All Forum Posts by: Mark S.

Hey guys,
I've decided to change up my strategy a bit for now (I started another thread on this). On this quad, the neighborhood is a "D" and I just can't stomach that as a new investor, so I passed.

After a heart-to-heart conversation with my realtor and myself, I've come to the conclusion that the multi-family space may not be for me...at least right now.

It appears that in my area virtually all the multi-family properties are in "C" or "D" neighborhoods, and mostly right on the border of each other. I'm looking for more of a "B" / "C" borderline area. With that said, I'm seriously considering (even though I was previously against it) buying 3/2, or similar, single family homes.

Here are my thoughts:

PROS Price: Based on my somewhat limited cash resources at this time, I can get into a property for quite a bit less than multi-families. Exit Strategy: In the event I ever get into trouble or want out, a 3/2 is likely much easier to unload than a small multi-family. Gaining Experience: I think this might be an easier entry path from a first time investor standpoint to gain valuable land lording experience. Ratios/Rules of Thumb: Buying foreclosures in this area should still allow me to achieve some of the general rules of thumb and generally accepted financial success ratios. Rate of Expansion: Since these single family homes will be less expensive than the multi-families, I should be able to acquire more properties more quickly.

CONS Cashflow: Even though ratios might be better, monthly passive Cashflow dollars will be less. Vacancy: If my 3/2 is vacant, I have 100% vacancy versus a multi-unit where that might only translate into a 25% or 50% vacancy. Competition: It seems like there may be more investors/flippers interested in the single family foreclosures vs multi-units. Rehabbing: Chances are many of these single family homes will need some major work. Do I really want to have to get into the whole ARV thing?

As I continue to ponder what the right next move for me, I also don't want to experience paralysis by analysis. If I were to move forward on the 3/2 approach, here's what my game plan is:

1.) Search for foreclosed homes generally within 1 hour of where I live that are in my budget.

2.) When I find a qualifying property, run some numbers on market rents, crime, etc. for that area to see if if will even be a feasible investment.

3.) Have my realtor get us in to the property to take a quick look at estimating any sort of work needed. Basically, do I just want to run the other way, or is it ultimately worth getting a few contractor bids for the repairs?

4.) Make offer on property with property inspection to my satisfaction contingency clause (assuming that's allowed).

5.) Negotiate. Get an inspection. Get contractor bids. Close the deal. Get to work. Rent it out.

6.) Wash. Rinse. Repeat.

HELP FROM BP NATION: What I would like to hear from all of you are your opinions on my pros/cons (did I miss anything, am I way off on anything), your opinions on my next steps, and either a slap on the wrist to fix some things or a kick in the behind to stop talking and get moving.

Thanks in advance, everyone! You have no idea how much this will help me. I will give back one day when I am in a position to help others and add value.

David Beard I heard back from the local bank today. The loan officer said that, "there has been a recent amendment that prohibits that transaction." I knew it sounded a bit too good to be true. It looks like my options are 15% down on 3/3 ARM or 25% down on 30 yr fixed. Cash is tight. What would you do?

@Daniel Dietz

Thanks for the calculator link. I'm familiar with the site, but not this particular calculator. I'll be sure to play around with it a bit. As for the SDIRA stuff, my retirement assets are spread pretty well among traditional IRA, Roth IRA, and 401(k) assets (both traditional and Roth 401k). This makes it a bit more difficult for me. Additionally, I like the tax benefits, want to use leverage, and want to get in for as little down as possible (don't we all?!). Anyway, I'm not sure this strategy would work best in my situation. I am investing for cashflow and general wealth building - and may very well use real estate to help with retirement income - although I'd like to keep it all separate, if possible.

@David Beard

Yes, I thought it was quite strange as well. The lender seemed somewhat confident, but also a bit hesitant. My guess is he may have been thinking of rules applying to owner-occupants versus investors (although, he clearly knows what my goal is and absolutely said 1-4 units). I asked him to work up some numbers for me next week and get back to me. The only reason I think this COULD hold, is the 3.5% upfront fee he mentioned. We'll see what happens.

IF this does NOT work, and you were me with extremely limited down payment funds, would you:

- Go 15% down on a 3/3 ARM just to get into the property and re-fi out later?

OR

- Go 25% down on a fixed rate loan and scrap every penny to rebuild savings as quickly as possible?

Thanks, guys!

I posted this in another section of the forums, but I'm not sure if it was the right place, so I'm posting it here again:

I spoke with local bank today, and after offering me a 3/3 ARM with 15% down to which I told them I much prefer a fixed loan, I was told that they could likely do a Freddie Mac investor loan for 1-4 units. I was advised that they could probably get the down payment to between 5-10% down on a fixed rate loan. The catch, they told me, is that there would be about a 3.5% fee (of the loan amount) by Freddie Mac to do such a loan. This would be in addition to all other closing costs. Mortgage insurance would also apply until I had 20% equity in the property, and would then fall off. I am told that this loan could likely be done on a foreclosure as well. Finally, the bank said they could probably get me out of some of the normal closing costs with a slightly higher interest rate. My situation is limited cash, sizeable retirement accounts (for my age), and wanting to minimize having to touch retirement accounts (ie, backing out Roth contributions, taking a 401(k) loan, etc.). For this reason, I loan such as this really appeals to me, even with the additional fees, due to the fixed interest rate and low down payment. The alternative is 25% down on a fixed loan, no PMI or 15% down on an ARM. I guess my main question is: Do these loans really exist?

