Offer Accepted - My First Investment Property. I'm scared now!

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Offer Accepted - My First Investment Property. I'm scared now!

Lisa Goodwin
Portland, OR · Member since 2012 · 21 posts · 1 vote

I've been making offers on short sale properties for two months now. Yesterday I got an acceptance.

I don't have any real estate trainings, all I know is what I have learned from my father who retired at 45 after doing real estate for 20 years.

I'm buying this property in Suprise AZ for 100K. It needs new carpet, painting and landscape. After all is said and done, I'll be out $107K-$110K and it should be apraised for about $130K.

Here is my plan and please let me know what you think of it.
Finance the house and get my $107K out after I have a tenant in and move on to the next property and continue doing the same.

I have a business that is doing well and I don't need to be making money in real estate at the moment.

I am going to form a real estate LLC and as long as the LLC breaks even I'm happy. So, if the rent covers the mortgage, managment, maintanance, taxes, HOA and etc I'll be happy. My goal is not to invest any of my own money into the LLC, just build equity for future.

When the market recovers, I plan to sell all the properties and get into commercial real estate, maybe an appartemnt complex and if the cash flow is equal or more than my current income I can retire then :)

I'm very excited and scared at the same time.

I look forward to reading your inpusts!

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Levi Gale
Real Estate Investor · Tempe, AZ · Member since 2011 · 102 posts · 27 votes
14y

Well not sure what part of Suprise it's in, but you may be able to save some maintenance costs if your in the newer area. At least that's something to look forward to. I think you can find that type of "deal" very easily here, but quite frankly I think I would pass on it. It's your first investment home, it's in a different state, and your numbers really aren't that great (of course I could change my tune with more details). If you are willing to invest out of state, why not get a decent return?

I don't hit 50% on my rental expenses, but I also don't use a property management company. If you do I would still expect you to keep expenses under 50%, especially if you are in the newer area. In my opinion you can do better than that here, but make the decision that best suits your strategy.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y

    To give you decent feedback, the going market rent will be needed.

    At 107K all-in and 130K ARV, you are at 82%; that is a bit higher than most would recommend.

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  • Nick J.
    Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes
    14y

    If this property is here in my neck of the woods then 82% ARV isn't bad at all considering.

    Lisa Goodwin, if you send me a message with the address, I'll be able to give you a 2nd opinion on value and what rents could/should be. Just knowing what typical rents are for your standard 3/2 2 car garage houses in Surprise, I'm willing to bet you're going to be in the $900-$1000 range.

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  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    14y

    First of all, congratulations Lisa. :)

    In regards to your plan, I think you're going to have a problem getting out the entire $107k you put into the house. If I understand you correctly, you're paying for the house and repair costs in cash, and you'd like to do a cash-out refi afterwards to pull the money back out and continue to invest. Correct?

    If so, here are a few things you may want to think about from my personal experience:

    1) Most lenders aren't going to do a cash-out refi above 70% LTV, which would put far less than $107k back in your pocket in this case.

    2) Many lenders are going to require a 6-month seasoning period before you can even do a cash-out refi.

    3) If you're thinking about putting the property into an LLC, before you do this you might want to look into whether you can find a lender willing to do a cash-out refi on a property in an LLC. You may have trouble finding one. They will want you to transfer the property back out into your personal name first, and then you may have to wait another 6 month seasoning period. Seems like a big waste of time/money to me.

    Just some things to consider.

    0Reply
  • Lisa Goodwin
    OP
    Portland, OR · Member since 2012 · 21 posts · 1 vote
    14y

    The rent comps are 875 -975

    0Reply
  • Lisa Goodwin
    OP
    Portland, OR · Member since 2012 · 21 posts · 1 vote
    14y

    Thanks Kyle J. I should call a few lenders and figure out the whole LLC thing.

    0Reply
  • Lisa Goodwin
    OP
    Portland, OR · Member since 2012 · 21 posts · 1 vote
    14y

    Steve Babiak Where should the ARV be to be considered good. or maybe I'm overpaying for the property?

    It's $71 per square feet. After all the work is done I'll cost me $77/sq

    Obviously it's no $30/sq that was available a year of two a go!

    0Reply
  • Mark H.
    SFR Investor · Phoenix, AZ · Member since 2009 · 484 posts · 181 votes
    14y
    Originally posted by Lisa Goodwin:
    The rent comps are 875 -975

    Are you coming to town to supervise the rehab?

