Getting REAL serious about RE investing

[The Captain]

I've joined the local REIA group and will be attending the next meeting a week from Saturday.

Spoke to my banker who will pre-approve for 80k with full knowledge of the type of loan.

Have 6 months EF in reserve and 20k on top of that for this venture.

Trying to run business models and not having much success finding excel templates to project cash flow, ROI, ROE, etc - any suggestions?

I've identified a property of the type I'd like to target. 3bdrm, 2 bath condo type townhouse where the association keeps up the grounds and exterior. I know the area, it's a good working class area.

Price is 40k, foreclosure. Association fees are 110 per month with Real Estate taxes another 300 per month. PMI on mortgage would be say 200 per month which gives a monthly carrying cost of 610 which I can cover on my current cash flows from my job.

I know I have to check the association to make sure no more than 15% are in default.

I know I need to get a lawyer to handle the legal stuff.

What else should I consider.

Rents in the area range from 1100 - 1800 per month.

If there are issues with the association I could make a cash offer at the risk of wiping out most of my EF in lieu of getting financing and refinance in2 years.

Thoughts and suggestions?

[2kids10horses]

If it will cost you $600 per month, and you can rent it for $1200 per month, you pocket $600 per month positive cash flow. (I think you forgot to add property insurance in on your costs.)

I see no problem with that.

Purchase price of $40,000. Putting 20% down is what, $8000? Do that so you won't have to pay PMI. That means you will borrow $32,000.

If you are approved for $80,000, you could buy 2.

If they are listed at $40,000 you can be sure that the bank will sell them for less. I would offer $25,000 and hope to be able to get it for about $30,000. Shoot, at those prices, buy 3. You'd have postitive cash flow of almost $2000 per month.

If you can do excel, you can make your own spreadsheets to calculate your ROI and ROE.

If you get it for a low price, the next step is to appeal the tax value for future property taxes.

[2kids10horses]

Rick,

A $40,000 note at 5% is only $214 a month.

I think the OP's "PMI" was "Principal and Mortgage Interest". I read it as "Private Mortgage Insurance".

But, if rents are that high, and the purchase cost is that low, this is an absolute "no-brainer".

[The Captain]

I'm planning on putting 25% down to get the best interest rate (save about .4%) as there won't be the condo "penalty" or private mortgage insurance. I didn't factor in property insurance but figure that should run about 80 per month (don't have to insure the exterior, just from the interior walls in).

Since this is my first time I have to wonder about the listing being so low ( it's on the Fannie Mae homepath site for investors). Do I bid at the listed or go with my highest and best offer?

[2kids10horses]

captain,

get a real estate agent who has dealt with Fannae mae before.

You'll be buying 'as-is'. They like offers with no contingencies.

Find out the listing history. How long has it been listed? For how much? What repairs are necessary? It's a townhouse, which means there's a HOA. Are there restrictions on renting? Is there a waiting list? Can you rent it? Is the HOA solvent? Are there a lot of unrented units already in the complex? If so, why aren't they rented? What have other units sold for?

You need to do the "due diligence". WHen I said it was no-brainer", I mean it looks like the dollars work. You still need to find out all this other stuff. For example, if there are restrictions on renting in the complex, and there's a waiting list of 10 owners waiting for permission to rent, and you will now be number 11 in line, you don't want it. Or, you find that there is a pending Special Assessment of $50,000 per unit because the parking lot needs paving and all the roofs need replacing, etc.

[brdsl]

Thought. If those are true numbers, the house is probably gone or going quickly.


Check DOM. You might want to see if they are doing multiple offers.

Good luck.

[Deleted]

What would the cost be on that $40k place to make it rentable?

[Clever Username]

A modest danger factor in your plan is the condo association.
If they have a high vacancy/default rate, their bills could grow quickly.

One association I was a member of actively gamed the numbers. Monthly fees actually ran the budget moderately in the red. When reserve funds grew low they'd declare "special assessment" of $10k to bulk them back up.
I say this was done actively. It was by choice so owners selling would look good to a buyer looking only at the monthly dues.

