All Forum Posts by: Steven Loveless

@Maurice Mugabo I think @Ross Denman made some really good points, so I won't rehash anything he said. I would ask myself two questions:

1. If you do sell the condo - are you positive that you would then buy a rental, or get into the game somehow?

If no: keep it and rent it. Even if it is sub-optimal, if it is what will get you started down the RE path that you want to be on, just rent it and then make a decision later. (Talk to a CPA, but tax exemption should continue for a few years if you decide to sell it later).

If yes: Proceed to #2

2. Look at what kind of deals you have available and you could do if you sold the condo. Based on whatever metrics align with your investment philosophy (total return, CoC, $ cash flow, etc.) - including all transactional fees, interest rate differences, etc., does selling and shifting to your ideal property outperform the condo? Let your best attempt at the numbers guide your action.

@Account Closed No worries - you came across fine. I just wanted to make sure that however it is you plan to go about reaching that goal you need to start thinking of the details.

It's all fine and dandy to say "I'm gonna go find a house at 70% ARV minus repairs, flip it for a $40k profit in two months, rinse repeat." It's a whole 'nother ballgame to actually go find that deal, get your financing, execute the flip, and be able to exit with a profit. Same for buy and hold - one thing to say you can find a deal that cash flows $500 and manage it perfectly, yet another to execute.

Pick a strategy (or two or three) - and go start running through the motions over the next few days. Talk to lenders, look at properties, talk to contractors, run the numbers. Then step back at the end of those days and re-asses: will I realistically (ie with some cushion) be able to implement the strategy I chose to the level I wanted?

This is what I did - I thought it would be no problem walking into a rental with built-in equity in one of the hottest markets in the country while working a grueling full time job. After spending two months looking at the deals I could execute, I realized that I had to change course a bit - so I did. Still fingers crossed on how we will end up.

TLDR; Pick a strategy, dig into the details and actual deals available, re-evaluate. Change plan if needed, and execute.

Good luck to ya'!

According to some of the folks you will hear on these forums, there are ways to do what you want. Those folks are typically on the wholesale/flip side though, which is a high risk business. 

I'll put in my two cents (two points):

1. Do the math. Know what you need to live (expenses), how much capital and income you currently have, and find what kind of monthly return you need to fill the gap, plus grow your portfolio. To get $50k off of $60k startup capital, you basically need ~85% return on your capital in the first year. Is that possible? Sure. Gonna be risky? Yep. Do the deals you are looking at support that? Choose your strategy appropriately.

2. Be careful about your loan assumptions. I'm not a super savvy REI so don't know all the various financing, but the 20% down loan product that most people talk about is old school conventional mortgages. To get one, you need a regular income, low DTI ratio, and decent credit. Outside of that are portfolio loans, private loans, and hard money. With each of those the cost of your money will likely increase. Also, (talk to a CPA, I'm not one) your rental income typically won't immediately count for bank underwriting.

I had a similar issue this past fall - purchased my first unit in October and immediately had it on the market everywhere - Zillow/Realtor/Trulia, Craigslist, and even on the MLS. We got a few calls and showings, all of which showed well, but just had no quality applicants. Our price was below market average for the quality of unit from all of the summer rentals, but it was just slow. (Similar homes were going for $50-75 more, but I was at the higher end of the price point for the area.)

We ended up dropping the price sometime in December, and that got a few more bites but no takers. Lots of flaky people that loved it, took home applications, but then never returned them or dropped off the face of the Earth. Just before price drop we decided to open it up to Section 8 applicants - and wow... I had over 50 calls in two days. Showed the house and had to stop taking applications in the first 20 minutes. Ended up going with a S8 tenant that had a few issues (what S8 tenants don't), but overall left me pretty comfortable. We'll see how it goes as the unit has only been occupied since the end of December (S8 seems to take forever....)

Let us know how it goes - I contemplated or attempted everything that was mentioned above, it just didn't work too well. My realtor friend who helped me list it did several CMA's, and we really think it was just seasonality.

I think everyone knows the market will eventually drop - the question is just when and how much?

If you are 100% confident that it's gonna drop in the next year - you would likely already have sold and be sitting on a huge cash pile waiting for opportunities. Fact is most of us (me especially!) are horrible at timing markets.

I am somewhat concerned about the frothiness in general, but not particularly worried about my assets (only have one rental atm but including other investments as well). I'm not overly leveraged, well capitalized, and am set to weather quite a storm. As long as I can stay that way, I'll continue to buy my next property sometime next year likely.

Now - if I had ARMs or anything with a balloon I would be more worried. In that case you had better be damn sure you can handle a worst-case scenario right when that financing changes. Leverage can make you rich but it can also make you bankrupt. But with long term fixed financing, as long as you can keep the lights on recessions won't bite you; my costs will likely remain virtually unchanged.

