Obsessing over a deal

Dustin Reynolds · 2019-05-31T05:56:04-07:00

I’m sure I’m not alone in this... I’m obsessing Day and night over finding the best deal. I have a SFH that was my starter home 10 years ago. I bought it for $40k, the loan is down to about $25k. I net $400 a month from the house. An off market deal presented itself to me. A duplex that rents out for $1,100 a month. They will sell it to me for $22k, it needs some roof work, couple windows, interior paint and flooring. I’m thinking $4-5k in repairs maybe slightly more.I have $8k for a down payment, I planned to get the rest of the money from an unsecured loan from the bank. Higher (6%)interest rate and its a 5yr note. Payments would be around $300 a month all included... netting around $800.The question I'm obsessing over is, do I sell my SFH and put the equity toward the duplex?? I figured the house should sell at least for 40-45. I feel like I'd rather have one property free and clear with a solid return. From there on out, stick with MFH's. OR do I keep the SFH and net roughly $1,500 a month with about $600 in payments. Gut says sell the SFH and start over nearly debt free.Obsessing

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

7y

That "unsecured loan" is your ticket to freedom. It will allow you to "use" that money multiple times, if you understand how money works. The amount may not sound like much, but in reality, it can be an infinite amount of money...simply because it isn't attached to any one property.

Goldmine.

4 Reply

Dustin Reynolds

OP

Steubenville, OH · Member since 2019 · 16 posts · 5 votes

7y

@Joe Villeneuve thanks for the reply. Would you keep or sell the SFH?

0 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

7y

Originally posted by @Dustin Reynolds:

@Joe Villeneuve thanks for the reply. Would you keep or sell the SFH?

Need more info on options after sale...if sold.

0 Reply

Dustin Reynolds

OP

Steubenville, OH · Member since 2019 · 16 posts · 5 votes

7y

Originally posted by @Joe Villeneuve:

Originally posted by @Dustin Reynolds:

@Joe Villeneuve thanks for the reply. Would you keep or sell the SFH?

Need more info on options after sale...if sold.

Between the sell of the of the SFH and the cash I have on hand, I could buy and rehab the duplex.

I suppose I could use an unsecured loan to buy and rehab the duplex. Once the sell of the SFH, pay off the loan.

0 Reply

Theresa HarrisPro Member

Member since 2019 · 15k+ posts · 11k+ votes

7y

Based on what you've said, you'd need another $18-19K to buy the duplex, but then you'd own it free and clear. If it was me, I'd try to borrow the money. Between the two (SFH and duplex), you'd be netting $1200 a month and can easily pay back the loan in a few years.

1 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

7y

Originally posted by @Dustin Reynolds:

Originally posted by @Joe Villeneuve:

Originally posted by @Dustin Reynolds:

@Joe Villeneuve thanks for the reply. Would you keep or sell the SFH?

Need more info on options after sale...if sold.

Between the sell of the of the SFH and the cash I have on hand, I could buy and rehab the duplex.

I suppose I could use an unsecured loan to buy and rehab the duplex. Once the sell of the SFH, pay off the loan.

Stop paying off loans on cash flow properties. Why would you want to do that? Your tenants are doing it for you. Don't help them. Paying them off is bad math. Profits are made after you recover all the money you spend on a property. The more you spend, the more you have to recover it, the longer it takes to recover, and the less you have to invest in the means to recover it.

11 Reply

Jared McCullough

Member since 2019 · 122 posts · 44 votes

7y

If your goal is to only have one property than yeah it would only make sense to sell the SFH to buy a high yielding MFH and walk away with some cash in your pocket. If your goal is to grow your business then what Joe said is accurate. It is all about what your end goal/objectives are.

2 Reply

Andrew Cornstubble

Rental Property Investor · Sedan, KS · Member since 2016 · 125 posts · 92 votes

7y

@Dustin Reynolds I used to until i started listening to the podcast. These guys helped me realise that deals are out there. I've missed out on a few I should have jumped on but oh well. It doesn't bother me anymore.

