I didn't randomly jump on anyone. I jumped on you specifically for a specific reason. There was nothing random whatsoever about it. The reason was that your question implies that I would feel smug when other people lose money. I take offense to the question. Further, it is a dumb question that has nothing at all to do with REI. Does this mean I won't answer more substantive questions from you in the future? Not at all. I'm happy to help explain concepts, or clarify anything I can about REI. But I expect this thread to stay on topic.

Spex and others - I am a first time poster who has lurked for some time and been driven to register and post due to the wealth of information provided in this thread. I have read the entire thread and the education provided has been incredible.

Let me introduce myself - I am a 26 year old firefigher/paramedic with a B.S in a business related field. I make a fairly good living at what I do, but I am afforded a great schedule in which I have 4 days off a week and have decided to get involved in REI. I am fairly skilled when it comes to home repair/construction and have many local contacts which allow me to get this sort of work done cheaply. I currently own my home and rent out several rooms to help with the mortgage and plan on turning it into a rental property soon (it is in a college neighborhood and has good rental potential). My mom is a RE attorney and broker and willing to invest with me. She currently owns 10 SFH rentals and has the credit and financial resources to help me get started.

The property I am currently looking for advice on is a 8 unit property in a fairly poor area with a very motivated seller. The property is a mix of studios (3 of which share a common bathroom), 2/1 and 1/1. It is currently bringing in $2950/mo in rental income with long term tenents. One studio is exchanged for landscaping services, similar ones are renting for $400/mo. The 2/1 unit is in the middle of a remodel and vacent. The current owner cannot even afford to pay the permit costs for the remodel so the project is on hold, however the plumbing and electrical work is done, along with new carpet. It will need flooring installed, cabinets, a counter, appliances and paint. I will be planning on doing most of that work myself. This unit should bring in a conservative $1000/mo additional when rented. I figured less then $4000 to get it in rental shape.

The seller originally listed the property at $505,000 four months ago, and has no reduced the asking price to $365,000. I plan on offering $300,000 and seeing where things go from their. Even at $325,000 the cap rate is 8% even with the current vacent unit and figuring a $24,900 NOI. With a $50,000 downpayment and a 7% APR I have an inital return on equity of 42% figured. I spent several hours at my City Hall researching the property and the city planner mentioned that the property could probably be split into 3 parcels and developed in that manner. The city also plans to bring sewer lines to the property at the end of 2010 at a cost of $2500 per hookup to get rid of the septic system. The parcel was orginally county land and annexed by the city in 2005. The building inspector also knows of the seller and informed me that the sellers personal life is affecting his business life at this point in time, resulting in him ignoring citations for the lack of permit and so on.

Prior to the remodel the property would have a positive cash flow, even at the asking price. With the 2/1 finished and rented and the landscaper charged rent I could bring in at least $1200/mo additional.

If any posters are willing to read over my post and provide me with feedback on what I should be wary of in this property and what I should be looking to actually purchase for I would be grateful. I will do my best to provide any additional information that might be needed and hope that I can become a contributing member of this forum. Thank you again for the great thread!

Bump. I got a couple other's people's input in response to my post. Do you have anything to add to this spex?

When will Obama confiscate all the real estate?

that's cool. i was hoping to get a response from somebody who has experience and knowledge of the real estate market in sw florida. that obv isn't you. i posted here because it is the real estate thread in this forum. i apologize i have offended you so much that you had to write a post about it that took you longer than it would have to answer my original question. i also apologize for not blowing you like everyone else for starting this magnificant thread.

It sounds like this is an old converted house. First thing I'd do is call the courthouse and find out what the zoning is. Then get a copy of the zoning ordinance to be sure you can have eight units like you describe. You don't want to end up in a fight with the city over this if a neighbor decides to complain.

This is a great little upside, however, just be sure you're not overpaying for the upside when you buy.

So $2950 (45%) = 1327/mo NOI
20% down = $60,000
closing costs = $9,000
renovations = $4,000
total cash out of pocket = $73,000

$240k mortgage @ 6.5%, 20 yr = $1789/mo.

So you're looking at a negative cash flow of $462 per month. That isn't quite a 42% yield.

You probably got a deal at about $150k to 200k.

I'll note that this jives with whoever made the estimation "it's a deal if (monthly) rents are 2% or more of the purchase price."

You're getting 2950 in rents, so you can pay ~150k. You can think about the range up to 200k (4k in rents), since you think you can add an additional 1k in rent from the 2/1.

