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Old 08-11-2008, 08:54 PM   #21
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Originally Posted by Nords View Post
We rented a 1927-vintage house in San Diego (Kensington neighborhood) for three years. As a tenant, I was exceptionally creative at getting the landlord to be quite concerned about our utility costs...
Sounds like you have some fun stories, Nords...
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Old 08-11-2008, 09:03 PM   #22
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Mine are simpler. My dad tearing the innards and outtards of a similar era property throughout my youth...and swearing a lot.
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Old 08-11-2008, 11:47 PM   #23
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CFB and Nords:

Thanks for the comments. Exactly the constructive dialog I was hoping for.

I am reasonably familiar with the problems of older homes. My own home is of only slightly newer vintage than the property we're discussing. Lots of potential pitfalls to look for.
Problems of an older home you plan to live in are different than problems of an older home you plan to rent out. It's a given that you'll be handing out lead disclosure pamphlets to potential renters. Aside from that, check rental codes for your county if you haven't.

In the city where we had our rental you had to get a rental license which had to be signed by the fire marshall, who was a stickler for things like proper fire escapes from potentially inhabitable areas (he wanted us to lock off the attic entrance because it was nice enough up there that someone might try and sleep up there) and wiring (luckily ours was already rewired to something more modern than paper-wrapped wire so we just had to upgrade the 60 amp fuses to a 200 amp circuit with a 20 amp feed for the dryer). Oh, and code in our city was a 100 amp service so it was unrentable when purchased.
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Old 08-12-2008, 12:09 AM   #24
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I can get cashflow from day one if I put down 30%, and talk him into a 0% loan, at $600 per month.
Include all costs (x% for repair costs, y% for vacancy cost, %a for advertising and any background checks, don't forget taxes, find out if there are licensing costs for rentals). I've head that a good rule of thumb is 5% for vacancy and I would budget a higher amount for repair cost if the roof or any major appliances are getting close to end of life.

Come up with scenarios that incude not getting a 0% loan. See what your breakpoints are. Check the area. Maybe you do 25% down and a 5% loan and take a cash flow loss now and count in appreciation and being able to raise the rents over time. Maybe you put more down to cash flow from the start. Maybe he agrees to 0%. Find out when it does and doesn't make sense for you.

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Now the questions:
2. I am not very familiar with HELOCs. Can someone describe the pros and cons, or point me to a good web info source?
You get a line of credit that's a portion of the equity in your current house. One I've seen a few times is that you can draw for 10 years and then the outstanding balance is amortized and paid off over the next 10 years. The interest you pay on the HELOC may be tax deductible. A HELOC can be frozen by the bank.

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3. I've read in a couple of books (Such as Weekend Millionaire Secrets to Investing in Real Estate) about getting a HELOC to make the initial down payment. Then immediately getting a mortgage on the new property to pay-off the HELOC. Perhaps I'm dense, but how does this work?
Say you have the following scenario:

You own a house with $50k of equity. You get a HELOC for $20k. (if you max out the HELOC, you now have $30k of equity in your house)

You find a property for $100k and the seller wants $20k up front and will carry back $80k at 4%.

You can just write him the check for $20k from your HELOC and then, once you have the property, take out a mortgage on that property to pay off your HELOC balance. The interest rate will likely be lower on the mortgage than the HELOC and all of your liability is transferred to the new property.

I'm guessing it's easier to do something like this with owner carry back financing than arranging a full closing and getting a mortgage broker and closers and all that lined up.

I'm not sure what the other benefits are.

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4. What are the odds of the current owner giving me a 0% loan?
I would probably laugh at you, and I'm a pretty generous person. I think you should be able to get somewhere between a money market and 80% LTV conforming loan. If there's outstanding debt on the house then a big enough lump sum up front to wipe that out might make any other offer more appealing.

You may want to start by asking him what he'd loan the money at... you could be pleasantly surprised.

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5. Are there other ways of financing that I should consider?
Convince him that you're a deity and you demand the house as payment for his past sins.

Convince him there's gold buried under the house and you'll give him a cut in exchange for the house

Become a government and declare eminent domain. Raise his taxes to fund buying his house from him.
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Old 08-12-2008, 08:48 PM   #25
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1. What taxes are you talking about? If he just inherited from his mother he has a stepped up basis.

2. Why would he prefer a $500+ check every month for only 20 years when he has a $1,050 (increasing annualy at say 3%) for LIFE!!? OK, take out $200 for property mgt. and maintenance but he's still keeping appreciation.

Are you young or cute enough that when you mention zero interest financing he/she will laugh it off or will they be disgusted that you would attempt to take advantage?

If a major concern is to cash flow why are you considering a HELOC? It sounds like you stumbled upon a property for sale and have not really done any home work on investing in real property but think you can get a "deal". Good luck with that.
Honobob:

I've been thinking a bit more about this. One strategy for the owner would be to invest the money I give him (be that at 0% or some other WAY low %) in a CD or other extremely reliable device. Then he makes the going CD rate, and has a nice predictable income from me for the next twenty years to grow. Yes, all the money now would be better for most buyers-but this doesn't seem to be a high priority for him.
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Old 08-12-2008, 09:16 PM   #26
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Sounds like you have some fun stories, Nords...
Hopefully your landlording experience will be better. But you don't have to volunteer for this duty.

