Is This A Good Idea?
Real Estate Investor · Levittown, PA · Member since 2008 · 36 posts · 3 votes
Hi all,
My Realtor found a great rental that she was going to buy but doesn't want to stretch herself too thin and told me about it. I would be a newbie at this and have no moola. Would it be a good idea to use hard money to buy the rental and refi in 12 months? And flip in 2 years?
Sincerely in Christ,
Leesa C.
Eph.2:8,9
Hard money is not magic money, only the Government has that. You have no money and a hard money lender is still going to want you to have a down payment. You also need to have money for reserves. What if you have a vacancy or repairs, or other expenses? This would be a bad idea for you at this time. Work to build up reserves before you consider buying and holding a rental property.
:cool:
If you found a screaming deal, it might be possible to use hard money and a refi and get enough cash to do the deal and have a small reserve fund. What are the parameters of the deal? Sales price, fixup cost and rent? Do you have sufficent income to qualify for the long term loan? Do you have a hard money lender lined up? If so, what are their terms and criteria?
Looks to me like you are betting the bottom of the downturn is here. If you bet right, you might do well. But I believe you also better be able to handle a complete loss in case the economy continues to worsen over the next couple of years.
It does seem like a bad time for a newbie to make the plunge.
Very tough times right now in the rental business.
I am one of the few landlords I know with 100% occup. right now but I had to pay for it, reduced all my rents 10% across the board to keep my good tenants, and my last vacancy took 5 months to fill and I had to drop my rent 20% from the previous lease to fill it.
Everywhere I look are for rent and for sale signs and the tenant quality had degraded tremendously .. credit ratings, background checks etc, which equates to higher damages for landlords and less ability to collect on those expenses .. experience speaking there..
Taking on a rental property for a flip is a dangerous game unless you can fully afford to fund the payments for a LONG time and still make a better profit then the risk free rate of return on cash.
One bad tenant, not paying, damages, legal problems, and you could be looking a total loss of investment.. which could be considerable to get a mortgage these days.
That said:
Property Taxes, Insurance costs, upfront renovation costs
House Age < 10 years preferred
Roof Age < 10 year < 5 years preferred
Insulation Quality
Electrical system age
Heating/Cooling System Age < 10 years < 5 years preferred
Floors (Carpets are a hole you throw money into), tile preferred
Kitchen and Baths (Expensive renovations)
You have to be able to accept rental payments up to 20% below the market to get a good tenant and credit and background checks are mandatory .. so longer empty periods are expected right now.
Personally, I think this is a great time to begin to build a rental business as properties are available well below rebuilding costs
and hence will appreciate but OJT Landlord training will be expensive ESPECIALLY NOW!
That's probably because you are in a bubble area. Here in Ohio (not a bubble area), the rental business is doing very well and we are raising rents.
Mike
Which Ohio is that?
Ohio joins States with Highest Foreclosure Rates · Jan 19, 12:08 AM by
A report from the Associated Press stated that Ohio currently has one of the highest foreclosure rates in the United States. If foreclosure rate is an indication of how a state’s economy is thriving, then Ohio is a good example.
Faced with a high unemployment and interest rates, Ohio homeowners are having a tough time coping with their mortgage obligations especially borrowers who opted for adjustable rate mortgages. Aside from this, they still have to overcome high credit card debt rates.
Predatory lending is the primary cause of the current housing situation. Many lenders have granted loans to people with bad credit history and who can not really afford a property in the first place. Some lenders even raised property appraisal value, which means that buyers are paying more for what their homes are really worth.
According to a research firm, around 7,349 properties in Ohio entered some stage of foreclosure in December 2006. Compared to December 2005, foreclosure rates climbed by 8.6%. That is roughly 1 out of 651 homes!
Ohio government officials are planning to control the situation by passing new laws in 2007 that are aimed to tighten subprime loan regulations and allow buyers to sue lenders doing fraudulent practices. Many lenders are also slashing down prices to decrease the number of REO properties. Conducting public auctions and entering into listings contracts with brokers such as Foreclosure Deals are just some of the options being explored by these lenders to sell their foreclosures.
With the growing inventory of Ohio bank foreclosures, many real estate investors consider this a welcome opportunity. Now is the best time to purchase Ohio bank foreclosures since list prices are very competitive. Also important are the new regulatory laws soon to be passed that can really help liven up the housing market and create a healthy investment climate.
Denver has had tons of foreclosures, too. But rentals are still in demand and rents are not falling. Not really rising, either, just flat. The low-end apartment market doesn't seem as strong, but houses are good rentals.