    FWIW, having just completed a rehab here, I'd urge you to think of a couple of things -

    No carpet - I had 18" tile laid on the diagonal for about $2.25 sq ft. That's including everything. Unless you're buying 1,000 sq feet of carpet, you'll pay more than that and it won't last more than a few years. The last 12' x 14' bedroom I had carpeted cost $150 for the carpet, $35 for pad, and $100 for labor. ( that's $1.69 a square foot).

    Landscaping - try to save what's there - you would be surprised what can be done with a rake and a blower. Weeds will grow through landscape rock, even if it's a foot deep. No weed barrier/fabric or plastic will stop them, so have the rocks "fluffed up" and get some pre-emergent weed killer sprayed twice a year to keep them in line.

    Reconsider the LLC - it's a hindrance to financing, and many who are smarter than myself suggest they won't protect you. Buy $300k of liability coverage for the house, and an "umbrella" policy that covers $1m. It'll cover your cars and other properties as well.

    Feel free to PM me if you need some decent/cheap contractors.

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y
    Originally posted by Lisa Goodwin:

    I'm buying this property in Suprise AZ for 100K. It needs new carpet, painting and landscape. After all is said and done, I'll be out $107K-$110K...

    ....

    The rent comps are 875 -975.

    Personally, I think this is a pretty bad deal. At $110K in and rent at $875 (worst case scenario based on your numbers), and assuming 50% expense ration, your cash-on-cash return for a cash purchase is only 4.7%. And, if you can find a portfolio lender to lend you 75% of your cash infusion at 6% on a 15 year amortization schedule, you'll be losing $3100 per year.

    Your best case numbers aren't much better. At $107K in and rent at $975, and assuming 50% expense ratio, your cash-on-cash return is 5.4%. And, if you can find a portfolio lender to lend you 80% of the newly appraised value (enough to get most of your cash out) at 4.5% on a 30 year amortization schedule (I imagine that's the absolute best case), you'll lose $1600 per year.

    I just don't see this being profitable...or even break even. And managing your first investment from 1000 miles away is just going to make things worse. You'll have travel expenses (that aren't factored into the 50% OE) and the cost of having to find and manage PMs.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y

    Lisa,

    I am not familiar with that area, but I will generalize. Rents at 1% of purchase price are considered "good" by the realtors selling the house; at best that rent percentage might get you a break-even situation where the rent covers the expenses (averaged over time). So, the rents you mention fall to less than 1% - but in that area, who knows, that might be wonderful, but I would like to see better.

    As for ARV %, Nick seems to think 82% isn't so bad for that area. In general, people target 60%, 65%, 70%, 75% (pick one, because it does vary). The goal being to be able to re-sell with all selling costs covered and still leave some profit. If doing a refi, the goal being to have as little cash into the deal as possible (see the 70% LTV mentioned above). And some investors require certain rents to be able to cover payments and leave a good amount of cash flow.

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  • Levi Gale
    Real Estate Investor · Tempe, AZ · Member since 2011 · 102 posts · 27 votes
    14y

    Well not sure what part of Suprise it's in, but you may be able to save some maintenance costs if your in the newer area. At least that's something to look forward to. I think you can find that type of "deal" very easily here, but quite frankly I think I would pass on it. It's your first investment home, it's in a different state, and your numbers really aren't that great (of course I could change my tune with more details). If you are willing to invest out of state, why not get a decent return?

    I don't hit 50% on my rental expenses, but I also don't use a property management company. If you do I would still expect you to keep expenses under 50%, especially if you are in the newer area. In my opinion you can do better than that here, but make the decision that best suits your strategy.

    1Reply
  • Nick J.
    Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes
    14y
    Originally posted by Steve Babiak:

    As for ARV %, Nick seems to think 82% isn't so bad for that area. In general, people target 60%, 65%, 70%, 75% (pick one, because it does vary).

    With our inventory so low and prices going higher in general across the valley, I wouldn't pass on a 82% so quickly.

    0Reply
  • Mark H.
    SFR Investor · Phoenix, AZ · Member since 2009 · 484 posts · 181 votes
    14y
    Originally posted by Nick J.:
    Originally posted by Steve Babiak:

    As for ARV %, Nick seems to think 82% isn't so bad for that area. In general, people target 60%, 65%, 70%, 75% (pick one, because it does vary).

