Is this a good investment? Hold & Rent strategy help; Hard Money.

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Is this a good investment? Hold & Rent strategy help; Hard Money.

Kevin Jung
Member since 2020 · 9 posts · 1 vote

Bunch of questions for my scenario; please help!

Considering buying a townhome near a beach. Lots of vacation rentals, casinos, and a military base nearby.

Listed: 140K, Offered 140K (in my name as of now). HOA 58/month, Tax 89/month, Insurance 136/month. Rent nearby 1200-1300/month.

So I did the math, and the rent pretty much cancels out the mortgage with 0 Cash Flow. **BUT** the place has a bunch of military folks coming in every week for training who stays for 4-7 months. They get at least $2500 a month to use for lodging. If they don't use it, they lose it. How do I know? I'm one of them. Other investors already taking advantage of the system. So potential $2500/month rent with 500-700 CashFlow, which is my goal.

Q1: Is this investment worth the risk? I ready talked to the property manager that deals with military folks and agreed this townhome can be listed in their system for rent. But they charge 20-25% of the monthly fee. And I would need to spend around 5K for furnishing it. 3bed/3bath.

Q2: There's 2 other exact same property listed and hoped to get a partner to buy all 3. Is anyone interested? PM me please!

I have only around 40K cash so I plan to use Hard Money, 20% down, 4-5% with 2-4 points, and some other fees. (Don't qualify for other loans due to income history and DTI. Good credit of 780). I put an offer already using my name but am in the process of creating an LLC, ASAP.

Q3: I was hoping to create a business checking, business CC, and hopefully business LoC as soon as I got my EIN. But since it's my first LLC and no business credit, I don't see myself getting a high limit on any of those even with my credit score of 780. I was really hoping to use the business credit card and pay myself using plastiq. And using it as downpay and other costs for this property. Cuz I might be short on a few K's, which I can borrow from friends and family, but I rather use the business credit strategy. Any opinions here?

Q4: First time using hard money, so not an expert. I plan to move all my money to business checking as soon as it's formed. HM Lenders are asking for a statement or proof of funding. Does this work?

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Tucker Cummings
Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes
5y

If the cash don't flow, it's a no go.

Overall, sounds like you're making this way harder than it needs to be. Or you're trying to make it into a deal. There's way lower hanging fruit out there.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y

    Terrible deal.

    Zero CF means bad deal from the start.  The $2500/mo rent may get you $500/cf...however, the 25% service fee the listing company charges will cost you $625...the results in negative CF.

    Adding (actually subtracting) to the problem is the financing...you NEVER use Hard Money as your financing for rentals. WAYYYYYYYYYYYYY too expensive.

    There is NOTHING about this property that tells me it's anything other than a way to lose money on purpose.

    1Reply
  • Kevin Jung
    OP
    Member since 2020 · 9 posts · 1 vote
    5y

    @Joe Villeneuve Thanks for the reply!

    My bad, I meant the property management fee of 15%.

    My estimation. Renting to market: $1250

    Tax $89.00 Insurance $136.00 Utilities $- HOA $58.00 Lawn $- Vacancy $100.00 Repair $50.00 CapEx $100.00 Property Manager $125.00 PMI $- Mortgage $588.00 Total Expense $1,146.00 Cash Flow $4.00 Annual CF $48.00 NOI $7,104.00 COC ROI 0.12% Cap Rate 5.07%

    My estimation. Renting to military: $2500

    Tax $89.00 Insurance $136.00 Utilities $300.00 HOA $58.00 Lawn $- Vacancy $100.00 Repair $100.0 CapEx $100.00 Property Manager $375.00 PMI $- Mortgage $588.00  Total Expense $1,846.00 Cash Flow $654.00 Annual CF $7,848.00 NOI $14,904.00 COC ROI 17.42% Cap Rate 10.28%

    Still no?

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y
    Originally posted by @Kevin Jung:

    @Joe Villeneuve Thanks for the reply!

    My bad, I meant the property management fee of 15%.

