You can see my introduction/ 1st post "Introduction from Oklahoma" I was asked to post how I structured my real estate purchases. What follows is a copy of an older post from another board with some updates. Why reinvent the wheel, right?
Started investing in real estate as a part-time supplement to income, and hobby in October of 2003. Understand that the prices are for Southwest Oklahoma. You can't touch these prices on either coast. Being a native-born and bred Silicon Valley Californian, I know.
THE DYNAMICS OF A FEW NO MONEY DOWN DEALS:
Purchased my first house for $73,500 in 2002. Got a ING HELOC for $55,100 and used it to buy a 1987 s/ft 1 1/2 story 4/2 VA repo for 59K renovated (all cosmetics) paint in/out, new laminate floor, new sinks, counters, fixtures, cupboard door knobs/hinges/pulls, new front door, screens, sheetrock repair, removed paneling in converted garage/den and textured, added door, new refrigerator, stove, over range micro...Sold 4 months later for $89,900 to a couple who decided they had to have it! Gave realtor 3% commission for bringing buyers to me and doing the paperwork, and I paid all closing costs. My confidence was built on the 12K profit of that first deal. This was my practical application & experiment with real estate investing. My low expectation was: Just break even. Fortunately I did a little better than that. I now had $12,000.00 (before taxes) to use toward future investments.
I then bought books and read the internet, e.g. Motley Fool Buying & Selling a Home board this board, etc., talked to other investors and realtors and gleaned clues much as many of you are doing here. I also had used my 55K HELOC plus other lines of credit to finance that first deal to save on initial purchase. That is the nutshell version of my first flip. I initially intended to flip more houses, but more reading
led me to decide I liked the cash flow and tax benefits of buying and renting houses.
Next Deal (Feb/04): Let me preface this by stating that I live in Lawton/Fort Sill Oklahoma, home to the largest army artillery and training base in the country. This provides for an excellent renting market providing good cash flow potential on properties. The base cannot house all the soldiers and their families, so, many live off base. Many want to buy, and many others are renters.
Anyway, a realtor who does a lot of REO's called me about a 1525 sf 3 bed 1 3/4 bath house. I looked up the tax assessor's records to which I subscribe online to quickly qualify a potential candidate. Asking price was $57,500. I offered 50K bank came back with $55k I countered at $52,500 and they accepted. My research helped me determine that it would appraise for ~80K and that after all repairs (again cosmetic)
loan costs, labor (which I hire out to the handyman that worked on the first property)etc. would leave me with 20% equity (my minimum loan threshold) and about $4,000.00-6,000.00 cash back at closing. In 2004 I could rent this house for 650-700 p/mo. (Cash flow positive). (2011 UPDATE: This house now rents for $875.00 p/mo.).
My banker loaned 80% of future appraised value. Appraisal came back @ $82,000.00 Construction loan is for $65,600 (60 days @ 7% interest) Purchase is $52,500 plus closing costs. We had $11,400 (or thereabouts) available for repairs which I draw from as invoices become due.
Necessary repairs are determined by appraiser so that completed project will appraise for initial loan amount (I do more than required because I won't rent what I wouldn't live in) WHATEVER MONIES ARE NOT USED CAN BE DRAWN OR CASHED OUT AT CLOSING. I spent $7,500 to bring this house to a beautiful rental condition. Put a sign in the front yard about 3 weeks before finishing and had a lot of calls and qualified a renter
for $685.00 per month before I even closed the second loan. The second loan is when the bank rolls the first loan into 10, 15 or 30 year FRM.(I choose the 30 yr FRM, with the option of paying additional principle to pay of in about 16 years if so desired). That way I get the protection of the 30 FRM and can revert to minimum PITI payments if/when times get rough. Like many investors here, I am always looking for margins of safety. This house gave me ~$190.00 free cash flow, 20% equity and $4000.00 cash out at closing. (2011 UPDATE: Refinanced this property to 15 yr FRM @ 4.5%)
This leads to deal #3 (March/04): A HUD home asking 54K that I figured would appraise for ~70K 3/2/1 brick home (1125 sf) in nice area of town. You can bid about 10% below HUD asking price after realtor fees before HUD kicks out the bid. I bought for 49K. Same terms as above adjusted accordingly. This one went a few thousand over budget, so I ended up using the $4,000 from the first home to finish this one.
