Author Topic: First Time Slowflip  (Read 5021 times)

GrayGhost

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First Time Slowflip
« on: October 09, 2014, 08:16:42 AM »
Greetings fellow Mustachians,

I am going to be leaving the nest in a matter of days and head down to Florida for my first real job. I am looking forward to applying as many principles of Mustachianism to my new lifestyle as possible, including living within biking distance of work if possible.

Anyway, I have gotten in contact with a realtor and am looking at a few fixer-uppers in the area. I'm pretty confident about my abilities to fix or figure out how to fix most problems and issues in short order, and I already have experience with flooring, painting, and other such things. I've done enough researching on tiling and other stuff that I'm pretty confident with that too. As for the rest, I'm sure I can learn it on the way.

My goal, essentially, is to buy a somewhat distressed property, fix it up over a year or two as I live there, and sell it for a profit.

Since I'm active duty military, I have VA loans available to me, and since this is my first personal home purchase, I may be eligible for FHA as well. I understand these sorts of loans are no good for really distressed properties, but that's okay--I don't want to bite off more than I can chew at this point.

My biggest question is one about math. I've been saving for a few months and I have about $10,000 in cash right now, plus more in stocks and stuff. This is enough for a downpayment in my price range, since a lot of the loan options available to me have zero down financing available. I also have access to further cash with a USAA Career Starter loan ($25,000, five year term, 2.99% interest rate).

So here's the issue. I understand that when you're doing buy-and-hold renting, it makes sense to maximize leverage as much as possible, because then you essentially get absurd returns on your money. Return = (Rent-Expenses-Mortgage Payment)/(Money invested, which might be very close to zero).

However, when you're dealing with a slowflip like mine, does it make more sense to maximize downpayment and loan repayment, or is it better to put in as small of a downpayment as possible and only make the monthly minimum?

I think the answer is the latter, because it means that you put less cash into the house, and your return is profit after sale over that meager investment.

Complicating the issue is the availability of cash through USAA's Career Starter loan. I doubt that I will need it, as I have tabulated my expenses and I should have plenty of cash left over each month for tools and materials. I guess I shouldn't use it if I don't need it, because it'll just mean putting more money into the process when I don't need to. $25k at 2.99% is a good deal though, should I use it for something else?

Any feedback and advice is more than welcome, as I am nervous (but excited!) about my career and renovating a home solo. Like I said, I'm confident about my abilities to do a bunch of things, and I'm willing to learn pretty much anything.

Many thanks in advance.

SpicyMcHaggus

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Re: First Time Slowflip
« Reply #1 on: October 09, 2014, 08:29:20 AM »
You essentially are going to live in the house while you fix it up ?
Would suggest you hold it 2-5 years then. Why? Tax reasons. Market fluctuations.
Use the most leverage you can get without increasing the interest rate over 5% or adding contract stipulations. If you can do 3% down, why not?  This will leave you more $ for your renovation and investing. Careful of PMI. Avoid this if possible.

You should buy a small house, rehab it quickly, and then rent out a room. This will likely cover a good chunk of your mortgage.

Christopher.Pfohl

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Re: First Time Slowflip
« Reply #2 on: October 09, 2014, 09:41:40 AM »
It sounds like you're in the military, is your assignment location guaranteed for some period of time?

GrayGhost

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Re: First Time Slowflip
« Reply #3 on: October 09, 2014, 10:42:02 AM »
Yeah, I will be in the area for (at least) two years. After that, there is a very strong chance of getting relocated.

It's occurred to me to rent out a room, and it's something I'll definitely consider once the ball is really rolling with renovations. However, my first priority is to renovate the house. It's also occurred to me to have an alternative exit strategy, to rent it out and be a remote landlord, instead of selling it. It might be very difficult for me, since I'm a one-man operation with a 9-5, and I'm not at all sure if I can manage repairs and renovations without being physically present.


RH

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Re: First Time Slowflip
« Reply #4 on: October 09, 2014, 11:31:46 AM »
I wouldn't recommend you purchase a house if you may not be there more than 2 years. Rent a room at someone else's house and live there for 2 years.

waltworks

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Re: First Time Slowflip
« Reply #5 on: October 09, 2014, 01:58:09 PM »
Yeah, what you are proposing is just working a second job for mediocre pay. If you want to work more, I'd say get an outside/after hours job in your area of expertise. If you want to invest, just keep investing in stocks/bonds/etc.

