Real Estate Opportunity for me, your thoughts?

[amarowsky]

Hello Crew. I was wondering your thoughts on this, like as a possibility, and consider the hypothetical scenario that I present as to be fully factual.

Opportunity:
29572 Clarita Livonia, MI 48152 - Real Estate | CENTURY 21 This link is to a house available a few miles from mine. It's only $24k for the house, seems to be in good shape. We live in an area with the best school districts in Metropolitan Detroit, and I believe the best school district in the State of Michigan as well. Excellent health care area (lot of hospitals near by), close to a Freeway, less than 1 mile from a huge development project (new salons, restaurants, retail stores, gas stations, and so fourth eta completion 6 months). So in turn it's in a great safe location.

Now If I were to buy this to rent, the average rental price for a house considering it's size is 700-900 in my city. Average rental price for houses in general in Livonia, MI (considering this is smaller than the average house) is roughly 850-1200.
House cost: 24k asking price
Yearly Taxes: $2200


My Situation:
I live at home currently, and my monthly bills are $550. I currently collect unemployment and work part time as a waiter, also with part time school.
My monthly net income before bills is on average is $1300.

Savings:
Bank: $3500
401k: $2600
Stocks: $1400

Outstanding loans:
Consumer Debt & CC: $0
Misc Loans: $0
Car loan: $5800 @9% $190 montly bill (included in my 550 count above)

Expectations:
Say I were able to rent this place assuming only two months of vacancy a year, so 10 months of the year at $700 a month. So my net income from the property would be $7000 annually.
My mortgage+insurance+taxes yearly = $4250

So even at a 10 month occupancy after my costs I would be at positive 2750 for the year. Also let's say for this that I have only $1250 worth of repairs necessary for the year.

Keeping in mind that in a normal market in my city, this house would be $100-140K, do you think in my current situation that I have displayed for you, that this would be a good investment/opportunity to consider? I guarantee I am going to have some more questions regarding my income/work situation, so let me know what you think of the proposed investment first, then ask additional questions. THanks guys!

[jIM_Ohio]

My concern is the house would be 10X the asset of any other account- meaning you do not have much in savings or investments to be diversified.

Why is car interest rate 9%? What is your credit score?

I went to college in Flint and have lived in Dearborn and Ann Arbor before... I know where Livonia is. You may have a decent opportunity, but you do not have the assets for a worst case situation.

Can you find a tenant?
What happens if tenant underpays rent?

I did not see any tax projections for property depreciation and taxation of the rent...

Before becoming a landlord, do more homework.

[cheerio]

The idea sounds great and all, but my biggest concern is the unemployment. Real estate is great opportunity, but with an uncertain amount of income, it probably is got a good bet yet. Unemployment doesnt last forever. Just my 2 cents

[autoxer]

What if you aren't able to rent it at all?

What if the house requires hugh repairs with the heating or plumbing systems?

Can you cover those situations?

[wincrasher]

Where is the money coming to make the purchase?

You can forget about getting a mortgage or an unsecured loan to buy an investment property in your situation.

[swanson719]

You don't have the income to buy this property and rent it out. A bank will want 20% down or more if it is not your primary residence. You also will need to have balloon insurance in case something happens with the property and you're found liable. You only have $3,800 in liquid savings. That's not enough to really be called an EF when you consider you're living at home, don't have full time employment, and are still going to school.


All of that aside, when you go to purchase this property you're going to have to pay for an inspection, which will be $250 right off the bat. Then to fix any minor repairs, which there surely will be with a house of this age, you're looking at another $500 ballpark. Then paint, a few minor upgrades, and you're at another $500 minimum. So $1,250 before you even list it, realistically.

Figure it closing costs. Probably around $2,500. Mortgage is now $26,500. Figure in a 6.75% interest rate because it's not your primary residence and you're not putting 20% down. This is if you're even able to get a mortgage. Not an easy thing considering traditional mortgage guidelines need a $50,000 minimum. Lower than that, it's a personal loan which needs collateral. Call the house collateral if it appraises high enough. Now instead of being a 30 year note, it's a 10 year note because it's a personal loan instead of a mortgage. And it's still 6.75%. You're mortgage payment a month is now $300 and change without insurance or property taxes. Call it $50 a month for insurance, which is realistic if not a little high. Property taxes are $200 a month. You're looking at $550 a month note for 10 years, if you're able to buy it.

Consider you get it for $20,000 and no closing costs. Unlikely, but possible. Now, you have the 20% down next month, if you're lucky enough to find a lender willing to lend to you. However, this only lowers your note to $480 a month.

