It really depends - the answer is both. Most of the time my properties are seen by the bank as a less than desireable risk. So I have to agree to pay a higher interest rate up front and hope that when I get the property up and running properly a bank will refi me to a better deal. This is somewhat risky for me because there is certainly no guarantee that any bank will be interested when it is time to refi, and beyond that, there is no guarantee that I'll be able to get a better rate later on. So I plan to refi, but I assume that its not going to work out. So I have to be sure that at the current terms I can service my debt and still be okay cashflow wise and still make the kind of ROI that I want - those three are like differnent arms of a mobile and they have to stay in balance in order to work.

What I normally do now is get the property and pay most or all of the fix up out of my pocket rather than relying on the banks. I then refi to get my money for renovations back out. I don't normally refi out any more money until I need it. I don't normally refi my down payments back out, although I know some investors that do.

Something too that you should be aware of is that the vast majority of the time I get a check at closing when I'm buying a property. I get the prorated rents for the month in which I'm buying.

You have to be smart about when you're going to close. Like, if I were to buy a 15 unit building that rents for $450 per unit and we close on the 1st, I should get a check for $6,750. If we close on the 15th, I should get a check for $3375. If the seller is smart then he'll ask you to pay the portion of the mortgage payment for that month - its only fair since he already paid for that month and you're taking part of the rents. That is fine. See, the principle portion of a mortgage payment is made in advance - so you should pay a prorated portion of the prinicple. However, the interest portion is paid in AREARS. There is no reason why you should pay him for any obligations before you took posession of the property.

Another thing. Before you schedule the closing date, find out from your bank when the first payment will be due. If you close on the 25th of January, maybe your first payment will be due on March 1. But if you push the closing to February 4th, your first payment might not be due until April 1. You see the difference? In the first scenario you get to collect prorated rents for a few days of Jan, and full rents for Feb before you've got a payment. In the second scenario you get prorated rents for almost of Feb, and all of March. In a 15 units property that is a differnce of several thousand dollars in your pocket. This is money that you can use to fix up the property.

Ok, so I said all of that to make a more general point. I don't consider the money that I use for fix up in my COCR calcs. That is because I'm planning to refi out all of that money within one year. If it so happens that I can't refi the money out, well, I still make a decent return on my capital, but nowhere near the 25% COCR that I want to get. So I do decent instead of great.

One thing to be aware of too is that when I first started doing this it was a constant struggle to get the banks to work with me. They always wanted 2 years of financials on the property. Obviously I'd just filled the place, so I didn't have those kind of numbers. It helped though that I was still only cashing out a small portion of the value of the property, so the LTV was still somewhat low given the new valuation.

Anyway, basically, if you buy the property right up front that gives you so much more wiggle room to deal with lenders because it limits their risk.

Excellent thread. I have made a resolution to do at least one real estate deal this year. I am a beginner but have started to do some research. I live in a college town, but a friend, real estate agent, told me about a HUD property for sell. I am most likely not going to purchase this property, not confident enough in my RE knowledge yet, it is just the only one I have looked at.
Details
Built: 1978 - Inside renovated last year; outside appears to be in good shape
Rent: $550/$600 = $1150 - 100% Occ last 2 yrs
Taxes $2400/yr
Exp: ~$1200/yr (Total Guess) too high, too low, not enough info?

What price/financing would you look for here? Sorry if this is not enough information to make a judgment.

Would you ever contact the seller directly here and try to setup an owner financing deal even though he is listing with an agent?

HUD Questions
Does HUD provide you with tenants or do you have to find qualified ones?
Pros/Cons of dealing with HUD?
Anything you think is useful to know regarding HUD.

Thread is great and any help is truly appreciated.

One nice thing about college towns is that they tend to have higher occupancy rates over time. The drawback is that usually property is real expensive in college towns. Anyhoo....

Your estimate of expenses is pretty low. As a ballpark, I would estimate closer to 45% expenses. That 45% includes professional management. You'll be tempted to leave that off since you're new to investing. I'm pretty sure that no matter what I say you won't include that 8% in your expense, so i'm not going to spend lots of time trying to convince you. When you buy bigger properties the bank will make you include that management fee in your expenses though, just so you know.

Ok, so you can get about $1100 in rents and your expenses are 45%, leaving you with $605. How much positive cash flow do you need? Lets say you want $50 per unit. Now we've got $505 left to pay the mortgage. If you've got a financial calculator, punch in the numbers. if you have to pay 6.75% interest, you can pay $77k. If you have to pay 7.5%, you can only pay about $71k. Or, another way to do it: at a 10% cap rate you could pay $72,600.



No. Even if the seller could legally go around his agent (which he can't) it'd be incredibly rude and you'd make no friends. This business is, IMO, very much about friends.

