I just had an offer excepted on a 2 bedroom house in Ferndale for $11000. The house needs about 5-9k worth of work and after taxes and insurance will flow about 500/ month.
Here’s the problem. I’ve got ALOT of CC debt right now and the only way to pull this off is gonna be more CC and probably killing an IRA. I’m not to worried about penalties cause its only worth about 8500 and I got so much back on taxes last year that its just not a big deal.
My question is do I pulll the trigger? The house will completely return investment in about 3.5 years, but right now i’m slow so I dont have much coming in.
Do I keep juggling and add to my portfolio? I need a little help here.
BTW DW is a sugar momma but shes only part time as a nurse so she could not cover all the bills.
Family…..They’re always there when they need you.
Replies
"My question is do I pulll the trigger? The house will completely return investment in about 3.5 years, but right now i'm slow so I dont have much coming in."
You're slow and "don't have much coming in" but you are considering killing a savings and undertaking more CC debt? Sounds like a recipe for bankruptcy to me. 3.5 years is a LONG time to be paying a CC. And by killing the IRA you lose the advantage of compound interest.
I'm pretty risk averse so my immediate reaction to your plan is "this guy is nuts".
Of course, I know some people that could pull it off and come out smelling like roses. But I wouldn't do it with my money.
Edited 8/18/2008 9:40 pm ET by frontiercc2
What if I change the scenario a bit. were buying for 11k, the current SEV (which I know is a little high) is 54k. If we get the house done and have 19k in it we could flip for 50k.
What do you think about that?
The other thing I forgot to mention is that DW has a couple of mutuals too. I know you cant raid the IRA shelf but if worse came to worse we wouldnt be dead in the water.
Family.....They're always there when they need you.
Edited 8/18/2008 9:53 pm ET by MSA1
You know your market better than me. I'm in the Mid-Atlantic where flipping and making big coin was like shooting fish in a barrel. That was before the slowdown started. I personally know three guys that had oh _ _ _ _ moments as the market started to crest and slow down. One sat on an $800K piece of property because he couldn't sell it on the back side. Took a loos of almost $150K just to be rid of the interest only payments on it that were starting to add up. As I said, I'm risk averse to a point. And I'm a stock market guy moreso than real estate. But essentially you'd be leveraging 20K (the 11 purchase plus the 9 borrowed to reno the place) to make 30K~ and that 30K is unknown. That's a better than 100% return. Aren't you in Michigan? Isn't the market in Michigan in the dumper? Can you REALLY sell it for $50 on the back end? I don't know the answers to those questions. And after you supposedly sell for 50 and take out the expenses and interest on the debt you incurred how much will you really have left? And cashing out the $8500? No way. THere are investment folks out there that should be able to get 12-14% return easy in the current market. To me that is a more realistic return for what I view as a lot less risk. I wouldn't do the new plan either, but some people might. It will be interesting to see the thought process of those that would do it. Not that it would change my mind, but it is interesting to see how other people view the risk. I subscribe to a lot (not all) of the teachings of Dave Ramsey. That should tell you something . . . The "No Go" signals for me are the high level of CC debt you currently hold and the fact that doing this deal will require you to take on additional CC debt and kill an IRA. I just generally don't feel like CC debt is a good way to capitalize a business.
Edited 8/18/2008 10:08 pm ET by frontiercc2
I agree with alot of what you're telling me. I'm concerned about this one but a price of 50k is actually a give away in Ferndale. The actual value should be around 85k so 50 would be fire sale price.
Family.....They're always there when they need you.
Can you buy it, fix it and then get it appraised and take out the equity in the form of a loan against the new value of the house; pay off the CC debit and put some money in the bank? Then just start enjoying the rental income.
"Never pick a fight with an old man. If he can't beat you he will just kill you." Steinbeck
That was the formula I used to get the property I have now. However, due to changes in banking rules I cant get a mortgage right now. My ratios are screwed up, I already have 6 mortgages, and when I try to go full doc (due to my write offs) the bank laughs at me cause my bottom line says I only make about 5k / year.
If somehow I could get a mortgage for 30k on this I would do it in a heartbeat.
Family.....They're always there when they need you.
