Would anyone take on a duplex deal like this? - Posted by Edwin

import · May 13, 2009, 6:04pm

Posted by Edwin on May 17, 2009 at 13:38:31:

Okay, Michaela, maybe “idiot” is not the correct word, but the person who sells to you for less money simply because you had a relationship her has, at the minimum a strange way of managing their money. All else being equal, it doesn’t make any rational sense to sell for less than you can get. I sympathize with the lady who lost her house to the tax sale, but that’s a good example of irrational thinking and poor planning. The bottom line is, I think, sellers who accept 0% notes and do other things like not talking to a buyer because she’s white/black/orange, etc, or because she’s a woman are making a foolish mistake. But that’s okay. That’s how investors profit, by solving sellers problems, whether created through no fault of their own, or by the seller’s mismanagement or illogical thinking.

import · May 13, 2009, 6:04pm

Posted by Edwin on May 13, 2009 at 18:04:39:

I thought I’d ask if anyone had an opinion on whether they thought this was a viable opportunity:

Duplex for sale in a good part of town, easy to rent to tenants who pay their rent, and otherwise behave themselves.

$2500 monthly total income, $30,000 yearly.
Less: expenses of 25%, leaves a net of $22,500 per year.

Asking price: $399,000

Proposed financing: $60,000 down, finance the balance at 6% over 30 years, payments of $2,076

Yearly Summary:
Rent: $30,000
Less: 25% expenses - 7,500
Mtg. payments -$24,912
Yearly cash flow: -$ 2,412

Okay, so there will be some tax benefits that will reduce that yearly loss of $2412 a little bit, but essentially you’re investing $60,000 to lose $2,400 each year, and probably a lessening amount each year if you can gradually raise rents.

But remember the positives:

With rent increases that are bound to eventually come, that negative will gradually decrease.

Property is in a good area with excellent long term appreciation potential.

Hassle factor is virtually zero, since units are easy to rent to quality tenants.

I’m just curious how this “deal” stacks up to deals you encounter in other towns and whether you’d take a stab at it or not?

import · May 14, 2009, 11:41pm

Re: Would anyone take on a duplex deal like this? - Posted by Kenneth Hocking

Posted by Kenneth Hocking on May 14, 2009 at 23:41:13:

New 4 bed 2 bath each side DUPLEX FUlly tenanted
SP 255,000
2300 Gross rent/mo 1150 each side

Increasing job base by 25,000 new jobs in 24 months or less Major Medical center 2 miles away

Improving part of major city that is being RAZED and rebuilt

Can be sold off as TOWNHOMES these are constructed as townhomes but sold as duplexes…

399,000-255,000 = 144,000 differnce

would you PAY $144,000 more for 200 more a month in cashflow…

import · May 13, 2009, 8:26pm

Cash(Flow) is KING!!! - Posted by brandoncbsre

Posted by brandoncbsre on May 13, 2009 at 20:26:16:

You’ll get more if you leave that $60k in the bank!!

Keep looking, the deals are out there!!

import · May 13, 2009, 7:47pm

Never be a panic buyer… - Posted by Rick, the Probate Guy

Posted by Rick, the Probate Guy on May 13, 2009 at 19:47:15:

Like some ex-girlfriends, I wouldn’t take this one with a large dowry.

With all of the great deals out there, why would you settle for one that doesn’t throw off much cash?

25% for expenses sounds low (got that from listing agent?)

Rent increases “bound to eventually come?” Maybe. One day. Maybe they’ll go down for a period of time, too.

It’s all pretty speculative. I’d be shooting to get great seller financing so, at least if you’re gonna pay that kind of money, you’ll get some rapid amortization (from a 0% seller-financed purchase money loan).

Other than that, this formula pretty well defined the message of 2005 real estate gurus (and, uh, where are they? In BK court? Oh, I see).

import · May 14, 2009, 10:32pm

Re: Cash(Flow) is KING!!! - Posted by Claude

Posted by Claude on May 14, 2009 at 22:32:45:

They bought long ago when prices were lower, and/or 2) They bought with bigger down payments so they could have cash flow–and that’s no reason to celebrate; i.e. any fool can do that, and/or 3) they did some remodeling or added square footage to increase the rents.

import · May 13, 2009, 9:27pm

Re: Cash(Flow) is KING!!! - Posted by Edwin

Posted by Edwin on May 13, 2009 at 21:27:06:

