My first investment property... :O)

[j1dias]

So today I bought my first investment property at auction. I was the winning bid for a 3 bedroom / 2 bathroom property at $65k. :O)

I can either fix and flip (I would nee approximately $18k to rehab) or fix and hold (in this case I would need approximately $10k to rehab). We are leaning towards fixing and holding. We will decide within the next week or so.

The ARV is $125k and I estimate rents to be approximately $1k.

And one very nice thing is that this property is only 2 blocks from my work... :O)

I couldn't believe when I got the winning bid. I almost got it at 55k, but there was another investor that bid at $60k, which forced me to go to $65k. I would go as high as $70k.

We close in 30 days... :O)

Have a great weekend! I am taking the day off tomorrow - originally I was planning to attend the second day of the auction, but since I got my property today, I will go to the club with the family... :O)

[justin0419]

Congrats Jose!  I know you had been looking for awhile, so I'm sure it feels good to get the first one under contract.  Are you going to do most of the rehab yourself?  What does it need?

We're still searching for our next one.  Seems our new area has a large run-down section of town that my wife is scared to mess with.  We're still looking at some multi's, but people want too much for them.

[propertymanager]

J1dias,

Congratulations on your first purchase!  That's definitely exciting.

Mike

[j1dias]

Thank you guys... I can't wait to get the keys... :O)

Congrats Jose!  I know you had been looking for awhile, so I'm sure it feels good to get the first one under contract.  Are you going to do most of the rehab yourself?  What does it need?

I am planning to do some myself. The property is so close to my work that I can go over there after work and put in a good 4 or 5 hours of work... :O)

Based on the walkthrough I did few days ago, the house needs:

- Ceiling lights throughout
- Sheetrock work in the kitchen, 2 bedrooms, and kitchen.
- mini blinds throughou.
- 2 interior doors.
- new knobs throughout
- 3 folding closet doors.
- 2 exterior doors.
- Sliding glass patio door 72'' - the doors work - I will need to fix the locks.
- Painting
- Flooring
- Yard cleanup
Kitchen:
- Stove, vent hood, dishwasher, sink faucets, and refrigerator.
- it has new cabinets, countertops, and kitchen sink.
Bathrooms:
- 2 vanity lights|
- 2 shower doors
- 1 vanity
- 1 leaky toilet - not sure where the leak is. May be able to fix it. If not, a new toilet.
- 1 sink faucet

My repair estimates were based on the idea of flipping the property. Now I am planning to keep it as a rental. So I believe I will not need to do everything I thought at first. I am going over there with my wife and kids later today to re-assess.

We're still searching for our next one.  Seems our new area has a large run-down section of town that my wife is scared to mess with.  We're still looking at some multi's, but people want too much for them.

Good luck, Justin. I hope you find your next property soon! :O)

[furnishedowner]

Terrific! I have been reading all your posts. You've come a long ways.

Check out the leaking toilet. Is the floor wet and spongy under the toilet, or is it just the toilet tank that is running? Lots of houses have issues with water damage under the toilet.

Furnishedowner

[justin0419]

Wow!  That doesn't sound bad at all for repairs.  All of that sounds like stuff I would enjoy doing. 

[QQQ]

Terrific! I have been reading all your posts. You've come a long ways.

Check out the leaking toilet. Is the floor wet and spongy under the toilet, or is it just the toilet tank that is running? Lots of houses have issues with water damage under the toilet.

Furnishedowner

Thanks for info

[phlemboy]

Congrats Jose,. It sounds like fix and hold is a good strategy. You probably won't have to put in the higher end items that you you would with a flip. Also, you can collect a monthly profit AND get money out via a cashout refi in the future ( assuming the income will support the increase in debt). Keep us posted.

[j1dias]

Wow!  That doesn't sound bad at all for repairs.  All of that sounds like stuff I would enjoy doing. 

Justin - so are you planning to come over to help me with the leaking toilet? :O) Just kidding... it doesn't look bad at all... I can't wait to close and get the keys...

Check out the leaking toilet. Is the floor wet and spongy under the toilet, or is it just the toilet tank that is running? Lots of houses have issues with water damage under the toilet.

Furnishedowner - thank you for the tip. I will check the floor. It looked fine when I went to see the property. But I didn't touch it... I didn't have gloves... I believe I will start carrying gloves when I go see these properties...

Congrats Jose,. It sounds like fix and hold is a good strategy. You probably won't have to put in the higher end items that you you would with a flip. Also, you can collect a monthly profit AND get money out via a cashout refi in the future ( assuming the income will support the increase in debt). Keep us posted.

I agree. My plan is to finance the purchase+repair with private lender (1.5% origination + 9.5% interest only) and then refinance immediately after the rehab (2 or 3 months). I am checking to see what are the seasoning requirements from some of the local lenders. Worst case scenario I will do a rate & term refinance. Best case scenario I will refinance the purchase price, the rehab costs, closing costs, and holding costs and take all my money out (this will bring me close to 70% of ARV). I believe there are some lenders that would allow me to refinance all my costs if I am below 75% ARV. However I am not sure about their seasoning requirements as I want to do it within 2 or 3 months of purchasing the property. I heard from one local banker that there might be some seasoning requirements (6 or 12 months) to do it. We will see.

