All Forum Posts by: Michael Dorgan

You describe something similiar to a sandwich lease where for all intents and purposes, the person in the middle is a broker and can get in trouble as such if you aren't licensed and things go way bad. The true owner gets all deductions. You get a markup as long as everyone keeps playing, and the final buyer hopefully ends up able to convert the option and purchase.

Of course, the more moving parts in the machine, the more points of failure.

You're talking about selling on a wrap. This does happen quite a bit on the commercial side from what I hear. Not ever done one nor have I heard of doing it in residential. I'll defer to others more knowledge for that.

My conern would be the spread you can charge. You aren't going to get an investment loan for under 6% and probably not even under 7% (unless you buy with owner financing.) Then, spreading up to 9.5% means you are marketing to people with poor credit meaning you will have a ton of defaults.

The truth is, you are going to make more yield on the price diference between your purchase and sales price than on your interest rate. In other worlds, even if you charged the same interest rate you were paying (or less even), you'd still be coming out ahead due to your price mark-up.

Then there's actually finding a property that you can make that kind of spread on. :)

Same thing. Use which ever term the buyer/leasor is familiar with.

Leverage, the double-edged sword. Here's a scenario to lok at. Buy 10 properties, 10% down and sit on them, or buy cash and keep buying until you get to 10.

Why buy 10 properties with loans:
Any appreciation is multipled by 10 meaning you can make a killing if properties go up in value at all.
Rent increases are also multiplied by 10. In fast rent rising areas, it can make sense to leverage hard.
More depreciation write-offs from day one.
More properties means less chance of all properties going vacant at once making it easier to plan for it.
It's sexier owning all those properties up front (I guess) :)

Why buy for cash more slowly:
Properties that go down in value will not put you in a situation where you cannot sell and/or have negative networth.
You'll have cashflow from day 1. This makes it SO much easier to do things correctly when things break and people leave.
You won't have to pay loan fees on the way in and quite likely will be able to negotiate an all-cash discount.
You can later sell on a simple note for a premium. Cash allows flexibility.
Your properties will show up as large assets as far as lenders are concerned for future business. Having properties heavily mortgaged scares lenders away (rightfully so)

So basically, buying with loans allows you to increase you networth much quicker if properties are appreciating in equity (forced or not) or cashflow. If you are buying in an area with no appreciation nor rent increases, then why are you buying? You'd better be purchasing a lot of equity coming in the door or your cash may be better off in a CD somewhere.

Buy Lonnie Scruggs Deals on Wheels. It's like 30 buck and its the best money you'll ever spend. It not only explains mobiles, but note buying and a number of other topics which are invaluable. I've done a bunch of deals up here in Wa and am very happy with the results.

If you want to go the complete LLC route, keep in mind you will be paying commercial loan rates and terms which are higher in rate and sooner in pay-off. Nothing wrong with that, just don't think you're gonna get a note at 6.5% for 30 years.

On the plus side, you can get some nice corporate LOCs from many businesses that will help later on when you really need the credit for larger projects. These LOCs, just like little department store cards when you were starting out, will help the business build a good credit record.

msedwick: Values have dropped 5-10% or so in the last year according to my tax records, but in terms of sales, things are pretty much flat - no increase or decrease. DoM has gone up quite a bit and grandma's old, un-updated house won't sell quickly nor for full price, but houses fixed nicely seem to move fine. On the plus side, rents are stilll rising quickly.

Primo:My favorite? I got a lot of personal satisifaction taking that 1st, preforeclosure junker and turning into a modern, beautiful looking home. Every time I drive by, I get a smile. But for consistant smiles, I think mobiles have been the best so far. The people you meet are very 'real' and down to Earth. The park managers can smell BS from miles away and the people I buy and sell to are genuinely grateful for the service I provide. Very few people actually want to rent if they have a choice. I give them that choice and it doesn't take all that much cash/time to do so.

