Posted by Nate(DC) on July 13, 2001 at 11:30:33:
The only “catch” is that you’ve got to take over properties subject-to which have a lot of EQUITY, because in most cases you can’t refi a rental property for more than 80% LTV…of course if you’re in a market like DC, where everything is appreciating in price really fast, that’s not a problem because within 2 years you will have 20% equity on many properties even if bought with $0 down…
NT
How do you acquire rentals? - Posted by Jay_TN
Posted by Jay_TN on July 09, 2001 at 14:32:31:
I’ve been acquiring rentals the conventional way. They are all Single Family Residences with good cash flow, good appreciation, and since they are only 5-7 years old, little maintenance. They were all bought at a discount from FMV. How do the rest of y’all acquire rentals? ‘Subject to’??? Wraparound mortgages? Any other methods?
Let me rephrase, if you had no money, how would you buy a rental property?
My original plan was to buy ugly houses, rehab, and then resell. Then, take the profits and buy rental properties in conventional manner, of course, buying at 20% under FMV.
My main goal is to have enough rentals to support myself, living from the rental income alone.
Thanks,
jay
Re: How do you acquire rentals? - Posted by Todd (OH)
Posted by Todd (OH) on July 10, 2001 at 18:08:04:
Honestly, Jay, I like your plan “As-Is”. Buy, Fix, Resell, Use Cash to Buy Rentals for passive income. In fact, sounds a lot like the CASHFLOW 101 game by Robert Kiyosaki. In fact, sounds a lot like what I’m gonna be doin’. To take it a step further, and sound like a lunatic, why stop at 20% down? Why not just pay a few of the dern things off?
I would tweek your plan, as other respondents have suggested, to incorporate learning to buy with some other less cash-intensive methods. NOT because I don’t think you should use cash, just because I think you should know HOW to conserve cash if and whenever you choose to.
I may deviate from some others here because I am slowly becoming a fanatic for having a stable of Free and Clear properties (i.e. no mortgages on them). I have bought and sold dozens and dozens of properties (creatively, without my own cash) and continue to do so. BUT, If I DON’T continue to do so, it would be nice to have a “stable” of 5-10-20-50+ FREE AND CLEAR houses sittin’ around makin’ BIG money if I’m too tired from my Hawaii vacation to get up and flip another house this week.
In other words I’m not opposed to sacrificing ROI, created by leverage, and sinking cash in A FEW properties for the benefit of perpetual passive cash flow. I mean, after you do so many “infinite return” deals, the excitement begins too dwindle (just kidding, but free and clear stuff has its own brand of excitement).
Just a thought.
Re: How do you acquire rentals? - Posted by ken in sc
Posted by ken in sc on July 09, 2001 at 15:21:21:
If you buy a house, fix it up nice, then resell it like you say, you pay taxes on that profit. Then you want to reinvest that after tax profit into a rental.
Why sell? If you have bought a house for say $60,000, spent $10,000 on it and could sell for $90,000 - why not just keep that one? That is what I do. I buy the house using a short term, no payments for 6 months loan from a small local lender (you could replace that with “investor”). After it is rehabbed, I owe in our example 70K on a 90K house. That is a 78% LTV refinance loan. Factor in 2-3% for closing costs and I can cash back out paying off the initial bank loan and have basically none of my own money invested in the rental house.
So your plan is good, but skip all that selling and paying taxes, and just keep the 20% profit as equity in your rental.
Of course, rentals in good areas with an 80% loan won’t have much cash flow for the first 3-5 yrs, so you will need to do something else to get by. Full time investors buy more, so they can sell some in order to eat. Others keep their “real” jobs until their rental income exceeds their job income. The choice is yours.
Happy hunting - Ken
Re: How do you acquire rentals? - Posted by Jay_TN
Posted by Jay_TN on July 10, 2001 at 19:53:13:
Todd, I’m still in the refining stages. My ORIGINAL plan was to cash out refinance two properties owned free and clear. Then, use the proceeds to pay down payments on 6 additional properties. Then, use the cash flow to support myself. Then, in the slow times, buy, rehab, and resell, using the large tax deductions from the rentals to offset profits from flipping. As long as my income continues to stay steady, continue to buy more rentals. Once I get up to say 20 single family residences, I will have enough. Then, use profits to pay off each loan. Then, retire and go crazy, not knowing what to do with my time.
That plan requires little creativity, a little patience, and plenty of sweat and blood. I don’t mind working as a property manager/rehabber. It’s what I love.
I’m going to write down your email address. Perhaps we can compare notes and ideas. I still like the idea of creative financing to leverage funds even further. It’s just a matter of putting the foot down and getting it done.
After poor performance of my mutual fund portfolio, I decided real estate was my call.
Regards and good luck with your endeavours,
jay
Re: How do you acquire rentals? - Posted by Jay_TN
Posted by Jay_TN on July 09, 2001 at 17:59:16:
Hi, Ken. Thanks for the reply.
