About to Make my First Offer.... Need Advice?

Question

Hey guys,

I've been looking a SFR (2/1 semi) out of my city for the last month and I'm seriously making an offer. But before I go into that, here are the numbers:

Ask: 83k, 20% down, reno 4k, closing 5k = total cash required 24k

rent 850

5yr fixed on 30year mortgage 272.26

5% vacancy, 5% maintenance, 10% capex, 8% PM

property tax 1000, insurance 600

Seeing a monthly CF at 216, cap rate 6.82% cash ROI 9.9%

Of course, the rent is very conservative (I can probably rent it out at 850 without doing any reno).

I believe I can get 950 and if I work on the curb appeal (corner semi), 1000-1050. Bringing my monthly CF to 289, 326, 362 respectively.

So that's what it looks like on paper. Looking at the other parts, I had an agent (we went to uni together and I trust him quite a bit based on how professional he was back then and he also invests in the area himself. He's also willing to PM for me at 8% like he does with a dozen or so properties his family owns) look at the property, take pictures and do some interviewing with current tenants for me (the tenant will be leaving at the end of this month). That said, I haven't had a chance to go see the property myself and will need to schedule a time this weekend to go see it.

My question to BP is what else should I do in order to minimize my risk? My plans right now are to see the place myself this weekend, let it settle and not let my emotions take over, and then make an offer (expecting to negotiate and will be contingent on tenant leaving) mid next week. Super excited and nervous as this will be my first investment and as a recent grad, it currently takes me half a year to make 24k (before taxes... so really closer to 3/4 year) so I definitely dont want to make any silly mistakes.

Thanks in advance BP!

Laurie Johnson · Answer

First let me say congrats!! My question is this what is your end goal? Are you an investor holding on to the property or are you looking to sell it in after rehab. The paying retail and conventional mortgage is the part the makes me worry. I started that way and quickly ran out of money and credit. The banks only give so much. Be careful. If you want to sell quickly make sure they do not have seasoning requirements and also if the property is HOA make sure you can sell quickly. Just a few thoughts.

Chungsoon Haw · Answer

@Jennifer Pereira - that was a very rough conservative approach. The biggest cost there will be the lawyer fees. Transfer tax is only 400. I will definitely make sure to get a good inspector to make sure the building is in good shape. The building is only 600sq ft 2 stories. Not a townhouse so no condo fees.

@Laurie Johnson and @Tracy Caywood - I haven't actually thought much about doing something non conventional. Maybe it's because it's my first property so I've been playing it safe... but now that you've mentioned it, time to read up about all the different financing options! Thanks for the suggestions!

Love to hear more, especially if you can rip me apart!

Tracy Caywood · Answer

I've also never been a big fan of using conventional financing to buy real estate, just like @Laurie Johnson says.  There are too many creative ways to buy houses without using your own cash or credit, even if your plan is to build a rental portfolio.  Those closing costs also look ridiculously high for an $83 mortgage. YIKES.

That plan will only get you so far, then the banks will start saying no because of your debt ratio.  BOOOOOO

Make this same seller an offer to finance it for you.  Offer them 10% down and a 15 year mortgage with no or low interest. Owners will often play the role of the bank if you ask them to. (the right sellers, that is)

Jennifer Pereira · Answer

That seems like a very low price for a semi-detached house in Ontario with only $4k of renos needed.  Make sure you get a good inspector and attend the building inspection. Is this a condo townhouse with a fee?

Your closing costs seem high, that's what we pay to close on a $300k house.  Biggest components are land transfer tax and prorated property tax.

Chungsoon Haw · Answer

Hi John,

The price is retail. I don't know how much space I'll have to negotiate.

All buildings in that area are different. There was another detached SFR that was sold for 125k last year right next to this building.

2/1 rent averages 1200. Kijiji (the craigslist of canada) has very few 2/1 properties which leads me to believe that they get scooped up quickly. However, I don't normally see any smaller semi being offered.

I will be having an inspector go through the property to verify. Majority of the 4000 is for painting, changing the floor so hopefully there is no structural damage.

Thanks for the input!

John Leavelle · Answer

@Chungsoon Haw

I am new at this too, but, here are a couple questions.

Is that the sellers asking price (retail) or your offer price?

What is ARV?  Comps in area?

What are rent comps?

Are you going to have an inspector or contractor go with you to the house to verify only $4,000 needed repairs?

Otherwise sounds good to me.  Good luck

John Leavelle

About to Make my First Offer.... Need Advice?

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