Reader Question #1

Andy over at Thoughtful Consideration emailed me the following question and, with his permission, I thought it would be better to answer it here.

“My wife and I are interested in getting into investment real
estate, but we’re having trouble identifying properties with which we
could generate a positive monthly cash flow. We have some (but not a lot) of
money that we could put down; unfortunately it’s not enough to bring even
the most basic expenses (mortgage, taxes, etc.) to a monthly dollar amount
below what we could rent the units for.


Did you run into that problem, or is that just our market (Boston suburbs)? Do you have any ideas on how that might be overcome?”

I guess I am lucky because the city I live in is heavily populated by students, and enjoys relatively low real estate prices.  The average home in my city costs approximately $250,000 CDN, but you can find town-homes and a lot of smaller homes in the $150,000 range.  My first home is a war-era home converted from 3 bedrooms to 5 bdrm, 2 bath.  My second income property is a 3-bedroom townhouse converted to 5 bedrooms.  Furthermore, I charge per bedroom since I am renting to students. This works out to $2000/month rent.  Expenses are kept low ($1200-ish) including mortgage payments due to the low cost of the homes, so the mortgage payments are reasonable.

I’m not really sure what the Boston market is like.  You may
wish to consider leasing out a property, or flipping a house or two to generate capital.  However, flipping is a risky business and one must very carefully plan out every eventuality prior to purchasing a house to flip.  I think flipping will become even more dangerous in the coming years as some of the air gets let out of the housing bubble.  For a light-hearted view of the Flipper Nation, check out this online video series. (It is worth a watch!)  There is also the question of flipping in a market which has a good potential for downturn.  I, for one, think it is still possible to flip a house as long as you do it right…  What does that mean?  You need to get in and out quickly, get the house on the market ASAP, know your market so that you can guarantee the house will sell fast, and keep in mind all of your expenses including depreciation of the market value.

Another idea would be to attempt to buy up some foreclosures.  There are several ways of doing this, and it does require a fair bit of legwork, however, you can often get the house for much less than market value.  I have not attempted this, so I really don’t know how to go about it.  I have some ideas… but untested ones, I’m sure a trip to your local Chapters would dig up some good information here.

Either way, the more down payment you can scrounge up, the more cash-flow you’ll have.  Ideally your yearly cash flow will be able to pay for all of your repairs, and other miscellaneous expenses. Otherwise, these will be out-of-pocket expenses, and I wouldn’t recommend getting into a situation like that.

Here are some questions for you, maybe you could chat them up in the comments:

  1. What is the average cost of a house in Boston? 
  2. How much do you think you could rent it for? 
  3. How much is property near the colleges? 
  4. College students pay exorbitant amounts of rent (because they are much shorter term usually).
  5. Have you set up a spreadsheet to compare properties (more on this later)?

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Foreign investment homes for retirement or vacationing

I’ve been toying with the idea of investing in a vacation home abroad for about a year now. There are many suitable countries for such an investment such as Costa Rica, Portugal, Chile, Brazil, etc. Right now, this is just an idea, but here are some links and information I’ve located on the topic.

I watched a program on one of our specialty channels on investing in Rio de Jineiro. Evidently, you can purchase a condo 5 minutes from the beach for in the neighbourhood of $150,000 USD. Not a bad price given that you would only need to come up with the down payment, and the place would be yours.

Costa Rica:

  1. LandShareProfits answers the why of retiring to Costa Rica? The website is 100% focused on Costa Rican real estate.
  2. Free the Drones posts a lengthy article with some nice details on the legal aspects, and includes some real estate listing sites to-boot. They also have a few other posts on the topic .

Thailand:

  1. Free the Drones also posts about retiring to Thailand. It is mostly an outline various travel guides to the country, as strict retirement guides are not available in print. However, the author states that he’s working on a collection of what the internet has to offer on the topic. Visit the Retire Abroad tag for more goodies.
  2. Good news , the coup has not significantly affected real estate prices.
  3. More good news , if you’re American, you might find better healthcare in Thailand and neighbouring countries than at home, so why not retire there?

Furthermore, here are some other ideas:
1) Invest with friends and time-share the home
– this spreads the inital cost out
– a recurring yearly fee would take care of the regular expenses
– in short order, I’m sure it would be easy to find enough interested parties to fund the home
2) Rent the house for most of the year, while owning it yourself
3) If you find a house in the right area, it could appreciate significantly in value as more and more people consider buying up property in areas where tourism and trade are only just beginning to take-off.

To be continued…

Casey Serin… strange dude.

There was more activity on Serin’s blog again today. This-time he spent 18-hours coming up with an explanation of everything that happened on his Phoenix trip.

It is becoming more and more clear that Casey has some mental difficulties. He is terrible at making decisions, is extremely impulsive, has little regard for the well-being of others, and has no idea how to predict the consequences of his actions.

