Something to consider
Posted on January 23, 2008 - Filed Under Business |
Let me be perfectly honest.
After all that work last year, and this month, the REI thing was burning me out something fierce. For nearly 7 months, all my brain obsessed about the houses. I put in nearly 40 hours/week during the months of November and December.
In other words: how many times in a row can you eat PB&J before it is the most vile thing in the world?
Chatting with the Real Estate Agent the other day, the topics of the economy, the complete and utter disaster of the sub-prime market blah blah blah and suddenly we were talking about purchasing my next property.
Once a house goes into foreclosure, it usually winds up at an auction house. The trick is to catch the house before it gets into foreclosure. Well, thanks to that legislation passed by congress and signed into law this is possible. The legislation I’m referring to allows a home owner, in financial distress, to do a short sell on their home before it goes into foreclosure.
For Long Beach, the MLS showed us dozens of properties in the Long Beach area which fall into this category. Properties that were bought at $470,000 are now being sold for $325,000 due to financial hardship. That’s a morgage payment of $1900/month (30 year fixed at 5.75%). Renting out a three bedroom in these areas is $2100 to $2200 per month. Positive cashflow?
My thought: purchase one of these units and live there during rehab. Once complete, rent the house out for $2200 per month. Once the market turns around, convince the tenants that they can purchase the property with a monthly payment of $2200 per month. This means the purchase price would be $375,000 which is $50,000 more than what I bought it. Or maybe convince them for $100 more per month, they can afford the property which is $390,000 in asking price. Or $65,000 more than my purchase price.
The marbles are rolling around in my head.
If you liked that post, then try these...
Budget for Renovation: Back House on October 12th, 2007
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Year End Tie Offs on December 19th, 2007
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8 Responses to “Something to consider”
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I think you need a little more rest before you move forward on one of these houses. First, the cash flow is just not there. At $200 to $300, it will be eaten up in your vacancy and collection loss and your maintenance/repairs. Second, the payment will only be acceptable to your renter turned buyer if the interest rate is less than or equal to your rate. There is no guarantee your renter will be able to get 5.75 percent financing when it’s time for him/her to buy. Third, values will likely continue to go down, making your exit price unachievable. Fourth, why would someone that can qualify for financing not just buy the house and do the work that you would do?
I could go on, but my point is that there is too much risk in your market right now. If I were in your position, I would keep an eye on the market for the next few months while piling up some cash. Once desperation sets in and sellers (including the banks) capitulate, it will be time to buy.
I don’t think you were in Southern California during the recession of the early 1990’s. Try selling a property when half a million well-paying defense industry jobs disappear. If your mentor was there, I would have a long talk with him as part of the recuperation process.
>That’s a morgage payment of $1900/month (30
>year fixed at 5.75%). Renting out a three
>bedroom in these areas is $2100 to $2200 per
>month. Positive cashflow?
Heck no.
Rule of thumb:
Expenses like taxes / insurance / maintenance / vacancies / management will likely take ~45% of the rent. For any deal you are seriously considering you should get the real numbers but this thing will clearly not cashflow as a rental.
AI, no decision has been made about purchasing anything. I’m just thinking “out loud”.
I fail to understand why the buyer would have to have an interest rate equal to mine? And for the short term, values will probably fall. But my article I wrote that in the “next few years” then would be the time to sell. Not now.
I do agree that waiting a few months will be good. With the recent fed cut, and rates being cheaper, the market is becoming ripe for picking up deals.
Greg: everyone has their own investment strategy. I do agree and have created a model by which I can calculate the cashflow of a property based on those criteria you have listed. But if I tried to purchase a property in Southern California based on that model, I would still be sitting in my apartment. Even with values dropping you would be hard-pressed to find anything in this area of the country that could cashflow per that model.
I do appreciate the red-flags being thrown out. It gives me something else to consider.
I finished a property three months ago and just started planning a wedding. Trust me when I tell you that I would rather be consumed with drywall and plumbers than weddings. Electricians don’t cry. Its easier to pimp-slap a Lowes Manager than your parents. Although I will be using my newly honed carpentry skills to build a photobooth. You think contractors give it to you like a prison cell ho, no one gouges you like the wedding industry. $1500 for a photobooth for 4 hours! Sorry, must keep the two worlds separate.
Carla, Congrats on both your accomplishment and your wedding!
Pimp-slapping hired help is legal? I wish I had known that! Or is it only a Lowe’s policy?
For a wedding, I almost think it would be easier to have an induced-coma during the process just to avoid the stress.
Clifford, you and I are so similar. I’ve been experiencing burnout so bad recently that I can’t see straight. THEN, I’ll see a good flip house and get all excited about it and want desperately to put in an offer! I think it’s a compulsion. I’ve forced myself to chill while I’m waiting to sell one or three of those that we have for sale. It’s been very difficult. Not only am I frustrated over the houses that haven’t sold, but I’m also exasperated because I can’t safely go for opportunities as I see them.
I agree with what others have told you–$200 a month in possible cashflow isn’t enough to justify a purchase at that price level at this time. I know that you know how easy it is to spend $200 on minor fixes alone for demanding tenants every month. Perhaps you should investigate other hobbies for now?
I’m doing yoga and other classes at the gym to keep myself occupied and sufficiently distracted during my off hours. But, I’ve told myself that I can start actively looking for opportunities again once we sell these three houses. So, it won’t be forever that I have to hold off. Perhaps you should have a set of conditions that you must meet before you can start looking for properties, too.
Trisha, first off I’ll take that as a compliment!
Try as I might, I can’t go look at any of the houses my Real Estate Agent recommended. I probably should . . . but I’m really fizzled out.
Gym is good. I may have to incorporate that into my daily routine.
That’s a good idea: having a set of conditions. I have another project going on in my off hours, which has started to consume my time. I’ll be announcing that shortly. But it is different than REI which is just what my brain needs.
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