Author Topic: found me a potentially cheap rental property  (Read 4790 times)

edpsycho

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found me a potentially cheap rental property
« on: February 28, 2012, 10:58:05 AM »
Hi Mustache People...

I will give you the short story. I'm 40 and should have retired 10 years ago. But no... due to years of financial mismanagement, this is not yet fesable. But now I am getting my act together and want to make up for lost time. I am fortunate to have a good job and income in an otherwise depressed backwater midwestern town.

When I was looking at properties for my residence about a year ago, one property in particular stood out. The place was an 800 sqft hovel in an odd location, but inhabitable, and (then) currently rented. I thought at the time,  sheesh this place would make a good rental property, but I ain't buying it for myself it's just too small and dilapidated. I found out later this property had sold for UNDER $10K, I happen to know the exact amount. Now, it's on the market again for 3 times as much. I drove by and the owner has made some obvious cosmetic improvements, but nothing significant. I've also determined it also has a valid rental permit good for several more years. I speculate the owner might take $10-15K for the place if he wants to be out from under it for some personal reason, but haven't asked.

I've been saving some dough. I could lay my hands on that much cash and buy it outright, but it would pretty much deplete my entire savings, leaving me stuck should I need to do a major repair either to the rental or to my primary residence, and I owe $40K on my primary residence anyway (just bought it 6 mo ago).

So the questions are:

1) Should I even think about buying this place? Should I pay off my main house ($40K) and student loan ($60k) first instead? I can drop $2-3k without batting an eye for 20% down on a $10-15K loan if the owner would sell it for that. I know for certain what he paid for it, and he'd still be making money. Then I could leverage that $100-150/mo loan payment against $300-400 rental income per month for some cash flow, right?

2) I had a hard time getting a loan for $45K... I have superior 800+ credit, but I had difficulty securing a mortgage due to borrowing so *little* money!  Most banks did not want to talk to me unless I was borrowing $50K or more. Can someone recommend a lender, or maybe a different *type* of loan for $10-15k?

thanks,

ed

AJ

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Re: found me a potentially cheap rental property
« Reply #1 on: February 28, 2012, 11:58:07 AM »
Hey ed, a couple questions: Why do you think he would accept 1/2-1/3 his asking price for the place? Has it been on the market a very long time, or do you have inside information? That seems like an unusually large discount from asking. Also, how do you know he would still be making money? If he bought it for around $10k and made improvements on it, I'm not seeing how he will be coming out ahead here.

If you're buying an investment property, you'll be asked for 25% down, plus closing costs. You can only count 75% or the rental income. But I think that is moot, because you'll probably have a hard time finding someone to loan that small of an amount. Could you just take an unsecured personal loan? Or a cash advance from a credit card? It would just be for a short time, I assume, since it can't take very long to pay off that small of an amount.

edpsycho

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Re: found me a potentially cheap rental property
« Reply #2 on: February 28, 2012, 02:39:45 PM »
@AJ

I am simply speculating that he will accept a lowball offer. Perhaps the owner is a young kid who is trying to flip a house, or possibly trying to get out from under a house he's tied to. The sunk cost of necessary repairs does not necessarily enhance the value of a property in my mind; you can't just repaint the place and fix a broken door and expect that it's now worth 3 times as much as what the County said was paid for it in 2010. Also, property values had never inflated around these parts to the astronomical proportions you see in other parts of the country.

Yeah, the closing costs almost make a conventional mortgage look stupid in proportion to the amount i'd be borrowing... what $2-3K in closing costs, on a $10k loan? I'd almost be better off getting cash off the credit card at 21%. Really, I need to wait until I have another $10-15K in the bank. Then I'll have a comfortable enough buffer of cash I can use for more speculative investments such as real estate.

But anyhow, I have a different dilemma now, I'll post about that elsewhere.

tannybrown

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Re: found me a potentially cheap rental property
« Reply #3 on: February 28, 2012, 10:48:37 PM »
My last renter had, ironically, rental property.  He indicated you could use a hard money lender for rental property.  I know next to nothing about the process but it may be an alternative to traditional lending.

That said, I might just try to knock out the student loan and then the mortgage on the primary residence.  The rental property can certainly make money but there's a chance it'll eat money in the short term.

arebelspy

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Re: found me a potentially cheap rental property
« Reply #4 on: February 29, 2012, 08:11:58 AM »
Wait for the cash. 

If it sits for awhile while you build up cash, the owner is more likely to be receptive to your low offer.

What makes you think this place would be a good rental?  Just the price?  There are homes you can buy in Detroit for 2 grand, if you want, or even some for $1.  PASS.

Have you actually investigated what it'll rent out for, to determine if it's actually a good rental or not?

Getting a loan that small will be a pain, even if possible, and hard money could work, but they'll want a large down payment from you, points, and high APR.  The annualized rate, with the points in there, will be astronomical.  And funding a rental on a credit card?  Bad idea.

