We have 10 already - so I'm not a total newbie but still don't know everything either - but this one is different.

So far every property we bought we've gotten for very, very cheap, done massive renovations & paid cash. All of them are profitable.

This one is nicer than we've ever bought, has a long term tenant, super location and is in really good shape - nothing to do immediately. Sounds great, right? Two things that are not our norm: we would have to get a loan & the tenant is in there for below market and renewed their lease June 1.

This is all gonna seem really cheap to most on here but for my market, it's a little high on the asking & a lot low on the rent, but here goes:

Asking $80K. Tenant only paying $780/month. Terms of loan at my bank 6%. 15 year note payment w/ 20% down would be around $500/month. Leaving $280/month to pay taxes & insurance (might not even be enough to cover) = nothing for profit. My realtor is asking for the lease so we can see if the current landlord includes any of the bills or lawn care, if so, we would definitely be in the hole this year. We'll offer less but just trying to look at the worst case scenario and also figure out how low our offer should be to make this work.

The seller did himself a big disservice signing that new lease. Is it stupid to buy a rental property that doesn't make money in the very short term? We have just never had to service a loan and that cost is a killer for properties in this market where you have to make your money on the purchase since rents are fairly stagnant. That said, the rent on that house should be in the $950-1100 range if we did some small upgrades.

Thoughts? We don't have to have it but have always liked this house and figure it might be a good long term buy. Just wondering what I'm missing.

CS78 - Thank you for replying. It's probably worth the $80K they are asking but I'd hope to get it closer to $70K considering that we'd be tied to that lease. Valued on the CAD at $70K - they bought in 2008 & I'm guessing probably paid around $50-55K for it.

You are certainly right about the no drama value and for the year while we finish out some other projects that would be nice.

edit to add: The street is really great - one of the best in town. A friend just listed theirs for $120K - overpriced but completely renovated in a super nice fashion. So there is room to spiff it up to get the higher rent.

Nothing wrong with making money on the front end, it's what you should do. But your previous threads were all creating equity with sweat labor. Now your looking a turnkey deal. Much different.

This is a buy and hold. Like ten year hold. Don't evaluate your finance numbers off a lease you can modify in 11 months. Don't Use that number. Defer maintenance until then.

Develop a plan based on 12 to 60 months from purchase. See if that makes sense.

Also call your banks biggest competitor and get an offer. Even if you don't go with them just use it to grind your current guy. Trust me local bankers can be fat and happy. Check him. 6 at 15 is ok but it's worth asking

Thank you SteveBott. That makes sense. We are definitely long term investors.

I will check with a couple other banks that have hinted at wanting our business - that's a good plan!

Had the same issue on our last house. The house next door to one of my Pawnshop's came up for sale and due to convenience we decided to grab it. The current rent was $850 which left us about $180 after mortgage and escrow. We decided to go with it and keep the same rent because we wouldn't have to renovate and it's a long term tennant who hasn't been any trouble. I wouldn't hesitate if you can make it work.

Thank you for replying 0.........erAG.

We are waiting to get some answers about what (if anything) the current landlord pays for. It's not uncommon around here for some to include lawn care to keep things looking good and that can be around $100 for a yard that big & 2 mows per month. That would hurt.

We could ride with a year of no profit & hopefully they would even stay with an increase. They wont get a house this nice for the rent they pay anywhere in town, so maybe it won't be a big deal when their lease is up. They've been in there 5 years per the realtor.

schwack schwack said:

---

Thank you for replying 0.........erAG.

We are waiting to get some answers about what (if anything) the current landlord pays for. It's not uncommon around here for some to include lawn care to keep things looking good and that can be around $100 for a yard that big & 2 mows per month. That would hurt.

We could ride with a year of no profit & hopefully they would even stay with an increase. They wont get a house this nice for the rent they pay anywhere in town, so maybe it won't be a big deal when their lease is up. They've been in there 5 years per the realtor.

---

No problem, and like Bott said, i'd check around for a better rate. I got a 30 year fixed for a similar amount for 5.75% Then again it may be worth having a good relationship with your bank. It was a pain finding someone to loan around $50k. We even had to reduce the down payment to keep the equity up.

You stupid federal government "for the good of the consumer " is mostly responsible for that. Low loan amounts face stiff rules on how much fees can be charged. See my link. It actually was improved a bit after the original ruling but still a hurdle.

