How to buy a house

[biophase]

If I built 1,200 sqft units they would rent anywhere between 1,800 to 2,500 per month. Market value for each unit would be approx 450-500k.

It can easily be worth around $2mil after I build and can realistically generate $6k per month in rental income

My father is general contractor who builds houses like this and i would get a really great deal on the building as he offered to do a cost plus 10% - Most contractors have 30%-50% profit

What you just said above means nothing. Where are your numbers?

How much to build 3 1200sf units?
How did you calculate $6k month in rental income? What is this based on? What are your monthly expenses?

Did you even do any approximate calculations on this?

What was your interest rate on the $800k based on? What is the interest rate on the construction loan portion based on?

Seriously, this is so out of your league.

I mean I know absolutely nothing about this piece of land and I can come up with ballpark calculations.

3 x 1200sf houses @ $250/sf = $900k. Rehab 800sf property, $30k. Purchase house = $800k. $1.73 mil, Assuming an insanely cheap 100% loan at 3.5% interest only is $5045 in interest per month. Real estate taxes of $3k/mo? 2%? You are at $8045/mo.

Rent of $2500 x 3 + $1800 x 1 = $9300/mo.

I get $1255/mo cashflow with best case scenarios and no maintenance or vacancy. I have no idea how you even come close to $6k/mo cashflow based on even $10k/mo rent. Show me how you end up with $4k in monthly expenses after buying land and building 4 1200sf homes in LA.

 

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[biophase]

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?

F*cking seriously?? You didn't even bother to google mortgage calculator. I don't see any hustle going on.

When you say "insanely cheap 100% loan at 3.5% interest only is $5045 in interest per month" you are saying the mortgage payment would be 5045 a month correct? Why do you call it interest not mortgage? Was that a typo or is there something I do not understand
The mortgage is the principal and interest correct?

Also why is the tax so high in your calculate usually the tax is approx 2-3k annually not monthly

Look dude, I'm trying to help you out as much as I can, but your questions here are telling me that you don't even know how to google stuff.

I was giving you the benefit of the doubt, but I'm going to keep playing here, because I like running numbers and showing you how far off you are.

First, where did you get construction costs of $116/sf? Please show me the research, a link, some proof? Are you building a ghetto unit? Yea, you said your dad is a contractor, is that the quote he gave you?

Second, I see that your market rent went from $1800 to $3000/mo since the last post. Ok, I'll accept your $9000/mo gross income.

Third, I'm going to accept your $1.2m cost, assuming you have no money and get an unlikely 3.5% rate, your mortgage payment will $5400/mo. I'm even going to ignore costs of PMI here.

Fourth, real estate taxes are based on the value of your property. Maybe 2% is too high, so let's assume 1% which may be low (based on your $2m valuation you said), which would be $20,000/yr, or $1666/mo.

So... we have $7066 in just mortgage and taxes, at your super low rate of 3.5%, with a 100% loan, at a building cost of $116/sf.

Even with every single assumption being skewed towards your direction AND you have the best tenants and never have to do a repair, you end up with less than $2000/mo cashflow. Please tell me again how you got $6k/mo?

 

[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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[TonyStark]

What color Lamborghini would you like?

 

[biophase]

You mean like of the units I would build? I'll try to find out by comparable properties....

You just posted that it's a really good investment and that the rents will cover the mortgage.

So I'm just asking you how you can up with that statement? Where is your math to support your statement?

This is already a really bad idea. You don't have a clue and you want to purchase a property and build on it?

 

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[Envision]

Edit: Exactly what bio said above.

0 experience.

Wants to spend a mil + build.

In California.

Asks a forum how to buy a house.

In short, I would highly advise against buying the property if you didnt get that vibe already. It seems that you have not posted any financials on the property and simply said the rent covers the mortgage so Im good. That is exactly how people get screwed.

Learn about real estate (go to a local REIA, read, Biggerpockets)
Learn ow to run the numbers.
Invest in a different market.
Learn from mentors.
Build a track record.

 

[jon.a]

I really want to put my extra cash it to something big...And my boss who is an expert is pushing me to do..