The problem with your plan is that in a 2 year timespan, you're not going to save any money over renting a house when you factor in the up front costs and then costs to sell the place. In fact, you'll spend a lot more than you would renting unless rent is super expensive and the house is crazy cheap.

Fire up the NYT buy-vs-rent calculator and figure it out, maybe.

-W

GrayGhost

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Re: First Time Slowflip
« Reply #6 on: October 09, 2014, 03:41:20 PM »
Price is absolutely of great concern here. If I buy a place that's just a few thousand bucks under market value, you're right, I will come out behind for sure.

On the other hand, if I use the 70% rule and get a house that's undervalued due to a lack of maintenance, then I could come out ahead.

Another thing I have considered is that mortgage+repair costs ~= rent costs in the area. So that alone helps me out, and once I start to look at undervalued homes, then I've got the possibility of making some money.

As for the Buy vs. Rent calculator, buying is favored by about $900 a month, and that's for full price houses. Distressed properties are more favorable.

escolegrove

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Re: First Time Slowflip
« Reply #7 on: October 09, 2014, 04:52:55 PM »
Congrats on getting your first duty station!

My husband is active duty Navy! I think it's awesome that you are getting started right away. We are buy and hold investors. The first house we ever bought was a totally cosmetic gutter that we bought using a va loan. There were a few repairs about $800 that the va required us to pay out of pocket before we could close. Otherwise we had no issues. We fixed it up and than rented it out.

Everyone has their own purchase strategy. I personally prefer putting as little down as possible. I like my houses being their own "baskets" and therefore funding themselves. This allows us to out money in tsp growing another basket. Our goal is to live on the cash flow from the house to supplement my husbands navy retirement.

While there are lots of buy and flip strategies I highly recommend you have a second option. Personally we always make sure it is rentable. The biggest mistake we made was over improving it. So as you look at all the houses make sure you look at fixed up ones too! Over fixing doesn't usually add to the purchase price as most areas have a ceiling.

Good Luck! We have done very well buying. A house at every duty station and renting it out as we leave.

GrayGhost

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Re: First Time Slowflip
« Reply #8 on: October 12, 2014, 07:59:48 PM »
Today, I looked at a house that is priced at around $125k. It needed cosmetic work to the kitchen and a bathroom, flooring, windows, and some cleaning and landscaping. Judging by comps and units currently on sale, I imagine market value, after repair, is something like $150k.

Now, that means that I need to talk pricing down a bit, but there's another unit I'm going to see tomorrow that needs similar renovations (although fewer of them, since it's an occupied short sale) and the price on that one is $100k. It's farther from work, but the area is pretty good, so I will have to take that and more into account.


SpicyMcHaggus

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Re: First Time Slowflip
« Reply #9 on: October 13, 2014, 08:16:52 AM »
short sales are notorious for taking forever to close(think 9 months). in your case, this may not be for you. Being farther from work is not really mustachian, but you have to weigh that extra commute time/cost against your savings on the purchase price. If you'll only be there 2 years, you may not save all that much by getting the closer house.


GrayGhost

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Re: First Time Slowflip
« Reply #10 on: October 13, 2014, 10:10:24 AM »
Yeah, I've heard that short sales can take months. However, my realtor mentioned that he closed a short sale in two weeks, largely because it was a cash deal. Now, I can't do a cash deal personally, but I can make an offer contingent on quick closing, and my parents are willing to buy in cash and I pay them back for it at a reasonable interest rate.

In any case, the $125k house is pretty exciting. I'm going to see it again in a few short hours. It's got a weird layout, but it's apparently quite common in the area--and I'm not making a dream house for myself, I'm making a marketable home for whoever I sell (or rent) it too in a few short years.

Bob W

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Re: First Time Slowflip
« Reply #11 on: October 13, 2014, 10:24:01 AM »
I see that you are excited about having a real job!  Good for you.

Now for my opinion.   You have houseitus. 

You are buying a house based on emotion.  Bad decision.   In our area military people often loose 10s of thousands of dollars on the sale of their homes.   They often sit on the market for over a year after they leave.

Your assumptions are wrong at best.   You are assuming that the real estate market will be good in two years.  You are assuming you wont be moved in an emergency due to international conflict. 

I echo fellow posters comments.   If you want to make the best of it financially simply rent a very inexpensive situation.   Then  go get your real estate license and make a good second income selling homes specializing in military clients. 

