So we've decided to aggressively sell house #1. Our monthly income on the house is only $142.50/month. The problem is, for refinancing, the bank requires about 75% equity (which we have but that's all we have), so we can't take anything out or that would be our choice. If we sell we stand to make about $20k in cash that we can put towards 2 other homes we've identified that have the potential to cash flow $400+/month.
So with no new dollars (or very few new dollars) we can essentially turn $142.50/month cash flow into $800+/month cash flow. Our adjusted basis in the house is only $64k (we bought for $70k), so when we sell we have at least $10k of pure tax-free profit. We only have to pay capital gains tax on the remaining, which when split between the 3 of us is pretty easy to do. That's only $1,500 on the other $10k we're expecting to make on the house.
Wonder why real estate is a great investment? We're going to sell a house and make $20k on it and only have to pay $1,500 in taxes. For those of you who don't want to do the math, that's a tax rate on the sale of 7.5%. Try and find that in any other medium besides real estate!
Stay tuned, I'll let you know how it goes.
Monday, June 24, 2013
Sunday, June 23, 2013
Closing on house #4 and selling #1
We closed on house #4 on Friday. All went smooth. We are turning it over to the property management company to rent for us since we all have full time jobs. It does cut into cash flow a little but it's what we need to do.
The first house we ever bought is currently cash flowing $142.50/month. We've been getting an average of $300+ with no member loans considered. We currently only owe $54k and it's probably worth $78k. if we can figure out a way to get $75k net from it, then we're looking at $21k in cash (tax free). This means we can buy roughly 2 houses that cash flow at least $300/month. We're potentially looking at cash flowing $600/month with 2 houses instead of $150/month with one. There is no reason why we wouldn't do it.
Our business is based off cash flow. We don't care about equity or appreciation near as much. The max we'll hold a house for is 5-6 years and then we're cashing out all the equity and appreciation and rolling it into another house. Our goal is to sell 1 house and buy 2 that cash flow just as much as the first house.
I'll keep you posted but the idea is to turn $150/month into $600/month without any cash investment on our part. I'll let you know how it turns out.
The first house we ever bought is currently cash flowing $142.50/month. We've been getting an average of $300+ with no member loans considered. We currently only owe $54k and it's probably worth $78k. if we can figure out a way to get $75k net from it, then we're looking at $21k in cash (tax free). This means we can buy roughly 2 houses that cash flow at least $300/month. We're potentially looking at cash flowing $600/month with 2 houses instead of $150/month with one. There is no reason why we wouldn't do it.
Our business is based off cash flow. We don't care about equity or appreciation near as much. The max we'll hold a house for is 5-6 years and then we're cashing out all the equity and appreciation and rolling it into another house. Our goal is to sell 1 house and buy 2 that cash flow just as much as the first house.
I'll keep you posted but the idea is to turn $150/month into $600/month without any cash investment on our part. I'll let you know how it turns out.
Sunday, June 9, 2013
House #5 - An Experiment
So, my brother is in a position where they are expecting and the house they are currently renting isn't going to cut it anymore. He doesn't have the cash to buy yet so he's going to rent. We decided to look for a house for the company to purchase and him to rent. There are many different schools of though on doing stuff like this with family and friends, so we'll see how it goes. We all agreed to the following approaches to ensure there are no surprises and it goes smoothly.
-- The company has certain criteria so it must meet them. We agreed that the house must cash flow $300/month for it to be worth it to the company. We agreed that rent would be whatever it needs to be to make that happen. This ensures that the following is met.
-- Emotion would come out of it. This is easier said than done. My brother would find the house and it will be the sole discretion of myself and my father as to whether or not we would purchase. This takes his emotions out of it. Again, if we turn down a house he really wants that could cause contention but we have a relationship level that transcends that in my opinion.
With that being said, we identified a house. Turns out the realtor refused to pay the referral fee to my Father's appraisal company (which is a requirement of every deal we do). This caused my father and I to say no to the deal. My brother whole heartedly agreed and we walked away.
We've identified a second house (which is a short sale) that meets our requirements. We've made the offer. However, short sales are different animals and this is a new venture for us. We've been told it can take up to 90 days to close. None of us have ever bought on a short sale before so we're researching it and I'm sure the process will be full of lessons (hopefully none that we have to learn the hard way). We don't even know if we're past the point where someone can come in and offer more. With that being said, every thing we do in this process will be run by all 3 of us before a decision is made so we can reduce the chance of mistakes. I'll keep everyone posted. Should be an interesting experience!
UPDATE (9/1/13):
We had a timeline and we never did get an acceptance back from the bank so instead of looking for another house, my brother decided to just rent from someone else. Probably a good decision in the grand scheme of things. So now, no matter what happens, where he lives is separate from our company and no harm can come out of it.
-- The company has certain criteria so it must meet them. We agreed that the house must cash flow $300/month for it to be worth it to the company. We agreed that rent would be whatever it needs to be to make that happen. This ensures that the following is met.
-- Emotion would come out of it. This is easier said than done. My brother would find the house and it will be the sole discretion of myself and my father as to whether or not we would purchase. This takes his emotions out of it. Again, if we turn down a house he really wants that could cause contention but we have a relationship level that transcends that in my opinion.
