Can I get some opinions please

Question

There is a foreclosure that I have been looking at purchasing. They have it listed for $32,000. Repaired and updated it’s probably worth about $60000 - $65,000. I made offers at $25,000 and $27,000 but the realtor handling the house, immediately said that the bank would not even look at an offer under $29,000. I made an offer on a house for $29,000 and it was accepted. I have a 10 day inspection period, so I hired a home inspector to look at the house. After the inspection it looks like the house needs 9 – 10 thousand dollars of work, if I do all the work myself. I still like the house but would feel more comfortable paying a few thousand less. My realtor is a friend and is fairly new. I asked him his opinion on trying to use the home inspection to get a better price. He said he called the bank’s realtor and they said they would not do any concessions. I still want to negotiate even after the offer was accepted because it needs so much work. Is this bad business of me? I only have a couple days left and I haven’t paid any earnest money yet, but they want it. Does anyone with experience have any advice for me? The house has been on the market for 50 days when I put the offer on it. Thank You

Michael Rossi · Answer

Ryan,

I'm not saying that all expenses are applicable to all properties all the time.  Quite the opposite.  What I'm saying is that it is impossible to know what expenses any given property are going to have in any given year.

The extensive damage done by some tenants is a perfect example.  Fortunately, this is infrequent, but it does happen.  I own several dozen rentals and have had damage in excess of $2,000 (materials only) occur twice.  A friend of mine recently had a tenant do $10,000 in damage to one of her rentals.  Chances are that when you only own a few rentals, you won't experience this very often, but let's look at the result.

Let's say that you buy a rental that only has $15 positive cash flow per month ($180 per year).  Things go exactly as expected for the first 5 years, but then you have a terrible tenant and he does $5,000 of damage.
In this instance, your entire profit for the entire 5 year period is wiped out and it will take you an additional 22 YEARS to make up the loss (assuming that you don't have any further losses - which is very unlikely).

Now, contrast that to someone who bought right and has a positive cash flow of $100 per month ($1,200 per year).  If the same person has a $5,000 loss, he will be able to cover all but $200 of the loss from the cash flow of the 1st 5 years.  Then, during the next 22 years, he would make $26,400 with which he could invest.  Multiply that by 50 or 100 properties and you're talking about the difference between a failed business and a successful business.

I believe that the opposite is true.  The 2% of gross rents IS possible in the great majority of markets, although that does not include the coasts and bubble areas where a lot of people live.  If you want to see where these prices exist, take a coast to coast flight and look out the window.  Flyover country is where prices are sane and great deals can be found.

I'm not saying that finding these deals is EASY in any area.  It requires knowledge, networking (I hate that term), and a lot of work.  With work, patience, and persistence you will find these deals in most areas (forget California, Florida, NYC, etc).  In addition, it shoudl be remembered that in the rental business we're not flipping houses, wholesaling, or running a business that requires doing 5 deals a month to survive.  If it takes 2 or 3 months to find a single deal, then so be it.  It is better to buy one great deal for a rental than 10 bad ones.

There are currently several posts on this site where people have bought marginal deals and paid the price for doing so.  Shouldn't the newbies learn from these instances, instead of learning everything the hard way?

I do get frustrated seeing newbies screw up things that should have been learned the easy way.  The information is available in many forms (from books, from successful investors at their local REIA, from this forum, etc).  To simply ignore the experience and advice of successful investors and intentionally make mistakes (all the while trying to rationalize it or attacking the messenger) is crazy.  Of course, that's why the vast majority of newbies fail and I guess there is little you or I can do to change that (even though we continue to try).

