I've been researching for the past couple years about real estate investing and I'm intrigued with the "Buying and Holding", "Subject To" and "Zero Down" deals. Out of ALL the methods community, which one would you suggest for a newcomer?
The is no one best way to start. It depends on your goals and your resources. Where are you starting from?
The first step is get educated and start learning your options. There are some very good getting started guides under the learn tab above.
I'm in the Stafford, VA area. I've been researching for about 2 years now and I'm ready to get to work.
Thanks Ned for that response. I am in a similar place as Daniel and I'm working now to educate myself about the business, the market and networking with fellow investors.
Maybe you can add some insight on this deal I'm thinking about 'pulling the trigger' on.
It's a 2 unit duplex with tenants already occupying one unit for only 105k. I'm planning on getting a FHA loan. The going rent for 2 bedrooms in the area is right around $900 and there are 4 bedrooms in the building all together. Your thoughts?
ON the surface this seems like an OK deal based on the rent vs the price but that is a pretty crude assessment. The deal would likely work from a cash flow standpoint but I have no idea if this is a good deal or a bad deal relative to your market.
as Ned said...on the surface that sounds OK. However, you must factor in your costs to determine the true value of the property. There is another thread about computing costs and what figures most investors use. Some of your costs will be property taxes, maintenance, insurance, debt service if you get a loan, CapEx (replacing items such as roofs, AC systems, etc), vacancies, etc. You need to determine what these will be. Then you can plug them together to get a better picture of the financial results you might achieve. Also, you need to determine if that purchase price is at market, above market, or below market. Buying a property just knowing the purchase price and potential rent without analyzing the complete picture would be like putting half a puzzle together. You will only get half the picture:) Once you determine your expected costs, then you can calculate if it will make you money, if you will break even, or if it will cost you money. Every day there are investors that make decisions without being fully informed.....and every day there are investors that lose money.
Thank you again Ned. I read through your post. I am definitely working on the knowledge of the market. There seems to be so much to learn. I'm working on now on just a few zip codes near my home. I chose these areas because they are close to me and i most comfortable there, but i honestly am a little stuck on how to determine if these areas are "up and coming" areas that are good places to invest in.
I'm working on it. Thanks again for sending me to your post.
@John Thedford @Ned Carey I know the property tax and insurance would run me about $2,400 annually. I know the average listing price in the area is around 110k. I ran some "guestimations" based on if I make the regular monthly payments on top of only one unit is rented out consecutively for 5 years I will have received at least 80% ROI. Any other perspectives on this? I'm looking to inspect the property on Thursday.
I will counsel you the same as I do with my clients - be careful getting into rentals as a 1st foray in real estate investing unless you have sufficient cash reserves to handle unexpected expenses. I have see too many investors lose everything because they were underfunded to start with rentals.
As for the other strategies, I recommend that you learn different strategies for structuring a deal, and utilize the right one for the deal in front of you rather than look for a deal that matches the strategy.
Think about your exit strategy - are you wanting to renovate and re-sell; wholesale; or build your rental portfolio. One of the advantages of wholesaling (besides consistent cash influx) is that you can pick and choose the best properties for your rehab or rental projects.
btw...I'd be happy to share my Deal Analyzer with you. Just write to be separately at [email protected]
@Lou Castillo I'm not sure what you mean about structuring other deals? As for the property, I'm looking to rent it out for an extended period of time.
I will have received at least 80% ROI.
Well I don't know what you mean by ROI. Are you referring to IRR after 5 years, are you talking about cash on cash the first year, perhaps total accumulated return? (that is a rhetorical question no need to answer. You haven't given near enough info for readers here to evaluate the deal.)
My guess is you are not calculating return properly. This goes to my point of learning to evaluate deals. If you want to better understand deal analysis there are a ton of tools here to help. Good luck - Ned
When I say 'structuring the deal" it means what are the terms. Are you buying it "subject to" the mortgage? Can you get seller financing? When do you have to close? Can you have access to the property for 30 days?
For rentals, I like to buy 'subject to" the mortgage so I don't have ot go out and get a new mortgage.
everyone has their own opinion and "comfort level".
We got started with a personal property that we turned into a rental when my husband was transferred. Other people house hack or rent out rooms. If you buy a personal and than rent out the rooms you can effectively live rent free while being able to take advantage of the low down/interest rates of personal property.
You have found a great way to learn tons of different methods to success!
@Daniel Ham Ned is right. Get all your estimates. Here you go:
PGI Potential gross income (say you get 1K per month--that is 12K PGI
-VCL Vacancy and collection losses
+OI Other income
=EGI Effective gross income
-OE Operating expenses
+NOI Net operating income
Mortgage payments are not operating expenses. If you assume you will lose one month per year your vacancy would be about 8%. So, deduct 8% of your PGI. Add in other income (if there is any such as coin op laudry facilities, etc). This will give your EGI. Then deduct your operating expenses (taxes, insurance, management fees, trash, utilities, repairs, etc. If you turn over tenants once a year and you spend 2K painting is a good example of repairs. Also factor in CapEx (expenses of major components that are depreciated such as new roof, new driveway, new A/C). You will end up with your estimated NOI. Then, if you have debt service, subtract that to give you an idea of your ROI.
I hope this helps.
Based on my personal experience, getting into Buy & Hold will require some capital for down payment(s), reserves, deferred maintenance, etc. With "Subject-To," having down payment capital will increase your chances of getting a property under contract. And, to get a Zero Down deal, you will require a very motivated seller, but would still need some capital reserves in case things don't go as planned. But of course, none of this capital that I'm mentioning has to be you own.
Of the three methods to suggest for a new investor to pursue, it all depends on the investor, their investment tolerance, and capital available to them. A new investor has to look at their options and recognize what works for them and goals. They have to ask themselves which approach would make them pursue it with passion. I would suggest the newbie to research and identify the resources and guidance that are available to them, and hopefully they are motivated enough to put their plan into action in pursuit of achieving their goals.
To me, the most important part of making any of these three approaches to work is to communicate with the seller(s). You're communication with the seller and building rapport can put you in a position to propose any or all three suggestions to find the right solution for the seller. I hope this was helpful and best of luck.
Don't assume that I haven't ran the numbers, just because I don't know the fancy acronym for all the precautions, estimates, and cash flow.
The finance company is asking for 9k in total for the loan so I'm looking into some "No Money Down" options as listed in Brandon's new book.
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