Real Estate Investor · Denver, CO · Member since 2010 · 33 posts · 27 votes
So to keep a long story short, I have been working with a few mentors in my area that have been helped me to step my game up. Not only do I get their experience and advice on deals, as well as partnership, but I also get to benefit from their private money resources.
Here's the dilemma:
They are only interested in a few specific areas to focus their investing on. Which is just fine and dandy. But, the area I live in, which is about 20 miles away, doesn't fit their criteria to invest in.
Now today and yesterday I have made three offers. All three were houses in the area I live in and are owned free and clear. I have negotiated with the sellers to offer Owner Carry as long as I pay them a 10% down payment. Since this isn't the area that my mentors are interested in, it leaves me on my own to figure out where to get the money for the down payments on the houses.
With all the help that Bigger Pockets has given over the years, I figure someone might shed some light on my situation. Any thoughts?
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
You're going to lose big time if you seriously buy houses for $140K that only get $1050 in rent. Even paying $119K for $1200 in rent is a loser. If you put in a decent down payment you might scrape a little cash out of that better deal. If you're 100% financed, and especially at the higher rate you'll pay for that last sliver, you're underwater all the time.
Paying $119K for a house worth $127K, or $140K for a house worth $145K is a terrible deal. Those aren't deals, you're paying full retail price. Transaction costs alone eat 10%, so if you're paying more than 90% of what you could quickly sell for, you MUST, MUST, MUST put in at least enough of YOUR OWN CASH so you can sell without having to bring money to the table. If you don't have the money up front, where are you going to get it if you're forced to sell. Much better to be down below 70% of value, or, at most, 75% of value.
Lets look at the best possible of those deals:
Rent: $1200
Expenses: $600 (50% rule, yes, it applies to you and your property)
Purchase price: $119,000
Down payment: $11,900
Closing costs: $2,380
Loan: $107,100
Cash needed: $14,280
First loan payment: $642 ($107,100, 6%, 30 years)
Second loan payment: $286 (2% minimum monthly payment on a credit card at 10%)
Cash flow: -$328 (yep, $328 a month loss)
Now, if you put 25% of your own cash, plus closing costs, into this, you at least aren't losing. Your payment is $535, giving you $65 a month, or $779 a year in cash flow. You put in $32,130, so that's a 2.4% cash on cash return.
Don't buy terrible deals like this, and if you are going to do it, absolutely do not finance them 100%.
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
16y
Rather than needing to know where to get the 10% for down, concentrate on where you're going to get the money to PAY THEM BACK. If you plan on doing this very long, you'll need the 2nd item to make them comfortable loaning you the money originally.
When you have # 2 figured out, you'll probably find # 1 also. Rich
Real Estate Investor · Denver, CO · Member since 2010 · 33 posts · 27 votes
16y
Thanks for the input guys. One house I'll need 15k and the other I'll need about 17k. I plan on paying it back over a longer term of 3-5 years from renting out the homes. But, honestly now that you mention it Rich, I am a little lost in the exact way to pay it back. How is this situation handled? Lower the monthly payments to the owner so I can pay back the down payment money in bigger monthly chunks?
Real Estate Investor · Chattanooga, TN · Member since 2010 · 151 posts · 59 votes
16y
Originally posted by Ali Samana:
Jimmy,
Would you mind discussing the specifics on the houses i.e appraised value, your accepted offers and rent comps in the area.
With that information people on this site could look at it and tell you if the house would cash flow well or not.
Have to agree. It would help for you to lay out the details of the deal so that we could give you a better response.
I will say this, partners always beat lenders. If your deal is really a good deal, talk to family and friends and see if anyone is willing to put up the down payment for a cut of the deal. 50/50 would be pretty fair.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
You're going to lose big time if you seriously buy houses for $140K that only get $1050 in rent. Even paying $119K for $1200 in rent is a loser. If you put in a decent down payment you might scrape a little cash out of that better deal. If you're 100% financed, and especially at the higher rate you'll pay for that last sliver, you're underwater all the time.
Paying $119K for a house worth $127K, or $140K for a house worth $145K is a terrible deal. Those aren't deals, you're paying full retail price. Transaction costs alone eat 10%, so if you're paying more than 90% of what you could quickly sell for, you MUST, MUST, MUST put in at least enough of YOUR OWN CASH so you can sell without having to bring money to the table. If you don't have the money up front, where are you going to get it if you're forced to sell. Much better to be down below 70% of value, or, at most, 75% of value.
