Am i missing something?

Question

Ok, so I made my last post about having 12k saved up for a property. I got mixed comments- some saying that’s plenty, others saying keep saving.

I just put an offer on my 3rd property and ran this one through the BRRR Calc. I can’t seem to see if a deal makes sense or not. Better yet, how can I make it make sense.

The asking price was 160k

I offered 150

As stated previously, I only gave 12k- so I’d be doing 3.5% down

Taxes were roughly $2,800

It’s a 4 bed 1 bath rowhome

Was previously rented for $1,375

Detached garage in rear rents for $125

I calculated that it would cost about $12,000 for rehabs- I’d be doing all the work myself

My realtor seems to keep telling me that deals won’t workout because I don’t have a lot of money upfront. I might add he’s also family.

It’s very frustrating because I moved home a year ago to save some money so I could move out and have something that’s my own, and turn that into an investment a year after living in it.

I really want to get my investment portfolio started but it seems everyone keeps shutting it down and I’m constantly trying to figure out how to make things work.

Please help! Thank you all in advanced, I’m literally on BP every day after work for hours trying to learn as much as I can!

Aidan Mulligan · Answer

@Brandon Ribeiro Keep in mind the closing costs. If you have 12k saved for a house purchase you need to factor in about 5% of the house price as the closing costs.

Your home for example, a 160k house will have around 8k in closing costs on top of your downpayment. I'm not sure what your savings look like but banks will also be looking for 3-6 months worth of reserves for tax, insurance, and mortgage. Say insurance is $800 annually, taxes are $600 annually and the mortgage is $400, you're looking at reserves of $3,100.

That's $3,100(Reserves)+$8,000(Closing Costs)+$5,600(3.5% Downpayment) = $16,700 needed to close.

If this won't be a primary home then it gets harder because banks won't lend on less than 20%, you might able to find someone who would do 15%.

That's $3,100(Reserves)+$8,000(Closing Costs)+$32,000(20% Downpayment) = $43,100 needed to close

It gets expensive quick.

Erik W. · Answer

I'm with Dennis M.  This deal sounds like you'd have to leverage yourself highly at a time when the market is on fire and prices are up to buy a place that most likely won't throw off enough rent to cover all expenses plus debt service after donating weeks of your own labor to the project for free.

You really want to do that?

Plunk that $12,000 somewhere safe or get it into S&P 500 index fund and keep saving.  Prices will come down.

Or shop somewhere else.  Your purchase price to rent percentage is below the 1% rule, so unless your is SoCa or NYC I don't know why you'd accept such a poor return.  Can you enlighten us on what the currently invisible upside is to this property?

If there isn't one, then consider buying off market.  MLS is where prices are typically the hottest and the market is efficient enough that it is rare you will find a good deal.  Plenty of terrible deals on the MLS.

Find some one who has a house they want sold yesterday but hasn't taken any steps to get rid of it.  Even if you pay them fair market price, you can nix the 6% REALTOR commission, saving almost $9000 on a $150K property.

Patrick Menefee · Answer

I would echo what @Henry Lazerow suggested about seller credits, depending on what your goal is. In your case, you’d be paying 3.5% down but then adding that same amount right back through the sellers credit. As a result you’re going to be in the property for less cash, but you’ll be financing 100% of your purchase price (150k - 5,250 down + 5,000 credits).

This means you’re likely going to have a difficult time cash flowing in the near future unless you get a great deal on the purchase (and as Aidan said the credits could potentially lower your standing as a buyer a bit), in which case buying for the purpose of having a rental isn’t going to be easy. Best bet on that route is to get a roommate and live cheap/free to save capital again.

But this is where I go back to the importance of your goal. Is your goal to move into a house? Or is your goal to start a rental portfolio?

If it’s to move into a house, go with the route above. If it’s to start a rental portfolio, maybe it’s a better option to scour the market for deals, find a partner, and maximize that capital by investing in a cash flowing deal together.

If you want to try to mix the two, maybe you do both. Find a partner, find a 3-4 unit multifamily, and make a deal where you live in one of the units.

Bottom line is there are a lot of options, but the first step is to know what you’re shooting for. Not something vague like “i want to start investing in real estate”, but a specific definitive goal with a deadline. “3 doors by December 1”, “2500 annual cash flow by 2021”. The plan doesn’t need to be perfect, but you need to at least know what general direction you’re walking before you take you’re walking before you take the first step

Melba Chambers · Answer

@Brandon Ribeiro Many states offer programs for 1st home buyer that help with the down payment as well closing cost. Often realtors and/or lenders can give you more info. But try google that may tell you what is available in your area. That may speed up the process for you.

Aidan Mulligan · Answer

@Brandon Ribeiro With a house hack like you mentioned you would be eligible for the 3.5% through an FHA which requires the home to be your primary residence for a year. You can ask for seller assistance in closing costs but in a competitive market it might make your offer less desirable. It really all depends on your market and how much risk you want to take on.

It's frustrating but don't take no as an answer. There's a way, if it means saving a few more months, or looking at a cheaper property.

You said it needs 12k worth of work. What I would do is take the value of the house after you repair it, multiply that by .7 then subtract the 12k. This will give you what you should offer. Then you can take that to the seller and say, look this is what I can offer and here's why. I need to put 12k into it in order to make it market condition. If the seller understands why you're offering where you are, they might be a little more susceptible to a lower offer.

Offer = (ARV * 0.7) - (Repairs)

Dennis M. · Answer

160k for 1375 rent

Sounds like Your deal sucks

Not enough meat on the bone

Brandon Ribeiro · Answer

@Dennis M. Plus another $125/ month for the detached garage

Henry Lazerow · Answer

I wouldn't say you don't have enough money especially if willing to live in the house but would recomend you at the very least have a credit card in case an emergency repair is needed while you save up for a reserve account. It may also help to do a closing cost credit if tight on funds. For example offer $155k with $5000 credit vs $150k it nets out same for seller but lets you spend less money at close.

Brandon Ribeiro · Answer

@Aidan Mulligan that’s what I figured. So how would it even be possible for me to get a house? My main objective is to just own a house and house hack for the time being. I just see all these stories of people getting into real estate with nothing, and having tons of success. It’s pretty frustrating

Am i missing something?

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