    My estimation. Renting to market: $1250

    Tax $89.00 Insurance $136.00 Utilities $- HOA $58.00 Lawn $- Vacancy $100.00 Repair $50.00 CapEx $100.00 Property Manager $125.00 PMI $- Mortgage $588.00 Total Expense $1,146.00 Cash Flow $4.00 Annual CF $48.00 NOI $7,104.00 COC ROI 0.12% Cap Rate 5.07%

    My estimation. Renting to military: $2500

    Tax $89.00 Insurance $136.00 Utilities $300.00 HOA $58.00 Lawn $- Vacancy $100.00 Repair $100.0 CapEx $100.00 Property Manager $375.00 PMI $- Mortgage $588.00  Total Expense $1,846.00 Cash Flow $654.00 Annual CF $7,848.00 NOI $14,904.00 COC ROI 17.42% Cap Rate 10.28%

    Still no?

     Still no.  When you refi, you're adding one property at a time based on the cash out part of the refi.  The rest of your equity remains with the original property.  Even though this added property (let's say you repeated the numbers for the first property), the refi loan is greater than the original mortgage, so your CF goes down...substantially (REFI int rates are higher too).

    When you sell, you take advantage of ALL of your equity, so if your equity doubled, you are now buying 2 properties like the first one.  This doubles your total PV and your CF (that's the big one).

    When you repeat each strategy, you're only adding one property at a time, and decreasing the CF to the refi property each time doing the refi strategy.  When you sell, you are doubling the number of properties each time, doubling the PV and the CF.

    Doing REFI's is a linear return, with a step back (reduced CF on refi property)

    Doing flips is a compounded return.

    0Reply
  • Kevin Jung
    OP
    Member since 2020 · 9 posts · 1 vote
    5y

    @Joe Villeneuve Hmm, Okay. I 'somewhat' understand (still new). Thank you for your input.

    But I don't plan on refinancing for a while. I'm still shopping around but the rate I have in place for hard money for $145K is

    30Y, LTV: 80%
    Points 3 = $3,480.00, 
    Transfer/UW Fee $2,174.00 
    Title/Transfer Fee $4,000.00
    HOI/Taxes Fee $2,500.00
    First 4 payments Due $3,059.02
    DP 20% = DP $29,000.00
    Total Cash $44,213.02
    Estimated Mortgage $871.00

    I don't have experience with flipping and zero knowledge of fixing a house (would love to) so my strategy as of now is just to buy and hold for the CF and equity; long term.

    0Reply
  • Tucker Cummings
    Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes
    5y

    If the cash don't flow, it's a no go.

    Overall, sounds like you're making this way harder than it needs to be. Or you're trying to make it into a deal. There's way lower hanging fruit out there.

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y
    Originally posted by @Kevin Jung:

    @Joe Villeneuve Hmm, Okay. I 'somewhat' understand (still new). Thank you for your input.

    But I don't plan on refinancing for a while. I'm still shopping around but the rate I have in place for hard money for $145K is

    30Y, LTV: 80%
    Points 3 = $3,480.00, 
    Transfer/UW Fee $2,174.00 
    Title/Transfer Fee $4,000.00
    HOI/Taxes Fee $2,500.00
    First 4 payments Due $3,059.02
    DP 20% = DP $29,000.00
    Total Cash $44,213.02
    Estimated Mortgage $871.00

    I don't have experience with flipping and zero knowledge of fixing a house (would love to) so my strategy as of now is just to buy and hold for the CF and equity; long term.

     You're losing money doing that.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y
    Originally posted by @Tucker Cummings:

    If the cash don't flow, it's a no go.

    Overall, sounds like you're making this way harder than it needs to be. Or you're trying to make it into a deal. There's way lower hanging fruit out there.

     Correct.

    0Reply
  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    5y

    @Kevin Jung, getting off topic a bit.  I agree with Joe, this is a no go, and I also agree with Joe that if you want to build you wealth, flipping is generally a better strategy for all the reasons he said.  Rentals are great only once you have too much money to continue reinvesting at a steady rate.  I.e. if you grow your base to the point that you have 10 flips going on at once, and can't keep them all going, rentals become a more attractive option.

    Now onto my reply: just because you create an LLC and have an EIN doesn't mean you get a business line of credit. A business is an even riskier borrower than a person. Any lender is going to be looking back at your and your credit worthiness when applying for credit cards and lines of credit.

    0Reply
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