Investor · La Crosse, WI · Member since 2023 · 9 posts · 5 votes
Hey all,
A deal has recently fell into my lap. It is a land contract for 180k with a 10 year balloon, 15k down, 4.75% interest. Its a 2 bed 1 bath in a area of town built around the 60's. P&I would be around $860, $200 for taxes, and $65 for insurance. Monthly cost of $1125. Rent would be around 1450-1500 for gross cashflow of around 350-375.
I am currently 20 years old and just purchased my first duplex in July so I am sort of tight on money. I like the deal however the house is priced high for the area. The highest comp I can find in the area is around 165k. Additionally, I could get half of the down payment financed by the seller at 6% for 6 months. (Just an option)
What is everyone's thoughts on the deal? I will need to borrow most of the down payment as I am tight on money but the house has a brand new bathroom and waterproofed basement. Am I just excited simply for the fact that it is a land contract and not bank financing? Any thoughts good or bad are welcomed.
@Elijah Faas Congrats on your first purchase. As for this deal, a couple things to consider.
1. Do you have the reserves necessary or access to $ for your current duplex if issues arise?
2. Did you factor the downpayment $ financed by the seller into your payment? That lowers the cashflow significantly if you took that option.
3. Have you done anything to look for other deals? Driving for dollars....I'm sure if you spent some time looking for deals, you may find a better one.
4. I recommend you pass for the following reasons:
a. you don't have the cash to handle an emergency..i.e. HVAC system goes out, roof, hot water heater replacement.
b. The house is overpriced.
c. Who finances a property at a lower interest rate than a bank? In theory the owner is making money at 4.75% instead of letting the money sit in the bank, but when you factor the tax implications it'd be a break-even at best. Check w/ a few hard money lenders to see what their rates currently are for comparison.
All "deals" aren't deals. Walk away from this one, get your financial position on a good foundation then buy your next deal.
So, how you attack real estate is all about what your goals are. Most, if not all, have the goal of scaling. Scaling their portfolio, scaling their flips, scaling the amount of projects they can do at one time.
Scaling takes opportunity and know how. When you have those two ingredients you can scale till the cows come home.
You're twenty, I mean you are way ahead of the game already. You stick with this for ten years and at thirty you should be nice and set up already.
Moving the money around, in and out of deals and knowing what kind of deals and what kind of markets is so key early on. You do not want to be in any capital intensive deals that have a chance to drag on and on. Buy Box from 60k - 90k, 30k - 50k rehabs, 60 day projects tops and make 25k - 40k on a flip. Those deals require laying out 20k - 25k for a few months and then get your money back with some profit. I have all my new investors start there and do three just like that. Learn the process, live through the life cycle a few times, survive some ups and downs, fail in some problems so you know what to do next time, suffer through not so good loan terms, and in the end make some money. This is how you acquire the know how. You keep going through more and more deals sharpening your understanding of the relationship financing has with scaling and how to use financing to scale.
Too many times I think people drown because they are just laying out all their capital to finance a project that is way above their head in terms of capital infusion and level of difficulty.
I always make sure I have inventory of those starter projects for my people. It's always good to be in a project that will take 100 days from close to close. You can squeeze three of those in one year even at a 1 at a time pace. You're not gonna kill it, you'l gross 100k, but you'll start racking up the experience, the know how, the confidence. It's easier and easier to find financing once you have 8 - 10 under your belt.
Think about it, if you look to get into capital intensive, rehab extensive projects then getting to 8 - 10 under your belt will take forever. You'll learning curve will be slower. You're risk of losing money increases, it stymies growth.
But if you start with the buy-box I describe then you can be a 10 in 2,5 years given you start doing two a time maybe second half of year two. Now you have the best rates, now anybody will throw you 90% leverage and now at 90% leverage you can step up to the next buy box. Purchase price 120k - 150k, 80k - 100k rehabs ARVs of high 300s maybe 400k. Now who is ready to scale? Who knows how this all works and has set up a pipeline of inventory to be sent their way? You have, that's who.
Learn small, execute big. Don't learn on big deals. There's plenty of markets in this country that have great growth in home appreciation, inventory of homes, and entry point is 60k/70k. I know cause I opened three of them for my guys. I'm doing a first deal for a BP'er right now. 60k purchase, 50k rehab. Lender's appraisal came back 165k. He's not gonna kill it, but he'll make 35k I figure and not be a 0 any longer. We are already talking about what his second deal should look like.