Well.....it sounded like a good plan anyway.
Good luck on what you wind up doing. You gotta take some risks.
Hope the flip works.
Keep us posted.
"Never pick a fight with an old man. If he can't beat you he will just kill you." Steinbeck
It was a great plan till the banks got upside down.
I was rolling along just fine till my last one. We out in 40k for repairs and pulled out 15k at closing. That last one is a big reason my ratios are the mess they are today.
I'd still buy that houses again in a minute though. Great house, and great location. We have alot of equity in it (no we cant get it out) and he tenants are taking good care of it.
Family.....They're always there when they need you.
Sometimes things do work out.
I can't count the number of times I almost did something that would have turned out to be a total disaster.
Good luck and keep us informed.
"Never pick a fight with an old man. If he can't beat you he will just kill you." Steinbeck
Go back and look in the business section. With in the last 2-3 weeks I posted a message about using an IRA to buy investment properties and you can get no recourse loans that don't count against you as they are in the name of the IRA..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
I thought you could do that. I'm calling to the account manager today. I'll bring it up.
Family.....They're always there when they need you.
After I wrote that it might not be what you want.All profits remain within the IRA. Great for long term. But does nothing for current income or profit.You may or may not be able to pay your self a reasonable labor rate for own labor.And tax wise an IRA might be a good idea for a flip. But I am not sure of a rental. Most likely you won't get depreciation, but don't have to pay recapture taxes. And the long term capital gains (real, not tax wise) will be added cash to the IRA when sold and taxed at ordinary income when taken out.But I think that they would be great in a ROTH IRA as you don't pay any tax on what comes out.Also there is a good chance that most IRA trustes know little or nothing about how to do this. A specialist would be needed..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
All those things are true Bill. One strategy for the IRA is to acquire the property and get it paid for instead of watching it go to someone else because the financing isn't available. Then, figure out how to get it refinanced and rebuilt using a different entity. So, he could acquire the property and then flip it immediately. It may not be possible to flip it and keep the deal at arm's length but at least he'd make something for the IRA instead of passing on the deal. It might be possible to do a lot more too.
I forgot to mention, if he does the IRA deal wrong, the penalty is the same as if he just cashed it out. Essentially, it's something to look at that carries no greater risk than what he's already thinking of doing: cashing out the ira and paying the penalty and taxes.
My fealings, are to go for it.
I am looking at some tax properties right now, 5000 will buy, with 30k in repairs I have single family to sell in the 90+ range. The difference in you and me is I will be useing cash. But if I was useing CC's I would still be doing.
Good luck!
Thanks Framer, I just spoke with my cousin and explained some things to him.
He's gonna float me for one year. After that if I dont have other financing in place we'll sell and split whatever profits are there.
Family.....They're always there when they need you.
What is the likelihood that you will be able to rent it at the price you're shooting for?
If it's good, I can't see a reason why not to do it. A 3.5 year return on a house is something I've never dreamed of.
If you had to finance it all with your CC (assuming 18% APR), you would still have $200/month positive cash flow. After 62 months, your house would be completely paid off. To me, that's a great investment if you can keep a paying tenant in the house.
But what do I know?
Jon Blakemore
RappahannockINC.com Fredericksburg, VA
I could rent that house all day in Ferndale for $750.
I think given all my circumstances, this may be one to flip.
My cousin has offered to back this house but he wants his money back quickly so flipping may be the best way to go on this one.
That way I can pay down some more of my debt to put me in a better light for the next greatest property to come down the line.
Family.....They're always there when they need you.
I'm amazed that you can buy a house for $20k that will rent for $9k/year. I don't think I could get a $9k/year house for $120k around here.
Jon Blakemore RappahannockINC.com Fredericksburg, VA
There are $120k houses there? That's an inexpensive lot price here.
I too was surprised at the cost/rent. Had to grab a calculator. Zero chance of anything remotely similar here, where rentals don't return much. Maybe a third what MSA1's looking at if his house's FMV is $50k.
Although, I was offered upwards of 10k sq ft, currently commercial use, for $60k yesterday. Lacking one of those three keys to good real estate: location. PAHS works. Bury it.
