What do you guys think of this deal?

Question

Here is a deal I am looking at. Would allow me to fully rehab and have some equity in the property prior to renting. I have it on a 15 yr mortgage as I am looking for the equity build and not cash flow. Let me know if you would go with this. Please see the link.

Opportunity

Thanks Derrick

Opportunity

Thanks Derrick

Nick Stoddard · Answer

I'm a newbe so take this with a grain of salt. It seems to me that your rehab cost is way too

Much for this type of property and that's killing the cash on cash return and flow.

Experts correct me if I'm wrong please

Brent Coombs · Answer

@Derrick Carpenter, you are right to allow PM Fees even if doing it yourself, and yes, that will nearly triple your net return while you continue doing it yourself, all the way up to 1.44%/y.

My point is, for that first purchase, you ARE out of pocket $73,500.

Yes, you are refinancing so that you get back all but $21k, which brings your annual return for that first property up to 3.77%.

But, if that is going to be the same story for every subsequent purchase and refinance, that seems a very slow way to turn your $73.5k into REAL money!

And having the ability to lengthen your mortgage just looks like an excuse to justify seemingly poor investment returns. UNLESS there is more equity that you spoke about forthcoming!

Derrick Carpenter · Answer

@Brent Coombs thanks for hanging in there with me.

I think I may not be explaining this well.

Purchase price: $40K (cash purchase)

Rehab cost: $30K (fund out of cash)

ARV: $85K

Once the rehab is done and is all rented, I will do a cash out refi and take a loan on the property of $49K.  This loan will pay back $49K of the $70K i put in to purchase and rehab the property.

At that point, the property would be on a 15 year mortgage and I would still have $21K of initial money and $3.5K of closing costs in the property.  The property would cash flow $37 per month with all expenses accounted for.  Additionally, I am going to personally manage the property, so the $85/month expense will not truly be going out.  I just like to factor it in incase I want to hire a property manager later on.  Furthermore, if i were to put the mortgage on 30 yr, it would take the monthly cash flow to $114/month.

thanks for the review.

dc

Brent Coombs · Answer

@Derrick Carpenter, so, are you happy with six tenths of one percent annual yield for your initial cash purchase and rehab, just to be in the property market?

Ouch! You had better HOPE that your (theoretical) equity will get you where you want to be! To recap, You would refinancing the NEXT purchase by taking out 75% of this ones new Bank appraisal ie. $63,750? In which case, you would put down on your analysis sheet that your down payment is $21,250 (because that is the amount you are unable to re-use for your next project).

Please tell me you would be wanting a much better cash flow than just $37.34/m for all your future buys - even if you are mainly hanging out for equity increases?

How are you planning those equity improvements? By buying under market value? (That's the safest way). Or by adding more value in the rehab than it costs you? (Getting riskier). Or waiting for "natural" rises in property values? (Riskiest theory of all)!...

Derrick Carpenter · Answer

@Brent Coombs good questions.  Some background as to my plan is that I am contemplating me purchasing the property for cash and doing the rehab in cash.  The analysis I am showing here is after the fact when I get the rehab done and renters in place and me refinancing it and pulling out some equity.  That is why you see the cash I need being $24.5K and my loan being $49K. If you add those together you get $73.5K needed to do the purchase and rehab.

In the end the ARV of the house would be around $85K and I would have $24.5K in the property, with equity of about 29%.  I would take the other $49K I pull out of the property do another deal.

Thoughts?

dc

Brent Coombs · Answer

@Derrick Carpenter, yes, that link works; thanks.

Surely, your "down payment" is NOT zero? Where are the remainder funds coming from that you aren't borrowing? You can't use paper equity as the reason you don't need a down payment allowance, unless your Lender is loaning you 100% of the purchase price including rehab costs, in which case all your calculations will be different.

Not the least of which is your Cash-on-Cash return...

Before I comment further, am I misreading something? Cheers.

Derrick Carpenter · Answer

'@Brent Coombs sorry didn't copy you back correctly above.

Derrick Carpenter · Answer

Thanks at @BrentCoombs   I reposted and this one should work

Here is a deal I am looking at. Would allow me to fully rehab and have some equity in the property prior to renting. I have it on a 15 yr mortgage as I am looking for the equity build and not cash flow. Let me know if you would go with this. Please see the link.

Opportunity

Thanks Derrick

Opportunity

Thanks

Derrick

Brent Coombs · Answer

@Derrick Carpenter, that link was not accessible (maybe not allowed by BP)?

Can you please instead, write the figures down for a generic analysis? Cheers...