Wait and save up and do research in the meantime.
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AJ

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Re: found me a potentially cheap rental property
« Reply #5 on: February 29, 2012, 11:52:18 AM »
And funding a rental on a credit card?  Bad idea.

Oh come now, you can't just say something is a bad idea without providing justification. If the OP is right that this property can be bought for $10k and will rent for $400 a month, he'd make his money back in less than 3 years even with crazy-high cash advance rates. FWIW, I think the chances that anyone would sell such a profitable rental for so cheap are worse than playing the lottery, and there is definitely something off with the numbers. But, if such an opportunity is, indeed, presenting itself for this fellow, why shouldn't he use whatever means available to take advantage of it?

arebelspy

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Re: found me a potentially cheap rental property
« Reply #6 on: February 29, 2012, 12:01:18 PM »
And funding a rental on a credit card?  Bad idea.

Oh come now, you can't just say something is a bad idea without providing justification.

Okay.  Justification: you will pay more for it that way than other ways.

And you're right, a property that cheap, renting for that much, likely is too good to be true.  Meaning it likely will come out somewhere - it needs more repairs (so it's selling cheaper), or it won't actually have reliable renters in that range, so it'll be vacant a lot, or the quality of renters it attracts will be terrible, etc.

Like I said, there's houses in Detroit for a few hundred to a few thousand.  But I wouldn't want them if they were free (literally, I would not accept them as a gift).  You won't find good tenants in the $300 range, you'll find people who will trash the place, if you can find any.

That may not be the case with this place in particular, but in general, numbers are fairly sharp, and something seems off with the numbers on this one.  If it rented for 400, that's a cap rate of 16% on a cash purchase of 15k, using the 50% rule.  That's a ridiculously high cap rate, since interest rates are at all time lows.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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AlexK

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Re: found me a potentially cheap rental property
« Reply #7 on: February 29, 2012, 12:19:25 PM »
The price previously paid for something has absolutely nothing to do with its value.  A rental property's value is determined by its potential income as a rental and the amount of money needed to get it rentable.  The value could also be driven up above that by owner occupant buyers who are emotionally attached. 

edpsycho

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Re: found me a potentially cheap rental property
« Reply #8 on: February 29, 2012, 03:34:15 PM »
Thanks to those who have replied. I was kind of using this as a sounding board. If I buy this place, it will need to be with cash, and I just don't have enough right now. Financing at that price range is just not cost-effective. But I actually think that using a cash advance on a credit card might actually be CHEAPER than a mortgage after taking into account all the closing costs, etc. But I'd have to run the arithmetic. Let me make it clear however I have no intention of doing that.

But If I did have the cash... I'd have been tempted to pull some Quentin Tarantino type scenario on the owner where I pull out a briefcase with $10K cash and set it down in front of him along with a quit claim deed - all approved by my attorney in advance of course. I think this little house is a good buy even at the dude's asking price.
 
I'm not going off half-cocked on some burnt out shell of a house like you'd find in Detroit. Let me share some more info: I've actually personally been inside the property on two occasions and took extensive photos. I know for a fact at that time it was owned by an absent/out-of-town landlord who presumably just wanted to be rid of it. I understand the new owner has fixed some things up a bit in the past year, but have not been in it since then, though I can see some of the work from outside. The property has a current rental inspection permit, so it at least meets those life-safety conditions. It's primary problems are that it is a) very small and b) in a weird location and c) habitable, but dilapidated condition. I also have the advantage of knowing exactly what was paid for it. Typical rents published in the newspaper for apartments in my location start at $400/mo, so that's how I derived that figure.

OBTW - I have to agree with AlexK... if the current owner bought it for say $9000, and put $10000 into it, it's not automatically worth $19000. It's only worth what someone is willing to pay for it.
« Last Edit: February 29, 2012, 03:38:14 PM by edpsycho »

arebelspy

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Re: found me a potentially cheap rental property
« Reply #9 on: February 29, 2012, 05:19:54 PM »
It's primary problems are that it is a) very small and b) in a weird location and c) habitable, but dilapidated condition. I also have the advantage of knowing exactly what was paid for it. Typical rents published in the newspaper for apartments in my location start at $400/mo, so that's how I derived that figure.

(Emphasis mine.)

Given a, b, and c, what makes you think this particular place will get the same $400/mo other apartments in the area (that presumably aren't dilapidated, as small, or in a weird location)?

Is it currently rented?  Can you find out for how much?
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

AJ

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Re: found me a potentially cheap rental property
« Reply #10 on: March 01, 2012, 02:02:54 PM »
OBTW - I have to agree with AlexK... if the current owner bought it for say $9000, and put $10000 into it, it's not automatically worth $19000. It's only worth what someone is willing to pay for it.

Not to pile on, but that knife cuts both ways. If s/he bought it for $9k and put $2k into it, it could be worth much more than $11k - esp. if that $2k in repairs took the property from non-financeable to financeable.

Also, fwiw, housing sales are public record, so you should be able to find out the previous selling price of any property you might be interested in.