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So I've recently lost my job as a nightclub manager and decided that perhaps its time to move full-time into rental property and/or flipping. I'm 30 if that makes any difference. I guess my main interest lies in restoring older homes cost effectively. I have a network of "suppliers" of reclaimed building materials and I live in New Orleans, where most of the homes are 50+ years old. I am proficient at design and execution, but need some help with budgeting projects from time to time (i.e. how much it costs to do xxxx)

My finances are as such:
Duplex in great neighborhood under renovation (1mo, maybe $5k left). I unit completed and rented for $1225 (lease extending from last March to Sept). Value of property is $~260-280k (maybe more, just based off of 2 similiar units on the same block that sold within days of being listed in the last 6mo. Mine is larger and nicer). I owe $130k to a relative who is flexible with the payments. I can rent the second unit (which I had planned to live in) for $1350.

I am living mo-to-mo in a rental unit $200/mo. No car payment. Only other bill is cell phone. The rental probably won't last more than 2-3 more mnths at the most so I will need to either live in the above property or find a cheap apartment ($500) or something else. I'd live in a box under the overpass if in a couple years I had a healthy passive income flow.

Cash on hand is $40k. Liquidation value of portfolio is $130k leaving $20-30k in ROTH. I have some receivables in the 30k range outstanding also.

I guess my question is: whats next? Financing is next to impossible without income but I'd like to derive my income from rentals which I will need financing for. How does one get "established" in rentals. Flipping is another thought but that would tie up all my cash, leaving nothing for the actual work. The New Orleans rental market is fairly strong. Is it better to start buying a $30k house that needs $30k worth of work immediately and renting it for $1,100 or buying a $100k house and fixing it up slower that rents for $2,000? I've been advised that the #1 rule of a flip is GET IT DONE FAST. I was cashflowing out the renovation of that first duplex but now the flow has dried up except for the rent.....

Any advice is welcomed.

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Investment Property thread with almost 10k posts: http://www.fatwallet.com/forums/finance/59627/

Watch reality TV on flipping.

I will check that thread out. Thanks!

I do watch reality TV! However, I've dabbled in entertainment and very little of it is "real." Although I'm watching more of the "Property Brothers" and such just to get an idea for when they say "To replace this bathroom would be $6,500." They sure do renovate those houses fast in half an hour!

b70002 said:   I will check that thread out. Thanks!

I do watch reality TV! However, I've dabbled in entertainment and very little of it is "real." Although I'm watching more of the "Property Brothers" and such just to get an idea for when they say "To replace this bathroom would be $6,500." They sure do renovate those houses fast in half an hour!


I am pretty sure the watch reality TV was being sarcastic.

Reality TV is made for entertainment. It has little to no relation to real life.

1) Offer yourself up for property management as an extra source of income. Many landlords are always looking for a good trust worthy property manager assuming that is true for you(your trustworthy). You probably already know about this site: Padmapper.com(it's the best when looking for apartments). Should help you in finding your next place and be very thorough about seeing a lot of places for your next apartment because: all the d-bag property managers you come across make note of them and then try to get a hold of the landlords letting them know you can do a better job. Some might not care, some might not believe you, others might take you up on the offer and give you an extra source of income(maybe even a free apartment in one of their buildings).
2) Sweat equity or contract work on other peoples beat up rentals? Let's say you frequent the auctions for some pretty beat up properties. Even if you don't acquire the property maybe it pays to find out who did and introduce yourself. You may end up doing work for cash compensation. You may end up finding other people who are flipping and might be willing to take you on as a minority partner to do the renovations. If that is the case you would need a professionally drafted partnership agreement to hand to each of those people to sign.
3) In the process of doing that you might find someone that is willing to offer up a decent amount of capital to stake you on a lot of properties.
4) It's possible that in the hard money space that you might be able to find a lender that will take on someone without income, but with substantial cash assets or maybe only finance a smaller LTV of the property(with you kicking in the difference) which would mean that if they had to foreclose they're pretty much guaranteed to get their money back. Let's say I was a hard money lender. If you came up to me and said finance 50% of the value of this property, I'll pay the rest, and if you were ever to foreclose you can penalize 30% of the loan value in the process(i.e. foreclose and the value of their debt moves from 50%-65% of the property and then upon sale pays you out the difference) I would probably say "Okay I don't need to see any income then."
5) Also it looks like no doc loans are back as well(yeah I know right?). It might not be ready for some time, but maybe a company to pay attention to. Press Release