Mike

Richard Bader · Answer

No, I think you are just trying to get your post numbers up. Again you say "I thought expenses were only taxes and insurance". I never said I thought that was the only expenses in a rental house. You make things up. And I believe it does matter if its a good looking house in a good neighborhood, I am going for the long term appreciation. Would you prefer I want to buy a house in a crummy neighborhood just because I could get it cheaper and on paper it cash flowed for more?  I am not so sure you do this for a living.  And all that call the lawyer and stop the closing when I am not even getting that loan to purchase the house. Then after I say I am getting landlord insurance, you say if I have homeowner it will not cover a loss if I am renting. I was asking the mortgage question because I was wondering why it mattered. I didn’t need a lecture on how I committed Mortgage Fraud, and I should go turn myself into the nearest police station. Please move on and help someone else. Thanks

Kyle Gregory · Answer

mike i know you were there once and  it appears you are doing very successful. Now if i can toss my hat into the ring here, coming from a newbie going to do his first deal. Either fortunately or unfortunately me and a buddy got a small 2 family for $34k and plan on doing about $10-15k rehab by ourselves, now my partner is going to be renting 1 floor and my step daughter the other (this is where it might be unfortunate part comes in, but me and my wife are doing this to help her out)... Anyway, first, remember this is the internet . Second, for some it is a very scary venture, especially if you are starting out at the max (for my first deal i am making sure that if we get screwed over by my partner and step daughter i can do this alone) so maybe this guy is getting in up to his ears in it..Third, the best advice i  got was from a guy in the cleveland ohio area .. and just do it!!

thanks for listening
kyle

Ryan Webber · Answer

As you said a lot of people live in these bubble areas, and actually I would say the MAJORITY of the population live in these areas.  Therefore I would say it IS NOT possible in the great majority of markets.  These bubble markets do NOT cash flow even with 20% down.  You are looking at 4 or 5 cap rates in many of these markets on a retail side and 6 or 7 maybe 8 or 9 on a wholesale side.  The rents just have not appreciated like the values have.

I think maybe you are speaking without understanding how much appreciated values have affected most markets.  Now I do agree that in much of the Midwest and Texas, where appreciation has been minimal over the last 10 years, cash flowing on properties is still very doable with little or no down payment.  In these areas the 2% formula is an excellent rule of thumb (I use it myself).  And as you said Mike, it takes knowledge, networking, and and a lot of work, but it is still very doable in those areas.

Either way I think starting out, its good to get your feet wet with a small rental that is a decent deal.  Learn the ins and outs with something that won't break you.  The school of hard knocks will teach you what we're saying but I would just make sure you use the smaller rocks to knock your head on.

Richard Bader · Answer

I wanted to respond but why bother   ugh
Signed,
Newbie that is in fear and is destine to screw his whole life up in bad real estate deals.

Richard Bader · Answer

Everyone has different strategies in real estate investing. That’s why the forum is here to get different opinions. A good deal to you may not be a good deal to someone else. A good deal where you live might not be so good somewhere else. I respect your opinions but to say it’s either your philosophy or failure is ridiculous. To say “if this” and “if that” is not real world to me. Sure you got to look for the unexpected, but “if” is a big word. If your home falls in to a sink hole it doesn’t matter if you get $15 a month cash flow or $500.00.  I was just looking for some kind, experienced folks to share their thoughts, not for someone to tell me and everyone else that responded that we are all wrong and they are right. I may be frustrating and hard headed but I am a fighter and not in fear. If I was in fear I would have never bought any property and just talked about it. I don’t know anyone in my area that can buy a home for $40,000 and rent it for $800, and I want to purchase only in my area. If I can pull 10 thousand out of a property and still cash flow anything it seems good to me. Or maybe I will just learn the hard way.

Michael Rossi · Answer

Charles,

I understand what you are saying, I just don't understand the rational of intentionally doing bad deals.  Learning everything from the school of hard knocks is a sure path to failure.

