I found what I think is a great deal for my first investment?

Question

I found what I think is a great deal for my first investment. I work with a guy who told me today that he NEEDS to get out of his house. It's a low income neighborhood but not the roughest neighborhood. He is current on his mortgage but wants to move closer to work. He had the house on the market but it seems like it is too nice for the neighborhood. He has made a lot of improvements on the house while living there. He told me today that he is not looking to make any money off the house at this point he just wants it out of his name. He was asking if there is a way for him to just sign it over to me and he would even pay me rent until he found a new home to buy. He pretty much just needs it off of his credit. He pays under $300 for his mortgage and local rents are around $550-$650 for the neighborhood. What is the best way to go about this? I would like to work with an investor since I don't have a pile of cash or the best credit right now. He only owes about 28k. Any help or feedback will be much appreciated!!!

Thank You,

Thomas Heil

Thank You,

Thomas Heil

Shaun Reilly · Answer

@Thomas Heil

Go around and talk with some local banks to see if you will be able to get a new mortgage on the place (If you need to cash the guy out rather than a Subject 2 situation).

In my experience most institutional lenders don't want to do loans less than $50K generally.  In my home area it is almost impossible to get stuff that cheap so it is even harder since nobody has that experience.

However I also do rentals on the other side of your state and I know dozens of investors with hundreds of properties and not a single one has a bank loan (That they originated at least).  These would all be places in that same basic price range you are talking about.

Shaun Reilly · Answer

Raymond linked to an interesting thread on this (Hadn't seen it before but the debate looked good but was too long to read right now) but here is a basic explanation.

As stated elsewhere expect that 50% of your gross rents will go to your non-finance related expenses.

These expenses include, but not limited to, Real estate taxes, property insurance, property management, any owner paid utilities, maintenance and repairs, capital reserves, advertising, legal and accounting for the property.

Even if you intend to self manage make sure it works if you did pay someone because a) That is a job so you should pay yourself and b) if you really hate doing it you want to have the option of hiring it out without losing money every month.

Lots of people do not formally put away reserves and will just call them big repairs for cash flow purposes (not for formal accounting and taxes).  But those expenses DO come up and you should make sure your calculations account for them.

Easy example:

You get $800/month rent.  When nothing big happens you are running at only 25% non finance expenses, or $200/month.  After owning it for a while the roof has some issues and you have to replace it at a cost of $6,000.  If you based your numbers on the 50% rule you would have budgeted an additional 25%, or $200, each month into your expenses.  So at $200/month to pay for a $6,000 roof you need 30 months to do that, or 2.5 years.

So if you owned the place for 2.5 years and pocketed that extra $200 each of the first 29 months then had a $6,000 "repair" in month 30 you have a place that met the 50% rule for the 2.5 years you owned it to that point.

Ali Boone · Answer

Do you know where you can get a mortgage for that little of an amount? Most banks won't lend under $50k, so just make sure you aren't assuming you can get a mortgage on it. Find someone who can definitely give it to you before you go much further!

And don't go by the 50% or 2% rules. Go with actual numbers. The best way to find out rental comps is to talk to a local property manager. Then you can get taxes and insurance and such as actuals. The % rules are a waste of time once you have an actual property picked out. And no idea why anyone is suggesting the owner keeping it on his credit....that was the whole point of your post- to get it off his credit.

Shaun Reilly · Answer

Tom I think that you have the right idea IF you can get a bank to start working with you in the first place.

If you are going to get those small loans (or possibly lines of credit to finance some of the stuff) you will be more likely to work something out with a small local place that holds stuff in its own portfolio.  You won't have a chance with a big bank if you don't fit exactly into their criteria.

That being said it might be hard getting off the ground fast with that.  What you hear is you go and open an account then you take out some small loans that you pay back, maybe even secured with the money in your account.  Build the reputation (maybe get other things like car loans and stuff to get more credibility).  So if you don't have the foundation it might be hard to get the mortgage off the bat.

Finding a private lender or an investor partner is probably your best bet (Unless you have the cash and want to sink that much into this property, Good and Bad points to that strategy) to get this deal done.  As you said I am not sure if there would be enough meat on the bond to attract a seasoned investor to go in on it.  So a private loan is probably the more likely possibility.

Lowest hanging fruit is always family and close friends.  If you have someone that might have this kind of cash available and would invest in YOU as much as the property that will be the path of least resistance generally.

If you go this route remember you are not asking for money you are offering them an oppertuinty to make a great investment.  However you sturuture it they should get a return better than if they just have it in a bank, or CDs and generally in mutual funds.

Thomas Heil · Answer

Okay I was afraid of that, I guess I should start trying to find an investor. I'm not sure there is enough meat on the bone to make it worth it. What do you think? I was just trying to aim small for my first deal in case I foul it up. Maybe this would work better for me to try to wholesale? Or maybe it's not the deal I thought it was and just move on to the next one? I have reached out to a smaller local bank but I have not heard back from them. My thoughts are that maybe if i build up a reputation with a smaller bank they would be more flexible with me.

Thank you!

-Tom

Thomas Heil · Answer

Ok thank you that makes complete sense! So I guess I really need to start at what the house would actually rent for by finding good comps. Then work backwards from there. I was told not to charge less than $650 by a local and after running some numbers on a 15 year mortgage it looks like my monthly mortgage payments would be about $150-$175 not including taxes or insurance. That actually raises another question though. I was thinking about making double payments to pay off the loan asap but maybe I should keep that money available for repairs if needed? Your input most likely saved me from a pretty big mistake lol.

Thank you for all the help!

-Tom Heil

Raymond B. · Answer

@Thomas Heil,

Here is a link to the 50% rule to use as a guide

Raymond

Scott Anthony · Answer

The 50% rule is that for any potential rental property, you can likely assume that 50% of the monthly rent will be for expenses, not including your debt service. So for your deal, a house that can rent for 650, likely will have 325 a month in other expenses (maintenance, cleaning, utilities, etc.).

So, my advice is to do your research, know what you are getting into, but don't let the "analysis paralysis" get you. Go ahead and pull the trigger if you think it will work. Everyone has to start somewhere.

Thomas Heil · Answer

wow this is great info! Thank you guys for the advice. I ran some more comps last night and it looks I should be able to ask $700-750. Hopefully that is accurate, I have been in the house but I want to drive the neighborhood this weekend to get more accurate comps. @ Shaun Reilly can you break down the 50% rule for me? I'm not sure that I understood how that one works.

Thank you all!!!

Tom

Thank you all!!!

Tom

Jerry W. · Answer

@Thomas Heil , it appears the motivation of this Seller is getting it off his credit.  If you cannot do that he may move on.  There are many options from wholesaling, to getting your own loan,  to the "subject to" mentioned earlier.  Good luck.

I found what I think is a great deal for my first investment?

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