All Forum Posts by: Aaron H.

Entirely market specific. The question is whether you have demand for that product amongst the tenant base in your area. Maybe you don't have students - do you have lots of short-term shift workers? Miners, oil and gas workers, etc.? Or something like a large base of traveling nurses/doctors that need simple accomodations on a shorter-term lease? Or is your area so desirable that people will pay ludicrous amounts for literally any accomodation (think Manhattan, Bay Area, etc.)?

Most people wouldn't choose to rent a single bedroom if they have other options at an affordable price point. So it's not going to work very well in most markets. If you're filling a specific niche where you can validate strong demand, then it can work.

1) Yes. Or if you'd prefer to work with a Buyer's agent, have them submit the offer. Or get a standard contract form for your state, fill it out, and send it to the listing agent yourself. Doesn't matter.

2) Isn't going to happen. Realtor's operate under a stringent set of licensing and ethics requirements - doing what you describe would be grounds for having their real estate license revoked.

3) No - you need an "or assigns" clause in the original contract, so this is something you would want to do in advance, not afterwards.

You can do it either way. If you're planning to flip the property and sell immediately, you could pay John back his full 100K, plus half of whatever you make in profit on the sale.

If you're holding it for a long time as a rental, John wouldn't get his money back in the short term - he'd leave it in the property, and just collect half of whatever you make in rental income, earning a return on his investment. Then, if you did end up selling it (say in 10 years), John would be entitled to half the profits (or however you structure it, you could negotiate a different split for sale vs. rents, it's all up to you).

Scenario B is how you refinance to pay off your initial investor if they don't want to leave money parked there indefinitely.

Note that you can mix and match - maybe in Scenario A, instead of John giving you the whole 100K, he just puts up the down payment (25K) and you get a bank loan to buy the property. You still get to do the deal with none of your own money, John still gets to collect half the profits and earn a return on his (smaller) up-front investment. But in that case, you've leveraged John's money with bank financing, instead of using all cash.

Scenario A: You find a house for 100K that's turnkey ready, and will generate 12K/year in net cash flow after all expenses except the mortage. The bank wants 25% down, so you have 25K invested, and then you make whatever's left over from the 12K after you pay the mortgage (let's say it's 6K left). And the bank will take 30 days to close, they require a credit report, etc.

Instead, you go to your friend John, who's a doctor and has a lot of cash but not a lot of time. You convince John to give you the 100K to buy the house (you put in no money). You'll deal with finding the house, placing tenants, managing the property, etc. In exchange, you agree to split the profit 50-50. So of the 12K, John gets 6K, you get 6K. He's still making a 6% return, and he didn't have to do anything. You're making 6K for finding and managing the deal, and you didn't have to put any of your own money in. Alternately, maybe John would rather have a guaranteed rate of return instead of equity - so you tell him you'll give him 7% interest on his 100K, plus a first-position mortgage on the property (so he can foreclose on you if you stop paying him). Now, you pay John his guaranteed 7K/year out of your 12K profit (just like you would pay a bank), and you keep 5K. If you have a bad year and only make 10K, John still gets his 7K, and you only keep 3K. You have a great year and make 15K, John still gets his 7K, you get 8K.

Scenario B: You find a distressed house that all fixed up would be worth 110K. It will cost you 50K to purchase, and 25K to renovate, so 75K all-in.

You go to the bank. The bank says "it's only worth 50K right now, so we'll only give you 75% of that, or 37.5K, and you're on your own for the rehab. We'll charge you 6% interest, and we'll take 30 days to close the loan." So now you have to come up with the other 37.5K on your own to get the entire 75K you need to do the deal.

Instead, you go to John and say "give me 75K for a year. I'll pay you 10% interest." John gives you the 75K the next day, so you go buy the house and rehab it. Now it's worth 110K. You wait a year until the bank will let you do a cash-out refinance (i.e. the bank's "seasoning" requirement). Now they'll give you 75% of 110K because it's all fixed up, or 82.5K.

Now, you pay off the loan from John, plus interest (75K + 7.5K = 82.5K), with the money you got from the bank. Now, John has his original money back, plus a year's worth of really good interest (10%), you bought the property with zero of your own money, and you have a (hopefully) cash-flowing rental that easily covers the new bank mortgage, and you still have 25% equity left in the property.

Again - you can structure a private deal any way that makes sense to both you and the person lending you the money. Some people want a share of the profits, some are happy with a fixed interest rate loan, some want points or a down payment up front, some want to fund the entire deal and are happy getting a lump sum check at the end. 

Buying negative equity for good cashflow can certainly work for some people in some situations. Like Richard said, know your situation, know your risk tolerance. And make sure you have adequate reserves.

That said, a lot of people got burned in the last crash by too aggressively pursuing deals like that - Personally, I sleep a lot better at night with a 25% equity cushion...

Fair enough - food for thought, though, if 6% is the best you can do in the area, but you've got that amount of cash to play with, look in a different market. Even if you wanted to go with something turnkey, you could do a lot better somewhere else. Check out David Greene's book on Long Distance Real Estate Investing if you want a good mental primer on getting out of your local market...

Looks pretty solid cashflow wise, but if the ARV is truly 115K, why would you put 136K all-in to buy and rehab it? You'd end up 20K under water from the get-go...

Closing costs and loan fees seem low, unless you're really paying cash. If you are, I kinda think you can find something better to do with 300K than get 6%.

Yes, you need to account for vacancy - your tenants will leave eventually, and you have to budget for those turnover costs. Your expense projections might be a bit on the low side overall, but obviously it all depends on your area, the property, etc.

6% strikes me as low, but if you're happy with that rate of return and the property is truly turnkey, then buying something is better than buying nothing.

If anything, cash flow is more important, not less - you have to account for seasonality, higher wear and tear, higher management fees, etc. If you're not cash flowing enough to handle those, you're in trouble.

The analysis is basically the same - you just have to account for a huge vacancy factor (since you won't rent it 365 days/year), much higher repairs/maintenance expenses, and higher management fees. Other than that, it's still income - expenses = profit.

The answer to all 3 is "it depends":

1) Depends on the loan terms, the deal itself, and your goals. If you get an identical loan from both, but the bank wants 6% interest and the private lender wants 8%, the bank is better. If the bank wants 25% down, won't underwrite a property that needs a lot of rehab, and doesn't like your credit report, but a private lender will fund 100% of the deal at 10%, which is better? Broadly speaking, you'll pay more for private money than a bank (both points and interest), and usually have significantly shorter loan terms. But, private lenders come with less hoops to jump through, and can be more flexible.

2) Whatever you negotiate. Every private lender is looking for something different. There's no formula - ask them what they expect, and go from there.

3) No rule - you can structure a private money deal as debt, equity, or a combination of both. It, again, is down to what you negotiate.