You don't need the perfect deal. You just need a good deal. As long as the investing covers any mistakes you make, itself, and your time then idgaf if I make $100 on the next deal if it's a handshake and a closing.

0 Reply

Dennis M.

Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes

7y

i have multiple properties I got through lines of unsecured credit . Joe is correct having them unsecured is ideal in many ways and gives me a clear deed to play with ! plus I get tax advantages on the interest of the debt just like a mortgage interest deduction

2 Reply

Frank Geiger

Rental Property Investor · NC · Member since 2018 · 776 posts · 776 votes

7y

You lose out on a major benefit of RE investing when you own a property free and clear. Leverage is your friend and helps you scale. Retire Early with Real Estate by Chad Carson defines it pretty well. You can still do it; just have more cash tied into the property and it will take longer.

5 Reply

Account Closed

Rental Property Investor · Canton, OH · Member since 2017 · 1k+ posts · 1k+ votes

7y

@Dustin Reynolds

Sounds like a potentially good deal. Just to clarify, when you say a property "nets $XXX," what does that mean? What's the calc you are using?

0 Reply

Dustin Reynolds

OP

Steubenville, OH · Member since 2019 · 16 posts · 5 votes

7y

Originally posted by @Dennis M.:

i have multiple properties I got through lines of unsecured credit . Joe is correct having them unsecured is ideal in many ways and gives me a clear deed to play with ! plus I get tax advantages on the interest of the debt just like a mortgage interest

The bigger question is:

Do I sell my SFH, take the equity and down payment to put down on a MFH?

0 Reply

Dustin Reynolds

OP

Steubenville, OH · Member since 2019 · 16 posts · 5 votes

7y

Originally posted by @Account Closed:

@Dustin Reynolds

Sounds like a potentially good deal. Just to clarify, when you say a property "nets $XXX," what does that mean? What's the calc you are using?

Rent: $700

Mortgage/insurance: $ -250

Water: $ -60

Net: $390

I’m not factoring in 10% for maintenance and vacancies to get my net. In two months my tenants renew and rent goes up $20. I see this as top of the market for my 2br - 1 ba.

0 Reply

Dustin Reynolds

OP

Steubenville, OH · Member since 2019 · 16 posts · 5 votes

7y

Originally posted by @Theresa Harris:

Based on what you've said, you'd need another $18-19K to buy the duplex, but then you'd own it free and clear. If it was me, I'd try to borrow the money. Between the two (SFH and duplex), you'd be netting $1200 a month and can easily pay back the loan in a few years.

I would need an unsecured loan of $14,000 to own the property. From my own personal income and or SFH income I would need to put about $4-5,000 into shaping it up.

If I took an unsecured loan for $18,000 I’m guessing my payments for 5 years would be around $500. Not including taxes and insurance.

0 Reply

Theresa HarrisPro Member

Member since 2019 · 15k+ posts · 11k+ votes

7y

Originally posted by @Dustin Reynolds:

Originally posted by @Theresa Harris:

Based on what you've said, you'd need another $18-19K to buy the duplex, but then you'd own it free and clear. If it was me, I'd try to borrow the money. Between the two (SFH and duplex), you'd be netting $1200 a month and can easily pay back the loan in a few years.

I would need an unsecured loan of $14,000 to own the property. From my own personal income and or SFH income I would need to put about $4-5,000 into shaping it up.

If I took an unsecured loan for $18,000 I’m guessing my payments for 5 years would be around $500. Not including taxes and insurance.

What is the interest rate on the loan? If you pay $500 a month for 5 years, you are paying $30K total for the loan.

0 Reply

Account Closed

Rental Property Investor · Canton, OH · Member since 2017 · 1k+ posts · 1k+ votes

7y

@Dustin Reynolds

Definitely factor a % for repairs, vacancy, and capex. Trust me, you'll be glad you did when sh** goes wrong.