Many closing fees are fixed price so an appraisal is 500 for a 300k home and a 50k. Survey 425 and so on. So the total closing cost is too high to sell the loan. Most of my lenders will not do less then 50k. Local banks have more flexibility

https://www.consumerfinance.gov/ask-cfpb/my-lender-says-it-cant-lend-to-me-because-of-a-limit-on-points-and-fees-on-loans-is-this-true-en-1795/

I would do a longer loan with a 5-7 year disposition plan assuming you can raise rnetal rates within the first 2 years.

That property won't net you a lot of money on a future equity sale, so you don't want to paying the bulk of your NOI to P&I.

Returns will also lessen as the years go.

Mazag08 - thanks for your input. This is such a different process for us with getting a loan that I just need to really think it thru. It might not be a good investment in the short term but we are retired and want long term income.

Quote:

---

Many closing fees are fixed price so an appraisal is 500 for a 300k home and a 50k. Survey 425 and so on. So the total closing cost is too high to sell the loan. Most of my lenders will not do less then 50k. Local banks have more flexibility

---

What if I just got a personal loan or home equity against one of the properties? Are the rates lower, easier to get, less hoops to jump thru, etc?

edi to add: I can get a loan - no problem - just trying to make this easier than it sounds like it might be.

Home equity probably pretty easy and normally it's no fees but every bank is different. I'd probably just go with the loan on the house but talk to the banker and see what they can do. I doubt there would be a significant rate differential on the two options.

Also people tend to get hung up on rate but on that loan amount actual costs while impacts the bottom line is not that much. 1 point difference (5vs6) is 600 a year.

If you roll with the scenario you presented, without doing upgrades and getting more rent for them, a quick pen and paper pro forma shows you'd be looking at around 5-6% cash on cash in year 1. That's not awful, but it's also not going to be netting you very much on monthly income. But a sale in Year 5 would net you around $30,000 - $35,000 in proceeds.. which is an 18-22% return on your cash.

Don't get me wrong, bringing in cash from renting any property is not a bad thing. I personally would aim for the upgrade and rent premium play, sell within 5-7 years, and take the equity from the sale and place it in a more productive property that could generate more cash.

Great way to look at this one, Mazag08. Thank you for the input.

edit to add: Not too concerned about monthly income now. We have 13 doors paying rent - it's the long term plan we're wanting to set up. Currently the plans are to sell one property a year if/as needed once we hit late 60's early 70's. That's within your time frame of sell in 5-7 years. Maybe this would be the first to go.

(using my first $1/3 weeks Premium emoticon - yay!)

You can worry about it later but this sounds like it would be your nicest property in the best area. As the years go by you might find that you prefer to sell something else and use the proceeds to pay this one off and keep it til the end.

Ive found myself in early retirement and needing to increase cash flow. Most of my early properties were just like yours. We did the rehabs ourselves, not bad areas but older homes spread around Bryan. As we had more resources, less time, etc we bought more in nicer areas. Im now selling the older homes in Bryan and paying off the newer homes in south College Station. Ive only sold four so far but my work load has already been noticeably reduced. It sounds like this property will give you some diversity. With that comes options for the future.

That is our situation exactly, CS78. Been in a constant state of renovation since 2015 on these things. Luckily everything is new now so our maintenance is pretty low for old houses. Oldest was built in 1899 - newest probably 70's vintage.

Still haven't been able to get the lease info from the seller - death in the family or something. Will be next week. Seems odd, but whatever. We're patient & have a couple of other ones we could look if this doesn't pan out. Honestly, we weren't looking for another project this year. Just finished up one in July & we were looking forward to a break.

In Texags tradition, hijack post. Any update on the family land? I've followed since the first post

Quote:

---

In Texags tradition, hijack post. Any update on the family land? I've followed since the first post

---

Nothing big. Tons of small battles between parents & them over small stuff like running the power to their portion (Dad will not give them the access to cross the front of his), them wanting to put in some culvert (that makes no sense to Dad so he's vetoed it), even one battle over the lawn mower (Dad's pride & joy. They want to mow in the morning - Dad insists on it evening for some reason) that ended with sis heading into town by herself for a drink.... said she was going to the library - ha! Both Mom & Dad have told us that they had no idea this would be so hard - that's a laugh, we told them how it would go down & so far we're batting 1000. I just hope we are wrong about them ever needing money out of that property.

They are there this week ironing out the power, etc. and Mom had some surgery last week. We went for the operation & left before they came. It will be interesting to hear how this week has gone.

