Hey @Will Harrison,
It's been a few days for the comments to come through. Are you still looking at that asset? Are you still interested in how to make a property like this work?
I read all the replies and there were basically two themes. One, you have to be nuts to overpay for a cashflow property. Two, it might work, but the numbers are so tight that you would be better off searching elsewhere. Nobody actually answered your real question!
You asked for thoughts on buying this, but would it be fair to say that what you really want to know is "how can I make this work?" I would like to suggest that there is positive solution to this, but it's not for the faint of heart. It may not work in this case, but it is designed to work in negative equity, non-distressed sale situations like this.
Do you know why the seller is selling? He has apparently conveyed to you that he's not flexible in the price, but most people are not interested in paying over 13% above market for a fixer. Worse than that lenders are usually going to unwilling to finance above 80% let alone 100%, so who else is going to buy this? Sure, someone who just loves the place and is willing to put $50k and has another $20k lying around for repairs just to bring in a relatively meager rent, i.e. a unicorn.
So, find out what moves this seller. If he won't budge on price, then GET BETTER TERMS! You've indicated that you're settling for $216 in cash flow based on a bank loan for 30 yrs. Your expense total does no match the expense you itemized, nor do your expenses include taxes, insurance and PM, so I'll estimate that they'll be somewhat closer to $1200/mo.
Gross Schedule Rent: $2680
Expense Total: $1200
Net Operating Income: $1480
Debt Service: $956
Cash flow: $524 ($131/door)
On top of that you still have to find a way to finance $20k in repairs, right?
What if you get a little creative? What if you capitalize on the seller's need to sell at above market to negotiate a lower debt service? Would the seller be willing to carry back the $170k @ 4% for say 50 years? This would drop your debt service to a much more manageable $301/mo for 600 months, which yields $1179/mo or $295/door. Does this appeal to you a little better?
"Wow! That's awesome, but I'll never be able to reach the end of a 50 year mortgage!" So what?!? Are you looking to pay a mortgage off or make money?
"But the seller won't carry back the whole amount. He needs $20k down." Cool, let's see, $150k @ 4% for 600 months works out to $265/month plus whatever your private money guy is charging. It'll bite into your cash flow some, but you'll still be in good shape.
"Now the seller is telling me to have carnal knowledge with myself! He says he'd rather hunt for a unicorn." In this case let him. You can't fix stupid!
Moral of the story, you as an investor MUST get either your price OR your terms OR both for the deal to be a deal.
I hope this is more the kind of answer you were looking for. Contact me if you're not sure about any part of this or you wanna bounce an idea around.
Cheers!!
Welcome @Joseph McGregor to BiggerPockets and real estate investing. I'd love to tell you, "just do this and you'll be successful", but that would be wrong. Anyone that offers you a "one size fits all, silver bullet" solution is just trying to sell you something. Don't put any of your money into that.
So, to offer you meaningful advice I would need to know more about what gets you out of bed in the morning. What is it about real estate that makes you want to invest? What is your own vision? Are you just in it for the money or do you have a mission? What is your passion?
What do you consider a good return on your investment dollars? Do you know how to acquire and develop OPM? How vested in your comfort zone are you? Are you willing to grow into areas that you may find uncomfortable?
Have you been listening to the BP podcasts? Have you read @Brandon Turner's book, "Ultimate Beginner's Guide to Real Estate Investing"? You really need to join Brandon for his weekly webinar as well. The point here is to determine what kind of investor you want to be and what you intend to get out of your business.
I'll be happy to help wherever I can. Feel free to contact me. I'll do my best to get you off to a good start.
Cheers!!
Hi @Gabriela Martinez, I applaud your ambition. You're starting to think like an investor. However you appear to still be influenced by the "employee think" mindset that you were raised with ("get good grades so you get into a great college which will allow you to get a good job...."). Let me recommend that you keep your mind open.
You won't need credit to start wholesaling, but if you have good credit, use it. Hard money lenders won't care very much about your credit. They will be more interested in your business model and your experience. They'll be more comfortable with a proven business model and a solid track record of success. Good thing you won't need hard money to wholesale.
You may find it quite difficult to get a HML (hard money lender) interested in shipping container homes. They're kinda weird! You'll likely find more success in mainstream homes. You're gonna wanna invest your time, money and effort into something you can duplicate over and over.