[HoldAndBuy]

Congratulations!

[diogom]

Congratulations man.

In my opinion you got great terms for private money.
Let us know how the process go,

Do you plan on getting a second now or you are going to wait a little?

[HoldAndBuy]

Sorry to go on a tangent, but I've been reading through the threads about the 2% rule. So OP is paying 65K + 10K (rehab) to prepare the place as a rental, to rent it at $1000/mo. But according to 2% rule a 75K property needs to rent at 1500/mo. to cash flow. What am I missing here--is it possible that even a dirt cheap property like this won't meet the 2% rule?

So today I bought my first investment property at auction. I was the winning bid for a 3 bedroom / 2 bathroom property at $65k. :O)

I can either fix and flip (I would nee approximately $18k to rehab) or fix and hold (in this case I would need approximately $10k to rehab). We are leaning towards fixing and holding. We will decide within the next week or so.

The ARV is $125k and I estimate rents to be approximately $1k.

And one very nice thing is that this property is only 2 blocks from my work... :O)

I couldn't believe when I got the winning bid. I almost got it at 55k, but there was another investor that bid at $60k, which forced me to go to $65k. I would go as high as $70k.

We close in 30 days... :O)

Have a great weekend! I am taking the day off tomorrow - originally I was planning to attend the second day of the auction, but since I got my property today, I will go to the club with the family... :O)

[Dave T]

The 2% rule is a "rule of thumb".  It is a screening tool to filter the properties that have a high probablility of positive cash flow from the pool of available properties.

Once you have narrowed down your list of candidate properties, you do a detailed cash flow analysis with actual (or as close as you can get to actual) numbers to see if the property will generate an acceptable cash flow for the financing terms you plan to use. 

Chances are that this property will be a breakeven cash flow property after doing a cash out refinance for the purchase and rehab costs.  I am guessing that there may not be enough cash flow to sustain the property as a long term hold unless his rental market gets a lot stronger in the near term.

Since there will be ample equity in the property when he buys, j1dias will most likely consider a wholesale flip, fix and flip to a retail buyer, a sale on contract for deed, or a lease option sale as his preferred exit strategies. 

Buy and hold should probably be his strategy of last resort with these numbers.  If he does choose to hold for long term rental use, the property will still generate an acceptable cash flow if j1dias leaves around 20% of his invested capital in the property and only does a cash out refinance for 80% of his invested capital.

There are a lot of options with this property, and holding for long term rental use is not completely off the table.

[HoldAndBuy]

thanks Dave...so I take it that the 2% rule is not something that is written in stone, you need to adjust it on a case by case basis according to how much equity you have in the property?

The 2% rule is a "rule of thumb".  It is a screening tool to filter the properties that have a high probablility of positive cash flow from the pool of available properties.

Once you have narrowed down your list of candidate properties, you do a detailed cash flow analysis with actual (or as close as you can get to actual) numbers to see if the property will generate an acceptable cash flow for the financing terms you plan to use. 

Chances are that this property will be a breakeven cash flow property after doing a cash out refinance for the purchase and rehab costs.  I am guessing that there may not be enough cash flow to sustain the property as a long term hold unless his rental market gets a lot stronger in the near term.

Since there will be ample equity in the property when he buys, j1dias will most likely consider a wholesale flip, fix and flip to a retail buyer, a sale on contract for deed, or a lease option sale as his preferred exit strategies. 

Buy and hold should probably be his strategy of last resort with these numbers.  If he does choose to hold for long term rental use, the property will still generate an acceptable cash flow if j1dias leaves around 20% of his invested capital in the property and only does a cash out refinance for 80% of his invested capital.

There are a lot of options with this property, and holding for long term rental use is not completely off the table.

[j1dias]

Dave - thank you for your analysis. It was quite accurate. See below some other items that I took in consideration before moving forward:

1 - I may be able to get more than $1,000 (this was the lowest rent in the area). I was very conservative on my rent estimate.

2 - I am going to manage the property myself - so instead of paying the $80 or $100 to the management company I will pay myself. I know that this is frowned upon, but I thought it was a good idea.

3 - One exit strategy that I have available - move into the property (it is only 1 1/2 block from work... :O) and sell my current home. The equity in my home would pay for the new property and I would be able to live mortgage free... :O) My wife likes this one... The idea of living mortgage free is very appealing to her. But I am not sold... I would rather rent the property. I want to be a landlord... :O)

4 - In the worst case scenario, I can pay both mortgages out of my regular paycheck. So I would not be in a position to become a motivated seller...

and one last thing that I found this past Sunday (after I put the property under contract):

5 - Another thing that may increase the rent is the fact that there are very few properties for rent in the area. We drove around on Sunday late afternoon and we found only 4 (2 with 2 bed/1 bath - $825 and $850). I don't know how big are the other 2 as the agents haven't called me back yet. This is a very convenient area for a working family - close to big hospitals, big companies, and 2 major freeways.

And Furnishedowner - I even thought about trying the furnished rental... My wife wants new furniture and is trying to convince me to move our stuff into the property and buy new stuff for our home. The problem is that I don't feel I can trust her advice because she has this hidden agenda... :O)