leverage techniques

[DollahBillYall]

Hi folks, I am a forum newbie but I have a serious question. I am interested in aquiring foreclosed properties at a low sale price and renting them out to HUD voucher recipients. The FMV rent equation is fairly high here (>1K/mo 3 & 4 Bedroom) and the housing prices depressed. My question is not about aquiring the first property, but LEVERAGE TECHNIQUES to aquire additional properties without waiting to use equity buildup with accerlarted mortgage payments.

Does anyone have any good leverage schemes with the bank to build up real estate inventory faster than waiting for existing inventory equity to mature?

Thanks much --

 

[cube_rat]

this should be interesting...anyone want to take a stab at an answer(s)?

 

[dandan14]

Does anyone have any good leverage schemes with the bank to build up real estate inventory faster than waiting for existing inventory equity to mature?

Personally, I wouldn't touch this with a 10 foot pole, but my brother has played in this arena quite a bit. Basically, what he does is look for houses that appraise for higher than the sales price -- or that he thinks will appraise a lot higher with minimal work. With the instant paper equity (appraisal minus sales price) he has collateral to leverage on the next property.

Now with that said, I think there is a LOT of risk in this. Not only do you have normal rental property risk, but you also have increased risk in the properties (hidden problems in foreclosed houses), and a substantial amount of risk in this type of tenant. I suppose the return could be nice, if things go right. (FYI, this is the kind of stuff that they promote on late night infomercials which generally make my skin crawl.)

 

[macdaddy]

You can buy with no money down pretty easily these days, if you have a decent job and/or decent credit. If you can find houses that cash flow positive, then you could, in theory, buy pretty much an infinite number of them, right? In reality, the mortgage lenders would probably cut you off at around 10 or 12 houses, depending on your income. I have a friend who did this, he was cut off for awhile at 12 houses, even though most of them are cash flow positive. He never put more than 5% down and on many houses put nothing down.

You can definitely make money doing this. The downsides are that you will be dealing with very low income tenants and they can cause a lot of problems (crime, drugs, destruction of property). Depending on your state, you could have a tenant who knows how to work the courts and then you're looking at months with no rent, while they sit in the property. Also, almost anywhere that cash flows positive these days, with less than 10% down, is not an area that is likely to appreciate much. You have to save up all those $100 per month profits and hope they cover the cost of a new roof, new furnace, etc, over the years.

I would look at multifamily apartments and apartment complexes, they are generally easier to manage than SFHs, and more profitable over the long run.

 

[Zathras]

So Dollah, you are looking for advice on how to get poor quick??

Honestly, you can make a lot of money this way. You can also loose everything.
With a softening housing market and the HUD designation you are really asking for trouble.
I would suggest a safer way of making money would be learning the numbers and playing blackjack for a living (which I also wouldn't recommend normally, but it is safer, imo, than what you are proposing).

In any event, good luck.

 

[FinanceDude]

The timing on this could no possibly be worse..............I think the "education" would be very expensive.............

Wouldn't touch this with a 10-foot pole...........

 

[DollahBillYall]

Thanks all for the replies. I was surprised by the responses but they are valued. For example, I would think (it may be my naivete and that I don't know Sugar honey iced tea) that a soft housing market would be ripe for deal making, especially on foreclosures, since it is a buyers market. While I generally agree with most points made, I don't really understand the rationale for that one. Isn't this a renters market?

Thanks all -

 

[Zathras]

It is a great market for buyers.
It is a very poor market for selling.
The future of the real estate market is unknown, but many feel we are in for at least 2 years of a soft market.
Leveraging multiple properties with the least amount of funds available using "aggresive" loans is a disaster waiting to happen.

If you go ahead with this, I would recommend trying it out with a single property. Rent it out for a little while and see how it goes.

Remember, aggressive loans mean they make more money for the bank/mortgage company. Meaning, it costs you more.
Anything goes wrong with any one of the properties and the whole house of cards can come down. Set up your system very carefully.

Anyone remember the blog by the guy that admitted illegally obtaining multiple loans (I am not implying in any way you are planning this Dollah, it is just a great site to see how bad it can get) and then had his house of cards fall down. He was blogging in efforts to obtain loans from people to start his 'system' up again. I originally found the link in this forum, was thinking it might be useful for dollah to see.

 

[spideyrdpd]

Interestingly enuff its been harder to get renters now than it was in the past. Although its probaly not as big an issue if you going to go section 8 .

Leverage is a 4 letter word here. Most would rather have root canal than owe anybody any money.

Depending on where you live it may be possible to do what you describe. You will need to keep a nice safety cushion. Since you may be buying into homes that need some money invested before you can rent them out. Then it has taken hud some time to get me my first checks. Once your in the system they come like clockwork.