Here’s my comment from No Limits Ladies‘ account of the story.

My
guess would be that NLL offered to take on Casey’s properties, sell
them for a profit, make sure Casey broke even on the deal, and also
take a significant chunk of any media (print, film, documentary and
what-not) royalties to-boot.

Not a bad deal for NLL… and if Casey was smarter, he would realize
that it is a good deal for him too. Unfortunately, he doesn’t realize
at this time that he is incapable of selling his properties himself and
bailing himself out of debt. So… the floundering will continue.

I mean really, who spends 18-hours on a post admitting that you’re
stupid, you aren’t a man of your word, and that you can’t make a
decision?

My thesis adviser, a wise man by my standards, once said “there’s
nothing worse than a man who can’t take a decision.” (no, he was not
referring to me, thankfully 🙂

If I were NLL, I would consider holding Casey to his word. He signed
the agreement, now he should have to live with the consequences of his
actions (FOR ONCE!!!).

Casey entered a contract with these ladies, and has now backed out of it (kind of like a child might do once they realize that the deal will entail some kind of sacrifice in order for them to ultimately get what they want). Why would he back out? Greed… greed is the only reason I can figure why Casey would back out.

NLL were trying to help bail him out of hot water. In return for their hard work (selling his properties where he had failed over the last several months), they likely would have taken some or all of any profit, as well as rights to some of his book royalties.

Now… it seems here that everyone is getting something of the deal. I believe, and have stated in my comment, that Casey at this point in time does not realize that he is incapable of digging himself out of trouble. He has consistently shown his lack of tenacity and drive by choosing to spend hours and hours writing blog entries when every minute of every day his debt, and missed payments stacks up.

Casey… its time to play Let’s Make a Deal!

And remember:
1) Deals are always negotiable, think of every possible way you could restructure the contract and propose them all to NLL.
2) You’ve already accepted the deal anyway.

Economics of Flipping

Yesterday my wife and I stopped by an open house just one block from our own home. The house for sale was purchased almost one year ago now, for approximately $210,000 (it was listed for $230,000). The obvious intention of the purchasers was to renovate and flip the house.

For approximately the next three months, we watched the new owners driving in and out with a pickup truck, hauling junk, and renovating like crazy. The house was placed on the market about six months ago.

The online listing looked good. They had redone all of the kitchen cabinets, and created a beautiful master bedroom suite on the whole 2nd floor. The master suite included cherry hardwood, a spacious bedroom with 3 dormer windows, and a large bathroom with a corner jacuzzi and standup shower. Original list price, $345,000.

Now, you might be thinking that there is something fishy going on. Why is the house still on the market after six months? Here are some of the major mistakes made by the owners:

  1. Incomplete renovations
    • Almost all of the doors, windows and some of the flooring were left original (50-years old).
    • The main floor bathroom remained untouched… and ugly.
    • The basement was untouched, and remains useless.
  2. Shoddy workmanship and cheap materials
    • Drywall and kitchen finishing’s were not well-done.
    • Exterior was largely untouched and has a very cottage-feel.
    • The upstairs shower enclosure is very inexpensive, but it is paired with an expensive showerhead.
    • The bathroom tile is the cheapest variety and looks quite mundane next to the high-gloss cherry hardwood.
  3. Bad planning
    • The bathroom is not well-thought out, the toilet is in an odd spot in the open in the middle of a wall, there is only one sink when most couples prefer two.
    • In the kitchen… they reused 20+ year old appliances.
    • The cook top is located in the corner of the counter, where it is less accessible and also sits underneath the upper cabinets.
    • Furthermore, because the appliances are old, I think future buyers will have trouble finding new appliances to fit the custom openings.
  4. No curb appeal
    • Slate tiles were used to cover the walkway up to the front door, this looks nice. However, the garden work is atrocious. Bad stone combined with mortar that blends in makes it look like they built concrete terraces for the garden.
    • The siding around the dormers was kept plain white, and looks dated.
    • The roof shingles were left green… it just doesn’t look good. The house needs a colour scheme on the outside that doesn’t remind you of christmas.

In general, I think the owners of the house just missed their target market all-together. The idea to renovate the 2nd floor and turn it into a master suite was a good one. However, the execution was not consistent throughout the house. Also, a couple who would appreciate such a large space for themselves with cherry hardwood would likely want nicer bathroom tile, and newer appliances. Furthermore, the outside looks like it is suitable for your grandparents, so I don’t believe it will attract younger buyers.

They have lowered their price to $299,000 now, but I still believe it to be overpriced for the neighbourhood. We purchased our house for $330,000 a little over one year ago, and it is larger, has a much larger kitchen, a much larger yard (we’re on a corner lot), an attached 2-car garage, and a 3-bedroom basement apartment (that conveniently pays our mortgage P&I). Thus, I think they will still have trouble selling at the reduced price given the above points.

