Real estate investing and your financial situation

by Greg B
(Macon GA)

Thank You for taking the time to share.

I came to this sight seeking advice on foreclosed home investing. I found a house that meets the quick criteria mentioned on this sight. The house is worth about double the purchase price. It's in a active community that is sought after (Halloween block parties, garden tours, various festivals,etc).

If I analyze the decision it makes sense until I look at my financial situation. I have excellent credit, no credit card debt, no car payments. Sounds great until you factor in the fact that I have no liquid assets. I do not have enough money set aside to live without work and pay for renovations on an investment.
So with your advice I need to focus on building my wealth especially in the form of liquid assets. I can place 80% of my net pay aside and plan to do so via auto deposits in a investment account I already hold.

I have a spouse that tends to over spend only when she sees money in the checking accounts. We paid off credit cards and other debt in a short time using a budget. Unfortunately when the debts were paid we felt a rise in our income and started spending more. If we had took all the new found money that was not paying debt and invested it I would be purchasing the investment property.
So instead of wasting time on what could have been I will take you easy advice and stat paying my family first.

Once again thank you for sharing your experiences. As simple as they are we overlook these things every day even when they are sitting right in front of you.

LM says: Greg, thanks for the kudos.

You have a couple of things here I would suggest you consider. First of all I want to congratulate you for being what sounds like relatively debt free. If you can manage to stay that way, this one step alone can be worth millions. Second, it looks like you have some solid ideas of where you are and where you want to go and you understand some of the basic principles of building wealth, excellent!

Now, in terms of the property you are considering; when you say is worth "double the purchase price", I want you to be very careful on how you determine that, I know how hard it can be. Make sure you to do your due diligence and a lot of research so you make a really solid determination of what the house would be worth after repairs. Then you can determine what kind of repairs you would have to do in order to get the house to the value you have determined it can realistically be sold for.

You bring up a very good point when you stop and look at your financial situation. I know there are great opportunities out there to invest in real estate but unlike what you hear in TV infomercials about how "easy it is to invest" and how "you don't need any money" I have not found that to be true. Having said that, it's not that you have to have hundreds of thousands either. But you do have to have access to money, it might not have to be yours, but you still need it.

I am not sure why you say you need to have money to "live without work", you might have to explain a bit more. But I can remind you that my very firt foreclosure investments where done while I was holding a full time job. I know it is very possible to invest in real estate on a part time basis, so don't feel you have to do it full time.

I agree with you 100% that setting money aside,in other words, pay yourself first , is something that is key to building wealth. Not only is creating the habit important but the power of compound interest is incredible.

Do this: since you are already analyzing investment opportunities around you, as part of your real estate business plan, write down some figures of how much money and resources it will take to do an investment. Look at some of the analysis I have done on flipping real estate property and then write down your expected costs for:

- Purchase costs - price, closing costs, inspections, surveys, appraisals, etc
- Repair costs - labor and material costs for everything from demolition to kitchen cabinets to the final cleaning before listing for sale
- Holding costs - I would suggest you figure out how much are your monthly costs and that you assume that you are going to be holding for six months minimum
- Potential selling price - The most important number of all. Be conservative.
- Selling costs - How much you will pay in real estate agent commissions, sellers closing costs, concessions, etc.

Once you have these numbers together you will have an idea of how much money you either need to have OR have access to.

Once you have a plan like this share it with your wife and let her see what it is you want to achieve. In other words, do your best to get her on board. Share your vision of being able to create wealth for your family and the steps that are going to be required.

If monthly household cash flow management is an issue then make sure you both together create a written household budget and/or a spending plan. This way you can determine ahead of time where you want your money to go and why. You also use this to determine how much money you want to set aside each month for saving and investing.

Greg, it sounds like you are headed in the right direction, keep it up!

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thank you for the advise
by: Anonymous

To answer a few questions you mentioned.

- Purchase costs - price, closing costs inspections, surveys, appraisals, etc

Asking is $56,000 and purchase is questionable. I would go $60k max and walk away. Closing would cost around an additional 10% with a loan (inspection title insurance etc.) It is a REO and most likely I would foot the bill on the purchase and anticipate it. Worst case 66k.

- Repair costs - labor and material costs for everything from demolition to kitchen cabinets to the final cleaning before listing for sale

The house has been renovated a bit. IE cabinets are new, white and generic. Counter tops are formica but modern. Floors are original hardwood dull but no major water marks or repairs. The interior colors are all over the place. The outside has deteriorated wood under a few places around the roof. The windows are old and would need replacement. The plumbing and wiring is unknown. So my worst case is 35K best case is 10k with me providing the easy labor (paint, refinish floors, minor plumbing, trim work and cleaning)

- Holding costs - I would suggest you figure out how much are your monthly costs and that you assume that you are going to be holding for six months minimum.

I could pay the mortgage out of my salary, but I could not do that if my spouse or I loose our jobs.

- Potential selling price - The most important number of all. Be conservative.

I would be willing to sell the home for a $2500.00 loss to get a feel for the present market.

- Selling costs - How much you will pay in real estate agent commissions, sellers closing costs, concessions, etc.

I dislike the costs when selling a home. I have done it 3 times with the same dislike. Realtors get a high percentage and in my case 66% of the time the fees were acceptable for the service and work provided. Bottom line.. $108,350 for worst case and best case $76260. If its anything under I would try to rent.

I appraised the market on the tax assessors website based on the homes that have sold and not the value placed on the homes for taxes. Based on the research, home sales are slow and every home that did sell sold above my worst case.

When you said

"I know there are great opportunities out there to invest in real estate but unlike what you hear in TV infomercials about how "easy it is to invest" and how "you don't need any money"

You got my attention and that is why I replied.

So how shall I pay this forward? Thank you for your time and if you can use or edit any part of my post please do.

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Re: Greg's comments
by: LM

LM says: It sounds you have been doing your due diligence. I would make sure that when you are determining the most you would offer for the house that you make sure you have a solid assesment of what you can sell it for. Then you back out all your costs and that is how you want to determine your maximum offer price. If that is how you came up with the $60k then you are on the right track.

There is nothing wrong with doing some repairs yourself but make sure you can do a great job. And also that you keep detailed records of what you purchase and your time involved making the repairs. An appraiser might want to see actual receipts for work done to the house. I advise that for plumbing, electrical and HVAC you only used licensed professionals.

I would suggest you have at least six months worth of mortgage payments in the bank if you are planning in financing the purchase. Having a reserve is very important.

I completely disagree with your willingness to loose $2500 in the sale and strongly urge you to reconsider the deal. You are in this to make money. There are cheaper ways to get a feel of the market. If you go into the deal thinking you might loose $2500 you might end up loosing $10k. You will be surprised at how quickly costs can pile up when something goes wrong.

That is a very wide gap between $108k and $76k. I assume that means the price you think you can sell it for. At $108k and if your rehab is $20k or less it sound it could work. At $76k it would absolutely not work.

I would suggest you look for a good real estate agent, that is experienced with investment property and has hopefully flipped houses him/herself and get them to help you. As a buyer you would not have to pay them since they would get paid by the seller. Then get the agent to do a good search of what has sold in the last three months similar to the house that you are considering. That will help you firm up the ARV.

Also don't go into the deal without picking an exit strategy. A rehab for a rental and rehab for a resale are very different. Sure, you can rent a house if you cannot sell it but then you would have probably have an over improved rental property ;-)

Pay it forward by going out there and finding a great deal when the time is right for you and letting us know about it!! :-)

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