Lets look at the best possible of those deals:
Rent: $1200
Expenses: $600 (50% rule, yes, it applies to you and your property)
Purchase price: $119,000
Down payment: $11,900
Closing costs: $2,380
Loan: $107,100
Cash needed: $14,280
First loan payment: $642 ($107,100, 6%, 30 years)
Second loan payment: $286 (2% minimum monthly payment on a credit card at 10%)
Cash flow: -$328 (yep, $328 a month loss)
Now, if you put 25% of your own cash, plus closing costs, into this, you at least aren't losing. Your payment is $535, giving you $65 a month, or $779 a year in cash flow. You put in $32,130, so that's a 2.4% cash on cash return.
Don't buy terrible deals like this, and if you are going to do it, absolutely do not finance them 100%.
Mobile Home Investor · Spanaway, WA · Member since 2008 · 1k+ posts · 578 votes
16y
At the start you mentioned you were working with a mentor. Your mentor should have explained all of this to you unless he/she just wants you to birddog deals for them to chery pick from. Perhaps you need to find out exactly what they are looking for and get these under contract subject to a buyout by your "partner". If no buy out - walk away. If a buyout you net some savings to put away for your down payment on your own property later. Repeat process over and over until you have enough to get your feet on the ground.
Real Estate Investor · Denver, CO · Member since 2010 · 33 posts · 27 votes
16y
"Perhaps you need to find out exactly what they are looking for and get these under contract subject to a buyout by your "partner".
This is where the confusion starts for me. If it isn't a good deal for me, as it appears not to be, why would my partners want to buy it out?
These offers were actually told to me by my mentor. So i figured if it was good for him, it would be good for me if I could do it solo,too.
What piece of the puzzle am I missing?
And the terms of the deals contain 10-year balloon notes. Instead of the 30 year mortgage payments. I'm not sure if that makes any difference, just a lil extra info to help.
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
16y
Originally posted by Jimmy Delcamp:
I guess I figured this is a deal because of the owner financing. The saying of "either great price or great terms", I didn't think you could get both.
You are correct. Having the owner carry 90% of the cost is going to cost you top dollar. Therefore, it may take a while for these properties to cash flow, but if they are appreciation plays, you'll find you'll make much more money there than whatever little scratch you're getting from the rent. But it all depends on what you're after. Do you need cash flow to live off of or do you plan on cashing in future appreciation and equity?
Real Estate Investor · Denver, CO · Member since 2010 · 33 posts · 27 votes
16y
Originally posted by Mitch Kronowit:
You are correct. Having the owner carry 90% of the cost is going to cost you top dollar. Therefore, it may take a while for these properties to cash flow, but if they are appreciation plays, you'll find you'll make much more money there than whatever little scratch you're getting from the rent. But it all depends on what you're after. Do you need cash flow to live off of or do you plan on cashing in future appreciation and equity?
Thanks for the response Mitch. With properties in these situations, I am looking for cashing in on future equity and appreciation. While deals that can be made for quick cash are always great, I think throwing some long term properties in my portfolio can't hurt.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
Jimmy, you said you get price or terms, but not both....that is absolutely not true, you should never look at seller financing as a concession by the seller, it is generally a benefit to the seller. He gets a higher than market rate on equity dollars based on the sale (may not be real money) he gets pays taxes on the winnings as it is received, not all that year and he is in a position to use the note to lebverage other financial transactions as well.
Always buy real estate based on the price, what it is worth to you. Never follow guru schemes to justify more than market price because the financing is included. What is the financing worth? Compoare it to a conventional loan, loan and closing costs, that is really the value of the money in your deal.
Now, don't tell the seller you can't get a conventional loan, that makes his loan more valuable! Such a benefit is a consideration to you, but only to the point of saving you loan costs and making the deal possible, but as Jon pointed out, it needs to be a good deal. Unless there is something else to the property, like potential of increased value for future sale, examine carefully what the property is worth. Good luck, Bill
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
16y
If you track down other posts by Rich Weese, you'll see that he refers to the "alligator" - that manifests in the mortgage payment that becomes difficult to keep paying.
Real Estate Investor · Denver, CO · Member since 2010 · 33 posts · 27 votes
16y
I have to thank everyone that posted here today. It has been extremely helpful and informative advice.
Luckily, the sellers tried to reneg in order to get interest on their financing. They figured they were giving me some sort of deal by financing 90% AND charging interest. Since I was aware of the already looming bad deals (thanks to ya'll), it gave me the chance to make the appropriate decision of declining their new offers.
Recap of What I have learned from this deal along with your advice:
1) Just because it is owner financing doesn't necessarily make it a good deal.
2) Owner financing doesn't justify the owners to charge FMV and Interest, thus over leveraging myself.
3) The importance of going out there and making offers and gaining the experience from it all. Bad or Good. Priceless. No guru can teach you the same thing that experience does.
