Bud, what is your definition of investing? For me, it is building assets using compounding, not maximizing income. I do not agree that investing is about paying off debts. How many people here are investing to pay off debts? How many are here to make a better life, and build wealth? Perhaps short term investing is about paying off debts.
Don’t tell me about dot.com’s. I had a large mutual fund portfolio fall to pieces these past two years. Needless to say, when the market goes up, I’m cashing out. I now prefer real estate.
Bud, I am definitely in agreement with you regarding recycling equity. I surely need to diversify. I have tons of equity sitting in two properties, and need to leverage it into income. I have problems thinking out of the box, and that is the reason I’m here learning. I am willing and open towards change my mind. I am opinionated as HE!!, but at least I do have an opinion.
To avoid depreciation recapture and capital gains tax, try a 1031 exchange. It is possibly one of the best ways to leverage into bigger properties.
Owner has paid off 30 year mtg and has clear title. FMV on this property in Dayton OH is 78-83K. Purchase Price is 58K. Needs paint, carpet, Central heat/air and small roof repair. My estimate for repair costs are 6,000. I plan on fixing and renting for 695/month. Is this a good deal? I plan on financing conventionally (20% down, 30 yr fix, 7.375%, taxes = 92/mo, ins = 20/mo) I value your opinion since I am a new investor. I can probably repair this house in 30 days and have it ready for rent.
From your figures you would have a PMT of about $430 and income of about $695/mo that is a positive cash flow of $265/ mo or $3180 a year(before taxes.) Sounds great doesn’t it. But lets look at your return on equity. $80000 minus $46400 mortgage is $33600. The return is about 9.5%. Your cash on cash return may be better, $11600 plus $2000 closing costs and 6000 repairs equates to, a 16+% return.
Compare these figures to what you could get if you could get owner financing and sell on an AITD.
The creation of wealth starts with turning that equity into cash and reinvesting it again. Once you have so much in assets that you are financially independent then you can be looking at cash on cash returns.
If you are going to analyze the investment properly do not forget to take in that roof that will need to be replaced. Or the carpet and paint that will have to be done after you evict that no good tenant. Even the AC in the future.
When you sell you give up appreciation. The gurus of the late 80’s changed their tune after values went down. They said don’t buy for the appreciation. You can still control property, use little of your own and make greater returns.
Mark, you want to do what I do full-time. I buy houses needed repairs, rehab, and rent. The numbers look good. This is the type of deal I would go after. There are two advantages to your deal: first is cash flow, and second is that you’re buying good equity. Each dollar in down payment is netting almost $2 of equity ($11600 DP for $31600 equity). In my book, this is good.
The one thing that would make this sweeter is if you can reduce your down payment. Others here will advocate owner financing, and it might be worth considering.
Regardless of how you structure the deal, this is a good buy, especially when compared against skinnier deals with very little equity and little or no cash flow.
Re: What is your opinion on this deal? - Posted by Stacy (AZ)
Posted by Stacy (AZ) on August 07, 2001 at 13:28:21:
Mark, have you asked the owner if he will finance you? You could probably decrease or eliminate your down payment if he would accept a mortgage from you. Tell him you’ll put a five year balloon in it if that helps. Tax-wise, it’s better for him to collect payments from you at an 8% interest rate than to get paid-off in a lump sum. What would he do with the payoff money? Put it into CDs? You will be giving him a better return on his investment dollar than he could get at a bank…and no maintenance issues.
If he MUST have a large amount down for some reason, would he consider split-funding? Give him half now, and half over time in the form of a second mortgage (at a decent rate…8%?). Then you could find a lender to loan 50% LTV for a first mortgage to pay him the cash he needs now. Should be very easy to find a lender at that LTV.
Anyway…if you are going to keep and rent this place out, iut would be great to get in for less than 20% down plus fix-up costs.
Sure, owner financing is always good, but this deal stands good on its own feet. What about depreciation and tax advantages? You totally ignore this aspect. If you buy and resell, you lose this return on your investment.
Gotta disagree. Puting 20% down, plus closing costs, plus $6K in fix-up puts his total out of pocket at close to 20K. All for $150 cash flow…if that? There is no mention of maintenance costs or holding costs in the cash-flow analysis, so $150 is suspect.
The only way I’d do this is if my out-of-pocket was MUCH smaller, and if I could make it flow. Owner financing, or private lender.
Jay, You have expressed how you like to fix up and keep houses. No problem with that. It makes good money. We have one local investor that buys all cash or promptly pays them off and keeps them as rentals. When you do that you return on equity and your return on cash become the same thing. Unforunately you are generally limited to rents in the 1%FMV/month range when you do that. That is not how you maximize return.
If you have income to support yourself from other sources you do not have to maximize your return. But is is false economy. Most people invest to make additional money to pay off bills or other indebtedness. No one would want to make a 10-15% return investment in rental property when they can take that cash and pay off an 18-24% credit card.
Once you get past the debt you have then debt for investment sake is appropriate.
No one is ignoring depreciation. But where is the benefit in something that you have to recapture when you sell and take the cash. I’m not sure what other tax advantages you are including. Long term capital gains applies if you have appreciation. The euphoria with increases in values in the past few years is like the emotions of the dot.com investing that burst last year.
I doubt you will change your mind. But consider reading up on how to recyle that equity to make it grow faster. Kyosaki has some good books on that.
You totally ignore depreciation, equity paydown, and deductions that you don’t get when you resell or L/O.
Each buyer must evaluate their situation. A person with high income surely does not want to do L/O. Conversely, you don’t need to throw $20k at a deal if you need cash.
I had a large mutual fund portfolio fall to pieces these past two years. Needless to say, when the market goes up, I’m cashing out. I now prefer real estate.