All Forum Posts by: Paul S.

Paul S., just to summarize, since you seem to be confused on a few things.

In the analysis, the mortgage payment is always just the P&I payment.

The taxes and insurance are included in total "expenses". Total expenses are often short-cutted to be 50% as a rough rule of thumb. (It's irrelevant that taxes and insurance are often escrowed by the mortgage company.) In this context, "expenses" include vacancies/bad debts, operating expenses, and capital reserves you NEED to set aside from each month's rent payments to ensure that you have the cash to replace the roof, mechanicals, etc. when the time comes.

You need to make sure that you get at least 1.25% of your all-in cost (purchase+rehab+closing costs) in rents each month, for houses in the $1,000 rent range. Houses such as this appear to be available in your part of CA. This will give you an 8% net yield based on the 50% expense guideline, and if you use financing then the return will be magnified as long as your borrowing cost is below 8%. How much it will be magnified is of course a function of the rate and LTV.

The best deals are on houses needing some work. This will lead to some financing challenges, as conventional loans typically only cover the purchase costs, so you'd have to come out of pocket for rehab. Fannie Mae Homepath loans are a narrow exception that permit rehab financing to be built in, and only applies to select Fannie Mae REOs.

To maximize leverage in these cases where you're doing a fair amount of rehab (say $8K or more), while still getting the conventional loan and the low fixed rates, you could do a few different things.

1) Buy and rehab the property in cash, then apply for a conventional loan under the new "delayed financing rule", which enables you to finance up to 70% of the new post-rehab appraised value, but the loan cannot exceed the total of your original purchase price plus closing costs on the new loan. You can do this cash-out refinance immediately after completing the rehab. So if you buy and rehab for $75K, and now it appraises for $90k, then you can get a new loan for about $65K (70% of $90K + $2K in closing costs). This is the equivalent of an 84.4% LTV ratio on your investment of $77k ($75k + $2K closing costs). You do have to show "source of funds" for your original cash purchase, they want to make sure you didn't borrow the money. But if you have the liquid assets already, this is a great way to do it, as your cash purchase offer will go to the head of the list versus other investors that are using some sort of financing on the front end.

2) Get a 1 yr rehab loan through a local bank, then refinance out to the conventional loan in 6 mths when you've been on title long enough to permit the refinance. Find a bank that will loan up to 70% of a "subject to" appraisal amount (ie. an appraisal that takes into consideration the work that you will be doing and thus comps the property against other good-condition "full price" properties that have sold in the area.) You'll need to get pre-approved with the bank, and the bank will then issue a pre-approval letter to submit with your purchase offer (assuming it's an REO or short sale).

3) Same as the previous step, but using a hard money lender, which will charge you something around 5 points up front and 12% interest.

Paul, my business cards have Property Manager on them. I have the keys, a professional looking business card with a company name that matches the ad they are responding to, and applications and leases with the same company logo.

Sure, none of that is "proof", but it all lends credibility. Generally most will assume if you have the keys, you're the right person.

Also if you are the owner they try to manipulate you.If you say you are the property manager and have a compliance list the tenants know you don't make the decisions and if they don't pay rent they are out.

It cuts down on the sob stories too they tell you on why rent can't be paid.

Let the utility companies get paid late and you get paid first.

@Paul S

Where else can you buy an asset with someone else give you 80% of the costs, and you only come up with 20%?
You can't buy that with gold, silver or stocks!!!
Anyway, 1250/month for rent minus 40% expenses leave you $750 for deb service or paying the mortgage. That would be
$750 (rent minus expenses) - $567 (mortgage) = $183/month net positive cashflow.

Return calculated
You put $28000 (20%) and your return is $183/month x 12 =$2196/Year

$2196/$28000=7% return on a good property in CA. Also, things that are intangible, You get tax benefits of Depreciation, and Interest write off. Also, a cherry on a cake such as appreciation, and Amortization to pay down the loan and create equity. But also, who is really pay down your loan? Not you of course the tenants. Happy Investing - Tin

Paul -- that's rather uncanny, the one on 7678 Canova Way is also 75k, 1255 sq ft, and built in 1977, in the same zip code.

The ROI of 17% is derived -- in shorthand -- as follows: 8% net yield + (8% yield - 5% borrowing rate) * 3 = 17%. You multiply by 3 because you're leveraging 3 times as much borrowed money as your own personal capital. Just a quick and dirty in your head.

On the tax assessment issue, the local tax assessor establishes values for properties. Almost everywhere, values are down from their high points of the prior 5 years. The lower your sales price as a percentage of that highest tax assessment, it gives you more confidence that you're buying at a good value. It's just one little calculation among a bunch, and I don't expect values to recover to that 5-yr high, but it's something I glance at, as a measure of how the neighborhood HAD been viewed not too long ago. (I don't factor in any appreciation at all when running numbers on deals.).