In fact I just had a furnace go out this week. $1,800 and I didn't even bat an eye (I may have cried a little on the inside though :))

1 Reply

Dustin Reynolds

OP

Steubenville, OH · Member since 2019 · 16 posts · 5 votes

7y

Originally posted by @Theresa Harris:

Originally posted by @Dustin Reynolds:

Originally posted by @Theresa Harris:

Based on what you've said, you'd need another $18-19K to buy the duplex, but then you'd own it free and clear. If it was me, I'd try to borrow the money. Between the two (SFH and duplex), you'd be netting $1200 a month and can easily pay back the loan in a few years.

I would need an unsecured loan of $14,000 to own the property. From my own personal income and or SFH income I would need to put about $4-5,000 into shaping it up.

If I took an unsecured loan for $18,000 I’m guessing my payments for 5 years would be around $500. Not including taxes and insurance.

What is the interest rate on the loan? If you pay $500 a month for 5 years, you are paying $30K total for the loan.

$18,000, 6%, 5yr = 350 a month, taxes and insurance will be over $400. So, slightly under $500 all in.

0 Reply

Nathan Hall

Rental Property Investor · Martinsburg, WV · Member since 2017 · 111 posts · 81 votes

7y

@Dennis M. I haven't looked into this enough, but I'd love to hear your thoughts sometime if you'd care to expound. I'm intrigued by the power of unsecured debt now lol

0 Reply

Andrew Cornstubble

Rental Property Investor · Sedan, KS · Member since 2016 · 125 posts · 92 votes

7y

@Frank Geiger i couldn't agree more. I always say owning a property paid off in your own name is like playing Russian Roulette with a semi auto.

Even if it somehow sped your growth it's like dangling bait fishing for a lawsuit theft.

But sadly nobody around me will listen.

"I can't wait to get out of debt."

"I (own) my home free and clear."

This is day 1 asset protection and i get laughed at. Oh well, i tried.

3 Reply

David Roe

Flipper/Rehabber · Dayton Ohio · Member since 2019 · 114 posts · 71 votes

7y

@Dustin Reynolds

You should read/listen to richest man in Babylon. I would refinance the rental you currently have and go buy the duplex, fix it up, then refinance it. It's called the BRRRR lots of info on the website here.

Having a house that’s paid off is like have $100k under your mattress. It’s doing nothing for you. All that equity can be used to build more wealth

5 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

7y

Originally posted by @David Roe:

@Dustin Reynolds

You should read/listen to richest man in Babylon. I would refinance the rental you currently have and go buy the duplex, fix it up, then refinance it. It's called the BRRRR lots of info on the website here.

Having a house that’s paid off is like have $100k under your mattress. It’s doing nothing for you. All that equity can be used to build more wealth

This is true...mostly. The troubles with the BRRRR method is:

1 - You're limited in the number of loans in total you can carry

2 - You're only getting 780-75% back based on the ARV, so if you spent more than that in cash, you're behind.

3 - You can only do one of these at a time, since you need the cash out of the previous property to use on the next one.

4 - Every time you repeat this (meaning refi), you have to pay for the money you are moving forward with. This isn't the same money you entered the previous deal with...that's still in the house...it's just leveraged and collateralized, so you are really still just "buying" new cash.

5 - The process moves slowly.

6 - In the end, you still have to have positive cash flow...or there's no point.

To make the BRRRR method work, you really need to do a Cash Out REFI (taking out more than you put in), but you have to season each property at least 6 months (see #'s 3 & 5 above), and you're forced into finding great deals. If the property isn't CFP after you do a simple REFI, it sure wouldn't be if you did a COR.

Where the BRRRR method works best is when you pay all cash using flip profit to buy a rental. The REFI gets all of the cash back out in the form of a loan (not taxable income) that you can use any way you like. It's basically free money (as long as the rental in question here is cash flow positive).

1 Reply

Joel Fine

Rental Property Investor · Leander, TX · Member since 2018 · 183 posts · 264 votes

7y

Here is how I look at it.

