All Forum Posts by: David L.

Just a quick update to say that Fannie Mae rejected our offer. Thank you to everyone who responded here.

On to the next one!

No plans to live in it, Jesse. I have thought about the possibility of flipping it (and that would still be my Plan B), but then I figured:

1. Let's say I might clear ~$40k after realtor fees and taxes. That's awesome, but that equity's also not going anywhere, most likely. This area hasn't been an overheated market for over 8 years, so if that's a real price today for this unit once non-distressed, the price should be at least as high 1 or 2 years from now, etc.
2. If I hold the property for at least a year I'd pay tax on long term capital gains instead of being taxed at my current earned income rate. (correct?)
3. My premise for getting into REI is to create long term passive cash flow. If I take my proceeds from the hypothetical sale and stick them in a low risk non-RE investment, I might clear 3% gains, at best, taxable and with no depreciation to offset them.
4. If a good opportunity comes along after the property has seasoned, I could always have it reappraised for FMV and pull equity out, assuming I don't just sell it then.

You make a good point, but that was my thought process. If others have been around the block longer and would do differently in this situation, I'm eager to learn.

Beverly,

I would say our realtor tried to apply some light pressure to get us to raise our offer, but I agree with you that this is an investment and should be as unemotionally based as possible. If the math works, it works. If not, it's not worth it. My wife and I have been biding our time for quite a while so if we miss this one, we can wait for the next.

By the way, I grew up in Passaic County. I'm curious how you feel about the investment prospects in that area? I imagine with the relatively high property values and taxes it might be a difficult area for getting cash flow in buy-and-hold investing.

Martin,

That makes sense, considering principal paydown as part of your return, especially in tougher markets where you'll be sitting on the sidelines or doing a lot of rehab to come anywhere near the 2% rule of thumb. With conventional financing we'll be putting 20% down so our principal reduction as a percentage of our cash investment will be less than 5% according to my spreadsheet, but every bit counts. That coupled with the pure cash-on-cash return would total more than 10%, which isn't too shabby compared to other relatively stable investments. I do plan on self performing the property management in the beginning, as well, so I agree that won't be an actual cash cost, at least initially.

Thanks, Brant.

First response and you already put a couple hundred bucks back in my pocket! I found my Excel error and fixed the prop. management, so I'm now $18 shy of $1,200 cash flow for the year. I also don't actually plan on using a PM at first, so that's all additional cash to me in the beginning, but I want to budget for it so I'm not losing money if I decide to use a PM later.

I hear ya on the HOA. I never thought I'd buy another HOA property, but I'm trying to do this first deal with conventional financing and it's difficult to find things that will cash flow around here without needing significant repairs, disqualifying me from conventional loans.

I've been lurking, and listening to the podcast, for a while now and finally feel like I have something to post about. We are looking to buy-and-hold for passive income, more so than flip for quick returns.

We submitted an offer yesterday on a foreclosure condo in central VA and the seller came back today claiming multiple offers, requesting our highest and best today. The condo's been on and off the market for over a year, and continuously now for 4 months, with the asking price having been dropped $60k over that time.

The numbers:

Current Asking: $110k (just reduced by $10k yesterday)

Our Initial Offer: $90.5k

Annual Rent Less 8% Vacancy: $11.6k ($1,050/mo gross rent)

Taxes: $1,425/yr

Prop Manag. (8%): $1,260/yr

Insurance: $800/yr (?)

HOA: $1,224/yr (exterior maint. only)

Interior Maint. of Unit (5%): $630/yr (ext. under HOA)

Misc. (Sewer/Water, etc.): $700/yr

Mortgage P&I: $4,600/yr

Cash Flow Before T&D:$930/yr

It meets the 1% but not 2% or $100/door. I figured it's not a scorching hot deal, but it is in a good area and is pretty much move-in ready (new carpet and paint already installed), with only some minor touch-ups needed. Non-foreclosure units in the same complex have sold for $160k - $170k within the past 4 - 6 months, which indicated to me that 1) there should be equity coming in the door and 2) this is a really tough area to find units that cashflow.

I'm pretty much sticking to my math for the highest and best response, asking seller to pay for my closing costs and increasing my offer by about the same amount.

My questions: How do the numbers look? Did I offer too little, too much? Would you have handled the best offer differently?

EDIT: If someone can tell this n00b how to turn off the extra carriage return, I'd be happy to fix the formatting above. Thanks!