Advice.. - Posted by Tony

Posted by GMann on September 14, 2004 at 11:56:56:

Great post Ed!!

By the way, FHA doesn’t allow for 97% financing on a non-owner occupied (investment property)loan. Could have problems when the underwriter starts asking questions.

Advice… - Posted by Tony

Posted by Tony on September 09, 2004 at 08:04:53:

I am pretty new in real estate investing and hoping to catch some advice about this investment deal…

I am interested in purchasing a condo for $57,000
(60,000 with seller’s concession)
With the FHA loan I would only need to put in a down payment of about $2500 in order to close.
Interest Rate 6.25% fixed/30yrs
My monthly payments on mortgage, assoc fee, taxes and ins comes out to about $690/month

If I am able to collect $650/month on the property is this deal still worth while even if there is a negative cash flow??

Re: Advice… - Posted by Ed Garcia

Posted by Ed Garcia on September 10, 2004 at 10:51:59:

Tony,

I?m kind of disappointed in the answers you?ve been given. It looks like some investors are reaching, trying to make chicken salad out of chicken $hit.

This is NOT A DEAL.

When the market is HOT, condo?s are the last to go up, and when the Market is COLD, they?re the first to come down. In most cases, they?re nothing more than glorified apartments.

Can you make money on Condo?s? You betcha.

If you purchase in a High dollar area, an area where there?s no affordable living, or a Resort area.

Tony, there are different types of investors. Some investors have tons of money and are looking for a vehicle to invest in and that?s why they turn to Real-estate. They?re looking for a secured return as residual income.

But the majority of investors on our board are looking to Real-estate as an opportunity become entrepreneurs. In the last 6 years on this board, I?ve seen Real-estate become a life changing experience for many of the viewers.

Tony, when investing, keep two things in mind. 1, you make your money on the buy and 2, Positive Cash flow.

Here is an article I wrote a few years ago that I hope will help you.

Here is what I tell a Newbie who is starting out.

First, is to evaluate how much time you are going to be able to commit
to Real-estate? If your approach is hit and miss, so will be your result.

Second: Go to the street. It is the best teacher. Rather than talk about
doing deals, reading in the library, getting courses, JUST DO IT.

You’ll find in the long run, the street is the best teacher. Not only that, by getting out an doing it, you’ll learn your MARKET, meet people to build a NETWORK, learn the demographics as well as the geographics of your area, and of course you would have over come the biggest obstacle in getting started, PROCRASTINATION.

Third: Read every Article you can in the How-Articles of this site, as well as the Success Stories. Then follow the various News Groups, which are live and inter-reacting. Ad the Archives of this site for looking up questions and getting multiple answers and your journey has begun.

We need to do what we call, penciling out a deal. When doing that, we
ask ourselves a battery of questions necessary in structuring a deal.

I’m going to give you 5 steps to get you started.

(1) How much do we want to make?

So many times I hear someone act as if they are afraid of loosing a deal
because of the profit they put into it. Forget about it. I’d rather be sorry about the
deal I did not make, rather than the one I did. The profit is what protects you in a deal.
Don’t be afraid to make it.

When doing a deal I want to make at least 30% and believe me when I
tell you, when I structure a deal with 30% in it, I never get it. Some how the profit always
dissipates, even after I thought I figured it to the penny.

Would I do a deal with less profit? Yes but I would do it as a flip,
lease option, or as a leveraged deal with positive cash flow.

(2) Determine the Value of the Property.

The next thing I must do is determine what the property is worth. The
obvious thing to do, is comp it. Don’t let the seller or real-estate broker tell you what it is
worth. Get it compted yourself.

(3) Deferred maintenance.

Usually I figure my profit after taking off the deferred maintenance,
otherwise it distorts my profit. So it must be figured in the beginning to determine your profit.

(4) Game plan.

What do I want to do with the property? Do I want to fix it and sell it?
Do I want to keep it long term or short term? When I buy a property, I have a plan for it.
And usually I buy it with that plan in mind. This part is so important, I’m going to go into more detail by giving you an example.

Remember, you make your money on the buy.

GAME PLAN.

Each deal speaks for it?s self. For example, if I bought a house for
Lets say $50,000 and had to put $10,000 into it for fix up. I?m in this deal
$60,000. Now what would that house have to be worth in order for me
to feel comfortable to buy it, and debt service it on my line of credit.

$70,000 ? No I don?t think so. I have no room in this deal for
error. What if after a month or two I don?t sell it ?
Now remember, we can play the what if game all day. I can create a fast
Sale for the purpose of this posting to make myself look good, but
that?s Not the answer. So remember we have to always be careful with
hypothetical questions and answers. The profit structure on this deal is
not good enough for me to do the deal.

$80,000 ? Were getting better, but No. I have to keep in mind that
things can go wrong with my deal. What if I sell it after 2 months, and then
the sale falls through after being under contract for 45 days because of
financing.

Now I have had the property for 31/2 months, and have to put it back on
the market again. Also what if the market changes or slows down ?
Even though I show on paper that I have a $20,000 profit, that?s not
so.

For the fun of it, lets take this so call $20,000 profit and structure a

Game Plan around it.

(1.) I plug in 6 month worth of debt service on my deal. I?m in the
deal $60,000. Interest, depending on the interest of your credit line,
Let say for the benefit of our example is 9.5%. Our payments would
Then be $475 per month. 475X 6 = $2850.

