First Offer
Hopefully I will be successful one day and look back at this and laugh at myself...
After learning from BP for a year, I couldn't wait to start investing in real estate. A friend recently became a real estate agent, so I started to work with her to find my first deal. This is not the first time I buy a house. I have a rental that was my primary home and I also have my home. But, I never analyzed a deal and bought a house as an investment. This is new and exiciting and scary! I was already talking to a mortgage banker about getting my husband a loan and another broker to refi both of my homes so I would have cash to buy a rental. My refi will close in 9 days. In the mean time, the broker told me not to apply for a new loan since I will have to provide more reserves for all 3 properties. He asked me to wait until my refi is done. I found this quadruplex in my city (A and B area with A schools) for $204K, which is surprising because affordable multifamily is so hard to come by in my area. I need to get it. But how? Can I wait 9 days for the refi to close to put in my offer? Can I put in the offer in my name but my husband is the one getting the loan? Should I make my husband put in the offer? Should we start an LLC and make an offer using the LLC's name? I am overwhelmed with questions. I will have $40k from the cash out refi. Is that enough for downpayment plus closing cost? I used the BP Calculator for the first time today tried to see if the numbers make sense. I love the calculator, but I am still lost! The rent for the quad is currently $2,200, which is low compare to the neighbors. 2 of the units need to be gutted. It makes me question why are they occupied when they are in such bad condition. The seller won't show the house unless I get my offer accepted. So there is no way to know now how much repaire it will need.
If I offer $200k, my down payment will be $40k at 20%. That's almost all of my cash, and I still need to pay agents commission and closing cost. $200k is not going to work. I might need to just low ball this one. With 2 units needing total rehab, and my low on cash, and the low rent... Wow I don't know what to do. I still need to take action!
Here is where I really got stuck. The calculation on how much should I offer? Can I use the 70% rule here and offer $142,800? Well, zestimate says this property is valued at $217k, so maybe offer 70% of that- $151,900. That will be $39,494 for 20% down+6% commission. I estimate $10k for closing cost (paper work, loan points,etc) to be conservative. So that's $49,494 cash out of my pocket if I offer $151,900. I can bearly afford it even after a low ball offer... Then there's the gut job. (I don't really have to make the repairs since they are rented right? Ha)
I am talking to a lender that offers a 15% down payment product. If I use this loan.. Let me do some backward calculation to see how much I can afford. $45k cash- $10k closing cost = $35k for agent and down payment. $35k ÷ 0.21 (15% down + 6% agent) = $166,666.
At interest rate 4.5%, PI is $844.
Monthly home owners ins- $100
Tax-$ 178
Vacancy- $22
CapEx- $220
Management- $176
Repairs- 220
Total operating exp is $1760
Rent income is $2200
Cash flow = $440?
What about the 50% rule? 2200×50%= $1100. $1100-$844= $256. So is my cash flow $440 or $256? I think I am going crazy.
Or that I can just move to the quad and use FHA with 3.5% down, or conventional 5% down. Then I will have to start over...
I know there is always a way for me to buy a property. I guess I will go sleep on it now and hopefully I will wake up knowing what to do.
If you have any suggestion or comment, please let me know. I think I need all the help I can get.
Comments (15)
John C S., over 8 years ago
John,
Yes, the tenants take care of their own utilities. The only thing I am not sure about is the trash. I know the neighboring quads have the tenants pay trash so I will definately ask the seller. If I pay the trash then it will add $40 a month to my expense.
Kelli Huang, over 8 years ago
Have you considered using private money or partnering up?
Tom Chen, over 8 years ago
Tom,
Yes I have thought about them, but I have no one to work with. And I am not ready to use hard money. I think if I price it right, I wouldn't have problem using conventional loan for this deal.
Kelli Huang, over 8 years ago
Hey Kelli i was reading your post and I can't help but notice you missing some calculations. For example you don't have any utilities on there such as electric water garbage excetera. Unless they pay their own. Your missing your homeowners insurance and taxes too. And I also agree with Matt Geeres.
John C S., over 8 years ago
This honestly sounds like opportunity knocking. Low rents, unpolished units. I'd say if you have the flexibility, move into the ugliest unit with 3.5% down. Use the extra cash you have set aside to completely redo the unit that you're in, then after the necessary time period go buy yourself another primary residence. You'll have converted the worst unit to the best, greatly improving your rent.
I'm eager to find out how it goes for you.
Matt Geerts, over 8 years ago
Matt,
It would definately be great if I can put down as little as possible. I am still working with the lender on this. We will see how it goes.
Kelli Huang, over 8 years ago
One thing I ran into when looking for a 4plex what that most conventional lenders will require 30% down rather than 20% down. I spoke to a couple of mortgage brokers who thought they'd be able to find a 20% down conforming loan but came back with nothing. That could be worth keeping in mind and exploring further when running your numbers.
Best of luck!
Chris Ready, over 8 years ago
Chris,
I have not heard that from the lender yet, but I will keep that in mind. Thank you!
Kelli Huang, over 8 years ago
@Kelli Huang Maybe the 50% rule would work if the rents were higher like the neighbors. And maybe the rents are cheaper than the neighbors because of the run down condition it sounds like the apartments are in. You also want to know what kind tenants, leases and lengths that they have. There is not any risk in giving a properly structured LOI at full price and a secured escrow deposited with your own lawyer and then seeing the other details to further evaluate. You can then either buy at the agreed price or further negotiate depending on answers to your questions and conditions of the units and tenants. I think that you have a strong question that since the apartments are currently rented then it should be in good enough condition for you to make the purchase and do work later on. If it isn't, then if the owner is upset for you to further negotiate you now have this reason to give him saying that rented apartments made you feel that it is livable at this lower rent in the meantime. I believe in being honest and if it is a good deal, then why should you both lose out just because he doesn't want to deal without an accepted offer....as long as you are willing to pay that number if all checks out. Good luck.
Jeffrey Levy, over 8 years ago
Kelli Huang, over 8 years ago
Never heard of buyer paying agent commission. Is it a Georgia thing?
Avi Garg, over 8 years ago
@avi garg
I don't know If it's a GA thing but for my first 2 homes the sellers didn't pay for them. Well, one was HUD and another was FSBO so maybe that it's why. I did put it in the contract to ask the seller to pay for it this time. But just in case If she want me to pay, I willb already account for This cost.
Kelli Huang, over 8 years ago
...... Wow,
You definitely know what you're doing, but you're looking at each individual problem and getting flustered with all the numbers. Over analyzing can be just as bad as under analyzing. Take a deep breath... Hold it... let it out.. and continue breathing. Remember, getting to attached and emotional about a property can spell bad luck. If this deal falls through because the seller doesn't except your offer, or you can't find enough profit margin to make this worth it FOR YOU, it will all be okay.
Let me say that again:
IT WILL ALL BE OKAY...
There are lots of deals out there, and though its okay to be nervous about a deal, you will be just fine, whether or not the deal works.
Smile... you know why? Because you're a Real Estate Investor, and you are far beyond most people out there working everyday and not following their dreams. But you are, and that's pretty cool.
Look at your numbers again, make sure you are leaving enough room so as to not screw yourself. Leave lots of wiggle room. If there's no room to wiggle, how is that fun?
Zane McLaughlin, over 8 years ago
Zane,
You are amazing for reading my entire post. I don't even want to read it again after I wrote it. It hurts my brain. Thank you for reminding me to see the big picture. Yes, I will be okay! Now let me go find some room to wiggle.
Kelli Huang, over 8 years ago