I would recommend that you keep your priorities on finding great deals and good partners, not on building your personal credit. Buying things that you can payoff over time may build your credit and credit can be useful, but you'll be wasting time. Instead, find someone you might partner with who already has the credit you need, then go do some deals.
Have you looked for REIA's (Real Estate Investor Association) in your area? They can be a fantastic way of meeting people who have the resources you lack when you're getting started. I'd look on Meetup.com for a Cashflow 101 or Millionaire Maker club near you.
You're fortunate to be starting with a little nest egg. Don't be in any particular hurry to spend it. Certainly do NOT spend it to build your credit. If you need a computer for your real estate business, then by all means buy a computer, but don't buy it just to play Candy Crush and hope that building your credit will be enough to succeed.
I would put a pin in the idea to invest in storage container housing for the time being. Once you have developed enough success you could play with the new concepts when you have enough resources to weather the risks. So, what else are you interested in?
You said that you live in Houston, TX. What great fortune. There should be a pretty good stock of distressed properties in your area. Do you know how to find a great deal? If you find a deal, do you know how to find a buyer? Do you have enough money to fund your own deals? If not, do you know how to find the money?
I'm not trying to discourage you, rather I encourage you to step out there, but with a bit of caution. Each of us starting out knows less than we need to. Many of us has paid for our education with our investment nest egg. I'd rather not see that happen you. If you'd like, feel free to contact me directly. I'd be happy to help you develop a plan and mindset that works for you. Send me a Colleague Request and we'll chat.
Cheers!!
Well....OK....I see what you mean Mindy, but the same argument could be made on any commercial property investment. Wouldn't you agree. I mean, if I'm looking to invest in a rental house, I determine the price I'm willing to pay based on comparable sales of rental housing, not on the income potential. However, if I'm investing in an apartment building, I based the acquisition price on the net operating income, not the value of the land and improvement.
Yes, I agree there is a lot of overlap during due diligence between the value of the real estate and the value of the business operating on and in that real estate whether the property is residential or commercial. Optimally we would want a terrific value on both sides of the equation.
Fundamentally, I believe the question is whether investing in self-storage is really investing in real estate. After all BiggerPockets is all about real estate investing. I would say that investing in self storage is equivalent to investing in apartments, but with tenants that are much better behaved. A similar argument could be made with assisted care facilities or strip malls, etc. Wouldn't you agree that the common thread is the role of the landlord. As long as you can claim to wear the hat of a landlord for at least part of the time while you invest, then you are investing in real estate.
Bottom line: when you invest in self storage property and end up in the self storage business then you are investing in real estate. If you're just operating a self storage business as a tenant with no interest in the real estate, then you're NOT investing in real estate.
Cheers!!
@Kenneth Sesley, it sounds like you've found a unicorn. They're pretty hard to find, so don't let go, if you can hang on.
First of all, do you have a signed purchase agreement with the owner on title? If not, get one. When you have that in hand ask the owner to call his foreclosing lender right away and ask for an extension considering that he has a buyer in hand. Often lenders will postpone by "beneficiary's request" if a sale will cover the arrearage and costs. You have plenty of latitude in you offer for that. If this is a big bank, like B of A or Chase, there may be just too little time to work through their process. (I know. I lost one in my neighborhood with just this timeline. Sigh!)
At the same time contact the trustee and ask them to postpone the auction considering that their client (the foreclosing lender) will get everything they ask for. The beneficiary can postpone or cancel the auction any time up to the opening of the bidding, so work fervorishly. There are no guarantees that you can get the auction put off, but you may as well try.
If you fail to get the postponement you need, watch the auction results. Of all the auctions scheduled for a given day about 80%-90% are cancelled or postponed for one reason or another. Often the reason listed is the mysterious "Beneficiary Request" or "Trustees Discretion". That will usually buy you another 21 days here in California.
Be ready to make good on your offer the bank is unlikely to give you a second chance.
This is the triage plan. Next time see if you can't get a little more space on your timeline. LOL
Cheers!!
I'm confused.
Is this apartment a good deal? You're structuring the acquisition, so I think I can assume that you believe it to be a good deal. However, how you structure the deal often depends on what makes it a good deal and what you're looking to get out of it. Why do you like this property?
How motivated is your seller? Is there any reason to imagine that he would entertain either of your offers? How much do you want this property? When he turns down your offers what are you planning to do next?
