All Forum Posts by: Steven Noreika

Congratulations on your first deal, posts like this are very encouraging to us hopeful first time investors. Good luck.

I agree, for us I think it's a combination of lack of experience coupled with some nervousness about the state of the market in general. Good news is I don't think either of these is going to prevent us from making the leap sometime in the near future. So, we'll keep this property on the back burner for now and we'll get out again next week to check out a few more REO listings. I will update this thread again when we make some progress.

One thing that has surprised me during this process is the amount of time these listings stay on the market. Going into this, I envisioned these properties making it thru auction, then being snapped up by savvy experienced investors before they even hit the MLS (and us having no chance at anything good). I've been surprised that, out of the ~40 REO listings we've looked at in the last six weeks, none have been purchased and several have even been reduced. I guess this speaks volumes to the state of the local market right now, for better or worse (let's hope better!)

Thanks for the comments guys. My partner and I got a bit skittish about the state of the surrounding houses so we're in a holding pattern for now. We need to make a decision on this one soon, then if need be get back out and see some more properties.

I will follow up once we get off our asses and decide what to do here, and will be sure to include $ amounts for each phase as well.

So far, this experience has certainly proven what I've read to be 100% true - the learning/planning is the easy part, gritting your teeth and taking the initial plunge is much more difficult.

Great stuff here. The rehab looks great and I hope the sale goes smoothly for you as well. Please keep us updated.

OK we've made some progress on two fronts with the rehab property, so here is a quick update.

I spoke to two lenders and a broker to discuss financing alternatives, and we have settled on using a lender that was recommended by our agent. I think going into this we expected to be able to borrow enough to cover the rehab costs while keeping the down payment low as well, but after talking to these lenders that looks to be a bit unrealistic.

The two basic options we have to choose from are a construction loan or a more traditional mortgage. Here are what we see as the plusses/minuses of each (we're assuming a $180K purchase price and $20K rehab costs, for lack of better estimates at this point):

The construction loan requires 20% down but will allow us to borrow the full amount of the estimated rehab costs (and some additional soft costs as well). The downside (other than the 20% down part) is this is a much more involved process, which requires us to get estimates from our contractors beforehand, then have them reviewed and probably adjusted by the lender's contractors.

The traditional mortgage will allow us to get by on only 10% down, and it lets us negotiate with the seller to contribute a portion of our closing costs (up to 3% of the purchase price) by building them into the sale price. The downsides here are a) we'll need to come up with the rehab costs out of pocket; b) the interest rate is considerably higher (9.5%) if we only put 10% down, whereas with 20% down we'll only pay 6.5%; c) in order to take full advantage of the seller closing cost contribution (up to 6% of the purchase price), we need to put 20% down.

Right now we're leaning towards the tradtional mortgage with 10% down, as we'd like to keep our cash outlay to a minimum (especially on day one). We'll take care of the rehab and holding costs as we incur them.

Also, we were able to get out to see the property yesterday. This was the first look we'd had at the inside, and it was pretty similar to what we expected in terms of cosmetic needs (I took some pics and will post them in a few days once i upload them onto the laptop). The interior work looks doable so we were encourgaed by the visit, but here are the matzo balls hanging out there that are still making us a little nervous:

1) There was about 3 inches of water in the small basement/crawl space. There is a sump pump down there that is apparently out of order. Keep in mind that this is not usable space, and is certainly not included in the house's square footage, but is still concerning. We are clueless when it comes to this, so we'll be depending on the inspection to tell us the severity of the problem and suggest some possible solutions.

2) The half bath downstairs looks like it was pretty much torn out by the previous owners in the process of changing out an old water heater for the current one. This leaves us a clean slate there, but we just need to make sure everything is still in working order.

3) The house and yard next door looks like a war zone. Unfortunately there's not much we can do about it other than put up a fence, and even that won't really solve the problem.

The next step looks like an offer, where plan to ask for the seller (the property is bank-owned) to contribute a portion of our closing costs, pending an inspection. Hopefully, the inspection will cure some of our concerns about the project and we can move forward from there.

I will update with pics early next week. In the meantime, please fire away with any questions, criticisms or comments.

I agree 100%. Especially since we will be using our personal savings and/or personal LOC's for our out-of-pocket needs, we will require positive cash flow from any property we choose... and our wives certainly will require this as well :D

As I am new to this type of number crunching, please let me know if this doesn't make any sense --> I am using the cap rates above as a guideline to tell me if the rental will cash flow. Assuming the same financing arrangements for each property (10% down, 90% financed for properties in the same general price range), wouldn't comparing at the cap rates be a quick and dirty way to estimate the cash flow of each? If the monthly debt service is essentially equal across all options, I think I can establish a baseline cap rate (say 7% for example) that should produce cash flow starting year 1.

