Autopsy
Posted on April 24, 2007 - Filed Under Business |
Every time one of my projects meets with failure, I dissect it in order to learn something constructive from the situation. Just because I don’t succeed the first time doesn’t mean I can’t a second time.
This venture cost me around $2,100. A very expensive lesson.
Scalpel
My model. I missed the obvious: first and second mortgages. My mortgage calculation is based on a 90% first, which isn’t realistic. If I am going to do 80/10/10 financing I’ll need to have a calculation that reflects an 80% first mortgage and a 10% second mortgage along with my 10% down payment.
The "Unexpected". How do you expect the unexpected? My mentor mentioned figuring in 10 to 15% for unforeseen expenses. I’ll add this to my calculations, which may make it tougher to find cash flowing properties. The "other" category should house this figure.
Rib Shears
Insurance. The approximation of 0.8% of the asking price grossly underestimated the real value of the insurance. It is closer to 1.4%. There are several factors that can influence this percentage.
(1) Wood structure versus cement. Insurance providers seem to favor multi-units which are made out of brick versus wood.
(2) Hurricane Insurance. This is purely a location issue. I picked Corpus Christi, which encourages having this insurance. This is $800/year or $65/month hit to the monthly cashflow. Over a 5 year period, this is $4,000 which I could have had in my pocket. I may have to rethink the location of my next investment.
Forceps
Financing. Obviously I’m going to have to find a lender that works with investors instead of trying to screw them. It is borderline ridiculous to believe that investors are being charged 10% for financing. I know investors who are paying 1 point or 1.5 points above prime. An idea I thought about pursuing a few months back involved becoming a loan broker for some lending firms. I may have to revisit that.
This may take some time, some experimenting. But it needs to be done if I’m going to continue down this path.
Close it up.
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Comments
3 Responses to “Autopsy”
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Cliff
All of that is SO true, especially about the lenders. In my experience, there are some sketchy lenders out there.
I’ve met mortgage brokers who feel the need to schmooze because they think it makes the borrower feel better.
I’ve met 1st year lenders who think that they’re the next coming of Gordon Gekko and try to sell you all these exotic mortgage schemes when they know you’re looking for a 30-year fixed.
And then the LenderLady I always end up using is a 20-year veteran who is like a sniper. The lady never misses, doesn’t get excited and is all about business. She closes on-time every time. No exceptions.
Modeling methodologies are very interesting and are found in almost every field. How does your model compare to the others you’ve found in literature, on the net, and among the cadre of Real Estate Investors who post here?
Perhaps in your next post you could begin an open-source modeling exercise by posting your spreadsheet. Have people take a look, play with it, and suggest improvements. There’s no doubt enough knowledge out there to develop a fairly detailed model for your next deal.
Landlord, it is my desire to use my current loan officer for my next attempt. I know she won’t promise something she can’t deliver.
Engineer, your suggestion is a good one. I’ve posted the skeleton of the spreadsheet but never the actual sheet. I’ll toss it out there as an exercise soon.
There’s just so much stuff to catch up on!