It was darn hard to find an affordable rental in the summer of 1994. 4627 Biona Drive, right off Route 15 and only 25 minutes from Point Loma, three blocks from the library/playground and the Kensington Coffee Co. Built in the 1920s & 30s, Kensington was supposedly one of the nation's first planned-housing neighborhoods and one of its first homes was bought by Buster Keaton. It was a good neighborhood to raise a toddler (Buster wasn't around by then) but luckily we moved out before she was school-age.

- Rainwater leaking into the attic because the stucco had pulled away from a drip-edge joint. Ruined attic insulation and a collapsed first-floor (plaster) ceiling. Owners couldn't find the leak because roof guys wouldn't go up there during the rain. I found it during San Diego's annual rainstorm by spending an hour in the (unheated December) attic with a flashlight.
- Rotted (cast-iron) drain piping in the crawl space. Much of it had to be replaced during our lease with PVC and pipe-clamp joints.
- Lamp cord electrical wiring all through the crawl space from 1970s home-improvement projects. (Hint: this is not up to anyone's code, not even in the 1970s.)
- Gas-furnace ductwork had literally fallen apart. The gas furnace (whose gas bills we were paying) was putting more heat in the crawl space than in the house. The bonus when I investigated this problem was finding a 1966 Playboy magazine tucked in the frame bay along the crawlspace entrance.
- The gas furnace just needed to be ripped out and replaced. It was a pilot-light mishap waiting to happen. New ductwork wouldn't have hurt either. We finally gave up and put an electric wall-mounted heater in our kid's room while we grownups used an electric blanket.
- 2nd-story deck with the ledger board just nailed onto the siding. Felt kinda bouncy, but at least when it fell off the wall it would've splashed down into the pool.
- Tree roots (silver maples) tearing out the PVC sprinkler lines. We were responsible for maintaining the landscaping.
- Clogged municipal sewer drain (tree roots). Spouse looked out into the backyard one morning and noted a new swimming pool by the swimming pool. Turned out we were at the bottom of the entire street's worth of sewer drains.
- Flooding garage from rainwater coming down the driveway and a clogged floor drain. Collapsing garage from decades-old trusses.
- 35-year-old washing machine. 25-year-old refrigerator. We were paying the electric bill.
- Swimming pool leaks (we were paying the water bill).
- 30-year-old fence around the toddler magnet swimming pool.
- Every door was racked. Two doorframes had to be replaced. When we moved in, one of the doors had been inoperable for two years (operator ignorance).
- Every single freakin' 1920s casement window in the house needed, at a minimum, caulking. Most of them needed overhauling. If you ever watch Tommy Silva do them on "This Old House", he makes it look easy because he's done a couple thousand of them. The first couple dozen go considerably bloodier slower.
- The house was full of fleas. Three sprayings worth, luckily all better before we moved in. You never want to see an exterminator raise his eyebrows on the third visit and mutter "I'll be darned. I better go get the stronger stuff." The neighborhood dog/cat (rat?) population was high enough that we had to keep spraying the small backyard for fleas for three years.

Lead paint had been fixed, as had the asbestos. Water had tested OK.

The good news is that the landlord was a great lady who never raised our rent because we treated that place like a three-year home-improvement experiential-learning project. One of the first things we learned is that we're never buying or renting an old house ever again. Ironically her land & location are worth at least $600K today while the house is a teardown.

I might age in place in our current home, but I'm going to be supervising regular overhauls & upgrades.
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Old 08-13-2008, 01:23 PM   #27
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Honobob:

I've been thinking a bit more about this. One strategy for the owner would be to invest the money I give him (be that at 0% or some other WAY low %) in a CD or other extremely reliable device. Then he makes the going CD rate, and has a nice predictable income from me for the next twenty years to grow. Yes, all the money now would be better for most buyers-but this doesn't seem to be a high priority for him.
Don't see how this matters much... doesn't change the fact of him locking up $145k of equity into a 0% loan over 20 years. In other words, he would either need it ALL now or that "promise of payment" is earning nothing while he is waiting to put it into a CD. He has equity in the house, he wants it or a return for forgoing it when he sells it. Or he's incredibly nice.
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Old 09-18-2008, 02:55 AM   #28
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Keim, From reading your posts it sounds as if you have the fire in your belly and are not afraid of being a landlord - many are. It sounds as if you can do your own repairs - a big plus.

Whether this deal works out for you or not - don't give up on this idea! You are young and real estate is once again starting to look really attractive for beginning investors. Good luck to you.
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Old 09-20-2008, 10:09 PM   #29
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If you have the $$ for a down payment,maybe consider getting a deal elsewhere if he cant/wont offer a 0% loan. There's deals to be had around here.....I'm sure it's the same by you...
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