Thursday, March 13, 2008

May Ranch $78 sq/ft

Who was it that wanted a house in May Ranch under $200k?

Here's a nice one, I expect this will get a few offers.

3272 El Nido Ave this is a 3 bedroom, 2 bath home, 2296 sq/ft in size. it says it was built in 2004. The home looks to be in really good shape (not vandalized or anything). The original selling price is not listed but the tax value is $384k so it probably sold for about 10% under that. It's listed for $179,900, or $78 sq/ft. This should pencil out as a rental if you can get it for close to the asking price.


Anonymous said...

Is this the auction start bid price or real sale price?

Jeremy Miner said...

Have you published a list of criteria for what makes a good rental purchase? I'm interested in knowing more.

golfer_X said...

This is a real listing price as far as I can tell. It does not indicate it's an auction property. Auction properties have usually been listed for months before they go to auction. This is a new listing. It's a good marketing strategy when buyers are few and far between. price it way low and attract a lot of attention and hopefully a few offers.

The simplified criterial for a good rental is, can you buy it and rent it for enough to cover the loan and hopefully make a few bucks. These homes will probably rent for around $1500/mo. So your TOTAL expenses should be less than that. At $180k it will be close unless there is a large down payment made. If you have to pay much more than the $180k it would be hard to make any money using this as a rental property.

Assuming you put down 20%. That would give you a 144K loan. As a rental property your loan rate will be higher than as an owner occupied. So let's say 8% which gives you a payment of about $1050. On top of that you have property tax of about $260/mo ( I believe the property tax in this tract is between 1.6% and 1.8%) Then there is an HOA fee. I think it's around $80/mo. So you are already close to $1400/mo before figuring in any maintenance or down time when you don't have a renter. You also might factor in the lost income from your 20% down payment. Even sticking that into a 5% CD would get you $1800 a year. That's more than you will make on this home as a rental in the short term.

Jeremy Miner said...

Excellent! Thank you. Do you have any books that you would recommend reading to learn more on the subject?

BrianH said...

I specialize in acquiring, repairing, and then delivering occupied, rehabbed rental properties that are activity managed to buy and hold investor/landlords that are in the 125-135'ish monthly gross rate multiplier neighborhood. I learned a long time ago that there are many people who are very happy with the types of returns at a 125-135'ish monthly GRM or they are looking for a break even rental for tax purposes. I also do performance based property management and financing.

Real quickly, this particular home has a decent looking monthly GRM on it's face. However, it is a 2200 square foot home and when dealing with rentals that are of the larger sized variety the returns have to be really good because when people move out that is 2200 feet of carpet, paint and crap like that. To each their own, but I personally will only own rentals that are 3-4 bed 1.75-2 bath and between 1000-1500 square feet no exceptions.

Lets analyze this as a rental.

If you paid the 179,000 in cash and looked at it as a pure cash on cash return the numbers would work out something like this.
179,000 purchase price
2,738 annual property tax 1.53%
850 a year insurance
You are not going to rent this for more then 1500 a month to a decent renter. You could get more but the turnover will be high and the repair bills on crappy renters will eat you alive. There are a lot of 2500+ foot homes in this area for rent in the 1750-1800 a month range so to get the attention and enough rental applications to be very selective you will need to come out the gate at 1500 per month, do six month leases and then raise the rent 25 bucks every six months. You should be able to get a decent tenant who will stay for a while that way.
So, 18,000 in annual GROSS income minus the taxes and insurance is an adjusted GROSS income of 14,412. That is a gross annual cash on cash return of 8.051%. Over time roughly a third of your annual rents will be eaten up in repairs and vacancies guaranteed. So your gross annual of 18,000 gets lowered to 12,060 less taxes and insurance equals 8,472 in net rental income a year. That is almost 5% cash on cash.

Now, lets say you put down 25% and get a nice solid Conforming Conventional 30 year fixed mortgage. Right now 25% is pretty much the lowest you will be able to put down to get good financing.
179,000 purchase price
44,750 down payment
7% 30 year fixed rate
893.17 a month plus taxes and insurance works out to a PITI of 1,193 a month or 14,304 a year. So, as you can see the positive monthly cash flow, if the property stays rented consistantly each year is 307 bucks or 3,684 annually. If the house stayed rent consistantly your cash on cash return on the down payment would be around 8.20% which isn't bad however for those of us that manage and/or own rentals we know that tenants are very rough on your houses and your pluming and crap like that. They rarely move out and leave the home ready for a new renter and shit always seems to break on a rental home much more then on the one you live in. So again, your return will be a little lower then 8.23% but still decent enough to make the risk worth it.

So, if you stick to the right inventory that hopefully has lower tax rates and is smaller in square feet, can keep them rented with a good manager and be creative with the way you structure the leases we are pretty much there. But, most of these are REO's that are going to need 10-15k in work before you move people in and then you will need a very good manager to get them rented quickly in such a soft market.

golfer_X said...

Brian, Can you still get 7% for a non owner occupied? (I still think I'de take that $45k DP and short CFC. Once the B of A sale falls through their stock is going to fall faster than Governor Eliot Spitzer's political career.)

I agree with you on the smaller homes. Cleaning up, painting and fixing a 2000+ s/f home can be expensive.

BrianH said...

I just checked Flagstar's ratesheet for today.