I think your jumping the gun in any case. You would need to start following home sales and calling hud to get a good idea of what the exact numbers they are paying. Although hud does have rental figures on their site. Although this guy didnt do the section 8 this talks about buying hud homes.

http://forum.richdad.com/forums/tm.asp?m=164818&appid=&p=&mpage=8&key=hud&tmode=&smode=&s=#316408

 

[brewer12345]

Anyone remember the blog by the guy that admitted illegally obtaining multiple loans (I am not implying in any way you are planning this Dollah, it is just a great site to see how bad it can get) and then had his house of cards fall down. He was blogging in efforts to obtain loans from people to start his 'system' up again. I originally found the link in this forum, was thinking it might be useful for dollah to see.

www.iamfacingforclosure.com

Moron at work!

The whole leveraging to buy houses is potentially attractive on two conditions: 1) if the properties will still flow cash after you have leveraged them up the wazoo, and 2) you still have the liquidity and free cash to swoop in and deal with expensive problems when they occur

If you are serious about this, start with one property and see hoow it goes for a year or two. One thing is for certain: houses will still be for sale and renters will still be around ina couple of years. If your first effort works out, thewre will still be opporttunities.

 

[ERD50]

www.iamfacingforclosure.com

Moron at work!

Wow, that guy *is* a moron! I hope his wife/GF/fiance figures it out and leaves him before he drags her down too.

I like this quote from his blog:

Since I didn’t have any money, I “juiced up” the equity on most of the houses by getting cash at close. The cash-back was to pay for the holding costs, travel, repairs, etc. So every time I bought one there was a “CHA-CHING” sound and my bank account got fatter. This gave me a false sense of profit and kept me going.

hmmmm, kinda has that old 'total returns don't matter' ring to it, doesn't it? Just look at the 'cash flow' from each closing! And, now he's bankrupt (or considering it) and will let the rest of us pay for his ticket in this high-flying risky game.

I'm sure he would have shared his profits with all of us had he been lucky and 'won' this game.

These guys make me sick. - ERD50

 

[thefed]

dont let everyone scare ya. if ur gonna buy, do it now...not when the market is up. buy something that needs cosmetic non-structural repairs (siding,paint,flooring,windows,drywall,plumbing etc). Hopefully, you can save some $$ by doing these repairs yourself...otherwise, i'd stop right there....not a good market for buying and then paying for someone else to fix it up...imho


but you can then obtain heloc on the property and buy another.


im on my 3rd, they are rented, and im cashflowing on all 3. just gotta maje the right purchases and dont plan on selling them anytime soon EXCEPT for selling as investment properties that already are rented and will cashflow immediately


good luck

 

[nun]

I think most of the people here tend to be careful investors so RE speculation and leveraging won't be too popular. I agree with the post that suggests getting into it slowly with one property and seeing how it goes. I like the option of getting a duplex, living in one unit and renting the other, that's what I do and my only housing cost is $4k in RE taxes each year,
mortgage interest, insurance and basic repairs are covered by the rent.

Lastly I'd like to rant about those house flipping shows. How can they rennovate the places for say $30k when that's what it costs to do just a kitchen. seems like the budgets are way out of whack and I'd personally like to see a few more people loose money on the deals to give the audience a reality check.

 

[kcowan]

There are still deals to be made. The big thing for me is the risk/reward ratio. If someone rolls the dice with their financial future, they might come up lucky.

I see people proud of their second vacation homes because they have gone up in value so much. But so have many other asset classes. And the others do not demand taking on debt to enjoy the returns like real estate.

My stocks and funds do not need hurricane/flood/tornado insurance and the associated worry.

 

[Helen]

Thanks all for the replies. I was surprised by the responses but they are valued. For example, I would think (it may be my naivete and that I don't know Sugar honey iced tea) that a soft housing market would be ripe for deal making, especially on foreclosures, since it is a buyers market. While I generally agree with most points made, I don't really understand the rationale for that one. Isn't this a renters market?

Thanks all -

IMO, the rationale is that as usual the future is unknown. For one, the landing is soft now, but what will it look like three years from now ? Will the price you pay for the house today seem like a good deal in three years ?

If housing prices continue to decline, will rents decline as well ? Will more people rent their houses if they can't sell them ?

I wish I could tell you with certainty.

-helen

 

[lets-retire]

Lastly I'd like to rant about those house flipping shows. How can they rennovate the places for say $30k when that's what it costs to do just a kitchen. seems like the budgets are way out of whack and I'd personally like to see a few more people loose money on the deals to give the audience a reality check.