Short term, you’re probably right—on getting % from leaving the money in the bank. But a “good” real estate investment is not always about cash flow. I have properties that give me cash flow, but they also give me lots of headaches from the tenants. Buyers seem to be willing to pay a premium for properties that will attract good tenants. However, I happen to think many of them are paying too high of a premium. It’s also a problem of too much money chasing too few deals, which just drives prices up to “unjustifiable” levels. Most RE investors would get creamed trying to do their usual stuff in my home town. Here, most of the sales are to buyers with big down payments, and/or high paying jobs who can afford the high payments from the high sales prices. And then they don’t have any cash flow until at least several years later. The only thing they have in their favor, at least historically, is appreciation. Where is this town? California, of course. Land of the nutty real estate prices. Sorry, but I just have to chuckle when I read about different investment strategies that might work in some places, but not here. Whomever said investing was easy, fun, and profitable should try it here.

import · May 14, 2009, 5:18am

Imputed interest - Posted by Wayne-NC

Posted by Wayne-NC on May 14, 2009 at 05:18:26:

The IRS will have a say in 0% financing. Still a nice option but maybe something to consider.

import · May 14, 2009, 4:49pm

Re: Cash(Flow) is KING!!! - Posted by Kristine-CA

Posted by Kristine-CA on May 14, 2009 at 16:49:05:

Edwin: you’re in Sac, right? There are plenty of better deals…you just
need to find them. I live in SB where the prices are MUCH higher and I
have friends who have cash flow rentals. I never could wrap my head
around those numbers nor had that kind of start up capital, so I work
in the Central Valley.

Are you saying you can’t find a house that will rent for $1200 for
under $200K? I don’t believe it. Kristine

import · May 14, 2009, 8:03am

Re: Cash(Flow) is KING!!! - Posted by brandoncbsre

Posted by brandoncbsre on May 14, 2009 at 08:03:49:

I always like the idea of buying in my backyard…but if my backyard sucked, I’d look elsewhere.

Rich (reg poster here) is from Cali as well and buys in AZ and CO if I am not mistaken. You may want to consider that as well. Maybe go spend a weekend with James in Michigan. He has offered that to several people here so far. From the sounds of it with $60k you can pick up 6-7 houses free and clear there and have lots of cashflow.

I am from NE Indiana and the deals here are in the REO market. Which is perfect for me because I dont deal well with homeowners.

The multi-fam market is pretty bad, at least with the smaller properties. Typical small deal here isnt much better than you describe.

Good Luck

import · May 17, 2009, 9:34pm

Re: Imputed interest - Posted by Anne45

Posted by Anne45 on May 17, 2009 at 21:34:03:

There are always going to be sellers who want to sell so badly that they will accept 0%. I think it’s a neat trick when you can pull it off, but I think it’s only possible in certain situations. And probably works best when you’re dealing directly with a seller without attorney’s or agents involved.

import · May 14, 2009, 6:58am

Re: Imputed interest - Posted by Rick, the Probate Guy

Posted by Rick, the Probate Guy on May 14, 2009 at 06:58:25:

Imputed for the Seller, not the buyer. If I’m buying, I’m bargaining for benefits. I don’t give seller’s tax advise (it’s neither my place, nor my concern, nor am I qualified).

Poster ask if his deal was a good deal. I’d have to ask “why” unless it was re-negoatiated at more favorable term. 0% I like. Have you obtained such favorable terms in your deals yet?

import · May 14, 2009, 5:18pm

Re: Cash(Flow) is KING!!! - Posted by Edwin

Posted by Edwin on May 14, 2009 at 17:18:23:

Not in Sacramento, but close. I admit I have not done an exhaustive search for the “better deals” that are supposedly out there. Mainly because for at least the past six months I’ve been fighting with deadbeat,slow paying tenants and doing/supervising (Okay, mostly doing) the necessary repairs and clean ups after 3 tenants moved out. Actually, for a house that would rent for $1200 I think it would be hard to find anything under about $110-120k. Sure, maybe in some less desirable neighborhoods you could find something under 100k, but as I get older–and hopefully wiser–I think I prefer to pay more for better locations. As for your friends in SB (think that means Santa Barbara?) I would bet they have cash flow rentals because, 1)They bought long ago when prices were lower, and/or 2) They bought with bigger down payments so they could have cash flow–and that’s no reason to celebrate; i.e. any fool can do that, and/or 3) they did some remodeling or added square footage to increase the rents.

