How to buy a house

[arcola]

What happens when a water heater in one of the units goes out? A tenant leaves and a unit is vacant for 3 months? After a deeper look one unit has black mold throughout it?

You end up going negative and now your living with a problem. There's too much money/risk involved to simply just break even..

It's not my planned source of income or business..it's not like I'm quitting my job and relying on rental income

I want the asset.

Right now I pay rent and that's 100% in the negative...

 

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[Envision]

It's not my planned source of income or business..it's not like I'm quitting my job and relying on rental income

I want the asset.

Right now I pay rent and that's 100% in the negative...

It's not an asset if it doesnt make money.

You are more invested and have more responsibilities when you own as opposed to rent.

Dude you can do whatever you want but its just a bad idea and thats what we've all been trying to explain to you. But you will figure it out

 

[arcola]

It's not an asset if it doesnt make money.

You are more invested and have more responsibilities when you own as opposed to rent.

Dude you can do whatever you want but its just a bad idea and thats what we've all been trying to explain to you. But you will figure it out

Do you own real estate?

 

[Envision]

Do you own real estate?

Yes, I bought my first property when I was 20.

 

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[arcola]

Yes, I bought my first property when I was 20.

So how did you get the money for a down payment?

 

[Envision]

So how did you get the money for a down payment?

I saved my money for 2 years.

 

[Guest34764]

It's not my planned source of income or business..it's not like I'm quitting my job and relying on rental income

I want the asset.

Right now I pay rent and that's 100% in the negative...

This thread is hurting my head.What's the point of owning an "asset" (liability) if It doesn't pay off?

Look, you don't have money for this type of "asset".

Make more money and start somewhere on a smaller scale, It's cool being a "big-shot" and owning real-estate, but If it ends up as a liability (which It will be) then what's the point?

You'd screw yourself hard from such a big mistake.

At this stage with your amount of money it's better to take small risks and make small mistakes than it is to go up to a big risk.

If you really want to, go for it, no one here is going to stop you, but you should sit down and think about it more before making a rash decision.

 

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[DrunkFish]

Honestly I think you should definitely go for it but not with this deal. Start waaay smaller before you make a bad move and it costs you 100x what it would've with a smaller start. Ive been studying up on real estate and it definitely seems like one of those things where its way better to start of small and build a nice little track record before you get to the big stuff.

 

[Liberty T. Vance]

Wow... Your Dad is getting an amazing deal. I grew up in Orange County and lived in Newport Beach for a few years, it is one of the most expensive cities in Orange County where most of the homes are worth millions.You've obviously found one of the famous old tear down homes.

Before the financial crisis I owned a construction and was building 1200 sq. ft. houses averaging $120,000 per house in N. California. That was in 2007-08.

None of your numbers are realistic. @biophase has shown you how unrealistic your calculations are. My concern is your ability to run a construction project. Is your Dad a general contractor and can supervise the whole job? Are you building as an owner? Who will keep track of the sub-contractors? Is the electrical guy coming today or the plumber? They hate being there at the same time. How about city inspectors? What about cost overruns? And there will be cost overruns.

Take all of the previous advice and start small.

 

[kkompoti]

i am sorry to say this but man go do your big step, go and do it.


nobody here is trying to stop you.

they try to show you that maybe the numbers are wrong and that going in for such a big move is far more riskier than you think.

if you don't succeed then what? you will have to pay the morgage from your paycheck.can you handle this?

why are you so fixed that this is the only option for your investment strategy?

go and explore other opportunities.smaller.
as it goes for rent .buy a dublex ,rehab it, live in one and rent the other. you will break even with that morgage if you do the math right.
as it goes for you wanting to live in a nice place,postpone that for some years. maybe in the future if you work right and with good decissions, you maybe living in calabasas la , next to the kardashian sisters.
as it goes for hearing others trying to make you invest, think again why they want you to put your money in that particular investment.
as it goes for the people in here, they do not know you,this is a forum for entrepreneurs, all of them have the same mentality, people answering in this thread and telling you to do something different from what you think,maybe is something you sould think twice and please do.

now go and do your big step.

please come back and tell us what will happen.

i will be very happy to hear you managed everything out and you are in the fastlane,
and if you cannot manage it correctly then this will become a really big lesson for you.

