Potential first deal, need opinions. - Posted by Tracy

import · April 13, 2004, 3:06pm

Posted by Randy (SD) on April 14, 2004 at 09:18:35:

Have you read the " How-to articles" and “money ideas” on this site? If not, do so now before you go any further in your search for profitable properties.

import · April 13, 2004, 3:06pm

Posted by Tracy on April 13, 2004 at 15:06:41:

I’ve identified a property which I think would be a good investment for a rental property (its currently not rented). The seller is asking 90k. It has been appraised for 93k, but needs paint and flooring (another 5k out of my pocket plus my labor). It should rent for 950-1000/month. Maintenance costs should be low so it should cash flow ($100/month at $950 rent, w entire purchase price financed).

Here’s what I’m thinking right now:

I could offer 80k cash (pretty sure he won’t take that)
Offer 86k and ask him to carry back a second mortgage for $18k so I could get a first mortgage for the remaining balance, therefore a no cash down deal for me.
Propose a lease option deal for 90k, $1000/month, 36 months, with $500/month credit toward the down payment.

Are any of the above offers better than others? Am I way off base on any of my ideas? Could I propose a more creative offer? I’m really afraid of making a mistake on my first property. Any ideas or reassurance would be greatly appreciated. Thanks in advance for your thoughts.

import · April 13, 2004, 4:27pm

Re: Potential first deal, need opinions. - Posted by Randy (SD)

Posted by Randy (SD) on April 13, 2004 at 16:27:58:

Tracy IMHO this is not a good “first deal” for beginning investor. First of all the seller is asking full retail-worse because you are proposing $5000 in repairs, so if you gave the seller has asking price you would be $95 K. into a $93 K. property.

Examining your purchase options you propose:
$80 K. Cash-which you already say he won’t take.
$86 K. and a seller carried the second for $18 K. = $96 K. + $5 K. repairs = $101,000 for $93,000 property.
Lease option $1000 amount payment with rental income of $950 a month = $50 per month negative cash flow and you haven’t accounted for vacancy allowance, maintenance and upkeep, advertising and marketing, management (you have to get paid) etc. etc…

No deal is better than a bad deal, for a beginning investor with no resources and limited experience this is a bad deal…

import · April 13, 2004, 5:00pm

Re: Potential first deal, need opinions. - Posted by Tracy

Posted by Tracy on April 13, 2004 at 17:00:28:

Thanks for the reply. I’m a little confused re “$86 K. and a seller carried the second for $18 K. = $96 K. + $5 K. repairs = $101,000 for $93,000 property”

I was thinking of getting a first for $68k (or more if poss), his 2nd of $18k = $86k.

What would you typically offer if you had all cash?

In regards to the lease option offer, how would you offer that one so that it makes financial sense?

Thanks again.

import · April 13, 2004, 5:34pm

I misunderstood your post. - Posted by Randy (SD)

Posted by Randy (SD) on April 13, 2004 at 17:34:53:

I thought you are saying $86,000 first lien and $18,000 second lien.

Tracy, proceed with your offer if you can make the numbers work. Personally I would pass unless the seller is willing to accept something around $75,000, that’s 80% LTV on appraised value - anymore is above my buying criteria. Remember the golden rule in real estate is make your money when you buy, buying for $100 a month positive cash flow or future appreciation only works when you have reserves to cover the eventual contingencies. It’s not a question of whether or not you will have a vacancy-the only question is when and how long will property be vacant.

A perfect tenant for two years, save every dollar of positive cash flow and it?s wiped out with two months of vacancy or the water heater goes out or you have storm damage and a $1,000 deductible on your property insurance. The contingencies you must account for are far too numerous to mention in this forum.

I’m not saying don’t invest in real estate, I am suggesting you choose your properties more carefully. There has to be an upside potential on the purchase, either your gaining positive cash flow sufficient to cover all contingencies and make a profit or you’re getting enough equity (10%-20%) to risk a short-term negative cash flow.

There is a free property cash flow analyzer you can download from “another web site” do a google search for “property cash flow analyzer” or pop me an e-mail and I’ll send you the link.

import · April 14, 2004, 9:06am

Re: I misunderstood your post. - Posted by Tracy

Posted by Tracy on April 14, 2004 at 09:06:19:

Thank you again for your posts. You made some good points.

So I guess I’m at the point of asking another newbie question. I haven’t found anyone yet who’s taking or interested in all cash at 75-80% of market value. How do you find those deals typically? FSBO’s?

Regarding the lease option method, I could handle a negative cash flow knowing that $500 a month is being used toward the down payment. If you have any more thoughts regarding lease options, spefically for this deal or in general, would appreciate your thoughts.

If you could shoot me that link re the analyzer software, I would also appreciate that. Thanks again.