42k and rents at 850 a month??? ...am I missing something here?

[Corey Demuth]

I'm new to all of this so if I am missing something obvious, sorry.

I have been lurking and reading some threads, trying to absorb as much information as I can. I came across this and I don't understand:

http://www.biggerpockets.com/properties/1797

The price is 42,500. So, even if you bought it at the asking price without trying to barter, and put 10% down, a 15-yr mortgage on the remaining 38,250 at 8% (a bad rate as I understand; I am purposefully trying to assess this as a 'worst case scenario' to make sure it is profitable even if the loan doesn't come out as well as planned)

That means payments are 365.54/month + 149.42 taxes + I have no idea how much for insurance. According to that ad, which of course may not be reliable, the house rents for 850 and is in move-in condition.

850 - 365.54 - 149.42 = 335.04/month profit (minus whatever other expenses I may be missing here.)

If you go back and change that mortgage to a 30yr, at 7%, your monthly payment drops to 254.48, so your profit rises to 446.10/month (again, minus whatever additional expenses I am missing).

Not a ton of cash but not a ton of work either, and presumably the value of the property increases with time and you build up equity in it without ever paying the mortgage yourself.

So why is this such a deal and why hasn't someone grabbed it already? Am I missing something? I was originally considering trying to buy a house (for myself, to live in, not an investment) this fall but now that I am seeing such cheap rentable homes in areas like buffalo, I am thinking about staying in my current apartment for another year or two and picking up as much property as I can be approved for loans to purchase. Am I diving into shallow water?

[Joseph M.]

This place looks nice , the wood staircase and everything. It's interesting though as some REO properties in California are actually priced at these levels, with rents maybe equal . These are properties that were 150k+ at the height of the boom so it's pretty amazing.

Seems like a decent deal though at 42k asking price.

The one thing that sucks about NY is property taxes are sometimes really high in certain areas, also the weather you have to plan for the freezing cold weather.

[Corey Demuth]

MikeOh, I'm looking and I appreciate any suggestions you can give me - I live in Fresh Meadows which is in queens, the zip is 11365. I haven't really found anything local that I could afford; I'm told I can get about 250k for a mortgage but that was when I was looking for a home to live in. A mortgage broker told me a few days ago that on a NOO property (non owner occupied) most banks require 20-25% down.

[Will Barnard]

Thats correct!

Affordability is one aspect and the other is that the deals pencil out in your favor. The fact is, there are mny places in the country that are not suitable for a rental business. If you happen to live in one, as I do, you must invest abroad.

I also agree with Mike that investing longer distance can add "risk" but the word risk is a very loose term. Risk can be managed or even eliminated. Choosing a good team is crutial. How do you do it? Education, experience, some trial and error, or piggy back off someone else who already has a team in place.
Those are a few options for you.

On the buy side, if you lack cash or credit, you may want to look into creative acquisition strategies such as sub2 or buy with money partners. Hard money is too expensive fro rentals and is for short term flips anyway (or temporary financing).

[Corey Demuth]

can anyone explain what sub2 and hard money are?

[Joseph M.]

I agree, there are just some areas where it is basically impossible to find cash flow properties. This is the case where I live in Los Angeles, CA. Some of these 2-4unit properties are priced ridiculously high, and L.A has strong rent control laws so they might be asking $500,000 a duplex, but tenants might only be paying $900 or less a month each so there is no way someone can cash flow. Rent control means the banks can't keep out tenants after foreclosure.

It's amazing people are still asking these prices now that properties are DEPRECIATING rather than Appreciating.

[Joseph M.]

Sub2 means that you are buying a property Subject to the existing financing , you are taking over the seller's financing basically..although I don't know a ton about it.

Hard money loans are loans from private individuals rather than banks. Sometimes they don't check your credit even and the documentation is much less than a traditional loan. These loans are based primarily on the equity in the property.

Hard money lenders will have a certain LTV (Loan to Value) that they will lend to.

For example if their loan to value is 60%

It means they will loan you 60% of what the property is worth (appraised value)..but I've seen that will only loan on the PURCHASE price .

Some hard money lenders will loan you money based on the ARV (AFTER repair value) . So let's say you find a property that needs work, and it's worth 200,000 AFTER it's fixed and the Hard Money lender will loan 65% of the ARV value it means they will loan you 130,000 to buy it.

Hard money lenders generally charge points (a percentage of the loan) as their fee , 5% is typical.

Also they charge interest on the loan of usually 12-18% per year. So hard money loans are usually only practical for flipping or getting a quick loan to refinance.

This is just a general summary of hard money loans..keep in mind Hard money lenders are different and they have different fees and requirements.

[Corey Demuth]

Originally posted by Joseph M:

It's interesting though as some REO properties in California are actually priced at these levels, with rents maybe equal . These are properties that were 150k+ at the height of the boom so it's pretty amazing.

Can you point me to some of these properties you're talking about? Do you own rental properties in CA? If so, what management company do you use? Thanks!