All Forum Posts by: Erik Hitzelberger

First, make sure you are doing the deal on today's numbers not 2009 and sure as heck not on 2019.  Second, make sure all of your numbers (purchase price, closing costs-purchase, rehab, carrying costs, and closing costs-sale) are included in your analysis.  I think you know both of these, but I don't want to make any assumptions.

To answer your actual question, I wouldn't pay cash for this.  Having a 2 rentals, a rehab project and $0 in the bank is very risky and can lead to short-lived investing careers.  The loss of a water heater or furnace in a rental property can be devastating.  That being said, if the deal is good the right question is "How do I pay for this?"

Several suggestions have been made above.  My favorite is getting a construction loan from a small-local bank.  After that... Private Money, Hard Money, Equity Deal, and partnerships are all viable.    

Good luck!

I am currently offloading most of my traditional rentals in favor of student rentals.  Over the past few years, these have consistently been way more profitable.  Contrary to Scott's experience, my properties have significantly lower management requirements.  I suppose it has something to do with the International background of his tenants. 

You've already mentioned that you are getting the parents to cosign.  That is good.  The other thing I recommend is that you spend an extra 30-90 minutes at the move-in inspection teaching the tenants how to take care of your house.  Many have never done laundry, bought dishwasher detergent, changed an air filter, located a shut-off valve, etc.  

If you are an investor selling to an owner-occupant you need to be aware of the Dodd-Frank regulations.  Rather than worrying about compliance with that monstrosity, do a lease with an option.  You collect the rent, you pay the bank, you maintain the insurance, you pay the taxes, and if the buyer doesn't pay, you simply evict him/her.  The option fee provides you a few thousand dollars upfront and the tenant is responsible for securing financing within the allotted time. 

@Adrian Lee - Congratulations on getting started in REI. I am a huge fan of constantly learning and an even bigger fan of finding someone to help guide you through the process. Making mistakes that can be easily avoided often causes many people to leave REI before they ever really get started.

If you haven't done so already, lay out your short and long-term goals.  For instance, "I will have 10 income producing properties by the time I am xx.  These properties will generate $xxxx per month in cash flow after all expenses including management, vacancy and repairs."  If this is your long-term goal you then need to figure out how to acquire the properties.  There are a variety of methods to generate cash including flipping and wholesaling.  There are also "no-money" down techniques like buying under lease-options or subject-to.  Any of them can help you achieve this goal, but you really should pick one and focus on it.  The key to initial success is specialization.  Once you are an expert in an area, move to the next technique.

I say all of this, because finding the RIGHT mentor is important and you have to understand your goals and desired path to identify that person.  Recognizing the value of a mentor is a great sign that you are thinking like an investor.  The next step is to say "I need a (insert technique here) mentor who will teach me how to do xxx deals so that I can achieve my long-term goal."  

The 70% Rule is a guideline for people who don't know their numbers.  The 30% is to cover closing, carrying and profit.  Why anyone would do a deal without understanding the exact numbers is beyond me.  But, some people seem to love it.

Regardless, the FMV of other distressed properties is irrelevant to a rehabber. He/She only cares about the profit potential and associated risk.

IF your numbers are correct, this meets the criteria of your buyer (and a lot of others I'd guess).  It's a shame you can't trust him to review the deal without going behind your back.  Are you able to put together a Proposal with pictures of the needed work without revealing the property address?  I'd want to see the break-down of the $26,500 before committing one way or another.  

@Sylvia B. and @Account Closed 

It's not a lie.  I am the Property Manager.  If asked, I disclose that I have a vested interest in the property.  There is no need for me to volunteer that I am the owner just as there is no need to volunteer how much I am making off of the tenants, my home address or the names of my children.  

Earlier today, a landlord here in Louisville was killed during a dispute over a $60 utility bill.  I wrote about this as well as a few steps you can take to avoid this situation on my BP blog.  Please read and add any systems you have in place to prevent similar tragic situations.  

You are either putting way too much thought into this or not enough.  If you intend to hold the property for a long-time everything is going to break and many things will do so multiple times.  The simplistic solution is to assign a certain percentage of your monthly rent to repairs.  8% is a fairly common number although I've seen more conservative estimates.  Some months will be nearly zero, others (such as the one when that furnace does give out) will be much higher.  Over enough time, it will wash out.

If this isn't satisfactory, try this exercise...  Think about everything that you will have to replace over a 30-year time period and the number of repairs that might be necessary.  Using your furnace as an example, let's say it costs $2000 and you have to replace it 1.5 times.  Additionally, let's assume you will have 2 service calls of $500.  Over the 30-year period of ownership, this item will cost you $4000/360 = $11.11 per month.  Now go through EVERYTHING in the house including the roof, mechanicals, flooring, paint, cabinets, lights, etc.  Add up all of the monthly costs, and you will have your repair reserve funds.  

I like the second method as it is not dependent on fluctuations in house location or rents.  (Two identical houses will have the same needs/costs over the long run regardless of whether the rental rates differ).  The second thing I like is that you gain insights about your properties and your business.  If you assume that you paint once every 5 years and it costs $1500 each time, the monthly allocation for paint is $25.  That's more than twice the cost of a furnace!  Also, if one particular property is running well-above these costs, it is a good idea to check out why.  Is it just the end of life for big ticket items, or is there an underlying problem?  Conversely, if a house is well-below, you may consider selling (or getting a home warranty) before the big ticket items start failing. 

Wow!  Unfortunately, my only advice is for you to find a good attorney quickly.  However, I'm very interested to see how this turns out.  Please post updates.  Good Luck!!!

My very first house had this problem.  The existing sump pump had failed.  I bought a new one since I was going to have to do this anyway.  I used a generator to pump it down to a few inches, than hooked it up to the plumbing that was intended for the sump and got the rest of the water out.  

As Jon mentioned above, you then need to get as much as possible out.  In my case this included the furnace, water heater, studs, electric, and a rabbit carcass.  After that, clean the floor, walls, etc and start putting it all back together.  Good Luck!