You have a monthly net after all expenses of $750 working part time. That now becomes $270. And you would have absolutely nothing left in savings to make any minor improvements or upgrades to this house once you bought it, let alone any savings to cover your own unexpected expenses.

So you're spending between $5,760 and $6,600 a year in "mortgage" costs alone on this property. Upkeep averages 1% of the property value a year. If it's really worth $100K+ you're ballpark of $1,250 is about par. So now call it $7,010 to $7,850 on note payments and upkeep.

Let's suppose you get $750 a month in rent, and it's rented 10 months out of the year. You're up to $7,500 a year in rent payments, but paying between $7K and $8K a year in note and upkeep costs. Even rented every month, you're personal income is dependent on the rent being paid on time. Let's say that doesn't happen. It takes 90 days to evict a single man. It's practically impossible to evict a single mom with kids when the weather is bad. You don't have 4 months of rent in savings. Three to cover the note during eviction, and at least one more to cover the month minimum between eviction and finding a new tenant.

Not to mention you still would need the $1,250 in maintenance costs in savings before you rent the house, plus advertising costs.

It's a losing game unless you have a) the cash up front to buy the property or at least put 20% down, b) a full EF in savings for you, c) a full EF for the rental, and d) extra insurance to cover liability on the rental.

You have none of these things. I've been in your shoes, staring at what would appear to be an awesome rental property, a real cash cow. But it takes a lot of capital up front to be able to pull the trigger on that kind of thing without putting yourself in jeopardy. These are all things I learned from trying to pull the trigger.

Why not buy that for yourself, have it paid off in a few years as your income increases, and then move up in life to a bigger better deal, and then rent that place out, or when the market comes back, sell it for the $100K you say it's really worth? Would that not make a heck of a lot more sense? And that's something realistic, that could be done without too much hassle.

[wincrasher]

Not much hassle - except for the "not having a job" dealio.

[amarowsky]

edited

[amarowsky]

Originally Posted by swanson719

Why not buy that for yourself, have it paid off in a few years as your income increases, and then move up in life to a bigger better deal, and then rent that place out, or when the market comes back, sell it for the $100K you say it's really worth? Would that not make a heck of a lot more sense? And that's something realistic, that could be done without too much hassle.

I would like to buy it to move into myself, but currently my mom needs my rent money at my house to keep our payments afloat. And I'm pretty sure I could have several people to move into it fairly soon. So if I were to buy it I would be living there while still paying my mom to help keep make all of her bills while she's getting back on her feet.

Regarding the job situation, I have a regular career I just have been furloughed for some time now. I was laid off January 09', and was supposed to be back to work last month, until my railroad lost a contract with fords. I have security though with the company (Norfolk Southern) because they passed a new legislation though the FRA (fed rail administation) that does NOT allow them to hire anyone before they offer me my job back at my Detroit terminal. There is a fairly good chance I will be back to work anywhere from spring to summer, and I do make pretty decent money for a job that does not require any college. I'll be at about $21/hr in which I average $700-800 weekly income.

Also I didn't know you couldn't get a mortgage for under $50,000.00. I thought you could get one for almost any amount. I have been thinking about sitting down w/ a business bank manager or whomever with a list of questions to ask them. And I am well aware of evictions and how difficult they can be to work with, I have been reading a lot of material and actually joined a land lord association online to kind of pick peoples brains about their experiences.

I failed to mention a lot of the connections and close resources I have with the "home inspector" and getting work done around the house. One of my best friends and his Dad own a general home improvement company, that I often work with for side jobs, and they offer excellent help for me, they are licensed n' insured. Also two other best friends went to heating and cooling school together, and offer help at little cost.

When it comes to renting, I have 4 friends who rent out of my friends house for example. I have a surprisingly large pool of friends, and although I try and keep business and friendships separate, I could possibly rent to them if they passed the required credit checks and met my criterion for a renter.

You mentioned something about a personal loan that I would have to use because of the "no mortgage" situation. Would that be the only route I could do except for buying it out right?

[amarowsky]

Originally Posted by jIM_Ohio

My concern is the house would be 10X the asset of any other account- meaning you do not have much in savings or investments to be diversified.

Why is car interest rate 9%? What is your credit score?

I went to college in Flint and have lived in Dearborn and Ann Arbor before... I know where Livonia is. You may have a decent opportunity, but you do not have the assets for a worst case situation.

Can you find a tenant?
What happens if tenant underpays rent?

I did not see any tax projections for property depreciation and taxation of the rent...

Before becoming a landlord, do more homework.