I've done 1 REO - my 2nd flip attempt. Did it 3 years ago in the height of bubble-mania up here in W.Wa. Boy did I learn alot :)

Found it via a realtor I was working with, listed for under an hour as a 3/2 colonial for 190k. We went and looked at it. It was actually a 4/2 (on septic for 3) that had only surface cosmetic issues and would be worth 220k arv. We put an all cash offer of 170k with only an inspection clause (3 days) in place, which in hind-sight was far too good an offer. The next day, they said they had another offer and wanted us to raise ours. We declined. The next day, they countered at 180k and we said we would stand pat at 170k. They accepted. Yeah, sort of.

So, we had the place inspected and it turns out there was a fairly major pipe-leak in the up-stairs bathroom. We told the bank and they actually offered to fix it for us in place of lowering the price. Sweet I thought. They had it fixed in under a week and we closed. Spent roughly 1 month doing cosmetics (I didn't really know what I was doing, but I was learning.) and roughly 12k on patching drywall, painting, new carpet, re-graveling the driveway, and landscaping/stump removal. Tried to sell for 6 weeks as a lease option without gettings even a nibble (didn't know how to advertise well either.) Listed it with my Realtor for 220 and sold it a month later for 210k. A very thin, lame deal.

It gets worse though. I let the buyers move in 2 days early on a lease to allow them a place for their stuff due to their previous lease being up before close. Dumb. It turns out the bank actually had not fixed the leak in the wall, but had just cut the old drywall out and replaced it with new! Uh oh. Now, because I rented the place to them, I was in a bit of a bind. Luckily, they accepted a 1.5k check for the defect and said they'd fix it themselves. Now for the numbers of my "Killer" deal:

210k - 170k purchase - 12k repairs/holding - 20k closing costs - 1.5 oops check = 6.5k of profit. Woohoo party. I made bumpkins for the risk and work I had to put into the place. I did earn a lot in education though.

In poor cashflow areas, you need to buy at significant discounts and/or find ways of charging above average rent (Lease Options come to mind.) Seattle area isn't the worst for cashflow, but it isn't easy. Market prices for older 4 bd houses in my local neighborhood are around 390k. Said house rents for 1800 a month. That won't cashflow without very creative financing, a huge down payment, and/or a way to supliment rent. The good news is that rent has shot up 10% a year for the last few years up here allowing people who bought marginally to do ok by now. My remaining rental I bought for 280 (worth 340 or so at the time) and it rented for 1400. With interest rates as low as they were and 20% down, I was break even on day 1 with some equity. 3 years later, rents are 1800 a month and I'm doing fine. If I hadn't negotiated that discount on the way in (and it wasn't a great discount), there's no way I would have bought.

Do you have any local investor clubs you can attend? There's a good chance that a few people there can give you some pointers for your area and help you out. When I'm doing a rough guesstimate when walking through a house, I use the 5k rule.

5k to fix/update any major house component. Half that for a minor componet.
5k to cosmetics (carpet, floor, paint, fixtures & covers, minor landscaping)

So a cosmetic fixer that needs a bathroom would be 5k to spruce up and 5k for the bathroom.

A more major fixer that needs 2 bathroom updates, a new kitchen, a roof/exterior paint (they usually go hand in hand), HVAC work, redone electrical, and drywall repairs throughout would be 10k + 5k + 5k + 5k + 5k + 2.5k or around 32.5k.

Keep in mind, this is not accurate enough for a full on bid, but it gives you a good ballpark idea of where to start.

To do this for real, you need to start doing some serious shopping and comparing. Call some contractors and get an idea of costs to use them for various repairs (they will be on the expensive end of what things cost.) Go to your local big box store and jot down prices for fixtures and other upgrades. Network with some local handimen and see what they charge for things (should be MUCH less than contractor pricing, but requires knowledge on your part to not get screwed.) Talk to some carpet companies to find pricing on flooring etc. Build a list and get a feel for costs. This will also turn into a future contacts list for when you really need these people to help you out.

It takes quite a bit of practice to be able to spot many of the things wrong in a walk-thru. This is where having some experienced investor/builder partners can really help out. It also helps out to be on site watching the installation/repair jobs for the first few times. When you see how simple some of the things can be, you'll be in a better position when you negotiate a bid next time (or perhaps do some of it yourself.)