All Forum Posts by: Justin Webb

@Mike D'ArrigoCould you explain a little more about the impound account?

@Rick Pozos , very simple but true advice. I should probably link up with a few investors locally. I might be missing something or my math may be too conservative.

@Robert Gilstrap, outstanding! I'll send you a PM. Inherently, there is risk involved with being the middle man, but you are right. If you have the means to pay for the wrap in case a buyer falls behind in their payments it looks to be beneficial. I just can't close the gap on all the small steps that have to occur to make a wrap, or make owner financing work on the back end. Its tough work but looks promising. Look forward to hearing from you. On a side note, I hope all is well there in the city with the big chicken. I'm originally from Rome.

@Greg Lawrence, Hooah! I'll send you a PM.

@Clarence M Canty, @Adrian Silva, thank you both I'll shoot you a PM.I have struggled with starting in El Paso.@Clarence M Canty I agree with your multi-family strategy. That was one of the only strategies, I found that would cash-flow. The others were flipping and wholesaling. Both are great but I'm trying to build long term collection of assets since I'm doing this part time. Also, the payoff from mortgage interest and depreciation is more appealing than capital gains and the steep tax associated with it.

Below I'll give you an example of my numbers. Please let me know if I am being too conservative or if my numbers are not matching yours. All information is based on comps I received for September-November (90 day) Bottom line up front, I would require a home at 45% ARV in order to cash flow $150-200 after factoring in PITI, CapX, Property Management, and vacancy. This does not include closing costs, rehab, or HOA. Also, this example is a monster of a house. I prefer 3/2around 1200 sq ft for investments but this is one of the average homes in the far east that seemed to sell due to its proximity to the loop. The numbers were proportional to several 3/2 1200 sq ft homes and rent averaging around 1100-1300 a month. This just happens to be the only example I didn't delete.

I can get a positive $58 cash flow if my maximum offer is 55% of the valuation. 4 Br 3 ba 2707 sq ft home ARV = 202,333. If the purchase price is 55% for $95,387 ($0 for repair costs). The Primary Mortgage is 92,523.85 @ 3.5% APR (Based off early November's rates, add .5% for today's rate) for 30 years amortized ($415 P&I monthly). Private Loan is interest only $21,140 @ 8% APR for 30 years amortized with a balloon at 10 years ($140 monthly). CMA/Comp average rent for the property is $1750. Expenses total $1035.55 monthly. ($482.23 taxes @ 2.86%, $143.31 insurance @ .85%, $175 Property Management Fee @ 10% Rent, $160 for CapX). The Vacancy Loss% is 5.75. With all that I have a NOI of $603.83 less $555.48 for both loans. Grand total of $58.35 cash flow. As mentioned above, this is how many of them work out if I remain conservative. Sure, I could skip saving for maintenance and vacancies or try my luck with increasing rent by $200 but based off the conservative numbers I tend to draw a negative cash flow with most properties. These number only get worse if I try to purchase at 70% or 75% of ARV/Valuation.

However, I remember Brandon Turner mentioning that sometimes we should be embarrassed at our offers. If that is the case, then we know we are setting ourselves up for a deal. I just thought an offer of $91,049 for a $202,333 home was more of a punch in the throat. Thoughts?

Great information gentlemen! I think I drifted a little off course and read a few over-inflated strategies from some of the Guru's out there publishing books with no substance. That's why I needed to ask the question here to see if it was a valid tactic or something to get us all in trouble.

@Rick PozosI noticed your an investor from San Antonio. Would you mind sharing a strategy you use to acquire properties in Texas that still cash-flows after P.I.T.I, property management, and capX without having to put 50% down? Property taxes typically push me over the edge so I've had to abandon El Paso. The rental market is $200 cheaper because of proximity with Mexico and the industries located here. Plus, too many houses were built between 2008 & 12 since the city was expecting more soldiers to be stationed at FT Bliss than actually occurred. I have been conducting the research to invest in San Antonio since it's the next closest metropolitan in Texas. We both know it's still quite a drive. However speaking with the chamber, there is a lot of growth and preparation occurring.

Good to know @Wayne Brooks, I just can't wrap my head around it. Let's say the investor now owns the property subject to the existing mortgage. Taxes and insurance are paid as part of the monthly mortgage payment. The investor then turns around and sells the home using owner finance. Does the new homeowner pay the taxes and insurance associated with the original mortgage through the investor using an escrow company until the original loan is paid off?

Hello BP,

I just need a little clarification on strategies using subject to. Specifically, how do you handle taxes and insurance? 

As I understand it, acquiring a property subject to the existing mortgage entails that the owner is still responsible for the lean, but ownership of the property is transferred to the buyer/investor.  The smart thing for the investor to do is pay an escrow company to ensure the mortgage remains current. As opposed to relying on the seller to pay a mortgage for a property he/she no longer owns. 

The gap in knowledge, or portion of the strategy I'm not finding, is how taxes and insurance are handled.

Some lenders collect a monthly payment that includes PITI. The taxes and insurance are deposited into an escrow account and paid annually on behalf of the borrower.

Once title is transferred, should the buyer/investor ask the seller to cancel the escrow account so that the only portioned paid is the principal and interest remaining on his or her mortgage? Would this cause any issue with the lender?

