Great Deals, but I'm Broke! How to Attract Financial Investors?
So, I've been browsing the MLS for some weeks, now. I've viewed some decent deals and some great deals, but there's a common trend: I don't have enough money for these deals! I'm curious to hear how the BP community goes about finding and building relationships with individuals that can fund deals. I have a deal right now that I want to jump on, but without the cash, it's simply impossible. I would be more than thrilled to hear from the community about your strategies for finding lenders. THANKS!
Great morning gentlemen,
With 12k you will be short of reaching your goal given Nick’s scenario. He forgot to mention points (3 = $2730), lender ‘junk fees’ ($2000), holding costs (debt service, taxes, insurance, utilities, $9000) and upfront funds needed to get first draw ($7000)……for a grand total of $24,730…I have never done a flip but I have analyzed tons of deals to better serve my end buyers and I was considering doing a flip myself. A very successful flipper in my area informed me that if your potential profit is not AT LEAST 30k you should not be doing that flip. The risk and time investment is just too great for 10-15k profits for six to nine months worth of work. Yes give yourself six to nine months for the first one. I’ll take those profits don’t get me wrong but one must know their worth in terms of time. How much are you worth an hour, are you doing $1000/hr tasks in your business or $10/hr tasks in your business. So, with Nick’s numbers it looks like you will make $36k. There are also closing costs on the back end as well. So if you do everything right, you really stand to make about 5k on this one. Ultimately, if you are using hard money/private money (the terms are interchangeable imo), this is not a deal, far from a deal and 12k will not get you started.
Finally to answer your initial question…..visit the following links, call all of the lenders in your area, make a spreadsheet detailing each lender’s requirements and fees, and begin analyzing deals accordingly. Please let me know how you make out. Peace!!
Thanks for the advice Eric! I didn't realize there were so many extra fees. I'll have to continue researching and saving.
Eric,
My example is not a flip. It's a rental that is bought with built-in equity.
HML will charge about $5K in interest in fees on $97K loan but these are paid upon refinance.
Also, keep in mind that our hypothetical house rents for $1300/mo. It is preleased before the rehab is done and $3900 is collected from the prospective renter (first month, last month, and security deposit).
Nick
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@David Dachtera @Chris Purcell David little over the top scaring the young man thinking he will go to prison with one little private investor deal.. not going to happen... it takes so much to get wrung up by the SEC and there has to be millions ... not one little deal.. but civil matter sure if it goes bad and private investors are famous for suing.
In today's law enforcement environment, don't take so much for granted. Innocent people die just for being with the wrong cop at the wrong time.
The size of the deal does not matter, as I posted earlier. The fact that improper procedures can lead to prosecution is enough. We REIs are viewed rather dimly by the establishment.
Please forgive me for not recognizing that your analysis was for a buy/hold deal. Yes it is very possible that lender will roll points and fees into the back end of the loan but this will ultimately leave buy/hold investor no room for error. House will have to appraise at 130k in order to refinance at 75% LTV to get the 97k. Furthermore, lender will want at least some interest payments while rehab is going on, which goes to @John Tyler original question of how much does he need upfront. It goes without saying that real estate is local but I can’t get first month, last month, and security deposit in an area where home prices are 130k. I can get first month + security deposit. I can get 1300 month rent in those areas but I am not cash flowing at $300-$400 with a 97k mortgage at 5% interest. I’m talking about true cash flow. Rent minus vacancy, taxes, insurance, management, maintenance, and cap ex. I can get $100-$200 at best. Overall I think your example was just a little unrealistic and the 'hidden' costs are what we should help the community avoid if we are aware of them.
Happy investing!! Peace!!
You're right that I did not mention many details but my example was to illustrate what's possible, not to lay out and exact business plan with all elements spelled out.
On the HML side, let's assume 12% interest and 3 points. The rehab should take a month or two at most. During that time, investor may pay $970/mo in interest but that should fit within $12K budget. This is not always the case though.
As for cash flow, I only use PITI on the expense side because house is freshly remodeled and all major system there are new. It should not have any maintenance issues or capex in the first 5 years at least. Management is not factored in because if an investor just bought a first rental he/she should self-manage to learn the ropes. It makes no sense to hire a PM for a single house.
Thank you
Nick
John let's talk deals. I'm in your area.
Originally posted by @Nick B.:
$12K is plenty if you indeed find a good deal.
For example, let's say that houses sell for $130K and rent for $1300/mo in a particular area.
You find a fixer-upper in that area for $60K that needs another $30K of work and $5K for closing costs, etc. A hard money lender would loan you 70% of ARV or $91K. You need to come up with $4K out of pocket to do this deal.
Once you finished the rehab, refinance out of hard money loan into 30 yr fixed. If you manage to get 75% loan to value at refinance, you will receive $6K in loan proceeds after you've paid the hard money loan.
