This may be a silly question! - Posted by Guy


#1

Posted by Guy on December 03, 1998 at 17:43:50:

Sorry Soapymac:

I should have been more explicit. I used Robert Allens formula, similar to yours and figured a positive cashflow of $125. My parents taught me to be conservative so “should” reflects a conservative but probably ridiculous allowance for other unexpected problems. I am arranging an inspection to make sure there aren’t any.

BTW I am not committed to the duplex (thanks John) but it is 10% below market and I have comps to prove it.
The property is FSBO but the owner is married to a re agent!! They rehabbed it.

Reif thank you for the calculation help. I appreciate this site and all the great ideas

Guy


#2

This may be a silly question! - Posted by Guy

Posted by Guy on December 02, 1998 at 22:55:05:

I am a homeowner thinking about getting into more REI.

I have been looking at a two family that should have a +ve cash flow. I am a little short on the downpayment.

Meanwhile on my current home I have built up enough equity to provide that downpayment. I have just been offered a refi on my home at a lower rate. I want to increase my mortgage back to its original amount and take the equity for the downpayment on the 2 fam.

Am I making a mistake?

Thanks in advance for any advice

Guy


#3

Re: This may be a silly question! - Posted by John(NH)

Posted by John(NH) on December 03, 1998 at 14:35:02:

Ditto what Soapymac said, only add:
Why settle for a 2-family when for the same price
you should be able to get a 4-family with much
higher cash flow? I for one won’t touch 2-families
(unless no money down and positive cash flow)
because there is more cash flow properties out there
for the same price. Just something to think about.

-John


#4

Redicculus! The silly question… - Posted by Soapymac

Posted by Soapymac on December 03, 1998 at 24:48:17:

is the one you DON’T ask.

That being said, here is one man’s 2 cents worth.

  1. Have you done your homework? By that I mean, have you done some comparison shopping to see if the price of the duplex is in line with local market prices?

  2. The idea of “Creative” real estate investing is to be able to purchase property using as little of your own money as possible. Did you locate this duplex through a realtor/broker/agent/salesperson or did you find it without using one of those?

  3. “That should have a positive cash flow.” That phrase scares me…BIG time. In Real Estate investing there is NO SUCH WORD as “should.” Either it does, or it does not. Know that going in. Which leads to the question, “How do I know if it is a good opportunity?”

  4. Behold Soapymac’s “Q&D” (Quick & Dirty) math class. None of this is original, but the answers will give you a pretty good idea.

First, total the gross ANNUAL rents, then subtract out a factor for vacancy (I use 5%,but it may be different in your area. A realtor could give you a working figure.) What’s left is your gross ANNUAL profit.

Second, add up a total for ANNUAL expenses…like:

taxes, insurance, maintenance costs, management costs (even if you fix your own toilets, you should pay yourself), advertising any vacancies, water bills, sewer bills, utility bills if you aren’t on seperate meters…stuff like that.

Third, subtract your gross rents from your expense total. The amount that’s left over is your Net Operating Income (“NOI”)…and it is THIS figure that you use to pay your mortgage(s).

Fourth, subtract your ANNUALIZED mortgage payment. If there is anything left over, that is your spendable cash flow. If the figure is negative, that’s the amount of money you will have to pay OUT OF YOUR OWN POCKET to keep the place. In business terms, if the number is a negative, the whole deal is called an “alligator”…'cause it will eat you alive!

This is why you will hear many people say on this board, that you make your profit GOING IN to a “deal,” not while you are in it.

By the way, I have deliberately left for someone else the LEGAL alligators you have to watch out for.

If you still want to invest after all this “help,” then welcome to the club. You will find some great people on this site who are willing to share what they know to keep you from losing your shirt, pants, and socks!

Tell you what…do some homework and bring the numbers back to us here. We will be happy to help you learn.

Cordially,

Soapymac


#5

Re: This may be a silly question! - Posted by Reif

Posted by Reif on December 03, 1998 at 24:27:48:

I’m new, but my first crack at it would be to make sure you count your ‘additional mortgage’ on your residence as part of your cash flow equation on your duplex.

Second is, how are you financing it in the first place? Is the owner willing to be creative? Or are you using conventional financing with standard down that you are borrowing?

Hey old guys, is this a situation where if the seller doesn’t need the full amount of equity that HE could take out a second against the duplex for the cash he needs and then Guy here could give him a 100% wrap for the whole deal?

Reif