My first Investment Property
 

Since my mortgage is paid off I decided to put my house to work for me following the advise of financial gurus who say a paid off house is a bad investment.

I took out a line of credit at the local bank for 200K with my house as collateral and went a huntin for a good flip house.

I found one today, actually I missed a better deal but this is a good first one. The guy selling was a real estate "flipper" himself. He was younger to me and made sure to mention he was picking up his second Bently next week. I saw his wifes brand new 7 series and he was driving a Crossfire? Maybe true but inconsequential.

I made sure to go in my Pickup truck and make sure not to let on what I was about.

He had the house listed for 165K and was in the process of renovating. I offered 150K with the idea he walks away and lets me finish it. He admitted he puts a max of 5K into a house before flipping after accepting my offer. (I knew I should have went lower) I dropped off a 3K deposit this evening and will close as soon as the title work is done.

I have a couple of partners in this. Both brothers and ex-frame carpenters, they can do most anything. We should be done renovating 3 weeks after closing and listing in the 200-225K range when done. Not bad for a first property.

I am already on the prowl for a second one. I have to figure out how to find these better.

Any tips?

Tip #1. No Partners. You put up all of the money(and all of the risk) and receive 1/3 of the profits?
Tip #2. Due Diligance. Make sure there are no environmental or other problems. Was the house built before 1980? Could have asbestos or lead paint, etc. When you try to sell the house, you can be certain the buyer is going to do home inspections, etc.

This house is a late 80's construction. So no worries there. But good tip thanks.


As far as partners. I own a small land surveying business that makes me a lot of money. (Enough to pay off my mortgage in 5 years, build a 40K RX-7 and shop for a 30K Porsche) Is there ever enough money? No. But these 2 guys I am teamed up with. They saved my business after the 2 hurricanes last year. They are far more than employees they are friends and people I trust 110%. Yes, I am putting up the money and taking the financial risk. They are putting up their sweat and blood to renovate this house. The one brother knows how to do anything from soldering pipes to applying stucco to electrical wiring to laying floors. I would have to pay someone top dollar to do what he can do. What I will save in labor is worth it to have him around.

Plus, these 2 guys deserve a break in life. They are bust ass workers that happen to be the best 2 employees in my company. They deserve to get ahead for the first time in their lives and I an both proud and happy to be the one to help them do it. They joy it gives me is unexplainable.

The best thing about these guys? Even after making some good money they will still be the same hard working honest guys.

BTW - I am looking for tips on how to find good deals locally. How are these pro-flippers finding these houses so cheap? Obviously this guy made some good money off of me for doing nothing.

Re: My first Investment Property
 

Don't buy the second property until you close on the first.

I think you should be very cautious in this market. The amount of speculation ongoing is not healthy.

Good luck,
jurgen

I'm sorta reminded of the old joke about playing poker. When you sit down at the table to play poker, take a look to see who the sucker is. If you can't find him....

I'm not saying this to second guess you, just taking a cheap shot ;). Its been a long run up in the RE market. Rates are rising and there are some areas showing some weakness. Just be careful. That small $ down gets you a known debt and an a variable asset.

You sound like a good person, Jim. Do your due diligence and don't invest more than you can handle losing. Good luck!

Earlier today I said the RE market is DEAD DEAD DEAD, only people don't know it yet.....so hurry and flip that property...

I agree the RE market is probably on its way down in a lot of places. For whatever reason this area ignores the rules and charges on.

Where else can you buy a 3/2/2 for 275K in a good school district and nice neighborhoods?

Google Port St. Lucie Florida and see how it is breaking records in the USA for new home start ups and % increase in value over the last 3 years. People are flocking here for jobs and cheap homes.

PSL has everything from starter homes to million dollar homes.

I am really not too worried about what is happening to the rest of the country as far as a slow down. That usually drives more people here looking for a freash start.

Because he pays contractors to do the work. I would imagine he will spend 15K in a remodel paying contractors. Plus he was going to put the cheapest crap he could find into the house.

By doing the work ourselves we can afford to put in a little nicer stuff. Plus we plan on adding as much curb appeal as possible. Landscaping is your best friend. Its cheap and adds lots of false value. This guy does not bother with that. As long as the grass is cut he is happy.

The guy I bought from is either:

A: Full of crap. He was very quick to show us the keys on his keychain, you know the Mercedes, BMW, Bentley, and H2 keys. He was more concerned about his image than his value.

B - He is really what he claims and just made 30K in a matter of days. Why bother fixing it up, listing it, and waiting for another buyer to come along. He made a smart move I would have done the same.