The trick is to actually have people who have jobs and want to rent. Five years ago, these folks would have bought houses with creative financing. Now they want to rent.
I read an article about FL. The people interviewed were complaining about how everyone was moving away and abandoning houses. As the article went on, it was clear most of the occupants had been construction workers. Since there was no construction going on, they were leaving. Strange situation where a big portion of the jobs were building houses, and those were the jobs that generated demand for the houses.
Meanwhile, back to Leesa's question. Leesa, without more info, its hard to give you a good answer.
Sorry grapped the wrong article
G.,
Thursday, February 12, 2009
RealtyTrac: Ohio foreclosures ease on moratorium effortsBusiness First of Columbus
RealtyTrac: Ohio foreclosures ease on moratorium efforts [02/12/2009]
RealtyTrac: Ohio foreclosures ease on moratorium efforts [02/12/2009]
RealtyTrac: Ohio foreclosures soared 26% in '08 [01/15/2009]
RealtyTrac: Ohio foreclosures soared 26% in '08 [01/15/2009]
Ohio foreclosures drop in November [12/11/2008]
> More Search Results
Ohio remains one of the nation’s most troubled places for housing foreclosures, but it joined a number of states last month in showing the favorable – albeit temporary – effects of federal and private-sector moratoriums on taking back homes from borrowers.
A report from Irvine, Calif.-based RealtyTrac Inc., a company that tracks and sells foreclosure data, shows Ohio logged 11,199 pre-foreclosure, auction and bank-repossession filings last month, which equates to one filing for every 452 properties in the state. The number of foreclosures was down 0.5 percent from December and down 12 percent from a year earlier, when the foreclosure storm was raging.
Ohio’s foreclosure rate was above the U.S. average and 10th highest in the nation last month, but the state was one of 15 to see drops in foreclosure filings.
“The extensive foreclosure efforts on the part of lenders and government agencies appear to have impacted the January numbers – particularly the Fannie Mae and Freddie Mac moratorium on all foreclosure sales that was extended through the end of January,†RealtyTrac CEO James Saccacio said in a release.
Around the nation, RealtyTrac recorded 275,399 filings, which equates to one for every 466 households. That was down 10 percent from December but 18 percent above January 2007.
The state with the biggest foreclosure problems once again was Nevada, which logged one filing for every 76 households in January. It was trailed by California with one foreclosure for every 173 households, and Arizona with one for every 182 households.
That article appears to be 3 years old! The rental business was relatively bad 3 years ago, but not because of a large inventory of foreclosures. The rental business then was bad because so many renters had purchased houses. These people have since been foreclosed on and are now once again renters (where they belonged all along)! As I think about it, that's a very nice story (almost brings a tear to the eye) - that the renters are now back where they belong - warmly welcomed home to their rentals. Kind of like the return of the prodigal son! LOL!
Mike
Hi Jon,
We had the same situation here as well. Transient workers,
really the life-blood of a healthy rental market are basically gone as well as the associated lower paying jobs from store clerks to waiters, etc as the local business all cut back due to less business.
Hence a glut on the market, especially in the lower end rental market (2 bedroom and less). Three bedrooms and up have stayed pretty stable but the vacancy rate is higher then it has been for years.
Those landlords that have tried to keep rents stable have more vacancies while those with payment problems on mortgages drop their rates until they have a tenant. It is doesn't take a math wizard to know that 1 month empty at 600 a month is the same
as 550 a month next month and so on.
It is great time to get into rentals but only with a solid financial support system, don't need to take any money out, and a long term view. Going in with a quick flip mentality and short finances is more of what got us all into this mess to begin with..
I may have been unclear. Denver has not seen a big outflow of transient workers. Population has been pretty stable. In my particular farm area, we have a bunch of hospitals moving in, creating jobs at all economic levels. Admittedly, they're moving from other parts of town, but the parts being vacated are near downtown, and properties there are already in high demand.
Like Mike says, we saw a lot of people getting out of rentals and into houses. Houses they really couldn't afford. Now these folks are back to rentals, creating pretty strong demand. Definitely much better than in 2002-2004.
I fear what happened in your area is a pure speculative boom. New houses were being build like crazy and were being sold to out of town investors. The demand was driven by the speculation rather than by people who actually needed housing. From the sound of it, the tenant base was people building the houses, rather than a permanent base. When the easy money ground to a halt, the speculative demand disappeared, building stopped, the tenants went away, and now its a very tough market.
Here we have very low inventory at the low end. Almost nothing available under $100K (under a months inventory) and not much more even up to $300K. If you have a million dollar house, you're in trouble. But bread and butter houses are selling.