The OP's success is going to be almost 100% correlated with his cost and access to debt or equity financing. BTW, I'm in NOLA too. Live in the Quarter.

There are federal and Louisiana tax incentives for restoring old properties, but a lot of them are for owner-occupied.


TravelerMSY said:   The OP's success is going to be almost 100% correlated with his cost and access to debt or equity financing. BTW, I'm in NOLA too. Live in the Quarter.

There are federal and Louisiana tax incentives for restoring old properties, but a lot of them are for owner-occupied.


I would argue that if we're talking about properties in relatively good order than of course this would mostly be true.

If we're talking about distressed properties I would argue most of his success will come from his ability to find great deals and efficiency(cost and time) of getting the repairs, renovations, updates done.

I do see some inherent problems with this business model though:
1) You require almost all of your excess cash as reserves in something like this. Basically, what you're describing in terms of cash flow is dropping in a lot of cash and taking on leverage, then performing work and spending a little extra cash, then earning a low income stream for a while, and then taking a large lump sum. That makes you very dependent on infrequent exit strategies to make your buck. That means that even if your expenses are low the risks of having a higher cost renovation than you initially expected, a major personal expense, etc. are high without regular income so you need to maintain significant cash reserves.
2) A 1 at a time model probably involves a lot of lag time in between finishing renovations and an eventual exit strategy. That is an efficient use of time. You need to make sure that your making efficient use of that time.
3) When someone else is working in one area and investing in real estate they're active source of income isn't that correlated to their investments. If they buy a property that ends up being a bigger financial mess than they thought or they have a tenant to destroy their property at the end of the day their income is fine. For you if that happens you could be screwed because it hampers your ability to yank out a profit on it's resale.

And at the end of the day I have to ask whether or not your being adequately compensated for the risks you're taking. I mean if you sold 1 a year it seems that you would probably only back out maybe what $50k a transaction? + Net cash flow in the interim of several hundred $ a month? Part of that $50k has to compensate you for your labor that went into it and I think that you need at least an extra $30k excess on top of a decent annual income just to compensate the risks.

So I wonder if your exact iteration of a business model is mathematically sound!

With all this talk about buying and renting, I think we're at the end of the crescendo. A good deal of my peers that foreclosed and short-sold their homes years ago are no longer forced to rent and have all the financing lined up. They're problem is getting their offers accepted as crazy investors are bidding $50k+ over list prices. With demand increasing for homes by owner-occupiers, and the amount of those who are forced to rent decreasing -- the ones who short-sold or foreclosed are now beginning to qualify for financing again -- rental demand looks to have plateaued and may start to fall off. Home builders are building to capitalize on the increased demand while existing home inventory remains constrained for a variety of reasons. Banks are anticipating they'll be able to sell REOs for a higher price if they collectively list properties very slowly instead of flooding the market, current home owners have negative equity to be allowed to a traditional sale. I see demand for homes rising, but inventory will rise also with new construction, and banks listing whatever is left of their REOs to take advantage of the late investors. What happens when rent prices fall, or a property go unoccupied? Does the owner decide to list the property for sale and moves on to the next investment trend? I'm guessing that in the suburbs renting out houses is a story that is coming to an end.

The only types of areas I see buying and renting to remain strong forever are areas where there just isn't room to build anything like San Francisco. In SF if there wasn't rent control you could charge some startup turd $10,000/month for 800 square feet and he'll bite.

Why are all my friends moving to Oakland?