If the market is slowing in the rest of the country I fully expect it to get even crazier here. Especially with winter coming and people figuring they may as well come down here and give it a go.

I am trying to stay in the 175-225 selling rang efor houses. As the new homes are creeping up to 300K I think the cheaper homes are going to be a hot buy for younger couples trying to get into their first house. Then again I am no RE expert just going with my gut instinct.

After repairs, what rent could you charge? If there is a wild disconnect between the cost of renting vs. the cost to own, you're in a bubble. Consider the fundamentals of pricing. What is the median income? Can the median income afford the median home?
Good luck with your investing.
jurgen

Are you making a serious offer here?



To answer your question. No.

This house is worth 200-225K max. A 195K price tag will sell it in day.

I am no newB to real estate prices, I am a land surveyor I see every day what people pay for houses. I see a giant hole in the market at the 200K and under range. That is my target price range for my flip houses. Starter homes for those that cannot afford a 300K home.

1/4 Acre Lots are going for 100K here now. But houses are still cheap to build in the 175 -200K range on your lot.

This guy flipped this house for 150K because he probably bought it for 100-120K and just made 30-50K in days without putting more than maybe $500 in it.

With my crew doing all the work and using quality products we should be able to list at 195K and sell without a problem and that is with us putting 5K into it.

Our total cash out will be 155-160K we shouel be able to clear 35-40K with the house listing in 3-4 weeks from the date I take ownership.

I will take some before and after pics for you to see.

It is if you ignore the possibility of some major financial downfall. Give me a house free and clear any day. I'll gladly find other investments.:) Also , I would find investors to front the money, 2nd mortgage is kind of like taking a house to the pawn shop. Good Luck.

All this speculation is good and well, but expect to be stuck with a house when the market finally turns. It will turn fast too, mark my word. No big deal though if you don't mind hanging onto the house and it makes financial sense as a rental. The previous poster made a good point about true market values...whenever a house sells for more than you could rent it for, you're in a bubble and it WILL correct eventually.

I think there's also a bubble in early Porsche 911 prices corresponding to the RE boom and easy credit. I'm flipping these cars a lot, and the money's good, but I won't feel too terrible if I'm "stuck" with an early 911! :D

It's probably instructive to look at the markets farther along in the curve than your area.

In So Cal, most neighborhoods have been speculated, flipped, whealt & dealt to death. Houses that don't sell immediately (usually because of greedy pricing) sit forever.

The backup plan is to be able to profitably rent the house if the flip doesn't work. In SoCal, virtually every qualifiable buyer has bought a house, so you're renting to people who are pretty far down the scale in terms of credit scores... and that can spell trouble. I've also seen rents soften as the market chases the available renters.

There's a show I was recently tipped off to (on TLC?) called "Property Ladder." Along with having some pretty attractive women flipping & advising, it shows what can happen when a 12-week 'flip' turns into a 6-1/2 month project. A rising market masks all mistakes. But no market can rise forever.

You can say that again. 2005 has been absolutely horrible for finding qualified renters. I may go through 15 applications to find an applicant with a credit score above 600. It's tough because I've seen ads for mortgages for credit scores as low as 500. Incredible! I have not reduced my rents, but vacancy times have increased from 3 weeks to 5-6 weeks.

Saw this show for the first time a few nights ago. It's pure comedy!

If you're that far under market value, you've already benefitted from a value drop. If you like the place, stay there. There are still plenty of tax benefits to reap, as long as you're not overextended paying for the house.

Most recent house purchasers are counting on 104 paychecks a year to cover all their costs -- especially Californians. If you can accommodate a business and income downturn, you're in great shape to ride out anything that happens in R.E.

Remember: when the market goes down, you don't lose unless you sell.

Very true. I fear a moderate downturn here if things turn sour in the big cities. We'd be most directly affected by Chicago, but I'm watching the coasts anxiously. I think a big pop in L.A. would take about two years to reach here, but you never know. Still, I plan on being in my house at least another 3 years, and maybe as long as 8 more, so I hope to ride out any downturn.

Additionally, you make money when you buy. You capitalize when you sell. :)

I would look at it from a standpoint of what the mortgage payments + taxes and insurance will obtain if you rented. If buying is not a great premium more than renting, stay. Since this is your home (as opposed to an investment), you'll have to define "great premium," as there are some fringe benefits to owning vs. renting.

Personally, I would not hang onto any paper profits unless I had plans to stay put for 5+ years. Historically, housing slumps have lasted 3-5 years.

Good luck with your decision, 930

What do you/ they mean by that ? My house is payed for.

