Am I Nuts? - Does This Sound Right? - Posted by JohnMI

Posted by Hope(Fl) on October 04, 2000 at 14:04:10:

Dont ever count on the tenants making repairs, no matter what it says inthe contract. It has been our experience that most tenants will let little repairs go rather than fix it, and when you ultimately get the house back, that minor repair is now a major headache!!!We pay for repairs, as we have found that they will notify us immeiately when something is broke, and it cost us alot less in the long run. Just my 2cents.

Am I Nuts? - Does This Sound Right? - Posted by JohnMI

Posted by JohnMI on October 03, 2000 at 23:49:53:

OK…Please Help…Need Honest Opinions (and open minds)…

DISCLAIMER: I realize that this site is dedicated to “creative” real estate deals. I have found it extremely difficult to find deals (sellers) that would allow for a “crestive” purchase option. Now, I know that you are going to say “keep looking” and “dig deeper” etc… and I respect that opinion -but- here is my problem with that advice:

Just assume the following is true (I will tell you why in a sec):
Assume: My area is currently an adverse environment for “creative” deals. Lets assume that I will continue to run into “roadblocks” finding the “creative” candidate. I am not saying that a creative deal dosen’t come about here, but what to do while looking for the needle in the haystack (please don’t come back with “keep looking”…too simple…I am in need of some deeper analysis here and have the looking part very much covered).

Ok: So lets say I have looked extensively and come up with nothing. (This actually fact and currently happening) and I meet up with a realtor/investor/mortgage broker who knows a mutual aquaintance and he says he will show me his theory on how to make money in todays market. I will share this “theory” with you now and request your analysis of the factors. But before I share the actual figures, here is a Q & A session we had:

Q: Shouldn’t I find a deal that lends itself to creative financing, etc… I can’t seem to find one in this market?

A: You could, but if you follow my reasoning, it may makes more sense to not search forever for the elusive deal (and wind up never starting) and work with the current market conditions by making the numbers work.

Q: How do I make money in real estate in our local market?

A: By buying “typical” 3-4 bedroom, family homes in predictible, good areas, with good schools, that fit the “standard” appreciation profile (I will detail this in a minute), THEN lease optioning those homes shooting for a break even or positive cash flow, benefiting from depreciation, tax breaks on interest, mortgage paydown, BUT MOST IMPORTANTLY, appreciation.

Q: Ok, show me the figures:

A: (here is the detail)
Purchase Price: $ 200,000.00
Down Payment: 0 - 20% (could get 100%LTV 10%Int)
Assume: 10% Down (20k) Conventional
Assume: Break Even Cash Flow (or better if possible)
Lease Option and rent at break even (market rent)rates.
Assume: Renter takes care of all maint. (they are buying after all).

Here is the key argument:
Assuming a 5% annual appreciation - your “REAL” money is made (in terms of ROI) on the appreciation portion NOT on the others (cashflow, mortgage paydown, depr, etc). and here is why.

$ 200k property after 1 year.
Appreciation: ($200,000 * 1.05) = $210k or $10k or 50% ROI
Taxes = $ 1800 writeoff or 7% ROI
Cash Flow: 0 or 0% ROI
Mortgage Paydown: $1440 or 7% ROI

Add them up: $13,240 actual return and 64% ROI !!!

Even if the cash flow, depreciation, or tax numbers change for the worse, their gravity is not enough to make the really big difference. The appreciation is the key.

I.E. Worse Scenario:
$ 200k property after 1 year.
Appreciation: ($200,000 * 1.025) = $205k or $5k or 25% ROI
Taxes = $ 0 writeoff or 0% ROI
Cash Flow: 0 or 0% ROI
Mortgage Paydown: Approx $1440 or 7% ROI

Add it Up: $ 6440 k actual or 32% ROI!

And this is not including any Depreciation expense.

See, you are getting appreciation on the much larger ($200 price of the home) and there is the real leverage.

If I did this using $0 down financing @ 10% yes I might be looking at a negative cash flow but the return on my appreciation would then be almost infinity becasue I had no money in except for the negative amount monthly for the year. i.e. $2400 negative is -12% ROI BUT - I put no money down so my return on appreciation only (at 5%) would be unmeasurable and not including expenses for the loss, depreciation, and the mortgage paydown.