Maybe there's a neighborhood in New Orleans where costs are increasing forcing those without all that dime to move away. Figure out where that they'd be moving to and buy property there ahead of the game. I hate to use the cliché but it's about location.

As far as financing goes, you're going after a owner non-occupier investment loan. It's going to have a slightly higher interest rate verses owner-occupier, but completely possible without a true 9-5 job. You're finances are going to come under more scrutiny from an underwriter. The loan will be for a maximum of 80% of the appraised value, no PMI will be offered on the difference between the offer price and appraised price, you'll have to come out of pocket for that. They want 6 months reserve of whatever the monthly liabilities on the property will be. 20% down of course. The down payment and other cash needed will have to be "seasoned" meaning that it had to have been in your accounts for a significant amount of time, $100k deposit couldn't show up out of thin air, even if you earned it complete with a 1099. What you're showing as seasoned money can be in checking, savings, 401Ks, 403Bs, whatever, as long as you can show that you can withdraw or request for an immediate distribution. If you're pulling from a 401K, call ahead and see if there's a program where you can take a one-time distribution without penalty before hitting retirement age. The one-time distribution will have automatic tax withholding which can be a 20%+ hit depending on your state. After you file your taxes, as long as you don't land in the highest of income earners you get some of the withholding back, but it sucks that comes out first, thus reducing your purchasing power of an investment property or home purchase. The underwriter will look and see your cash flow from existing tenants, look at the potential monthly cash flow of the tenant on the new property and use something like 75% of that, consider any other income you have from the past 2 years like interest from stocks, bonds, 1099s, but since you no longer have the 9-5 job that income is left out of the equation. The most important qualifier is if every month your incoming cash is equal to or less than 40% of your liabilities. After all that math and other stuff you'll get a number that shows you the maximum size of a loan you may qualify for. The reason it isn't a true official number is that mortgage rates will change and rental rates may change by the time you get into contract on the property.

This is the crap that I learned when buying house #3. House #1 and house #2 were financed using owner-occupier loans. The only type of loan possible for house #3 was owner non-occupant which was essentially a loan for investors. Why own three houses? Family drama...

dienliv said:   With all this talk about buying and renting, I think we're at the end of the crescendo. A good deal of my peers that foreclosed and short-sold their homes years ago are no longer forced to rent and have all the financing lined up. They're problem is getting their offers accepted as crazy investors are bidding $50k+ over list prices. With demand increasing for homes by owner-occupiers, and the amount of those who are forced to rent decreasing -- the ones who short-sold or foreclosed are now beginning to qualify for financing again -- rental demand looks to have plateaued and may start to fall off. Home builders are building to capitalize on the increased demand while existing home inventory remains constrained for a variety of reasons. Banks are anticipating they'll be able to sell REOs for a higher price if they collectively list properties very slowly instead of flooding the market, current home owners have negative equity to be allowed to a traditional sale. I see demand for homes rising, but inventory will rise also with new construction, and banks listing whatever is left of their REOs to take advantage of the late investors. What happens when rent prices fall, or a property go unoccupied? Does the owner decide to list the property for sale and moves on to the next investment trend? I'm guessing that in the suburbs renting out houses is a story that is coming to an end.

The only types of areas I see buying and renting to remain strong forever are areas where there just isn't room to build anything like San Francisco. In SF if there wasn't rent control you could charge some startup turd $10,000/month for 800 square feet and he'll bite.

Why are all my friends moving to Oakland?

Maybe there's a neighborhood in New Orleans where costs are increasing forcing those without all that dime to move away. Figure out where that they'd be moving to and buy property there ahead of the game. I hate to use the cliché but it's about location.



I don't agree with anything that you just wrote.

I don't know what place you live in where homes are constantly being bid $50k over list. That does not fit with any market that I know of.

Given the quantity of people who turned over the keys to their homes it shouldn't surprise anyone that many of those people are once again qualifying for mortgages especially when you have a Fed acquiring more agency mortgages each month than are being created(purchase and predominately refi) meaning the supply of agency mortgages available for investors and financial institutions is actually shrinking substantially for a while now even though we've been in a refi boom.

