n00bie here; opportunity check

[Jason Robinson]

I'm interested in REI as a long-term passive income for my family. (Computer nerd by day) I'm located in Northwest Arkansas and have lived in the area my entire life. I was raised by a tradesman; have seen some construction projects ran and I'm familiar with contractors in my area. I have an opportunity to purchase a home and I would like to check the opportunity with an experienced investor to see if my thoughts/approach is correct. My goal for the property would be to renovate and rent.

Where is the best place to bounce this information on the forums? There is a ton of information on here and I'm trying to be methodical in my approach to absorb as much information as efficiently as possible. 

Thanks in advance! 

[Gary Parilis]

@Jason Robinson

For someone “super green”, you’ve figured out an awful lot – and gotten a whole lot right. Congratulations on your excellent self-education!

To calculate cash flow, you need to do two things I don’t see here:

1. Make an assumption about the percent vacancy, and adjust the annual rent accordingly. You may go several years without a vacancy, but you have to allocate that as a cost.
2. Subtract ALL costs from your rent (including utilities if you’ll pay them, any management fees, avg. repairs/maintenance). Like vacancy, you have to allocate the costs of water heater replacement and roof repairs, even if you’ll go years before you need them.

Also, how are you planning to fund it initially? You’re not getting your mortgage until after the renovation is done, right? A couple of important considerations there:

1. If you get a regular mortgage with the intention of refinancing after the work is done, you probably cannot refi until the original loan has seasoned for 6 months. Check with your bank.
2. If you initially buy without a bank loan, you can refinance right after the work is done (google “delayed financing exception”). But… The amount of the loan will be limited to the purchase price ($95,500), not 80% of the appraised value.
3. If you don’t have cash to buy up front, consider alternative funding methods. This isn’t intro stuff, but since this is family, it’s much easier to work out. You can buy the property “subject to” the existing mortgage, meaning you take on the existing mortgage as it stands. And for the remainder of the purchase price, perhaps your in-laws would do work out a deal where you make additional monthly payments to them until you can refi, at which time you pay them the balance.