First Timer - Private Money Offer on SFH Rental

Tyler Kress · 2019-03-28T09:37:15-07:00

First timer with only a few weeks of REI study. Any feedback you can help provide would be appreciated!I have 22k in the bank and comfortable parting with 10k tops (up to 15k on heloc also available). Should also be noted gross salary of wife and I is currently 108k total and we save 1k more than we spend each month after all taxes/expenses. I was offered a deal from an experienced investor who owns 150+ properties. He will offer to be my mentor and teach me what he knows, and have his company manage the property for 5% of rent. The deal is a $20k house in Peoria, IL. I bring $10k he brings $10k. I will collect rental income from day 1. After 18 months I pay him $15k and own the house free and clear. $650 estimated rent for 2br 1ba. Plan would be to hold it. Conservatively estimating $500/mo cash flow. Rent + Other Income: 675/moTaxes: 50/moIns: 25/mo Property management: 35/moCapEx budget: 75/moAssuming his references and property check out, does this deal seem good for someone in my position - from purely a deal ROI type perspective and a time/opportunity perspective? I am thinking at the very least I will benefit from having a mentor and gaining that network. He owns his own contractor company and property management company and has done about 30 of these small house deals in the Peoria area.Pros I can think of:Can start right away instead of doing more study/gathering deals over the next few months (might run out of steam and never start)Gain a mentor, learn, networkThe details of the deal are easy to understand and the variables are all well knownSince the house is only 20k, if market crashes it won't really matter as long as I have tenants paying rentNot paying as much interest compared to a 30 year loanCan still try running deals in parallel if wife and I sell current house (~30k equity and can't rent out due to HOA rules) and house hack or make another investmentLender currently owns the house and is placing the tenant now, no worry about a vacancy period to beginNo startup fixes/rehabs neededThe major con to this deal I can think of is it will take away a lot of operating $ we could be using for other opportunities in the short term ($16k in 18 months (25k minus $9k NOI). However, besides using the move in low money down loans, we would not really be able to pull off any 25% down payment deals without getting deeper into foreclosures/networking/higher risk taking in my opinion.We are doing our due diligence on the lender as well since we just met him, asking for books on his other investments in the area, he provided references to other partners, etc.

Tyler Kress

OP

Rental Property Investor · Davenport, IA · Member since 2019 · 25 posts · 20 votes

7y

Originally posted by @Matthew Olszak:

Originally posted by @Tyler Kress:

Originally posted by @Matthew Olszak:

Originally posted by @Tyler Kress:

Originally posted by @Matthew Irish-Jones:

@Tyler Kress if I habe the option of purchasing a 100K home with leverage or a 20K home in cash...

I am going with the leverage option every time. If you do your homework there should be less Risk, it should be on a far better area, with better tenants, and more upside.

20K for a House is nothing. There are homes in and around the city where I live for 20-35K. They can be great cash flow homes.... I would never buy them.

They are in depressed areas, with high crime, and you can go months without a tenant.

May be a different situation where you live but... a 20K home is a 20K home and the issues are usually the same no matter where we are talking about.

Without any more details whatsoever on the mentor situation... sounds a tad shady. If I am going to mentor someone I am going to do it because I want to.

I don’t need them to “do a deal with me” and if there is a deal to be made I will just make it on the free market.

I don’t need to make deals and offer mentoring services and combine them into one.

Just my thoughts. Good luck.

Just to be clear, he made himself available and answered questions before talks about this deal came up and I was the one who approached him asking if he would be willing to put together a private money deal (initially I was thinking of him coming up with the extra money for a downpayment on a duplex rather than my wife and I needing to move out of current home to take advantage of an FHA downpayment) - I just know if we did the deal it would be a plus that we would be in contact all the time and I could pick his brain more, so I phrased it "I would gain a mentor" so maybe bad wording on my part to make it seem like he would only be my mentor in exchange for doing business together.

Sub-$50k properties are usually tough to make work, and the experience won't correspond to other types of properties. My main concern would be what experience you would actually gain from this "mentor-ship" arrangement. Normally a mentor would help teach you how to find deals, analyze them, negotiate them, and finally get them performing (either through self-management or hiring the right firm). In this case, it sounds like he already has the property lined up, and will be managing using his company. Which to me makes you more of the private money investor than he is because you'll be more or less just handing over the cash to be a partner with everything else already in place.

On top of this, your $10k will likely be stuck until you sell as you likely won't find a lender for a $25k property, whereas if you leverage your $20k to get a $75-100k property you can do a BRRRR play and refinance out afterward and hopefully get all your cash invested back to invest on another deal.

Thanks for the input, Matthew--are you saying it will be a challenge (if not impossible) for me to do a HELOC or other type of loan on the 20k equity I should have on this house after it's paid for?

You definitely won't get a conventional loan, maybe you could get a HELOC (but the rate will be high as the loan amt is low). My primary concerns were:

1. I don't think this "mentor" brings any value to the transaction. The BP community is here if you need brains to pick unless the mentor is going to work one-on-one with you to show you exactly what he does to get to where he is.