I spoke with local bank today, and after offering me a 3/3 ARM with 15% down to which I told them I much prefer a fixed loan, I was told that they could likely do a Freddie Mac investor loan for 1-4 units. I was advised that they could probably get the down payment to between 5-10% down on a fixed rate loan. The catch, they told me, is that there would be about a 3.5% fee (of the loan amount) by Freddie Mac to do such a loan. This would be in addition to all other closing costs. Mortgage insurance would also apply until I had 20% equity in the property, and would then fall off. I am told that this loan could likely be done on a foreclosure as well. Finally, the bank said they could probably get me out of some of the normal closing costs with a slightly higher interest rate. My situation is limited cash, sizeable retirement accounts (for my age), and wanting to minimize having to touch retirement accounts (ie, backing out Roth contributions, taking a 401(k) loan, etc.). For this reason, I loan such as this really appeals to me, even with the additional fees, due to the fixed interest rate and low down payment. The alternative is 25% down on a fixed loan, no PMI or 15% down on an ARM. I guess my main question is: Do these loans really exist?

I found out the 25% down would be a 30 year fixed rate loan.

Thanks Shane Woods I guess it will heavily depend on rehab costs. I believe this property is eligible to have the repair costs rolled into the loan, however, I'd be required to then put 25% down. The 20% down I mentioned would be on a 30 year fixed conventional loan. There are other lenders that would do only 15% down, but on an ARM and only over 20 years. This would put the upcoming interest rate environment against me and raise my monthly payments. The downside is it's going to be very difficult for me to even come up with the 20% down. I'll likely have to back out some Roth contributions, coupled with bank accounts, just to get the cash I need. Not an ideal move, but these numbers look really good. Am I wrong that even if I buy at ask, I'd be getting about $48,000 instant equity? I know equity doesn't pay bills and put food on the table, but damn! As for the other owners, I'm not interested in their properties, but more so how they affect the surrounding neighborhood. I basically want to get a sense of whether or not they care about the area. I'm also curious to see if they know anything about the previous owner/tenants/etc. who knows? They may have some insight as to why the property went into foreclosure in the first place.

Fourplex foreclosure. Asking $194,900. Taxable Value (PVA website): $243,000. 5,000 square feet. Built in 1999.

Purchase Price (conservatively): $194,900.
Down Payment @ 20%: $38,980
Financed Amount: $155,920 @ 6% (conservatively) over 30 years
P&I Payment: $935/month

EXPENSES
Taxes ($2,753/yr): $229/month
Insurance (estimated, need to get quote still at $2k/yr): $166/month
Repairs/Maintenance: $200/month
Lawn/Groundskeeping: $100/month
Vacancy Loss at 10% (conservative, $3,360/yr): $280/month
Advertising: $16/month
Miscellaneous at $2k/yr: $166/month
Tenants to pay utilities, minus trash (absorbed in miscellaneous)

INCOME
Rents @ $700/month per unit: $2,800/month (Conservative)
Rents @ $750/month per unit: $3,000/month (Likely)

RULES / RATIOS at $2,800 / month.
50% Rule: $2,800/month = $1,400 to expenses, $935 debt service, $465 cashflow = $116/month per door. Pass.
2% Rule: Says property should sell for $140,000. Fail.
38.97% Cash-on-Cash Returns
13.55% Cap Rate

RULES / RATIOS at $3,000 / month.
50% Rule: $3,000/month = $1,500 to expenses, $935 debt service, $565 cashflow = $141/month per door. Pass.
2% Rule: Says property should sell for $150,000. Fail.
45.75% Cash-on-Cash Returns
14.90% Cap Rate

QUESTIONS:
1.) Is this a seemingly "good deal?"

2.) Same owners has two other quads on this street. Would it make any sense to contact them? If so, what is my approach? I essentially would want to see other owners' approach to managing property / neighborhood / get a feel.

3.) I'm not sure yet what maintenance might be needed. Assuming property does not require any immediate work, what is a fair offering price?

4.) Any advice if this should turn into a bidding war?

Thanks in advance, everyone!

I passed on a 4-plex that was a foreclosure recently for many reasons. Among those reasons, it was virtually impossible to find anything out about the property in terms of previous rents, repairs, etc., as it was a foreclosure.

It seems like these properties could potentially be great deals, but there are a lot of unanswered questions and that makes it difficult to pull the trigger.

I guess my question is how to approach evaluating a foreclosure differently than you might for a property where you can actually contact the owner or seller's agent for answers to common questions.

Thanks.