1. Why isn't he doing it for himself?
2. Why isn't he showing you how to do it?

This is a really dumb idea. Lucky for you this property will require $200K down that you don't have so just move on.

Let's see if @JScott @SteveO @biophase @JustAskBenWhy are willing to jump in and explain why.

 

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[Envision]

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

I saved my money for 2 years.

 

[EvanOkanagan]

Hi all

There is a property near my house - in Southern California a Mile or two from the beach - that I know is a good investment property.

It's about $800k for 9,000 sqft lot..

How do I get enough money to actually get a down payment down on this house? Anyone have advice? I have 10k in savings, am 24 and have never bought or financed anything like this before. Even my car I bought I cash.

As of recently I make about 4-6k a month in sales sometimes more.

I'm starting from ground zero - anyone have advice?

No offense, but you bring nothing to the table on this deal. Your value is almost zero.

- No Real Estate experience.
- Little to no capability to finance (I'm a Realtor and have been in sales and experienced firsthand)
- No capital (your 10k may just cover closing costs)

If you're to bring this to other investors, the only value that you can bring is that you found the deal. And in that case, you have other options that don't involve you being the purchaser (like assigning the purchase contract to make a finders fee). Otherwise, why do they need you in this transaction?

 

[Runum]

He is doing it himself as I mentioned. He is showing me, and actually offered to help (I'm not sure to what degree) once I get the process started.

Why would it be 200k down? Even if it was 20% down it would be 160k no? Isn't the percent down much lower for first time buyer?

Lending rules and requirements are usually different for owner occupied vs investment properties. If you qualify and live in it then you have no rental income.

You may get hard money but it's very risky and you will be on the hook if it doesn't work out.

REI is business. Business is driven by the numbers. @biophase has tried to get you to post your numbers that you have. If you do that then we can help you assess this better.

You have to know comp sales, cost of each unit, comp rents, taxes, insurance, maintenance, vacancy rates in your area, etc. You also have to have reserves for the vacancies. What is the timeline for building it out and getting it rented? Will you manage the property or will you hire a manager? What's the exit strategy? What are employment/business trends in your area?

Overall, this is quite a bite for a first timer. You will learn a lot in a short period of time.

Good luck.

 

[Envision]

Do you own real estate?

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

 

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[biophase]

Yes I plan on renting it out
It is a 9,000 sqft lot with steer down 752 sqft property

It's an R2 zoning so I can build up to 3 detached units...

It's in Basically in Newport Beach for those familiar with the area

If I can figure out the money part it can be a really great investment because the rental income should easily pay for the mortgage...

What's the rental income?

Please post your numbers on this property.

 

[MattCour]

If I built 1,200 sqft units they would rent anywhere between 1,800 to 2,500 per month. Market value for each unit would be approx 450-500k.

It can easily be worth around $2mil after I build and can realistically generate $6k per month in rental income

My father is general contractor who builds houses like this and i would get a really great deal on the building as he offered to do a cost plus 10% - Most contractors have 30%-50% profit

Partner with your dad on the deal. He puts up most of the money, you do all the leg work and split the profits fairly after the project is complete.

Sounds like you need to do a lot more homework before even considering this.

 

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[exclusives88]

Yes I plan on renting it out
It is a 9,000 sqft lot with steer down 752 sqft property

It's an R2 zoning so I can build up to 3 detached units...

It's in Basically in Newport Beach for those familiar with the area

If I can figure out the money part it can be a really great investment because the rental income should easily pay for the mortgage...

You have to factor in maintenance, capex, and vacancy. All of this will be a factor when calculating cash flow. Have you checked out biggerpockets.com?

 

[kkompoti]

Yes I plan on renting it out
It is a 9,000 sqft lot with steer down 752 sqft property

It's an R2 zoning so I can build up to 3 detached units...

