First investment property: need a sanity check 16 posts by 8 users

Posted: 10/12/2008 at 06:50AM

So you're financing $100,000?

If so, payments for that at 7% / 20 years (commercial setup) will be $775.30.

Rent is only $950

You still have taxes and insurance to pay.

How can you refi and pull out any money?

Or are you putting 20% down? At which case:

Mortgage on $80k: $620.24
Expenses (40%): $380
Rent: $950

Loss: $50.24

Posted: 10/12/2008 at 09:10AM

I thought 100% financing was gone!

I'm initially financing $87,500. I'd like to refi 80% LTV which is what I believe lenders will allow.

The initial mortgage would have a $567 P&I payment, and my expenses look like $251 for taxes, $79 for insurance and I'm including $40 for PMI. That would give me $10/mo cashflow at $950/mo rent. Or $50/mo if I get rid of PMI.

Certainly not what I want, is it.

I'd also be $21K out of pocket after down payment, closing costs, and rehab.

If I were to refinance to recapture that out of pocket expense, hmmm... it looks like I'd have to get $1100/mo in rent to break even.

Damn, the numbers sure looked better before. I wonder what I did wrong in my earlier analysis. I like the idea of purchasing $20-30K in equity, but being $20K out of pocket hurts. If I could get $1100/mo rent I could have the equity but no cashflow and no money out of pocket.

Rats. I've spent a lot of time and money pursuing this property and now that I have firm numbers on lending costs it doesn't look nearly as attractive as it did initially. It'll still work even under my most pessimistic numbers (if I don't refi) but the out of pocket amount will sideline my investing for a while.

Jon, the garage has been converted to a family room. It's not unusual in the area. Comps to other 3/2/0 in the area actually average to $140K. (I really wish my comp service gave median, not mean, $/sqft!) If it does actually comp at $140K (which I haven't allowed myself to count on), I'd be buying into $40K of equity.

It appears that renting this property isn't going to be a viable exit strategy. I may have to take a harder look at selling it with a wraparound mortgage. And investigate the ramifications of backing out of the deal before closing.

Edited: 10/12/2008 at 09:16AM by Matthew M.

Posted: 10/12/2008 at 09:39AM

You'll find lenders will have different LTVs if you're doing a cash out refi vs. a rate-and-term refi. If you're paying cash for some expenses, then doing a refi and getting cash (more than about $2000), its cash out. Typically max LTV of 70%, and often a minimum of six months or a year of ownership. If you're not taking cash, you can get a higher LTV. But, sound like you want a cash out. Lenders consider these high risk.

Richards right about the way I've evaluating the deal. When you evaluate the deal at 100%, then stick in a down payment, you're getting the same return on that cash as the loan rate. 7%, in this case. You can always put cash into a CD or money market (almost) risk free. You can get 5% on CD's right now. You must consider the opportunity cost of your cash. You implicitly realize this, when you talk about wanting to get your cash back to do another deal. Most properties will "cash flow" with 100% down. But many will return you less than a CD, with much higher risk and hassle.

You need a comp service that gives you specific information, not ranges and averages. You need to go drive by the comps and have a look. If your comp service doesn't give you that data, get another. Title companies will share data, an agent friend (you have one, right?) can get you MLS info, and county records in some areas have details.

Better to let a crummy deal go, even if you lose your earnest money. It will cost you more later. Sounds like you have this under contract. You did check "liquidated damages" as the remedy if you don't buy, not "specific performance", right?

Back when I bought my first rental at the beginning of this year, I looked at something like 200 listings. Looked inside 60-70 houses. Drove up and down every street in my farm area multiple times. Made 15 offers, had two accepted, and finally bought one. This is a time consuming business.

Posted: 10/12/2008 at 10:50AM

First, always, always, always cross out any specific performance clauses when you're the buyer. You never want to agree to this as a buyer. As a seller, you want this because it gives you the rights to sue the buyer if they don't follow through.

$70K for $950/month rent sounds about right.

