Guys, I'm new on this board, and don't chime in frequently, but this thread got me going. I am curious how one makes 20K on these homes. Note that I have tried this route, and was somewhat successful. I have a nice paying fulltime job, and mostly invest in real estate in the hope of an early retirement. I have done 2-3 foreclosures (hud homes mostly) in Chicago. Spent 50k on the house, 20k to fix, sold for 100k. Sounds good so far, right? Now throw in my free labor to help/supervise, mortgage payments for 6-9 months (average time to sell), and then being taxed at 35%+ for the sale...(short term gain)... I figured out that I made 6$/hour...or close to it... I would love to know how you fixed up the pictured house for 20k? Just eyeballing it, you have: 1)5k in siding 2) 2K in roofing 3) 2-3 k in cleanup/dumpsters/ perhaps permits 4) 1500-2k in paint (assuming all white) 5) 2k in carpeting - cheap beige, 1.35$ft installed 6) 2K in grass/ trees/ anything cheap to make it look nice 7) New cheap kitchen, 1500$parts/ god knows regarding labor... 8) 1500$ for bathroom surround/vanity/ cheap fibertiling And about 500-1000 hours of labor...figure 12-15$hour if you get a nice immigrant....40$hour if you get a nice union guy... And this doesn't include correcting the damaged drywall/joists/grafitti/carpentry/doors/woodwork/windows/financing fees/insurance (VERY EXPENSIVE for a vacant house, 2-3K a year, unless you lie and say it is owner occupied...haha). And I assume you are doing the "rehabbing" yourself? I found it to be a nonsustainable model. But I would love to know how others do it...If you make 20k per house and don't have to lift a finger, I'm impressed...TEACH ME! Now I do rental and commercial. Rental isn't too bad, but it's hard to get good cashflow, it's mostly capital appreciation...and there is ALWAYS something to fix. Retail is nicer, but riskier...vacancies cost. If you hire a management firm than you just lost all of your tax write-offs, because it becomes a passive investment... or so I hear. Good luck, sounds like your doing great! Bo
First remember that the house is in a crappy area of Dallas. All African American and Hispanic and very low income. Finding a qualified buyer is the hardest part. Also, remember that I am not fixing it to specs you or I want. Lastly, cheap labor. Here is a quick breakdown of my costs. Paid: $18,500 Rehab contract for $18,850 (doesn't include carpet/linoleum) Carpet/Lino $1,988 Breakdown of Rehab... Windows $250 Doors $750 Fans/chandelier/switches/plates $1000 Foundation $3000 Interior Paint and sheetrock repair $2000 Exterior Paint and trim back roof line $1800 Major sheetrock $2000 Plywood floors $1050 HVAC $3000 Porch Columns $400 Bathroom total redo down to studs $1800 Kitchen redo $1800 Total should be $20838 Add in purchase price of $18500 Subtotal $39338 Title Work was only $258 Insurance $356 for 3 months vacancy coverage to value of $65K. Double that if it takes 6 months to sell or 12 months.... That leaves $24,948 profit. However to sell the house I pay the buyers closing costs up to 6% plus some misc expenses from title company etc. Total costs range from 6% up to 12% this one I used 8% so $5455 Final Profit $19,493 Not using realtor so no fees. Figuring on 6 months hold time if I borrowed money, but usually move in 3 or 4 months. Take 6 to 8 weeks to rehab although he is behind right now. Again, not an exact number based on some "what ifs" and "gotchas", but $20K'ish is fine with me. Another one I am doing is only netting $8k. Another is doing about $14K. I have passed on about 10 deals that would have netted about $5K to $7K. Cutting too close for me if I make a mistake.
Oh, forgot. Based on sale price of $64,900. And yes taxes, but ya got those no matter what ya do and I can't make 19k sitting at my desk at work. Oh and one final caveat, I am partnered with a guy and he has most of the cash so we are splitting 50/50 so that 19K suddenly becomes 9500. So I gotta do twice as much work for same results.