[The Captain]

MMC - I'm setting up an appt this weekend to inspect. From the pictures it looks to be in pretty good shape. Don't think it will take much to make it rentable.

I appreciate the feedback on the condo association. Used to have a condo looong ago so already knew to check for special assessments. Will also request the most recent set of association financial statements as well as the association by-laws. Won't buy if the default rate is above 15%. Also will check the association rules on renters. I did not know that there could be a waiting list so appreciate the heads up on that.

I've already connected with the real estate agent who specialized in HUD foreclosures. The step I'm trying to get into is the last-ditch private auction before the properties are bundled into pools for large investors. The property will be listed for 15 days with preferences going first to owner-occupier buyers, then to investors. I plan on making a bid after the 15 day period and inspection.

It may turn into a multiple bid proposition which is why I need to run the ROI/ROE calcs. I can then decide what the "highest and best" offer will be. If I win, great, if not I'm already looking at several other likely prospects. One thing you all have taught me well is not to get emotionally involved, it is a business decision.

[skweet]

It is so weird how real estate is so local. If a property could legitimately return rent of $1,450 per month consistantly (the average of 1100 and 1800, that OP states), then the sales price at a fire sale would be $175k. I know this because I just sold a property with that rent at that price, and had investors chomping at the bit to get it. An agent would have listed for $230K, and probably taken 6 months to sell it for around $210k, but I wanted to move it fast. Where in the world, do investment properties regularly sell for cap rates in excess of 50%? I know everybody here says they exist in a ton of places, and I have no reason to call OP a liar, but it is so foreign to me that I have a hard time believing. Too many people are sitting on millions of dollars in checking accounts earning nothing, for me to believe that rental investments that assure even 10% return aren't gobbled up. I, also, don't buy that most renters have a hard time coming up with $8k down payment, $350 PITI (or $500 at a local bank for a 10% interest rate heavan forbid), and a modest credit score, but will shell out $1,100 + for rent. Qualifying for a loan isn't so difficult today, maybe a government loan at 4%, but a bank will lend money, if a borrower can pay it back at whatever a market rate is.
To the original post. If your facts are in fact a fact, there should be no question whether to buy or not. It is a fact that you must.

[The Captain]

skweet - just showing my ignorance, but wha do you mean by "properties regularly sell for cap rates in excess of 50%"

I don't know what a cap rate is???

And yes, buyers have a hard time coming up with the down payment and have trashed credit scores so can't get financing. However people need a place to live and in the Chicago secondary market 1200-1800 for a 3/2 is pretty average.

[milee]

Apr 25, 2012 16:17:43 GMT -5 skweet said:

It is so weird how real estate is so local. If a property could legitimately return rent of $1,450 per month consistantly (the average of 1100 and 1800, that OP states), then the sales price at a fire sale would be $175k. I know this because I just sold a property with that rent at that price, and had investors chomping at the bit to get it. An agent would have listed for $230K, and probably taken 6 months to sell it for around $210k, but I wanted to move it fast. Where in the world, do investment properties regularly sell for cap rates in excess of 50%? I know everybody here says they exist in a ton of places, and I have no reason to call OP a liar, but it is so foreign to me that I have a hard time believing. Too many people are sitting on millions of dollars in checking accounts earning nothing, for me to believe that rental investments that assure even 10% return aren't gobbled up. I, also, don't buy that most renters have a hard time coming up with $8k down payment, $350 PITI (or $500 at a local bank for a 10% interest rate heavan forbid), and a modest credit score, but will shell out $1,100 + for rent. Qualifying for a loan isn't so difficult today, maybe a government loan at 4%, but a bank will lend money, if a borrower can pay it back at whatever a market rate is.
To the original post. If your facts are in fact a fact, there should be no question whether to buy or not. It is a fact that you must.

You can find deals like that around here as well, but you gotta have cash. That's part of why I'm thinking of doing this - the numbers are just so tempting.

[2kids10horses]

Captain,

I thought you said it was Fannie Mae?

A HUD foreclosure is a different kettle of fish.