Oh - the big thing now is that when they start their house IN 2 YEARS they want to stay with Mom & Dad in their house while it's built - 6 months or so to save money. Parents say to us that they are not going to do that - but we know how they are so it will happen. Only good thing is that my old room will be occupied so no visits!

Also just to give another example of how unreasonable they are, they have been trying to get the homebuilder to lock into a price for 2 YEARS FROM NOW. He ended up hanging up on them.

That's it. Should I post this on the other thread or too uneventful?

Where's the other thread?

Highly entertaining

https://texags.com/forums/59/topics/2737966/1


8 pages - started in 2016. Happy reading....

Quote:

---

Highly entertaining

---

Now it kinda is - before it wasn't. We've moved on and are resigned to just watching it unfold.

Offer $70k or $80k with the seller carrying the note at 4%, not a great rate for the seller but higher than a cd depending on why they are doing with the money, could even offer the same down payment, plenty of options.

I think the bigger factor is who the tenant is. A long term handyman with ocd is different than a methhead with 5 pit bulls. That will tell you a lot about your extra repair expenses.

*Not an expert but own 2 leveraged rental properties*
Any shot at getting a 20 or 30 year instead? If you're worried about cash flow. You're looking about $540/month for P&I on the 15 yr 6%. If you got a 30 yr 6.5% you'd be looking at $405/month for P&I. That extra $135/month would increase your cash on cash returns 7.5-10% depending on closing costs. If you are doing loan in personal name versus business loan that might be worth looking into. You could take the extra $135 and put towards principle each month and save pretty close to 14 years off the loan if my math was right. Gives you the choice of more cash or pay down loan faster. Just a thought. I have a lender who will do 30 years on investment properties.

I don't necessarily believe in everything in the below article but the higher cash flow does give you flexibility. Even only taking 50% of the cash flow and putting $65/month extra down you pay the loan off 9 years faster.
https://www.biggerpockets.com/blog/real-estate-mortgage-choose-30-year?utm_source=newsletter

schwack schwack said:

---

We have 10 already - so I'm not a total newbie but still don't know everything either - but this one is different.

So far every property we bought we've gotten for very, very cheap, done massive renovations & paid cash. All of them are profitable.

This one is nicer than we've ever bought, has a long term tenant, super location and is in really good shape - nothing to do immediately. Sounds great, right? Two things that are not our norm: we would have to get a loan & the tenant is in there for below market and renewed their lease June 1.

This is all gonna seem really cheap to most on here but for my market, it's a little high on the asking & a lot low on the rent, but here goes:

Asking $80K. Tenant only paying $780/month. Terms of loan at my bank 6%. 15 year note payment w/ 20% down would be around $500/month. Leaving $280/month to pay taxes & insurance (might not even be enough to cover) = nothing for profit. My realtor is asking for the lease so we can see if the current landlord includes any of the bills or lawn care, if so, we would definitely be in the hole this year. We'll offer less but just trying to look at the worst case scenario and also figure out how low our offer should be to make this work.

The seller did himself a big disservice signing that new lease. Is it stupid to buy a rental property that doesn't make money in the very short term? We have just never had to service a loan and that cost is a killer for properties in this market where you have to make your money on the purchase since rents are fairly stagnant. That said, the rent on that house should be in the $950-1100 range if we did some small upgrades.

Thoughts? We don't have to have it but have always liked this house and figure it might be a good long term buy. Just wondering what I'm missing.

---

I'm wondering if I am missing something? Someone retired with 10 properties bought with cash, so may I make some assumption.

1. Discipline couple, probably with no credit card debt, and possible no auto debt.....Great!
2. Retired cash flow more than adequate, plenty of reserves as well.
3. Strong ability to acquire additional funds because 10 properties are not leveraged.

First, what is it with 6% rate on a 15yr mortgage. If the above assumptions are anywhere close your rate should be slightly above 4%. I don't know where you are located but Randolph Brooks Federal Credit Union is advertising 4.125% 20% down on investment property on a 15yr loan.

Using 4.125, 15 yr, Taxes 1800 yr, Insurance 1200yr: all in except maintenance and PM is $727month. Not much left over if any each month, but outlook to raise rents is promising. With rents in the neighborhood of $800-1000 a month, you should not worry about vacancies.

Lastly, your principal buy-down averages over $260 per month first year. Think of it as shifting money from one account to the next. Principal reduction alone is $3120 a year. Cash on Cash is low but the total return is around 19% with NO appreciation and that is with no rent increase. Full disclosure, nothing is deducted for maintenance or vacancies but plenty of slop to cover.