The area my rentals lie is a hot city. Growth is explosive, but since it’s a relatively new city, there are very few “ugly” houses to buy. I buy these ugly houses at good discounts and then rehab and rent. Usually, on an $80k property, with 20% down payment, I will come away with a $200-350 positive cash flow, after mortgage, insurance, and expenses.
However, since I enjoy doing remodeling work, I think I can actually buy, rehab, and resell. My intention is to go into OTHER communities, with older houses, buy, rehab, resell. Of course, then, I’m looking at the profits being taxed, as well as paying self-employment income, so there needs to be a good profit. However, the homes in the OTHER communities aren’t great rentals.
So, my problem is:
Basically, my dillemna is, do I invest all my capital in rentals, or do I allow a mixture of buying rentals and properties to flip?
I was wondering how others here do it. I wanted to get some insight, before I lay out some 5-year plans.
Thanks again,
jay
Re: How do you acquire rentals? - Posted by ken in sc
Posted by ken in sc on July 10, 2001 at 07:31:21:
Great cash flow, enjoy! However, Anne is right if you are investing 20% cash down, you are not making near the investment as when you can get in light. An example:
House value $100,000
downpayment $20,000
appreciation/yr $5,000
Mortgage paydown/yr $2,000
Cash flow/yr $1,000
As you can see, you are making $8,000/yr on a $20,000 investment (40%). While that will seem great to your friends in the stock market, it is not what we who live in the creonline world try and achieve. What if you could get into this same $100,000 house for $4,000 or $2,000 or even 0 down? Your return goes up exponentially (200% to infinity). And if you have many rental houses, this is how wealth is achived in under 10 years as compared to your stock market buddies hoping to have money when they are 65.
So take the time to learn other ways to buy rentals. Your education dollars will pay off, believe me. Rule #1 = Always put the least down as possible (and still cash flow), and finance for as long as possible at the lowest rate you can get.
Good luck - Ken
your down payment is eating your profit - Posted by Anne-ND
Posted by Anne-ND on July 09, 2001 at 21:55:59:
Jay,
If you’re putting 20% down, what’s your cost of capital? In other words, is that $200-$350 positive cash flow per month AFTER you’ve paid yourself for the money you put down? If you can get 40-60% ROI buying a house with very little money down (buying via lease-option, CfD or subject-to) or using OTHER PEOPLE’S MONEY, then using $16K for a 20% downpayment means you’ve got an alligator on your hands, you’re actually losing at least $200/mo.
Something to think about…
Anne
Re: your down payment is eating your profit - Posted by Jay_TN
Posted by Jay_TN on July 10, 2001 at 09:51:15:
I definitely see your point. Until 2 weeks ago, I had never heard of a subject-to, Contract for Deed, or Wrap. This is all totally new to me. However, I’m still hung on the proposition of buying and holding long-term “subject-to” or “contract for deed.” I admit that I’m not 100% knowledgable about these transactions. Don’t these types of deal rely on the honesty of the seller making the mortgage payments?
Do you guys buy houses in this manner, and do you hold them long-term without refinancing them? Also, it had occurred to me that one could hold the home for 1-2 years and then refinance the loan to APPRAISED value, essentially getting in for no money down, but a mortgage company would not consider the home to be seasoned, correct? I mean, the mortgage is still in the previous owner’s name.
Bear with me. I’m trying to get over some of the basics. I have the resources to buy many homes with 20% down. But, if there is a better way, with little risk, and no greater liability, I’m all game.
Best regards and thanks for your time,
jay
Re: your down payment is eating your profit - Posted by Nate(DC)
Posted by Nate(DC) on July 12, 2001 at 09:28:34:
Nope. Seasoning refers to how long you have had TITLE. On a subject-to deal, you have TITLE from day one because you got the deed. The lender will never know whose name the existing loan is in; only the title company (because they have to call to get a payoff figure) and they won’t care.
NT
Re: your down payment is eating your profit - Posted by Anne-ND
Posted by Anne-ND on July 10, 2001 at 11:52:47:
Jay,
Your questions are good, but even if you can afford to pay 20% down, you are still incurring a cost that you are not including in your determination of cashflow: the return on that money had you invested it.
We buy and hold long term for rental, using a variety of seller-financed ways, including CfD, L/O and having the seller take back a note. There is always risk involved, but the returns are great for buying this way. I suggest you do a search on Merle Wooley for an example of someone who gets great returns for his investors, and helps sellers and buyers, all while making a very nice living.
good luck,
Anne
Re: your down payment is eating your profit - Posted by Jay_TN
Posted by Jay_TN on July 12, 2001 at 09:45:35:
Great jumping horny toads. What a great way to buy with no down payment!!!
I just asked this question in a later thread, and you answered it here.
Light bulbs are exploding in my head.
jay