Perhaps your biggest mistake in my opinion is that you don't have $125K.   This blog is about being out of debt not going into debt. 

You said "buy" a house when you really mean  "mortgage" a house.  Two completely different things.  One is ownership,  the other borrowership. 


GrayGhost

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Re: First Time Slowflip
« Reply #12 on: October 13, 2014, 04:40:45 PM »
Thanks for the feedback.

However, I have done some reflection, and I do not think that I have houseitis.

Here's why: I'm more than happy living in an apartment. I have for the past several years, and I would be more than open to doing so again. The idea of owning a home itself doesn't excite me very much, certainly not more than a few thousand dollars' worth of index stock.

On the other hand, I am open to strong investments. Right now, the house I'm most interested in is listed at $125k, and the price dropped from $135k earlier this summer. Houses in worse condition in the area (in fact, on the same street) have sold for $130k as recently as a month ago. Houses in poor condition in the area are renting for about $900 a month, so I have another exit strategy available to me.

It's true that people often lose lots of money on real estate, but it's equally true that people earn lots of money in it. Yes, I suppose I am assuming that the real estate market won't crash within ten years of the last crash, but that's a risk I'm willing to take. As for the risk of deployment, I've spoken to multiple high ranking officers in my career field. None have ever been deployed--ever.

The main point of this blog is to retire early, and if part of the pathway to doing this involves leveraged investments, I don't see a problem with that. MMM himself writes extensively on landlording, and even a foreclosure project of his.

The numbers look pretty bad if you look at this as a flip. But once you consider that I'd be paying about $500 a month on an apartment (at least), it starts to look a lot better. Heck, if I come out of this without earning a dime, that essentially means that I'll have lived rent free for two years. If I come out of this $12,000 in the hole, I'll have paid $500 a month on rent for two years. If I make money, then that's even better.
« Last Edit: October 13, 2014, 05:31:02 PM by GrayGhost »

retired?

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Re: First Time Slowflip
« Reply #13 on: October 14, 2014, 08:14:41 AM »
Could you live "on base" for free?  I just read that 1/3 of military move each year to a new base and that  Personnel who were unmarried and without dependents had the least time between PCS moves.

My knowledge is limited to what I saw for my brother-in-law.  Just retired from Army after 24 years.  Many times in one spot for 2 years.  The average, at most, would be 3 years, i.e. he was in at least 8 locations.  Think about having to sell after 2 years or managing as a rental from afar.  BiL did not buy until his last post.  From what I can tell, that was the right move.....at least for them.  Also, my understanding is that the military does not provide sales assistance (since they offer base housing) as compared to what many firms will cover (I never paid a sales commission). 

Don't want to be a naysayer, but.........If you can control your location it's a different story.

retired?

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Re: First Time Slowflip
« Reply #14 on: October 14, 2014, 10:44:56 AM »
according to BiL, VA loans can only be used for primary residence and not investments.  Don't know if that is checked if/when you have to move, i.e. it is not an investment property originally, but if you choose to keep it after moving, it would become one.

Also, even if they don't check, you can only have one VA loan out at a time, so if you wanted to purchase in new location, you'd have to find another lending source....if you kept first house.

something to verify.

waltworks

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Re: First Time Slowflip
« Reply #15 on: October 14, 2014, 12:57:38 PM »
I think your best case plausible scenario is you break even after factoring in transaction costs and opportunity costs on the money you wouldn't be investing in other investments. Which would be fine if you were an experienced handyman who enjoys working on houses. It sounds like you have *some* experience with DIY stuff but not tons (yes, you can learn to do all that stuff - but your first efforts will take longer and cost/suck more than someone who knows what they're doing).

So I guess you could look at this as an opportunity to get experience at remodeling and flipping and call that your profit. I'd be surprised if you make money though. It does not really sound like these places are smoking deals and if your only value added is some minor cosmetic stuff... you have to hope for big appreciation, as others have already said.

-W

GrayGhost

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Re: First Time Slowflip
« Reply #16 on: October 15, 2014, 03:46:12 PM »
Could you live "on base" for free?  I just read that 1/3 of military move each year to a new base and that  Personnel who were unmarried and without dependents had the least time between PCS moves.

