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Posted by brandon on October 16, 2005 at 19:27:04:
Im just starting to get involved with RE investing. Ive been shown a few houses with rental potential…wanted to get a second opinion.
The house is in a run down part of minneapolis. Its selling for $250K, it has 6 bedrooms and 2 bathrooms. The fellas who showed it to me say the sellar will find the tenants. Would rent out for 1800-2000/mo. Would cost me $1500 so potential cash flow of $200-400. The sellar would give me $10,000 cash back after closing. Does this seem too good to be true? Am I missing something? With renting…how is P.I.T.I handled?
I figure, sellar finds tenants…I get 10k after closing. I have to be missing something. Any thoughts?
Posted by Frank Chin on October 17, 2005 at 08:09:11:
Brando:
Not much of a rental market for a 6 bedroom house. I find the most popular size apartments to be 2BR, and most popular house to be 3BR.
Now who would rent 6 bedrooms?? How many family’s got 5 kids?? Rent to 6 roommates?? Who’s going to pay $2,000.00 in a run down area?
The most likely candidate is a “rooming house”, and its generally illegal in most areas not zoned for it, and even if it is, its a active business unlike RE.
Posted by Marc Donovan on October 17, 2005 at 06:25:50:
If the 10K is not on the HUD1 form and disclosed to the lender, then its mortgage fraud. You would be defrauding the lender and you could be charged with criminal and civil penalties.
You also need to do your own research. Do your own comps and rental surveys and don’t believe anything these folks tell you. They are telling you to commit a crime here - do you really want to listen to their advice?
Do a search for “mortgage fraud” on this site and you will see what I mean here.
Uh, yes. Never, never, never let the seller find tenants! The seller could sign a lease with a couple of dopers or other deadbeats then stick you with these tenants from hell in a property you now own. Ooooooo not good. You must keep control and do tenant screening. It’s a specific process.
You said the house is in a rundown part of the city. Then how would it ever rent for $1800 to $2000? Where did you get those figures? Have you been watching the rental prices advertised in the newspaper for various parts of the city to see what the real rents are? Or are you believing the seller?
You will find that 3-bedroom and sometimes 4-bedroom, houses are easier to rent than 6-bedroom houses. (Unless you are in Utah where the large Mormon population often has large families and needs housing with six bedrooms. But even in Utah, 4 bedrooms is easier to rent than 6.)
Why would you assume it’s not on the HUD-1?
Who’s to say that the seller isn’t including it on the HUD 1? I’ve done plenty of deals where the I get cash back at closing. It’s in the contract and on the HUD-1 and the lenders don’t care. As long as the appraisal is right and everything else is in order, we’re fine.
Posted by Brandon on October 16, 2005 at 20:32:15:
Thanks for that info. I got that rental info from these mortgage brokers that have been showing me some houses, and they also do wholsalers. Im just getting my feet wet with this business so I appreciate your feedback!
After Closing is the key word - Posted by Marc Donovan
Posted by Marc Donovan on October 19, 2005 at 18:58:17:
That tells me its not included in the HUD. The after closing deal is where most of these deals turn fraudulent. If its on the HUD, you get the cash at the closing, not after.
Yes, it all starts with wet feet. Next you know, your knees are wet, and before long it’s up to your neck. Just keep your head above water.
Years ago a Realtor who was acting as a buyer’s agent told me to keep my emotions out of it. Don’t fall in love with a property, fall in love with the deal…with what you can make from it.
Are you a member of your local REIA? It’s one of the best places to learn from others’ successes and from their mistakes.
Good luck Brandon. It all starts with a dream, then with effort and knowledge can become a reality. (I almost wrote “realty”. Come to think of it, that would be true too.)
Next you know, your knees are wet, and before long it’s up to your neck. Just keep your head above water.