DEAL 1, n00bie investor with questions. - Posted by CGS


#1

Posted by Bill Jacobsen on August 02, 2011 at 17:44:13:

I get an error on one of my i-phone calculators also but the other one works. I don’t know why.

You are absolutely right, it doesn’t take into consideration that you are getting the money early.

IRR is the return you are getting on your investment but assumes that you can earn the same rate on money that comes back to you. By the way, 20% per year is not too shabby.

Bill


#2

DEAL 1, n00bie investor with questions. - Posted by CGS

Posted by CGS on August 01, 2011 at 20:15:52:

Join Date: Oct 2007
Posts: 538 Opinions on a deal?


Hey guys,

Wanted to get a little feedback on the first deal I am considering doing. Here is how it went down.

  1. Made some money playing pokerz, incurred some debt going to medschool.

  2. Read a some good forum threads on investing, some books, and made some contacts at a REI meeting.

  3. One of the contacts I made has done about 9 deals including flipping/selling, buying/renting. Proposes the following:

Says he has a husband and wife who are interested in doing a land contract on a house but didn’t have the money. He set up the deal and has a verbal agreement with the owner of the house to buy it for 35,000. He says the husband/wife are interested in buying the house and have verbally agreed to pay 50k and will be able to put between 10-15k down and will pay 8% interest and plan to make payments for 6-7 years. Told me closing costs are about 1500 and has yet to suggest a fee for his service. I currently have student loans at 6.8% that will not compound annually for another 3 years but will accrue interest in a seperate account so I feel that for this to be a good deal for me I need to get about 10% ROI/year compounded annually or else my time/finite money would be better invested elsewhere.

CALCULATIONS:
Cash Investment: 35,000 + (1,500 closing?) + 2,500 (to contact?) - 12,500 (down payment) = 26,500
6 Year profit (assume 6 yr plan@8%): (50,000-39,000) + 9,839.75 (interest paid) = 20,839.75
%ROI calc: 26,500 * 1.x%^6years = 20,839+26,500, x~ 10% (this rate goes to 14% if not compounded annually) (is this a cap rate I am calculating here?)
CoCR= 7890 yearly payment/ 26,500 investment = 29% (is this CoCR for this deal?)

QUESTIONS:

  1. Are my calculations and estimates of closing costs correct?
  2. What do RE investors typically pay for the finding fee here?
  3. How much of a gaurantee can I get that the couple will buy the house from me before I purchase the house from the current owner? Is there a way to have the couple make a binding agreement to land contract the house from me under certain terms agreed upon before I purchase the house?
  4. Is 10% a worthwhile investment in real estate or can I do much better?
  5. Is there free software to put all the variables (interest, years of payment, down payment) into a spreadsheet/graph and show me how to maximize profit?

CLIFFS:
Real Estate N00b asking for help analyzing a three-way land contract/ cash purchase deal. Once past n00b story, erroneous calculations and donk questions will ensue.

Thanks for your time and taking a look!


#3

Re: DEAL 1, - Posted by Bill Jacobsen

Posted by Bill Jacobsen on August 01, 2011 at 22:37:03:

  1. I usually spend $1,000 or less for closing costs. I calculated an IRR of 1.8% per month.
  2. I don’t care what the other guy is getting. I am concerned with my return.
  3. I don’t sell what doesn’t belong to me. Get to know the couple. Make sure the house is worth what they are paying. In other words, do your due diligence.
  4. In my opinion, it is not. My required return for flips is 30% annualized and about 20% on rentals.
  5. I am sure there are. You could also set up something on Excel. I use my i-phone to calculate IRR and MIRR.

Good Luck.

Bill


#4

Re: DEAL 1, - Posted by CGS

Posted by CGS on August 02, 2011 at 12:50:27:

Bill,

I have some more info regarding this deal. Please let me know your thoughts and if this changes anything.

My contact has actually put a deposit down that is non-refundable pending his satisfaction with the house inspection of 1,000$. He is signing at the end of August and had this couple in mind that he had been working with when he purchased the house.

The couple that wanted to buy this house had foreclosed on their last house and their credit was destroyed. The husband works as some kind of trucker and makes ~4,000$/month of steady income that has been verified by the contact. The couple has saved up 14,000$ for the down payment and has provided proof of funds to my contact as of today.

The house itself is comped at about 40,000 and I have the address (any reason why I shouldn’t put the link here?). Description of hte house on zillow is “BRICK FRONT 3 BEDROOM 2 BATHROOM CAPE COD. THIS MOVE IN READY HOME HAS NEWER WINDOWS, FURNACE, AIR CONDITIONER, COPPER PLUMBING AND DIMENSIONAL SHINGLE ROOF. LARGE KITCHEN WITH A PANTRY AND BREAKFAST BAR. LIVING ROOM HAS A FIREPLACE, COVE CEILINGS AND BUILT INS. GREAT ROOM OFF THE KITCHEN IS THE PERFECT SPOT FOR A DINING ROOM AND ENTERTAINMENT SPACE. THIS HOME HAS A GORGEOUS HUGE FENCED BACK YARD WITH TONS OF PRIVACY.?More”

The pictures are numerous and look like it is probably nice.