If someone has a 25% down, a FICO better then 680, verifiable income and some reserves in the bank 6.50% is a PAR rate in the scenario described above. Par means the broker originating the loan receives ZERO compensation from the bank and is going to be hitting up the buyer in the form of origination points. At 7% you are approaching the zero origination point realm. I personally think the entire zero point mortgage thing is crazy because it costs the borrower so much more money in the long run but that is an entirely different topic all by itself. People have been conditioned to think zero points is a good thing and loose sight of the difference between price and cost. I used 7% in my example just to be safe so any changes in rates won't make someone yell at me via the net. Us brokers are sensitive lately..... LOL

Bottom line is we are so darn close to being able to purchase truly make sense rentals right out of the MLS and guys like me who have cash are already purchasing them much cheaper. I've been all over this REO thing for well over a year and have established relationships with a few REO agents and when the flood gates finally do open I will be purchasing 65-80 homes a year for a couple years. I friggen can't wait.

My goal is to come out the other side of this down cycle with 35 free and clear rentals in Lake Elsinore and Murrieta. To accomplish that I will have to buy, repair and sell 65+ homes a year for a couple years. That is why I have been working on the REO relationships for so long. I'm at the front of the line already with one major REO shop and a couple other mid sized REO shops and am just waiting for the gates to open.

We are standing at the edge of the greatest buying opportunity anyone over the age of 25 will ever see for the rest of our lives. Those with the cash or no cash and the drive and perseverance are going to truly get wealthy this cycle.

BrianH said...

I should have mentioned in my last post. The cash I'm using is not actually my cash. It is not hard money loans. What I do is team up with someone who has seen what I do and they allow me to use their cash. In return they get a piece of the action. Depending on how they want to structure they get either 50% of the net profits if I turn and burn or we work out a set rate of return if I end up holding the property. That rate of return is never less then 10% and we usually land somewhere around 12%.

It is very much possible to quickly sell homes even in Moreno Valley. I closed on my most recent deal mid January, rehabbed it and had it on the market on the first couple days of Feb and was in escrow by the end of Feb. When the dust settles my money partner's 50% share of the profits will earn her 9.8% cash on cash return and we should hit roughly 90 days, give or take, total time which means I will redeploy that same money three or four times a year for a 30%+ annualized return.

I personally need properties to drop a hair lower before I have enough cash myself to not need money partners and not have a wife who feels unsecure in our savings cushion.

vulture fund said...

Brian H,
How do you plan to finance 65-80 non-owner rentals? Fannie/Freddie and FHA(the 7% rates) only allow up to 4-5 properties per investor.
Private money costs about 10%, and eats into your profit.
My investor fund that I manage(vulture fund) are finding no success on the MLS due to busloads of inexperienced hyped up investors coming out of some seminars held by realtards to only promote and create commissions for themselves.
If the deals were really that good, dont you think these loser REO agents would grab some of the good stuff.
The most efficient and cost effective way is to purchase distressed property is to purchase the paper(notes) on a wholesale basis from the investor directly.
We then in turn sale the properties thru auctions or REO agents who act as resellers.

Anonymous said...

It's Perris!

Papasmurf said...

Please, next time leave us some more so that we might marvel at your finely tuned observational powers. Yes dillweed, it's in Perris and it's a fine place to own rental properties if you can "snap-em-up" cheap enough.

BrianH said...


Click on my name and shoot me an email. Lets talk about this.


BrianH said...

However, to answer your questions:

1. Dealing with the Carleton Sheets type folks is very easy. The good agents who have a brain can tell the difference between one of them, and one of us. The guys that I'm around have many years of real estate experience and most of us also have many years of construction experience. I have 7 in residential construction and 10 of real estate. It only takes a few minutes of conversation to differentiate between an amateur and someone who has a clue. So, what I'm about is mostly relationships, These REO folks are not in this game to buy properties, they are in it sell as many as possible and earn a commission.

2. Right now at this stage in the market to hold long term I need Fannie/Freddie which allow a maximum of 7 properties including the primary. Between myself, the old man, my mother and younger brother I have enough credit to put in place permanent conforming convention good financing to last me a good while. By time next year or so, if I have even limited out amongst the family, the properties that I will be looking at will more then likely cash flow with private money out the gate.

It isn't like I'm buying huge numbers of properties right now. At this point it is all about purchasing the right properties, making the REO agent happy with your performance and ensuring that you are at the front of the line when the dams break. The dams will break, that is in the can, it is just a matter of time before guys like me start purchasing massive amounts of properties. Another thing to keep in mind is this. I won't necessarily so much more then wholesale some of the properties out. For example, once a week a group of us get together. Some of the biggest names in the local buying business are there and this group has a massive amount of buying power. Some of the members are not focusing on the relationships because they know people like me are. So they will be on the ready to purchase. Via a title holding trust I can close with their money and just get a flip fee outside of escrow. The relationships with the agents and then a second set with people I know have the means and credibility to do what they say. Further, this group has the combined buying power to knock down a 5-8 million package and we have one guy who only works on that. The problem we find on that front is that the accumulators (right word?) give us stuff to look at but their BPO/appraisals are from another planet six months ago which means they try to sell at 65% of value but that value is six months old and is now more like 90% of value. We have not even come close in that regard.

So, for now I'm ok on financing and hopefully when I run out of conventional options the properties will cash flow with private money. And I don't worry about the faux investors because they are buying what guys like me have already turned down. They will force themselves out of the game very soon while the deals are still marginal.