by David | Oct 20, 2014 | My REI History
This blog was born after I completed my first real estate purchase back in July, but my real estate investing adventure started long before that. It started about 2.5 years ago with a lot of research. The adventure also involved two failed purchase attempts that happened a few months before the first successful one.
I think one of the most important things about real estate investing is not giving up, and not being afraid of the hard times. Of course, it’s OK to fear the hard times (that’s normal), it’s just that you need to prepare for them so that, when they happen, you’re ready and aren’t surprised or paralyzed by them.
Here are the stories about the first two deals I tried to close:
Deal #1 was a turnkey property in Chicago. It was a duplex in a working class neighborhood. The top unit was inhabited by a small family and the bottom unit by a single woman. For some reason, the information provided by the turnkey company about the tenants wasn’t very reassuring. I never received very clear information about who the tenants were or what kind of background checks had been done when they applied to live in the house. Furthermore, the week we were supposed to sign the contract and I needed to send the earnest money, I was notified that the woman living in the bottom unit had left. This created some concern and a lot of uncertainty about the property and more so about the turnkey provider, so I stepped away from the deal. Perhaps this was a mistake since the property seemed like a good investment, but it would have been my first deal and I was very cautious.
Deal #2 was a single-family home in the Midwest. Everything was going smoothly; I had the mortgage approved and the contract was in place. The only problem was that the appraiser appraised the house at roughly $70,000 while the asking price was $95,000. This made me very nervous about the turnkey company since the main benefit of working with one is the fact that they are experts in their market or city. They are supposed to be experts on their neighborhoods and property values. Moreover, this was a mortgage that I was getting through a bank they recommended–so the appraiser was someone they’d worked with before. This led me to believe that the company is not the expert I need my turnkey provider to be, and I stopped working with them. (Sure, glitches happen, and this may have been a mistake on their part, but there are plenty of markets and turnkey companies out there.)
The moral of the story is: You might not succeed the first time (in fact, you probably won’t), but things get better and easier as you gain experience. So, if you head into real estate investing understanding that there’s a learning curve, early failure won’t be as hurtful to your morale as it may have been if you’d been expecting things to be smooth from the get-go.
by David | Oct 12, 2014 | Thoughts about REI
For my first real estate purchase, I used a Fannie Mae/Freddie Mac loan which had pretty good conditions. It’s a 30-year loan with a 20% down payment at an interest rate of 5.125%. Since I don’t qualify for a loan with those conditions at this time, I spent this month searching for other loan options.
The best option I’ve found is provided by one of the turnkey companies I’ve been in touch with. It’s a 10-year loan, the down payment is 40% of the house value, and the interest rate is 7.5% (while higher than the interest rate I’m paying on my first property, other lenders I spoke with offer interest rates as high as 12-15%).
So, what would this loan look like vs. the loan I received for property #1? Let’s examine the costs of property #1 with the loan I took for it (lets call it the “original loan”), and with the loan I’ll be using on property #2 (we’ll call that the “new loan”):
Original Loan
Down payment (20%) – $14,540.00
Loan term – 30 years
Interest rate – 5.125%
Monthly loan payment – $316.67
Monthly cash flow – $265
Cash on cash return – 17%
New Loan
Down payment (40%) – $29,080.00
Loan term – 10 years
Interest rate – 7.5%
Monthly loan payment – $518
Monthly cash flow – $63.67
Cash on cash return – 2%
As you can see, when looking at the cash flow, the 30-year loan has an advantage since it provides over $3,000 of cash flow per year, while the 10-year loan provides under $750 per year. However, after 10 years, the new loan will be entirely paid off, bringing the monthly cash flow to $581.67 (or $6,980 per year). That’s a 21% return from the initial $29,080 down payment.
To conclude, if we’re not looking for immediate cash flow, or if our goal is to create passive income in 10 years from now, the new loan can be an attractive option. So when you’re checking out different loan options, keep in mind what your goals are and you may see that initially less-attractive loans may turn out to be worthwhile.
by David | Oct 5, 2014 | Uncategorized
Introducing the Passive REI performance meters!
Every month, as part of my income reports, I’ll grade the following parameters:
- Cash flow – will be graded based on the potential versus actual cash flow.
- Passiveness – graded based on the amount of time spent on my income properties-green means very little time spent, red means too much time spent. This won’t include efforts on acquiring new properties, as those are not passive but rather very active (it’s important to learn everything I can about the property, neighborhood, turnkey provider, etc.).
The idea is to compare between different months, and visuals are always easier to consume than text.
My August and September meters came out the same:
Cash flow
Passiveness
by David | Oct 1, 2014 | Income Report
September was a busy month since I moved to a new house and was preoccupied, so real estate took a back seat. I didn’t find the right property to start the purchase process yet, but plan on doing so in October. One of the main things I was researching was how I can fund my next real estate purchase since I won’t be able to qualify for another conventional loan. I came across several turnkey providers that work with local banks and lenders on non-conventional loans. These loans rage from 5-15 years and have interest rates as high as 12% (as opposed to a conventional loan which you can get for 30 years at around a 5% interest rate). I found that the company I purchased my first property with works with a bank that has a fairly attractive offer, but I’ll go into more details in a post all about non-conventional loans.
So what did we have this month in regard to my rental property, well… I received my first full rent payment this month! (the previous month was only partial since I only owned the house for part of that first month) As well as paid my first mortgage payment.
| Rent |
$795.00 |
| Mortgage |
-$316.67 |
| Insurance |
$0.00 |
| Taxes |
$0.00 |
| Management |
-$79.50 |
| Total cash flow |
$398.83 |
The total cash flow this month comes out to $398.83, making the total cash flow thus far $629.64. This wealth building is going to take a while 🙂
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