4) I can see how easy it is to let emotions take over when analyzing a deal. With emotions aside, it is much easier to look at the numbers only and see if they work or not.
5) Lastly, it is becoming more and more clear why so many newbies quit before they ever start. It's easy to read a book from some guru and go to a few seminars and meetings. What's not easy is accepting the fact that in order to learn the game, you actually have to go outside and talk to sellers. It's easy to put out some half-hazard attempts at marketing and wait for the phone to blow off of the hook. And if no one calls, you can just blame it on the marketing, not your efforts. Sure, marketing is great and good, but if you don't have to courage to call sellers yourself before ever marketing, how do you plan to know what to say when they actually do respond to your ads. It's easy to get caught up doing "investor" activities that don't ever seem to produce any real results. What's not easy is facing your fears of talking to people you don't know (i.e. sellers) and not being afraid to look like a beginner. Like it or not, we as novice investors, are beginners. So why should be ashamed of the fact and allow that to stop us. What's not easy is accepting the fact that this is not a get rich quick type career.This is where it seems that many of the newbie investors start to fall off. I have only been doing this since the beginning of May, and during my time I have seen so many people come and go. They get real hyped about making tons of money, and when the real work kicks in, they disappear and move to the next get rich quick scheme that will hopefully work. I must admit, I was aroused by the idea of making tons of money as soon as I finished reading. But wait, when the first book was done being read, I found the next latest and greatest. So of course I couldn't stop with one book. Many books seemed to follow. A lot of organzing "investing" materials and looking at the MLS for houses. I was "investing" though, right? Wrong. . . Not until I stopped the webinars and closed the guru books, did I really start to understand the importance of action over knowledge. Now knowledge is key of course, BUT real knowledge is what happens from applying these techniques we spend so long learning about.
While this may have seemed to go a little off topic, rest assured there is a moral.
I know many newbies are reading a lot of the posts here. This is why I wanted them not only to see what kind of advice ya'll had given to me, but more importantly, what I learned from the advice as well. I am not concerned with whether or not these deals or past deals worked out. All I concern myself with now is getting out there and making it happen. Making the calls. Going to appointments. Making offers. Having offers rejected. Asking advice and immediately applying it. Why do I concern myself with this? As the veteran investors know, its because these are the things that produce results. When I learned and understood the 80/20 principle, I had a rude awakening. I asked myself: "If there was only one thing that I could do everyday for the rest of my life in this business, what would produce the most results?" The answer inevitably was . . . talking to sellers. We are in this to buy houses, right? And who do we buy houses from? Sellers. Now if you never talk to any sellers, how will anyone ever sell you their house? And if you never buy any houses, how can you expect to make money? It's a hard pill to swallow, I know. Moral of the story . . . . focus on activities that reward you with results.
Now that long, and drawn out story is over, I wanna thank everyone again and wish you the best!
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
16y
Jimmy,
I think a couple of other lessons in this thread are:
1. to be careful of advice that is given (look into things more closely because the advice being offered might be good for somebody else but not you).
2. be careful of partnering.
3. And I'll add that sometimes you get information here that never gets to the point of answering your original question - because learning the whole story sometimes leads to better questions! :idea:
Real Estate Investor · Dallas, TX · Member since 2010 · 449 posts · 173 votes
16y
Jimmy, I'm a newbie myself, closing on my first property myself later this month. So, I'm usually a little hesitant about posting my opinions about stuff because there is so much for me still to learn compared to the experienced folks here.
Well, I can't help it this time. Personally, I think you were misled by the mentors that you were working with. Think about it - first, they did not teach you enough that you could evaluate those properties and figure out for yourself that you they wouldn't cash flow. Second, they led you to believe that there was nothing unwise about jumping in the deep end with not one, but three properties, with no experience, and very little cash. It sounds like a whole bunch of "rah! rah! you can do it! fear is the only thing holding you back!" b.s. to me.
I'm glad that you were able to get out of those properties that weren't a good deal. From here, I'd learn everything you possibly can. There is nothing wrong with learning from more experienced folks, in fact it's mandatory in one way or the other, but take what they teach you and research it yourself, and make sure you really understand it for yourself.
Also, personally, I'd take it a bit slower - one property at a time. The way I see it is that despite all the steps I took to educate myself beforehand, I'm learning a great deal in the process of buying this first property. Once we're done, I'll continue learning as we see how it performs, and deal with the things that go into the month to month of owning a rental property. We will go into buying the second with a lot more knowledge than we did the first. So, all other things being equal (which I'm sure they won't be), there's a good chance we will make a better deal. I'm sure the same will happen between the second and third, and so on.
So obviously when you buy three at a time there's no opportunity to take advantage of this gradual learning process from one property to the next.
