Hello LoanUniverse,

I am interested in what you think my best plan of attack would be for aquiring some Investment property.

What I would like to purchase is a 4-unit (or bigger) apartment building. The area is not important, but if it makes a difference I reside in California.

I have No debt, my Personal income is a little over $100k a year. I own NO property, my car is worth about $1000 (its a junker) and I rent an apartment. At this point in my bank account I have about $30k.

I recently ran a credit check and my score was a little over 780 ... according to the site it described that score as Excellent. I would like to start out with a property that costs is NO more than $150,000. I do realize this pretty much eliminates California as my investing area, as I am aware that a 4+ Unit apartment building will cost much more than $150k here.

I also would NOT be moving, so ofcourse this would be a NON-Owner occupied rental.


My questions are:

- Would someone even Consider me for a $150k loan?

- Is there some kind of Investment software that could guide me through analyzing various properties?


Well I suppose that is all, Thank you for your help in advance.

Hello,

Its me again.. I just registered. I figured I would tell you in hopes that you answer my question

Thanks again!!

John:

The area is not important, but if it makes a difference I reside in California. Are you sure about this? With such a small property we are talking small amounts of profits involved. If the property is going to be far away, you will have to pay someone to look out after it.

- Would someone even Consider me for a $150k loan? You are a little short in the down payment, but it is not something that could not be worked around with some creative financing options such as having the seller carry a small second mortgage. In fact, you seem to have a couple of good things going for you. A good paying job and a good credit score.

Mainstream lenders usually finance 80% of the value of multi-family income producing properties. Which, essentially means that they want equity or a junior lender for the remaining 20%. A $150,000 loan would be given for the purchase of a property in the amount of $187,500, and you would have to come up with $150,000 / 4 = $37,500.

Is there some kind of Investment software that could guide me through analyzing various properties? I am sure there is, but I do not know of any. There are a dozen or so real estate investment gurus that sell their courses and seminars in the internet and late night TV. Nevertheless, I question the value of those things. The whole industry seems a little shady to me.

There are a few things that you should now:

You should be able to compute the “Net Operating Income”

You should be familiar with the concept of “capitalization rate” or “cap. rate”

You should be familiar with your state’s tenant/landlord laws.

My little corner of cyberspace is far from being a comprehensive resource, but you can start by taking a look at the following pages on this site to start with:

http://www.loanuniverse.com/sensitivity.html

http://www.loanuniverse.com/capitalization.html

The first page is really good because it has a link to a spreadsheet that is very useful. It will pretty much show you what “Net Operating Income” and “Debt Service Coverage”. The second link takes you to an article about capitalization rate that I wrote a really, really long time ago. Frankly, now that I read it again, I found it a little confusing, but I hope you get the idea.

Good luck

Hello LoanUniverse,

Thank you for the fast response. If you dont mind, I have a few comments regarding your answers.


Are you sure about this? With such a small property we are talking small amounts of profits involved. If the property is going to be far away, you will have to pay someone to look out after it.

I am ready and willing to pay for a property manager to take care of my place. I also realize that a place for $150k wont be a Money Machine However I just want to "Test the water" if you will. I imagine that I may even go as low as $100k for my first investment.


This brings me to my first question.

I have been on quite a few websites advertising property, and some of these sites list an enormous amount of data for the property being sold. One detail I had noticed is that some of these properties have a Cap rate of over 15%!! These fantastic deals were advertised on a site owned by a Very reputable company.

Does this EVER happen?, or is someone trying to pull a fast one? I imagine there are good deals out there, but sometimes the cap rate is as high as 20%!!


Thank you for your responses.

I hope these questions may also help some other newbies to the Real Estate Investing process.

I am ready and willing to pay for a property manager to take care of my place. I also realize that a place for $150k wont be a Money Machine However I just want to "Test the water" if you will. I imagine that I may even go as low as $100k for my first investment. Understandable…. Just take into consideration the fact that a property manager that takes care of everything on your behalf will run you at least a couple of hundred bucks a month.

I have been on quite a few websites advertising property, and some of these sites list an enormous amount of data for the property being sold. One detail I had noticed is that some of these properties have a Cap rate of over 15%!! These fantastic deals were advertised on a site owned by a Very reputable company. I am not going to say it never happens, but if I were to see something like that {specially the 20% cap rate that you mention}, I would immediately wonder about the reliability of this number.

Off the top of my head, I would check for:

1- Rents above market rates. The building might be rented at a rate that is not supported by those of similar properties {believe it or not, I have seen a few of these}. Chances are you will lose those tenants at the end of their lease. It is even worse if we are talking “month to month”. Of course, having the tenant invested with a lot of leasehold improvements helps.

