I am trying to say is for most of America this would be an excellent buy. Could boost retirement tremendously.

As ATW stated it really depends on your own situation.

 

[Dhappy]

I buy mostly mobile homes on land in working class areas instead of houses now days. It makes more since. I can buy a SFR in working class area for 45k and rent it out for $700 a month or I can buy 3 mobiles on land at $15k each and rent them out for $600 a month each. I live in fl and there are alot of mobile homes. It is just a way of life here, there is no stigma to mobiles down here like there is up north. There are good mobile home sections in every town around here. Now days most banks will not finance them so they are hard to sell. This is great for me, I pick them up for 50 cents on the dollar and either rent them out or owner finance them.

 

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[biophase]

I think we've all seen what happens when people overleverage and then can't make payments. Leverage is great if you can handle it. During the feeding frenzy everyone was overleveraging or we wouldn't have this real estate problem.

Just having 20% and no reserves does not work even in a good market. If you had $40k only and bought 4 houses at $40k each with $10k down, that is a recipe to disaster.

First of all, you have break even cashflow on each house. This means you do not replenish your savings at all. You bank account stays at $0 each month.

Second, although you have planned for vacancies, what happens if you have longer than anticipated vacancies? You fall behind on payments?

Third, what do you do if the roof or appliances need repair? How do you pay for this? Credit card probably?

Now you are behind one payment and have a $5,000 credit card balance. Once you start falling behind you have no way to catch up because you don't cashflow and eventually you will lose all 4 homes. If you have cash reserves then its a whole different issue.

You NEED cashflow if you have no savings! Sometimes you fall behind and have a credit card balance, but at least in the long term you can pay that down if you're getting $200-$300 a month.

I agree with Kwerner about flipping. That's what I would do with this if I had to buy this or it got handed to me.

Buying cash and refinancing doesn't work for me here because closing costs will be at least $2,000 minimum. I don't want to give up 7% of my purchase price right now and wait 20 months to break even (assuming $100 a month cashflow after refi).

 

[SteveO]

I have not read the entire chain of the thread so forgive me if I am simply repeating.

You are good if you have a business model that supports your investments and allows you to make money per a target. As with all real estate you need to have an exit strategy. An optional exit strategy works as well.

I like to buy when others are shying away. It is built into my model. I don't have any fear from that angle. It doesn't mean that I am always right but in general it is easier to operate in this model.

I personally do not see the housing market making large gains in the next couple of years. But your proposed purchase has plenty of potential profit and equity from the start.

You stated that you would get all your money back and after ALL expenses you would break even. So my decision as a rental would be whether I see an improving rental market in the future. It is certainly softer than it has been in a while.

Assume that there will not be a lot of product built for a while. Also assume that the job market will turn positive in the next year. If the population increases, houses are not being built and more households are being formed, you have a recipe for rent gains.

You should also be looking at the fact that finding deals well below market value are very likely easier than they might be at some point a couple of years from now.

Along with this, you have the alternate exit strategy of selling for a profit. This of course is based on the premise that you bought well under market.

 

[Charmed Angel]

Good Discussion Everyone!

It seems like just about everyone thinks that Cashflow is important, especially in this market. To buy a property that has no cashflow and hold onto it, what's the point? You gain some equity, but what are you going to do with that? You don't want to over leverage yourself.

To buy the property and not refi at all, IMHO, would be Slowlane.

Leverage is absolutely needed to build wealth quickly. But, it also requires some liquidity. The more leverage you use, the more liquidity you need.

I agree with you Sonya.
3 or 4 years ago there would have been a lot of people saying to buy this property and refi 100%, hold onto the neg 200 cashflow because your building equity. We all have seen that. This is not investing, it is gambling, and most of those investors lost their shirt. It is so nice to see that there is no one saying that here.
Leverage needs a happy balance

I think in Real Estate there are two main goals investors want. Build Capital, or Cashflow. With this type of property, to find a buyer could be very difficult in today's market. Not to say it can't be done though.
For me, I am looking to build Cashflow and use that to feed my Capital. (not to say that I wouldn't take a capital building deal if it was handed to me on a silver platter) So where I'm at now, I would buy this house. But I would refi for less, say 15k-20k. This way it does cashflow some and I could continue to use the rest of the money to build my portfolio.

Leverage is a powerful tool, but just like any other powerful tool, you need to know how to safely use it. Like a chainsaw, you can cut down a tree with it, but you need to know how to do that so the tree doesn't just fall on your house. Then you would want to chop the wood into smaller pieces, you can't use a chainsaw to do this, you need a log splitter.

 

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[Charmed Angel]

Thanks Steve! Very well said!

 

[SteveO]

I think in Real Estate there are two main goals investors want. Build Capital, or Cashflow. With this type of property, to find a buyer could be very difficult in today's market. Not to say it can't be done though.
For me, I am looking to build Cashflow and use that to feed my Capital. (not to say that I wouldn't take a capital building deal if it was handed to me on a silver platter) So where I'm at now, I would buy this house. But I would refi for less, say 15k-20k. This way it does cashflow some and I could continue to use the rest of the money to build my portfolio.

I feel that you are looking at this from the wrong angle.

It is always difficult to completely build a cashflow business from single family houses. It is possible though. You could continue the cycle of buying that you described but it would end real fast with a minimum amount of cashflow. Take that cashflow to continue building capital and it is going to take a long time to get this ship moving at any speed.

The easiest way to build cashflow in real estate is to have capital. That capital can go into some type of commercial that, with a plan, can really put a reliable source of cashflow into your pocket.

Do whatever it is that you do best to start building that capital. It seems that if you have the ability to purchase houses at 50% of fair market value, that you have the ability to gain capital. As you said, it would be tough to sell these days as houses are sitting on the market for a while. You stated yourself that this property is worth 70K. You said that you could purchase it for 35K. The trick is to price them where they will sell and make sure that they are marketed. Everyone wants a deal so that is what you need to provide.

If you can repeat this process and build the capital that you need, then you are on your way.

Put something on a spreadsheet. Evaluate all your options. See where you would be in 5 years if your plans work. Then put all your efforts into the implementation of the one that makes the most sense. Continuously check your plan to make sure you are on track. If not, adjust your plan.