As someone who has renovated two of my last three houses, I can say it is all in the labor. The first house I renovated I had someone else do the floors. I walked away with about 20000 in my pocket. I could have sold it for more, but I gave my BIL a sweet deal. The second house I renovated I had someone else do the kitchen (custom cabinets) and the carpets. Everything else was done by me and the DW. The second house we walked away with about 90,000 in pocket. If I had hired everything out I would have spent a lot more than I made on both houses. So unless the person does most of the work themselves I agree with your point.

 

[raysk]

Just be careful as to the condition of the houses you buy.
Sect.8 inspectors can be very nasty and gig the house for a variety of reasons.
I hope that you are in an area where there are renters to be found that are good.
My last two years are the worst I've had in the last two decades.
Put one in,evict two others.
Then there are the trashings that can be in the thousands of dollars.
Most landlords just wind up eating the trashings instead of getting insurance companies involved.
The tenant pool has never been worse than today.
During the last few years good tenants wound up buying their own homes.
Now we just wind up selecting the best of the worst.

Ray

 

[Martha]

Raysk, what part of the country are you in?

 

[raysk]

Northern Ohio.
Just about the worst area of the country for residential rentals.

 

[mjarzoms]

Brewer beat me to posting this link, but I read through the http://iamfacingforeclosure.com/ blog once in a while out of curiosity.

I don't have experience with any rental properties but I would be cautious and start slow. Review lots of properties before your first deal and see how you like being a landlord.

John T. Reed has many good real estate investment books available though his web site. Also has a good real estate guru ranking available on the site.
http://www.johntreed.com/

-Mark

 

[CCdaCE]

www.iamfacingforclosure.com

Moron at work!

Pffft. I had virtually forgotten about this link, since it had been posted ... seems like a month ago. Thanks again brewer.

Humorous to see that Mr. Real Estate is still figuratively in a full dive and can't pull up. Landing gear is stuck and there's massive fits of grasping for the eject handle. No, wait, that would constitute intelligent effort.

Others such as 'raysk' and 'lets-retire' have posted valuable insight.

-CC

 

[spideyrdpd]

Raysk
My homes are in the Toledo area.
I think a lot of rehabbers in the recent past got lucky. Appreciation made up for many mistakes.
Many people buy lots of things they call assets that cost them money. Cars boats computers. Like any business it may not always make you money . So yes you have costs. Isnt that sort of a given ? I rather throw some funds at a house that will have value than a lexus like my co workers.

 

[Nords]

I rather throw some funds at a house that will have value than a lexus like my co workers.

Lots more comfortable to sleep in, too...

 

[raysk]

Spidey
Flippers and rehabbers have been losing around here as homes have not appreciated all that well.
All my units are in the Lorain area which has lost close to 10,000 in population over the last few years.
Very little industry left,most applicants are burger flippers or bedpan changers.
One of my tenants kids torched a recently fixed up ranch duplex (last sunday).Both sides destroyed,no one hurt.
I had just rented the vacant side and the tenants were to move in last monday.That means I lose on lost rent from the insurance company on that side.Insurance is also trying to bone me on the full amount the house is insured for.They contend that Ohio is a fair value state and insurance will be based on what I paid for the duplex.It was one that I for the most part stole from an absentee landlord that lived in N.Carolina.To top things off it's the third fire in thirteen months,all tenant caused.
If I could sell them all they would be gone tomorrow.Problem is that there is no money in Lorain county at this time.
We lead the country in repops.
The last two years have been disastrous.It's just a good thing that I always carried a very large reserve and paid extra on the notes.
Everything will be paid off within two years.

On the bright side,I had an excellent year in the market so the rental loses will offset the capital gains.

 

[spideyrdpd]

Dont you have replacement insurance. I had a fire on my personal residence. In hindsight I would of hired one of those companies that take 5% and manage things.
Rather than try to pay them all of you might be better to do the snow ball effect with the houses. You pay off one at a time and then take the extra cashflow and pay off the next. I would think it would work the same as credit cards. Just pick the house with the smallest amount of debt. Unless you have some sweet interest on it.
Personally I am a leverage guy. I rather have the tenant pay off the loans and invest the other money elsewhere. Although we have one property that we rehabbed that seems to suck up a good amount of the cashflow. When it came time to sell the market turned and we rented it for around what the mortgage is. Which doesnt include all expenses.
I also rehabbed a house on the toledo river. That we could sell at a nice profit but I think will have a good rate of appreciation. Its also got a piece of the riverfrontage.

I would imagine that many of those that lost money were newbies. I am sure the veterans still can find deals and make money.

Rob