Tell me how my buying plan is bad/dumb!

12 Replies

I'm fairly frustrated at the moment with my attempts to get some solid RE deals.  Originally I really wanted to start out with multifamily properties, but I've looked at tons, and all the ones that seemed plausible on paper were really terrible once checking out further so no properties as of now, boo.  I'm striking out hard there :-/.

What I'm considering now is buying foreclosures in the $50k range cash, spending roughly another $20-25k in repairs and six months down the road doing a cash out refi and basically starting the process over buying the next property.

I currently plan on holding properties, not flipping, and renting them out.  Specifically looking for neighborhoods that are renting ~$1k/mo range.

Cliff note version:  Buy house for $50k cash, use another $25k cash to repair, rent for $1,000/month.  6 months down the road take a cash out refi, and purchase next unit.  I know there are angles I'm not thinking of, or am not even aware of and I'd love to hear why this plan will fail, or what needs to be changed to give a better chance of success.

I appreciate any and all feedback and sorry if I'm slow to respond.  I'm currently deployed so I don't always have access to the internet, thank you!

@Mason Keith what do you think the ARV of these houses will be? That will affect the value of this proposition.

One other thing to consider: You need to find a bank that will do a cash out refi without 1 year of seasoning which can be done with some local banks here, but you need to check in your area, especially if you are holding these propertieis in a LLC.

@mason 

@Mason Keith  sounds like a proven strategy but completely different than your original plan - what are your goals with the purchases and how much time do you have to commit to it? The strategy you mentioned above with renovating will require a good amount of time and oversight. 

@Mason Keith  Have you set your financial goals yet?  Specifically based on your monthly expenses and your yearly or one time expenses?

Buy and hold is one of my areas I focus on as well but I also have to use other avenues like flipping to grow my buy and hold faster, overall most people who have a w2 job the buy with cash and then cash out refi is the best way to go from my experience BUT it must be a property you can improve and drive the ARV on because banks will only lend normally 75% or 80% of the value of the home.

So if you buy a place that is rent ready and you don't make improvements that will drive the appraisal up then you will end up sinking 20-25% of your money into the property and not maximizing your cash out refi.

I have rentals that I get a 12% return on in nice areas and I have rentals that I get 20-25% return on in not so nice areas, I have better tenants and less headache with the nicer area but my bottom line looks better with the bad area.

Hope this helps! 

If possible acquire properties at a purchase price that will work for either a flip or a buy and hold.  That way you have multiple exit strategies.  You can either pick the option that is best for you when the repairs are completed, or you can offer the property as both and let the market decide.

Hi Mason,

I live really close to you, in Bonaire.  I also wanted to start out with multi-family properties because I figured the risk was a little bit less.  But like you I am having a HORRIBLE time finding multi-family properties in my price range that are also worth investing in.  The only ones are in Bibb County and that was a no-go for me due to the school system.   

Instead, I switched to SFR's in Houston County and now have 3 properties. I'm no expert, I've only been in this business for about 7 months now. But SFR's in Houston County are EASILY found in the $40-$60 price range in good enough shape to rent out almost immediately. I purchased Rental #1 for $52k and put about $2k in it and get $1000 in rent. Rental #2 I bought for $50k and put about 100 bucks inyo it and get $950 in rent. Rental #3 I bought for $58 and I will end up putting in about $5k. I plan on asking $1100 because its in a slightly nicer neighborhood, but its the completely wrong time of year to do this so we'll see what prospects I have.

 The other thing I've noticed in this area is that to buy a "good deal" foreclosure you have to find the deals and be able to close QUICK.  I looked at several foreclosures and I could never get to them before an investment company snapped them up.  That said, I got a great deal on a house someone was flipping that had sat on the market (house #1).

Also, even with the relatively small jobs I needed to do on my rentals, I found that having a good contractor base is one key to success in this business.  I struggled to find not only good contractors, but good contractors willing to do smaller jobs.  That second point is key, not all contractors want the smaller business.  Even so, I try to do most of the work myself.  And while I'm capable, it takes me about 10 times longer to do a job than it would a professional, and every day I'm working on a property is a day I'm not getting rent on it.

Here's what I base my housing prices on: http://www.housing.af.mil/robins/localcommunity/

Anyway, long story short, it seemed like way to much effort to find and fix a foreclosure since I'm just starting out, don't have an awesome contractor network yet (but I'm building it), and want to start bringing in cash ASAP. I recommend you look at SFR that don't need much work.

