All Forum Posts by: Michael Clemson

if a home went into pre foreclosure 1.5 years ago and the sale is in 2 months, and the home is worth $130k, and the owed amount in the filing is $50k, what's stopping me from finding the owner and buying it for $80k so the homeowner keeps some money and saves her credit? How does this work, or am I straigt up fabricating stuff?

I'm still starting out, but from a closing costs perspective, fees will be a large percentage in relation to the small amount financed. Banks don't normally like small mortgages, but perhaps you refinance the $41k property to get the cash needed to buy the $26k property and I imagine some repair costs you've already identified. Your only out of pocket might be closing costs. Or you could see about no cost and just wrap it into the rate.

What's the market price of the two properties? Would you cash flow still if you refinanced 75% of that value?

Repairs keep things in working order and are expenses. For example, paint, replace broken glass or doorknob, fix garage door opener. Improvements add to the value of the property and can be depreciated over the life of the improvement. For more reading, go to the source: IRS Publication 527: http://www.irs.gov/publications/p527/index.html

Appreciate the responses already from experienced folks like yourselves. As a newbie, money/cash out seems unlikely -- based on list price and sales price, there's zero room for it. Diversification seems unlikely also -- she rents the SFH property across the street and has other properties in similar areas in the region.

Maybe I should phrase it differently. Suppose you have a portfolio of 10 properties of the same type in the same region. There's no real equity to get back from a sale -- you'll break even (edit: of course, I suppose some of the small down payment would of course be equity that is released). You cash flow and pay taxes each year on profit. What are the sorts of reasons that you have a property that works on paper, but you want to get rid of it anyway?

I'm looking at an apartment rental property. The numbers are great (19% cash on cash). This would be my first rental property. I still need to see it, walk through, and have an expert GC or inspector help me understand issues and years remaining on major components/mechanical.

The odd part is the owner-investor has a property management company manage it, owns a SFH rental next door (this one is a converted triplex), and has other rentals. I haven't seen a true Schedule C yet (requested), but my assumptions appear solid so far based on spreadsheets with revenue and costs.

What are the reasons investors sell properties? I'm try to figure out the catch: she is profitable and has zero involvement and is fully rented. What could be her motivation to sell? Obviously repairs could be one cause, but I expect I would discover that on walk through/inspection -- right?

Looking for caveats and reasons to walk away or reduce risk.

For owner-occupy, should OP include money saved on not paying rent to someone else in his calculations?

If you would manage it yourself, is it an option for you to manage it for your friend? You would get paid, friend doesn't have a delinquent loan. Win-win? Is the $10k in rehab absolutely required? If it's your first property, you should be focused on getting better returns so that you can go get that 2nd, 3rd, 4th property.

You're right, I forgot to factor in depreciation against taxes. in that regard, taxes are nearly eliminated. However, I also forgot to factor in equity as a cash cost but not an expense. Fixing for both of these errors, I still come out with the same schedule.

Could you explain more about your last comment, regarding conservative assumptions and inefficiencies? My spreadsheet and plan should assume worst case, so I didn't want to use "perfect" numbers. But I'm interested in how I could triple the schedule -- as you said in 5 years not 15.

I have been reading the site and other resources for a few weeks. This will be a wall of text, but I've thought this through and hope someone can check my math and assumptions about how this works.

My goal is to compare 15 years of real estate investment using a $60k base cash investment plus $12k injected personal cash per year. I am comparing it to a taxable brokerage account (since I already max my 401k and IRAs) which would receive the same base and injections. As a "model" property, I used a 4-unit property in my area selling for $225k with monthly rents of $695/unit. I used estimated costs for cleaning, utilities, property tax, mortgage interest, insurance, professional services, etc, and guessed repairs would be 2% of the property value per year. It came out about the same as using the 50% rule and adding in the mortgage. Either way, this gives me 1/3 of rents in cash flow per year. I would need to put down $60k in principal and closing costs for the first year. In return I would receive $10k in rental income or $7.2k after 28% income tax.

Using this house as the "model," I then map out future years to determine when I could buy my next property. For any year in which I would start on January 1 with a multiple of 60k in cash (from rental income plus excess personal cash), I buy another model property, using the same assumptions as the first. (I ignore inflation, since my rents and personal income will also inflate.)

According to this math, I would buy my 1st property this year, and then again in 2017, 2019, and 2021, until starting in 2023 where I buy one every year until 2029, when I could buy two properties per year. By 2030, my annual rental income for 14 properties would be $143k, or $103k after taxes. I would have over a 850k in equity. By contrast, the same cash injections and reinvestments of return on a brokerage account would have only yielded me 610k by this point. If another 15 years pass, by 2045 (at the ripe age of 60), I'd likely be done buying new properties, with a portfolio of 69 properties. Even so, at 60 I would have $4M in equity and $700k in annual rents, compared to just $2M in a brokerage account.

So, some hard truths. I didn't include management costs, but at some point, at around 5-10 properties (20-40 units), I imagine I would either need to quit my job or hire someone to help with management. This could eat some of the revenue and slow growth. By 60 in my example, I would have had 280 units -- definitely a full time job! This is napkin math, I didn't add inflation, so it's basically expressed in 2015 dollars throughout. Nor did I adjust taxes on my rental income for older properties that have less interest expense after, say, 15 years of ownership on a 30-year mortgage.

What am I missing? Do you see issues with my model assumption?