I do think we're hijacking Leesa's thread, and if she replies back with more info, I'll probably move this discussion to a separate thread.
in the tampa area, we aren't having any issues finding renters either....
as jon and mike said, with the foreclosure rates rising, these people still need somewhere to live.
i've said it before, but a client of mine has 10+ rentals and he said whenever a vacancy is coming he throws an ad in the st pete times and on craigs list and gets a quality tenant in within a day. can't beat that!
Ok, I give up ..
Old saying One person sez your a horse you can ignore it, two people, get a mirror, three ?, buy a saddle ..
I guess it is area specific .. In this area, rentals are a disaster ..
worst market I have seen in 25+ years ..
The property is in a part of the city where there are two colleges. It is already rehabbed and tenant occupied. A new tenant is already lined up for March.
The rents for the area are $2300/month. My thing was just to find out if anyone has every used hard money to buy for a hold to rent. Thanks!
No. Hard money is to expensive for holding. You'd have to have an incredibly good deal for it to be profitable with 15% interest.
I agree with Jon. Hard money is expensive and should only be used for the very short term.
Give us more details... how much is the property? what would be your monthly payments on the loan be @ 6% @10% @ 15% or even higher since it would be hard money.
Then factor in utilities, water, sewer, electric, gas etc if you are covering those for the tenants. Don't forget about taxes. are they higher if you dont live in the property? are they higher if its a rental. are their city taxes, county taxes etc....Michigan charges more taxes for properties that are not lived by the property owner.
will you have extra money available to fix any damages, roof leak, water leak etc...
Be careful with your Realtor too. SOME of them LOVE newbie investors.
The house is on the market for $299,000. I would offer less of course!. My mortgage would be about $1700/mo , RE taxes 2008 were $722. Renter pays all utilities. The house is also completely renovated. I wouldn't need to do any repairs. Also Kim is a great Realtor, she's an investor herself and she is on here too:) I trust her judgment. I was just kicking around the thought of being a landlord. I am a wholesaler but right now nothing has been working out. I just wanted to see what other options there are to get my RE investing happening. I'm green but not that green that I don't know when someone is pulling my leg. Thanks!
Leeza, here's my $.02. Homes in this price range do not make a good buy and hold investment. Using the 50% rule your NOI is $1,150. With payments of $1,700 you are going in the hole $550.00 every month (yikes!!!)
For a rental with $2300 in rent, and the usual 50% for expense and $100 for desired cash flow, the most you could pay is about $158,000
Rent: $2300
Expenses: $1150
NOI: $1150
Cash flow: $100
Max payment: $1050
Max loan: $157,822.95
That's assuming zero rehab.
Using hard money, assuming you want nothing out of pocket and a 70% LTV, you would need to buy for no more that $141,687.19. You would need an ARV of at least $221,175.64. That would make your HML $154,822.95. That would give you enough money from the HML to buy the property, pay the points, and cover all your holding costs. After the refi, you're at about that max loan amount.
At $299K this is an awful rental. Even anything close to that is bad. At best, its a speculative play, and I don't see much appreciation potential in most places.
Now, if you went with my more agressive criteria, 40% for expenses and no immediate cash flow, you could go up to a $207K loan and a $188K purchase price. But you'd have to see some upside.
Hard money/refi will work better if the place needs some work. Otherwise, its hard to justify the higher value on the refi. In that case, split my purchase numbers between the rehab and the purchase.
I wouldn't buy anything in Hunington Beach, either. I think you guys have another 20-30% of downside. Same for the bay area, LV, or FL. But I think there's less downside in many other locations.
I think a realtor will tell anyone that something is a "good deal" just to make the sale. ie: I was looking at a house. I was perhaps about 90% there in terms of buying it. My realtor is looking it over and he said something like "wow now this is a good deal. I should mention in case you're not interested in this one let me know because I might just buy it myself". So I thought it was a "really good deal" and ended up buying it. So they use tricks like that to get you to buy stuff.
Leesa,
something sounds fishy about that tax rate. You said its California right?
I would pass on that one. Yes, it SOUNDS very enticing...a $2300.00 per month coming in but I have to agree with Jon again. i don't want to pee on your tree, but I think if you go through with this deal you will loose your shirt.
keep looking. There are thousands of deals out there that are actually GOOD deals!
To Matt:
My realtor is a friend of mine, who is an investor and belongs to this social network.
To Jenny:
I never said where the place is but it is in downtown Philly. The comps are 200k-230k. It is in an up and coming area.
And any time a realtor says something is a good deal, it means a good deal for THEM if you buy it!