"There are $120k houses there? That's an inexpensive lot price here."No, that's my point. I didn't want to exaggerate lest I overstate things. I'm not looking at the market daily and making offers, so I don't know if I can claim to have the markets pulse.We've got one rental now (our first) that rents for $1,250/month. The fair market value is probably $200-220k. I would be buying houses as quickly as I could if I could put $20k down and get $750/month.I could possibly buy 1/6 of an acre here for $20k, but that would be a very (very) difficult lot in a bad location, and with septic/well costs or tap fees (if on city utilities) the price would more than double.
Jon Blakemore RappahannockINC.com Fredericksburg, VA
I didn't think things would be all that different there.
Got another call recently from a friend selling his mother's house, FSBO. Very nice neighborhood, 2 story (small) farmhouse, hasn't been updated since they added indoor plumbing. Only $170k, making it about the cheapest house in the county (with indoor plumbing). Unclear if it's in a floodplain.
When you take your expenses off that $15k income ($1250/mo) and divide by your FMV of $200k, what's your return?
My closest neighbor, moved in 2 yrs ago, just plunked down $686k for a lot in the newest offering, second property over. Includes a share in the large farm, for better or worse. Unsure if he wants to build, but wanted to reserve the choice. He's prohibited from reselling for 5 yrs. That's some carrying cost...PAHS works. Bury it.
"When you take your expenses off that $15k income ($1250/mo) and divide by your FMV of $200k, what's your return?"That's a complicated question.Our loan was initially for $150k as we bought with a decent down payment and before the market got too high. We got a HELOC to buy some property on which we built a new house and plan to live in it for 2 years and sell, if profitable.So, with the original note and the HELOC, we're upside down. I'm willing to pay the difference and wait for the market to start going up again. It's costing us somewhere around $200/month to keep so I think (hope) it will work out.To answer your question, if we had moved in to an existing house with a conventional mortgage (rather than using the equity to buy land and build) our return would be about 1.8% per annum.
Jon Blakemore RappahannockINC.com Fredericksburg, VA
Pretty sure I followed that, but profitability is usually income less expenses (factoring in tax ramifications gets sticky). Your cost to get into the property isn't relevant. Nor is MSA1's, for considering rental profitability.
He says he can net $500/mo on a $50k property if he ponies up the management and maintenance. Taking that at face value, it's a 12% return. Not bad. Impossible in my market with a median house of $325k and relatively low rents. In his shoes, I'd then be considering whether 12% looks good or if there's another, better, use of the capital.
Obviously the house purchase is a deal.
It's been more than a few years since rentals here offered much return other than appreciation. Clearly, if you're getting 10-30% appreciation/yr, nothing to complain about. Last year missed and this year doesn't seem likely. We've got a new gov't deal about to move 1500 specialized jobs in here, which'll change a few things in our small community. PAHS works. Bury it.
"Pretty sure I followed that, but profitability is usually income less expenses (factoring in tax ramifications gets sticky). Your cost to get into the property isn't relevant. Nor is MSA1's, for considering rental profitability."I'm not sure I'm following you now. You say that profitability is income less expenses, I agree with that. But then why do you say that the cost to purchase is not relevant?
Jon Blakemore RappahannockINC.com Fredericksburg, VA
I'm not sure I'm following you now. You say that profitability is income less expenses, I agree with that. But then why do you say that the cost to purchase is not relevant?
Sorry Jon, apparently I wasn't clear. Notice that I ignored the actual purchase price here and used FMV of $50k for my figures. Independent of sales price, that's the investment amount MSA1 is considering renting out. He could convert the capital to something else.
That's how I figured his profit margin. Using his sales price skews absurdly. If his sales price was higher than FMV it would also skew, the other direction. The decision to rent is largely based on profitability, helps to know what that is.
For MSA1 the question, which I posed to you, was whether the rental was adequately profitable. Whether the purchase decision was profitable is a totally different and unrelated question. In this case, a no-brainer. Once he buys the house, according to him he has a $50k house- to rent or sell.
