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Answers (11)
- wordsmth
- Contributions:361
Just to add to what's already been said:
It doesn't matter what you buy the house for. If you fix it up so it's comparable to houses selling for $150,000, then the house you bought and fixed up is now worth $150,000.
Same with the rental income. If comparable homes are renting for $1,200, yours should rent for $1,200.
However, as noted already, if you want to do a cash-out refinance, you may run into all sorts of issues. Frankly, that's the same as if you wanted to "flip" it--there's a seasoning process that lenders often require to prevent property values from being artificially (and too quickly) inflated. Check with a good lender in your area to find out what limitations they'd put on a cash-out refi.
One other consideration: Your property may cash flow very nicely before the refi. It may not cash flow at all after the refi. If you put in $20,000 and have an $85,000 mortgage, then your total commitment is $105,000. And so you'll have some positive cash flow renting it at $1,200 or slightly less. But if you were to refinance it, now you're into it for $135,000 or so, and your cash flow narrows significantly.
And another point: There's a big difference between rehabbing a property as a rental and rehabbing it to resell. Basically, you'll put more money into it if you're reselling it--granite countertops, stainless steel appliances, etc. On the other hand, as a rent, you'll put in Formica countertops and enamel appliances. And that brings us to your very well meaning but unwise decision to do "green" rehabs. No, no, no. Do you think the house will rent for one penny more if you put in a $10,000 solar panel? Absolutely not. Not one penny. And that's true of other possible "green" things--a tankless water heater, for instance, or triple-pane thermal windows. Or a very high efficiency HVAC system.
If you're looking at a rental, you want to do it nicely but inexpensively. Choose things that'll last and won't break. You want to minimize your expenses. And if other homes are renting for $1,200, you won't get a penny more for all this "nice to have" items. In fact, you're planning on charging a bit less. Why? If it's an investment, charge full market rent. Hate to break this to you, but tenants won't feel grateful or thankful you're charging less. All you'll end up with are applicants who can afford $1,000 but not $1,200 a month.
Hope that helps.
It doesn't matter what you buy the house for. If you fix it up so it's comparable to houses selling for $150,000, then the house you bought and fixed up is now worth $150,000.
Same with the rental income. If comparable homes are renting for $1,200, yours should rent for $1,200.
However, as noted already, if you want to do a cash-out refinance, you may run into all sorts of issues. Frankly, that's the same as if you wanted to "flip" it--there's a seasoning process that lenders often require to prevent property values from being artificially (and too quickly) inflated. Check with a good lender in your area to find out what limitations they'd put on a cash-out refi.
One other consideration: Your property may cash flow very nicely before the refi. It may not cash flow at all after the refi. If you put in $20,000 and have an $85,000 mortgage, then your total commitment is $105,000. And so you'll have some positive cash flow renting it at $1,200 or slightly less. But if you were to refinance it, now you're into it for $135,000 or so, and your cash flow narrows significantly.
And another point: There's a big difference between rehabbing a property as a rental and rehabbing it to resell. Basically, you'll put more money into it if you're reselling it--granite countertops, stainless steel appliances, etc. On the other hand, as a rent, you'll put in Formica countertops and enamel appliances. And that brings us to your very well meaning but unwise decision to do "green" rehabs. No, no, no. Do you think the house will rent for one penny more if you put in a $10,000 solar panel? Absolutely not. Not one penny. And that's true of other possible "green" things--a tankless water heater, for instance, or triple-pane thermal windows. Or a very high efficiency HVAC system.
If you're looking at a rental, you want to do it nicely but inexpensively. Choose things that'll last and won't break. You want to minimize your expenses. And if other homes are renting for $1,200, you won't get a penny more for all this "nice to have" items. In fact, you're planning on charging a bit less. Why? If it's an investment, charge full market rent. Hate to break this to you, but tenants won't feel grateful or thankful you're charging less. All you'll end up with are applicants who can afford $1,000 but not $1,200 a month.
Hope that helps.
- Craig1976
- Contributions:69
You're right, they all started somewhere and you're doing something unique. Best of luck with it all.
- RhynoJosh
- Contributions:12
Thanks for the advice Craig...
However, all of the things you listed can either be learned or acquired. By no means are any of these thing impossible, hard maybe, but not impossible. Every challenge is an opportunity.