Are there other cash flow factors that I'm leaving out of this? If so, I'll make sure to incorporate those into my calculations from now on.

Thanks, and Happy Thanksgiving all.

Thanks, this is a good point. I listed above only the cap rates that I would theoretically be buying at if I were to pay full price for these properties that are currently on the market. For the purposes of calculating these cap rates I am assuming 50% of rents goes toward operating expenses.

In order to attach a more realistic value to these properties I will ask the realtor for a listing of recent multifamily sales and figure out the cap rates that were applied to those sales. Then, apply an "average" cap rate based on these sales to these current properties to determine true FMV to us... if I'm following correctly.

Haha I hope you're not the only one also... although it's probably as beneficial (or even moreso) for me to put this stuff in writing as it might be for a new investor to read. I guess this is kind of my way to hold myself accountable, in the same vein as others writing down their goals and making sure to look at them every day.

To answer your questions... Yes, the property I mentioned is the one we're ready to dive into, assuming the following:

- The interior is void of any major defects that we couldn't see from the outside. We should know this by the end of the weekend, when we are able to schedule a viewing.
- We are able to get the financing we need. We'd prefer to only take the down payment out of pocket, and borrow the remaining purchase price and all the rehab costs. I will provide firmer numbers for reference next week when I have gone thru our financing options with the broker.
- The inspection goes as planned
- Our agent or contractor can give us some suggestions about dealing with the property's only major visible flaw - the house next door looks like a bomb hit it (complete disrepair, living room furniture and car parts in the backyard, etc)

We should be able to purchase the property for $180k-$185k and comps in the area have recently sold for around $260k-$270k, so we are hoping that there is enough profit built in that even if we screw up a few times (which seems inevitable to me), we can still finish in the black.

We are both handy to the point of being able to maintain our own personal residences, but in terms of running a rehab project we will be seeking all the contractor help we can get.

And don't worry about asking questions, I'm sure most of my answers seem clueless and unrealistic to more experienced investors too =)

We met with an agent over the weekend that came recommended by a family friend, who is also an agent/investor. It was a very productive meeting, as it turns out he has years of experience dealing directly with bank-owned REOs, as well as being an investor himself. So, for our purposes, he sounds pretty much perfect. Let’s hope he proves to be as valuable to us long-term as he was during our first 2 hour meeting.

So for the last few days we've been pouring thru numerous listings, most of which are bank-owned properties, some multi-unit rentals, some SFH rehabs. While our ultimate objective is to purchase and hold multi-unit rental properties, this does not look promising right now given the current state of our market. For example, here are a few of the multi-unit financial specs we've seen in our area so far (remember, these are in various states of disrepair):

List price $239,900 / Monthly rents $2,100 = Cap rate 5.25%
List price $279,900 / Monthly rents $1,500 = Cap rate 3.21%
List price $289,900 / Monthly rents $2,500 = Cap rate 5.17%
List price $390,000 / Monthly rents $3,200 = Cap rate 4.92%
List price $420,000 / Monthly rents $3,300 = Cap rate 4.71%

As you can see, unless we can find a BIG bargain somewhere, rentals just do not look feasible right now, at least until we are able to build up our capital reserve and increase our down payments.

However, we did come across one SFH rehab that looks particularly attractive. Keep in mind, going into this venture I did not picture myself as a flipper and promised myself that this volatile market was not suitable for such a project. As fun as they are to watch on TV, flipping/rehab projects always seemed much better suited for more experienced (and handy, which we are not) investors and healthier markets.

But… this property came recommended by our agent as one that had been on the market for a while and had several price reductions, as well as requiring very few if any structural improvements. My partner and I were able to drive by the property Sunday to check out the exterior, backyard, etc. and we agree that some cosmetic improvements would go a long way on this property.

Next steps - I just got off the phone with two mortgage brokers to check out our financing options, and we need to decide when to form our entity and how to handle the purchase/financing (sign individually, then transfer to the LLC looks like the way to go). We plan to schedule an interior viewing for this weekend and it looks like we should be able to get our financing in place by early next week. Then comes an inspection, and hopefully an accepted offer (which will be a considerable percentage below the list price, mind you!)

Will update next week with any progress we have made, and more details on our prospective rehab house. Keep the questions/comments coming, or please lock if too long and bloggish.

We met with an agent over the weekend and are looking thru property lists right now. We have identified one rehab that looks like it will work numbers-wise and will get out to see it over the next couple of days. I'll post some more details on the property in my next post.

The plan is to keep our full-time jobs while we get started investing on the side. We have some capital at our disposal, but not nearly enough to quit and begin investing full-time yet (I don't think in terms of experience that we're ready to do that yet anyway). Down the road, both of our ideal lifestyles include investing and being our own (and each other's) bosses.