......says the man that makes 2600 a month lives in rent also and has family(wife-kids-cat-dogs), and just saw two appartments for buying (120000)and renting out(700) but said no because the numbers where not so good for me and currently waiting for a better deal.

 

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[mayana]

Right now I pay rent and that's 100% in the negative...

Buy a duplex or some other kind of mult-family housing unit, and live in one of them while you rent the other/the rest out. This way, you can start building some equity in real estate, try out renting (while you are living close by to your renters), and you can learn more about real estate.

If it works out, and you like it, you'll find more deals that you are better prepared for down the road.

 

[Envision]

Okay, I'm mostly going to reiterate things that others have already said, but they are things that are probably worth repeating:

- First, if the property is in Newport Beach and it's zoned R2, then legally you can only build 2 units per lot. This took me about 30 seconds to find in the Newport Beach zoning code:

R-2 (Two-Unit Residential) Zoning District. The R-2 Zoning District is intended to provide for areas appropriate for a maximum of two residential dwelling units (i.e., duplexes) located on a single legal lot.​

- In Newport Beach, I'd say it's nearly impossible that you'll be building for $115/sf. Have you factored in permits? Architectural fees? Engineering fees? Lot clearance and grading? Utilities? Etc?

- You mentioned that the rent would cover the mortgage. That's all well and good, but you still have taxes, insurance, maintenance, capex, rent loss, vacancy, turn-over, legal/accounting, lawn maintenance, potential property management, etc. Those costs will typically eat up about 50% of your gross rents, so by my estimations, you'll be losing up to $2000/month.

- To extrapolate on my number above, assume you're getting (best case), $3000/unit on three units -- that's $9000/month in gross rents. Assume that you lose 40% of that off the top (all expenses, capex and rent loss, but not including third-party PM) -- that's $4500/month net income before P&I. Now, let's say you get a loan for $900K (75% LTV), at 4.5% interest for 30 years -- that's P&I of $4560. You're losing $60/month on the deal. You seem to think you'll get closer to 100% LTV loan, which puts your P&I at about $6200 -- so you could be losing closer to $1700/month under that scenario.

- It's quite likely that you won't qualify for a HUD loan on a property like this, so you could be looking at a 20-year amortization (or less), which would put your P&I quite a bit higher -- and your monthly income loss quite a bit higher as well. And, you're almost certainly looking at a minimum of 20% down, but it could be 25-30% if you have to go with a portfolio lender or a typical construction loan.

- Tax rate in Orange County is 1% plus local assessments. You're likely looking at about 1.25% of value -- though this may be phased in due to Prop 13 (I don't know how they deal with new construction). Regardless, if you have a property/build cost of $1.2M (the minimum that would likely be used to assess taxes), you're looking at a minimum of $15,000/year, or about $1,250/month. I think $1,500/month is probably safer.

- From a resale perspective, you said that the average value of a 1200 sf unit would be about $450-500K. Let's assume your high-end number. If you build three units, that's a total value of $500K -- though keep in mind that those units would all be deeded as a single lot, so I'm skeptical you'd get top dollar per unit. But, let's ignore that for now. If each unit is worth $500K, that's $1.5M for the whole lot. If you go to sell, you'll lose about 10% to commissions and closing costs -- leaving you with about $1.35M from the sale. If you spent $1.22M on purchase and construction (which I think is VERY optimistic) and then probably spent about $4000/month in interest for the year it took you to complete the project, that leaves you (very best case) with about $90K in profit. That's best case. More likely, I think you'd lose a couple hundred thousands dollars.

Overall, I think you're way underestimating your costs, you may be overestimating your gross income, you're almost certainly overestimating your net income, and you're probably underestimating the difficulty and cost of getting a loan. From the little information you've provided, this doesn't seem like a very good buy-and-hold deal and it doesn't seem like a very good value-add/flip deal.

There are other options that *might* make the deal profitable, but you don't provide enough information for any of us to analyze alternative scenarios, so we'll have to leave that to you to determine. In order to do that, I would recommend starting to get educated on real estate, construction, real estate finance, etc. -- I'd recommend spending a year or so learning the basics before you try to jump into a project like this.

This is the info that everyone is telling you you need to know. Break down JScott's response and research bits and pieces of it to start to understand REI and look for another deal and try again.

