Which one? or both?

Question

Hi guys,

Wanted to run a couple deals that I'm looking at by y'all.

Option 1
Price: 79000
Down payment: 10%
Rehab: 3000
Rate: 6.25ish
Rental range:900-1100

Option 2
Price:27500
Down payment:27500
Rate:N/A
Rehab: 2000
Rental range:650-750

What do you guys think?  Need any other info?  We'd like to buy and hold, not fix and flip.

Also side question on this 50% rule of thumb.  How does that work for a hard cash deal, when mortgage is 0 so you'll have positive cashflow.  What's a good indicator in that situation that its a good deal?

Thanks

Stone

Stone Jin · Answer

Thanks everyone for the input.  I'm in contract with option B.

Wish me luck!

Jeff M. · Answer

if real estate investing is your main business then i would go for option 1 as that yields more free cash flow by virtue of putting you in a position to buy another property with the remaining cash.

however, if your looking for a safe place to put money that you want to get some return out of then id go for option 2.

my grandfather would always go for option 2. he says "if you need a mortgage, then you cant afford it". believe it or not, that has worked quite well for him.

Anna M · Answer

Hi Bill,

Thanks for the post - I read it and I can totally relate. We're starting to see a very similar picture in AZ, at least in the lower end of the market.
High end homes are continue to lose value and last I heard had about 5-6 years worth of supply (at current buying rates) on the market already.

Cash definitely is the name of the game in REOs - you can get great discounts and banks are a lot more interested in doing business with you.

Personally, I am looking at both, if a decent financing option is available, I am definitely exploring it, since cash is tight for a newbie. I evaluate each deal using multiple financing scenarios that factor in opportunity cost of cash and different financing options, so hopefully I can make something work as a start.

Anna M · Answer

Thanks Mike! 
I am just starting out, so don't really have a history of success per se, but will definitely work on building it and the relationship with a bank...
And thanks for the other ideas - I've been mostly looking at REOs in my area, so hadn't really looked at other options...

Will Barnard · Answer

Anna,
            If you are looking at REO's in AZ, do you have the cash to close them or are you looking to use debt leverage on them?
            
            I highly suggest you get cash available to make that strategy profitable and successful for you. While many preach to use no money down strategies, etc. with REO's it is not that simple and you have a much harder go at it without cash.
            
            I just made a blog post on my Blog about this very issue. Read it here: http://www.biggerpockets.com/blogs/63/blog_posts/1463-if-you-re-not-paying-cash-you-re-not-in-the-game

Michael Rossi · Answer

It's very simple - you just don't put your money into the deal.  You can buy at a HUGE discount and borrow 100% of the purchase price (with a very low LTV) from the bank (if you have excellent credit, some money in the bank, a history of success, and a good relationship with a small local bank).  Or, you can buy with a lease option; sub-2; with owner financing; via land contract, etc.

Mike

Will Barnard · Answer

Anna,
I think a 20% COC would be a good deal. 25% would be a great deal.

Eliott,
As far as your cap rate question, the actual market value has NOTHING to do with it so you would base it on the 100k not the 150k by your example.

Anna M · Answer

Hi Mike :)

Yeah, I wouldn't mind getting that myself :) Can you teach me how you get the cash flow with no investment? :) Or are you following the Robert Kyosaki model of thinking: "if my investment is paid back and I invest additional returns, that's like getting money for free"?

As a newbie with limited fundraising options I was thinking 20% cash on cash ROI (annually and not figuring appreciation in) is reasonable, considering one can get 7% just off dividends these days...

What do you guys think? Am I setting the bar too low?

Michael Rossi · Answer

Anna,

I'm getting an INFINITE ROI with a minimum $100 per unit per month positive cash flow, so I like that!

Mike

Jon Holdman · Answer

Mikes approach evaluates the deal independently of financing.  Its similar to the "cap rate" concept used in commercial, except it assumes 100% financing rather than all cash like the cap rate calculation.

Another way to look at this calculation is that you're paying yourself the same return on your cash as you're paying for the loan.  Say you use 7% as the interest rate on the 100% loan and the deal cash flows $100.  Then you assume a 10% down payment and the deal cash flows $150 a month.  The property itself is still producing the same $100 a month, and the cash you've invested is returning the additional $50.  There are numerous investment alternatives for cash, so you must alway consider the "opportunity cost" for your cash.  That is, the return you would generate from that cash when invested elsewhere.

Another way to evaluate the deal is a cash on cash return.  Total true cash flow for a year divided by the total cash invested.  If that's 3%, forget it.  You can get that for CDs with no risk and no hassle.  If its 25%, that's a pretty good deal.  That deal would also evaluate pretty good with Mike's simple calculation.

(impossible for an investor loan right now