All Forum Posts by: Raj Gandhi

@John M. I think the deal is a no-go if PMI is for the life of the loan. The drag on profit is just too terrible. Save for a year and then try again.

To increase your available funds, can your roommate pay 1 year up-front for a discount? Do you have a Roth IRA or 401k from which you can borrow medium-term funds? (Borrowing from your retirement isn't a very good suggestion.)

Regarding your offer, maybe initially I'd try $165k with buyer paying all closing costs, seller provides 24 months @ $10k warranty for the roof (funds held in escrow at title company), buyer puts 5% down, seller takes 15% 2nd mortgage (rate 5% @ 5 year term). This offer will not be accepted but hopefully will garner a response. Hopefully they bite on the 2nd mortgage which would allow you to avoid PMI.

For the 2nd offer, dump the roof warranty.  Increase offer to $172.5k with seller providing $5k towards closing costs.  Note the switch from buyer paid closing costs in the first offer to seller paid closing costs in the 2nd offer.  The specifics of the offers can probably use some tweaking but the point is to start with enough variables in the first offer(s) so that you have room to negotiate later.

One last tip.  Before you are serious with your offer, set a max amount for yourself.  If this is business then there must be a point where the deal doesn't make sense.  If you don't have that preset price then, invariably, their "final" offer will be $5k yours.  Then you'll capitulate because you're emotionally invested in the deal.

Can you get a cost estimate for a new roof even if you don't need it?  Regs in my area changed in the last decade and flat roofs are ridiculously expensive to bring up to code. 

If you're owner-occupying half then you're in a great spot.  Even if you make a significant mistake it will be blunted by not needing to pay additionally to live.

Insurance should be easy to quote.  Call your car insurance agent or renter's insurance agent.

Is there any way that you can avoid PMI? Ask the seller to take a 2nd mortgage? Borrow from family? What is your plan to eventually eliminate the PMI?

$14k cash to close seems high.  Offering 8% under asking seems high also; at least this is regional.  I typically end up at 8% under asking.

If fair market rent is $1750/mo then it would be very nice to achieve a purchase price of $175k (1% rule).

I needed storage earlier this year and used Google / Google Maps.  I researched the ~six closest self-storage places and appreciated informative websites.

I don't think self-storage is an impulse buy.  People that need storage can probably spend time researching.  Just make sure that you're one of the nearby results for the search engines.  Know your competition and set your pricing to hit the vacancy rate you want.

@Suzanne O'Connor 

Selling for $125k sounds unlikely because in your first post there were other properties selling for $106k.  Your terms might be better in some ways but a traditional mortgage would certainly have lower monthly payments.  Taxes and insurance will cost them an additional... $200/mo?

It isn't very good as a pure rental either; rent of $1200 and mortgage of $900 (+taxes & insurance). Monthly cash flow probably won't be enough to maintain property repairs + vacancy.

If the owner doesn't want to manage tenants then you could become a property manager.  Charge $600 per new tenant and $100 per month.  The original owner carries the property risk and has some cash flow.

I've thought about a similar question recently.  My solution addresses some but not all of your concerns. Perhaps others care to critique and augment this plan as well.

• The property is purchased with both names on title and mortgage.  Ownership is 50/50.
• Partner with cash puts up 90-100% of down payment.
• Partner without cash (with experience) has a loan from the other partner for ~half the down payment.  The loan might be 0% interest.
• Every year, the property should have some profit.  The down payment loan (partner-to-partner) is paid with those profits until paid-off.  Depending on the deal, the time frame to pay off the down payment loan is hopefully 4-5 years.

The benefit to the 0% interest down payment loan is that it lowers the barriers to entry and the partner with cash is repaid ~quickly.

First suggestion is to walk-away.

Second suggestion is to have the owner pursue a short sale.  You pick-up the property for $106k with much better loan terms, 4.5% for 30 years.

Third suggestion would be to structure the purchase as a Contract for Deed or option on the property (probably forbidden by his original mortgage).  Down payment of 5% (=$6k) + $4k rehab with three year balloon payment.  Pray for 5% appreciation on the $106k current value.  In three years, the value would be about $122k; if it isn't then walk away from the balloon payment.  Hopefully in the three years you'll have cash-flowed $10k that you had into the property.  This quasi-terrible plan seems like a lot of work with break-even returns over 3 years.

Welcome to the site!

@Matt Taschner and @Dusty Ackerman let's go with Friday 12/5 11:30 at:

Buffalo Wild Wings, County Road B2 West #215A, Roseville, MN - (open invite, just let me know to save you a seat)

(I'm a little lost with the players here.  I'm assuming that, as sales price goes up, you'll make incrementally more money.)

No, set a price where your gut is happy.  How about $385k where the bank loan is $315k and you (the seller) carry the 2nd mortgage of $77k.  Your 2nd mortgage is 5%, fully amortized (30yr) with a 5 year balloon (or whatever).

If everything goes well then great.  If not, you'll have the hassle of foreclosure.  Foreclosure isn't guaranteed, just a risk.  What's it worth to you to accept that risk, $35k+?  If you're willing then send that back as your counter-offer.  Feel free to hike-up that number; "you'll miss 100% of the shots you never take."

@Kyle H. Yes, I did numerical analysis.  I'm an engineer without real estate investment experience (at the time).  Numerical analysis / finance is my strong point.  At the time, I was able to estimate fair market using a few weeks of craigslist data that I'd been collecting.  I'd also spent several weeks looking at listings and had visited 5-10 properties.  I had a contractor bid on the rehab before I put in my offer.  Ultimately, everything took longer and cost more than planned but I had plenty of backup cash remaining.  The project was habitable in November but I couldn't fill it until February, just due to MN weather.  Those holding costs aren't explicitly included in this analysis.  Roughly:

• Purchase price $70k
• Rehab: Estimated $35k, Actual $50k
• Rent: Estimated $1320/mo, Actual $1400 (was able to raise the rent to $1500 within a year)
• After Rehab Value: Estimated $120k, Actual appraisal $150k
• Estimated Cash on Cash 10.3%; Actual = ~infinite (because the loan was for as much as I had into the property)

During my analysis, I was evaluating the estimated CoC in relation to other investments (bonds, stocks, stock options). 10% is an okay number but not really better than the stock market. My backup rationale is locking-in fixed rate debt with an asset that can appreciate and rents that can go up, both faster than inflation. Therefore, the 10% is a low-end number with a higher upside potential.