2- Understated expenses This is somewhat common when the buyer is not well versed in all of the related expenses that are associated with income producing property. A lot of it can be double checked by the buyer. You can check up on the taxes online {most counties have this} and you can ask for utility receipts. I would ask for a breakdown of how the expenses are calculated.

3- An unknown factor as in there is something that you do not know about the property. Really a 20% cap rate? Where? Does the roof needs replacing? Is the ground contaminated next door?

If I were you, I would get a duplex around your area. You said California real estate is high, but I am sure that this is just in the metro areas. How about that peaceful town located 80 miles outside of your hometown? “There is always one that is just a bit too far to be used as a place to conmute from” I would feel more comfortable having my investment within driving distance.

The following are advertisements for properties that have Cap Rates that I spoke of:

19% Cap rate on this one.

19% Cap Rate Advertisement

15% on this one

15% Cap Rate Advertisement

There are quite a few at 15%, and the property that was 20% was when my price range was $150k, but you get my point.

As for your Comments:

Understandable…. Just take into consideration the fact that a property manager that takes care of everything on your behalf will run you at least a couple of hundred bucks a month.

As for Property Managers, the normal cost seems to be around 8-10% of the Gross rental income. Something I am willing to part with to be able to buy out of state.

To continue on this topic, I have searched for quite a while now in the surrounding California area and finding a place that I can afford is not going to happen.

HOWEVER, I may be missing an option here. I suppose I could buy a Duplex (about $250k out here) and live in one side of it, at least in the beginning, and then move out after the required "Live-In" term in the Loan contract expires. This way I could manage a 30year loan, and with Less money down on top of that.

I have been wrestling with this problem for a while and I ALWAYS come back to an Out of State purchase. The fact is that California just can NOT compete with the cost of Real Estate elsewhere, at least with the amount of money that I have to work with. Do a search in California yourself just for Kicks, I am in the San Mateo(Silicon Valley) area, I think you may be shocked at what the prices are in this area, and EVEN an area that is a 3 hour drive from here. The other thing is, even if I DID find a place that was 3 hours from here, I still would hire a property manager to deal with it.

I really want to get this property up and running and then move onto researching other possible investments. I must say I am not terribly interested in being a Landlord in the aspect of running around and fixing broken toilets and leaky faucets. The idea though of crunching numbers and searching for good investment properties is very exciting to me.

Anyhow, that is my dillema


BTW, My interest in Real Estate was sparked when I read one of those "NO money DOWN" books. I must say after doing some reasearch I quickly realized that the "NO money DOWN" option is pretty non-existent. However, this fact did not scare me away, as I see no reason that with my credit and my income that I cant get something going.

Thank you for your responses. Your site has been extremely helpfull.

John:

It does seen like you are doing some good research. Loopnet is a good resource. However, do not confuse the reputation of Loopnet with that of the person listing the property. A few years ago, I was considering stepping out from behind the desk and buying a property myself and I went to the same site. The one thing I did was get more information on the property I was looking at from the realtor.

Let me go over the 19% example: A 19% cap rate is hard to believe. Why would anyone sell it at that price?

Off the top of my head, I would ask for the rent amounts on each of the units, whether the tenants are seasoned, and if the tenants are in a government program such as Plan 8. First thing I get from the listing is that the price per unit is $16,980 is very, very low. For that kind of money, I am thinking one room apartments, but the description tells me that there are a couple of two-bedrooms. From the demographics, I get that the property is in a minority neighborhood.

Frankly, if you go after this property you are going after the low end on the rental market. Sure, there can be a lot more monetary reward going after this market, but there are other risks involved with such property. I am not familiar with that area, but I know that there are some areas in my own town that I would have trouble getting a property manager to work a property for me. You could also be looking at a lot of tenant turnover. Sure, I can get a 19% cap one month, but what happens when I lose a tenant every other month or I have to evict people. That 100% occupancy quickly becomes 80% or 70%. You also start getting into other expenses such as evicting people.

If you still want to go after these types of properties. You should at least familiarize yourself with the area {economics, unemployment, rents} For example this is the tax info on the 19% cap rate property.

HOWEVER, I may be missing an option here. I suppose I could buy a Duplex (about $250k out here) and live in one side of it, at least in the beginning, and then move out after the required "Live-In" term in the Loan contract expires…… This sounds much more appetizing. I also did do a search on realtor.com for your area and that of the Greenville, TX property {like night and day}. I can see how buying a five unit apartment for 30% of what buying a single apartment/condo would sound great to you.

You are in the right track, but for your first property you might not want to go to the extreme low end of the market. Then again, you might have a higher tolerance for risk than I do.