By HUD, I assume that you mean primarily the Section 8 program? Section 8 is HUD, but HUD is not Section 8. Kinda like in the way that poker is gambling but gambling is not poker.

S8 doesnt' really find you tenants - you have to still find your own tenants. However, if you take S8 vouchers they will put your property up on their local website and usually they'll make the available properties known to S8 tenants that want to move. It helps too indicate that you accept S8 vouchers when you put your ads in the paper.

I very highly recommend S8 and other community programs. The pros, IMO, far outweigh the cons. First, having a community program involved helps you control your tenants - in my experience a lot of people are competeing for limited housing aid. So no tenants wants to lose their spot at the trough. Second, in these programs the tenant is not responsible for paying the rent - it comes directly from the program. Third, for some programs you've got a case manager that you can talk to if there is a problem - lots of times these programs will pay for damages inflicted on your property beyond the scope of the security deposit. Fourth, you can charge above market rents.

The downside is that you have to comply with some relatively strict guidlines if you want to participate. The house will be inspected by a S8 inspector. Of course, unless you're a slum lord you would have the property more or less in the kind of condition that S8 wants. Its not that big of a deal. The property will be inspected every 2 years or so. It seems like a pain the first time you do it because you don't know what to look do to pass. But after that its pretty easy.

spex,

Great thread.

Question...how easy is it to get setup to accept S8 vouchers, and where would one start to get a property qualified?

I assume that in your analysis of tj00’s property you are using 100% financing. How would you go about the calculation accounting for a down payment?

Hi,

I've done a couple double closings and L/O's (tried only cooperative assignments). Was thinking of getting Dave Lindahl's course, Apartment house riches. Can I get your opinion about his course/ideas?

Thanks!

how much more expensive is it to build a house than to buy a house (assume that your design is not overly complicated). would it be cheaper now that the housing market is struggling?

Its pretty easy. All you have to do is contact whatever authority handles S8 in your area. You'll have to fill out some paperwork and get the property inspected. Thats about it. These links should help:

https://pic.hud.gov/pic/haprofiles/haprofilelist.asp
www.hud.gov

Sorry, I'm not familiar with Lindahl's stuff. I heard him speak once and overall I wasn't impressed. If I remember correctly, this is the guy that never talks to his tenants and he was trying to get people to not only to buy his overpriced course, but also to buy into the apartment complex partnerships that he puts together. Overall, I didn't hear any unique insight that justifies the price of his materials. But I've never actually read anything of his, so I'm no expert.

I found this review of Lindahl by John Reed (who I respect and recommend, and whose books only cost about $35 each):
http://www.johntreed.com/Reedgururat...anchorDlindahl

I am investing my money with a guy who owns a renovations company in Canada. What he does is he flips homes (cheap, unattractive homes) and sells them for a profit. He says he needs investors because he's used his name to buy mortgages and he can't get any more houses. First off... is this a scam? I guess you can't know until he shows his true colors. What can I do to protect myself from scams? Is there a group that will help incase it is a scam? Please let me know your thoughts.

First off, lets not get confused about down payments (I'm not saying you are, I just want to be clear for the benefit of the noobs). You don't make a large down payment in order to make a property cash flow. For example, I could buy a property for $1,000,000 and rent it out for $1,000, putting $950,000 down. I'll get a positive cash flow but it's still not a good deal because my cash on cash return would be nothing and I'd be gambling on appreciation in order to make any money with this 'investment'.

Having said that, I'll answer your question. You're right, the down payment will affect the price somewhat. Thats is because the more you put down the smaller your mortgage will be. However, you STILL determine a purchase price based on a cap rate - not on a COCR. COCR has to do with the amount of cash outlay it takes to acquire the property and get it running. cap rate has to do with the the total purchase price of the property. These two are not necessarily linked, but usually they are.

Lets consider a few scenarios with different down payments. We'll use the 10% cap rate number that I determined earlier - $76,200 purchase price. Bascially, to determine the COCR for each scenario we have to change the mortgage payment to reflect the lower amount. We then take that number and divide it by our down payment to determine the COCR (oversimplified, but you get the idea). Below PP= purchase price; CR = cap rate; DP = Down payment; M= mortgage; MP = mortgage payment (assuming 6.5%, 30 years). So we've got $1100 in rents less 45% expenses. Our NOI is $605/month or $7260 per year.

CR - 10%
PP - $76,200
DP - $22,860 (30%)
M - $53340
MP - $337
COCR - $605-337 = $268 positive cash flow. 268x12 = $3216. 3216/22860 is 14% COCR. at 14% it would take you over 7 years to get your $23k back out of this property from rents.