Landlords here commonly confuse cash flow with profitability. When I sit down with one and we determine that there is a <3% return, it brings it all into focus. Which I thought was happening when you mentioned that tiny return. This is not to suggest that profitability is the only reason to be a landlord.
As you know, with a sufficiently large downpayment I could get a decent rental cash flow in my market. Exactly the same thing happens if I either ignore accumulated appreciation, or get an extremely low sales price. FMV is the only number that works to determine profitability. As MSA1 shows us, it can be a very different number, unrelated to sales price.
Hope I'm clear now. PAHS works. Bury it.
you are saying what I have believed for years.
I see supposed investments that when I look at and run the numbers, it looks like I am going to be parking money with the hope of a return when I sell. I guess that is why I don't compete for those properties. If I want a 3% return, I will go to the bank.
Uhhhh, I buying the house for 11k.
20 will get me to a finished product.
I'll admit this is one of the better deals to come across my desk.
Family.....They're always there when they need you.
Sorry, you can get $9k/year rent for a house you have $20k invested in.Still a great deal in my mind.
Jon Blakemore RappahannockINC.com Fredericksburg, VA
Yeah, now that me and my cousin have reached an agreement i'm pretty jazzed about it. This will be my sixth property.
Family.....They're always there when they need you.
If you want to be a landlord for $500 per month you are asking for trouble. There will be untold expenses or losses over time that will eat up a good share of your assumed profits.
Now, the idea of flipping it is a better one. make a profit and move on.
I refuse to accept that there are limitations to what we can accomplish. Pete Draganic
Pete, i'm landlording for less right now.
You're telling me $500/ month cashflow on a SFH is bad?
That is after buying / owning the home outright and doing all the initial repairs which would include new HVAC and plumbing plus cosmetics.
If you're flowing better off of SFH shoot me an e-mail, you can be my mentor.
Family.....They're always there when they need you.
I've got one now that clears $700 per month and it really isn't worth the headaches to me.
My dad owned 8 and that was his primary source of income. but, with it being a secondary income for me it is more of a problem.
If you want to be a landlord then go ahead I just see too many problems with it here. Could be the neighborhood where I and my dad own/owned.
I think the idea of flipping it sounds much better to me.
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I refuse to accept that there are limitations to what we can accomplish. Pete Draganic
How many hours would say you spend per month on that rental?I would welcome $700/month if the property has a chance of appreciating.
Jon Blakemore RappahannockINC.com Fredericksburg, VA
He's already in the landlording business so I'm thinking he'd be thrilled with 700 per month.
Pete one thing I didnt mention is that we renovate our houses when we get them. Maintenance isnt really an issue for the first five years so my costs stay relatively low.
I'm looking long term here. My plan calls for rate & term refi's in about five years to lower payments to gain more cashflow.
Thats assuming the market remains depressed that long. Best case is we play the Monopoly game and dump these houses in four or five years for "hotels".
Right now i'm just living like a pauper while building equity. Do I like it? Not really but in the big picture i'd rather go this route than work in a factory till i'm too old to stand in front of some press.
If you have the path to a quicker way I would seriously be happy to learn. I realize there are quicker ways I just havent learned them yet.
Family.....They're always there when they need you.
I guess you and I would have to agree to disagree.
700 hundred a month times 10 houses is 7 grand per month.
Thats worth my trouble.
I dont know why one house doing that isnt worth your trouble ?
Ive got renters I only see 12 times a year as they are handing me cash at my front door.
What is it that ails you about that?
The more I've thought about it the more I realize that the big difference is probably the areas in which our houses are.
Mine is in the neighborhood where I grew up and where I subsequently bought our first home.
The area used to be pretty solid but in recent years it has become a real bad spot.
I spend too much time chasing late rent and dealing with other aggravations.
Now, my dad made a good living and that was primarily during a different era. he sold off all of those area properties and no longer has to deal with it... because things had changed that much.
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I refuse to accept that there are limitations to what we can accomplish. Pete Draganic
Hey! You can't concede that easy. What's this tavern coming too? Pretty soon we'll be having group hugs after every post!
I agree.
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I refuse to accept that there are limitations to what we can accomplish. Pete Draganic
"
The area used to be pretty solid but in recent years it has become a real bad spot.