[skweet]

Apr 25, 2012 18:00:06 GMT -5 The Captain said:

skweet - just showing my ignorance, but wha do you mean by "properties regularly sell for cap rates in excess of 50%"

I don't know what a cap rate is???

And yes, buyers have a hard time coming up with the down payment and have trashed credit scores so can't get financing. However people need a place to live and in the Chicago secondary market 1200-1800 for a 3/2 is pretty average.

A cap rate is short for Capitalization Rate. If you invest $40 and get a return of $20 ($1,760 per month), then you have a 50% cap rate. It is usually used as a valuation method, for instance if like investments are returning 8%, you would expect a capitalization value of around $250k on a $20k return. This means that if you would be taking like risks on purchasing a stock that is expected to return 8%, but could instead purchase this rental then you are getting a $200k + bargain.

I suspect there is actual data, but anecdotally, most people aren't in the dire straits that you think. Many choose not to purchase real estate for reasons outside of capabilities, you and milee for instance can, but are not willing to jump on such an obvious home run invesment. This is another thing makes me suspiscious that deals exist as advertised. Are you going to need to make $20k+ in repairs every year for your renter? Is $1,100 the asking rent, but 75% of rentals remain vacant? What is it about this market that does not match basic economic theory? If it is as you describe, then you would be crazy not to invest. If you got a loan from a local bank at 10% interest on $32k, and netted $600 per month of gross positive cash flow, then you are making a 90% return on your investment of $8k. There is just no question as to what you should do.

[The Captain]

Apr 25, 2012 22:51:04 GMT -5 2kids10horses said:

Captain,

I thought you said it was Fannie Mae?

A HUD foreclosure is a different kettle of fish.

2kids - Again showing my ignorance. The properties I'm reviewing are on the Fannie Mae website. The real estate agent who is going to show me some of the properties supposedly specializes in foreclosures. I don't know where I got HUD from...

I'd appreciated it if you could expand on the differences between Fannie Mae and HUD foreclosures though...

[The Captain]

skweet quote snip * A cap rate is short for Capitalization Rate.*

Thanks skweet for the thorough explanation above, it's very clear.

snip * This is another thing makes me suspicious that deals exist as advertised.*

I agree, it seems too good to be true and this is my first time looking into it which is why I'm seeking wisdom here

snip *Are you going to need to make $20k+ in repairs every year for your renter? Is $1,100 the asking rent, but 75% of rentals remain vacant?*

Vacancy rates are 8-9%. I would not expect to need to spend much in repairs, that's what the association dues are for. FWIW the balance sheet and income statement are going to be key here. I used to live in a condo and am an accountant by trade so can read and understand financial statements. It's what is not on them that is the risk...

snip * What is it about this market that does not match basic economic theory?*

I agree and would love to be able to answer that question. I can say that I'm seeing single family 3/2's selling for less than 100K, needing some work but with great bones. It's really the actual rent that is the keystone and I've checked postings on craigslist, flyers at our local groceries, and ads in the local newspapers.

I suspect the listing price on the online auction is a starting place and there will be multiple offers with the properties going to the "highest and best". I'm just trying to figure out how to decide what my highest and best should be.

Really appreciate the comments and feedback! ;D

[2kids10horses]

The two "Quasi-governmental" mortgage loan securitizers, Freddie Mac and Fanny Mae buy mortgages from the mortgage originators, package them into "securities" and sell securities to investors. Those investors hope to earn the interest generated by the people owning the houses.

When those owners defaulted, ownership of the mortgage (the security interest) went back to Freddy and/or Fanny and so now, they're having to sell them. You offer on them like any other real estate. They're listed by a real estate agent, put on the MLS, and also listed on Freddie's and Fanny's webpages.

HUD houses are offered by HUD because the mortgage loan was a different kind of government backed loan, and they try to do more direct selling, by offering via a certain webpage. You have to get an agent authorized to bid on HUD houses, and they have to do it thru the "Bidselect" web page. They have these rules and regs as to when they lower the price, when investors can bid etc.

My personal experience is that HUD houses are pretty rough. I have looked at many, but never found one I'm interested in.

All the government owned houses would prefer to sell to an owner occupant before selling to an investor.

