Offered on my first rental house today

[_JT]

I made my first offer on an investment property today. It was an unusual one, but it's an unusual situation. A guy has been rehabbing this property near my old neighborhood (aka, in a neighborhood somewhere between blue collar and ghetto) in his spare time, and before he got finished it was vandalized. They broke all the glass in the doors and windows, stole the hot water heater, and the kitchen cabinets. Now he just wants out. I drove by it, both last night and this morning, and it doesn't need much to be a finished 2/1 cottage. I think 10k is a generous estimate to have it be a nice rental property. He's asking for 40k and he owns it free and clear (I spoke to him on the phone today).

I did some rental comps, and I think I could get 650/month for it if it was finished nicely, and maybe 700/month if I add central AC (which I'd definitely look at doing if I could afford it).

I offered him 17k, in cash, when I get back to town in January, and while he didn't accept it he also didn't hang up on me. He wants to check his records and see exactly how much he's got into it. But he knows that I need to have it rehabbed and rented for 30k max, with a 10k reno budget, meaning a max purchase price of 20k. He also knows I'm looking at another 2/1 slightly across town that's a bit bigger but listed for 25k. Really, his place is a good buy for me up to 25k purchase price, but if he wants cash I'm not sure I'd be able to come up with it in a month. If he and I can't agree on a price, I'll try to get the other place, which is open to owner financing.

I'll keep you guys posted, but regardless it was a pretty fun day for me.

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Action items for me: run the numbers a few different ways, to make sure that even with lower rent and higher rehab costs I still approach the 2% rule (or at least cash flow $200+), and take care of a few outstanding issues on my credit report that are keeping me from qualifying for the best interest rates.

[arebelspy]

Neat.

Don't purchase unless you have the rehab money as well - would suck to have it sitting idle, no rent, because you can't afford to get it rent ready.

You won't get a mortgage on a loan that small, regardless of credit.

What's your management plan?

[_JT]

The plan is actually to purchase with a private lender or hard money, and I have the rehab costs liquid, for precisely as you say. I don't want it sitting around vacant any longer, even if the note on it is minimal.

I'm budgeting for a PM, but I plan to self manage this first one, since it's close to my house and I want to learn land lording firsthand. If I'm able to successfully do this first deal and it's cash flowing like I calculate, I'd like to have a PM in place for all of my rentals by the time I hit 3 properties.

I know this is your area -- am I missing anything?

[arebelspy]

I know this is your area -- am I missing anything?

Exit strategies.

Private or hard money is usually for short term holds (flips) - the carrying costs will eat you alive if using it for a buy and hold.  (Aside from maybe real cheap private money from friends or family.)

Due to the loan amount you won't be able to refi out of it to institutional money, so what's your plan for this?  Aggressively pay it off in three to six months to get it free and clear?

[_JT]

Yeah, exactly. My side gig is lucrative enough that after I finish the work I have scheduled for February I'd be able to pay it off, then have a free and clear place that cash flows. The hard money % and fees will eat into my profit, but if I buy it low enough that's ok here. Backup plan is that if rehab balloons, work cancels, or I can't put a good tenant in, just straight flip it. Conservative comps put it at about 65k, so there's meat on the bone that way.

[arebelspy]

Why rush to buy then?  If you'll have the cash in February - two months? - it would make more sense to wait and buy than use hard or private money with the points they'll charge you, the APR will be ridiculous.

[_JT]

Because it's a good deal even with hard money. If I don't get it for the price I want, I'll keep looking for Feb/March for a similar deal.

ETA: without having a 'team' in place, I'm limited to MLS and craigslist for deals. For my first property, I really would like it to have a manageable amount of rehab work and also be in my neighborhood. Those are my security blankets, meaning I'll take a slightly worse deal that meets those criteria. Once I own a few properties and am really comfortable with the process front-->back, I imagine I'll become a much more by-the-numbers investor.

[tryan]

Every time I looked at hard money it was a 1 year deal at 12% ... first position on the house.

Never wanted the thing that bad.

[_JT]

Where'd you see that? I'd take that in a hot second, since I'll be paying off the lender in total in month 2 and cash-flowing from even before then.

[KingCoin]

But he knows that I need to have it rehabbed and rented for 30k max, with a 10k reno budget, meaning a max purchase price of 20k. He also knows I'm looking at another 2/1 slightly across town that's a bit bigger but listed for 25k.

What's wrong with this place? Why not bid it 20k? Does it need a 10k reno too?

Are your in Detroit?

In any event, it sounds like investment opportunities are plentiful in your neck of the woods. I'd make sure that first and foremost, you're on firm financial footing. You don't want to end up in the exact same place as the guy looking to sell to you.

