Financing for homes under 50k.

[Rumi Tever]

Hi everyone. I'm looking to purchase rental properties in Milwaukee, WI. Purchase prices I'm looking at ranges from 35k-55k. Properties are all tenant occupied. Because of minimum loan/ property amount that lenders have, I'm having a hard time finding someone who will lend for these. I'm also open to put together 2-3 properties on one loan (blanket/ portfolio loan), but the properties are not from one seller. Down payment is not an issue, I have a fairly large sum saved up.

Anyone know of a lender that would consider this? Can anyone offer some advice?

[Marcus Auerbach]

A word of caution to all who are interested in 30-50k houses in Milwaukee. The math does not work - for a long term buy and hold.

One thing I have come to realize doing rehabs is that every house needs a complete redo inside and out evry 30-40 years give or take, depending how well it was bulit and cared for. Some systems will last a bit longer - electrical and plumbing is typically good for about 60 years. But anything else from windows, cabinets, roof, driveway has a design life and will eventually get to the end of it's useful life.

Most people understand that with cars - after 100,000 miles you start to see more repairs and after 200,000 most cars are done. Houses are no different. You can patch it together and "drive" it a bit longer, but you are already living on borrowed time.

A complete rehab for a typical Milwaukee home will run around $35-50 per sqft, depending on things like do you replace the siding or just paint it. Understand that if you just paint wood siding, all you have done is defer the replacement a few years down the road, but it's still there.

There is a big difference if you rehab for a flip or if you rehab for a buy and hold! A good flipper has to recognice that you don't recoup the cost of all new plumbing. Buyers will not recognice and value the expense. For a buy and hold it makes sense to replumb the entire house (and investigate the sewer lateral!), because you it will reduce your repais and capex expenses for the next 30-60 years.

The problem with cheap houses is that the only source of income to pay for both capex and repairs is cash flow - after you have already paid for PM, vacancies etc. Do the math.

Also, you should be keenly aware that on this type of investments you have disabled the two main wealth generators of real estate: principal pay down and appreciation (both natural and forced). Together with CF those are your 3 sources of profit as an investor, it used to be 4 with tax write offs against W2 income, but that's been gone since the 1980s.

Cash flow is necessary, but if you look at the big picture you understand it's small $s and never amounts to much wealth. To me the whole point of REI is to generate wealth, but if cash flow is your only source of income and that gets drained by capex and reserves faster than it comes in, you are looking at a money pit.

Once you understand this and see it, you can't un-see it.

I am not here to bust dreams, so how can you make it work with cheap houses? 

First you have to fully understand the math on your investment over it's life cycle. I defer to J. Scott's books here on BP, study them and you will have a better understanding about capex over time. Second, pic a property that is in good shape ("low milage") and will run for a while without the need of major capex and repairs - and then plan your timely exit before you start bleeding. Third use the cash flow to buy an investment that does actually performs on cash flow AND your main wealth generators principal and appreciation.