Regarding the savings, I have so few assets that they are not really diversified in any specific way. So I am not really concerned with diversified balanced assets at my current standing (with the exception of my 401k funds).

I can't really do anything for a tenant that underpays rent except start the eviction process and tap into the EF for the property. I was planning on using all the positive cash flows of the rent and some of my own contributions to fully fund all expenses for the rental for six months.

To the 9% interest rate, my credit was screwed up earlier in december, and I found out on the day I was getting my loan. I had some $41 dollar medical bill that went to collections, which brought my score from a 730 down to a 650. Luckily I called the collections company, explained the situation (they had the wrong phone number on file for me. Same actual number, just the wrong area code) and I had two other bills from the same company they were collecting from that had been paid immediately upon receiving them. They realized I fully intended to pay it, had they ever contacted me, so I talked to their manager and had the company remove their report they gave to the Trans Union credit bureau. I then called TransCredit (one of the big 3 credit companies) and explained my situation, and they said it would take a month or so to adjust back to normal, so I have to buy some credit monitoring thing or something to make sure it's back up to the early 700's.

And I to the homework remark, I really HAVE been doing a lot of home work. I have read several books, I took a business law class at school, I have recently been talking to CPA's and Lawyers regarding how This would work if I were to open it though an LLC to avoid liability, I also joined the SCORE program (its a program though the SBA.gov that lets you find mentors to keep a running dialog with. The mentors are chosen from a large list of retired CEO's, business owners, executives, investors, that were successful in business and volunteer time) and they offer a lot of good information. The only other learning I can really think of now, is to actually sit down with a few bankers and see what I'm going to have to do to get a loan, they way it is looking now, is I will have to wait to be back to my career before I will be able to qualify for a loan.

What other homework could you suggest for me? Thats why I love the forums because they offer many different perspectives on these financial situations.

I only make about 40k a year at my job, but keeping in mind my Yearly bills are less than 5k, I don't see a major problem paying for a good Opportunity investment.

I know there is a Lot of extra expenses that come with a house, but Given you know livonia, and how my 1100 sq foot house I live in now, costed 190k less than 6 years ago. A house that is selling for less than what most new cars sell for is a pretty good bargain. Also this is not the only house for this relative price, I just have been looking around, I'm sure there is better deals out there still waiting to be found.

[Mike75]

Originally Posted by swanson719

You don't have the income to buy this property and rent it out. A bank will want 20% down or more if it is not your primary residence. You also will need to have balloon insurance in case something happens with the property and you're found liable. You only have $3,800 in liquid savings. That's not enough to really be called an EF when you consider you're living at home, don't have full time employment, and are still going to school.

I agree with you. Investment should be done at a time when all of your other immediate needs are getting easily fulfilled. If you don't have a full time job, then you shouldn't be thinking about investment yet.

[amarowsky]

So would it be correct for me to say, that the only major issue with this possible investment would be my employment situation?

Also I intentionally neglected to mention I was splitting the financing and responsibility with a friend. I did this to see your feedback coming from just one person's income instead of two.

[Landlord Greg]

$24,000 is a great deal for a property that rents for $700-900/month. Do your homework though; make sure you know how much it would actually cost to clean up for renting out, and look into any restrictions placed on the property.
If a deal sounds too good to be true, it usually is.
Final word of caution - investing with a friend is a recipe for trouble. Money can ruin a friendship pretty d@mn quick, and with a piece of real estate there are a lot of potential disagreements you each might have.
Best of luck,

__________________
Brian
EZ Landlord Forms

[PetMom]

You are certainly thoroughly considering/researching this.

Lots of good posts made and I especially like swansons post on points that I agree with. And I will add that evicting friends is even more difficult and they unfortunately take advantage of bad times or their financial emergencies to get a break (our family had only one good tenant that was a friend). They think of their nonpayment of the rent as their emergency fund. Of course your friends may be more reliable.

Also, and probably mentioned and you are aware of the property taxes and insurance that have to be paid by you if tenants vacate and in some states can be quite hefty.

And you know a lot of people and know the work involved with home maintenance and repairs - make sure to check foundation and drywalling used - referring to the China drywall debacle and for any mold problems. Knowing a home inspector would be good in that you can get a really thorough one instead of a quick 'pushed through' one.

My point: have you been to the neighborhood and driven through the neighborhood streets. Sounds like a good location but if you have a lot of vacated houses that in and of itself can bring down a neighborhood and your investment.

If most of the homes are occupied and cared for then that is a plus. The house really looks nice and what a price - but you got to check it out even more and the area and take hints about your budget and the stuff that can pop up and cost you.