All Forum Posts by: William Donaldson

I know a lot of people that are into speculative REI - or maybe I should say where. My dad was big into speculative REI at one time and taught me a lot about the good and the bad..

You should NOT go through with this plan if you think you can make a lot of money by putting a lot of "sweat equity" into a new build - when you aren't a GC or have any construction experience! It's very hard to make money with spec investing, especially considering how banks aren't lending for this even to the most experienced investors/builders.

If you are a GC with plenty of experience, capital reserves, opportunities for loan/LOC, then maybe it could work for you. I don't think the way to get into REI or into short-term REI (flips/rehabs/spec) is through speculative building. Learn the ropes with flips and rehabs and work your way to speculation. It's a lot easier to sell a home that needs some work than a house that is half-built.

. so that would leave you with 800-450-250-100.
Thanks for the post Brian! I am worried that I am missing something here. I am not sure how you arrived at the $800 figure for operating expenses. I will break down the operating expenses section better because I think I caused some confusion.

Gross Rent: $1,600

Operating Expenses:
Vacancy (At 10% -- market rate is 3%): $160
Taxes: $100
Insurance (beyond what is covered in condo fee): $100
Expense budget (capital expenses such as roof, structure, etc. is covered by condo's insurance policy): $200
Water bill (no gas bill; electric is paid by tenant. Not even sure water bill is not covered in condo fee): $50
Condo fee: $200

TOTAL O/E: $810

At this point the only thing left to include is the principal and interest amount.

P&I: $450 (overstatement, based on 6% and higher purchase price than expected)

O/E ($810) + P&I ($450) = Cash outflow ($1,260)

Gross rent ($1,600) - Cash outflow ($1,260) = Cash flow $340

And these are with very conservative numbers. Am I missing something?

There are several basic pros and cons with each option.

[Invest locally]
Pros: Close to investments, knowledge of markets, greater control, potentially depressed prices from market crash that can rebound strongly in 5-10 years
Cons: No cash flow, only benefit is building equity, lack of diversifying

[Invest long-distance]
Pros: Cash flow, diversifying possibilities, potentially depressed prices from market crash
Cons: Virtually no control, lack of knowledge of market, distance from investments, potential unmitigated nightmares

After going over the options, I'm not really sure which one I would choose. It did teach me to be thankful for what we have in areas away from the big cities. The price range you listed in the cities buy nice McMansions here.

The interest rates are higher because you don't need mortgage insurance since it is through FNMA.

The terms will be a 12 month lease from early August-early August. Virtually all housing around here is like that for obvious reasons - how could anyone make money on 25% vacancy?

Believe it or not there are actually people that prefer to have a 9 month lease and pay extra per month (so that they really pay 12 months rent in that period) and not have a lease over the summer. Doesn't seem to make too much sense to me, but I won't fight it. How often could you get 100-125% occupancy? --- I know this is being overly optimistic, but either way I'm not losing out.

Thanks for the replies! I think I did not include enough information in my original post.

-I budgeted $2,000 per year for maintenance and capital repairs. Major capital expenses such as the roof is covered by the complex and comes out of the HOA fees. This is mentioned in $2.5k for expenses and utilities.

-John, the $5.4k you mentioned for insurance seems very high. The complex has insurance on things such as the roof and exterior and structure (in case of catastrophe). I DO need to check what exactly it covers. I was told by the property management company that all I need insured is anything inside of the walls of my unit, so the insurance should be quite low.

-Tenants pay the electric bill themselves. There is no gas bill. The water bill is not divided between units so it is either covered under the HOA fees or a separate expenses (I budgeted $500 - obviously would be low). This is another thing I need to check out.

Using this information, it should bring the expenses to below 50%. What do you think with the additional information I provided?

Brandon: I already have a prequal letter from the bank. Financing will be through the Homepath program offered by FNMA. And I do plan to buy and live in one unit and rent out the three bedrooms. It's much better than paying the $520 a month in rent that I do now!

I am in a similar situation to you. I am 20 and close to buying my first investment property. I couldn't qualify for a loan by myself because my employment history is not longer than two years and my credit score is still being born, but I did have a pretty good amount of cash saved up from my property preservation business. I sat down with my grandparents, explained the deal and the circumstances, and they will be co-signers on the loan.

I received my pre-qual letter this week for well above the price of the condo/townhouse that I'm looking at - so I'm good to go. For you I would recommend finding a FNMA foreclosure, because their Homepath financing is very attractive to an investor.* 3% down and interest rates at historical lows? Count me in!

*I am buying 4BR/4BA condo owner-occupied so I'm eligible for Homepath and also a 15 day window before investors can put in offers. I live in a college town so I will be renting out the other 3 rooms and in doing so cover my PITI, expenses, condo fees, etc. Maybe this is something you can do at your age!

Jason: Do NOT try to get into REI in a market far away from you (one hour-two hours+). Definitely do NOT get into real estate investing in Florida when you are in NYC! Like Uwe said, try other markets around NYC. Could you live outside of NYC and commute while building up your investment portfolio?

There are some amazing deals to be had where I'm from, South Carolina, but I wouldn't recommend these deals to an investor from far away! Unless you have a partner that you've known for a long time and can trust, investing out of state will be a guaranteed nightmare!

Good luck!

Unfortunately it is too good to be true.

---NOI is overstated because you are not accounting for expenses from the basics (paint, cleaning, etc.) to the expensive (roof, hvac, electrical, etc.).

---NOI is overstated because vacancy isn't accounted for. Go with a 10% vacancy number to give you an idea of lost income.

---Taxes and insurance on this duplex seem very low. $~1.2k in taxes AND insurance per year for a $80,000 property? I don't think so. I bet the taxes are also calculated based on owner-occupied (you living in one side).

---You will NOT be collecting $880 month to do nothing. Remember you will be paying principal and interest on the loan, around $450/month. This drops you down to $430 a month IF you have NO expenses EVER and you NEVER have a vacancy!! Remember the taxes/insurance are probably understated.

Based on the numbers I ran in my head accounting for vacancy, repairs, reasonable PITI, etc. it looks like you wouldn't be cashflowing too much on this property that is almost 40 years old.

The seller would have to come down a very large amount for this to be a good deal. I'd pass on this one.

I currently live in a college town that was hit pretty hard by speculation and foreclosures. The property I am looking at sold for $125-140k back in '07. The complex is around six years old and in good condition. The apartment units are 4br/ba and the townhouses are 4/br/4.5ba with a good bit more square footage and a small "porch" (concrete slab). Most of the tenants are college kids with one-year leases. Tenants pay electric. Based on comps and research, I'll include the figures I've come across for this particular apartment.

Purchase price: $75,000

Gross Rent: $400 per person x 4 people = $1,600
PI = ($450)
Vacancy: Low in this area but let's say 10% = ($160)
Condo fees (includes insurance) = ($200)
Taxes = ($100)
Expenses & Water bill = ($250)

Cash flow = $440

Vacancy was reported to me at 97% by a property management company. I live right by this complex and find this number believable. The unit I'm looking at is a flat, not a townhouse, so the purchase price will be around $62,500-$65,000 but the rent will be more like $355-375 per person. FNMA has several foreclosures and with their Homepath financing, I can get 3% down and low interest through an approved lender since I will be living at the property for at least a year.

I would love for a more experienced investor to check my calculations. Also, I know I will need a cosigner because my credit history and income history is minimal, though I did make a pretty good amount of money this past year with my property preservation business. Would a bank loan the amount to me, without a cosigner, based on the merits of the property as a commercial loan? I have no debt and about $20,000 in cash and a short-term note for $7,500 with more income possibilities over the next year with my business.