2. Even if you get a HELOC, you'll be taking even more meat off the already dry bone. On a $650/mo rent property, the repairs and capex can obliterate your gross income and put you into a loss for the year just in a single episode. A roof costs $X,000 regardless of if it covers a home generating $1.5k in rent or $450. Same with hvac, appliances, etc. Also check out what the market rate for management is in case your relationship with this person sours or he no longer is in the business. 5% of $650 is only $32.50/mo to the management company - that doesn't even cover the cost of an assistant's time making a single follow up call when the rent is late.

These low $ homes are good if you live nearby and can put in sweat equity (IE you are the manager, handyman, etc). OR if you go for volume. But for a single purchase, and especially as your first, I'd recommend finding something $50k+. Is there a reason this guy doesn't want to go 50/50 with you on the down payment for a more stable property around $100k?

Good points - I did not mention he offered to lend me more if the first deal went well so maybe he would be willing to agree to lend me more with better terms and use the house as collateral on the next deal. So if I went through with this one I would be asking him what the next couple of deals/loans would look like to avoid needing to wait 3+ years to get my money back from rents. I should probably go back to him and develop a road map for the next 5-10 years and explore some alternative investments outside of these specific SFH's. What do you mean by going 50/50 on a 100k prop? I only have a max of 10k to bring right now. Do you mean he covers 50% of my down payment for a conventional loan?

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John Taylor

Rental Property Investor · Metamora, IL · Member since 2018 · 11 posts · 5 votes

7y

@Tyler Kress be careful and do your research on the person you are partnering with. Get references of people they worked with in the past. It sounds like a great opportunity and if it's legit would be a great way to get into it. With that being I would contact @Jesse Mitchell and send him the address. I also have several rentals in Peoria and the surrounding areas. A house for $20k is probably not in a great area and will have headaches. The fact that the potential partner is offering to manage this property for 5% seems a bit below market to me. Any good managers in this area are closer to the 10% range especially for a more than likely higher problem type of property. I notice some responses say stay away from Peoria due to the Caterpillar relocation. That is no doubt a problem and a worry to many, however the rental market is strong here. You should not be investing for appreciation anyway. If you want to speculate you might as well invest in the stock market. Invest for cash flow. Especially in the Peoria where appreciation is at or below the national average annually. My advice is to do your homework and be 100% certain of who you are partnering with. Good luck.

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John Taylor

Rental Property Investor · Metamora, IL · Member since 2018 · 11 posts · 5 votes

7y

@Josh Durham I am with you. I am no longer looking to invest within the City Limits of Peoria. The city is becoming more and more difficult to deal with and they are trying to have investors pay for their incompetence and inability to balance a budget. However the surrounding areas, East Peoria, Pekin, Morton, Metamora, Dunlap etc are strong rental markets but also harder to find good deals.

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Travis Knox

Investor · Peoria, IL · Member since 2019 · 6 posts · 3 votes

7y

Hard to imagine Cat not always having some presence in the area. If they did move out of the area and take their jobs with them, yeah, Peoria's probably another Detroit since so many companies depend on them. Over the long-term, though, cities will recover and compensate for industry leaving.

Nearby Galesburg had a rough patch after several big, established companies left 10+ years back (Maytag, Gates, Butler), and they're seeing a resurgence lately. New businesses are popping up everywhere over there now. If they can do it, Peoria could do it if it came to it.

I guess that's why rental investing is so interesting to me. If you plan to hold on to a property for awhile and you got it at a good price point, you can probably survive most economical cycles other than a total disaster where people abandon the city or something.

2 Reply

Nate Wilson

Weare, NH · Member since 2016 · 59 posts · 23 votes

7y

For only 10k it sounds like a great place to start. Plus it will prove to your mentor that you are committed. The cashflow sounds very good.

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Matthew Irish-JonesBusiness Member

Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes

7y

@Tyler Kress I would run the numbers again with this deal vs finding a place you can afford a 20% down payment with on a multi family. When you add in debt pay down by tenants, and appreciation opportunity because you are in a higher end neighborhood you almost always come out on top.

I know a lot of people that own these 20-30K investments. They may have decent cash flow for a time period but... I do not really consider them investments because they rarely appreciate, are very tough to sell, and have all kinds of management issues.

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Chris Levarek

Real Estate Syndicator · Phoenix, AZ · Member since 2018 · 903 posts · 1k+ votes

7y

@Tyler Kress As mentioned multiple times in different podcasts, 50% of something is better than 0% of nothing. If this helps you get your foot in the door, gain knowledge and begin the journey with some confidence I think its great idea. Check the numbers, get costs and estimates on your own (contractors, utilities, etc) and double check the provided information. You can always go do it on your own for the first deal but if working with another investor in a partnership is the starting point versus not starting at all, well thats a easy call in my opinion.

Note, I highly recommend consulting an attorney and writing up a JV agreement for the duration if not a creating a LLC to which you would transfer the deed after purchase. Theres alot of grey area when it comes to verbal agreements. Iron out the details such as name on the deed, expectations of parties, roles of parties, dispute resolution policy, exit strategies, dissolution policy, etc.

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First Timer - Private Money Offer on SFH Rental

First Timer - Private Money Offer on SFH Rental

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