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Help to structure mt first deal

alexh

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This is a a little complex in my opinion, as i am still new to real estate investment.

This deal is a venture with a friend.
my friend owns the house on a secured line of credit, and has 80,000 equity.


I want to buy his house with no cash down.

I will carry the mortgage
I am preapproved for $440,000 (the price of the house.)

Here is where it gets more complex.
He will own the house 50/50, but I will carry the complete mortgage. He is willing to leave some equity in the house up to $40,000. I am buying the house from him so he can purchase another house on his line of credit, (which has nothing to do with this venture)

My question is how can i structure this deal to buy this house with no cash down?
 

TommyK

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My question is: what are you going to do with the property?

Are you investing for the cash-flow (like renting out the other rooms out? or rent out the whole place?)

If so, what is the rent going to be like? What the current payment?


Tommy
 

Thembi

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Wow 440k?is this an investment property or personal residence?How big is thism house?Have u use dthe 10% rule and it fits?Well if u can rent it for 4400/month then i guess u can consider it but that sounds a little high for a first property,u dont wanna tie down all your funds,just my opinion but am a rookie as well.
 

SamEfford

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If he is willing to leave the equity in the home, add an addendum to the sale contract stating that he will give you $40,000 cash back up on closing. This money can then be used as your downpayment funds. Essentially 0 down.
 

alexh

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QUOTE (TommyK @ Oct 1 2008, 01:36 AM) My question is: what are you going to do with the property?

Are you investing for the cash-flow (like renting out the other rooms out? or rent out the whole place?)

If so, what is the rent going to be like? What the current payment?


Tommy

Hi tommy, this is meant to cash flow.
The renos are included for almost free. (the owner of the house will include through the purchase.)
I will have to pay for materials.

Its about 1400 sq feet. top level
And the basement another 1000 sq feet.

I plan to rent top for 1400
basement for 1100

And this house will qualify in dec 2008 for a gov grant.(affordable housing) They give 75% of the cost of all renos, I will use this to build a lofted garage, Increasing the upside potential of the property.

At the same time this loft will the rent for approx 600-700

I put no cash at all? All i have to do is carry half the risk with him.
and take on the whole mortgage.

any details i left out?
 

princecharles

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QUOTE (alexh @ Oct 1 2008, 10:53 AM) Hi tommy, this is meant to cash flow.
The renos are included for almost free. (the owner of the house will include through the purchase.)
I will have to pay for materials.

Its about 1400 sq feet. top level
And the basement another 1000 sq feet.

I plan to rent top for 1400
basement for 1100

And this house will qualify in dec 2008 for a gov grant.(affordable housing) They give 75% of the cost of all renos, I will use this to build a lofted garage, Increasing the upside potential of the property.

At the same time this loft will the rent for approx 600-700

I put no cash at all? All i have to do is carry half the risk with him.
and take on the whole mortgage.

any details i left out?

I am new to the REIN system, but if I understand correctly it doesn`t seem like this deal passes the REIN 10% Solution.

Does automatically make this a poor deal, or are there exceptions?
 

invst4profit

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Looking at the numbers and being generous assuming total rental income (3 units) is $3200/month.

Mortgage $440,000 @ 5% 30 year monthly payments $2348.24
Expenses a conservative 40% - $1280/ month

$3200 - ($2348.24 + $1280) = -$428.24/month negative cash flow
@ 50% expenses monthly negative cash flow = -$748.24/month

This is a really bad deal for a rental income property.
 

alexh

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QUOTE (invst4profit @ Oct 1 2008, 12:34 PM) Looking at the numbers and being generous assuming total rental income (3 units) is $3200/month.

Mortgage $440,000 @ 5% 30 year monthly payments $2348.24
Expenses a conservative 40% - $1280/ month

$3200 - ($2348.24 + $1280) = -$428.24/month negative cash flow
@ 50% expenses monthly negative cash flow = -$748.24/month

This is a really bad deal for a rental income property.

Great analysis.

My plan is to shave off almost 20% of expenses.
-8% property manager
-10% cost of labour.
- 35 -40 year mortgage (decreases monthly payment)
This is all included in the price as sweat equity.

I intend to have very minimal cash flow at least,
free equity building(payed by tenants) and 2-5% appreciation/year


???? I know it doesnt pass the 10% rule, but i would like to be creative and make it work.
 

wealthyboomer

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QUOTE (alexh @ Oct 1 2008, 05:46 PM) Great analysis.

free equity building(payed by tenants) and 2-5% appreciation/year
How do you know there will be appreciation?
 

princecharles

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QUOTE (wealthyboomer @ Oct 1 2008, 10:06 PM) How do you know there will be appreciation?

Hi Invest4profit how did you figure 40% or 50% for expenses (10% for property management but what else are you considering?) and did you calculate that mortgage did you use this formula or is there an easier way to do it:
M = P [ i(1 + i)[sup]n ] / [ (1 + i)n[/sup] - 1]

And if someone wouldnt mind helping me, what do you consider when choosing an amortization period for an investment property purchase of say a duplex or sfh? do you always take the longest one you can get in order to achieve more cash flow? and then try to sell off your package to someone else when you are ready?

tx
 

invst4profit

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alexh

Be very careful in choosing a property that clearly does not work. There are lots of properties out there that do work. Choosing one that falls into your lap and trying to be "creative" with the numbers is a poor business plan. Many have tried and failed. Your expenses for upkeep, repairs, legal, accounting, advertising, evictions, vacancies, utilities when vacant, management, insurance, taxes, etc will be higher than a novice landlord will expect. If you count your time as being worth nothing you might get it down to 40% of your monthly income (might) long term.
If you want to do the work yourself fine but pick the right property and your efforts will really be rewarded with higher positive cash flow not just the relief of getting close to break even. And it`s best not to include appreciation or paying down of the mortgage as part of the positive benefit of the property as they do not put food on the table at the end of the week and can easily evaporate with a change in the economy at time of sale.
Keep looking.
 

alexh

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QUOTE (invst4profit @ Oct 2 2008, 06:47 AM) alexh

Be very careful in choosing a property that clearly does not work. There are lots of properties out there that do work. Choosing one that falls into your lap and trying to be "creative" with the numbers is a poor business plan. Many have tried and failed. Your expenses for upkeep, repairs, legal, accounting, advertising, evictions, vacancies, utilities when vacant, management, insurance, taxes, etc will be higher than a novice landlord will expect. If you count your time as being worth nothing you might get it down to 40% of your monthly income (might) long term.
If you want to do the work yourself fine but pick the right property and your efforts will really be rewarded with higher positive cash flow not just the relief of getting close to break even. And it`s best not to include appreciation or paying down of the mortgage as part of the positive benefit of the property as they do not put food on the table at the end of the week and can easily evaporate with a change in the economy at time of sale.
Keep looking.


Understood, I think i should not get too emotional about this deal, and keep looking.

Very much appreciated, that further clarifys my reasoning.

One more question cleared up.

Thumbs up!
 

alexh

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QUOTE (wealthyboomer @ Oct 1 2008, 09:06 PM) How do you know there will be appreciation?

I assume there will appreciation over long term, as my strategy is to hold for more than 10 years.
 

invst4profit

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Right on alex. There is no room for emotion in this business. Except for the ones associated with being successful.
 

kreezo

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QUOTE (invst4profit @ Oct 3 2008, 07:24 AM) Right on alex. There is no room for emotion in this business. Except for the ones associated with being successful.

40-50% of gross rental income? ie of $3200?
 
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