All Forum Posts by: Steve Milford

Welcome!

I advocate to everyone interested to get a real estate license. The education that you gain by helping other people put together deals is HUGE. You make it what you want to get out of it.

If you run it like a business you will see where the deals are, how to find them, learn best practices, build your marketing machine, and more.

I have been in the industry a little over a year and I am having a blast.

This industry is all about connecting with other people in person and helping them, being active in your market.

Feel free to contact me and connect!

I would look for the best return for my money based on my risk tolerance. That may or may not be real estate.

Within real estate or anything really, for me, the cost of entry versus the reward based on quickest availability to sell, is how I evaluate. If I am looking to own something more liquid, like a piece of furniture, I can sell that quicker - so the risk is less. Real estate is not really considered liquid, so I look at the time of selling a year realistically. And then I look at the numbers based on what I like. If I buy a chest of drawers for $30, rehab it for $20, and then sell it for $120, I netted $70. Now consider real estate. These are numbers based from an investor I recently helped. A recent rehab in my market is $150k+ wholesale. If I put down $10k, I still need probably $35k to rehab. Then if I sell for $210k - $10k (down) - $35k (rehab) - $140k (mort) - $12k (mort pay/carrying costs) - $5k (closing costs & excise tax) - $8k (realtor fees) = $0. How do you win with real estate? Lower cost of entry when you buy, you sell it quicker if you are flipping or you hold onto it longer for the BRRR strategy. You have to look and look and look until you find one that makes sense for you.

Here is my analysis...and realize you are trying to analyze apples and oranges here between the two scenarios. Also a true analysis is looking at the reward & the risk, of getting into the deal and getting out.

1) You are going to put down $60-$70k (based on your budget) + any cost of rehab. If it is $35k, total cost of getting in is $105k on the top end. And then you have a mortgage payment of roughly $1.7k per month. Now we only want to consider the 1st year because you are cashing your investor out at that time (see below), so your mort payments will be $20.4k. Add that to your other cost, resulting in $125k +/- cost for the first year. Compare that to scenario below.

2) You are going to put down $26k. Let's hypothesize that your rehab costs $35k which is probably low. You won't want to fix up too nice since you will have rough tenants. By your numbers (80% of $130k = $104k), you are going to pay him 1% (or $1,1040) per month for 6 months for a total of $6,240. After the 1 year, you are going to refinance and pay him his original $104k and then be more educated. Now since you are cashing him out after 1 year, you are still paying that. Total cost = $26k + $104k + $35k + $6,240= $171k +/-. 

For me, the best education is when I take the biggest risk that I can afford with a good exit strategy if it goes south. In this case, the exit strategy is to sell, if you don't lose it altogether through a legal battle. Let's hypothesize that you sell at the 1 year mark, the market doesn't change in the year of this project, and the value of the home increases by your exact rehab cost - which are all big ifs.

1) When you sell, you break even minus cost of mortgage. Your rehab costs will be included in your sale price. So you could potentially lose $20.4k in this scenario.

2) Now realize that you only own 20% of the title, so if you sell, you only recoup 20% of total value. Let's say the market doesn't change in the year of this project and the value of the home increases by your exact rehab cost, $130k purchase price + $35k rehab + $6,240 1st year payments = $171k +/- @ 20% = When you sell you get back $34k+/-. What did it cost you really though? ($26k down + $35k rehab + $6.2 payments to him = $67.2k). The difference between your reward when you sell and your cost is $33k.

The difference of that is your potential loss between the 2 scenarios is $14k against scenario 2.

Reward:

Short- and long-term: Market value of each.

Risk:

Cost of entry: 1) $125k. 2) $171k.

Net cost of exit with cost of entry included: 1) $20.4k 2) $33k.

Something I did not consider is the rents...FYI and they would increase or decrease the numbers here.

To me, I am more comfortable with potentially losing $20.4k versus losing $33k although my risk tolerance is VERY LOW. Only you can decide the best option for you.

Here are additional questions that I would have:

a) For the cost of using his money he makes a 7.8% return or $6k+/-, no matter what. I am sure any contract will have have verbiage to enforce that. With the difference between the two scenarios of a loss of $13k, is the education worth that? Only you can answer this question.

b) What is the process to be a Section 8 landlord in your area? Can you be one with little fee or hassle? Contact your local housing authority. They will tell you the process for free since they are the one's that administer it.

c) Will your lending institution refi this kind of transaction. Are the rates favorable to you, with a payment you can work with?

d) What kind of legal entity works for you to protect your interests? Contact an attorney. (Don't forget to add these costs to the cost of the transaction.)

e) What happens if this goes south and your relationship sours? What is your legal recourse? (Don't forget to add these  potential costs to the transaction.) Make sure to have that process in writing.

f) To get closer numbers contact a CPA with real estate experience.

I am sure that I might have missed something...but this would be my basic analysis.

Steve

Sounds good! Welcome!

@Connor Swalm,

It matters what kind of lead. For a warm lead, an interested seller, that is one thing. For a house with the owner's address and phone number, I wouldn't pay anything from you. I get most of that information already from my local title company for almost nothing per cold lead.

