BiggerPockets

What an interesting, informative and exciting site! I have been lurking and learning here for weeks now. Thank you to all of you who share your expertise, experience and wisdom.

I have been actively looking for my first investment property - single family home - and am having a hard time finding anything in my area that is far enough under market value to produce $100 after OE.

My plan is to buy and hold and most of what I find looks like the figures below, which is actually an REO I am going to make an offer on on Monday:

3/1 and 984 SF
Listed for 77,900
Estimate Appraisal: 93,500 - 114,000
Sold in 2006 for $110,000 - but that was during the boom...
Will Offer: 69,000
Bank Loan: 80%
Down Payment: 20% - best my area offers
Taxes: 1693.00
Insurance: 1,100
Repairs: approx 6,000
Will probably rent for about $750 - rents not = to the 1% rule in Ocala.

After I figure the taxes, insurance, 5% vacancy rate, 8% of income for maintenance (don't really know how to account for this as I'm a newbie), $210 electricity/water holding costs till rented per year, $200 for advertising to rent it per year, my OE are at 48% of my operating income . 8,400 - 3855 = 4,209.

I will have 4,209 left to pay P & I, and I will be negative a couple hundred dollars the first year. (After taxes and depreciation I will be + 300 or so). At this rate, it will take me 7 or 10 years to make $100.00 per door at 4% appreciation and debt reduction...

I figure the numbers mean my original offer is too high and I need to offer less. However, I've read that banks don't usually go below 10 to 15% of Market Value (or is it listing price?) on REOs.

I'm so new that I figure I'm leaving something out or just going at it the wrong way. I certainly don't expect to get rich quick off of real estate - but do want to begin making smart investments that, down the road, are going to allow me to retire VERY well... :D

Any input would be greatly appreciated.

Ahhh....of course. Appreciation and debt reduction build equity but do nothing for cash flow. Thanks for pointing that out.

So basically, I just need to offer the figure that will give me an adequate amount of cash flow and not worry about how far below market value it is.

With my first post...am I missing any obvious expenses that I should be considering? (I know I didn't put 10% for a property manager...I plan on doing this myself as it is my first investment property.)

Thanks for the response. I appreciate it!

I am sort of new yet so don't take my word for this do the research, but are you looking to have residual income or are you willing to make a profit in a year or two?

In my opinion (IMO) now is a great time to be renting w/ option to buy. In your contract you make the purchase price for what the appraised value is today. Set up the amortization schedule at what they will buy it from you in a year or so and also a % higher then what you are paying the bank. This way they are making you payments as if you were the bank. You are now making profit! You no longer have to worry about fixing things or such as well because you are the acting bank for them because they have bought the right to buy the house. That's the other thing, in the agreement you sell them the OPTION to buy the house for like $1500 - $3000. You keep that safe somewhere making interest and give it back to them in the closing cost as part of the agreement when they buy the house. If in the end they don't buy the house EVEN BETTER, you keep that deposit, and start over again. You now owe less on the house, made a positive cash flow from day one + the deposit, and hopefully things have changed in the market and the house has appreciated.

IMO this way you can do more deals too... and I agree with what has been said, you still need to offer less for the house.

Jayo, Mike buys in a state where nobody wants to live, and he buys in marginal areas. What he does works very well for him in his area.

What he does might or might not work well in Florida.

I suggest you find out what the locals guys are doing to make money with real estate.

One thing that Mike says that is true all over is that expenses are high as you average them over the years. So you must be realistic about expenses and be sure you know where the money is coming from to pay those expenses.

My suggestion, if you are certain that the house is a good one to own, is that you make your first offer to the bank lower. They are going to want to negotiate and they aren't going to approve your first offer. Leave yourself some room to come up.

When you are buying to hold, " cheap" is not the only consideration. How solid is the neighborhood? Don't buy to hold in a neighborhood that is sliding into slumhood.

Do people with incomes want to live in that neighborhood? Are there jobs in the area? Is the location commutable to work -- consider the high price of gasoline.