Fred, thanks for taking the time to write that. I can't help but think that it's a matter of perspective, though. The amounts are about the same in the end, but the precentages are different because of WHO has the money. Is that incorrect? By my thinking, if you have to pay someone to borrow money, that's just another expense. Wouldn't you save my cutting them out of the picture? Life choices and goals. I know what you mean. Thanks, -Mike
Jim, thanx for the input. I think my mistake was buying in a slightly nicer neighborhood, and i probably overpaid for the homes. I haven't seen any homes in chicago go for 20k, unless they were crack houses, and I didnt really want to rehab those... I understand your point on financing, though. That was difficult. FHA/VA comes through the house and wants it to be nicer than the mansion in the best part of town. They have cancelled deals becuase a light bulb was burned out, or the furnace was shut off (in the summer, sigh). It amazes how crappy some folks credit is...how can you NOT afford a 70-100k house...escpecially with the 5% down the goverment offers. I also had a difficult time with appraisers. They don't want to appraise the house any higher than they have too, even if you have 3-4 ready and willing buyers at a good price. The banks figure that your rehabbed beauty is worth 10k more than the crack house down the block...
The cheap houses do move quicker than the more expensive ones so I have also passed on some pretty good deals for houses in the $175K range. As for financing....2 of my best friends are awesome mortgage brokers and we know friendly appraisers and lenders. Not saying we inflate any values, but don't have to fight with them. Also, there are comps in the area from other investors doing this. And if I borrow the hard money lender does his own appraisal. So that gives me a few checks and balances. Lastly, if I have to I can do an owner finance deal and sell the note for a discount. Still need some decent credit though. Now if I can just do 20 of them in the next 6 months.
bpu699- (bo), yes, it's a tough business right now. Spreads are very thin. I think this is because of all the so-called geniuses hawking their books and tapes on how to get rich quick by preying on all of the desperite working-in-dead-end-jobs, unhappy people out there. Martin- I'd welcome the opportunity to meet you! Jim- Thanks for the breakdown. By the way, have you ever thought of financing the buyers yourself? A lot of people have lousy credit, but can come up with a nice down payment. If they can give you a decent upfront payment, you should arrange to hold paper. Oh, and if your partner is putting up the cash to do the deals, that makes your return infinite!!! Yee-haw!! Mike - yes, the amounts are the same if you're looking at one house. However, remember, if you put $100k into one house and made $20k, that's all you get. If, instead, you levereged the $100k and put $20k into 5 houses and used other money to finance the rest, then you make $100k on that $100k. (making it simple, not including the interest cost), still, you would get $60k if you included the interest cost. Yes, it costs you. However, you make more than you would otherwise. ($20k vs. $60k as a return on the initial $100k) By the way, what's wrong with crack houses????? You KNOW they will pay their rent on time!!! Seriously, those may be where you get the best deals from a seller who is desperate and fed-up. Kick the loosers out, rehab, sell with owner financing with 25% down or rent-to-own.
Guys, this is off topic, but wouldnt mind folks input on commercial property...(unless anyone know a good board to discuss real estate on... ). I'm thinking of selling a 3 unit I own in chicago, paid 200k, worth about 400k 5 years later...(Love real estate). Im worried prices may trend downwards as ineterst rates slowly go up. Perks of holding the property: 1) Locked in 5.5% for 30 years 2) Break even on a 15 year mortgage 3) Great tenants 4) area going yuppie Downside 1) Old building, always something going...$$$ 2) May go down in value as rates rise I'm buying my first commercial building now (5000 sf, 2 level, 20% down, historic building, 800-1000$ cashflow/month). And I am thinking of selling the apt building, rolling over 200K into a large commercial building (office/mini-mall/etc). Questions: 1) If interest rates go up, do commercial properties fall in value more/or less than apt buildings. 2) If interest rates go up, do rental rates usually keep up with this on a commercial property? On a smaller building I could always make up shortfalls out of pocket, but replacing a roof on $mil building if one has no cash flow will hurt... 3) How do you guys deal with the financing. It is unfortunate that you can only lock in a rate for 5 years on a commercial loan...I worry about 8+% rates in the future - your mortgage payment might double... 4) It seems like commercial properties give great cashflow, but don't appreciate as much. Is this about right? Thoughts appreciated....or maybe I should sell, cash out, and buy a 360...
