Help me think this through - Posted by MikeT_Ca

import · March 20, 2007, 9:13am

Posted by R. James on March 21, 2007 at 08:12:04:

That is fabulous. I would love to be in your situation. I am curious as to what type of market size you are in and how you are able to get your rents so high and still maintain a 15 year note. What is your strategy in locating properties / finding tenants willing to pay market or higher rents? Thanks for your input.

import · March 20, 2007, 9:13am

Posted by MikeT_Ca on March 20, 2007 at 09:13:07:

I am in the middle of rehabbing a house that I purchased in the urban core of Kansas City, Missouri

Purchase Price: 11k
Rehab Cost: 17k
Total Invested: 28k

After Repair Value: 55k

Purchase and rehab were paid for all cash.
Here are the options I have been thinking about.

Cash out refi for 38k, pull my 28k out plus an additional 10k, rent to a section 8 tenant at $550 a month, after expenses maybe make $100 a month.
Leave money in property and rent for $550 a month, and get a decent cash on cash return, around 17%
Sell with owner financing for 1k down and $475 a month for 180 months. Hold note for 1 year to season and sell note?

I like option 3 but have never carried, bought or sold any notes. Does option 3 seem like a good investment strategy? What would I be able to sell the note for and to whom? Would this be a note investors would want?

Which option would you pick and why? Do you have another option to add to the list?

Thanks for reading and providing feedback.

Mike

import · March 20, 2007, 2:14pm

Re: Help me think this through - Posted by Anne_ND

Posted by Anne_ND on March 20, 2007 at 14:14:16:

Mike,

If you do option 3, bear in mind what will make your note more valuable to potential buyers: higher down payment, higher interest rate, good payment history and good credit from buyer, as well as recent appraisal showing value of property that underlies the note.

To demonstrate a good payment history, copy every check you receive from your payor, and keep it with the envelope it came in- this will show most convincingly when and how much your payments were on the note.

You’ll find local note buyers by calling on ‘we buy houses’ ads in the paper that’s local to the house. You are likely to get the best price for the note from a local buyer.

A note buyer will also be concerned with LTV. If you cannot get the payor to put down more than $1-2K, then consider two notes: the one in first position at 80% LTV, which is the one you sell after you season for 12 months (or however long), and then the 2nd note that you keep. The note in first position will have more value, and you should be able to get a better price (sell with less of a discount) on the first, because you will remain in second position.

Good luck,

Anne

import · March 20, 2007, 11:50am

Re: Help me think this through - Posted by dealmaker

Posted by dealmaker on March 20, 2007 at 11:50:56:

Option 4. If FMV is $55K you should be able to sell it for about $62K+ the way I sell. Advertise it as “FSBO, owner will finance with $2K down”.

What you’ll get are people who are “payment buyers”, the same people who couldn’t tell you what they paid for any car they’ve ever bought!

Collect the $2K leaving you with $26K invested.

Finance the $60K (for example) at 9% or 10%, you’re not charging any points so that’s a pretty good interest rate!

$60K @ 10% is $579/mo. That’s the equivalent of 26.5% on the $26K you’ve actually got invested.

No tenants, sometimes the house comes back, but just repeat the process!

Much better than being a landlord. Trust me I’ve been both and for the past 14 years I’ve ONLY done this.

dealmaker

import · March 20, 2007, 11:29am

Option 1 - Posted by Jimmy

Posted by Jimmy on March 20, 2007 at 11:29:01:

Think about Option 1. do it with a 60% refi. you get all you cash out, plus 5K. deent cash flow on a zero-cash investment.

then repeat the process 100 times.

you should be seeing a flaming arrow pointing you to this conclusion.

I saw this arrow about 4 years ago, and its all I do now. buy-rehab-refi-hold forever.

import · March 20, 2007, 7:47pm

Re: Help me think this through - Posted by R. James

Posted by R. James on March 20, 2007 at 19:47:04:

Dealmaker, Curious if, over the past 14 years, you have had any major issues with locating buyers or if, you have had any problems with maintenance or major repair items?

import · March 20, 2007, 1:23pm

Option 4… - Posted by Jason (AL)

Posted by Jason (AL) on March 20, 2007 at 13:23:27:

dealmaker,

This is my game plan as well.
I also like Jimmy’s plan as well.
So many decisions for one to make…

Are most of your purchases bought sub2?
Also, are you the same “dealmaker” with the “cafe”?

import · March 21, 2007, 5:07pm

Re: Option 1 - Posted by MikeT_Ca

Posted by MikeT_Ca on March 21, 2007 at 17:07:15:

Jimmy,

I am going to apply option 1 to this house. Just a few questions for you.

How do you structure the financing on your properties?
Do you have any issues with seasoning before refinancing?.
What is the best way to hold title.

