All Forum Posts by: Matthew G.

 Thanks for the insight. In recalculating at 4.4% it still yields a return of $48,400 per year on $600k equity which is an 8% return on investment? That coupled with $13k per year in principle reduction brings it to 10%. Perhaps that is not a good return for this type of investment.

I'd love your thoughts on what you look for as something that is more productive. 

Thank you everyone for your advice. That's why this forum is so amazing because you get great points of view from a variety of different backgrounds. I discovered another option to renting that could help with cash flow. Keep in mind that historical appreciation is 6-8% per year and it is the consensus with Realtors and brokers that we are in a very good up trend cycle at least in this area.

I had two other options for renting presented to me. 

Refinancing to a low interest 7yr fixed around 3% or interest only for 7 yrs. This could create up to $1k in cash flow (rent comps came in at $3,800-$4k/month) with little to no principle paid down. Assuming the property appreciates for next 3 years at trended rates there can be the expectation of $55k-$66k per year in appreciation? In this vehicle I will essentially be pulling the principle reduction out as cash flow and basing the equity increase on appreciation only instead of combining them in the last scenario without the refinance? Then sell in 2-3 years to avoid cap gains or 1091 etc. I get that this will not look good to some investors outside of southern California. 

The overall return is the same 10-14% but the money is not completely tied up in the property.

Thoughts?

Correction on the Return calculation. The 4% per year is on the total value of the property so in this case $40,000 or 4% on $1,000,00. This added to the mortgage reduction yearly amount of $13,200 totals $53,200 or 10.5% return on equity of $505K. 

I'm not sure if I'm doing the math right and would love some feedback

I'm sure this question comes up often when people upgrade to a new home but don't need to sell their existing home as a contingency. I'm looking for advice on the following scenario. 

Party decides to buy new home and is contemplating selling or renting existing home. The existing home is worth approx $1,000,000 and has a mortgage balance of $490,000. Mortgage, property tax, insurance, gardener, and pool guy run a total of $3,600/month. The home is turn key having been completely stripped down to the studs and rebuilt 2 years ago. The home is located in a beach community in southern California with higher than average appreciation rates. Based on current amortization schedule the current monthly principle reduction is around $1,100 per month.

The home has some other unique features that are rare in the area such as a private double sized lot. The owner has been told that rents for a home like this could fall into the $3,600-$4,000 per month range living little room for emergency improvements/maintenance etc. Monthly cost for property management company is $150.

For all you buy and hold investors out there would you consider renting a property like this situation knowing that the mortgage is getting paid and where the appreciation trends are at in southern California? I calculated the yearly principle reduction at approx $13,200 which is around 3% of the equity in the property. In researching the average trends for southern California beach communities in the last 20 years I found a 4% annual appreciation on average for the area. 

7% return is not amazingly appealing but I know southern California real estate plays by a whole different set of rules. 

In keeping and renting the property there is also the option of refinancing the loan which will insure cash flow but reset the amortization schedule and of course lengthen the payoff term. 

So what does the community think? Sell or Rent?

Thank you in advance for your investor feedback. 

@Matthew G. So you're buying it for $1.7, putting $300,000 into it, and hoping to sell it for $2.5? Have you figured in any holding costs, commissions, etc.?The $300k includes holding costs, not commissions.

First off, what are the specifics of the property, and how does it compare to the others in the neighborhood that are selling for $2-4 million? (size of house, lot, age, etc.) It needs to be remolded and approx 700sq feet addition to compare.

• Are those homes that have actually sold, or are they on the market? Both sold and active comps
• Were the comps remodeled or ? Yes
• Where in Newport Beach is the property? Is it on the south or north side of 55/Newport Blvd.? Port Streets neighborhood of Harbor View Homes
• Does the property actually have a Newport Beach address? Yes
• Who will do the work on the rehab, will you hire someone or is your partner a contractor too? Partner handles contractors, he is not a contractor
• Whoever is doing the remodeling, have they dealt with Newport Beach before and are you sure of the timeframes? No

I hooked up with a seasoned investor that has lots of experience flipping homes and I'm looking to do my first deal in southern California. In speaking with my mortgage broker he has a loan vehicle that will allow me to put 10% down with a loan amount up to $1.5M, no PMI, and 4% fixed interest only payments for 5 years. I found a property for $1.7M with potential (homes on same street are selling at $2-4M. City is Newport beach, CA. Estimated out the door costs approx $300k. Target selling price after rehab $2.5M

I am considering using the loan vehicle to purchase the property in my name, adding the partner to the title after the close, and having the partner pay for rehab costs. I would cover the down payment, secure the loan, and cover the interest payments. Goal is to upgrade and sell within 6 months. 