So tell me…what is wrong? Thanks…I know it was LONG…

If you aren’t making offers you are! - Posted by SCook85

Posted by SCook85 on October 05, 2000 at 08:52:57:

I will have to chime in with everyone else on this one and add to it.

You are setting yourself up for failure- You are basing your returns off of a hope and a prayer. Let’s assume that your home does appreciate 5%, you still have to sell it to actually make your return, and in the process it can’t cost you anything to sell the home or your 5% is gone.

You have to make your money going in. Find the motivated sellers. You say that you have been doing all the right things, you may or may not be. But this is my guess. You are probably doing all the right things to find the properties but the deals don’t look great as presented to you and you let them go. You aren’t making “offers”. Again, I may be wrong, but I would like to know this, of the deals that get presented to you as “motivated sellers”, what percentage of them do you actually make offers on? I offer on every one of them, some of my offers appear to be rather insulting, but some of those insults are enough to solve my sellers problem, and I buy houses with my insulting offers.

I always tell others to stop worrying about what a seller tells you, in many cases it isn’t the truth. You just have to tell them that you would like to help and these are the only numbers that work for you, most will say no, but every once in awhile someone is going to say “OK, I really wanted to get more out of it, but let’s do it”. I have bought many homes because I was the only one who would make an offer on the seller ridiculous price.
MAKE OFFERS- lots of them, and make offers that work for you, you will be surprised at how often they work for your seller as well.

Happy Investing!

P.S. Your advisor is only looking out for themself. If you are considering this method, ask them to invest in you this way. Tell them that IF the home appreciates they get paid, they get nothing today. When the home sells you will split the appreciation with them. I’ll bet they aren’t confident enough in their own investment philosophy to do it.

Re: Am I Nuts? - Does This Sound Right? - Posted by Rob FL

Posted by Rob FL on October 04, 2000 at 09:56:15:

There are alot of areas of the country similar to yours. For about the last year or so my area has been in such an extreme sellers market that anything that gets priced reasonably sells quickly. Anything that is priced low sells within days (sometimes hours).

However as mentioned by someone else below, there are motivated sellers in every market. Even in my extreme sellers market over 100 people went into pre-foreclosure last week alone. You can bet they will hear from me asking about their situation.

Find the motivated sellers and the distressed properties. That is where the profit is. Don’t count on appreciation unless you can afford 10K down on a whole bunch of deals.

Here are the situations of the last several properties I have bought or attempted to buy:

1 bank-owned
3 HUD repos
2 divorced sellers in pre-foreclosure
1 tired landlord
1 landlord in over his head with problems
1 dumpo fixer-upper on a FSBO
(and a partridge in a pear tree). Haha. Best wishes.

Sounded good to me! - Posted by Hope(Fl)

Posted by Hope(Fl) on October 04, 2000 at 09:51:29:

I have done something similiar, and now 10 yrs later, I am finally earning a cash flow. I also thought that the house would go up at least 5or10% a yr, but I was wrong. You see, I bought a waterfront home that I believed would jump up in price in just a yr. or two. I figured, like you, that the rent would cover the mortgage and then after 2 yrs, I could make a nice profit. I was wrong. The home did rent for the mortgage, but the expenses came out of my pocket, as did the vacancies, repairs, etc. I still have the home. I look at it like a SPECULATIVE growth stock. Even though I have fed it alot of money, I am still hoping that one day it will pay back bigtime(definetly better than if I put my money in the bank) However, as you can see, I am grateful that I only bought 1 home with appreciation in mind. My other homes are all great rental homes that showed a Positive cash flow from day 1. If I would have bought more homes like this, I would have been under a long time ago. If you want to SPECULATE, go right ahead, but be prepared to LOSE

Re: Am I Nuts? - Does This Sound Right? - Posted by Phillip ¶

Posted by Phillip ¶ on October 04, 2000 at 09:28:42:


There are a lot of problems with this scenario - some of which have been covered by others.

  • How many houses can you buy where you have to put down 20K and get no cashflow?
  • What about realtor’s fees/closing costs (easily 6-11% of purchase price).
  • You don’t list carrying costs and money you’ll spend to ‘pretty up the house’ before you get the T/B
  • You don’t list the option consideration the T/B will pay you.
  • I think your tax writeoff is off.
  • What if MAJOR maintenance (heater, broken water pipes, problem with foundation, etc…) comes up?
  • What if you get deadbeat T/B?
  • What if the house depreciates by 15% (30K)?