With that being said, we identified a house. Turns out the realtor refused to pay the referral fee to my Father's appraisal company (which is a requirement of every deal we do). This caused my father and I to say no to the deal. My brother whole heartedly agreed and we walked away.
We've identified a second house (which is a short sale) that meets our requirements. We've made the offer. However, short sales are different animals and this is a new venture for us. We've been told it can take up to 90 days to close. None of us have ever bought on a short sale before so we're researching it and I'm sure the process will be full of lessons (hopefully none that we have to learn the hard way). We don't even know if we're past the point where someone can come in and offer more. With that being said, every thing we do in this process will be run by all 3 of us before a decision is made so we can reduce the chance of mistakes. I'll keep everyone posted. Should be an interesting experience!
UPDATE (9/1/13):
We had a timeline and we never did get an acceptance back from the bank so instead of looking for another house, my brother decided to just rent from someone else. Probably a good decision in the grand scheme of things. So now, no matter what happens, where he lives is separate from our company and no harm can come out of it.
House #4 - A New First And New Lessons!
I had told you previously that we had identified House #4. We had offered $79k on it. Again, we based this off our financial calculations but as you may or may not know, most (if not all) residential appraisals are based off the comparison approach, not the income approach that we use. So, the appraisal came back at $75k.
We then called the agent and said based on our contract, we now had to reduce our offer to $75k since that's what the appraisal is. So, could we have still paid $79k? Of course, but as I've mentioned before, the bank only loans based on either appraisal or the purchase price (whichever is LOWER). The seller did accept our new offer but they didn't have to. I'd venture to say 90% of the time, the seller (if they need to sell) will do this. The reason is, the appraisal is an independent appraisal provided by someone the bank chose who has no vested interest in the deal (he gets paid regardless of whether the deal goes through or not).
So, with that being said, a smart seller will realize that unless they wait a year, no other appraiser in their right mind would change the value of a previous appraisal. So they are stuck at a value of $75k for a little while. Almost no buyer would offer more than the appraisal value. Had we purchased at $79k, that extra $4k is money out of our pocket. That brings our cash on cash return down lower as well as brings our cash itself lower meaning it extends the next house we purchase out even further. The market is too good to be doing that.
There are 2 lessons we learned here:
-- We ordered an inspection before the appraisal came back. Our lesson is don't order the inspection until the appraisal comes back and you have a final accepted purchase price.
-- Had the sellers turned down the reduced offer, we're still out the appraisal price too. Moving forward, all of our contracts will say that "If the appraisal value comes in below the asking price and the seller refuses to sell at the appraisal value, the seller will be responsible for the appraisal fee.
With those 2 lessons enacted, we can go from potentially being out $500 or $600 if the deal falls through to nearly nothing. With the market as good as it is right now, this is absolutely something that we can get away with. It may not be the case in the future or with different types of properties. These houses are available as fast as we want them so sellers are willing to do these things.
As a side note, I want this type of stuff to happen now and with these sub-$100k properties, not later on the multi-million dollar deals :). Again, our worst case, we were out $600. \these lessons happening now are VERY valuable. Fortunately for us, we didn't have to learn this lesson the hard/expensive way, but it doesn't make it any less visible!
We then called the agent and said based on our contract, we now had to reduce our offer to $75k since that's what the appraisal is. So, could we have still paid $79k? Of course, but as I've mentioned before, the bank only loans based on either appraisal or the purchase price (whichever is LOWER). The seller did accept our new offer but they didn't have to. I'd venture to say 90% of the time, the seller (if they need to sell) will do this. The reason is, the appraisal is an independent appraisal provided by someone the bank chose who has no vested interest in the deal (he gets paid regardless of whether the deal goes through or not).
So, with that being said, a smart seller will realize that unless they wait a year, no other appraiser in their right mind would change the value of a previous appraisal. So they are stuck at a value of $75k for a little while. Almost no buyer would offer more than the appraisal value. Had we purchased at $79k, that extra $4k is money out of our pocket. That brings our cash on cash return down lower as well as brings our cash itself lower meaning it extends the next house we purchase out even further. The market is too good to be doing that.
There are 2 lessons we learned here:
-- We ordered an inspection before the appraisal came back. Our lesson is don't order the inspection until the appraisal comes back and you have a final accepted purchase price.
-- Had the sellers turned down the reduced offer, we're still out the appraisal price too. Moving forward, all of our contracts will say that "If the appraisal value comes in below the asking price and the seller refuses to sell at the appraisal value, the seller will be responsible for the appraisal fee.
With those 2 lessons enacted, we can go from potentially being out $500 or $600 if the deal falls through to nearly nothing. With the market as good as it is right now, this is absolutely something that we can get away with. It may not be the case in the future or with different types of properties. These houses are available as fast as we want them so sellers are willing to do these things.
As a side note, I want this type of stuff to happen now and with these sub-$100k properties, not later on the multi-million dollar deals :). Again, our worst case, we were out $600. \these lessons happening now are VERY valuable. Fortunately for us, we didn't have to learn this lesson the hard/expensive way, but it doesn't make it any less visible!
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