I spend too much time chasing late rent and dealing with other aggravations."
Well it doesnt cost anything to read what I write and you can think about it .
Ive been in the same spot many times till I got sick and tired of being sick and tired.
Rental property is not worth mental disturbance for the land lord. You have to eliminate it if you are to be successfull in that business. My answer is put a stop to what disturbs me. I made up my mind that late rents only got worse with time anyway. Theres no real future in the late rent business unless you are collecting by the week. I wont go into that .
Ive got two rentals that are in the lower areas of town. Its not the area. Its the people . Make a change. There are poor people that need a place to live and their bond is their word. Ive got a poor white family and a poor black family thats willing to live in an unkept area of town. They are unkept too. But they both pay their bills . I come around and have a nice conversation that doesnt upset either one of us about the yard a couple times a year. I got a letter from the city on one of them and I showed it to them. It shamed them but I was sure not to be the one that did it. They improved. Next summer it will probably be all over again. But Im winning because IM not upset . If they werent paying I would be very upset. Ive told them not to upset me in that way. If they are late they call me and we talk about it .
I dont keep renters over five days late that dont pay or call. Let someone else have them. I issue eviction notices the 5th day . I call the second day for a warning . I get aggressive getting them out . Im satisfied with the decision by then and Im not upset . Evicting is just another process of the job. The key is to pull the trigger in a timely fashion. By the 5th day late Im up deposit and the last months rent . They forfit all of it . Even if you only got a deposit you can break even . Make the house payment and get a divorce . Look for a better partner . The black family has been with me for 5 years and the white family 3 years. I can send my 14 year old over there to collect rents and they invite him inside to feed him or play video games amoung other things like basketball. . Thats because everyones happy.
My investment was smaller in that area of town. The rent is the same price as any of the others . Thats one reason the investment dollar is greater reward on apartments for more head pain. Ive never wanted apartments because of all the turnover I see in them. But there are apartments that do hold good renters for a long time . Im not one of the owners and IM not really sure how they do it .
Tim
Thats what i'm talking about, volume. Gotta have a penny before you can have a dollar.
Family.....They're always there when they need you.
Edited 8/20/2008 7:02 pm ET by MSA1
Put your IRA into a self directed account and use it to buy the property. You won't lose your penalty money on it that way.
Equity Trust is where I have an account. Scroogle them.
I'll check into them, thanks.
Family.....They're always there when they need you.
I just wanted to say I got a kick out of your title for this thread
lol
I'm a Simpsons fan. I could totally hear Ned Flanders say that.
Family.....They're always there when they need you.
good luck with your Home Sweet Homediddly-Dum-Doodily
and thank diddly you too diddly.
Family.....They're always there when they need you.
Just skimmed some of the reponses... They all seem to focus on an analysis of the upside - is it realistic? is it worth it? etc. Assume the answer to all of those questions is YES....
The next step (which i didn't see) is to do an analysis of the downside... Figure out what would happen if the deal went wrong for some reason. The first thing i see is that you could go into default on your credit cards, triggering a very high rate and dramatically changing your cash flow situation. In addition to the high rate, you'll get hit with fees, and your credit will dry up overnight. From there its an ugly spiral. If i were leveraging that much of an investment on my credit card (a HUGE if), you can be certain i'd want to know what the worst case scenario is and how i would dig out of it.
Once you've quantified the potential loss in the situation, you have something to compare your upside against and evaluate risk.
I know the houses in Ferndale. I've rebuilt 6 of them almost completely so i'm pretty sure of the project. As far as rents, I know from personal experience and from what friends that do this have done that $750 will be simple. We will probably try for $800 first.
What I mean to say is i'm not too worried about this not working out plus as I mentioned a few posts ago, my cousin and I have worked out an agreement where he'll fianace for one year. After that if I havent gotten more traditional financing in place we'll sell and split the profits.
Family.....They're always there when they need you.
No matter how you crunch the numbers, you need to pay off your credit card debt first.
Are you ever going to get 20% compounded interest on an investment?
Debt is an OK thing if it's structured the right way, but credit card debt is NEVER good debt. Even if you are on some super low promotional rate, it's bad debt. If you don't think so, ask your banker why he isn't giving you a seventh mortgage.