Also, I'm not doing a conventional "flip". You have to many expenses this way and no residual income after the flip. If you make it a rental property, you can pull out the money by refinancing instead of the profit you'd make from a flip. That way you still own the property and you still get paid for it down the road.
I'm also not going for the typical repairs that most "handyman/contractors" flippers do. I'm going to specialize in making green improvements such as energy independent homes, etc. There is a growing market for that and a $5k-$10k solar panel system that makes a home energy independent can let you pass on up to 75%-80% of the "ex"-energy bill onto the tenant through rent. Extra cash flow and faster appreciation...
However, all of the things you listed can either be learned or acquired. By no means are any of these thing impossible, hard maybe, but not impossible. Every challenge is an opportunity.
Also, I'm not doing a conventional "flip". You have to many expenses this way and no residual income after the flip. If you make it a rental property, you can pull out the money by refinancing instead of the profit you'd make from a flip. That way you still own the property and you still get paid for it down the road.
I'm also not going for the typical repairs that most "handyman/contractors" flippers do. I'm going to specialize in making green improvements such as energy independent homes, etc. There is a growing market for that and a $5k-$10k solar panel system that makes a home energy independent can let you pass on up to 75%-80% of the "ex"-energy bill onto the tenant through rent. Extra cash flow and faster appreciation...
- Craig1976
- Contributions:69
I am not saying don't do this, just be careful. I have a couple of friends that do this full time. Here is what they have that you and I don't:
1 - knowledge of what is a minor vs major repair - you can make BIG mistakes here (the $40k kind)
2 - access to cheap labor - they know the tradesmen, give them lots of work in return for lower rates, and know how to not get raped
3 - realtor licenses - they know what comps sell for (not just list prices), and they save half the commission when they flip the house
4 - back-up plans - they know all the creative financing options, and how to get a place rented for top $ if they make a big mistake (which they do sometimes)
They make their living from these advantages. They have competitors too. Most of these houses get picked over. If you found one where you know more than anyone else out there, great. Otherwise be careful and get as much information you can before taking the plunge.
1 - knowledge of what is a minor vs major repair - you can make BIG mistakes here (the $40k kind)
2 - access to cheap labor - they know the tradesmen, give them lots of work in return for lower rates, and know how to not get raped
3 - realtor licenses - they know what comps sell for (not just list prices), and they save half the commission when they flip the house
4 - back-up plans - they know all the creative financing options, and how to get a place rented for top $ if they make a big mistake (which they do sometimes)
They make their living from these advantages. They have competitors too. Most of these houses get picked over. If you found one where you know more than anyone else out there, great. Otherwise be careful and get as much information you can before taking the plunge.
- Rudi Hofmann, "LUXURY HOME LOANS CA"
- Contributions:7435
RJ,
A year from now is any one's guess. Guidelines are in a constant state of flux. By today's guidelines after 12 payments are made you can do a cash-out refinance to 75% for a single family non-owner-occupied property.
Currently, to my knowledge, traditional and portfolio lenders require a minimum of 6 months PITI in reserves for an investor property. If you also own a primary residence you will need 2 months PITI in reserves for it. ..... Best wishes, Rudi
A year from now is any one's guess. Guidelines are in a constant state of flux. By today's guidelines after 12 payments are made you can do a cash-out refinance to 75% for a single family non-owner-occupied property.
Currently, to my knowledge, traditional and portfolio lenders require a minimum of 6 months PITI in reserves for an investor property. If you also own a primary residence you will need 2 months PITI in reserves for it. ..... Best wishes, Rudi
- RhynoJosh
- Contributions:12
You would be correct Danny, it's around 4%. My bad. Typo.
Thanks!
Thanks!
- Bentley Advisors
- Contributions:294
At a glance, your property tax figure seems woefully low for TX. I doubt it's 1% in TX. Try over 3%...at least in Dallas. I'd imagine it'd be similar in Austin. I'd dig deeper and confirm your numbers.
- RhynoJosh
- Contributions:12
Wow, this is so crazy. I never realized there would be so much stuff to learn, I'm loving it!
I got some questions about all of the different responses, so I'm going to list them in order of who answered my question, but anyone feel free to answer them...
Correspondent Lending, "CA Jumbo Loans"
So if my purchase price was $65k, but my new appraised value a year later is $140k, I would only be able to refi the $65k, correct? If that's the case, what would it look like for the rest of the mortgage assuming I pulled out all that I can from the loan?