Because this is my first deal and this is an experience investor I don't mind taking on more of the risk. However, if the market goes bad and the rehab stalls for whatever reason, I am responsible on paper for the mortgage regardless if the partner is on title or not.

Does anyone have any suggestions as far as a contract etc that could hedge some of my risk in the event that an event like this does occur?

Does anyone feel like this is just too risky in general and if so have thoughts on how to change the structure?

Thanks for the information Chris. What about a scenario where I take out a mortgage in my name and pay the down payment? The other investor would pay rehab costs and I would put him on the title as an owner after closing? My concern in a case like this is if the market heads south and I'm stuck paying the loan what legal rights do I have to make him cover his portion? 

I have been looking for the right entry point to get in on my first deal. After putting the word out that I was looking to purchase a home to rehab and flip a real estate agent introduced me to a seasoned investor.

He currently owns over 200 properties and is looking to start investing in southern California. He just closed his first deal in so cal and is working on his second.

We talked about partnering up and putting capital together to acquire properties in so cal. Our target is cash purchase on $650-800k range. He asked that when structuring a deal we put the property in his name with a promissory note or lien in my name to secure my financial interest. He asked that he be in charge of the rehab portion due to his experience and we would split profits minus expenses. I believe in this scenario we would be contributing equal amounts of cash as well. 

I want to start out with a mentor and since I have capital I think this is a good opportunity to learn and win for him as well. Due to my inexperience I was wondering if anyone has any insight as to the structuring of this partnership. Am I exposing myself by allowing him to have the property in his name and me a promissory note?

I'm looking to start buying, fixing, and selling single family homes in southern California as another income source. I was planing to buy/sell 2 properties per year and maybe keep the really good ones as rentals after I get a few under my belt and find some good contractors. I'd like to make a minimum of $100k per flip (after taxes) if possible. My guess for renovations costs were $150-$300k per flip. 

I'm looking at properties in the $700k-$1.5M range. I'm also looking for the right entry point and method. Personally I'd like to put a large addition on my current home (1 kid and another on the way) but don't want to tie up $300k in my primary residence when I can invest in real estate with it. 

I was thinking of a way to enter into the residential real estate investment market and also getting my own home renovated. 

here are some of my thoughts to accomplish this: As you all will see I need mentorship. Of course this is heavily weighed on finding the right house/Realtor/contractor etc. 

Options:

1. purchase new home. Move into new home and begin construction on primary home. Move back into primary home after construction (4-6 months) and do a cash out refinance to pull out initial upgrade costs. Use that money to renovate new home purchase (4-6 months) and sell new home (after one year of ownership to avoid short term capital gains tax). Take the investment and profit and purchase my next home and repeat (without moving this time). 

2. Purchase new home and do renovation right away (4-6 months). Once completed move into newly renovated home and begin construction on primary residence (4-6) months. Once construction on primary is complete move back into primary and sell new renovated home. Take the investment and profit and purchase my next home and repeat (without moving this time).

Note about finances: 

In order to do option 2 I may run into some financial constrains with funding two renovations without refinancing one of the mortgages. My broker did tell me today however that new loan products are coming down the pipe for short term positions like this. Most recently a 30 year term with the first 5 years being fixed at 4.1% with no PMI AND with only 10% down.

A product like this would help me put less down and only pay interest on the loan (that I can write off) and use more toward renovations.

I have the means to pay for two mortgages so that is not an issue.

Just trying to find a good entry point, renovate my own home, and keep my wife happy by not living in a beat up house for 6 months. 

I am sooo open to suggestions. 

Thanks Rob.

You definitely make very good points and your questions are great at triggering objective thinking. Your expertise is clear in reading your reply. To answer your questions tax bracket is at 48%. 99% of current income is taxed at earned income rates. Some passive gains (not much) could be off set. Current yearly interest is $22K. An investor told me once to not count on the mortgage interest deduction when making a decision on real estate investing since the government could take it away. Perhaps that was not good advice. I'd say the mortgage interest deduction adds about $850 a month to the investment. Adding the depreciation would make it even better.

I didn't even consider the capital gains exemption scenario. A good estimate for capital gains on the primary would be $120-150k. My thoughts were that it was not significant enough to off set the potential to keep the property as a rental. But I may be off here? Selling the primary would also allow me to leverage and additional $230k that was put down initially. This would allow me to put over $1m down on the new property. However this seems too conservative and I think I would be missing leverage potential?

Regarding amortization schedule this is something I should focus more on as I learn and invest in more properties but the current schedule is showing principle payments at $940/month. To date there would be a 19 month amortization difference between this loan and the new one. I'm not sure how to calculate its significance to making a decision either way other than that.

Your last paragraph has a lot of layers and insight to it an I want to make sure I'm understanding it fully. This is the main reason for having a buy and hold investment strategy? Would you mind elaborating a little more for a new investor?