    With our inventory so low and prices going higher in general across the valley, I wouldn't pass on a 82% so quickly.

    No doubt - anything anywhere near $100k is a fistfight in this market. I know many people don't want to talk about appreciation as an investment goal, but that home could very easily be $200k in five years.

    1Reply
  • Lisa Goodwin
    OP
    Portland, OR · Member since 2012 · 21 posts · 1 vote
    14y

    Is the airport noise an issue in surprise?

    0Reply
  • Nick J.
    Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes
    14y
    Originally posted by Mark H.:

    No doubt - anything anywhere near $100k is a fistfight in this market. I know many people don't want to talk about appreciation as an investment goal, but that home could very easily be $200k in five years.

    True Statement. I know others in the thread were giving advice with the best intentions. I just didn't want OP doubting herself after reading their advice.

    Lisa Goodwin, Do you mean the Air Force base? You should be given a pamphlet. I believe its either required for any property in Surprise or just withing a designated area. I wouldn't let that deter you as its to be expected from everyone who chooses to live in Surprise.

    0Reply
  • Albert Hasson
    Investor · Paradise Valley, AZ · Member since 2012 · 366 posts · 214 votes
    14y

    Lisa, congratulations on your first accepted offer. I am closing on a short sale in Surprise this week. It is 2200 sq ft built around 2004 in Royal Ranch. I expect to get 1300-1400/mo. I am paying 160k.
    If you could share more details r.e. size and age of home, amenities, etc I could give you an idea of rents in the area.
    I can also get you in contact with an excellent handy man that does paint, flooring, repairs, etc.

    0Reply
  • Lisa Goodwin
    OP
    Portland, OR · Member since 2012 · 21 posts · 1 vote
    14y

    @Albert Hasson the house is in east Surprise. 1400 sq feet 3 bd 2bth. It is within the Luke fly zone, but according to the info/ map i received its not in the red zone. The closest intersection is Greenway and Dysart.

    A mode match sold in June for $110k and another model match is on the market for $ 130K.

    0Reply
  • Lisa Goodwin
    OP
    Portland, OR · Member since 2012 · 21 posts · 1 vote
    14y

    @nick j.

    The house got 25 offers and my offer wasn't even the highest offer. Having been monitoring the mrket for 2 months 24/7 and haven't seen any deals like what others are talking about!

    Most properties are getting 20 + offers in this market. I don't think $77/ sq feet after all is said and done is a bad deal. The house was sold for $160K in 08, $140 in 03 and was worth $260k at the peak of the market.

    1Reply
  • Levi Gale
    Real Estate Investor · Tempe, AZ · Member since 2011 · 102 posts · 27 votes
    14y

    I hit about 36% rent to expense ratio on mine, and I don't use a property management company. Now correct me if I'm wrong with these numbers.

    975 * .64 = 624 NOI
    624 * 12 = 7488 annual return
    7488 / 107000 = 7% CAP

    Albert has numbers pretty similar to that, and I have to ask. Is 7% CAP a good return? I understand that appreciation will sweeten that deal, and I also understand Az does have room to grow (hopefully at a steady pace). Our local REIA market updates really drive that fact home. But I think you can also expect that 7% to drop down a few percent probably closer to j. Scotts numbers. If that's all ok with you, then it's a good investment.

    I agree with all there is far too much action on every property that hits the market. Investment strategies are changing to suit the newest conditions, and perhaps I'm a bit behind the changes. But it's still pretty hard to agree that a sub 7% CAP rate is a good thing.

    1Reply
  • Lisa Goodwin
    OP
    Portland, OR · Member since 2012 · 21 posts · 1 vote
    14y

    Thanks everyone. I'm learning so much on here.

    But how do you guys find properties with that kind of return?
    Most properties that are listed below the markt value are hard to get.
    My agent told me that sometimes with those properties, the agents have their investor lined up before it's even listed. So the property is listed in the morning and by early afternoon they change the status to multiple offers accepted and boom by that evening it's gone!

    It make is hard for people like me to compete and get a property at way below the market value. You almost have to be a full time real estate investor to do that. I have another business that takes about 40 hours per week to run and manage.

    I wish I could find a better deal, but I doubt I can!

    0Reply
  • James H.
    Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y

    I don't thnk its a terrible sounding deal, just okay deal. Maybe good for that area, but why settle for what is only good for a particular area, yet marginal for most investors in general if you are going to invest out of state? Why not look for another place that has similar positives with better rental returns?