Two different things that are important when you buy to hold: 1- who are the renters going to be? Cant they afford the rent? Will they want to live in your house; remeber thay have many options for a place to live.

2- who is the eventual buyer going to be? Can your buyer affod the house? Can he get to work from there? Will he feel his children are safe? How are the schools? What are the features of the neighborhood that will be attractive to your eventual buyer?

Buying it is only the first part of the equation. You also have to be able to rent it and/ or to sell it.

Mike-

Thanks for your advice. Like i said don't take my word for it i am still really new, though, I didn't hear any of what i said from gurus. I did the research myself when i helped a friend get into a house. We had a lawyer write up the contract on how things were to proceed with the deal.

In the contract he agreed to be responsable for maintenance of the property and other things. The terms were agreed upon with buying the right to buy the house in a determined amount of time which was 1 year. Because of his credit he paid me a higher interest rate then i was paying the bank and he was buying the house from me for the appraised value and not the price i was able to nagociate. I made $87 a month after everything was said and done. I put all that away incase of emergencies and the deposite for the option. Over the year we worked on his credit and put money away for the future down payment. He baught the house from me at 15 months and i made overall a little more then $10k.

I am not saying this is right... i am new and maybe there's something i don't know, but as far as i know everything was done legally and safely. I didn't do it in an LLC though which would have been safer, but i have one now and was planning on doing a few more of these kinds of deals. Let me know if i am missing something or if i was right doing everything the way i did.
Thank you.

Jayo, Mike buys in a state where nobody wants to live, and he buys in marginal areas. What he does works very well for him in his area.

PNW, unfortunately, that's completely inaccurate. Ohio has a population of 11,500,000 and has the 7th highest population of any state in the U.S. In addition, Ohio's population continues to grow, although slowly in the past 3 years. So, to say that nobody wants to live here is ridiculous!

Mike

Jayo,
Mike is right, purchasing a buy and hold type investment in this real estate climate we all need some certainty. The only certainty is the cash flow you can get right now. Appreciation? Debt reduction? Crystal ball?

In many areas rent $$s are increasing as the demand increases with more bad credit, tougher lending guidelines and buyers with good credit afraid to buy. Some area may have a glut of rentals at certain price points from owners deciding to rent since their property won't sell. This will tell you if your rents are likely to go up or down over the next few years. So know this about your market.
What somebody in this thread said about evaluating if the area is on the upswing or the decline is really important too. Neighborhoods on the decline will likely depreciate and less buyers(investors) will be interested in that enviroment later when you may sell, and the quality of the tenant you can atract will decline too.

The $6000 repairs is that what it needs right now to make it rentable, or an annual amount you are allowing for? Annually that could be high? That expense might be less.
Good luck! I hope you make a deal!

Hi Jayo,

I just purchased my first rental SFR last month and it's been quite the learning experience. My house also needed several thousand to get it rentable. Two initial estimates were the same, but actual costs ended up being more than double, and took twice as long. For every item I knew needed to be fixed or replaced, 4 more unexpected items turned up. If you budget $6K, double it.

If you plan to accept Section 8 tenants, get a copy of their Housing Quality Standards. Ensuring your house will pass a Section 8 inspection may require additional items.

Even though I got a credit from the seller to fix a broken pipe, I still overpaid, given what I ended up spending. And having spent close to $200 in advertising costs in a month (in addition to placing free ads online, in local stores, in the city housing office, etc.), I still don't have a tenant. Plenty of responses to my ad, but no tenant.

I'm not discouraged (yet!) but am glad I have a cash cushion to fine tune this experience. The purchase of the next property will be a different story.

Jayo,
Maybe look at multifamily to get the cashflow you want?

You may find multifamily in the better part of town won't cash flow either right now. It won't here, but you could check your area.
A couple of rungs up from what I call " the bottom" might be the best bet.
Affordable, in town, so big tenant pool, but not fearing for your life or tenants who are too undesirable. Keep it clean and do maintenance as needed and your tenant retention will be good.