Cash Investment or wait?

Question

I know that is question has been asked several times but I cannot find the post that I started reading..

To make a long story short. I have about 25K in cash and spoke to a rep at the bank about a loan. They said based on the information I provided, I would qualify for a loan (they didn't check my credit). So here we are months later and I checked my credit score to verify it it had gone up. Well to my surprise it had gone down so i'm not sure if I qualify anymore. I have seen properties come and go for about 20K and less that i'm interested in.

My question is do you think that it would be wise to purchase a SFH or Condo with cash and have minimal on hand for repairs at this time. I was thinking that this would be my first investment and I would gradually make repairs until it is up to par. I could do up to 1,000 per month on repairs from my current income. I just want to get in while i can find something decent before the market changes too much but not trying to do a major renovation.

Is that just a waste of money? or should I get my credit back to where it was? Currently my money is just sitting in the bank earning no interest. My thought would be to get a property, fix it and rent it out over the long run.

Dawn Anastasi · Answer

Cynethia Scott usually when you close the taxes are pro-rated.  For example if you closed today, March 15th, the property taxes for January 1st - March 15th would be calculated based on the 2012 property taxes and you'd get a credit from the seller on the final "settlement statement".

But then for the 2013 property taxes (generally due January 31st, 2014), you would pay for the full year of 2013 (because you were already given the money from the seller for the first part of the year).

When you pay cash, you don't have an escrow account like you do with a mortgage, but you have to remember to set aside that money to make sure you aren't caught in January with no money to pay for it.

Also check into how your municipality allows you to pay the property taxes.  I owned properties in 2 counties.  In one county, you were allowed to pay 1/2 of the taxes by January 31st and 1/2 by July 31st (with no penalty).  So that's what I did.  In Milwaukee County, you're allowed to pay 1/10th by January 31st and a 1/10 each month through October 31st (also with no penalty).  So that's what I do for those properties.  (I'd rather not give the government any more money than they are asking for at that time as long as there is no penalty.)

Ramon Jenkins · Answer

www.biggerpockets.com/renewsblog/2013/03/15/investment-property/

Also, if you have not already listen to podcast 8

Ramon Jenkins · Answer

You ever thought purchasing a homepath or homesteps property ?
( Lower down payment need to purchase  )

I do not know your market , but here what I’m thinking $20,000
You might be able to purchase two homepath / homesteps
properties.

Correct me @Dawn A. if I’m incorrect :
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
$9000 down on 1st homepath / homesteps buy-hold property
- 1 year later after you got your feet wet -

Another $9000 down on 2nd homepath / homesteps buy-hold
property.  This would leave you about $7000 for 
emergency / taxes fund (over 2 – 3 years)

versus : 1 purchase for $20,000 and $5000 emergency fund

This what a co-worker of mines did and now their up to about 
4 /5 properties over 3 year span.  Definitely home inspections

Regardless, your taken action and that what count
( every decision make sure your checking your wisdom )

Ramon Jenkins · Answer

1st off - @Dawn A nice pic
I had to do a double take
I was use to seeing the cat pic

Ryan R. · Answer

Cynethia Scott, regarding the inspection, that is based on experience. Personally, the next property I buy, I'll be climbing through the attic and under the house so no inspector for me. I've paid too many inspectors to tell me the obvious..

For you, I would hire an inspector if you believe that the costs to update the property are minimal, such as paint, carpeting, landscaping etc. things that you will possibly be doing yourself or hiring unskilled labor.

If the renovation is more extensive such as a possible new roof, major flooring work, plumbing etc. I would find a contractor to work with and allow them to perform an inspection. A good contractor can do just as good as many so called home inspectors out there.

The great thing about forming a relationship with a contractor, is that they can give you good estimates before you buy a property.

Have a good plan with supporting documentation. How long will it take? How much will it cost? How much cash flow will it generate? What's my exit strategy? Who manages the property? Think of it like a business.

Cynethia Scott · Answer

Opps Dawn A., I didn't think about the utilities.. That's a good point. I figured that I would have to only worry about taxes for the next year. Paying cash, you don't have to pre-pay for taxes for the year like you would with a mortgage? Hmm another thing i need to think about. This is all valuable information! I thank you both for your guidance.

Dawn Anastasi · Answer

The issue with taking your time to fix it, is that you still have holding costs while doing that -- utilities (gas, electric, water) and property taxes are accruing.  So if you buy something, it's ideal to either rent it out immediately, or in short order to get that income offsetting your costs.

If you have anxiety about letting go of that much cash at once, think of it this way:

$700 monthly income * 12 months in a year * 3 years = $25,200

$700 monthly income * 12 months in a year * 10 years = $84,000

(This is overly simplistic, but it shows you what your money is doing for you versus just sitting there in a bank account helping only the bank.)

Cynethia Scott · Answer

Thanks Ryan Richard, That makes sense. Do many investors pay for a home inspection like they would if it was their primary residence? I was thinking of doing this to help me understand the condition of the property beyond what I can see. I would put this in as a due diligence in the contract. That is great advice, take a look at what is out there and renters look for.

Ryan R. · Answer

Cynethia Scott, proceed with caution. I think the most important aspect of moving forward is knowing how much money and time it will take to get your property rent-ready.  This takes two things.

1.) Accurate estimating.

2.) Knowing what condition the property needs to be in order to attract tenants. You may tour some of the rentals in your area to know exactly what the standard is.

If you can do this accurately, you will know how long it will take to fund the repairs and when you can expect to start renting to tenants. (making money)

Cynethia Scott · Answer

Thanks for your reply Dawn, since these are older homes in the city, they can easily rent for $700 or more per month for 3 bedrooms. I wasn't sure if buying and taking your time to fix it, was ideal. Plus I'm having a slight anxiety attack about letting go of that kind of cash at once..lol

Cash Investment or wait?

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