Most of the country can be described this way.
When there are so many houses in the price range, they aren't necessarily deals.
As discussed, this is speculating (i.e. gambling). Not necessarily a bad thing, but (as discussed), not Spex' style of investing.
Well yeah there's obviously +CF, but you've got opportunity cost, too. You buy a house for 60k. You bring in 800/mo less 45% expenses, so ~5280/yr. That's good if otherwise you would be putting the 60k in stocks/bonds. Of course, if you buy smart (search for deals that will give a good enough cap rate and COCR even though you're now paying interest), you can take that 60k and buy 5 60k-houses at 12k down. The equity you build in the houses is gravy. Spex looks for 10% cap & 25% cocr minimum for deals. Usually with SFHs, you can't find that, which is why he sticks to MHP, apts, etc.
Banks usually accept full price offers quickly. They are not in the RE business.
Sad but true, people don't have 12k down. The poverty line in this country is like 15k/yr. Also, with home prices dropping, lots of people have a "better safe than sorry" mentality wrt buying. This will turn around slower than the market.
I never saw you ask for someone with knowledge of Florida in this post, but now that you have, Gitty Up does RE deals in FL. Maybe what he does would interest you.

He buys homes super low, usually cash, from people -- not from the MLS or from real estate agents -- and resells them (quickly). He markets heavily (signage & whatever -- "Want to sell? Call me at xxx-xxx-xxxx") -- from what I can tell. He also has an ask me thread I think. If not, he started a 'walk thru a deal' thread. Use search.

Spex - Thank you for the answers.

I have checked out the zoning and was told that it is zoned for the 8 units that are on the property. Strangely enough this is not an old house, it was originally built in 1940 with the 8 "cabins" on the lot.

I calculated the mortgage at 30 years a 7% which is why I may have gotten a different number initially, and with a smaller down payment. I will need to work on my math, the spreadsheet I used gave me a positive cashflow. I thought I remember you mentioning in the thread that 45% was for poor managers. I will be managing the property myself initially and when I totalled up my predicted expenses I came up with $8300/yr or 25% of my income. Am I just grossly underestimating here?

My closing costs will 1.5% less as my mom will act as my broker, but that will not change the cashflow problem it seems I would have at the price I was looking.

The current owner bought the property for $160k in 2001, and initially listed it for $505,000. What is the best way to approach getting the price down to the 200K range that is suggested without being taken as a joke? Also, is my biggest mistake factoring less than 45% when getting my NOI or is it that I was planning on a 30 year note? Thank you agian for the help.

Additional Info: I live in California where RE prices are generally higher than the rest of the country if that makes any difference. I figured 8% of the gross income in repair costs, plus insurance, taxes and advertising in my expenses.

thanks for this valuable info. yes, the money is currently in the stock market and will remain there unless i do a deal or two.

i understand that spex, and many others, would put 20% down on six houses instead of buying one at cash. it makes sense to me too, however i run my own business that takes a lot of my time (yeah no wii or shark tank here) so i can't do the real estate thing full time and i'm a newbie so i'm definately not ready to manage a half dozen properties.

i'm looking at this as a long term investment/speculation and if i have success maybe i will do the 20%-30% down in the future.

again, thanks for your input.

hey spex,

i made it all the way to your second post in this thread and saw this little nugget: "When negotiating, the first person to mention a number loses."

it seemed somewhat familiar because i was just reading john t reeds site over the weekend. are you that weasel dolf de roos, sir? if so i don't think reed likes you very much or your buddy kiyosaki for that matter.

http://www.johntreed.com/DeRoos.html

it's not an exact quote but it was very similar towards the bottom of the page.

amirite?

I'm not really sure what you're talking about here at all. Are you implying that I am, in fact, DeRoos? I'm not. I dont' know what quote you're talking about either. Are you saying that the idea of the first person to mention a number loses? That saying goes back a LONG way, although I'd admit that the first person I heard use it was Carlton Sheets (not an endorsement of Sheets by any stretch).

I'm not sure at all how to take this post. Is this an attack of some kind?

Edit: I was thinking about this more and I figured this must be some kind of joke that I'm missing. Sorry if the reply is overly snappy.

Tough question. I grew up working around SFH renovations, so I was somewhat competent starting out. I'm expect your local REI club could guide you somewhat here. Also, a few hours at the library couldn't hurt. that is where I'd start learning before I even looked at any houses. The fact is that once you understand basic construction, problems start to jump out at you.