On another interesting note, I would estimate that holding on to the property for these six months will have cost them about $10,000 in mortgage payments, utilities and insurance. So, I think it is very important to find the right price quickly rather than holding the property for too long and slowly lowering the price. Otherwise, the monthly expenses quickly cut into your potential income!

I also wonder if this house would have been better to flip over into a student rental. I live close to the university, and I think that lowers the quality of prospective buyers. However, the rental market in this area is booming, so I think the property would have been better to convert into a 6-7 bedroom house rented to students. The gross income would be up to $3000/month, with a net cash flow of approximately $1000/month depending on the mortgage terms.

On the bright side, the real estate agent was informative, young and friendly. He showed us a data sheet for a $128,000 quad-plex currently renting for $2000/month! Very cheap, but apparently it does need some work such as a new roof (not surprising at that price).

All in all, the timing was perfect. We were able to critique the flip, see many different examples of what not to do, make a new contact, and find out about a potential investment opportunity. Not bad for a Saturday afternoon.

On Ramit v. Casey

Today Ramit posted a rather scathing account of his former friend Casey Serin’s real estate dealings. I have some comments on the post below:

“Wow this really made me mad. Casey had tried to sucker people into a scam real-estate deal less than a week before he admitted he was going through foreclosure.”

I agree with this point, Casey did not do well to disclose his current financial situation when attempting to gather new investors. This reeks of an attempt to use other people’s money to satisfy some of his debt. I guess he was desperate enough to try to take his friends down with him?

“I was fortunate enough to recognize his pitch as bullshit, but what if someone had gotten conned into it? Financial scams on unsuspecting people make me furious. So I read through his site. It turns out that he had bought multiple houses in different states (hoping to flip them quickly), lied on his applications to get his loans approved, and had grossly miscalculated how much it would cost to renovate and flip them. Bad move. His debt is now over $2 million.”

On this, I do not agree. What Casey is proposing in his first email is a simple scheme, not a scam. The legalities are unquestionably acceptable, however the moral implications are arguable. The scheme would involve approaching owners who are facing foreclosure and offering to buy them out of their debt obligations. The investors (Casey) would then assume the mortgage and pay the former owner somewhat less equity than they would gain in selling the house for full value. Say prospect 1 has a $150,000 home with $50,000 in equity. Buyer 1 would offer to stop the foreclosure and give Prospect1 $40,000 cash (or less… sometimes much less). Often the investor can refinance the mortgage to take most of the equity out of the house again. The house is then leased back to the former owner (because 90% of the time they don’t want to leave).

Now, secondly, Casey is not actually $2.2M in debt. Why? He bought 8 homes, so the houses have an average value of about $275,000. However, these houses have a liability of nearly 100% of the purchase price, but all of the homes are still worth probably close to 90% of the purchase price (in some cases perhaps more because he has done some renovations). So, figuring that the houses are worth 90% of their purchase price, he has $140,000 in unsecured credit card debt, Casey is actually in debt for the tune of $360,000… theoretically. A far cry from $2.2M no matter how you look at it.

At this amount of debt, I’m really not sure why Casey isn’t trying harder to unload these properties and minimize the impact. The credit card debt could likely be held for up to a year with minimal payments, now all he has to do is sell some of the houses ASAP, and try to find tennants for the rest……… is this happening?

Casey, Earth to Casey, what the hell are you doing to solve this problem?

Let’s Play – Funding for Flipping

As stated earlier, I am just itching to get out there and do a flip.  Whether this happens or not is a matter for discussion, but I’m still dreaming and scheming up ways to make it happen as easily as possible.

It is a simple matter to get a mortgage for the purchase price of a house, however, it is often more difficult to find traditional financing for renovations.  So, here are some other ways I am thinking of raising some needed capital to pay for renovations:

  1. 0% balance transfers
    • See this great article on 2million‘s blog.
    • He gives some great advice and specific strategies for taking advantage of 0% transfers.  The guy’s a pro at it.  He currently has almost $40,000 in loans at zero percent…  now you’re talking!  Thanks for the great guide 2mil.
  2. Remortgaging my properties back to 25% principal (similar to a HELOC)
    • This could net me $20,000 in working capital.
  3. Increasing my own credit card limit
    • Bad idea because I don’t want to carry a balance, period
    • Also, I eventually want to separate my business and personal finances so I have some level of decreased personal liability, and potential for some tax benefits.
  4. Secured line of credit
  5. Using other people’s money (investors)
    • This is my primary focus at this time.  I want to gather some investors, and offer them a tidy return (10%) in return for the ability to use their money on the flip.
    • Right now, I haven’t started signing people up, but some preliminary work has been done to feel out some prospects.

Any other ideas out there?  That’s all I can think of for now.