All Forum Posts by: Josh Young

 Not all new build communities sell to investors, but some/most do. Things to consider when buying a new build are appliances, fans, blinds, and back yard landscaping; sometimes we can get appliances included, it just depends on the situation. Back yard landscaping is usually the biggest expense at $5-6k for artificial turf and rock, but doing this sets you apart from the others. The best thing about a new build is the capital expenses and maintenance and repairs will be minimal for many years.  

Mesa is a big area and can vary a lot depending on the neighborhood. I personally wouldn't buy an old home as a rental, I only buy 1980 or newer for myself, all of my properties are in the north part of Gilbert built between 1985-2003. I buy homes as a primary residence with 5% down and move into them keeping my previous as a rental and the area that I live doesn't have new builds that would work for us, otherwise I would buy a new build. 

If I had $100k to buy an investment property and wanted at least break even on cash flow I would buy a new build in Casa Grande. If I didn't mind being a little negative on cash flow then I would buy in Gilbert. The cash flow that you need to achieve should be based off the rest of your portfolio and your financial situation as a whole. I personally focus more on appreciation, but if I wanted more cash flow I would definitely go to a fringe area and buy a new build rather than going to an older area and buying a cheaper property.

@Nithin Kumar with a $100k to invest you can break even or be a little positive on a new build in Casa Grande. There are other fringe areas (San Tan Valley, Maricopa, Buckeye, and Surprise) where you can almost break even too, but prices will be a little higher and rent to price ratios will not be as good. If you are looking for more appreciation and can afford to cover a few hundred dollars a month of negative cash flow then I'd recommend looking at Gilbert. I live in Gilbert and own 5 rentals here, but I also help other investors find, analyze, buy and manage properties all over the valley, and Casa Grande is a top pick from some of my other investors.

Investment Info:

Condo buy & hold investment.

Purchase price: $280,000
Cash invested: $7,000

Light rehab, rent, and 30 month balloon to refinance. After 30 months I will have paid the loan down a little, forced appreciation, might have a little market appreciation and hopefully interest rates are lower in 30 months then they are now. If everything goes right I will be able to refinance and will have created 25% equity, or I may end up having to bring $10-20k to the refinance to get the 75% LTV depending on the appraisal, but even if that's the case it's still a great deal.

What made you interested in investing in this type of deal?

I own 5 other properties in Gilbert within 2 miles of this property and I'm very confident in this area long term.

How did you find this deal and how did you negotiate it?

The seller was my mentor when I first started buying rentals. He is on the other end of his career now and I've been helping him sell properties as his agent. He wanted me to sell the property for him, I knew it was paid off and I knew he didn't need the cash since I just sold a property for him a few months ago, so I presented the idea to him. I gave him 3 different seller finance options along with other options of selling the property for him and after some discussions we found a win win.

How did you finance this deal?

I paid both sides of closing costs. 100% seller finance, 5% interest, amortized over 23 years, with a balloon payment of the principle balance due after 30 months. I plan to refinance and pay him off when the balloon payment is due.

How did you add value to the deal?

Light rehab, paint, blinds, fixtures, and paint cabinets. There are already new floors, countertops, and appliances.

What was the outcome?

Just closed today.

Lessons learned? Challenges?

Giving the seller different options during the negotiations was really helpful because it let me find out what was really important to him and allowed me to make changes to my offer, so we could come to terms that worked for both of us.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

I am an agent.

@H. Jack Miller

I have not had any tenants not pay rent, but I have seen rents soften for multi family and condo rentals (roughly 5-10% decrease in rental rates). This is because so much new multi family supply has come online. I own and manage mostly class B and B+ single family homes and condos, but I have heard that evictions have ticked up in class C, that’s one of the problems with chasing cash flow is getting into class C and dealing with a tenants that are not as well qualified and higher risk of default to begin with. I think the long term fundamentals here are solid with job growth and population growth, it’s just a matter of the new supply getting absorbed which will take 2-3 years. There is much less new supply of single family homes, so the rental rates are flat to up a little; this does depend on the neighborhood though, in some of the fringe areas where there is a lot of new single family home construction the rents are a little softer. From what I see and hear the less qualified tenants are being affected the most by the economy because they were in a weaker position to begin with.

@Sean MacDonald

I think you summed it up in your observation of your clients, it's very typical here in the valley that the number of transactions will decline right before an election and then those buyers just like your clients will get back in and the number of transactions will pick back up in the months following the election. Our supply of homes for sale on the MLS has been steadily increasing for several months, so I don't anticipate that price will start to increase until later in the winter.

Right now is a great time to buy, with less competition it's a lot easier to get seller concessions to cover closing costs and interest rate buy downs.

@Ashley Anderson 

5% down payment is only available on owner occupied loans, these also have a lower interest rate. If you buy something as an investment property you might be able to get 10-15% down, but the rate isn't going to be as good, I'd recommend 20 or even 25% down if you can, but even then the interest rate is still going to be higher than it would be on an owner occupied loan at 5% down. 

You can get $1800 in rent, so it will cash flow with 25% down, it's brand new and will have no cap ex for many years. This is in a growing market, so it will appreciate too.

@Shaheen Ahmed

Check out Phoenix and the surrounding area, our prices start around $300k for a single family house and taxes are usually between 0.3 - 0.5%, I just bought a house for $620k and the property taxes are under $2k per year. New builds that sell for $300k have property taxes of around $1500, but the insurance is usually less than $500 per year.

@Ashley Anderson

Typically a HELOC and HEL are second mortgages and they can be a good way to access capital to invest, but the problem with using them is the interest rate is typically even higher than the debt you can get on the new purchase, so they might not be a great idea unless you plan to aggressively pay them down when you use them.

Why don't you buy a new primary residence using a 5% down payment conventional loan and turn your current house into a rental? If you don't have the 5% down payment then you can do a HELOC on your current house to do it, but it will at least be easier to pay back compared to a 20% down payment on an investment property. If you buy a house that's a little nicer than you are in currently then it could make moving a lot easier.

Multi-family is tough right now because a lot of new supply has come online, so rents have been soft. Rental rates and vacancy rates on single family have been a lot more stable.

@Chander Sri

Austin (and surrounding area) is in a correction, but has good long term fundamentals, so keeping it as a rental could end up making you a lot of money, it just might take a few(5-7) years. From what you said it sounds like a short term rental could be a good move, and the tax benefits could be significant if you look into the short term rental tax loophole.  I personally like long term rentals, but it sounds like the numbers don't make sense and if you cant afford to or can't justify covering that much negative cash flow then another strategy is renting by the room, that works well if you have or can convert to at least 4 or 5 bedrooms. 

I know you are probably bummed about this and feel like you made a mistake, but if you can figure out how to hold this property and buy more properties and hold them then you will end up making significantly more money in the long run; you don't build a real estate portfolio by selling.