[arebelspy]

Where'd you see that? I'd take that in a hot second, since I'll be paying off the lender in total in month 2 and cash-flowing from even before then.

There's an old saying that I just made up: Do not rush to get in over your head.

I agree with KingCoin.  Make sure you have plenty of reserves.

[_JT]

I don't know that I'd call two deals at the same time in nearly six months of hunting 'plentiful'.

I appreciate all the thoughts and feedback. As I've said several times, if the numbers aren't right I'll keep looking. Right now they are right.

[_JT]

But he knows that I need to have it rehabbed and rented for 30k max, with a 10k reno budget, meaning a max purchase price of 20k. He also knows I'm looking at another 2/1 slightly across town that's a bit bigger but listed for 25k.

What's wrong with this place? Why not bid it 20k? Does it need a 10k reno too?

Are your in Detroit?

In any event, it sounds like investment opportunities are plentiful in your neck of the woods. I'd make sure that first and foremost, you're on firm financial footing. You don't want to end up in the exact same place as the guy looking to sell to you.

Sorry, missed this. What's wrong with it is it's rundown and not in a great area (another C neighborhood). I don't know if it needs 10k reno or not, because I haven't physically inspected it. Looks like it needs cosmetic upgrades, at minimum. Why don't I offer on it as well? Because I'd rather be in my old neighborhood than an area I've not lived in, so I'm giving property #1 some time to mull my offer before offering property #2. Property #1 I really would like. It's a smoking deal and I know it would rent easily to tenants I wouldn't mind having. The area has also appreciated over the past five years a tremendous amount, and where the house is is just beginning to gentrify, so while I don't need appreciation for the deal to work, I would be surprised if I didn't get some. #2 I don't expect any appreciation, as it's not a hip area at all.

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I'm not in Detroit, but rather in Nashville. Turns out there are plenty of SFH throughout the country available for ~20k if you look. Most all are 2/1 and need work, but I like work. It's my safety margin, since it's forced equity.

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That said, I did spend today digging farther and wider, and while I didn't see any other SFR deals that approached either of these two, there are a number of borderline deals out there on MFR (4 plex or smaller), so that makes me feel a lot better on not worrying about whatever happens here.

I still think arebelspy claiming I'm getting over my head was a lot more douchey than helpful, but he's BTDT so he's entitled.

[arebelspy]

I still think arebelspy claiming I'm getting over my head was a lot more douchey than helpful, but he's BTDT so he's entitled.

I wasn't claiming you were, but cautioning you not to.  You can take it as you will - douchey or as a friendly warning to someone new to the business from someone who has seen a lot of people fail at it in my short time doing it (6 years or so).  But no negativity was intended, just a caution to not get in over your head - plan in big reserves, have the money for the renovation ahead of time, and do your due diligence.  :)

[_JT]

Hey, it doesn't hurt my feelings. Just saying that a warning sounds a lot more like what you've just posted (due diligence, reno money, big reserves), rather than 'don't be in a rush to get in over your head', IMO. Like I said, I appreciate the input.

[SunshineGirl]

Why buy in a bad/ghetto neighborhood? That's asking for trouble.

[_JT]

Like what?

[DudeMan]

Rather than hard money...

How about a 12-15 month 0% card with a 2% transfer fee?

$20K for a cost of $400 flat for a fatty 15 mos is nice.

I have 5 credit cards, so does wife. We get 0% blank checks we can write to ourselves/anyone from at least one existing account every week.

So keep an eye out for cheap money in your mailbox or login into your account to view current offers if you went paperless.

Something to consider

[_JT]

Hmm, that's a good suggestion (potentially, depending on the card agreement). I was also considering using a Lowe's 0% for 6months card to finance most of the reno.

[DudeMan]

2% balance transfer no annual fee & 0% for 12-15 mos?

Man it's a slam dunk

It's IMO the only way to borrow $25K

As you pay it down the payment decreases, it's all principal & if it's not paid in full a year later just roll the remaining balance over to another card for a minimal 2-3%.

Let's see a hard money lender waive all loan fees & lend @ 2% a year unsecured with a $0 cost refi every 12 mos if needed while dropping the payment each & every month.

No way no how.

If shit hits the fan, zombies attack & you can't roll it over who cares?

You'd have lost it by then via other secured methods anyway. At least now you can shift ownership & collect money rather than hit hard times & default on a secured RE loan while losing the income.

Not saying to strategically default, that's half ass fraud in this situation & a waste of a great financial tool. Just saying this means of borrowing carries the least risk & ass kissing if you default as the property is owned by an LLC or etc.

Better than defaulting is paying it off & rinsing/repeating the process every year with the same card

[KingCoin]

Like what?