    1Reply
  • Uwe S.
    Property Manager · Dublin, OH · Member since 2009 · 1k+ posts · 291 votes
    14y
    Originally posted by Lisa Goodwin:
    But how do you guys find properties with that kind of return?
    I wish I could find a better deal, but I doubt I can!

    Lisa,
    Your market is a hot market I know, so you must live with much competitors and higher prices for houses thats unfortunately (for you) an fact and not changeable but you should make the best of this case. Good luck.

    -Uwe

    0Reply
  • Mark H.
    SFR Investor · Phoenix, AZ · Member since 2009 · 484 posts · 181 votes
    14y
    Originally posted by Lisa Goodwin:
    Thanks everyone. I'm learning so much on here.

    But how do you guys find properties with that kind of return?
    Most properties that are listed below the markt value are hard to get.
    My agent told me that sometimes with those properties, the agents have their investor lined up before it's even listed. So the property is listed in the morning and by early afternoon they change the status to multiple offers accepted and boom by that evening it's gone!

    It make is hard for people like me to compete and get a property at way below the market value. You almost have to be a full time real estate investor to do that. I have another business that takes about 40 hours per week to run and manage.

    I wish I could find a better deal, but I doubt I can!

    The short answer is that you *don't* have a chance against people like myself, who live in the neighborhood & have MLS & E-key access, and guys like me don't have a chance against *insiders* who broker deals in house to themselves & their friends & family.

    It grinds my gears in a really big way to see agents using the MLS system that I help pay for, basically as another "tool" to defraud lenders on these short-sale deals. There's no reason to "list" a property for sale, if it's already pending, except if you're trying to pretend that you tried to "market" the property. And listing a home as "active" for three minutes on the MLS isn't how these agents would "market" their own homes.

    I doubt you can find a better deal as well, and without even seeing your property, I'd bet it's a great deal. I'm not an "active" agent, but I do help friends & family find deals here, and the buyers I know in the sub $150k ranges are completely discouraged, and have pretty much given up on finding *anything*.

    I put tenants in one of my rentals a couple of weeks ago with 800 ficos, 2+ years on the job & a fat downpayment. They gave up after a couple of months of rejected offers, and asked to sign a two-year lease so they wouldn't have to deal with the madness here for a while.

    I think the deal you've posted is a good play for appreciation, not so much for monthly cash flow. I'd suspect that cleaning & fluffing it after closing could net $20k+, just by selling it as a "normal" sale.

    I don't see you losing piles of cash on this deal. Your original goal sounded more like a long-term play that's neutral for cash flow, but with a good chance of appreciation & the tenants covering all your expenses. I think this deal meets those goals.

    1Reply
  • Albert Hasson
    Investor · Paradise Valley, AZ · Member since 2012 · 366 posts · 214 votes
    14y

    Lisa, bottom line is you are buying a 3/2 1400 sq ft home in a good area for 100k. Yes, you could find better returns elsewhere in metro Phoenix (ghetto, slums, hood, etc) but not in Surprise. I say go for it, you will be happy with your investment 10 years from now. Word of advice, use an agent to find a quality tenant. Get credit report, bank statements, work history, etc. and wait for someone good. The rental market is very strong here now and you shouldn't have to settle for a marginal tenant.

    1Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y

    Lisa,

    You have mentioned that you run another business that requires a good amount of your time. So I'm sure you will admit that cash flow is very important to any business.

    Owning a rental property is a business - this is something that you either accept, or learn over time. So getting cash flow from the rental property is also important to that business. The rent ratios and purchase price percentages are just some indicators of when the property has a chance to have respectable cash flow, so that you can have a successful rental business in the long run.

    This is the point my earlier posts were driving at. You can only see whether you have sufficient cash flow over time by participating, and you are going to do that now. So you will end up learning. Just be advised that the cash flow situation might not be so great.

    0Reply
  • Lisa Goodwin
    OP
    Portland, OR · Member since 2012 · 21 posts · 1 vote
    14y

    Thanks everyone,

    I'm going for it. and here is why:

    Similar homes were sold for $70K a year ago, a model match conventional sale is listed for $130K .... Not considering the rental income and taking into consideration how fast the market is recovering, I have no doubt this house is going to appreciate rapidly.

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