If you're going to just turn around and resell it in the same condition as you bought it, you have to ask why someone would buy it from you when they could have bought it from the bank cheaper. Are you going to fix it up? Market it better? Do you have buyers in your pocket? What you're really talking about is wholesaling, and that's a business in its own right.

If you're going to sell this retail, you're probably going to have to fix it up. If you can spend $7500 and get it up to the $140K range, you should do OK as a flip. Sounds like you have the financing lined up, so your money costs are low compared to hard money. You will have to hold it a while, until the buying season really starts in the spring. Vacant house policies do exist, but are quite expensive. Easily 3-4X regular landlord insurance, and with worse coverage.

If the contract was executed on 9/25, that's when the clock started. Were you not informed until 10/1? Or do you just mean that's when you had the contract in hand?

Do those foudation issues need to be fixed for you to sell it? Have you raised that issue to the seller?

Being out inspection fees (and here in Denver, "dewinterization fees") is par for the course.

Its difficult these days to "buy equity and tap into it" with rentals. LTVs are low, so you have to be very, very low. You're buying somewhere between 71% and 80% of its retail value. That's not really that low, given the lending climate. The last 10% of equity is not really there, due to costs involved with selling properties. Banks aren't too keen on investors period these days, since we've proven to be a bad risk. So, realistically, you can't expect to be able to get the top 30% out of a property that you're holding.

You might consider wholesaling, if your goal is to generate cash. Fix and flips are hard in the best of times, and these aren't the best of times. Rentals generate long term wealth, but not much cash flow in the short term.

Posted: 10/12/2008 at 12:05PM

Using a specific contract doesn't mean you have to accept it as-is. The CO contract has checkboxes for specific performance or liquidated damages. You can always just cross out the language about specific performance and initial it.

Can you make money selling at $125K. Lets see.

Buy closing costs: $2000 (orig fee, plus all the other crap that shows up)
Insurance: $500
Inspection: $300
Rehab: $7500
Purchase: $92,500
Total all-in cost: $102,800

Holding cost for six months
Interest: $3000
Second insurance: $500
Utilities: $600
Taxes: $1500
Total hold: $5600

Total investment: $108,400
Loan: $87,500
Cash: $20,900

Sell
Price: $125,000
Commissions: $7500
Sell closing costs: $2500
Loan payoff: $87,500
Sale proceeds: $27,500
Less cash investment: $20,900
Net profit, pre tax: $6600

That's taxable at ordinary rates.

Your low money costs help vs. hard money. But the thin deal (you're at 80% of ARV) makes it tough to turn a good profit.

If you decide to try to refi, and it does appraise at $125K, you'll be limited to $87,500 assuming a 70% cash out. So, that's no cash. If your original note was higher, you could probably go higher on the refi. And, you might find some lender that would go to 80% of the new value (I've heard such things exist, but I dunno...) But I don't think you're going to find someone who will get all your cash back out.

This doesn't seem like an awful deal. Like you say, it doesn't see like you will lose your shirt. Since you have a significant amount of cash into the deal, you shouldn't have to pay to get rid of it. But, it could easily swing to a net loss.

This sounds like your first deal. Better to have an especially juicy deal for the first one, to give you some room for errors.

Posted: 10/13/2008 at 06:07PM

Matthew,

It has been said (by someone smarter than me), "Fall in love with the numbers, not the house". Nobody likes to lose money on a deal, especially if you don't end up buying it. But if worst case scenario you back out of the deal and lose a deposit, chalk those costs up to tuition. The worst thing you can do is start playing with the numbers to try to make them fit. Get hard comps on both the retail ARV and the rental rates (look online, look in the paper, and call 'for rent' ads).

I have done 5 rehab deals, most of them extensive. But I still shy away from foundation issues. Those can be expensive.

Keep your chin up and take solace on the fact that you took the time to do a reality check and ask for advice instead of letting your pride get in the way.

Best of luck!

Posted: 10/13/2008 at 11:16PM

Seriously. What a great thread. I've learned a lot in this one.

Posted: 10/15/2008 at 10:09AM

Thanks, guys. Should I try to sell you a home study course or a bootcamp?