[The Captain]

Patstab - Good thoughts on single family vs condo. The reason I'm thinking of condo/townhouse type properties is the associations are responsible for all exterior maintenance (roof, decks, grounds etc.). That way I won't get hit with major repairs like a new roof or windows for the whole place. As far as carrying costs go, I figure the lower utilities would offset the association dues (110 per month) but my thinking may be flawed.

I'm a little hesitant to start out with a separate family home because then the issues of maintaining the exterior (cutting grass, snow removal etc.) come up and that's more than I'd like to deal with starting out. If there are facts I'm not considering I'd appreciate some feedback...

[Deleted]

The Captain,

One of the big risks, as someone already mentioned, with HOA is the "special assessments". In some ways they are worse than many capital repairs because it's very hard to estimate what will cause them and when they will be levied. With a single family home you can guesstimate how long a roof will last and set a sinking fund aside so you're ready. I suppose you could do the same thing for future special assessment but I think you understand my point. Don't assume you'll get out of paying for capital repairs by being in an HOA.

With respect to the yard maintenance issues, many of LLs hire gardeners. And I have often said it's much easier to fire a bad gardener than a bad HOA.

For other exterior maintenance, I found that by getting a really good, thorough home inspection when you buy (the company I've used actually produces a booklet which includes estimated component life spans and a recommended maintenance guide and log) and annually inspecting your properties will dramatically reduce your expensive surprises. It won't eliminate them because shit happens but most of the time you'll be prepared.

I'm not saying "Don't buy a condo". Just understand the risks. FWIW, I do own one; I took over the mortgage of my late mother's home. But I did that after quite a bit of soul searching; there are deferred maintenance issues, the HOA isn't the best and it's more difficult to finance. But the location is amazing being a short walk to one of San Diego's best beaches. To buy a similar sized single family home would cost me at minimum $1M. And that would be a fixer!

[2kids10horses]

Oh, so now it's an "on-line auction"!

Yes, they often advertise extremely low starting bids to gin up buyer interest, and hope to start a bidding frenzy.

I have made great deals on on-line auctions. I've lost a few, too where the price went above what I'd want to pay.

Know that there is usually, a "reserve" price, and if the bidding does not meet the reserve, there is no sale. The opening price may be $40,000, but the reserve price may be $80,000. No way to know in advance.

I have often been the high bidder, but below the reserve. Sometimes the owner will come down to my price, sometimes not. If I'm the high bid, but below the reserve, the bank will usually start negotiations by telling me what the reserve is, and do I want to buy it for that. I always say no, sometimes, I'll offer a little more than my bid, but not usually. About 50% of the time, I get to buy it at my price, and it will be a steal.

[The Captain]

2kids - so when you say the owner may come down to your price does that mean you can negotiate? This is the site I'm using (a zip code close to my area is 60120) and there are some properties listed as under contract with prices under 80K. Now mind you I know the area well and the rents will be in the 900-1100 range on some of those properties (1 is down the street from where I used to live, and the house next door was a rental so I know what that house at least rented for). Maybe I incorrectly assumed the price listed was the opening price as opposed to the contract price? Will learn soon I guess...

www.homepath.com/search.html;jsessionid=41083AF3BED720EAC73ACEE4A948F7A2.japp2?st=IL&cno=089&z=60120

[2kids10horses]

You can ALWAYS negotiate.

When it says "Under contract", that means the the buyer and seller have agreed to a price, but it hasn't closed yet. It does not tell you what that price is. All you see is the Listed price. Which is the ASKING price. The final sale may be more, less or equal to that price.

You need to find and join your local REIA. Real Estate Investor's Association. You seem like a smart guy, but you're asking questions based upon your assumptions of how real estate investing works, and I don't think your assumtions are valid.

Go to your REIA, and find out how other successful local RE investors are doing it. If they are successful, then just do what they do. It's not rocket science, but every market is different, what works for me here in GA may or may not work in the Great Pacific NorthWest.

When we got started, we didn't know about the REIA. Fortunately, we got started off right, and learned about the REIA early on, and used knowledge gained there to ensure continued success.