All Forum Posts by: MATT WARDEN

Honestly, I think you are creating a lot of trouble for yourself when you don't need to.

First of all, taking an interest only loan to avoid throwing away rent money makes no sense. It's almost the same thing if you don't ever intend to pay any principle before you sell, and you have the added headache of maintenance and repair risk (not to mention variable interest rate).

You could go the foreclosure route. But do you know what you're doing?

My point is that this stuff requires a lot of education. If you have no intention on getting into the REI business, you are wasting your time. Your time is valuable enough, especially when you have a business in infancy, to make renting worth while.

I know that I have been a bit confsed by this thread, because questions keep getting asked even though the answers seem largely disregarded.

That said, I dont follow the logic re: operating expenses. If it takes a 1.4M prperty to generate 8800 GOI, I would be seriously concerned that my 50% calculation wouldnt be enough. 4400/month expense estimate to maintain a 1.4M property would make me mighty nervous.

Anyway, this thread has been beaten to death. There is a wealth of info on this very topic in these forums. At this point I would suggest that the OP either take the advice or leave it. Either way, I wish the OP good luck.

Many times people find acting like they don't know the answers (or avoiding minor calculations to get the answers because they know they will get an unfavorable number) less ethically challenging than lying. If a seller responds like this guy did and he is not an absentee owner with a property on the market for a long time, I pass.

What's wrong?!

I have a great deal for you. I'll hold $200,000 of your money and give you the privilege of paying me $3600 each month.

I'll send the papers right over. (I'll even pay return postage!)

Actually, I didn't say anything about amazing income. If you can find a property that generates over $100/unit/month income, you're doing pretty damn well.

It takes a lot of work to find a property that will cash flow. When you do, you have to assume debt. The more debt you assume, the more risk you assume* (and, in some instances, the fewer additional loans you can take on). There are also closing costs to pay, and in many instances you get stuck putting money down. And this is all before you even actually own the property!

That aside, if you re-read what I wrote, I said that analysis of properties is done as if you were putting no money down. This is so you're comparing apples and apples.

But, of course, in almost all cases you want to do everything possible to minimize your down payment.

*But this risk is nothing compared to putting more money down. If you default on a loan, you lose any down payment. And you clearly think it's impossible for you to ever default on the loan. So does everyone else, and that's why I'm profiting off of their foreclosures.

As far as I can tell, every Tom Dick and Harry is in REI! Or at least it seems like it. Then they buy a property at retail, thinking it's a deal because they used some bogus expense calculation method. Or, even worse, they think that they just need to find a property where the mortgage payment is less than the rent. (It seems surprisingly common for inexperienced investors to believe that profit = rent - mortgage.)

Default on loan and enter foreclosure or just get sick of losing money, depending on how emotionally invested they are. Either way, I eventually buy at huge discount. Wash, rinse, repeat.

If the seller, who is trying to get rid of this property, is reporting that expenses are 29% of GOI, what do you think they really are?

The point he is making is that you clearly have a lot emotionally invested in this deal. We are giving you an analysis on the numbers alone and you are fighting us tooth and nail. Multiple people here, myself included, have nearly screamed in horror when you gave them the numbers. If you want to justify the purchase that badly, then why are you asking us in the first place?

(Yes, I realize you didn't ask us to analyze the property per se, but you asked for a reasonable offer price, which is absolutely tied to what will make the property a good deal, which of course requires analysis.)

Bottom line, if you are absolutely convinced that it is a good deal at 1.4M, then take it at 1.4M.

I also won the lottery the last time I played, so I figure I'll be a shoe-in for the next time I buy a ticket.

Have you seen this graph? Do you think the current market is continuing this trend?

http://graphics10.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif

You will absolutely have negative cash flow. Please make sure you have adequate reserves to handle this.

Some of the people here telling you this is a horrible (not "marginal") deal are buy-and-holders as well.

It sounds like you will buy this property. In that case, I very much hope we are all very wrong and the community you are looking at has economics so unique that it makes a hugely-negative-cash-flow property a good deal. Please be very careful, stay alert to the situation, and get out ASAP if you see signs that the advice here might have been closer to correct than you originally thought.

Good luck.

Any deal will cash flow if you put more money down! Try putting 100% down on a property. That's not the point, obviously, and that's why analysis is done as if you are putting nothing down (even if you aren't).

If you really want to do analysis with factoring in money down, you need to charge yourself at least 6% interest, because that is what you would have been making if that money were in a CD.

My friend, you are absolutely not looking at positive cash flow. You are looking at serious, serious negative cash flow in this property. I didn't even get into an actual calculation of the expected cash flow because this deal was so clearly a loser. Average monthly expenses for a rental property are 50% (some braver souls use 40%) of gross rent. Quick calc in my head... this puts you at a $4900/month loss before factoring in tax benefits.

Show up at the property to let the electrician in.

If you are looking for the corp entity to survive you, you may want to consider a C-corp, although they are not corp structure for real estate preferred by most.

Yowza! Let's do some quick math...

1.4M @ 7% for 30 years is over $9300/month!!!!

And your income is only $8800/month? Please do not buy this property! It has serious negative cash flow before factoring in taxes, insurance, and the 50% gross rents expenses. Insane!

Forget whether the math works for your area. Why would you ever buy a property like this? I don't see any angle where this could be anything but a HUGE loser.

Sorry to be harsh, but from your last response it sounds like you are not listening! No one wants to see you lose that much money...