Equity only exists if you: 1. Sell your properties, 2. Borrow against it.
Right now, you can't do either, so guess what? All you have is "ALOT" of credit card debt.
It's not too late, it's never too late.
I have a sick amount of CC debt. Its all building materials for the houses so at least its getting smaller not bigger.
At least I have low interest rates (none over 10%).
Doesnt make it any better but it could be worse.
I'm aware that there is good debt and bad debt and this house will help get rid of the bad kind.
Family.....They're always there when they need you.
"Are you ever going to get 20% compounded interest on an investment?"I don't like CC debt either. But, if I'm understanding MSA1 correctly, he will be getting $6k/year after taxes & insurance. Even at a 20% CC rate, the interest on $20k is only $4k/year. Isn't that a reasonable risk if he can keep it rented?
Jon Blakemore RappahannockINC.com Fredericksburg, VA
MSA,
Any way you can borrow against the investment accounts?
Mine I can go to about 50% of value, at a decent rate.(about 6.5% now)
Or hard money lenders? I'd think there are a few folks down there, with the cash that would like fixed rate, short term deal. The market isn't that great now.
Good luck! I'd do it, but not by adding CC debt. I might be willing to CC the repair costs, if I could get it on a 0% for the next year deal.
That should give you the time to get it done, and back on the market.
I'm looking at something like that. Just a bit concerned, as our market is flooded right now, and sales are really slow. The purchase cost would be a bit higher for me.
I'm just getting into it. If I discover some great unknown financing option, I'll let you know.
Brudoggie
Thanks. Read above. We got the money thing handled for now. My cousin is financing. All I have to do is either pay him back in one year or we'll sell the house and split the profits.
Family.....They're always there when they need you.
Great, You must have been posting that, as I was posting mine.What kind of condition is the property in? The one I'm looking at is a gut job. Nice old exterior details though. That's what got my attention.Brudoggie
I would say for 11k its not bad, but actually for 20k its not bad. It has no furnace, plumbing is shot, it needs a kitchen, and misc paint and repairs.
There is a little mold problem in the crawl but we will fix that with a dehumidifier at first thenthe usual crawlspace treatment of sealing vents, 6 mil plastic and conditioning the space like a basement.
I'm pretty sure we'll get out for 5-9k in repairs and be ready for rent.
Family.....They're always there when they need you.
Edited 8/19/2008 7:47 pm ET by MSA1
So are you putting a kitchen and a furnace in for $9k max? Are you including your labor in the costs?
Jon Blakemore RappahannockINC.com Fredericksburg, VA
You got me. No i'm not. I'm working for the asset.
My pay comes in the form of financial freedom (theoretically) through cashflow.
Family.....They're always there when they need you.
MSA1,
I think you are a little worried about this---or you wouldn't have mentioned it here---you would have just gone ahead and pulled the trigger.
that being said-------- if it were me-- i think i would go ahead with it.
in fact--in my area we are looking at several similar situations right now.
Last week-- my helper and I are driving down a street----probably in a neighborhood similar to the one Pete was describing( Pete- i was up in what i think is your old 'hood on monday buying slate and tile---like E. 82nd??? is that about right????)
anyhow--- helper sees a sign on a phone pole---"house for sale $10,500"---- helper says to me------look at that----and my dad says you can't buy a house for $10,000 anymore"------ I told him you can buy LOT'S of houses for around $10,000---but you might not want to live in them---but somebody will live in them.---Later i got out Saturdays Real Estate transfers section of the paper---at least 8 houses had sold for under $20,000-----most of those in the $10,000 to $13,000 range
there are a lot of opportunities at that level--but these aren't properties that anybody would exactly brag about owning--and they don't rent to the commuinites stellar citezens
for a variety of reasons-- i would like to tie one up later this fall--but not close on it untill after January 1st--and then re-hab it through the winter.
have the time, have the resources---and looking long term.
stephen
The only thing I was worried about was the prospect of going further into debt, but as I said yesterday, my cousin and I were able to come to an agreement about financing so now i'm pretty excited about it.