Also, thanks for the PM and Insurance tips... I already planned for that, but It's good to have someone looking out for ya!
And as for the PITI, will that be necessary from every lender, or just yourself? Would I be able to get out of having any PITI?
Thanks Correspondent Lending!
John Marion
Getting an investment Realtor was on my agenda, but do you have any advice on finding a investment Realtor?
You are correct John, I plan on holding on to the property for a long time. I know that I could flip it after a year and use a 1031 and invest in another property tax-free, but I'd still be paying Realtor commissions, closing fees, etc. The only purpose for me selling would be to pocket some cash, so I can accomplish the same thing by refinancing, minus all the fees and commissions.
John, you just said what's been confusing me this whole time and I think you could answer this for me. You asked me if the the loan will be on the purchase price ($65k) or the final value price ($140k). Ok, first off, why would a lender give me a loan for $140k for a $65k house, when there is no guarantee that it will appraise for that much after it's repaired? Or, would I present the ARV in my business plan to the prospective lender and have them lend me the money based on the ARV?
Thanks for your advice John!
Pete Semen
What would be more advantageous to me? It will be a rental property, but if I lived in it during the repair process (est. 3-6 months), what I have any advantages? Also, could I more in for 6 months, fix it up, and then let a tenant move in and still be in compliance with my lender?
Yes, I do plan on having MI, but from what I hear, I will probably have to get it just because this will be my first mortgage, and even with a 20% down payment, I have a short credit history, so I think I will be required to have it if I got a loan.
Yea, and I've really broken everything down with my expenses, so I shouldn't get caught short in that area. When I do buy, one of my requirements is to find a property great rent to value ratio, specifically 1% or better. This will provide me with a nice stream of cash flow right off the bat, even after my dozens of expenses.
Thanks Pete!
Another quick question!
If I buy the property at $65k, and the loan is for $85k, when the house is finally appraised at $130k-$140k, and all the rents in the area, and more specifically the neighborhood, are $1.2k-$1.4k a month, would I be able to demand the same rent as everyone else (assuming the home is comparable or better than the rest of the neighborhood) and have a monthly mortgage payment on a $85k loan (minus the 20% DP)?
So it would look like this:
Income:
Gross Rent = $1,000/month
Vacancy Loses (1 Month per Year) = $85/month
Operating Income = $915/Month
Expenses:
Property Taxes (1% of Appraised Value / 12 Months) = $109/month
MI = $109/month
Property Management Fees = $100/month
HOA Fees = $75/month
Maintenance = $50/month
Operating Expenses = $443/Month
Net Operating Income = $472/Month
Mortgage on $65k w/ 6.5% Interest 30 yr. Fixed = $411/month
Total Cash Flow = $61/Month
That's being conservative in saying that I will be charging $1k of rent instead of the average $1.2k-$1.4k. Also, between inflation and annual rent increase, my operating income will increase and I will be paying back my mortgage with a weaker dollar. =)
I'd like for people to go through my numbers and let me know if I've missed anything, or mis-calculated something, etc.
Thanks everyone!
I got some questions about all of the different responses, so I'm going to list them in order of who answered my question, but anyone feel free to answer them...
Correspondent Lending, "CA Jumbo Loans"
So if my purchase price was $65k, but my new appraised value a year later is $140k, I would only be able to refi the $65k, correct? If that's the case, what would it look like for the rest of the mortgage assuming I pulled out all that I can from the loan?
Also, thanks for the PM and Insurance tips... I already planned for that, but It's good to have someone looking out for ya!
And as for the PITI, will that be necessary from every lender, or just yourself? Would I be able to get out of having any PITI?
Thanks Correspondent Lending!
John Marion
Getting an investment Realtor was on my agenda, but do you have any advice on finding a investment Realtor?
You are correct John, I plan on holding on to the property for a long time. I know that I could flip it after a year and use a 1031 and invest in another property tax-free, but I'd still be paying Realtor commissions, closing fees, etc. The only purpose for me selling would be to pocket some cash, so I can accomplish the same thing by refinancing, minus all the fees and commissions.
