Posted by HR on January 27, 2001 at 07:27:38:
Good question. There certainly is a lot of hype surrounding rei; there is a lot of money to be made, too.
If you are just starting out, check out books by Robert Allen and McLean and Eldred’s excellent book, Investing in Real Estate, 2nd Edition. These will help you sift the hype from the reality. I really like Allen’s Creating Wealth and Multiple Streams of Income.
I remember reading something Joe wrote on the board once that foreclosures are the fast track of rei. Not for newbies. I would agree. Let me give you an example.
I’m buying a huge duplex/4 plex from a mortgage company any day. It’s a raised duplex with two unfinished spaces underneath. Each apartment is 3 bedroom and 1 bath. The house was a reo and sat on the market forever. Hmmm… I wonder why? Could it be that it’s a block from a project in a bad neighborhood? Could it be the fire damage the house sustained? The cracked slab? The 8 water leaks and holes in the roof? The settlement? Probably so. I agree with Rick, though: if you know how to fix these problems, you can get unbelievable deals.
When you walked in this place, sheetrock was hanging from the ceiling. You could look thru the ceiling, thru the attic, thru the holes in the roof and see daylight. You get the idea. The whole roof repair, though, cost just $600 to fix (I budgeted $1000).
The fire damage is cosmetic and will only cost about $300 to fix. The settlment I will live with; the house is 60 years old and it’s been there a long time. It won’t go much more. The cracked slab is not part of the original structure of the home; it’s a chain wall. It as poured on the first floor to avoid mud. Hence, that damage isn’t much. Since I’m going to wall and sheetrock off access from the second floor apartments to these first floor spaces, and then use the first floor as storage for my rehab company – clawfoot tubs, scrap wood, left over tile, cabinets, etc – these problems don’t bother me.
My “back door” (“Never go thru the ‘front door’ until you know how you will get out the back door .”) on this property is to keep it as a rental, section 8. Those apartments upstairs will rent for $600/month each side (tenant paying utilities and supplying all appliances and window units). To redo the plumbing, electrical, some inner sheetrock work, redo 1 kitchen and 2 baths, and vinly the outside of this 4000sf monster should cost me about 25k.
I figure I’ll be in this for 30k total. I’ll pull out an extra 10k on this and refi for 40k (a no money down, cash back at closing deal) and PI on 40k, 180 months, 8.25%, will be $388/month. TI will be around $150/month. I’ll put aside another $200/month aside ($100/unit) for vacancy and repairs, and I’m left with a cash flow on this of: $1200 - 388-150-200= $462/month.
This is actually going to be a fourplex for me, because my rehab C corp will rent one downstairs unit from the owning LLC and my realtor wife will rent the other downstairs utit, to create more income to the home and more expenses to these two businesses. My corp will pay around $200-500/month and my wife will pay around $100-400/month, depending on how much we need to bleed out of these two entities. Hence the cash flow will be even better.
There have been title problems on this house. The bank that claims they own it never recorded their act of sale when they bought the note from another mortgage company. Hence, legally, I have a mortgage company selling me a house they don’t own. (That was a nice surprise). Here’s an example of the fast track. One better have pros on one’s team that can deal with this stuff: from the fire damage to the title problems. My wonderful re attorney/closing agent can solve all this, so this potential deal killer is just a minor delay to the sale.
Thomas, I’m buying this cash machine for $2000. The mortgage company, to sell this house, is having to come to the table with $1500! They are having to pay to sell their asset (because, believe me, they don’t see this as an asset, which it isn’t to them).
So, can you get some great deals? Oh yea. Do you have to have some serious expertise to get the really great steal deals? In my opinion, yes. On this property, one must be comfortable with a major rehab and have the knowledge, vendors, cash, and crews to do it, as well as the ability to manage section 8 and their tenants. If you can do all that, hey, this was a great deal that fit my needs exactly. If not: this house was just another tear down (which was how it was listed in the mls). Not for me!
Hype is hard made easy. This biz takes knowledge, skills, and a good team. Develop that and you will make money. Don’t, and you will sit on the sidelines and conclude that it was all a bunch of nothin’. Personally, I like the latter conclusion. (It gives me far less competition).