Family.....They're always there when they need you.
we are gonna be looking at 5 or 6 houses on thursday and friday this week. one of them is advertised for UNDER 4K, LOL--( I am thinking fire might have been involved)---it would be about 6 minutes from my home----the other prospects are in various locations about town.stephen
If you're making a difficult decision (rental vs flipping) ask yourself "what would Ned Flanders do?"
If Ned would buy it and use it as a rental, then I would flip the house
conversely if Ned would buy it and flip it, then I would use it as a rental.
Hope this helps
; 0 )
Ned Flanders would buy the house and let homediddilyhomeless people live in it for free.
Family.....They're always there when they need you.
Edited 8/20/2008 6:59 pm ET by MSA1
LoL
Some people may not know who Ned Flanders is so here is his bio
http://www.ship-of-fools.com/features/2001/NedNight/Pics/NedFlanders.gif
OK, Im responding to the first post . If I missed somthing , please inform me .
I got off track and responded to someone else the other day .
I guess there are several different methods for buying real estate . I have never used a credit card for purchase and frankly cant figgure out why you would .
Heres why;
Many people make a mistake in my opinion not building a bank portfolio. You need a credit history and this house is credit to your overall worth. Once a bank has it in house it can become a tool to use when needed . Lets say after to exaust your funds on this house and a couple years down the road it needs a major repair then wheres the money comming from? Somthing to think about . Theres a book I read that this lady had 15 houses . Every five years she would refinance the first 5 of them up to 80 percent not changing her payment value which she called harvesting the crop. Meanwhile the renters kept paying them all down while the values grew. The next 5 years would see harvest of the next 5. She never wanted to own these houses from a tax stand point . Thats just one take on the subject.
Several years ago I had open heart surgery. I had never taken anything away from any of my rentals . At the time I had 12 houses. I owed 20 percent of the bills which my portion was 48 grand . I refinanced 3 houses that just happened to come up at the same time on a ballon note. This is how farmers do it or a lot of them do. They get their new truck or tractor off harvesting their crop . Point is they probably owed the bank so so they turned a note over as they call it . Thats why farmers have a lot of toys to work with on the farm.
If you look at it like a cattle farm you can see they have several choices in the way they might operate thats very flexible . The toys show up when they need write offs and in loss years they ask for assistance . The write offs lever the profits in a way thats affordable . Once you start making money on a rental you have to be concerned about the same thing .
Some people believe they want to own the rentals as I did so when they retire they will have 100 percent of the money. That just didnt happen to be true . It was a good idea that didnt work. If you owned a rental with no write offs you would owe the full value of taxes off the return. With out a write off at all it would become normal income.
A rental is set up on a depreation schedule in the first years of ownership. Those are the sweet years as I call it . Normally a new rental gains value for me while getting depreciation. The difference in what I gave for it and what it is worth is really hidden tax wise unless I sell it . Meanwhile Im collecting higher rents than the investment while getting depreciation. Thats how the first real money is made off the investment thats visual to you but invisable tax wise. If you never sell it , it will always remain hidden. If you do decide to sell it you will pay the fiddler all that money you hid. That fact alone changes the way many people do it .
You have to decide your plan of action at some point but the sooner the better . Under the current law thats expected to change with Obama being elected you can benifit keeping it two years and selling it . If Obama gets elected and hes successfull the house will always be considered normal income at sale time . Thats the short of it . If I sold a house today under the current law I would owe around 12 to 18 percent tax plus depreceation. Obama wants 40 percent plus my depreceation which would make it a bad idea to sell which will change this market as long as the new law is in existance. He thinks he will get more money this way and to some degree he may be right but not from people with rentals. Bottom line is there wont be any money being made swapping rentals giving him 40 percent . So that action will stop which wont give him any money from us .
The new idea is to keep the rentals if the new laws come into play dead with us . Thats when we will need our cretit lines with the banks. We will own houses that will sit at the bank like cds drawing interrest. Meanwhile we will borrow off their worth instead of selling them. Much like the farmers do. Instead of selling a crop we will make a transaction at the bank not only tax free but deductable . We will have to keep these houses till things change which might be another 12 years. When the economy needs to be boosted off the loss of business then we will be ready to move properties. Bush did understand that and he needed the money, so he did things like that . He didnt know how to invest it but thats another subject . Still the housing boom happened under him and ended .