The home builders are still a non issue. The only space that as even in the slightest degree shown up on the radar screen is apartment construction which is primarily fueled by the ability to acquire attractive locations for cheap, tear down the buildings, and put up an apartment complex in it's place in addition to rental demand.

I as of yet have seen no 'plateau' in rental demand. Especially as you approach city centers vacancy rates are extremely low. Prime locations are often times rented within the day their listing's go up and that spills over elsewhere. It was only a few years ago that rents fell with home prices they are only in the very beginning of their ramp up and unlike housing last time, they're likely to outpace housing appreciation for the foreseeable future. The high end market still doesn't have a pulse at all. $500k+(in non high cost cities) generally speaking has in the high 10s if not more than 100 homes for sale for each buyer looking at that market and that doesn't include people that could sell.

Also, I have no idea where you get a sense that it's overheating at all. Prices have ever so barely moved off the lows and it's all at the ultra low end on basically a no brainer rent trade. They currently represent a straight flat line nationally for the last year and a half.

The homeowners are still falling as a percentage of the population; falling every single consecutive quarter and now represent the lowest portion of the population since 96 and there has shown no signs of that stopping anytime soon and going back the other way.

And housing overall represents a big flat line in real terms for the foreseeable future. There is zero reason to suspect sustained housing appreciation nationally nor any noticeable lags down in the future. Outside of the rental space housing is now very, very boring(as it should be)!

Renting in suburbs is a story that is just beginning. As of right now most traditional suburban homes have represented serious cash flow losers to any landlords. It's also represented some of the most attractive spaces that a larger family can get cheap housing costs. As the rental population continues to swell and as more rental price increases show up in the market they may just end up pushing the string enough to make some cheaper suburban homes reasonable cash flow plays.


The real estate sector that is red hot right now is farmland. Farmland rental rates are skyrocketing and the purchase price of farm land is primarily driven by the rate of increase of land rents and not based on the low percentage of acquisition cost you'll receive in rent the first year in anticipation of rate increases in the future. That is what a real bull market looks like in a real estate sector.

OP,

I am currently dealing with a pretty epic fail after wanting to flip houses. The #1 reason I attribute to this is not understanding construction/repairs - in fact, being a flat idiot about it. There's a lot of great traits I have, but a kinesthetic understanding of what's broken and how to fix it isn't one of them. The fact you are proficient in design and execution goes a long way, in my opinion, about your success. How much trust are you going to have to put into others? Are you going to be able to look at something and know it's a 30-50k repair and if your GC tells you it's really going to be 70-80 - will you be able to figure out if it's BS or not? To me, in my very limited experience, that's a huge intangible that goes a long way in discerning success or not. If I had 'that person' on the team, we would have probably known to stay faaaar away from certain houses. Good luck with your journey - and I hope you can find a money person to assist you in getting going on this. Before I got married, my plan was to live in a house for about a year, turn it into a rental, buy another house, and repeat.. but my wife didn't like that idea!

If you want to own rental properties or flip homes, you've better know how to repair them. Sometimes you might not need to do the work, but you need to know how much work and cost to get it done. I have a full time job and I have been doing rental/flipping as hobby in the last 6 yrs. So far I have 6 rentals and in process of buying 3 more. All I can tell you rental/flipping is not a job for everyone. You need to know the right people, cost of material, and some construction codes/laws. I do my own drawing, apply permit by myself which could easily save thousands. Once you know the system, flip one to two homes a year can easily make 6 figures. Wish you good luck.

OP, I'm definitely no expert on RE investing, but I've found that BiggerPockets forum is a good read.

Go read every post on bbs2.mrlandlord.com

One thing it sounds like to me, if you can rent a unit for 1250 and can spend 500 a month on your living area that would be a smart trade off. One thing to consider is if you can flip a 280k property and buy two 140k properties (or 3 properties, etc.)

Wow, what a bunch of great info! I printed this out and am studying it now! Thanks for the advice and sharing your wisdom.



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