Essentially, I average the 2 homes together to arrive at the no
money down, & no money out of pocket. Final rollover was $56,800. The appraisal came in at 71k for house. However, it rented for $650.00 per month giving me a $213.00 FCF. Cash flow between both houses is $403.28 with no money out of pocket providing infinite ROI, Not to mention the depreciation and interest for tax purposes. (2011 UPDATE: This house now rents for $900.00 p/mo. Also refinanced for 15 yr @ 4.5%)
The next several followed similar pattern leaving me with 7 houses over the span of a few years. I Recently sold one house, and contrary to the way some would do, I paid off one of the houses, and a few other debts making me debt free (aside from the four mortgages below).
One small house I purchased for $10,000.00 cash from a frustrated seller. Rents out for $275.00 per month. (2011 UPDATE: now rents for $375-$400.00 p/mo.)
Last house was a remodel/flip with $20,000 profit in 2 months. But that was about 4 years ago. I've slowed way down since then having spent three years living in Costa Rica and then moving back to the states 1.5 years ago.
Most of the properties (with the exception of my personal residence that I bought 15 months ago) were bought at the height of the real estate bubble. However, I bought carefully, conservatively having done my due diligence. I have been able to manage them without problem paying all the mortgages, making all the repairs (as much as 7k in my worst month) using the proceeds from the cash flow they generate. I'll post how I manage that later. As it stands now, 3 of my 7 houses are payed off including land I own in Costa Rica.
I have other deals such as a lease/purchase option that I did when I didn't feel it feasible to purchase at that time, but later did, etc. but I hope what I've posted for now gives a pretty good picture of what I did a few years back. Much has changed in the world of mortgages and financing since then, however.
Real Estate - My Story
Hey JasonR I don't have comments enable on my site. Though you can email me directly through the contact form. I just started going to auctions about 6 months ago, watched a few of them and got the hang of it. Now I just go to properties I expect won't go for very much (limited bedrooms, in disrepair) and hope the other guys sleep in that day.
@JasonR: Lots of good questions. I'll address them when I have a little more time.
@Dragoncar: It all depends on my schedule. Sometime I do any number of things from demolition, little bit of framing, drywall & texture, install sinks, laminate counter tops, interior exterior painting, some plumbing etc... Can do a little of almost everything. I don't lay carpet or tile, replace windows or roof. I just find it better to hire those things out. So, again, it just all depends. When I would buy, I factor in the cost of all remodeling as if I were to contract out everything.
@Dragoncar: It all depends on my schedule. Sometime I do any number of things from demolition, little bit of framing, drywall & texture, install sinks, laminate counter tops, interior exterior painting, some plumbing etc... Can do a little of almost everything. I don't lay carpet or tile, replace windows or roof. I just find it better to hire those things out. So, again, it just all depends. When I would buy, I factor in the cost of all remodeling as if I were to contract out everything.
OK, Jason, I was a little lazy but in all fairness let me address a few of your questions:
How did you get in with your REO person?
Actually, ask if they deal with a specific realtor whom they use to market their properties. This was the case with one of the properties I purchased. Or, get a new realtor in the business who is hungry. After a while, the more experienced ones 1) keep the better deals for themselves or friends and family. 2) have several investors whom they work with and get first dibs on new listings, etc. Find new and hungry realtors who'll carefully scan the MLS daily with you in mind. Then, if you flip, tell them they'll always get to list any properties you purchase from them.
Regarding construction loans...
My LOCAL bank was willing to finance 80% of the after repairs value of my remodels. I'm not sure if such financing is still available today through traditional brick and mortar banks. I'd certainly ask around until you find one that does. The other option was to develop a simple business plan and assuming some assets and good credit, you may find a bank that will give you a line of credit. I had one bank that gave me 250k though I never used it. I'm a little out of the loop on the current financing environment. Be persistent. Not all banks are the same, and not all loan officers are cut from the same cloth either.
How did I find a Handyman?
I interviewed a couple of them and the first that cam to the house I was remodeling almost got me intoxicated from his breath. The second was hungry and knowledgeable. He turned out to be extremely good to work with until everyone else caught on to him and he became less and less available. Either way, I suggest interviewing a handful. You will probably find different tradesmen (tradespeople) for different aspects. I had one for roofs and siding. One for tile, another for carpet installs another for foundation repairs, one for garage doors and appliance installation, etc... I got to know their prices and was more easily able to accurately bid remodels using a very detailed spreadsheet I developed.
VA & HUD have their own website for bidding on their houses. I'm not sure where they are now, but a google search should reveal those sites easily enough.
I like what mikeBOS did on his remodel. Bought cash and remodeled out of pocket. I've looked at his photos and think he did an admirable job.
Lots of ways to skin a cat (although I confess I've never actually skinned one to know). Keep searching and you'll find.
Hope that helps. I'd add more but I gotta run.
How did you get in with your REO person?