When I first started my rental property business about 3 1/2 years ago, I realized that there was little room for error.  The majority of new businesses (of any kind) fail and real estate is certainly no different.  Therefore, it made sense to me that I didn't want to make any mistakes that were preventable.  To that end, I read many books and joined my local REIA.  At the REIA, I met a woman who owned about 50 rentals (which seemed like a lot at the time) and had been in the rental property business for many years.  I already knew the basics, but not the CRITICAL real world aspects of the business.  I asked her questions and considered the answers to be gold (which they were).  They have allowed me to build a rental property business with several dozen rentals in only 3 years with VERY few mistakes.  I was not able to accomplish this because I am a genius, but rather because I followed the path that other successful investors had already paved.  There was no reason for me to repeat mistakes that others had made.  There was no reason to pay too much for my properties and have an insufficient cash flow that would doom my business to failure.  Those that had gone before had already made all the mistakes and been gracious enough to tell me about them.  To have repeated those mistakes anyway would have been....STUPID and I would have deserved to fail.

That's what's so frustrating for me.  People ask questions and when they don't like the answer (because it's too hard or inconvenient), they ignore it and condemn themselves to failure.  THAT'S CRAZY!

Mike

Richard Bader · Answer

Ryan, Charles, Mike and All, Thanks for your comments. Sorry if I came across as rude. I am just learning about real estate. I bought 2 homes in the last couple years and realized how much I really enjoyed it. All I ever talk about is real estate. So much my friends get tired of hearing me telling them about property I saw and prices. I get told all the time if you buy a house and rent it you will be sorry. Or people that aren’t even buying any property will tell me, you took to long to flip that house and you need to do this next time." I also have talked too many realtors that rent homes and they have told me don’t ever rent, yet they are renting homes. I found this site and there is so much information and people listen to your experiences and want to help you succeed. It is also so interesting learning about others experiences and what they have done and what they wish they didn’t do. I set a goal to have 3 rental homes before the end of the year. I close tomorrow so hopefully I am on my way. I also started coaching soccer a couple weeks ago and it turns out the other coach with me is a real estate attorney and he has 5 homes that he does lease/purchases on. So I am going to be talking to him to learn from some of his experiences. Again the site and everyone on it has been a great help, and I wish everyone the best. Thanks so much,
Richard

Ryan Webber · Answer

Rbader, Mike can definitely be a little overly strong in his reponses, but what he is saying is right.

When factoring an income/expense statement for a rental property, you will need to factor in ALL the expenses.  I don't personally think all the ones Mike listed are necessarily applicable all the time, but I would definitely factor in maintence and vacancy.  I normally factor my maintenance and vacancy rate each at a blanket 10% of gross to take into account some other expenses that Mike mentioned like advertising and fix up.

I would put you in the neighborhood of about $40 per month in cashflow.  Again as Mike mentioned, I wouldn't categorize this as a "great" deal, but I wouldn't call it a horrible one either.  Your market will dictate quite a bit with your cash flow potential and obviously your downpayment makes a difference too.  In many markets, cash flow with no downpayment is unheard of, so doing a cash out refi and still being able to cash flow might be really good for your market.

The 2% of gross rents that Mike mentioned is normally not feasible in most markets.  Check out http://forums.biggerpockets.com/viewtopic.php?t=5201 for more discussion about this topic.

And obviously, if you are factoring appreciation, the location of the house and its appeal is paramount, but these things are not a factor in looking at straight cash flow.

In reference to claiming it as a second home when its really an investment property, again as Mike so eloquently put, it is mortgage fraud.  Now I have to say that it is very common, and most likely it won't land you in jail, but I would always recommend going the straight and narrow with these kind of things.  There are plenty of loan programs that cater to investors, and having to lie to get a house or a better interest rate is never a good idea.

Well all that said, I think we all need a good dose of Southern Courtesy. :D  Interacting with others always requires patience and understanding, and I think it would good for all of us to practice it more.

Michael Rossi · Answer

Please forget everything I said.

I simply answered your questions honestly and replied to the information that you supplied.  I used the information that you posted in my responses.  I didn't make anything up.  In the rental business, cash flow is King.  Without cash flow, the vast majority of new landlords fail in a short period of time.  I guess you'll just have to learn this for yourself.

I will do you a favor and not respond to anymore of your posts.

Good Luck to You,

Mike