John, you just said what's been confusing me this whole time and I think you could answer this for me. You asked me if the the loan will be on the purchase price ($65k) or the final value price ($140k). Ok, first off, why would a lender give me a loan for $140k for a $65k house, when there is no guarantee that it will appraise for that much after it's repaired? Or, would I present the ARV in my business plan to the prospective lender and have them lend me the money based on the ARV?
Thanks for your advice John!
Pete Semen
What would be more advantageous to me? It will be a rental property, but if I lived in it during the repair process (est. 3-6 months), what I have any advantages? Also, could I more in for 6 months, fix it up, and then let a tenant move in and still be in compliance with my lender?
Yes, I do plan on having MI, but from what I hear, I will probably have to get it just because this will be my first mortgage, and even with a 20% down payment, I have a short credit history, so I think I will be required to have it if I got a loan.
Yea, and I've really broken everything down with my expenses, so I shouldn't get caught short in that area. When I do buy, one of my requirements is to find a property great rent to value ratio, specifically 1% or better. This will provide me with a nice stream of cash flow right off the bat, even after my dozens of expenses.
Thanks Pete!
Another quick question!
If I buy the property at $65k, and the loan is for $85k, when the house is finally appraised at $130k-$140k, and all the rents in the area, and more specifically the neighborhood, are $1.2k-$1.4k a month, would I be able to demand the same rent as everyone else (assuming the home is comparable or better than the rest of the neighborhood) and have a monthly mortgage payment on a $85k loan (minus the 20% DP)?
So it would look like this:
Income:
Gross Rent = $1,000/month
Vacancy Loses (1 Month per Year) = $85/month
Operating Income = $915/Month
Expenses:
Property Taxes (1% of Appraised Value / 12 Months) = $109/month
MI = $109/month
Property Management Fees = $100/month
HOA Fees = $75/month
Maintenance = $50/month
Operating Expenses = $443/Month
Net Operating Income = $472/Month
Mortgage on $65k w/ 6.5% Interest 30 yr. Fixed = $411/month
Total Cash Flow = $61/Month
That's being conservative in saying that I will be charging $1k of rent instead of the average $1.2k-$1.4k. Also, between inflation and annual rent increase, my operating income will increase and I will be paying back my mortgage with a weaker dollar. =)
I'd like for people to go through my numbers and let me know if I've missed anything, or mis-calculated something, etc.
Thanks everyone!
- Rudi Hofmann, "LUXURY HOME LOANS CA"
- Contributions:7435
Until you have made 12 consecutive payments your purchase price or appraised value, whichever is lower is what you can refinance. After one year appraised value determines the loan-to-value.
If you plan on rental income (75%) to be included in your debt-to-income for qualifying purposes you will need 30% down and a property management company, since you do not have two years of property management history. Another cost is rent loss insurance.
In addition to your down-payment you will also need six months of PITI in reserves. .... Happy funding, Rudi
- John Marion, "businessjohn"
- Contributions:39
Hi Josh. I will do my best to give you some answers.
You first need to determine the value of the subject property more carefully. Ask a Realtor to run a comparative analysis (usually just called "comps") of similar homes sold in the neighborhood. There can be many variables among houses in the same neighborhood so you should have comps for homes of similar size, same number of bedrooms, bathrooms, and other similar features.
It sounds like your strategy is to buy and hold rather than resell. If you decide to change your strategy, don't forget to add the costs of reselling (closing, transfer tax, Realtor commission, etc.).
Now on to your numbers. Let's assume the property will appraise for 140K when it's all fixed up. That is the starting number from which you deduct all your expenses. In this case you have repairs for 20K and closing costs of 3K. But you have not accounted for the cost of getting the loan (application fee, points, etc.).
You are assuming that you can get the bank to loan you 85K minus your 20% down. Capital is hard to come by for investment property, but assuming you have great credit and a bank that is willing to fund your investment property, you need to find out if they loan based on the purchase price (65K) or the after repair value (140K).
You will need them to value the property higher than 65K but many lenders will not loan more than your actual purchase price. For this reason, you hopefully have a lender who will loan based on the after repair value (ARV) so that you have enough cash to buy and fix it up.
If you have a lender willing to loan on the ARV of 140K you should be able to buy, fix it up, put tenants in place and then refinance at 80% loan to value.
Depending on how the numbers work out and the amount you can secure with each loan, you should walk away with money in your pocket to help fund your next investment property.