It's in Basically in Newport Beach for those familiar with the area

If I can figure out the money part it can be a really great investment because the rental income should easily pay for the mortgage...

maybe you should start with something smaller than that house..find a good deal on a dublex, start fixing it and then rent it out.
then repeat
then repeat again,
and maybe down the way you will have enough money gathered to put a down payment for this house..

also check biggerpockets as suggested above.

don't do such a big financial move if you do not have previous experience with house buying and renting....

there is a member here that owns a golf course.....
buying a golf course is a really big investment and with the right management it can create a substancial cash flow...
he did not buy the golf course as his first ever investment.
he hustled his way through other properties and investments first.
and now he has the money to spent on safaris .....

 

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[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.

[HASHTAG]#EndOfThread[/HASHTAG]

 

[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.

 

[kkompoti]

The thing is this area is really really hot now and development gentrification is moving closer and closer to the property I want to buy.

My boss is actually the person who's pushing me to buy. Because he has bought a couple properties and value has doubled or tripled.

I'm making around gross 4-6k a month in commission, but in April I got my companies products in to one of the top 3 retailers in the world, and now I'm making about double that as commission rises..

I really want to put my extra cash it to something big...And my boss who is an expert is pushing me to do..

I just don't know what the options are to decrease the down payment to something I can afford....or what techniques are available to first time buyers to get more money to make the down.....to I need to just save for it???

start small, grow and learn as you go. real estate is wealth 101, you can do it!
patience is a virtue. and patience in making life changing decissions is needed.
plan carefully each step you make.
imagine the high risk you will be taking. high risk needs perfect planning
why don't you take your 10k put them as a downpayment for a condo and start small?
buying a lot, building several houses on it, taking all the licences for it, having to deal with the contractor(father mentling in your business idea is not so good in my opinion) and finding people to live in the houses takes a lot of time and a lot of money.
have you made an EXACT plan of expenses?
have you figured everything out? because after the downpayment, if something happens while you are building and you need an extra 30k to put in the project, where are you going to find that money?

real estate is king in making money but it can also be a king in losing money also.
also there must be a reason your boss is trying so hard to make you invest. secret agenda?

if the area is the reason you want to invest, is there a smaller lot for you to buy?

imagine facebook: started small from one campus, then second , then the world , you get the picture i think.

 

[TonyStark]

Essentially, you're trying to climb a flight of stairs without any arms or legs.

My advice? MAKE MORE MONEY.

 

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[Envision]

Typo I mean 9k in rental income and I was talking gross. I just occurred to me 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 interested opposed to 493,248 thousand over 360 months...

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

I'm not trying to build a real estate investment business...I just want to take the opportunity in the market right now and actually own something instead of renting.


Thanks for the help...your post helped me move forward.

I do know how to google and found some good spread sheets to work off of since this morning.

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..

 

[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.

 

[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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[Mikkel]

That is quite the house that you plan on buying with such little money you make in comparison. I assume you plan on renting this out?

If so, whatever rate you get on the mortgage, you should plan on being able to pay for it for months on end in case you don't get someone to move in right away.


That is my two cents though; I won't pretend to know a shred on buying houses as I have never done so myself. Only read a few things here and there.

Maybe read some of @JScott threads, i'm sure some of his stuff will help you out. Better yet, maybe he'll come in with some advice?

 

[arcola]

Yes I plan on renting it out
It is a 9,000 sqft lot with steer down 752 sqft property

It's an R2 zoning so I can build up to 3 detached units...

It's in Basically in Newport Beach for those familiar with the area

If I can figure out the money part it can be a really great investment because the rental income should easily pay for the mortgage...

 

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[MMatt]

What seems great on paper may not always work out so well in reality. I would start with a much smaller investment to get your feet wet in real estate.

 

[Mikkel]

I think the overwhelming suggestion here is to start out small @arcola

Are you giving up a great property, potentially? Yea, most defiantly could be. However, you are placing yourself at an incredible risk for barely knowing anything about Real Estate marketing.

You may have a mentor, but where is he going to be when things fall through? He won't be with you, I can tell you that. He's not the one investing in the property, you are, with your money.

You need to play within your limits. Going Fastlane does not mean going from the slow lane and jump 3 lanes of traffic just to get to the furthers most left lane.

There will be other killer opportunities, but the difference will be that you have experience and extra capital.

 

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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

 

[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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[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.