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OK.. a little update on my situation...

I decided to stay in the Single Family Home category. I wish to Purchase a house in the $100k - $150k range.

Anyhow, here are a few questions that I hope someone can help me with...


Question #1)

If I go to a bank and get a 2nd Home mortgate, The loan terms are Really good. If I go to the SAME place and tell them that I will be renting it out when I am not there, the Loan Terms switch over to an Investment property.. and the Loan Terms are basically out of my Reach. ( required Downpayment/ Interest Rates)

Do I ...

Option 1) Go to the bank.. get the loan as a 2nd home (nice Terms) .. and then Rent it out!! How would they POSSIBLY know? And even if they Did, what is the worst that could happen?

OR...

Option 2) Bite the bullet and get an Investment loan. Which basically means I have to find OWNER financing, or to simply wait to save money.


Thanks for the help!!

Option 1) Go to the bank.. get the loan as a 2nd home (nice Terms) .. and then Rent it out!! How would they POSSIBLY know? And even if they Did, what is the worst that could happen?

OR...

Option 2) Bite the bullet and get an Investment loan. Which basically means I have to find OWNER financing, or to simply wait to save money.

John:

I could not possibly recommend that you do something against the agreement. I personally don’t think that is a good idea to put yourself in those situations no matter how remote the possibility of getting caught is.

You are right about ” How would they POSSIBLY know?” I know a couple of people that have put residential properties to work within a month of buying them supposedly as their personal residences. I just don’t think is a good idea.

Going with option 1) will allow you to rent it eventually. I am sure that the “no rent” covenant is limited. I would ask them if those restrictions are lifted and if so when do they expire? Owner financing for option 2) sounds like something you might want to consider. I don’t think the problem is the difference in interest rates, but the down payment.

Good luck.

John,

Here's a few thoughts for your situation. I also live in the Silicon Valley area. Because I purchased a home here a little while back I have doubled my effective income in appreciation alone so I can appreciate your interest in real estate.

However, I have gone back to an area I lived in before and set up a business buying rental properties for cash flow. It's an interesting proposition and I am mostly renting to section 8 tenants with all the "issues" that entails such as working with the local housing agencies, maintaining the units to inspection standards, etc. Here's my $0.02 on the whole thing. The only way to effectively do out of state rentals is if you are already very familiar with the area (as I am) and can afford to hire your own full-time employee to monitor and maintain the properties (I have). Short of this, you will have a very hard time being successful. I am in the process of preparing a Regulation D 506 (see SEC website) offering to allow more investors to participate in my partnership but I wouldn't recommend it for someone with your limited resources at this time.

One thing most people who are interested in rental real estate underestimate is the amount of effort and attention it takes to successfully run residential rental properties. It is at least a part-time job. If you're not ready to start a business on the side in addition to your regular job then you should seriously reconsider the proposition.

If you still want to get involved and feel real estate should be a significant part of your portfolio then by all means invest in a REIT. They are publicly traded, often allow you to participate in the equity gains realized by their holdings, offer instant liquidity and (historically) excellent rates of return.

If all of this has not persuaded you to stay out of landlording until you're ready to start your own business, then may I humbly suggest the following strategy which has been enormously successful for me:

1. Buy a duplex or triplex (whatever you can afford) and move in.
2. Finance it with an interest-only note or such so that the cash out of pocket is covered by the rental income and then some. NEVER NEVER NEVER buy cash-flow negative. There's plenty of people in the Bay Area who buy on speculation and I think it is extremely risky.
3. Refinance the house with a 100% LTV HELOC to extract your equity after one year.
4. After one year of residence you can buy another property with the equity appreciation and existing equity you paid in.
5. Keep doing this until you have enough equity to put 20% into a 6 or 8-plex.
6. Quit the day job and make this your full-time occupation.

The 100% option only works for detached 1 or 2 family units. Once you start doing 3-4 family units you're looking at non owner-occupied financing which is still available at good rates and 90% LTV through companies like Washington Mutual and Countrywide. Anything over 4 units is commercial and requires 20%.

Good Luck!

Hello Adam,

Thank you very much for the words of wisdom.

To answer your question, No, I havent been scared off

Would it be possible for me to get your e-mail address to get hints or Tips from time to time?

PM me with your info if you are willing.

Thanks for the help!

John, You can always look to a 5 plex or larger and find a comercial lender who will allow you do a 80-10-10. Better yet if you can acquire 20% down payment you can do a commercial loan where you NOT required to personally guarantee the loan (a NON-recourse loan).
Hope this helps.

Clark Barr
Monarch Financial Services
843-450-8053