Cydy, you have to be more clear about what you want. You can get millions of different types of answers which doesn't help anyone.

Steve

I wouldn't give it back. By your own post, they are already always late. If they wanted to save a few bucks, pay on time. Like others have said, my credit cards/banks don't give me the fee back if I am late on my payments. 

If you want to be helpful, refer them to the local food pantry, or other social service. Paying rent on-time is a choice about priorities.

They are already taking advantage of you for not paying on time. If this was me and they paid routinely on-time, and then this was a one-time occasion then I might consider it, although it is a bad precedent to project to them. It showcases that you are a source a cash for them, that your payment is not as important as their groceries. And by the tenants statement, they meant to short you and not pay the full amount. In that case, next month you would be looking for ways to collect the $50 in addition to next month's payment and the late fee.

Just my 2 cents. 

Steve

Lol, @Jay Hinrichs, you make me laugh...yes you have been referred.

@Chris M.

Looking at what you want for a home, find a Realtor. Make your life easier - you're trying too hard now. Just connect with a Buyer's Realtor like myself or someone else and get the raw data about listings. You will be surprised what is or is not out there based on the area you look. Everyone is. The key that I tell my buyers is to wait if needed. If the deal sounds too good to be true then it is. You also need to focus on an area. I have first time home buyers getting in 3/1.5s with 2-car gar in the $230 range in Vancouver.The key is to be ready to put on an offer immediately as those homes go fast.

Chris,

You are putting the cart before the horse. When I got into real estate the first thing I learned right off the bat is that good credit allows your to get what you want and gives you options. 

Yes the market is cooling here. In Vancouver, WA we are connected to the Portland, OR market like a red-headed step child. Yet the prices are increasing because there is little inventory, in the less than $250,000 range. Get into the upper $200's and $300's and there is a lot more inventory. You also might consider Vancouver as an option versus because the inventory problem is less, keeping prices more reasonable.

I have a lender with a 1% conventional down payment, but it requires no other mortgages, a few months of PITI in the bank at closing, and requires, you guessed it, good credit.

I would suggest making your life easier and concentrating on the credit first. I know people first hand that have had major increases in their score in 6 months. Remember, your credit score is the litmus test of how much of a risk you are. By your note, student loans are an issue. If they are in default get them out. If you have little income, tell them that, work with them. Once out of default, consolidate to lower the interest if possible. And then think that way for all your debt. 

Also think about debt-to-income ratio. I am not a lender although I think it maxes at around 45% with some exceptions for FHA. Make sure that your's falls in line with that.

There are 2 ways to fix these issues. One way is with more income and the other is to cinch the belt a little tighter. To me easier is to cinch the belt, and then when that is as tight as it can be, more income obviously is needed. Trust me when I say, most people that I meet prefer "other than W-2" income, yet sometimes it is needed to help you meet your goals. 

It also sounds like you need to meet with a lender and really get your options. If you are asking general FHA questions here, then I am going to assume that you haven't gone down that route. Remember that many different lenders have different programs available just like different Realtors offer different options. When I bought my latest house, I had 7 hard inquiries on my credit as a result of shopping for the "right" mortgage.

If you were my client here would be my advice:

1) Find your local (HUD) housing counseling center and let them help you fix your credit. Don't pay for any service and they will do it for free, except that you need to pay for a credit report. A classic credit repair service, I have been told by my lenders, slams your credit hard. The HUD center is subsidized. The one here is Clark County is great!

2) Remember that your wholesale credit score is lower than the retail one. Check with a lender. Find a program that may work for you like the NHF Sapphire Grant. Only some lenders are certified to offer it.

3) Sign up for CreditKarma.com and watch your own credit. This is a retail score although it will help you monitor and learn how different things being reported to credit help and hurt you.

4) Become a quick study and your own expert on your own credit. And watch it like a hawk. 

5) Start thinking smaller scale and babier steps. What about buying something smaller like a condo, and ask the main office or association about renting it out after a short time. Again, check with HUD to make sure it qualifies first for an underwritten loan. If you need help here, contact me. I tell my clients, to think about what you need now not 5 years from now. Statistically, you are going to sell and purchase again in 4.5 years.

6) Be realistic. People get all jazzed and excited from the media and are misled. On average, people get an apartment for what they need, but turn that on its head and buy what someone else thinks they need in a house. 

7) Get real tax advice from a service that does it full time - not H&R Block, or any other service that only does it near tax time. Underwriting is based on your income minus your payments for housing and those that hit your credit. Having more deductions from your taxes is NOT a bad thing. It means you are acting smarter. Why give Uncle Sam your money if you don't have too?

This discussion is no different than one I have a lot where first-time home buyers want to buy a foreclosed home as their first, yet forget that they need a bare minimum of $25k liquid after closing to make most houses live-able - let alone decent to live it. 

In summary, what you want is doable although really look at what is required. Is the money you toss at it and the headache created worth more than the trouble of fixing what you need to fix anyways - your credit.

Let me know if I can help you.

Steve