Commercial is about buying the property right. Understand that the rental market is weak right now. If the property carries itself at 80% occupancy you are good. Trying to find that is tough. I know I have been doing that for the past 8 years.
. I wouldn't lose a whole lot of sleep worrying about whether interest rates will be going up signficantly. Not gonna happen anytime soon IMHO. You need to understand, interest rate = sales price for money. If demand for money goes up, interest rates go up. Right now, there's not a whole lot of demand for money. In fact, there is a whole lot of risk capital right now that is looking for a home, but not too many openings. All things being equal, yes, you can generally raise rents faster than inflation. But that's not what you should be worried about. The real worry is good old supply and demand. For commerical dirt, supply tends to be very lumpy. At the bottom of a bidness cycle, supply is tight because all the idiots have busted out. But once happy days return again, guess who is back in town? Yep, the next generation of idiots are back. Happens every time. On the demand side, the key is jobs, jobs, jobs, jobs, and jobs. Did I say jobs? Unlike residential real estate, there is no intrinsic value to commerical dirt. Nobody loves an office building. The only reason someone is willing to sign a lease is because they expect to make mo money than what they pay in rent. Here's DrTax's number 1 tip for dealing with lenders. Borrow a lot during the good times. This way if the ka ka later hits the fan, your lender will call and say, "Dale, what are we going to do about OUR problem?" Depends. Commerical is in a slump because the increased productivity means fewer jobs and fewer desks. But, all real estate is local. You cannot generalize from one area to the other. Now, you're talking! Hope this helps, DrTax
Dave's axiom to DrTax's #1 tip. If you owe the bank a little, they own you, if you owe the bank a lot, you own them. Truth be told, they are much more likely to work with you when there's more money involved instead of just busting your chops if things get a little tight. The more $$$ you have from them, the bigger part of the bank guy's bonus hangs on you staying in the fold, and paying on time. At least out here in brutal East Coast Bank Land. On rates. Fixed rate lending, at least here, can stretch 7-10 years, with a balloon on a 15-20 year term. We're currently getting great rates for these kind of deals on commercial/industrial deals with 1/2 -1% fees from the bank. Dunno what your part of the world has, but banks are banks everywhere, right? Also helps if you have a VERY SMART REAL ESTATE LAWYER. (No, I'm not a lawyer) Not a GP lawyer, but one who just does this all day. He's bound to have contacts that will get you a better rate than you can get on your own. One of my partners is a Real Estate lawyer and he's saved us hundreds of thousands over the years with shrewd negotiations and good contacts. I prefer industrial to office space. Tenants tend to be more stable, and the cost per sq foot is much lower. Maintenance, etc, is easier to deal with too, and the tenants seem to have fewer problems and compaints. Just my Real Estate .02.
I think the commercial market will chnage over the next years. In a decade we may have much less demand for office space than we used to. Reason: many large companies outsourse their workforce like call centers and helpo centers to foreign countries. many large companies outsourse their staff that is inputting data to the employees home. wireless internet, cellphone etc make is no longer necessary for a person to be behind a desk. In fact if you call me I am most of the time on the road. Answering e-mails during the cay from my laptop anywhere through cellphone technology. Technology has made it unnecessary to be in a building with co-workers. Today most communication between co-workers is by instant e-mail. The only think that will fal away is the watercooler chat. Office space is next to human resource the highest cost factor in company expenses. These will be the areas that will be cut the next decade to stay competitive. Office space will decline and more built-office space will stay empty. Our national vacancy numbers are close to 18% I believe. Here in Miami we are at clsoe to 20%. Retail is still a good investment if you buy the right location. I believe midsize neighborhood malls are the future. Megamalls will have their place but the smaller 100,000sq ft mall in your neighborhood, renovated, made attractive will be the boom of the next years. With more money made (stock market) you will see more money spent. Apartments is always a good idea. However ONLY if the numbers add up! Right now there is nothing I have seen that does, so be careful. I am cashing out! The only thing it eats you up when you get your tax bill and have to write checks to the IRS the size of 360 Spiders
Seriously I love this type of chat. Invaluable information from varied sources so the bias is not so bad and nobody trying to sell anything so opinions are honest. Any input on industrial space? I don't know much about it, how to price it, lease it, manage it or where to buy/not buy etc? martin, you had mentioned warehouse space once. Is that considered industrial or not?