You say you can rent the duplex for $1100/month. Using the 50% rule, that means your NOI (or unleveraged profit) would be $550/month. That's $6600/year.

The cost of the duplex is $22,000 + $5,000 rehab, maybe a bit more. So call it $30,000 all in.

So your return is $6,600/30,000 = 22%.

The bank is ready to loan you money at 6%.

If you can borrow at 6% to make 22%... Wow. I'd do that all day.

That's the power of leverage.

4 Reply

Dustin Reynolds

OP

Steubenville, OH · Member since 2019 · 16 posts · 5 votes

7y

Originally posted by @Joel Fine:

Here is how I look at it.

You say you can rent the duplex for $1100/month. Using the 50% rule, that means your NOI (or unleveraged profit) would be $550/month. That's $6600/year.

The cost of the duplex is $22,000 + $5,000 rehab, maybe a bit more. So call it $30,000 all in.

So your return is $6,600/30,000 = 22%.

The bank is ready to loan you money at 6%.

If you can borrow at 6% to make 22%... Wow. I'd do that all day.

That's the power of leverage.

Thank you for explaining that. I looked at it again today with the owner, I think they’ll take less than 22k. I got the vibe they just don’t want to deal with the repairs.

2 Reply

Brandon C Johnson

Specialist · AL (alabama) · Member since 2019 · 18 posts · 13 votes

7y

@Dustin Reynolds my adivce is you keep the sfh. Second never fall in love with a property. Only fall in love with the numbers. My thinking is thw rehab could be costly especially the roof. If you must do it get a loan for rehab and acquisition. Possibly a bridge loan.

0 Reply

David Roe

Flipper/Rehabber · Dayton Ohio · Member since 2019 · 114 posts · 71 votes

7y

Joe, this is mostly true... WPCU does up to 100% loan to value in some HELOC loans and ReFi loans. Since i am married i can do 10 in my name and 10 in the wife's name. You can do them as a portfolio under a business and a few other options.

HELOC season time is 30days for my bank.
Refi season time is only 90 days for my bank.

Hard money lenders that offer rental property loans are about 90 days to season, higher rates but still an option.

I'm currently doing 3 BRRRR properties at once right now...

I agree you should have positive cash flow after all bills and 5% for maint and 5% for CAP and 10% management fees i still aim for $50-$100 cash flow long as i can turn $10k-$20 on the Refi cash out....

Originally posted by @Joe Villeneuve:

Originally posted by @David Roe:

@Dustin Reynolds

You should read/listen to richest man in Babylon. I would refinance the rental you currently have and go buy the duplex, fix it up, then refinance it. It's called the BRRRR lots of info on the website here.

Having a house that’s paid off is like have $100k under your mattress. It’s doing nothing for you. All that equity can be used to build more wealth

This is true...mostly. The troubles with the BRRRR method is:

1 - You're limited in the number of loans in total you can carry

2 - You're only getting 780-75% back based on the ARV, so if you spent more than that in cash, you're behind.

3 - You can only do one of these at a time, since you need the cash out of the previous property to use on the next one.

4 - Every time you repeat this (meaning refi), you have to pay for the money you are moving forward with. This isn't the same money you entered the previous deal with...that's still in the house...it's just leveraged and collateralized, so you are really still just "buying" new cash.

5 - The process moves slowly.

6 - In the end, you still have to have positive cash flow...or there's no point.

To make the BRRRR method work, you really need to do a Cash Out REFI (taking out more than you put in), but you have to season each property at least 6 months (see #'s 3 & 5 above), and you're forced into finding great deals. If the property isn't CFP after you do a simple REFI, it sure wouldn't be if you did a COR.

Where the BRRRR method works best is when you pay all cash using flip profit to buy a rental. The REFI gets all of the cash back out in the form of a loan (not taxable income) that you can use any way you like. It's basically free money (as long as the rental in question here is cash flow positive).

0 Reply

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