I suppose cancelling would be the correct way to do business since taxes and insurance are the responsibility of the new owner.

Let me know if I'm in the ballpark or if there is something I have missed.

Thank you.

So, this evening I had a real estate coaching session and I may have inadvertently answered my own question. Its at least one possible solution. Over the last couple of weeks I read 4 books pertaining to creative seller financing strategies that gave me some background. Then my coach while answering a completely unrelated question, sparked an idea in me. All that being said, if the seller is willing to hold the note for the property he or she is selling and willing to agree to your terms. Then you could finance the property from him or her for 40 or 50 years annualized. That will drop the mortgage payment monthly by $100-$200  depending on the loan amount. Now you might be thinking, who wants to carry a note for 50 years, especially,  if you are middle aged or older. Some might, but you can offer a balloon payment at 10, 20, 30, or 17 years. Your choice. That gives you plenty of time to pay down some  of the mortgage as well as refinance before the balance is due. On another note (pun not intended), if the seller needs the cash up front to pay off an existing loan. You could arrange for a note investor to purchase that note from the seller at closing. That way you get the deal you need, the seller gets his or her cash, and a note investor now collects interest from the note and a balloon payoff when the home is refinanced. (Sounds great in theory, but that is a lot of work for a new investor). Any thoughts?

Hi Laci, thanks for the feedback. I am impressed with your determination to hold on for that long with a negative appreciation and cash flow. With many of the properties I've examined here, all having a negative cash flow I'm sure some investors that have a decent reserve or higher tolerance for risk might still purchased due to that bottom line after filing taxes. Only reason I became aware of it was by accident. I was previously stationed here at Bliss, then PCSd to Korea for 2 years. While I was there a tenant rented my home. Overall, the cashflow was a negative $250 but I needed to do something since the house would not sell. (I'm glad it didn't or I would not discovered  real estate investing). Due to the interest my tenant was paying on my monthly mortgage, it canceled out what I owed annually on property tax. Coupled with depreciation I got all that money back plus some. WIth that said, It is still possible to make money with a negative cash flow as long as you refinance every couple of years to ensure the amount of interest being paid by your tenants is still high. It may just work out for you. However, I don't have the reserves. So at some point the roof is going to blow away in one of these sand storms, so having to wait until the tax return is deposited in my account would not a feasible plan. 

As I continue to research the market, I am starting to believe the most feasible course of action for me to venture in is flipping a few houses, in order to generate capital. I can use that to pay cash for SFRs I turn around and seller finance. The notes would be a passive income stream or instant cash out when the buyer decides to refinance. Like you, I'll probably have to invest in another state until the rental market strengthens if I want to buy and hold.

On a second note, that is great to hear how refinancing worked out for you. Although you acquired additional debt, I think back to Robert Kiyosaki and Dr. Dolf de Roos's explanation of good debt your tenants are paying for you. Eventually you can cash out on what they paid and put that in your pocket. Lol, as long as you don't over leverage yourself.

@Adrian Silva, Great resource! I didn't know a company like this existed here in El Paso. 

@George P. , great question upfront. Yes, I agree. Typically a 3k house is way more home than many investors would want to deal with. Especially as you mentioned, cost to rehab/update. However, the particular area I'm interested in caters to the interest of military tenants from Ft. Bliss. A little background on their demographics show they are interested in these 3-4 Br homes based on many factors but location convenience, size and rent price are factors. A large majority of the military tenants are "senior" in position. The privates through Sergeants typically reside on post unless married. However the majority of Staff Sergeants and up, warrant officers, and company grade officers live off post in these areas. Their allowance for housing is in the range of $1000-$2000 based on rank whether they are single or married. They may even choose to dip into their base pay for the home renting the home. Something, I did in the past. So, there is a large market to capitalize on if you can make the deal work. 

I also appreciate your second piece of advice I wasn't thinking clearly about. Yes, the tenant can pay for yard maintenance. Typically, all the grass will be dead in a year or two, however, is it really that important to have grass? Not really. 

Again, great feedback!

Thank you @George P. for checking in.

Here is one of the better examples where I can get a positive $48 cash flow if my maximum offer is 55% of the valuation. 4 Br 3 ba 2707 sq ft home ARV = 202,333. If the purchase price is 55% for $95,387 ($0 for repair costs). The Primary Mortgage is 92,523.85 @ 3.5% APR for 30 years amortized ($415 P&I monthly). Private Loan is interest only $21,140 @ 8% APR for 30 years amortized with a balloon at 10 years ($140 monthly). CMA/Comp average rent for the property is $1750. Expenses total $1045.55 monthly. ($482.23 taxes @ 2.86%, $143.31 insurance @ .85%, $10 HOA, $50 Maintenance, $25 Landscape-Home has grass, El Paso is a desert-, $175 Property Management Fee @ 10% Rent, $160 for major repairs). The Vacancy Loss% is 5.75. With all that I have a NOI of $603.83 less $555.48 for both loans. Grand total of $48.35 cash flow. As mentioned above, this is how many of them work out if I remain conservative. Sure, I could skip saving for maintenance and vacancies or try my luck with increasing rent by $200 but based off the conservative numbers I tend to draw a negative cash flow with most properties. These number only get worse if I try to purchase at 70% or 75% of ARV/Valuation.