@Zack Ellard A lot of good advice on this thread so far, and I would agree that getting rid of that debt and improving your credit score is job #1. Right now with good credit you can get amazing financing - I would bet your card/auto/student loan debt have significantly higher rates than what conventional mortgages are at right now.

One option, and I'm surprised no one has mentioned this, is can you rent your house instead of selling it? If you are looking to buy and hold, this could get you started in the game without the transactional costs of selling it and buying a separate investment property. Of course don't do this if it makes a horrible rental, but I think you still have several years to sell it with no cap gains (check with your CPA/attorney, I am neither). Use the rent to pay off all that other debt, then re-evaluate in a year.

@Anthony Caiola At the end of the day it all comes down to making projections, and then deciding if the probable upside is worth the possible downside. Those estimates are only as good as your projections though, and that is where everyone is different. I think some of the questions I posed above provide a possible worst case. I like to draw up worst case, best case, and "muted good" (think inflation rate growth, normal expenses, etc.) case scenarios and see what your personal situation looks like in all three.

I don't think you can "manage risk," everything you do has some associated risk and it is what it is - you can't change it. Your job is to make sure that your likely return compensates you appropriately for an acceptable amount of risk, and that is unique to each individual.

It sounds like you have a lot of irons in the fire. Two rentals, learning the process of landlording, a job transition, and re-finishing out a basement and garage of a new home seems like a lot to take on all at once. I cringe when I hear a lot of people talk about "creative financing." You need cash reserves. period. If you use creative financing to goose returns that is one thing. If you do it solely to get in the game, then you are likely taking on what I consider to be some extreme risk. $0.02

I am just getting started (just closed first property) but have been planning and analyzing for several years. I'm a conservative person as far as risk goes, I think most folks on this site are way more aggressive. A lot of it depends on how much you have to lose though - if you have stable high income, a young family, an already significant net worth, etc. than you will probably be more risk adverse. If you have nothing, you have nothing to lose so will probably be very aggressive. I look at it from two perspectives, both of which must pass for me to invest.

1. On a personal finance level can I cover the risk? For a home - if it gets trashed, do I have cash reserves to rehab it? Can I cover 1 year of expenses with no income? If I lose my job, can I still cover it without fire-saling assets? These are all questions that take into account my entire financial picture. I rely on cash, income, etc. to maintain the property in one of these cases.

2. On an investment level - if rents drop by 25% for several years will it still achieve what I want it to? You also have to take into account that if there is a crash that stocks, bonds, etc. will likely suffer as well (unless you are clever enough to see it coming and short the hell out of it). So I don't look at absolute return in these cases, more of "will this investment perform equal to or better than a total market type fund in a negative cycle"? I'm buy and hold long term, so I don't care about if the retail market tanks - as long as those rents keep coming in, so I underwrite purely from a rent perspective.

That's a pretty subjective question based on your personal finances and risk tolerance, so I'll just throw out a couple of things to think about:

What would happen if your rental income over the next 2-3 years is 25% lower than you are forecasting?

What would the impact be if you have to evict a tenant (or two?) within the first few months of owning your new properties?

What about if you lose your job?

Do you plan on getting any bank financing for any of these? Your lender will likely require you to have capital requirements, which sounds like you might not make.

If any of these answers make you uncomfortable, think long and hard. Are you sure you are okay using a family member as a capital backstop? How long can that keep you solvent?

I'm new to this whole game - actually closing on my first investment house this afternoon! - but I am very conservative. I have made sure both my wife and I could lose our jobs, the market could crash, and have to pay primary and rental property mortgages with no income for a year. (And that is without taking any tax hits for withdrawing from 401k's/IRAs/etc.)

Just take a look at several scenarios, and then ask - is the return worth it? If it's a once in a lifetime deal, maybe so. If not, just remember you build wealth slowly.

After having my first deal fall apart due to foundation issues - I can say it varies tremendously.

Just for an example - when I put the above mentioned house under contract, the seller had a quote for ~$6k. Okay, sounds good. Had a structural engineer come out, and he says the house is verging on structural failure - needs 3x as many piers as the original quote, including the entire interior of the house. Had two reputable 20+ yr companies bid ~$25k, with high risk for other damage occurring during the job (plumbing, brick, roof, etc.)

I have seen price quotes range from $200-$600 per pier, depending on type, quality, etc.

Turns out the original foundation quote came from a company only in the business for 3 years, giving lowball bids with supbar materials and little to no experience.

I would suggest having a licensed engineer look at it and give his recommendation, the $400 it costs could save you thousands in the long run. Also, have an experienced company do the work - lifetime warranties are worthless if the company is gonna be out of business in four years.

Sorry for the long reply, hope it was at least somewhat useful.