The theory is that you can get a better return on your investment elsewhere than the 5-6% you're giving the bank on the debt for your home.

I'm interested in knowing also... I find it hard to believe a "flipper" would leave 35k on the table when he sold the property to you. Why would he do that? He's no dummy. I came to the conclusion long ago that there are no good deals out there... only big risk. If you're willing to have bigger balls than the next investor, it might work out for you. Or, it might not.

An employee of the Property Ladder phoned me and interviewed me to be on the show... I wasn't the right type of candidate, it turns out. They're looking for train wrecks, I guess.

Interesting thread. I hope the original poster gets back to us for an update. Jim, you there?

You never know. The house sound's like it needed work and that can be a hassle. He may have had another deal in the works also and needed some cash. I have flipped a few property's in the past and sometimes its better to take a profit when you can. Even if you leave some on the table.

Good luck Jim. It sounds like you have some room to work with and know the area.

This is a very wise comment. It applies to all investments. I just rode AAPL from $36 to $52.54 and got out. Yes, it went to $54 and change, but then dropped to $51 and change.

The famous investment advice attributed to Rothschild, when asked how he made all his money in the market: 'by selling too soon.'

IOW, never go for the last little bit of money. Take a satisfactory profit and move on.

I backed out. Partly because of some of the comments you guys made and partly because I realized that I am not a "flipper". The profit margine on that house was too small to make it worth my while. I am also nervous about the market and do not want to get stuck with a house I do not need/want. I did what some one mentioned. I looked at going rates to rent a house in that area and the sale price was already too inflated on that house.

I missed a good opportunity to buy a house for 160K in a neighborhood of 300K homes. It needed a LOT of work but is going to make a faster mover than me an easy 100K.

I decided to do what I do well and continue to concentrate on running my business and not trying to get rich quick.

I have a 200K line at the bank now that can be used for anything I need. If I ever see a good oportunity I will jump on it but I am not making it a priority right now. If I stumble across that one good house I will give it a stab.

I sold my last investment property early this year. I made a very nice profit and everything seams high right now. My home is also paid for and I have a line of credit at the bank. I wouldn't buy anything right now unless it was cheap or would cash flow as a rental. I'm not looking to hard right now either. It seams anyone with credit and wants a house has had time to buy one by now. With interest rates going up I would think things would slow down some. But Ive been wrong before.

I also sold some oil and gas related stocks a couple of months ago. I also made a nice profit but sure missed a big run. Its better than some of the big losers Ive had in the past.

In the last 3-5 years in this town ANYONE could turn a profit on a house flipping it. The market made the clueless look like Donald Trump. I have enough sense to know when I might be in over my head. I am not a RE expert so any move I would make would be very risky. Keeping that in mind I am treading very cafefully.

I had looked into a couple of homes in NM. New, cheap homes coming up in a more expensive neighborhood. Sounded like a really good opportunity, maybe too good. Local RE experts say I can get $1600 in rent for a house that'll cost roughly $175K when done. I passed because it sounded too good to be true. Stuck the line of credit into my own house instead. Gonna convert my office into a third car garage, build two additional rooms plus another bathroom.

Those were my thoughts exactly which is why I didn't buy in.

I'm heading to Albuquerque on Monday to check out home prices/rental rates. I'll let you guys know what I find.

$1600 * .75 = $1200 * 12 months = $14400

$14400/175k = cap rate 8.2%

I would not buy this unless there is healthy appreciation. The maximum amount I'd pay for this property would be $160000, and that's only because it's brand new. Even then, I'd probably back out, because I've passed up similar deals already.

SoCal, there are still good renters willing to pay healthy rental rates in exchange for flexibility. Good renters are hard to find, though.

Here in Massachusetts, for the past 3 years, every winter I've bought a distressed property or two, performed renovations and flipped for a profit (usually 3-4 months holding period to do the work, which I did myself on nights and weekends).

This winter, prices are too inflated, and there are too few buyers...the end is near, so to speak. So I'm out. I don't know what I'm going to do in my spare time this winter, and I expect to have plenty of it, I'm a real estate agent.

When I hear stories of guys making $30K in a matter of days, I know it's time to back out. Hell, I agree with Tabs, real estate today is the tech stock of 2000. When "everyone is doing it", it's time to leave the party.

I would take that deal in a minute. I assume that I would put little down, so the leverage would effectively multiply the return significantly.

With a commercial property yes. Too much trouble for residential tenants.

Have to agree with Alan. Folks getting into rentals is at a high + Price/rent ratios are high. This is a good time to zag.