Also, get the 1% rule for rents out of your head. This is not a good metric these days, if it ever was. Think in terms of at least 1.25%, and moving up from there depending on the quality of the neighborhood/property, and the norms for your targeted investment area. (In this part of the country, I'm typically buying at 2.5-3.0% rent per month, but these houses -- even though in decent areas and decent condition and with strong rental demand -- are less expensive, hard to finance due to low loan amts, and harder to get good appraisals when financing due to foreclosure saturation, so there are tradeoffs).

Paul -- the property you identified (Canova, righ?) looks like a nice candidate, appears to need minimal work to make it rent ready. You are obviously in an area of CA where you can buy cash-flowing properties, as this is a nice property for just $75k list. Perhaps you can get it for 15% less than list (it's almost a month on the market). Let's say you can buy it, cover closing costs, and have it rent ready for $75k. You have a 16% gross rent yield, or about 8% net, assuming the $1,000 rent. If you finance it at 5% with 75% LTV, your ROI is about 17% on your investment, a little less on the cash-flow ROI due to principal amortization, but still very respectable.

You need to build out those you'll work with, at a minimum a reliable, reasonably-priced contractor (usually a crew of 6 or less, no big companies, they're too expensive) and investor-savvy (meaning they understand ROI, rehabbing costs, REOs, and short sales) agent to start (also a prop mgr if you don't plan to self manage). Make sure of your rental comps from CL, realtor.com and zillow zRent, check your market comps with your agent.

-Zillow has it at 91k, ePPraisal at 100k, zRent says $1,140. These are all usually on the high side, don’t account for the rehab you need to do, and are just computer tools, but they still lend decent support to offering $60k on this house (assuming it needs no more than 7-8k of rehab, as APPEARS), and maybe willing to go to $63-64k.

I also like to see the all-in (purchase+rehab) at a low percentage of the highest tax assessment in the prior 5 years (I like to see 30-40% in my market, but perhaps 50-60% is a better metric in your part of CA). This helps me feel better about the value I’m buying and possible prospects for price recovery, but is just one indicator. Get familiar with your on-line tax assessment system in your counties nearby.

In short, you appear to have decent cash flow opportunities right in your backyard. Get busy! Plenty of people here will be glad to help. Get referrals for contractors, agents, RE attorney, etc., from contacts at your REI club. Work immediately to master rehab estimating yourself, though you'll be dependent on your contractor initially. Post any bids from the contractor here, and you'll get feedback.

Do a good job screening your tenants, and you won't have to be especially concerned about turnover or tenant damage. This is hardly a war zone you're targeting there... just stick pretty close to the 50% expense rule and you'll be fine with reasonably diligent management.

Good luck.

I personally think it's somewhat foolhardy to buy with zero cash flow. Appreciation is anything but assured. It appears that there are hundreds of SFR listings in the Sacremento and Stockton vicinities priced at 60k or less. Surely there are good cash-flowing rentals in this group. Don't be afraid to buy a foreclosure or short sale. These are where the deals are. Just work with a reliable agent, contractor, and property management company to evaluate the property prior to bidding. Look on CL to see where houses are being offered for rent in the 850-1000 range, and target your neighborhoods.

We have a separate insurance policy for each property with the exception of one, which is simply covered under an extension of our homeowner's policy. It's clear as mud to me, but my carrier explained that the one rental which we've had the longest was originally covered that way and that's how they prefer to keep it. All subsequent rentals received their own policy and each policy carries $1M in liability.

An LLC is NOT a substitute for insurance, but there are several misinformed individuals that believe that. An LLC is simply another layer of protection (think layers of an onion). In certain cases, such as negligence, your insurance policy may refuse to pay altogether, but your LLC can still afford you some measure of protection, especially if the negligence was caused by a third party and not yourself. We also enjoy the personal privacy and separation an LLC affords us from our business, e.g., all of our tenants understand the property they rent is owned by a company, not a person.

I purchase most of my properties in the name of my Self Directed IRA but have been know to my tenants as the landlord. There are times I regret this as some of my tenants feel they could ask me for things that they would never ask a property mananger. I am rethinking this as the leases come due but all my properties are very close to each other and my ownership is commonly known in the community. The advantage to me has been that my tenants also alert me to new tenants and new properties that come on the market in the community sometimes before they are listed. Getting too friendly with tenants has been commonly thought of as a bad thing and I can definately see why. And yes a computer literate tenant can easily go on line in many counties and find out who owns the property how much they paid and what the taxes are.