Fear, excitement, challenge–a matter of view (long) - Posted by Earnest
Posted by Earnest on March 27, 2000 at 20:04:45:
Take it from a slacker. I’m new to REI like you, so let me tell you what I’ve done. I’m 51 and have a Ph.D. but I’ve never owned a home. I’ve rented (burned money) all my adult life. I have good credit (“outstanding”, one lender told me) but no money. That’s because I’ve been burning money. I read my first RE book in Oct 99. I’ve read a lot of books in my life, and I know how much money you can make reading books(!) I closed on my first property Valentine’s Day 2000. I might have closed sooner but, being new, investors had a bunch of hoops they wanted me to jump through. I jumped though them.
I bought a 3-plex, soon to be a 4-plex with remodeling with an FHA loan @ 97% LTV–not good some may say, but it works for me. I live in one unit and rent the others. Doing it this way best suits my personal needs. My broker only makes money by making loans, and he knew I didn’t have any money. He found ways to reduce costs so that I could afford the loan. Thus, I’ve got only $2700 of my own money in the property. If I went bust tomorrow, I’ve lost $2700. That’s all. I would lose my “outstanding” credit, too, but what’s credit worth if you don’t use it?
I’m getting the $2700 back. I been approved for a remodeling loan that will get back my initial investment as well as eliminate about 18K in debt. That’s right, I’m in effect pocketing about $18,000.00. The remodeling loan is expensive, and on paper, the remodeling loan takes my not quite 20% over the appraised value. Remodeling adds a fourth rental income and improves the unit in which I’m living. But, using the income method of computing property value–basing property value on a loan amount the income could support–the loan takes the LTV to 95%, a slight improvement. (Other’s may disagree with using this method; I understand it’s not used much and you can’t base sales price on it, but I’m not selling. For right now, it’s the best figuring I can do since I’m not experienced in determining value once the remodeling is complete using more traditional methods.)
At these prices the cash flow is negative. I still need to use almost as much cash our of pocket as I was paying for rent for debt service. Of course, I’m paying it on my property, not someone else’s. My personal cash flow, however, improved by over $400.00 per month–the remodeling loan eliminates other debt, other monthly payments.
The FHA loan only requires I live in the property one year; I’ll decide what6 I want to do after that. I’ll refinance at some point, although I’m sure it will be 3+years before I can do that. In 3 years, however, I’ll know if I want to continue living here or buy another, etc.–I might well be happy to continue living here another 10-15 years. I’m VA qualified and have not used that option yet. It’s possible in 3 years I could build a small home to my specifications with nothing down, VA financing (and no loan insurance!) and use what will be by that time positive cash flow from my current property to make the installments. (Nothing wrong with dreaming, so long as one knows it’s just dreaming.)
In other ways, buying my first property has caused plenty of consternation. Sleeping hasn’t been as good and I’ve been more irritable, but these things will improve in time. One could lose everything tomorrow. The building could go up in flames. You might get run over by a hearse. Many things could happen. Others far more experienced than I might say I’ve done a poor job and should have looked for a better deal, and I’ve thought about that. But there’s a need to get my feet wet. I learned a lot this first time out. And there’s lots to worry about, if I feel like worrying. But disaster strikes no matter what. You don’t have to buy property to be susceptible to disaster.
After 51 years of slacking, I’m in a new game for me. It’s exciting AND it’s fearful. There is a need of sound and sober reasoning; its not at all like a roller coaster ride. A lot of homework needs to be done. Excitement, fear, and sound, sober reasoning and effort can go together.