Well today I closed on that first commercial building. 5000sq feet, 80 year old building. Here is the break down: 1) Cost 149,000 2) Rehab cost about 50,000 (Roof 12k, Electrical 4k, plumbing 3k, fascade 15k, tuckpointing 5k, gut and whitebox top floor 10-12k) 3) Taxes currently 1200 anum, will likely be 3600 now (was assessed at 60k prior to purchase) 4) Tenant pays all utilities, I pay tax. 5) Insurance 2k/3million coverage 6) Mortgage 860/mo, eyuity loan 50k 260/mo. _____________________________ Cost 16-17k year Income 8-10$/ft (currently at 8$) Bottom floor 17k per year Top estimated 16k per year _____________________________ Income 33k year I don't plan to increase the rates for the bottom yet, as I don't plan to gut it - looks decent inside). The building is in wisconsin (can you say cheeze, and high state tax?), but in a historic district which is being rehabbed like crazy. Bottom level is a record store, which I think is selling "stuff" on the side (wink, wink). This store carries the entire cost of rthe building, top level is gravy. So far looks like a no brainer. Plus the city will give me 7500$ toward fixing it, since its an eyesore.... Now if I could find 10 other similar properties, I can quit my day job . As an aside- have you guys had good luck with real estate agents? My impression is that few of them know anything about realestate. Ask them for the income statement, or NOI on a 1-2million dollar small retail space, and they just look at you dumbfounded...You would think that it would be standard practice to prepare these. It is like pulling teeth (or changing the timing belt on a ferrari ). You are lucky if they know the rents and taxes, much less any expenses. Or ask for credit scores of the leasees, that always gets a chuckle.... Lets not mention inspectors. I have had some that probably got a certificate from a mailorder school...If you werent a contractor in a previous life, I don't want you looking at my buildings...sigh... If it were easy to make money, everyone would do it... Bo
congrats on the purchase. Are you going to allow the record store to say and continue to sell "stuff"? Can they seize your building if they get busted? Perhaps you can upgrade tenants once building is up to par. Good luck.
Jim, the record store has been there for 25 years. I called the local police department prior to purchase to make there havent been any raids or the such, and there werent. The store is "rap music based", and sells tapes, cds, porno tapes, micellaneous powders to enhance your sex life, condoms, t-shirts, bong pipes, 300$ gram scales, little ziplock bags, and so on. I asked the police about waht I assume are drug paraphenalia, and was told that it is not illegal to sell all of these things, because they are labelled "for tobacco use only." He he, ha ha. Whether the store sells the actual drugs, I cannot say, and I have to presume that they don't. They have never been fined, and no one has been arrested. They do a nice job of keeping up the interior too. And they really really don't want to move... ). I would think that the property is at no risk to be confiscated. What if someone were selling crack out of a kiosk in a large mini-mall...would the goverment seize the mall? Hell, if thats the case, the government would own half of the southside of chicago... I must say that it is very cute that they can sell all of this legally...what do you suppose a little ziplock bag, big enough to house a penny, is used for? Interestingly enough, the neighbors on either side of me include 2 law offices...and the city planning commisioners office is right across the street. The building is in what is quickly becoming a very nice neighborhood, and there are yacht slips within 1 block of the property (I'm right next to lake michigan..). Well, we will see what happens...
yeah in dallas we have The Gas Pipe and in Tulsa we had Oz that all sold the "not for illegal use, only for tobacco" stuff as well. Gotta be accurate when you are weighing your tobacco you know. I just know/heard of some people losing a mobile home park in a seizure of a trailer, but I think the owners of the trailer might have also owned the park thus it was seized too.
