What would be a good return on a passive investment?

Question

I have been throwing this around for a while now and just don't know the answer.

If you could purchase a home, even at 100% financing, and it would give you positive cash flow, money up front, money on the back end, and you did not have to do anything. What would be a good return?

Just so you know, I would do all the grunt work and you would just collect you share. This would be a short term investment averaging three years, then the resident will purchase the property.

I have not factored closing costs into the questions below, simply, becuase they could be really radically different. My favorite lender charges about $1000, a mortgage broker will charge a lot more.

If you could pick an 200K property at 100% financing and get at a minimum 10,000 over 3 years, would it be worth it to you?

If you could pick up the 200K property with 5% down (10000) and get back at a minimum 13,000 over 3 years, would it be worth it to you?

And not have to doing anything but sign papers and pay the closing cost. You will get some cash from the upfront money the end buyer puts ups and the may cover some if not all the closing costs.

Also, this is an equity share set up, so, you would get a share of future appreciation, if any.

I have a couple of small projects I would like to offer in the Partner section, but, want to know if this is a decent return for just using some of your cash and your credit?

Thanks, Stu

Stu Stanton · Answer

r2d246

I totally agree, buying a investment home cash out is just poor use of money.

One of the projects I'm working on right now, using 100% financing*, 0 down, closing cost about $1000 (still negotiating with seller) is projected to return $18,000 over three years on a purchase of $216,000. That would be the minimum return.

This area has showed 10% growth for the last three years, so there is the potential for the investor share of appreciation to be another $18,000.

You have the potential to get $18,000 to $36,000 back with $1000 out of pocket.

*The lender I reccomend requires two years of landlord experience to get the 100%, no PMI, 8% loan.

Matt H · Answer

The smaller your mortgage, the less money you will make. So why would anyone want to go 100% down. That's crazy. More like go 0% down, 100% financing.

Stu Stanton · Answer

Jharris,

Interesting reading, but far from my business model. And, that kind of activity is what makes it hard for the honest working people to get past the damage done.

BTW: If any of those empty properties has a swimming pool, I have an end buy in wanting a place in Houston. I may be able to help out one of those investors. If I can get past your reservations, I may be able to help more. No sense in letting them stay empty.

Also, I'm not a real estate agent, property manager, or the like. The investor, the end buyer and I are all partners in this.

Stu

John Harris · Answer

But the upfront money is borrowed by the investor, right?

Sorry, but I have seen this type of deal go bad on a fairly large scale. Everyone loses except you, because you kept money from the front end of the deal.

I'm not saying that your deals will go bad, just that in my experience it can't work when the investor pays above market value for a house and tries to rent it out at a profit.

See my earlier warning on this topic.

http://forums.biggerpockets.com/viewtopic.php?t=7678&highlight=

EDIT: I don't mean to imply that you are unscrupulous. I just think the business model is risky.

John Harris · Answer

Who makes the payments when the renter leaves?

The risk is the part of the equation you left out.

Stu Stanton · Answer

No, it comes from the end buyer. The person that will purchase the property at future date. The investor gets a share of this.

The "deal" has not been explained, so how can you say you have seen fairly large scale failure. I'm more inclined to believe that I did not make myself clear enough on the original post.

I'm not sure where I stated we are paying above market price. There is a lot of research that goes into putting together a transaction such as this. In most areas properties are not appreciating and that would dictate a purchase at a discount. There are areas where they are depreciating and those need to be avoided at this time. There are a few that are still appreciating and paying near market will produce good results.

And the people in the home are not just renters, they are honestly trying to get it together to purchase the property. They know before they move in, they pay the mortgage, taxes, insurance, our cash flow, and are fully responsible for the property from the moment they move in.

I have not read your link yet, but, I will go there next.

Stu

Stu Stanton · Answer

Actually, I do, I have kept part of the upfront money to pay for replacing the end buyer should they exit, clean up as needed, and cost to eviction if needed. The investor should never have to put another nickle into this, but, as you know, there is no perfect solution in Real Estate, any thing can go wrong.

I didn't go into complete details, the message would be to long to read, I was just curious of the returns. But, your question is an important one in making a decisions on such a project.

Stu

What would be a good return on a passive investment?

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