CR - 10%
PP - $76,200
DP - $15,240 (20%)
M - $60,960
MP - $385
COCR - $605-385 = $220 positive cash flow. 220x12 = $2640. 2640/15,240 is 17% COCR. at 17% it would take you 5.88 years to get your $15k back out of this property from rents.


CR - 10%
PP - $76,200
DP - $7,620 (10%)
M - $68,580
MP - $433
COCR - $605-433 = $172 positive cash flow. 172x12 = $2064. 2064/7620 is 27% COCR. at 27% it would take you 3.7 years to get your $7600 back out of this property from rents.

CR - 10%
PP - $76,200
DP - $3810 (5%)
M - $72,390
MP - $457
COCR - $605-457 = $148 positive cash flow. 148x12 = $1776. 1776/3810 is 47% COCR. at 47% it would take you 2.13 years to get your $23k back out of this property from rents.


Can you see the pattern here? The less money you put down the faster you recover that money and the higher your COCR is. You can also see why putting more cash into a down payment is not necessarily wise. The more cash you dump in the lower your cash ROI is.

Now, that does NOT mean that its smart to buy properties at the RETAIL price and put nothing down. Not unless you have cash reserves to wheather some difficult periods of high vacancy or other problems. But if you buy the property for the RIGHT price you can put little money down and still get a good deal in terms of your cash ROI and CR.

Thanks for the reply to my other questions. I have some questions about how to structure the business.

What form do you use? i.e. S corp, LLC ect.
Do you put different properties under different LLCs?
Is it difficult to get financing under a LLC with no financial history?
How diffcult is it to move a personnel asset to the LLC?
How much litigation have you had to deal with in regard to your REI?

Anything else you think is important to know in regard to structure.

Once again great thread.

I own my smaller properties under my personal name. Larger properties are each in separate LLCs. I have an S corp that manages all my properties. I do it this way for tax reasons, which I'd rather not get into here. If you're just starting out I see no reason whatsoever that you need to worry about forming an LLC or anything.

Yes. The only way that is going to work is if you personally guarantee the loan, and even still, expect to do a little shopping. Like I keep saying, it helps a lot to go to small local lenders because they're a lot more flexible.

It depends on the asset and the lienholders. If you're talking about RE, you have to get the lienholder's permission to change the name on the deed and the mortgage docs.

I've never been sued by a tenant. I've had several instances where I could've been sued and wasn't. I've been lucky.

First of all I just wanted to thank you spex for doing this, it really is amazingly insightful for those of us trying to get our feet wet in this industry.

I'm going to give you my situation and would like some feedback. I'm 23 years old, graduating in April, and have intentions of being a property investor with a good friend of mine. We will have no other responsibilities come April, and our plan is to begin by flipping houses, dumping profits into bigger flips. Then once we have a greater working capital we'll have more options. We're just not totally interested in managing property just quite yet.

I've now read a few books on both general property management and flipping, and feel like I have about as much knowledge as anyone can without any experience (which I totally understand, really isn't that much..) I feel ready to attack a project, except for the area of finances. We are in a totally different situation than the people who these books are aimed towards. Neither of us will have any "taxable" cashflow with which to approach mortgage brokers with, as any money I've made the past 3 years has been from poker. I have ~$350k tied up in mutual funds, and ~$100k liquid cash in money markets put away for the first flip. I would think purchasing the first house to avoid mortgage payments altogether would be optimal, but I would really like to keep that other money put away and "start small" like anyone else would. The last thing I want to do is get ahead of my learning curve just because I have the finances. So in summary, I'm terrified to approach a mortgage broker. I really have no idea how to go about it other than setting up a meeting, dressing nicely, and having documents showing my assets.

Any tips on any other areas would be greatly appreciated.

Building is almost always more expensive than buying. That is partly because any time building is cheaper than buying, the builders go crazy building as many homes as they can to get that money. I've seen this happen a number of times. The builders just build and build and build. Then half of them go out of business because they flooded the market. Then homes get bought up over time. Then the builder forms a new LLC and builds and builds and builds.

Builders are dumb.

EVerything associated with building a house is expensive. Contractors are expensive. Materials are expensive. Labor is expensive. Permits are expensive. Construction loans are expensive. Everything is expensive. Well, someone has to pay for all that expense. Guess who? You.

In my experience, housing markets put irrationally high values on new construction. I think that buyers believe that a house built with modern construction materials and methods is fundamentally better. I think that is wrong. I figure that if a house has been standing 100 years, thats a pretty good indication that it'll stand 100 more years. Besides that, a house is only as good as the person who built it. I've seen friends buy new construction houses that turned out to be hastily and sloppily thrown together, and that will fail over time.