Also, if you are afraid to get ripped off by contractors, be sure you are using people that are recommended by REI club members or other landlords. I've found that if you ask 10 or 15 people for 3 recommendations, there will be a couple names that get mentioned over and over. May not be the cheapest guys, but will generally do quality work at a fair cost. Obv you don't want to just hire the cheapest guys.

I've also found that speed is a way bigger problem among contractors than honesty. In my experience they are honest but tend to be slow. I use guys that have proven to be quick. Although sometimes the only way to know is trail and error.

I know others (including spex) have answered your questions, but as another newer investor I felt inclined to chime in. I have found on the SNF I own that I do much of the work itself. I have learned quite a bit about building construction due to my background and have found that with a bit of reading (even the basic home repair books at home depot or lowe's) an intelligent person can become fairly familier with home repair and construction quickly.

I mention doing alot of my own repairs, but I also have used contractors for several things when I have been too busy with work, and when things are out of my skill level. I found that by educating yourself prior to hiring them (look at the DIY book for the project) and finding out how long it would take an amature, you can figure out how long it should take a professional.

ex: If a DIY book states you should be able to install a garbage disposal in 45 minutes, you know a handman giving a 2 hour labor estimate is trying to get over on you.
I would highly suggest trying to find friends that are doing small projects on their places, or members of your REI club and volunteer to help out so you can at least familierize yourself with the process. Hopefully I was not super redundant and I aplogize if these things have been said before.

I don't have a ton of startup money, but my friend and I are looking to start finding foreclosures and fix them up. I live in a blue collar area where you can find real estate extremely cheap. IE: Houses that need work for 15-35k.

We recently found half of a duplex for sale that is bank owned and listed at 21.9k. We had a contractor look with us and he said its in good shape, and probably 3-5k is all it needs into it. WE can do the work ourselves.

Rent in this area is 450-600/month. Even if we get the bottom end of that and pay it off in ~4 years, are properties like these a good investment? It seems to be too easy?

The area is full of these houses and comps sale for 32-40k.

I think that if you follow the guidelines i've outlined in this thread, you'll be in good shape.

i don't understand something, spex. this guy obv asks you a question you have answered a thousand times here but you give him a polite answer. yet i ask a reasonable question and everyone and their brother, including you flamed me. what gives?

btw, no i didn't really think your were dolf de roos...but he mentioned something similar to what you preach in one of his books and reed wasn't thrilled with it. it is slightly different tho, and i do agree with you over reed on it...not that it matters to you i'm sure.

Spex,

First off thanks for this great thread. It's a fantastic resource and I know a lot of people really appreciate you donating your time to helping new investors. I've spent the last few weeks toying with the idea of renting as a means of (eventually passive) income and this thread has really put things into a sharp business perspective for me. I never considered cash flow, or buying below FMV, or considering expenses before calculating cash flow. I've read this entire thread in the last 48 hours or so, and I know these last few pages you've been a bit flustered by people who seem like they've just read the last post so forgive me if I ask anything you've answered already! My excuse is that I'm twenty one and up until recently always thought that I would be going to university and then working for someone else for the rest of my life. I've never considered anything else. Now I'm entering my final year at uni and I've realised that I am definitely capable of working for myself and retiring young. So I'm more than a little excited!

I really buy into your REI strategy of buy, refurb, rent, refi. This seems like it would be the quickest and safest way to reach my financial goals. As you like I have determined my financial goal as follows:

"To have enough money to be financially free. That is (a) to never have to work for an employer again, and (b) to have a passive income from my investments that covers all of my living expenses." Honestly if I were bringing in £45,000 per year I wouldn't know what to spend it on since I'm not from an extravagant background. I'd like to be at that stage where I know I'm safe by 35 (I'm currently 21) and then spend my time travelling and continuing to develop my portfolio as a challenge to reach a £100,000 annual passive income. Do you think this is feasible?

I've reverse engineered the numbers, and to have £45,000 per year I need to be renting 15 houses with no mortgage and a £450 monthly rental (average rent for a 2 or 3 bedroom terraced house in the north of England). This would bring in £6,750 per month or ~£81,000 per year, and minus 45% expenses bringing in £3,750 per month or £45,000 per year. I would actively manage the property at this stage until I could develop my portfolio to bring in a £100,000 p.a. net income including management fees so I could just work a few hours a week and spend the rest of my time travelling. I figure at this point I won't just be involved in single family homes so couldn't try to calculate how long it would take to double my income. I also have the same attitude as you: I will be investing for cash flow not appreciation, so any equity will be a bonus. Though I would like to have an estate worth over £1,000,000, just so I can consider myself a millionaire if only on paper!