When I think about later on, I've got no problem with the idea of buying 3 properties at once if the deal is right - but AFTER I've learned the ropes a bit and know what I'm doing.
I'd also take some time to build up an adequate chunk of cash. For our own property, I wouldn't have felt comfortable getting started with less than double the 25% downpayment saved up. That might be overly conservative for an experienced investor, but to me those extra reserves are like an insurance policy against being a newbie with a much greater chance of making mistakes. And we're not going for #2 until #1 has been performing as expected for a while.
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
16y
Jimmy, it looks like you got some excellent advice above. I'll just share my thoughts.
IMO the deal has to make sense first and then I start looking at financing options. Financing plays an important part in the deal as well. If financing costs to much the deal may begin to not make sense either.
I believe in RE, but at this time, I would not look for appreciation in the short run. Long term I believe RE to be better than most investments and I'm quite willing to put my money there. The property must cash flow and IMO it must make a sufficient cash flow to still be positive if some of the worst case scenarios occur.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
Jimmy, your #2 above is not correct. When you buy any property buy it at a price that is right for you, that might be the FMV. As to the seller charging interest, that is a different issue.
After you reach an agreement as to what the property is worth, the price, now comes the question as to how it will be paid. Do you pay cash or finance it. If you must or desire to finance the deal the next question is how do you finance it. Now, if seller financing is an option, consider the seller financing to other financing arrangements. If seller financing is your best option, take it.
I never said the seller was not entitled to interest and to think otherwise will take you down the wrong road. The seller IS entitled to interest on the amounts financed, just as any lender would be.
I recently answered another post concerning a buyer disounting the sale price and adding the value of the seller financing and then doing a note at 0 interest. FIrst of all that is not the way to build in future interest in a sale price and secondly trying to do a deal at zero interest will certainly cause problems down the road, I listed 10 reasons not to do it off the top of my head! I guess some guru came up with that concept and it is not creative financing it's catastrophic financing. Bill
Real Estate Investor · Denver, CO · Member since 2010 · 33 posts · 27 votes
16y
Thanks for the responses everyone!
Harry,
I appreciate your advice. However, you and many others might like taking things slow, that's just not me. Regardless of the hiccups and problems I encounter from moving so fast, this is the fastest way to learn. The offers I discussed were only three of seven made this week. Honestly, the only problem I had with these was the fact that I tried to stray away from my game plan of sticking with the mentors for the first 15-20 deals. By sticking with them for the first 15-20 deals, all the finances, risk, rehabbing, etc . . will be all on them. With this in mind, I can learn while making money at an intensely accelerated pace. Now putting all your money on one property at a time to rent out may be fine and dandy for you, that just isn't me. Only regret with these offers was straying away from my objectives. Now that those have passed, I am back on track with my mentors and well on my way to where I need to be. Granted you did offer your input, I really can only take advice from the vets that have completed multiple deals. Nothing against you of course :-)
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
16y
Jimmy, happy investing. I sincerely hope your approach works the way you hope. Your young enough to make some mistakes, recover and get back into RE. Some mistakes can be quite costly. I'm sure that you will learn by using your approach and it will probably be faster.
Real Estate Investor · Denver, CO · Member since 2010 · 33 posts · 27 votes
16y
Originally posted by Charles Perkins:
Jimmy, happy investing. I sincerely hope your approach works the way you hope. Your young enough to make some mistakes, recover and get back into RE. Some mistakes can be quite costly. I'm sure that you will learn by using your approach and it will probably be faster.
Real Estate Investor · Dallas, TX · Member since 2010 · 449 posts · 173 votes
16y
Originally posted by Jimmy Delcamp:
Thanks for the responses everyone!
Harry,
I appreciate your advice. However, you and many others might like taking things slow, that's just not me. Regardless of the hiccups and problems I encounter from moving so fast, this is the fastest way to learn. The offers I discussed were only three of seven made this week. Honestly, the only problem I had with these was the fact that I tried to stray away from my game plan of sticking with the mentors for the first 15-20 deals. By sticking with them for the first 15-20 deals, all the finances, risk, rehabbing, etc . . will be all on them. With this in mind, I can learn while making money at an intensely accelerated pace. Now putting all your money on one property at a time to rent out may be fine and dandy for you, that just isn't me. Only regret with these offers was straying away from my objectives. Now that those have passed, I am back on track with my mentors and well on my way to where I need to be. Granted you did offer your input, I really can only take advice from the vets that have completed multiple deals. Nothing against you of course :-)
And no offense taken!
In the end a person has to figure out what approach makes sense to them. Obviously you've done that, so best of luck. I hope it works out for you.
By the way, just to be clear, I wasn't advocating a person sinking all their money into one property. I was talking about having a comfortable amount of reserves.