Now the workings of the deal…

Contact has done this deal before and has all legal paperwork in order. The paperwork provides for his inspection, requires the purchasers to buy homeowners insurance and put the land contract provider on the lease, and stipulates a 2k non-refundable down payment at closing. The closing will be done with all three parties present and signed back to back. The land contract purchasers will be repaying us for the closing costs of the pro-rated taxes so closing costs will be around 500 dollars my contact says. The contact wanted 3k, I’ll probably ask him to take 2,500 since that was my original estimate and used in my calculations.

My contact asked for my tentative decision by tomorrow evening. I told him I would give it to him and that it would be pending a thorough review of documents/the house/the couple by me.

CLIFFS:
-Contact paid 1k down and bought a house for 35k with payment due at the end of August.
-Couple will buy it for 50k with 14k down (proof of funds provided) and 8% over 6 years
-Contact was thinking 3k for finders fees/leg work/etc.
-Contact has already done background/financial checks
-Calculations above change slightly and the return on this investment is 14%/year + reinvestment of the funds as principle/interest is paid. I know the 14% is less than you usually look for but this seems like an extremely passive/safe deal and once the money starts coming back I can reinvest it possibly increasing the effect rate of income?.
-I have loans at 7%/year for school that could be paid but I will have a stable income as a Dr. and am willing to take a gamble now if I can make money now
-I have more funds to do other deals.

Does this change anything for you? Would you do this deal? Thoughts?

Thanks!!!


#5

Re: DEAL 1, - Posted by Bill Jacobsen

Posted by Bill Jacobsen on August 02, 2011 at 20:57:35:

If I now understand the deal, You will pay $35,000 plus $500 closing plus $3,000 or $38,500 for the property. You will get $14,000 down from the buyers so you will have $24,500 into the investment. The total price of the house is $50,000 so you are taking back a note for $36,000 which is payable over the next 6 years at $561.10 per month. I calculate the IRR at 1.514% which is about 20% per year.

If the house is worth $$50,000 or more this is a good deal. If it is worth less than $50,000 there is a chance that the buyer will default simply because of that. Even if there is a default you risk little because the payments have been more than 20% per year on your investment. You would then resale at market price.

The only other factor is your student loans. You actually have none of your money in this deal. It is all borrowed money at 7%. Some would advise you to pay off all debts before investing. It is up to you.

Good Luck.

Bill


#6

IRR - Posted by CGS (MI)

Posted by CGS (MI) on August 02, 2011 at 16:00:03:

Just did my due diligence on IRR and related calculations. I set up a spread sheet and used -25,000 as my initial investment and 631 as + cash for the next 72 payments. I tried to estimate various irr’S but i still get the #Num error.

I am able to calculate a 20% IRR using -25,000 as my first input and 7592 (yearly payments) as my next 6 inputs. I feel this doesn’t take into account that I get 7500 back the first year as opposed to waiting a whole year to get it back. I also feel it doesn’t take into account the monthly flow. Can I set this up for 72 monthly payments? What does 20% IRR mean when input in this context? How do you guys calculate IRR’s?


#7

Re: DEAL 1, - Posted by CGS

Posted by CGS on August 03, 2011 at 03:41:49:

Yes, this is the deal. The 36,000 is actually being paid off at 8% interest so the payments are 631/month. With those numbers my excel said about 1.85%/month IRR, or about 20%/year (if I seperately input 6 yearly payments). It sounds like you are saying those are pretty good numbers for a passive investment/my first investment to get my feet wet.

The house is most likely not worth 50k but is probably easily worth 35k and has reasonable tax. I only have a few good comps from the last 6 months and they avg. 44k. The area rents for about 900/month and this is a 3b/2bath with a garage and basement so even if they default I am comfortable renting for cash flow or selling, possibly on land contract again.

The loans I have from school are at 7%. However, some of the loans are subsidized and I do not have to pay interest on them for at least one more year. The ones that are not subsidized do not have annually compounding interest. The interest is placed in a seperate account so as not to compound until after I begin making payments.

Thank you so much for your help looking at this deal Bill. I think I will make a verbal agreement tomorrow night to do this deal pending what my CPA says about tax implications and obviously pending the house inspection, lawyer review of contract, and review of the land contract purchasers. (this has all already been done by my contact, with exception of home inspection, and checked out to his liking but I will do my due diligence as you have suggested.)


#8

Re: IRR - Posted by Dave T

Posted by Dave T on August 06, 2011 at 17:58:03:

IRR is an annualized rate of return. If using a spreadsheet function, IRR assumes annual cash flows. Also, if your calculation says the IRR is 20%, you only get 20% IF you are able to reinvest your cash flow at the same 20% yield until the end of your sixth year.