You first need to determine the value of the subject property more carefully. Ask a Realtor to run a comparative analysis (usually just called "comps") of similar homes sold in the neighborhood. There can be many variables among houses in the same neighborhood so you should have comps for homes of similar size, same number of bedrooms, bathrooms, and other similar features.
It sounds like your strategy is to buy and hold rather than resell. If you decide to change your strategy, don't forget to add the costs of reselling (closing, transfer tax, Realtor commission, etc.).
Now on to your numbers. Let's assume the property will appraise for 140K when it's all fixed up. That is the starting number from which you deduct all your expenses. In this case you have repairs for 20K and closing costs of 3K. But you have not accounted for the cost of getting the loan (application fee, points, etc.).
You are assuming that you can get the bank to loan you 85K minus your 20% down. Capital is hard to come by for investment property, but assuming you have great credit and a bank that is willing to fund your investment property, you need to find out if they loan based on the purchase price (65K) or the after repair value (140K).
You will need them to value the property higher than 65K but many lenders will not loan more than your actual purchase price. For this reason, you hopefully have a lender who will loan based on the after repair value (ARV) so that you have enough cash to buy and fix it up.
If you have a lender willing to loan on the ARV of 140K you should be able to buy, fix it up, put tenants in place and then refinance at 80% loan to value.
Depending on how the numbers work out and the amount you can secure with each loan, you should walk away with money in your pocket to help fund your next investment property.
- Pete Semon, "PeteSemon"
- Contributions:18
Hi Josh,
In theory that is correct. Do you own other properties? or would you be moving into it? if you plan to move into it you can get an 80% loan (without MI) or a 96.5% with MI which may be a better way to go and use the cash you have to do the repairs you would like to do. Here are your hurdles. Getting financing on a fixer upper is tough. If you have to buy it as an investment (rather then owner occupied) you are probably going to have to come up with 25% down. Basicly right now if you cant move in it "as is" its going to be tough to get it financed.
Now as far as after it is fixed up. You will need to have owned it for at least 6 months (some lenders want a full year) in order to get cash out. Once you get to that point you can (if owner occupied) get up to 80% of the appraised value for a conventional loan or 85% on an FHA loan. If you have it as an investment property you are limited to 75% of the appraised value.
Something else to keep in mind, most lenders are requiring that you have a 30% equity position before they will allow you to borrow money on another property and want to see 6 months off mortgage payments in your cash reserves in order to get the next loan.
Your thought process is good and, even though we are in challenging times, RE is still a fantastic way to establish income. Find a good broker that you can trust and lay out what your game plan is then the two of you can work out the idiosyncrasies to get you in the position you would like to be in
Be careful when managing your cash flow, always figure in a vacancy factor on your properties and pad your costs (if you think it will cost 10k make sure you have access to 12k or 13k) so you dont get caught short. Good luck Josh,
Real Estate Investing Question
I have a general real estate example that I need some help with...
Let's say I found a foreclosure selling for $65k (I actually did, so I've been using this as a case study) in a neighborhood (In Austin, TX) that was built in 2007. The rest of the houses in the entire neighborhood sell for $130k-$160k. I looked through the listing and here's the problems…
The previous tenant did not take care of the property and basically destroyed it. All of the damage is cosmetic however. It pretty much needs so new hardwood flooring, carpet, spackle and paint, lots of landscaping, and some other minor touch-ups.
Let's say I put $20k into the property. I'm assuming I can get this amount rolled into the mortgage, or a second mortgage, I don't know enough to know what it would be (I'd like to know how this would work). I put 20% down.
So that's:
$65k + $20k = $85k
20% = $17k
Closing Costs = Around $3k
Initial Cash Invested = $20k
If I made the sufficient repairs to bring the property back to it's original state, would that mean the value would be close to the $130k-$150k of the rest of the neighborhood? I mean, the property would pretty much be the equivalent of the properties surrounding it.
So assuming I get the house re-appraise and the property is worth $130k now, can I refinance at $130k and pull out the (sweat) equity, minus the original down payment?
New property value = $130k
Minus original Loan amount = ($85k)
Equals = $45k
Can I pull this $45k out? That's what this whole example comes down to. I want to be able to reinvest this into another property.
If anyone could help me out, that would be awesome!
Thanks!
Josh Rhyne
20 Year Old Entrepreneur
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