How are you planning to get premium rents? What does your local market look like? What kind of neighborhood is this property in? What sort of rents are you looking to collect? Have you taken vacancy into account?
What do you expect your operating expenses to look like? I do hope that you were not thinking that you just "split the rent" 60/40 after cutting out the PM fees.
So many questions come to mind. It's like Alice asking the Cheshire Cat which way to go, if you don't know where you are going, it doesn't much matter which way you take to get there. Perhaps if we could come to know a bit more about this deal and your part in it, we could offer a better opinion to your issues.
Cheers!!
How about a webinar? I live in So. Calif., so......
@Kyle Wenger, I see. So let's step through this by the numbers.
First, allow a moment for the cautionary advice. Have you considered your expenses? I mean all of them, including vacancy. What is the area like? Is this a 'C' neighborhood where ever tenant has a "sad story" and thinks that it's OK to stop paying rent if its convenient? Everyone knows about physical vacancy, but many new landlords forget to consider the more insidious problem of "economic vacancy". This is when a tenant occupies the property without paying for it. It happens. Have you budgeted for it?
Holding the property without debt can leave you exposed to a lawsuit, especially when you have adequate insurance. Many professional tenants know the system and how to work it to get "free money". Unfortunately, that free money for them is money out of your pocket. I know you said that you plan to refi as soon as possible. I would not take that lightly.
So, the place needs a lot of work. You know you're gonna have to put some money into this place. I would suggest however that you DO NOT over-improve this property. The standard for a rental property is "Safe, Clean and Livable". This standard costs substantially less than remodeling to retail ARV. A full gut-out rehab of an 800 sqft rental should not exceed $10k-$20k and possibly less. I'm assuming new electrical, plumbing, walls, flooring and fixtures. I might even look to the floorplan to see if I could make it a more comfortable 2/1, instead of 3/1. Remember this is a rental, not an HGTV show piece.
Let's say the furnace is in decent shape, you add upgraded electrical and plumbing, walls, flooring and fixtures and when you count it all up it comes to $20k. At this point you're all-in for about $60k plus transactional and holding costs. You rent the finished property out for $750/mo and you get a bank to give you a mortgage for 4% for 30 years on $70k. Your debt service would be about $210/mo, expenses should weight in around $300/mo (taxes, insurance, maintenance, management, utilities and repairs). You budget a reserve for vacancies and capital expenses of, say, $100/mo, which is often accounted for as reduction in scheduled gross income, leaves you a cashflow of about $140/mo.
Does this work for you?
To the point of chiseling the seller down based on the price he paid is a waste of time. If you're happy with your paycheck, you don't need to worry what the other guy is making. However, if this guy is just palming off a problem property, that's another matter. So, why is the seller selling? I would figure my numbers and make an offer as low as I needed to make the deal work. I would not bump my numbers up to make the seller happy then "hope" that things will work out. Hope is not an action plan.
Finally, once you have this property ready to rent DO NOT ever tell the tenant that you are the property owner! You are employed by the owner. Tenants will take advantage of the property manager anyway, but they will often rape the owner financially. They frequently view the owner as "a rich guy" that can afford to absorb the losses they create.
I know you said that you were planning to manage the property yourself, yet I left management in the expenses for a reason. This is usually not an easy job and you need to allow compensation in the budget for you time and effort. Value your time. There's no easy way around it. Property management is a cost of doing this business. You will pay the price one way or the other, so you may as well budget for it.
I left a lot to assumptions here, so take this with a grain of salt (or maybe a whole salt lick). The idea is to get the idea across, not to come up with a silver bullet solution. I have no doubt that you can work out the details.
P.S. I apologize for responding a day late. I starting writing this reply, but I got a text that it was a beautiful day in sunny So. Calif and that I should drop by my sister's house for drinks by the pool. I relented. I trust you'll forgive me. ;)
Cheers!!
@Kyle Wenger, it sounds like your getting advice on the questions you didn't ask. I think you know that you should be willing to put your own "skin in the game" and you've indicated that you'd be willing to do that. You said that you'd like to do this with OPM. I respect that immensely.
So, how do you buy the time you need to do this deal with OPM? Correct me if I'm wrong, but don't you need time to get the contractor in to evaluate the scope of work and provide you an estimate in order for you to finish your underwriting? From what you've said you could close on this contract right now. I believe you want time to make sure you're not stepping into a "money pit" before you sign on the dotted line. If this is your situation, good for you to pump the breaks a little.