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[MJ DeMarco]

Do you own real estate?

(Looking to discount the advice thinking it's just some random drive by)

Yes, I bought my first property when I was 20.

Epic!

Thread summary: Every RE guy (guys who have probably done MILLIONS in deals) in the thread has responded with some great information.

OP isn't interested in hearing what he doesn't want to hear.

 

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[Jon L]

The thing is I really want to figure out a wa



So I did a little more research

Land cost: $800,000 (I'm probably going to offer $750,000)
Demolition of existing property: $2,000 to 4,000
Construction estimate cost of: 1,200 sqft $140,000 ea
Total cost of construction: $420,000

Total cost of project: $1,220,000

Market value for rental of 1,200 in on the block: $2,500 - $3,000 (if I rent out 3 units I would have a rental income of approx $6k)

How do I estimate loan costs? Is there a website or calculator you use?




I am like I said I closed a pretty big account and the projection is im going to be making around $265,000 in commission pre tax this next year based on the plan the retailer laid out for us.

speaking from personal, painful experience...wait until that money is actually in your bank account before you start spending it. I had a similar deal years ago, and got paid pennies on the dollar from it.

 

[biophase]

Typo I mean 9k in rental income and I was talking gross. I just occurred to me you thought I meant net rental income.

The quote is from my dad it wouldn't be ghetto.

Even if I broke even on cash flow, and the tenets are paying the mortgage for me, wouldn't that scenario be a good one?

My income is rising and I could help pay the assets down over time fast - I noticed that at a 3.5% interest rate if I paid 7,184 or double the monthly, I would pay it down in just about 135 months and pay only 168,742 in interest opposed to 493,248 over 360 months...

I am probably going to make around 15k a month after tax next year and think this is doable...

No, I understood you were quoting $9k gross. Why do you keep on ignoring taxes and other stuff in your calculations? It's like you think that the mortgage is the only payment you'll have to make on the property.

So I'm confused are you living in 1 unit and renting 2, or renting all 3, because you talk about tossing away rent in another response.

You are not going to break even on this one. You should ask yourself if -$1000 or more is worth it on this property? Maybe you'll make it back when you sell, but wouldn't it suck to do all that work and then lose money on top of it?

Isn't it amazing how some of us here can run these numbers simply given a location, some ballpark square foot figures, etc...? Many of us can see that this is a no-brainer loser. But somehow, the real estate rookie is right with this fuzzy math while the experienced veterans just scratch their heads.

I am hoping that the OP is actually learning through all of this.

If you actually go through and manage to get funds to do this, I'd love for you to come back and post your actual numbers.

 

[HoneyBadger]

Why not instead pitch the land owner on demo + new house on the property as a way for them to sell faster/higher (if the numbers in the area make sense)? Then your dad builds it and you take a commission for the sale.

Requires no capital and if you make the sale you can add it to your $10k savings and go find a cheap duplex.

 

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[OldFaithful]

How do I get enough money to actually get a down payment down on this house? Anyone have advice? I have 10k in savings

Save your money until you have at least 20% in cash, which in this case is $160k. Then come back to us. Don't even think about it until then.

 

[JustAskBenWhy]

This is not a project that you can attract a bank to. You are too risky, and so is the project...

This doesn't necessarily mean that you shouldn't pursue. However, you statement that you know it's a good investment worries me. I would need to see much more to be convinced. Certainly, with $10,000 top line, you'd do well for the NOI to be at $6,000. If there are no prefs or debt, that would be your cash flow. But, if you owe money...

Now - assuming this really is a deal (and if it is, it's on the equity side - forget CF here), what you need is to raise money from partners. Institutional lenders won't do this with you. You build, and sell or refi...but sell sounds more like it. Construction cost should be well known to you (your father). Permitting and environmentals in the socialist country of CA - I have no idea. But, in the end, if there is anything here, it's build and sell. Give 50% of the profit to partners, Hell, give 80% to the partners. But, build and sell in one way or the other...

PS: I disagree with people who say you need 20%. Not really. You need access to money, but in RE it doesn't have to be yours

In RE, there are those people who are here to preserve wealth that they've built somewhere else - that's not you. You are here to run this business; you are an operator. Having your own money certainly helps, but if not, money is a too no different from a hammer - you pay to borrow it.

Good luck!