Clearly, you can’t go through life expecting the worst 'what if’s to occur, but you should at least factor them in, which your “expert” investor doesn’t seem to do.


We all bow and say a little prayer . . . - Posted by Bob H

Posted by Bob H on October 04, 2000 at 01:23:56:

to the God of Appreciation. However, He does not always answer us in the manner we hope for. While it is true that appreciation is the great healer in real estate deals - it often cures miscalulation, errors in judgment, bad management, and a host of other sins, it should NEVER be basis of your invesment strategy. Ask anyone who survived owning properties during the '80’s how well they fared banking on appreciaton in that decade.

The truth is ( I know you said you didn’t want to hear this, but . .) keep looking for deals. In every market - buyer’s market, seller’s market, increasing prices, decreasing prices, whatever - there are deals. The trick is learning a way that works for you to find them.

You say you have looked long and hard and found nothing. Have you contacted all the foreclosures in your market? The people getting divorced? The landlords evicting tenants? The attorney’s who specialize in probate or bankruptcy? The homeowners who receive health dept. citations for code violations? The list could go on and on.

The point is, in every type of market, there are legitimate deals; deals that will stand on their own merit based on price or terms, and make you money without relying on the whim of a sometimes fickle deity. The God of appreciation helps those who help themselves.

Re: Am I Nuts? - Does This Sound Right? - Posted by KevinTX

Posted by KevinTX on October 04, 2000 at 24:30:01:


Im a newbie and I too thought along your lines and the response I got from the people here convinced me otherwise. Basically, the responses your going to get will probably tell you that your worse case scenario is too optomistic.

actual worse case scenario:

Buy house for 200,000 @0 down 10% int
House sits vacant for 4 monthes (1440 X 4 = 5760)
Settle on tenants who move in and ruin carpet, let weeds grow out of control, kick a hole in one of the walls, break the bathroom mirror, and scratch up the countertops. (repair costs conservatively = 3000)
After 6 monthes they stop paying and you have to evict and find new tenants(1440 X 2 = 2880)
House is vacant again.

I dont know what the numbers add up to be after appreciation, taxes and option condiseration, but I know that your worse case scenario sounds great and mine sucks. I guess if your trying to compare risk to return you need to get a true assessment of the actual risk.

Probably a little far fetched but it could happen. I just finished Bronchick’s “Flipping Properties” and one of the first thing he mentions is “Make money going into the deal”, don’t count on outside forces to make you money. I think this doesn’t just apply to flipping.

Best of luck

Re: Am I Nuts? - Does This Sound Right? - Posted by JohnBoy

Posted by JohnBoy on October 04, 2000 at 24:20:26:

What do you do if the property does not appreciate? What if the market turns and the value goes down???

NEVER, EVER, buy for just appreciation. ALWAYS, ALWAYS, ALWAYS, make your profit when you buy, period!

If you buy for appreciation as your main profit center you’re heading for financial ruin!

Sounds like someone is trying to sell you a line of bull to profit off you!

Find MOTIVATED SELLERS and you will find the deals. Stop looking for properties. Look for MOTIVATED SELLERS! That is where you find the deals, even in your market!

Even in your market people run into financial problems, get divorced, lose jobs, get transfered from jobs, end up in foreclosure, buy a new home and get stuck with two mortgage payments because their first home didn’t sell, etc.

Depreciation is only the gravy, not the main reason to buy.

WOW! - One for the experts to refute (or endorse)? - Posted by TerryS

Posted by TerryS on October 04, 2000 at 24:01:19:


I realize that you wouldnt want to go negative…but if the appreciation return is even ok,it lloks like you are playing a “game” that flies in the face of the coventional wisdom in most of the “creative” real estate books, etc…which state that you should “always get positive cash flow”…well, I am not experienced enough to say if you are right or wrong (i’ll leave that to the experts on this site), but it sounds like you are thinking “creatively” and I commend you for that. Looking at your current market conditions and finding something that works for you is smart. I realize that the common wisdom is to find the needle in the haystack (and that is ok) but I sypathize with you trying to make some money in the absence of the “perfect find”. A wise Investor once told me that if I waited for everything to be “perfect” (find the perfect creative deal) I would never do anything. Do you due dillegence and then put you money where your mouth is. Harsh but true. You cannot truly learn until you expose yourself to the possibility of failure.
Good luck.