Actually, ask if they deal with a specific realtor whom they use to market their properties. This was the case with one of the properties I purchased. Or, get a new realtor in the business who is hungry. After a while, the more experienced ones 1) keep the better deals for themselves or friends and family. 2) have several investors whom they work with and get first dibs on new listings, etc. Find new and hungry realtors who'll carefully scan the MLS daily with you in mind. Then, if you flip, tell them they'll always get to list any properties you purchase from them.
Regarding construction loans...
My LOCAL bank was willing to finance 80% of the after repairs value of my remodels. I'm not sure if such financing is still available today through traditional brick and mortar banks. I'd certainly ask around until you find one that does. The other option was to develop a simple business plan and assuming some assets and good credit, you may find a bank that will give you a line of credit. I had one bank that gave me 250k though I never used it. I'm a little out of the loop on the current financing environment. Be persistent. Not all banks are the same, and not all loan officers are cut from the same cloth either.
How did I find a Handyman?
I interviewed a couple of them and the first that cam to the house I was remodeling almost got me intoxicated from his breath. The second was hungry and knowledgeable. He turned out to be extremely good to work with until everyone else caught on to him and he became less and less available. Either way, I suggest interviewing a handful. You will probably find different tradesmen (tradespeople) for different aspects. I had one for roofs and siding. One for tile, another for carpet installs another for foundation repairs, one for garage doors and appliance installation, etc... I got to know their prices and was more easily able to accurately bid remodels using a very detailed spreadsheet I developed.
VA & HUD have their own website for bidding on their houses. I'm not sure where they are now, but a google search should reveal those sites easily enough.
I like what mikeBOS did on his remodel. Bought cash and remodeled out of pocket. I've looked at his photos and think he did an admirable job.
Lots of ways to skin a cat (although I confess I've never actually skinned one to know). Keep searching and you'll find.
Hope that helps. I'd add more but I gotta run.
I accidentally skipped over the very first of your volley of questions:
When you say you "manage them without problem" do you mean you are the property manager?
No. I've been paying a property manager since about my third or fourth rental. I costs me approximately 12.5% of the gross rent capping at 67.50 p/month. That cost covers finding renters (they use a website), credit checks, collecting rents and depositing the net amount in my bank by the 15th of each month. Arranging pre/post property inspections, arranging for repairs with contractors (or, they will call me and ask if I want to handle those items). In the end it is extremely worth it for me. It is much more work to manage 1/2 dozen rental properties than one imagines. I don't want the headache and the cost is justified. I also don't have to split the first month's rent with the management company and other such nonsense. CAVEAT: Find a good rental manager.
I don't remember if I mentioned this or not. I set aside 10% of the gross monthly rent for maintenance/repairs and an additional 8% for vacancies. That 18% prevents me from ever having to put cash out-of-pocket to cover surprises. Aside from the rental management company and the 18% for maint/vacancies, I am cash flow positive on these properties. Some months I been know to have to replace a furnace and air conditioning compressor in one house and a furnace in another requiring 7k to complete. Since the monies are accumulating in a dedicated bank account, I have no worries about meeting the mortgage while footing the bill for these repairs.
In the end, the tenant is paying for these items as well as the mortgage on the house. The real payoff comes when they have paid off the house and I add the mortgage payment/interest to my retirement cash flow.
When you say you "manage them without problem" do you mean you are the property manager?
No. I've been paying a property manager since about my third or fourth rental. I costs me approximately 12.5% of the gross rent capping at 67.50 p/month. That cost covers finding renters (they use a website), credit checks, collecting rents and depositing the net amount in my bank by the 15th of each month. Arranging pre/post property inspections, arranging for repairs with contractors (or, they will call me and ask if I want to handle those items). In the end it is extremely worth it for me. It is much more work to manage 1/2 dozen rental properties than one imagines. I don't want the headache and the cost is justified. I also don't have to split the first month's rent with the management company and other such nonsense. CAVEAT: Find a good rental manager.
I don't remember if I mentioned this or not. I set aside 10% of the gross monthly rent for maintenance/repairs and an additional 8% for vacancies. That 18% prevents me from ever having to put cash out-of-pocket to cover surprises. Aside from the rental management company and the 18% for maint/vacancies, I am cash flow positive on these properties. Some months I been know to have to replace a furnace and air conditioning compressor in one house and a furnace in another requiring 7k to complete. Since the monies are accumulating in a dedicated bank account, I have no worries about meeting the mortgage while footing the bill for these repairs.
In the end, the tenant is paying for these items as well as the mortgage on the house. The real payoff comes when they have paid off the house and I add the mortgage payment/interest to my retirement cash flow.