My initial plan is to try to get hold of 2 bedroom terraces for £40,000, these would require a 30% downpayment with a 7% mortgage. If I can get a mortgage for 30 years this would be for £28,000 with monthly repayments of £188.00.

£450 rent - £188.00 mortgage - £202.00 expenses (45% rent) = £60 per month cash flow.

Now these properties will definitely be in need of refurbishment. My stepfather is a builder so I can get trade rates for materials and he won't rip me off. I would never buy a house with structural problems unless the numbers worked, so I am just looking at houses with cosmetic issues which need new carpets, paint, kitchen and bathroom. I reckon I can get all that done for less than £15,000. I figure if I have the best quality houses available for rent this (a) means I would be dealing with less vacancy problems and (b) the house would be worth more when it comes to refinancing.

But this means my rent works out to 0.8% of my investment and not the 2% goal. Honestly I know people have said it before but to be getting that number seems impossible. I'm already trawling bargain bucket properties in auctions, repossessions and at the county court whilst having the longest possible mortgage. To make that 2% figure I would have to find a 2 bedroom house for £25,000 which I don't think exists in the UK any more. Should I seriously be considering anything less than 2% an instapass?

Anyway I want to then remortgage the house to get the equity out and do the same thing again. I would need to be contributing a portion of my wage as well as all of the excess cash flow into a fund for my next deposit. I would repeat and rinse until I had 15 houses bringing in £60-75 per month cash flow each. That would be phase one and would take 7 years max.

Phase two is to pay down the mortgages. I would need to figure out the quickest way to pay down the remaining mortgage on my first house. This would be either through cash flow alone or through remortgaging the other houses plus cash flow. Once the mortgage is gone I would be getting £250 per month cash flow from that house instead of £60. I rinse and repeat this method until all fifteen properties are mortgage free and I'm just taking in expenses. I suppose this would take me another 7 years max.

At this point I would be able to quit working for other people and focus my time 100% on getting that net £45,000 income up to a net £100,000 in the next few years.

--

Now after that sprawling, rambling post I have a few questions if you would be so kind as to help out one more beginner:

1. What do you think of this plan? Is it feasible? Have I missed something? Could I do it quicker? Am I expecting it to be done too quickly? Would you do anything differently?
2. Would you instapass on the £40,000 house outlined above? What about if you were just starting out?
3. Do you have any tips for filling vacant properties?
4. Do you have any suggestions to help me reach that elusive 2% figure? Am I looking for houses in the wrong places? Could I negotiate better deals? Am I stuck with 0.8%?
5. What would be the quickest way to get from that £45,000 income to £100,000? I have a few ideas in my head but I doubt any of them are worthwhile. Something tells me that maybe I should just set £100,000 as my goal because all of the mortgages paid off at £45,000 is more of a hindrance than a help. I would be better having that capital leveraged across forty units than having fifteen fully paid off. And then trying to get all of the mortgages paid off through cash flow and moving equity around.

Thanks so much for taking the time to read this post even if you don't reply. I appreciate that you're much busier than I am and that just by starting this thread and sharing the information you've given away a lot of knowledge that is otherwise hard to come by.

Sorry if you feel I unnecessarily flamed you. You gotta remember though that when you post here you are asking a question that pertains to your personal situation. But when I respond, I'm trying to instruct everyone that reads this thread, not just you. Originally I did point out that the question has already been answered, and you proceeded to argue with me, stating, in effect, that you can't be bothered to read 1,000 posts. Well, I can't be bothered to answer the same question a bunch of times. That is a waste of my time, and since I'm the expert giving free advice, I get to decide which questions are worth answering and which are a waste.

I don't agree with John Reed on everything. He advises against strategies that I've found to be effective. Reed is very conservative. I'll say that if all you did was follow Reed's advice you'd probably be in good shape as an RE investor.

This is a very good start I think. What you might consider is the AMOUNT you'll need in a diversified investment portfolio that provide you the kind of life you want. This gets somewhat trickier, but is pretty important. The idea of having cash-generating investments like REI is great IF you also have somewhere to stick the cash. Over time you want to try to spread out your money.

This might be true for you now, but I promise that things will change. You'll get older, get married, have kids. You'll want your wife to come with you to travel the world, so you'll have to factor her living expenses in. Then you'll have kids who'll want to go to college, etc. You'll want to buy a house, so you'll have a mortgage to pay.