Originally posted by @Mason Keith :

I'm fairly frustrated at the moment with my attempts to get some solid RE deals.  Originally I really wanted to start out with multifamily properties, but I've looked at tons, and all the ones that seemed plausible on paper were really terrible once checking out further so no properties as of now, boo.  I'm striking out hard there :-/.

What I'm considering now is buying foreclosures in the $50k range cash, spending roughly another $20-25k in repairs and six months down the road doing a cash out refi and basically starting the process over buying the next property.

I currently plan on holding properties, not flipping, and renting them out.  Specifically looking for neighborhoods that are renting ~$1k/mo range.

Cliff note version:  Buy house for $50k cash, use another $25k cash to repair, rent for $1,000/month.  6 months down the road take a cash out refi, and purchase next unit.  I know there are angles I'm not thinking of, or am not even aware of and I'd love to hear why this plan will fail, or what needs to be changed to give a better chance of success.

I appreciate any and all feedback and sorry if I'm slow to respond.  I'm currently deployed so I don't always have access to the internet, thank you!

Right now foreclosure is our area doesn't make sense! They are over market value. .Honestly while deals exist on the mls, these type of deals do not at least in our market. Depending on your area you might have luck with letters or wholesalers. The issue the area I work in runs into, is the houses I like to buy were hit in the crash. So 95% of all sellers have no equity.

As an investor you need to have 20% in them when you refinance. So basically you would have to buy a house for 50k put 22k into them and be able to refinance those to 90k. 

Make sure what you are looking is reasonable for your area. While I LOVE BP, the practices that you read don't always translate to other areas.

We fund the 20% down for the rentals through living frugal. While we buy them under value by no mean what you are suggesting. We got them 5-20% no work to 4kish needed by buying short sales. We focus on single family home.

Just my thoughts! good Luck!

Your plan makes sense in general. Ideally you want to be all in with purchase, rehab, and financing at least 10-15% (in a tight market) below the ARV. Sounds like the rent/price ratio is pretty good - especially in the Houston County area mentioned above.

Find a local REIA and see if there are any hard money or private lenders you can use for purchase and some rehab money and also find out what lenders can then refi you into conventional longer term financing (should not require seasoning - can refi as soon as rehab done).

I am finding deals in STL at about 10-15% below market value after repairs on the MLS. Unfortunately, these deals tend to be in less than desireable locations. Granted, not warzones, but there is no real hope for appreciation. They do, thankfully, hit the 2% rule; but I'm starting to realize that after the increase maintenance and vacancy expenses, my cash flow won't look quite as good as projected by that rudimentary rule.

The more I research I conduct on BP, the more direct marketing seems to be the key.  However, in my case, the criteria most prescribed on the forums only nets me about 400 potential addresses in my targeted area.  At a 1% expected response rate (i.e., for calls), it's obvious that my net is not cast wide enough.  I would like to expand my area, but I'm not as well versed outside the 2-3 areas I've focused on.

So, I continue my search for the right methodology for my area.  The podcasts advocating persistence as the key to real estate is ringer truer and truer the longer I play the game.  But I'm loving it nonetheless! 

Happy investing!

Have your considered investing with a reputable turnkey provider outside your local market?
You may find the returns are comparable as well as completely passive.
Could be a good option for you if you are in and out on deployments.
Live where you want, invest where the numbers make sense.

I agree with @John Collins . You can't force a market that doesn't work for your REI model. The numbers don't lie. If you try to "argue" with them you'll lose every time. Many REI go out of state successfully when their market doesn't work,...either temp. or perm.

I see this every day here in Michigan, and work with many out of state investors coming from markets that won't cash flow immediately.  High cost areas like CA are flipping for cash, and taking their profits and moving them into other areas just like Michigan in large numbers.  Why not?  The house that they just sold in CA for $350k, and made a $50k profit on, they can buy with all cash here, rent, and cash flow (with no debt) at over$600/month.

There are a number of areas like this.  Let me add, we're NOT talking about "war zones".  We're talking about the same house, the same type of area, the same everything as the $350k house in CA....just a different price.

If the spread in your market allows it, this is a tried and true way of acquiring properties.

My only comment would be on the sourcing. If, by foreclosure, you are referring to MLS listed REOs, go for it.

I would not recommend starting with Trustee Sales.  The deals are few and far between as most foreclosures are a result of borrowers being upside down.  And you get no inspection (due diligence) period.  You must know what you're doing and be prepared for any physical problems after you own the property.

There are lots of ways to source value.  You should familiarize yourself with several methods.

Wm

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