So you live in SB, but invest in the Central Valley? How do you have to drive to get there?

import · May 14, 2009, 5:03pm

typo - Posted by Kristine-CA

Posted by Kristine-CA on May 14, 2009 at 17:03:10:

Sorry, I meant a house for under 100K…Kristine

import · May 15, 2009, 11:53pm

Imputed interest - Posted by Edwin

Posted by Edwin on May 15, 2009 at 23:53:23:

Rick, you have to admit that the only seller who would agree to a 0% interest note would be an ignorant, rushed, or unsophisticated seller. And if there’s an agent involved, and he’s not brain dead, he’s probably going to tell the seller to reject it. Now, if you’re paying a higher price to offset paying any interest, that’s another story.

import · May 14, 2009, 7:38am

Zero sum game - Posted by Wayne-NC

Posted by Wayne-NC on May 14, 2009 at 07:38:55:

That’s true. Usually, what one claims as an interest expense another has to claim as income. If the buyer has no interest expense and the seller has to “claim” interest income, how do you think the IRS views that? I’m sure they like it. Yea, as you pointed out, this deal has too many “maybes” in it for my taste. The most favorable terms could make up the difference though. Anyway, no I have not had a deal with that kind of favorable terms lately but have had in the past using other factors such as deferred interest and back end payments, etc. Playing with and adjusting terms is fun, they can be structured in what seems to be infinite ways.

import · May 14, 2009, 7:44pm

Re: Cash(Flow) is KING!!! - Posted by kristine-CA

Posted by kristine-CA on May 14, 2009 at 19:44:11:

The cash flow deals in Santa Barbara I’m talking about are multiple unit
properties that were undervalued. Normal down payments. The point
is that there are always deals, but they aren’t always listed on the MLS.
In fact they often not even for sale.

You say your search hasn’t been exhaustive…has it been at least a
little tiring? Like you said, when you are busy stamping out landlord
fires, that’s exhausting enough. However, finding a good deal in CA in
a down market is usually more work than buying a listed property. A
lot more work sometimes.

If marketing for and researching deals isn’t your thing, then maybe
consider finding people who have deals they sell to people like you: a
buy and hold buyer with a down payment and credit. You are gold in
my world. I have just a couple buyers who are always ready to go for a
good rental deal, but they would never spend one minute finding it
unless it falls in their lap. Of course being in the biz and on the
ground as a landlord, sometimes deals do fall in their lap. But as you
mentioned, real estate investing is work, especially when appreciation
is a long way off. Investors in other areas of the country that have
never seen what we saw don’t play games with appreciation. It’s cash
flow or no deal, unless the property has some other added value (good
for their college kids or other relatives, recreational, etc.)

Consider making it a goal to buy for a price that you know works from
your experience as a landlord, and then stick to it. Go to the area you
mentioned where the duplex deal is and find one. Kristine

import · May 17, 2009, 3:59pm

Re: Imputed interest - Posted by BTI

Posted by BTI on May 17, 2009 at 15:59:08:

Edwin

You hit the nail on the head with higher price. This is a tool you can use once in awhile. In 1969 I had a friend that wanted to buy a home worth $90,000 (would sell for $2.5m+ today. He was a math whiz and hired by companies for his math skills.

Anyway this seller wanted $120,000 period (a fsbo) and refused to consider anything less. My friend told me to give him the $120,000 but the terms were to be 10% down and 1/2% per month, no interest, for 180 months. The guy took it, the most important thing to him was to be able to say he sold his home himself for $120,000.

I not a math whiz but the actual price was like 65% at the time, I don’t remember the actual percent. I added this to my tool box and every once in awhile it would be taken out and used.

Of course there was no imputed interest then when I did this the first time, but later as rick said I’m not a tax advisor, especially to greedy people. I just advise them to check with their tax advisor as part of the contract. Never had one do it.

Maybe one of you math whiz types out their can give us a formula, eg if you buy at 125% of value then, or 130% then…using 10% down, .5% monthly = real purchase price.

BTI

import · May 16, 2009, 6:38am

Re: Imputed interest - Posted by phil fernandez

Posted by phil fernandez on May 16, 2009 at 06:38:25:

Edwin, not necessarily true. How about a seller that is motivated to get rid of the property and just move on. Or get out of keeping the property up, or moving across the country or getting a divorce or someone who is paying on two mortgage or is a burned out landlord or a landlord that has lousy tenants.

There are numerous reasons for that person to sell at 0% interest. Rushed perhaps, but probably not ignorant or unsophisticated.

import · May 14, 2009, 10:35pm

Re: Zero sum game - Posted by Twain

Posted by Twain on May 14, 2009 at 22:35:15:

This totally depends upon the buyer and the seller.