Is it possible? Yes, definitely. However, I want to strongly caution you here. People tend to be very focused on getting rich FAST (14 years is fast). That kind of thinking is why so many people get busted investing. You want to invest like Buffet - content to wait months or years for the RIGHT opportunities to come along. Rushing will cause you to make mistakes.

I dunno about the UK, but here you are generally not going to be able to get a mortgage this small for a 30 year term. You're probably looking at a 15 year tops.

If the numbers don't work they don't work. You're going to help yourself tremendously by being patient. Perhaps rather than focusing on SFHs, you should try to learn more about creative REI. Creative REI focuses on taking properties nobody wants and making them into properties that everyone wants. This is what I do with mobile home parks and crappy apartment houses.

yes and yes. this thread has afforded you the opportunity to pass on trash deals.

Easiest way is to have properties that people want to live in. You do that by giving them something that they feel is better than they could afford.

Where is you market? Right now I'm interested in expanding my rooming house portfolio. Thats because every time I have a vacancy in my rooming house, I get about 40 calls. I know that people need the housing, so I'm in a position to capitalize on that population. THAT is the quickest way to create wealth - find a need and fill it. I don't intend to be vague or to blow your question off. I realize that you are asking for specific methods for buying houses cheap. The key is to get the stuff that nobody else wants. That is what makes it cheap. SFHs are generally NOT cheap.

John Reed wrote a book called "How to buy real estate for 20% less than FMV" or some such. Its worth reading both volumes. I'm not sure if or how the techniques will transfer to the UK though.

Thanks for your reply. My worry is limited capital. I'll be graduating next summer with about £4,000 in the bank so won't know where to start. I don't think trailer parks exist in the UK, there are caravan parks but they are much less popular than in the US. Perhaps if I can just get a cheap one floor one bedroom apartment in a house then that will be a foot on the ladder and enough to start getting me a positive cash flow, however small.

I would actually like to invest in student housing in my university town as my university is doubling in size next year and the year after there will be an increased demand for private housing. For example I know my landlady paid £213,000 for a four bedroom house, extended it to a seven bedroom and takes in almost £2,000 per month in rent from us. But of course that is not 2% of what she paid for the house and unless she has a ridiculously low mortgage rate she also won't be able to keep 45% for expenses. She owns about twenty houses but I suppose she's doing it for the equity rather than the cash flow. What seemed like a perfect plan I'm now being told is unfeasible.

What's the urgency of the 2% rule? Is it just how quickly I can pay back my mortgage? What if I can create a positive cash flow on top of mortgage and expenses? Can I neglect the 2% then?

Unfortunately most of the places available for under £50,000 are either one floor one bedroom flats or land with planning permission for development.

http://www.propertyfinder.com/cgi-bi...n-pfc&u=BOLTON

http://www.propertyfinder.com/cgi-bi...u=fn-pfc&t=res

Also what would you suggest if I couldn't secure a mortgage that small for that long? Any shorter and I would probably not be able to cover expenses.

Cheers spex!

Spex,

When you say "I buy properties that nobody wants" do you mean because they are so run down or undesirable? Or do you mean because you are finding places nobody else has knowledge of, so you're the only person putting in an offer of any kind.

I realize the answer is probably both, but which would you say is more accurate in your case. While reading the thread I always interpreted it to be run down or undesirable properties, but then thinking about it more I guess it could also be unknown properties.

Mostly they're run down or have high vacancy or both. Sometimes I become aware of deals other people aren't. And most of the time I'm the only one putting in and offer. The easiest deals to find are run down properties.

Spex, when you put in offers then I am assuming you are approching sellers directly. Do you approach them with a hard sell technique where you tell them you are aware of the vacency problems, ect or do you not tip your hand early in the offer? Are you making it seem like you are helping them out of a tough situation or do you play dumb and use that information later in the negotiations? Thanks for all the input.

I just take the sellers numbers and use them to put together an offer. I dont' think too much about whether the offer is too high or low because the income from the property either fits into my criteria or it doesn't. I don't try to sell anything. If they don't like my offer they either counter or they don't. Sometimes sellers ask me to justify my offers which I'm happy to do by explaining my calculations any my repair estimates. I also inform them of my experience if they don't already know.

I don't play any games like trying to 'help' them or anything. First off, everyone knows what is going on. Everyone is trying to make money. Sellers are not idiots. Second, I can't imagine how games of this type would help you close a deal. I mean, the seller already knows how low he'll sell for and you already know how much you'll pay. So long as those numbers overlap you'll make a deal. If not, then you can't possibly make a deal.