You have to be aware of things that are happening before you make your decisions .
You are considering buying a house in bad times which for me was the best times because I didnt give much for them. Good times came and things changed for the better . Higher rents and higher property values followed. Right now you have an exellent turn around on your money of nearly 5 times which is exellent to have an investment pay out in 5 years . The property could possibly double in the next 10 years making your investment 10 fold . That actually happened to many in the last 10 years. Will it happen again? I dont know , but its happened twice in my working life.
Tim
Thanks Tim, thats alot of info.
Here's where we are now,
No credit cards. My cousin has agreed to front the money and hold the loan for one year. At that time if I cant get a loan, we will sell it and split the profits.
I'm all for holding property as I rather enjoy having people give me equity. I have good tenants that are taking care of my properties.
I realize there's maintenance but we do a pretty extensive reno on the properties as we get them. This should push back the inevitable maintenance issues.
I see what you're saying about keeping them leveraged to an extent and probably always will, but understand these are not the properties I plan to die with. These are merely stepping stones to larger properties.
As far as building a portfolio at one bank, i'm down with it, but no bank wants them right now. I think that once I get in a better place financially it will be different but right now my ratios are too out of whack to get a bank interested in me.
Funny you mention the lady the "harvests" every five years. That was my time table to (at first) allow more cashflow through rate & term refi's then eventually if I hold the houses, pull money out.
Family.....They're always there when they need you.
One of the things DanT said one time is , you can make rentals do anything you want .
Thats a wide statement of course but I sure understood it .
You have to start somewhere is very true with or with out a bank.
Just remember the steps of success. You can only be as big as you are by yourself . You are your only shadow to reflect yourself when you are standing alone .
Already you have reached out to family which is great .
Tim
Its great but it sucks. I've aquired all my other real estate by myself and really like the control. I understand you need a good team behind you, but I dont like the stigma of "if I cant get a loan I have to sell an asset".
I'll go along with it cause either way were gonna make money and I can always take my share to grow in a year.
I'm just a little concerned about my cousins knowledge in RE. I mean at first he thought he was gonna get all his money back and then some by the ed of this year!
We'll call the reno shots together since we both think alike and I dont think that will be a problem.
Family.....They're always there when they need you.
Mark, you sound like you made a fundamental mistake in structuring your agreement. I hope I'm wrong. You should have structured the deal so it would look like and act like a limited partnership. Your cousin should have zero input on how to do this deal. The only thing he should be adding is dollars...not opinions, not decision, not advice...nothing!
Honestly, its pretty much my baby, He's seen my work and know that I know what to do to make this house work.
He wants to get his feet wet, and for what we paid, its gonna be hard to lose and actually, i've wanted to work with my cousin for years, (hope I dont regret this but,) it might be fun.
Family.....They're always there when they need you.
I had fun doing one with my best bud. We are still best buds but if we ever do something else, the lines of duty will be clear: he's all money and no say and I have all the say and no money. We ended up arguing about things like sheen. Needless to say, I was right.
Yeah, were just testing the waters here.
If it doesnt work out, we get along way too well jeopardize it with business, so we would just stop before it got too heated.
Family.....They're always there when they need you.
"Just remember the steps of success. You can only be as big as you are by yourself . You are your only shadow to reflect yourself when you are standing alone ."At the risk of starting an argument, could you please elaborate? I think Henry Ford proved your statement wrong.
What did Henry do by himself?
I think the implication is--that henry became a very big man---by NOT doing everything himself.
stephen
That was my point .
That was my point too.
Henry had an idea.
My favorite story about Henry Ford refers was about just that.
Someone criticized him for not having the smarts to justify the position he had achieved.
He stood up to the challenge, when the day came the person came in and started firing questions at Henry. Without missing a beat Henry would point to the appropriate person on his team and tell him to "Get the answer".
A perfect example of good teamwork and really knowing your place.
Its not that you know everything, its that you know where to look for everything.
Family.....They're always there when they need you.