Unless your buying in Detroit or equivalent, and you like the property and location, I think you will do fine.

If your 16k down payment is sitting in a bank your probably getting less than 1% return. Good luck!

Hi Scrap - thanks for you reply. Believe it or not, we already have an account at RBFCU that I set up a few years ago after you mentioned them on another post. I kinda forgot about them & will look into what they can do for us. We almost pulled the trigger with them once before but decided the paperwork was too much of a hassle & just paid cash again.

Basically, your assumptions about us are correct. Extremely disciplined when it comes to money - both Schwacks have always been freelance/self employed so in preparing for retirement we knew we'd only have what we put back or invested so we planned accordingly the last 25 years especially. We went thru a few feast or famine years but came thru fine. Stock market is sucking but still got more there than we put in. We also own our commercial/loft building in Dallas that we'll sell to bolster the nest egg at some point. No debt other than one car payment (used) because they were offering a very low interest rate when we bought it and our SWACU accounts earn us 4% so we just financed it and we're about half way to pay off. I constantly argue with myself about just paying it off or letting it ride. Mr. Schwack has a beast of a 1998 Chevy truck that still runs like a top and has been great thru all the renovations - can't hurt that thing! Dent? No problem. Scratch? Welcome to the family.

We weren't planning on buying anything this year or maybe even next. That's another story, but the first ever "luxury" apartments are being built in our town (with tax incentives - urrrgh...) so we're waiting to see how that impacts us. They will be more expensive but will have amenities that we can't offer: gym, pool, etc. I'm confident it won't hurt our single family units - but might impact our 4plex & 2 duplex units. Those are all super nice & we've always gotten the cream of the crop tenants, but not sure what will happen. We will have recouped all of our initial investment (including renovations) on the 4plex next year (bought in 2015), so we'll be able to stay competitive on rates for those 1/1 units. The entire cost of both of the duplexes will be recouped within the next 2.5 years.

This house is just one that we've always liked the looks of and it is newer (built in the 50's - ha!) than any of our others, is brick for lower long term maintenance and I know it can bring more than it currently does. We should have some answers to our questions tomorrow.

Thanks WestTXAg16 - I used to look at biggerpockets all the time - need to get back on there!

Update: Did not pan out for us at this point. Seller firm on price, tenant very unreasonable, repairs a bit more extensive than we'd have liked at that price.

We buy at the 2% rule.

So if it rents fit $800, we only pay 40k.

If it rents for $800 and needs 10k in work, we only pay 30k.

This is me offering 40k on a hoarder 3/2 brick.

schwack schwack said:

---

Update: Did not pan out for us at this point. Seller firm on price, tenant very unreasonable, repairs a bit more extensive than we'd have liked at that price.

---

Tell us more about tenant.

Quote:

---

Tell us more about tenant.

---

Took several attempts to arrange a showing. Cancelled at the last minute once. Stayed in the house when we finally got in to look & they were extremely negative about things and very clear about things they'd want fixed if we bought it. It was clear to us that they don't want the house to sell.

This was nothing compared to one place we looked at a couple years ago. It was a 4-plex & 2 of the tenants would not let us in at all even though they were informed by the sellers realtor that we were coming. One answered & refused to let us in, The other one after the realtor knocked hard several times, called out loudly "REALTOR. HERE TO SHOW THE PROPERTY." and got no answer & used the key. Guy slammed the door in our face & yelled thru the door that if we used the key again he would shoot us. That property has never sold. Imagine getting those people out. Ugh.

We have bought several properties with people in them & passed on some because of we sensed that there might be difficult dealings ahead.

If you were to buy the house, would you be required under the lease to fix what they wanted, or could you just deny a renewal?

ABATTBQ11 said:

---

If you were to buy the house, would you be required under the lease to fix what they wanted, or could you just deny a renewal?

---

Renewal is always the option of the owner. In Texas, the landlord has the discretion to offer renewal or not. No reason for non-renewal is required, but if one is given it cannot be the result of unlawful discrimination. Usually, this happens when the lease term is met and the contract reverts to month to month. My tenants wrongfully assume that as long as they continue to pay rent they can stay as long as they want. Usually, a 30-day notice is required in the lease for either party to terminate the lease. In this case, either party can terminate, but only the owner has the decision to allow the renewal of a new specified lease term. Cheers.