Tenant quality is very closely associated with neighborhood quality. Would a person with a reliable, steady income and good credit move into this neighborhood or would they choose a better one?  You just have to be ready for a scenario where a tenant moves in and stops paying after 1 month. It might take a month of haggling back-and-forth to figure out what's going on, another couple months (and potentially a few grand in attorney fees) to evict him, and then another month to fill the vacancy. Then you have to hope and pray that the new tenant doesn't flake too. Is this a high probability scenario? Maybe not, but it's not a long shot either.  As long as you're prepared for intermittent rent payments and other complications, rock on.  I'm actually rather jealous of your opportunity (a 320ft 0br can cost upwards of $500k in my neck of the woods and yield very low single digit returns).

[_JT]

Sorry, KingCoin, I meant to come back to that post of mine and expand when I wasn't on my phone. I understand very well the tradeoff between neighborhood and tenant quality. I wanted to hear, specifically, what SunshineGirl's experiences were, especially since I never indicated it was a bad neighborhood. Certainly not 'ghetto' or a 'warzone'.

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To update the OP, the seller finally got back to me today, and said he's received multiple offers ~25k, and that he's holding out for 30k. I don't expect him to get it unless he waits until spring, so I told him I could go to 25k if he decided 25k cash now is better than 30k cash future. In the meantime, I've analyzed about a dozen other deals in Nashville, more and more leaning towards a small MFR. The cap rate, COC, and cashflow are just so much better than even the best SFR I'm seeing that it's hard to justify. I'm going to make offers this week and, if I can get something under contract, try and close early next month. My goal would be able to put a tenant in place in February.

[arebelspy]

I never indicated it was a bad neighborhood. Certainly not 'ghetto' or a 'warzone'.

This is what you told us about the neighborhood:

near my old neighborhood (aka, in a neighborhood somewhere between blue collar and ghetto) in his spare time, and before he got finished it was vandalized. They broke all the glass in the doors and windows, stole the hot water heater, and the kitchen cabinets.

Not exactly a ringing endorsement (below blue collar, which is about the lowest acceptable, and and it above ghetto, and the one story about it is the massive vandalism), thus, I'm sure, the friendly warning from SunshineGirl.

[_JT]

Well, fair enough. Property crime is more common in the much nicer adjacent neighborhood (where I live) than where the house is, and the vandalism is unsurprising anytime you have a construction site sitting unsupervised for months at a time. I'd actually put it solidly blue collar, after spending more time there, but given how I originally described it I get where the 'warning' came from, if indeed that's what that post was meant to be.

ETA: another thing I mentioned in the OP is that the neighborhood I'm looking at is the place I lived for 3 of the last 4 years, so while I'm sensitive to the challenges of investing in worse areas, I have a pretty good handle on the realities of this area. Which, if I recall, is exactly the argument I hear investors espousing all the time when they're investing in Detroit. "Sure, it's horrible in parts, but I know my area so I'm mitigating that risk as best I can."

Additionally, the area is one of the hottest in Nashville for investors (based on sales recorded on the mls and the developments you can see just by driving around), which is one of the hottest markets in the country. The fact that the seller got a handful of offers off of one cl posting with no pictures and no email address seems to indicate (to me, at least) that I'm not the only one who sees a good deal there.

All told, I appreciate the helpful feedback. I know I don't know everything.

[arebelspy]

ETA: another thing I mentioned in the OP is that the neighborhood I'm looking at is the place I lived for 3 of the last 4 years, so while I'm sensitive to the challenges of investing in worse areas, I have a pretty good handle on the realities of this area. Which, if I recall, is exactly the argument I hear investors espousing all the time when they're investing in Detroit. "Sure, it's horrible in parts, but I know my area so I'm mitigating that risk as best I can."

That's excellent, and just what you want to do!  I'm glad to hear that, and much more confident in the investment than I would be just based on what you posted in the OP.  Knowing your market is the number one key thing an investor can do to create opportunity.

The fact that the seller got a handful of offers

Or so they say.  Keep in mind, they are negotiating with you.  ;)

[SunshineGirl]

I've observed over the 15+ years I've owned my rental properties that marginal neighborhoods tend to get worse in bad economic times. I own in not-marginal neighborhoods, but rather lower- to lower-middle class ones, and as the economy has ebbed and flowed, so has the ease of attracting good tenants. Low-income earners, especially single people, are often one paycheck away from a really bad financial situation. They can start out as great tenants and then things fall apart.

The price of the house you described and the way you described the neighborhood and how the house has been vandalized AND, by the way, the fact that the owner is trying to sell while not having finished his initial goal for the property, would lead me to walk away and not look back. 

Many of us invest in rental property differently. I prefer multifamily in decent, central neighborhoods close to bus lines and grocery stores and as close to my town's university as possible, with a good cap rate, of course.