(2.) What ever the market value you come up with, always cut it 5%.
Because realistically, the potential buyer is going to want you to
Discount your price. Now if you don?t have to, great. But lets face
It. If you were trying to sell it for $80,000 and someone offered
You $ 76,000, you know you wouldn?t want to wait for another
Buyer. You would still be debt servicing the deal. With you luck,
You wait another month or two and the next buyer would make
The same offer. Terry Vaughan will tell you, that the first 10% of
a deal is water. I agree with Terry, but for the purpose of this
deal we?ll just keep it at 5%. So lets take off another $4000.

(3.) I always plug in a realtor. Now I know that there are a lot of
Geniuses out there that don?t need them. They are so great that
they can sell the property themselves. Great, you plug in a
Realtor. 76,000 X .06 = $4,560.

Lets recap. A sale of $80,000, gives us on paper a $20,000 profit.

$20,000
-$ 2,850 Debt service
-$4,000 5% Discount
-$4,560 6% Sales commission.

Potential Profit $8,590.

As you can see the profit dissipates quickly. And personally I don?t
Think It?s enough to take the risk your taking with your line.

How about $90,000? Now all of a sudden the deal can make sense.
We have between a $17,500 and $18,000 profit.

Lets look at our LTV (loan to value). 60,000 divided by 90,000 =
67% LTV.

So you see the deal speaks for it?s self, but the structuring of a deal
with a Game Plan is what will let you know if you should do the deal.

(5) Financing.

How am I going to take my deal down? An I going to create a seller carry
back, and use a lender to give some money to the seller? Will the seller carry back the whole deal? Will I have to buy it with a combination of down payment and financing?
Or will I pay cash and then refinance it later, getting all of my money back.

These are just a few basic fundamentals of doing a deal. I hope this is
some help to you.

Ed Garcia

Re: Advice… - Posted by Smart Money

Posted by Smart Money on September 09, 2004 at 22:30:08:

You said:
I am interested in purchasing a condo for $57,000
(60,000 with seller’s concession)
With the FHA loan I would only need to put in a down payment of about $2500 in order to close.
Interest Rate 6.25% fixed/30yrs
My monthly payments on mortgage, assoc fee, taxes and ins comes out to about $690/month
and able to collect $650/month on the property

I say: Well, its a condo, so maintenance fees are pretty much handled other than the little things inside. For simple math, if you assume that the unit is worth $60,000 and increases in value 3% every year, then the value of the unit will increase $1800 per year. On a $2500 investment, thats 72% return! You said that you could rent it for $650 but the payment is $690. Well, if you buy it, you get to depreciate the value of the structure. Assuming its worth about $50,000, you get almost a $2000 write off. If you’re in the 15% tax bracket, that is $300 a year of taxes you don’t pay. $300 a year works out to $25 a month. So, after taxes, your real payment is $665. You’d still be losing $15 a month owning it, and you’d have to pay for leaky faucets out of your own pocket. The good news is that if your rent payment is $650 this year, it will, on average, increase by about 3% a year, so you can expect to raise your monthly rent about $20 a year. So it looks like you’d run in the red a year or so and then you’d start to pull ahead, but you’d still have to pay for the leaky faucets out of pocket. However, for each year you hold it, your net worth will increase by $1800.

Now, one thing worth mentioning is that right now, with home ownership at a all time high, there aren’t that many renters out there. I talked about AVERAGE increases, but the reality is that rental rates may drop or hold steady for a while before they turn around. Do you have enough extra cash handy to cover it? You don’t need enough money to make the payments all the time. But you do need enough in case you have to drop the rent to $600 or so to keep people in it.

Its debateable, but not that bad after figuring in tax breaks and rent increases. If it were me, I’d be tempted to do it. (NOTE: This is all contingent on a $690 payment being based on a FIXED note so you’re not constantly chasing a carrot) My reasoning is that if your circumstances change before you can find another suitable rental unit (i.e., interest rates go up, bank policies on loans change, credit score drops, you need to buy a new car, wife changes her mind, kid needs $2500 in braces, etc.) then you’ll be kicking yourself for not buying it. My personal philosophy is that I snag them when I can if the numbers are close and the place is in good shape because I never know what the future holds. If I have to subsidize it a little, I do, because its more fun that just putting my money into a mutual fund in an IRA. So far, my philosophy is working because net worth just keeps on increasing nicely as the places go up in value on those “walk away” deals. Yours will too, to the tune of about $1800 a year. How much did you put in your IRA last year? I’d rather fix the leaky faucets than come up with $1800 to put in a boring, non-leveraged mutual fund.

SM

Re: Advice… - Posted by TrailerParkTrump

Posted by TrailerParkTrump on September 09, 2004 at 10:09:02:

Your taxes/ins/fees are $340/month??? Ouch! You still need to factor in vacancy ($32.50/month @ 5%) and repairs (lower for condos, but I would still budget $25/month). Also advertising, misc costs, etc, etc. Your negative cash flow is going to be around $100/month at best! That’s $1200/year! Your basically subsidizing someone’s houseing (read: paying them to live there) for the ‘pleasure’ of being a landlord. When do you get paid for all of your work? You MIGHT start breaking even 4-5 years from now through apreciation and increased rents, but I wouldn’t wait that long, move on there are better deals out there. That is UNLESS there is some major upside in your equity position (you can fix it up, flip it, etc), then I would probably rehab or flip this baby.

Keep looking, Tony, there are lots of great rentals out there that will cash flow, you’ll find what you’re looking for if you keep at it! Keep in mind you can always ‘make’ a rental cash flow through a large equity position (buying below market, huge down payment, or great terms, or all three).

Re: Advice… - Posted by Rashad Freeman

Posted by Rashad Freeman on September 09, 2004 at 08:47:01:

This would only be a deal if there were some considerable improvements that could be made to the property to either rent it for more or sell it for profit. Otherwise what is the point. You are in this business to make money right?