Oh, and don't forget to rent this house for $1300/mo. This should make you $400-500/mo in net cash flow.
Nick
If you have a 91k loan on a 30 yr fixed loan @ 5% interest your going to be paying 500 per month in debt service. Follow the 50% rule and your going to be spending 650 per month on everything else. Your total costs on this property are now up to 1150. You rent it for 1300 and you cash flow 150 bucks a month. How do you get 400-500 a month in net cash flow on that deal?
Originally posted by @Eric H.:
Please forgive me for not recognizing that your analysis was for a buy/hold deal. Yes it is very possible that lender will roll points and fees into the back end of the loan but this will ultimately leave buy/hold investor no room for error. House will have to appraise at 130k in order to refinance at 75% LTV to get the 97k. Furthermore, lender will want at least some interest payments while rehab is going on, which goes to @John Tyler original question of how much does he need upfront. It goes without saying that real estate is local but I can’t get first month, last month, and security deposit in an area where home prices are 130k. I can get first month + security deposit. I can get 1300 month rent in those areas but I am not cash flowing at $300-$400 with a 97k mortgage at 5% interest. I’m talking about true cash flow. Rent minus vacancy, taxes, insurance, management, maintenance, and cap ex. I can get $100-$200 at best. Overall I think your example was just a little unrealistic and the 'hidden' costs are what we should help the community avoid if we are aware of them.
Happy investing!! Peace!!
You beat me to it. Well said.
50% rule does not apply here. $400-500/mo assumes that the house is fully rehabbed, all appliances are new or almost new, A/C and boiler have another 10-15 years of useful life. In this case there should be no repair or maintenance expenses in the first 5 years or even longer. Also, no 3rd party management. Another thing to consider is a lease clause that makes tenant responsible for the first $250 of any repair except for those caused by landlord's negligence or not caused by tenant's negligence. Any repair caused by tenant is fully paid by tenant.
Originally posted by @Nick B.:
50% rule does not apply here. $400-500/mo assumes that the house is fully rehabbed, all appliances are new or almost new, A/C and boiler have another 10-15 years of useful life. In this case there should be no repair or maintenance expenses in the first 5 years or even longer. Also, no 3rd party management. Another thing to consider is a lease clause that makes tenant responsible for the first $250 of any repair except for those caused by landlord's negligence or not caused by tenant's negligence. Any repair caused by tenant is fully paid by tenant.
I think your being overly optimistic to say the least. I would run my calculations as such. I tend to err on the conservative side though.
Why would you pay 15% for PM? This is a single house. You should self-manage it. CapEx and R&M are addressed by rehabbing the house.
10% management fees are standard on SFH. Then I add another 5% for 2 reasons
1.Property managers are not going to shop for the best price on work done and sometimes they even get kick backs for directing work to certain companies.
2.They typically charge 1/2 to 1 full months rent to place a tenant. This needs to be accounted for.
Leaving management costs out of your calculations is not prudent IMO. Time is an extremely valuable resource. You must include property management costs for 2 reasons.
1.We all have some way we generate income that pays us for our time and talents. We have real opportunity costs when we devote time to the management of our investments. To subsidize an investment with valuable time is unacceptable and will prove an impossible model to maintain as you scale the size of your real estate portfolio. The investment must compensate one appropriately for their time or at least well enough to buy a competent managers time.
2.It comes down to working on your business vs in your business. If you have not factored management costs (either your time or someone else's) into the costs of running your business you are not going to reach financial freedom, but rather take a roundabout path to financial slavery. You won't be able to move away, You won't be able to take vacations and you will not reach financial freedom.
EX. A friend of mine owns 12 properties. He never factored the management costs into his analysis when he was buying them. He thought like you that he was going to manage the properties himself and the cost was irrelevant. He's in his 70's now and he has to do all the maintenance on these properties and deal with tenants because he can't afford to pay anyone to do it for him. He's sick of it, but he never factored in management costs so he has no choice.
Capex @ 10% assumes your starting with a new property. During your remodel you may not have touched the foundation or the roof. It's day will come and it will be a sad day if you can't afford it. When I analyze a property I judge life left in items and then I prorate it out of my purchase price.
By making the tenant responsible for repairs your just going to get poor work done that will likely cost more to fix later. When they move out they can easily leave far more damage than their deposit will provide for.
I admit I lean hard to the conservative side, but it's a fair bit easier to figure out what to do with too much money than to figure out how to survive with too little.
Fair enough, Greg, but you listed two reasons NOT to engage a property manager for SFH. It may make sense for a large portfolio but for one house (which is a subject of this thread) it is an overkill.
For your second point, ALL capex (including roof and foundation!) has to be done as a part of rehab.
Hi @John Tyler, I'm in your area (Ft Lauderdale).
Let's connect sometime.