Posted by Jay(TN) on September 07, 2003 at 20:12:11:
Excellent!!! Thanks a lot.
I purchased a house 6 weeks ago and rented it out yesterday… I knew it was a good investment. I ran the numbers in your spreadsheet. After tax IRR of 32%. Very nice!!!
Jay
How many would do this deal? - Posted by Rob Ricker
Posted by Rob Ricker on September 06, 2003 at 02:38:23:
3 Br/1Ba 1120 Sq Ft
1954 Brick Starter Home
FMV = $68,000
PITI = $527/mo (10.55%)
Seller Owes $51,120 + $2,100 prepayment penalty if paid off within the next two years. Sellers needs $6,000 cash to get into his next house. He is pre-approved by Wells-Fargo. I offered $6,000 cash thinking that I could get the guy to re-finance at a lower rate (he’s ok with that), but his credit sucks. I’m a mortgage broker, so I know that the guy only qualifies for 85% LTV and he basically told me that Wells Fargo is commiting loan fraud just to get him into his next house (phantom second Mortgage). I have $29,000 reserve (- $6,000 if I do this deal) and $21,000 in 401K if I get into trouble. This would be my 4th property. I did not want to spend any cash for down payment, but I feel obligated to follow through with what I told the seller. I’ve got a renter lined up for $600/mo or I can probably Lease Option for $2,000 down, $650/mo rent ($125 option). and $74,900 Option price. I would like to hear some personal opinions.
I would - Posted by B.L.Renfrow
Posted by B.L.Renfrow on September 06, 2003 at 11:02:54:
I agree the numbers aren’t spectacular, but I think it’s good enough, since you have both cash AND a tenant in reserve.
The high interest on the existing financing is really irrelevant at this point, since you can get adequate cash flow regardless.
Now, if you were a newbie with no cash, no credit and no experience proposing this as your first deal, I’d say no way in he**. But given your situation, it sounds fine.
However, I definitely would try to get a L/O tenant-buyer in the place, to recoup some of the $6k you have to pay to the seller and improve your monthly cash flow. But even if you can’t find a T/Ber, you’ll still be OK with a regular tenant if your numbers are accurate.
The only thing that might make me think twice about this deal would be if your market is down and you’re not confident you could find another qualified T/Ber or renter right away if the one you have in mind doesn’t work out or goes elsewhere. Obviously, you could afford the holding costs, but after a couple months or more, they would start to get pretty painful.
Brian (NY)
Re: How many would do this deal? - Posted by Jasonrei
Posted by Jasonrei on September 06, 2003 at 10:18:58:
You’d be paying $6,000 cash and take subject-to? You’d be getting $10,000 in equity above your $6,000?
Your lease/option sounds like the way to go, even if you end up paying the prepayment penalty.
Re: How many would do this deal? - Posted by michaela-ATL
Posted by michaela-ATL on September 06, 2003 at 09:09:14:
Rob,
to be honest, I don’t see where the deal is. You’re buying at 85% or so. You don’t say what your piti is, but I assume you kind of break even with $ 600 rent.
You can find those kinds of houses all day long.
I bet you have some real deals in your area
michaela
Re: How many would do this deal? - Posted by Gary (VA)
Posted by Gary (VA) on September 06, 2003 at 10:19:11:
I disagree. Assuming the house is in good condition and needing no major repairs/improvements, I don?t see anything wrong with this deal for someone that wants to buy and hold. I made a few assumptions and ran a 10 year proforma on this property.
Assumptions:
Inflation Rate (applied to rents and expenses): 3%
Appreciation Rate: 3%
Taxes/Insurance/Maintenance and Repairs: 4%
Vacancy Rate: 5%
Financing: 30 Years @ 6.5%
Capital Gains Rate: 15%
Marginal fed Tax Rate: 25%
Marginal State Tax rate 5.75%
Depreciation recapture rate: 25%
Buying Costs: 3%
Selling Costs: 7%
The 10 year after-tax internal rate of return (IRR) is about 22%. You pick up about $9K in instant equity and have no negative cash flow. What?s the problem? It isn?t necessary to steal a property for it to make sense. I don?t see why a property should be eliminated from consideration simply because it doesn?t provide an obscene rate of return. Where else can you get a 20%+ after-tax rate of return? Anyone holding a number of properties such as this for a period of time will probably be very happy with the results.
Re: How many would do this deal? - Posted by Jay(TN)
Posted by Jay(TN) on September 07, 2003 at 09:39:23:
Gary, what do you use to calculate your IRR? Spreadsheet, software, calculator? I’d like to run some numbers on my own properties.
Jay
Re: How many would do this deal? - Posted by Gary (VA)
Posted by Gary (VA) on September 07, 2003 at 10:02:39:
I use a 10-year proforma spreadsheet that I have developed and optimized over the years. It is my primary tool for evaluating prospective purchases. You can view/save it here: http://home.att.net/~gfhaga/property_analysis.xls
User inputs are shown in red. All other fields are calculated. It calculates an estimated 10-year after-tax internal rate of return (IRR). I am always amused by posters that come here (usually with only partial financial information) and ask others to pass judgement on their prospective purchases. The ability to crunch the numbers is a vital skill for any real estate investor. It cannot be left to others.
Re: How many would do this deal? - Posted by Anthony Beharry
Posted by Anthony Beharry on September 21, 2003 at 10:47:41:
I would not do this deal b/c there is no built in equity. Anyone can buy a rental property at full market value. This purchase isn’t from a motivated seller, so you have no built in equity. I look for properties that are 70 cents on the dollar no matter what the exit strategy is.