Did you happen to ask the seller why he's selling this rough little gem? Did you also ask him how he came up with his valuation of the property. If he can't (or won't) address your concerns, that would be a huge red flag. Maybe he's willing to hold out for an HGTV buyer. If that's the case, I'd let him and I'd move on to a better deal.
Let's say he says that he just wants to unload this property, but he's just not willing to take the necessary beating on the price, would he be willing to offer you seller financing on favorable terms? In that case you could offer a bit more for the property and you'd have your OPM lined up for you.
Perhaps he says that he is tired of this property and wants to lighten his portfolio of 'C' properties, he'd be willing to negotiate the price with you and what would you like to offer? That screams for a lower offering price. The less time and accommodations allowed for you to determine that price, the lower the offer. Remember that you'll have to impress your "money" people with the deal, so it better be impressive.
Is there any special rush on getting this property under contract? Are buyers lining up to make offers? You haven't "fallen in love" with this project, right? You need to be willing to walk away, if the deal stopping looking like a deal for whatever reason.
It sounds like you have pretty good bead on this negotiation. Maybe you just need a second set of eyes on it to check your math. You can do this. Remain confident and steadfast. Ask for what you need and walk if you don't get it. You are dogged and relentless. Get this deal on your terms or find a better one. (Pretty easy, huh?)
Cheers!!
@Account Closed, I hear you saying basically that you "feel" this would be a good deal even at a higher price point. In my experience feelings are tricky devils. They talk you into deals that may be no deal at all. Once the good feeling wears off you're left with a nasty sinking feeling.
Rather than search for clever ways of making your project work, why don't we just take a look at the numbers. Let's this by the numbers:
1) Why is the seller selling?
2) What is the property worth in its current condition with all it the problems, attributes and circumstances?
3) Why are the rents "significantly below market level"?
4) What is the NOI (Net Operating Income)?
5) What is currently owed on the property?
6) What do you expect to do with this property?
So, what is the seller planning to do with the proceeds? How long has he held the property? Could you assume his existing financing? If he has no plans to use the proceeds immediately and would be willing to carry back a mortgage for the difference between the price and what is owed, you may be able to make this work.
In order to make the seller finance option work we will want to know about the NOI. In its current condition would this property have a positive NOI? That is, would the gross income cover the gross expenses (all of them, including capital expenditures, vacancy, etc.) and still have money left over? If so, there could be a way to make this work.
Would the NOI cover the the assumed financing with money left over? The remainder after paying the existing mortgage is all you have to pay the seller carry debt service, so there has to be enough. AND this must be based on the current gross income, not the projected new rents! If this is the case, then there may be a way to make this work.
Once you've figured the NOI and subtracted the existing mortgage what is left is pretty much what the seller is getting on the property right now, but right now he's dealing with the property management and all the risk. You would be taking all that on and you need to get paid for it. You'll need to subtract the amount that you need to make in order to be willing to get out of the bed in the morning. If there's anything left, you may be able to make this work.
Could you structure the terms with the seller such that the amount remaining would pay the debt service to the seller? That means playing with the price, interest rate and term of the loan in order to get the monthly payments down to a point where it can be paid from the money remaining at the end of each month. If you can get that payment down below this "magic number", you'll actually cash flow. In that case you succeeded in making is work. Everyone wins and everyone is happy!
Over time the seller will make more money by carrying back the second, so you could in theory offer a lower price. Also, if the seller would carry for a longer term and/or at a lower interest rate, you could get the payment down to or below the "magic number".
As @Jeff Greenberg points out do not try to put anything over on anyone in the transaction. To do so may end up with you in front of a judge explaining that orange not really your best color and how you may like a different serial number for a name. Everyone would NOT be happy then.
So, to answer your original inquiry, yes, it is possible and it has been done before, but really it's pretty complicated and risky. If you analyze the numbers in a straight forward manner and find that price is the only objection, you might still be able to structure the deal to a close. "But I still don't have the down payment!" This can be tricky, it's true, but you might want to bring in a partner with experience in this area or someone who could put up the money for a piece of the action.
I like the way you're thinking. Keep looking for ways to create opportunities and you shall. Just be sure to do what you did this time and check with the folks on BP before you leap into anything.
Cheers!!