All Forum Posts by: Michael R.

Thank you for your input @Kiersten Vance.  It seems that anything I can do for less than 10 grand could make an additional 5 or so.  That's why I'm hesitant to do things like cabinets and other big-ticket items in the hopes that the end buyer is eager to do those things once they own the home.  I also don't want to make older items stick out like a sore thumb due to something new nearby.  It's a delicate balance I suppose.  

Any of you guys who are wholetailing care to chime in on this one?  Again, any suggestions are appreciated.

The plan is to rehab/flip or just wholetail it.  Like I said, the taxes will almost double once the 2 senior citizens exemptions and 1 homestead exemption fall off which will bring my cash flow down to around $250 a month if rented.  

If flipped the lowest it would sell for is around $140k after paint, carpet, and some minor odds and ends.  The numbers would look like this:

$140,000 - $78,000 purchase price - $5000 basic rehab & holding costs -  $10,000 agent fees and closing costs = $47,000 profit before capital gains. The net gain would take approximately 12 years to make by holding it.  My ultimate goal is financial freedom through rental property, but I would rather put the profits from the sale to work on a larger property with higher cash flow.  The real question is:  Sell as is or do some strategic rehab to net a slightly higher sale price?

I finally closed my first seller-financed deal last week in a great neighborhood.  The home is a 3 bed 1.5 bath tri-level w/ 1350 sqft and a 1 car garage built in 1960.  It took 2.5 months of back and forth negotiations with the seller to finally land on a 5 year term at 6% on a 20 year am for $78,000.  I would hold and rent it out, but the taxes will double after all of the senior exemptions fall off and put an end to, what would actually be, great cash flow.

The market I'm in has been on the rise for some time now and all the schools are 8/10.  I did a considerable amount of digging over the past few months while we worked on this deal and found comps that are both reassuring and confusing at the same time.  

It seems that the sale price difference between the comps that were outdated and the ones that were fully rehabbed is around 10-15k.  Sure they sold about a month or two quicker, but my holding costs are only around $800/month.  

Below are some photos of the home I purchased and some links to the comps listed below; all within a mile of mine.  

The roof and HVAC were replaced 3-5 years ago.  The exterior paint and siding are in great shape as well.

https://www.redfin.com/IL/Crystal-Lake/201-Sunset-...

https://www.redfin.com/IL/Crystal-Lake/100-N-Cryst...

https://www.redfin.com/IL/Crystal-Lake/51-Erick-St...

https://www.redfin.com/IL/Crystal-Lake/934-Notting...

-Does it make sense to do some minor things like paint, carpet, appliances, vanities, and switch the fuses for breakers before just putting it back on the market?

-Is there even a good case for doing a full update, opening up walls, and rearranging things?  It seems like I would spend 20k to make 15. 

Any advice would be greatly appreciated!

There are any number of ways you can do this, but it's really going to depend on the deal (when you find it).  You can either:

A) Save up the 25% down (along with 6 months of PITI reserves for both properties) and go conventional on the next one.

B)  Find a seller that is willing to finance the deal to you at whatever down payment and terms you both agree upon.

C)  Cash out some equity in your current property (as long as the cash flow numbers still make sense)

I was in a similar situation after purchasing a duplex with FHA financing last year. I ended up finding another, already fully occupied, duplex this year and had to put 25% down along with showing a 2-month-seasoned reserve account with 6 months of PITI for both properties. Then, two months later, found a SFR flip opportunity and had to negotiate terms where the seller financed the deal to make it work. The same thing can happen for multi-family. You'd be surprised how many sellers, after some negotiations, are willing to finance a property to you and make for a real win-win situation. It comes down to finding the deal and getting creative to make it happen.

@Account Closed congratulations on your success!  I would also like to congratulate you on setting the record, with your last post, for the longest unbroken sentence in history. :)

@Arthur Picanco while it's possible to acquire investment properties with low or no money down I generally advise against it.  What if you purchase the property and the following week you have a $2000 repair?  Then the week after that you have another? Then you have a vacancy?  I know it's not likely, but it also isn't out of the realm of possibility either.  Having at least 3-6 months of reserves before you jump into this can give you the security you need to weather any storms that can come up and keep you in the game.  Notice that it's:

The Book on Investing In Real Estate with No (and Low) Money Down

Not

The Book on Investing In Real Estate with No (and Low) Money Period

Save up those reserves, find money as cheap as you can get it, and make as low of a down payment as you can that still fits your cash flow formula and you're set!

I'm not an accountant so take my advice with a grain of salt, but I would avoid paying such a huge chunk in penalty and taxes by doing the early withdrawal.  One option you may want to explore is taking out a loan from your 401k.  Depending on the company that services your account, you can borrow up to 50% of your vested balance up to $50,000.  You make loan payments back to your 401k account from your payroll check at generally 1-2 points above the prime rate.  It's a pretty cool option that I took advantage of to get started.  I would talk to whomever services your 401k to see what your options are.

Ok so, believe it or not, we are still trying to put this deal together.  Maybe you guys could help me with this next hurdle:

The person I have been dealing with is the property owners son.  He/his sister have taken over power of attorney for the mother since her mental health has degraded over time to the point where she cannot make conscious decisions on her own.  It's a very sad situation and an opportunity to create a win-win  since the son and daughter are tired of paying for the recurring expenses of owning a home they never wanted in the first place.  

The son (my coworker) and I have come to an agreement on the terms of the seller finance loan:

10% down

5 year loan @ 6% with balloon based on a 20 year amortization

6 months guaranteed interest as a "success fee" to the son if it's rehabbed and sold early

Now it just dawned on me that I may have put the cart before the horse here.  My question is how can the son/daughter finance the deal if they only have power of attorney and don't actually own the home?  They're just making decisions on behalf of the mother and paying the bills from their mother's account.  

@Carl M. The reason you are putting a mortgage on the property or refinancing is to create a long term cash flow asset and pull out the equity that you've created by rehabbing the property. It's called the BRRR method: Buy, Rehab, Rent, Refinance. The way this works is after you've purchased the property and rehabbed it you will have quite a bit of equity sitting in the property since it's worth quite a bit more than you put into it. At that point you will want to refinance the property for as far out into the future as you can (30 yrs being ideal) since this will increase the cash flow number you'll be bringing in each month. That extra ten years of financing from 20 yrs to 30 yrs could increase your cash flow by at least another $100/ month in this scenario. The length of time that the property is financed isn't going to matter here as much as the cash flow you pull in from the asset especially since the tenants will be making those payments for you.

The other huge advantage to this is you can either do a HELOC or a cash out refinance once the rehab is complete to pull out the equity and recycle it into another property. This is what Greg means by "not leaving equity dead in a property". If you can find another great deal after this you can essentially recycle this original equity over and over to make more down payments and build your buy-and-hold portfolio. You'll need to own the original asset for 6-12 months to take advantage of either of those equity refi options, but it can really help ramp up your acquisition rate. Since the final value of the property is $130,000 that is what your new cash out or HELOC mortgage will be accruing interest on. You have to recalculate your cash flow at that new home value number and interest rate based on the option you choose (HELOC or cash out) to make sure it still makes sense.