My knowledge is limited to what I saw for my brother-in-law.  Just retired from Army after 24 years.  Many times in one spot for 2 years.  The average, at most, would be 3 years, i.e. he was in at least 8 locations.  Think about having to sell after 2 years or managing as a rental from afar.  BiL did not buy until his last post.  From what I can tell, that was the right move.....at least for them.  Also, my understanding is that the military does not provide sales assistance (since they offer base housing) as compared to what many firms will cover (I never paid a sales commission). 

Don't want to be a naysayer, but.........If you can control your location it's a different story.

I could live on base, but my actual station is a good 15 miles from housing. Plus, housing on base starts at about $1,159, which is nearly what I would spend on a purchase in the first place!

What you might be thinking about is single enlisted members who live in dorms/barracks. They do get to live for free, but in exchange they get no BAH. I'm an officer, so I can't do that.

according to BiL, VA loans can only be used for primary residence and not investments.  Don't know if that is checked if/when you have to move, i.e. it is not an investment property originally, but if you choose to keep it after moving, it would become one.

Also, even if they don't check, you can only have one VA loan out at a time, so if you wanted to purchase in new location, you'd have to find another lending source....if you kept first house.

something to verify.

The loan pre-approval I have is for a VA loan, but the bank informed me that since I can pay a downpayment, it can be a conventional loan as well. Thanks for the warning.

I think your best case plausible scenario is you break even after factoring in transaction costs and opportunity costs on the money you wouldn't be investing in other investments. Which would be fine if you were an experienced handyman who enjoys working on houses. It sounds like you have *some* experience with DIY stuff but not tons (yes, you can learn to do all that stuff - but your first efforts will take longer and cost/suck more than someone who knows what they're doing).

So I guess you could look at this as an opportunity to get experience at remodeling and flipping and call that your profit. I'd be surprised if you make money though. It does not really sound like these places are smoking deals and if your only value added is some minor cosmetic stuff... you have to hope for big appreciation, as others have already said.

-W

Let us assume $1600 a month for combined mortgage, taxes, and renovations. Throw in about $8,000 in closing costs.

Let's then assume $900 a month in rent.

Looks like I'd save about $24,000 over two years by renting. So to break even, I'd have to net $25k.

If I want to get "paid" at a rate of $15 an hour for working on average 20 hours a week for two years, I'd have to sell at $30k above and beyond my break even point. That is quite realistic (unless the real estate market tanks).

Obviously the situation is better if I get a roommate, but I guess I am currently looking at giving up a LOT of my free time for a decent wage. I'm not sure that it's minor work to add nice tiling here and there, opening up a room, and doing much-needed landscaping, but the whole thing is highly dependent on the status of the market in two years. At the current status, I imagine I'd make an okay wage for all of my work. If the market picks up, I could make a pretty good wage for my work. But if the market falls, I might become a landlord before I am ready to.

I guess this is the kind of thing that works if, like MMM, you are experienced and interested in doing a quick flip (before the market can plunge) or if you are interested in landlording. I am not prepared to do that right now, certainly not from afar. It would be a different story if I was going to live in the area for 5-10 years, because then I could do things slowly, but the two year timeframe is too short to ride out market fluctuations, and too long to do a quick flip.

The deals I have been looking at now are not going to work, and they're the best the agent could find. He's looking to see if there are better pickings out there, but I'm going to start to look at apartments pronto.

Thanks for all of your advice and input.

GrayGhost

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Re: First Time Slowflip
« Reply #17 on: October 15, 2014, 04:03:09 PM »
My parents are interested in becoming long-distance landlords, and they're interested in buying a house down here, letting me live in it while I fix it up, and then renting it out after I leave. This is a far better setup for me, and it will help them build equity. They're going to call our accountant tomorrow, but I am going to continue to look at apartments. The main thing, as always, is to find a deal, and the pickings are slim here.

retired?

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Re: First Time Slowflip
« Reply #18 on: October 17, 2014, 12:45:02 PM »
My parents are interested in becoming long-distance landlords, and they're interested in buying a house down here, letting me live in it while I fix it up, and then renting it out after I leave. This is a far better setup for me, and it will help them build equity. They're going to call our accountant tomorrow, but I am going to continue to look at apartments. The main thing, as always, is to find a deal, and the pickings are slim here.

Now, that would be quite a nice set-up.  The prop I own is in FL.  I wonder if there is a way for you to get the homestead exemption while there.  See ASI for insurance......some insurers pulled out of FL altogether.