All Forum Posts by: Bryan Casteel

There was a request for this recently, but it never really got answered so I thought I would start it off. Here is my checklist when I go through a house:
[list]

[size=18]Exterior[/size]

[size=18]Interior[/size]

[size=18]Mechanical[/size]

Who wants to add on?

From a basic understanding, you have the right idea. The problem with your example is your cash position in the deal. If you structure the deal differently, you can conserve capital and put your returns through the roof.

Here is a model of your cash position as you described it.
Assumptions:
You buy for $100K and finance $80K at 6.5% fixed rate for 30 years
You sell for $130K (no fixup costs) and finance, no money down, at 8.5% for 30 years with a balloon in 24 months.
It takes 3 months to find the person you are going to put into the home (they start in the 3rd month)
This data is shown with the RED line.

Now structure the deal differently by getting the same house at the same price ($100K) but on a land contract or subject-to the existing mortgage.
Assumptions:
The existing mortgage was originally on a principal balance of $120K at 7% fixed rate over 30 years.
The outstanding principal balance on this loan is now $100K
You take over house and have to make their payments
You have to make $2K in fixup costs (carpet, paint)
You sell the house on a lease option with 2% down and payments equal to your first example (8.5% over 30 years, etc.)
It takes 3 months to find the person you are going to put into the home.
This data is show with the BLUE line.

As you can see, the same deal structured differently can produce much different results. With the red line you are never cash positive in the deal until the very end when the big chunk of profit comes in. With the blue line you are cash positive after 6 months and your overall profit in the deal is over $13,000 more than before.

Creative deals can get tricky and complex, but if you study them and understand what is going on you can reach UNBELIEVABLE levels of investing.

I am not up on the Brooklyn market, but after reading the Special Comments on this one, I am thinking about heading out that way. The view from the third floor looks to be outstanding.

Property Details

This is a pretty cool deal if you can pull it off and the numbers are solid. One of your problems is that you really need to trust the guy paying for and doing the work on the place. He could really fiddle with his numbers to take more out of the deal than he should.

You can really structure this one any way that you want, but the best way may be for you to go to the Improver and tell him that if he fixes it he can have half of the profit (50%). Then go to the investor and tell him that of the remaining 50% of the profit, you will split it with him so you each get 25%. That would be a heck of a deal, let me know if you swing it.

What I was suggesting was that you get the house under contract to purchase it from the seller for $40K and then go to the investor and say that if he pays you $5K he can have the contract (you never close, just assign the contract to the investor). I don't see why he should be upset that you paid less. If he could have done the deal himself he would have. You got it under contract and you deserve something for your skills. More profit for you to stay in the deal and take 25%, but there is more risk as well. If there is a big surprise in the rehab, the profits can go away quickly.

The numbers you presented, if they are true, sound good enough to have some cushion if there is a problem.

Wow, I think the answer to your questions would fill up a book that could be published. I am sure you could find plenty of books to help you with these questions. That would be the best way to start.

1. Search for motivated sellers because you will be able to get the best deals and the best cash flows. There are A LOT of frustrated landlords out there, just start marketing to them.

2. Get a home equity line of credit on your personal home and use this money for downpayments on the rental properties. Find a local bank (the small community banks are great for investing with) and get to know the loan officer there and describe what you want to do. They may be able to set you up with the line of credit and give you their best rates for purchasing rentals.

3. The type of loan you get depends on your goals. If your goals are cash flow, get the 30 year or even a 40 year. You can get the 30 year and make extra payments with the left over cash flow and end up with a 15 in the end anyway.

4. You deals should be purchased below market and should cash flow nicely.

I recently did a 3 part series on this topic:

Into:
Should you get your real estate license? Part 1

Positives:
Should you get your real estate license? Part 2

Negatives:
Should you get your real estate license? Part 3

Your comments are welcome, but bring them back here so as to not get off this board and keep this thread for future people to read.

I don't understand why the investor isn't paying for and coordinating the improvements. If the investor wants to be passive and not do any work on the deal then you can be the active person and the investor can just put up cash. If you did it that way, you and the investor could each get 25% and the improver could get 50%. Who is the improver in this deal? Is he going to pay for all the work and do the labor?

Another solution is for you to negotiate the contract with the seller and then flip the deal to the investor for $3K or $5K and then you can go find another one.

Just remember that you don't need to know EVERYTHING to do a deal. The hardest one is the first one and then things seem to start clearing up. Have faith.

Asking for an owner carryback 2nd mortgage may be your best answer. Ask for a 25% carryback and you will get an 75% first (if you can find a lender that will lend to you without any of your own money into the deal).

As a general rule, creative deals need no selling at all by the investor to the seller. What I mean is that as soon as you feel like you are selling the deal to the person, you have lost. A good creative deal involved educating the seller so that they are comfortable and understand. If it is right for them they will tell you immediately.

The deal really sounds too tight to risk putting yourself in the middle. You could craft a deal with the sellers to lease/option it to you and you could turn around and lease/option it back out. If you try to take the property sub-to and then sell it, you will get upside down with holding costs and selling costs. If it is worth $900K today, you could maybe lease/option it to someone for $950K - $1MM and collect your check in a couple of years. I wouldn't suggest you get too obligated to the property though, if you can't move it you are going to be very unhappy.

It sucks to pass on motivated sellers, but there is no equity to play around with and very large payment to worry about. Get your marketing out there and find another one.