Thanks,
Mike

import · March 21, 2007, 8:12am

More on That Flaming Arrow - Posted by Jimmy

Posted by Jimmy on March 21, 2007 at 08:12:30:

maybe you don’t see the flaming arrow the way I see it. I probably did not see it the first time I encountered it, either. Let me describe the moment when I DEFINITELY SAW IT.

by that time, I had 15 or so properties, which were doing pretty well. most were properties in good condition, where I did not do much work to them. I stumbled onto a package deal (9 props, 18 units, all needed work). asking $315K. I “lowballed” them at 215K and they took it without delay. I scratched my head, worrying that I had overpaid. anyway, a year and $85,000 later, I had the portfolio in much better condition, and had popped the rents from $4500 to $6800 a month. I was liking this deal, but still had not sen the flaming arrow.

early in 2004, I went to my banker to refi the blanket loan secured by the portfolio. The appriasals came back at 480K. We did a 15 year loan at 70% LTV. the loan was for 336K. I only had 300 in the deal. I had an extra 36K in my pocket. my loan payment was $3000 with rents of $6800.

THAT’S WHEN I SAW IT. There was no reason I could not duplicate this transaction 100 times. each deal made the next deal easier to transact. each deal improved my balance sheet and my income statement. I’m over 50 properties now, and looking for my next multi-prop deal.

import · March 20, 2007, 7:43pm

Re: Option 1 - Posted by R. James

Posted by R. James on March 20, 2007 at 19:43:44:

How about maintenance costs and big ticket replacements? Have those been an issue for you? I do like your strategy-just curious long-term can you survive without bringing in additional outside money for staying power?

import · March 21, 2007, 8:11am

Re: Help me think this through - Posted by dealmaker

Posted by dealmaker on March 21, 2007 at 08:11:48:

No problems finding buyers, when I run my ad I typically get a lot of calls.

Maintenance and major repair are no longer my concern, they buyer BOUGHT the house. The only time that enters into it is in the few occassions that I’ve had to foreclose and take a place back. Buyers take better care of a ppty than do renters.

Last year I foreclosed one that the owner had started some “updates”. He pulled out a “Franklin” stove and (I guess) sold it. He put curved archways in and raised the ceiling in the living room. He also took out all the baseboard and moulding and threw it away.

I finished the interior ($1500 including paint/texture) added central heat/AC, re-carpeted for a total of about $11K. BUT I resold it for a total of another $9K over what I had in it including legal fees and upgrades.

I just wish I could find more ppty to purchase as I’m down to collecting only 7 payments per month. Lots of re-finances and re-sales the past couple of years.

dealmaker

import · March 20, 2007, 2:39pm

Re: Option 4… - Posted by dealmaker

Posted by dealmaker on March 20, 2007 at 14:39:15:

Nope, I pay CASH for mine.

Not the same “dealmaker”

import · March 22, 2007, 6:40pm

Re: More on That Flaming Arrow - Posted by Jason (AL)

Posted by Jason (AL) on March 22, 2007 at 18:40:32:

My “arrow” has been sub2s/sell with owner financing.
I haven’t done this in a while, as I’ve changed up my M.O.
The more I read your posts, the more I tend to see
myself there with in a few years. If possible, sometime sooner than later.

What’s your advice to getting started, or shifting into
seeing THESE arrows? More so, getting initial financing.
I reckon if it’s a deal, then finding the $$ shouldn’t be a problem.

import · March 21, 2007, 6:07am

Big Ticket Stuff - Posted by Jimmy

Posted by Jimmy on March 21, 2007 at 06:07:06:

Replacing roofs and re-flooring units is part of the biz. It’s only a problem when I have to make a major expenditure years earlier than I planned. That’s why I never install carpet anymore. I use laminate and vinyl.

Because I buy major rehabs, most of the major work is already front-loaded and incorporated into the purchase price.

Surviving long term? are you kidding? my portfolio of rentals supports a family of four, and nicely. my rents are well more than double my debt service, and I’m on 15 year ams. in 10-14 years, all of these properties will be free and clear,and my already healthy cash flow will explode.

import · March 21, 2007, 8:13pm

Where do you live? - Posted by Jason (AL)

Posted by Jason (AL) on March 21, 2007 at 20:13:56:

I hear you can get Alabama property on the cheap all day long.

import · March 23, 2007, 6:47am

Re: More on That Flaming Arrow - Posted by Jimmy

Posted by Jimmy on March 23, 2007 at 06:47:44:

What’s your advice to getting started, or shifting into seeing THESE arrows?

for me, its the numbers. I am a tax lawyer/CPA by backround, and spreadsheets are my friends. The deal I described above produced killer numbers for me. Once he refi was done, I knew I could be a very wealthy man, and in a relatively short time, if I could continue finding deals like that one. and i have found them. not every week or month, but often enough to keep my crews and my money working.

More so, getting initial financing.

the first deal is always the hardest deal. it helps to have some cash. but if you are doing major rehabs, there is better-then-average chance that you can get the seller to carry some or all of the debt. the major rehab is a liability in the seller’s hands, and they want to dump it. you have most of the bargaining power