# Buy and flip or buy fix and rent. What would you do?



## WarriorWithWood (Jun 30, 2007)

Master Mechanic said:


> I guess just clean the place up, new paint, get rid of rugs and put down some laminate. Don't want to go crazy, but I do want to attract the right tenants.


Depends where you're buying. If you're buying in Bristol or Levittown then go cheap, if you're buying in Langhorne, Yardley, or Newtown go nice.:thumbsup:

I'm assuming you're looking local and not in Philly.


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## Master Mechanic (Oct 25, 2006)

WarriorWithWood said:


> Depends where you're buying. If you're buying in Bristol or Levittown then go cheap, if you're buying in Langhorne, Yardley, or Newtown go nice.:thumbsup:
> 
> I'm assuming you're looking local and not in Philly.


I'm in Bensalem, lots of potential here. Langhorne as well. I think its worth spending a little more to get a better tenant. It will pay off in the long run

As for myself, we are hoping to buy land somewhere in newtown and new hope and build a nice house someday. I love it out there.


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## WarriorWithWood (Jun 30, 2007)

Yup, I know the area well, in fact I ran the Dunkin Doughnuts build in New Hope much to the dismay of Starbucks. 

Take a look in Feasterville too. There are some nice houses in the area.


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## Master Mechanic (Oct 25, 2006)

WarriorWithWood said:


> Yup, I know the area well, in fact I ran the Dunkin Doughnuts build in New Hope much to the dismay of Starbucks.
> 
> Take a look in Feasterville too. There are some nice houses in the area.


The small one on the corner of bridge rd? Dd>sb any day.


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## WarriorWithWood (Jun 30, 2007)

yup. I had to chase the GC for my checks all the time.


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## FStephenMasek (Jan 22, 2010)

If the property is in an area in which you expect significant appreciation, holding and renting could be desireable. 

My wife and I are landlords. We've never set foot in most of the property we've bought. Property managers work for 8% or less of the rent. You do have to manage them, but not deal directly with tenants. 

We've decided to avoid loans, so own outright and buy with cash. If you do the math, the only potential advantage of having loans is the potential appreciation from having three or four times as many properties (downpayments are 20% - 30%). However, if you own outright, you do not have to worry about it being rented, the bank failing to pay the insurance and taxes, and such. You also have less liability, as you own fewer properties. Repair expenses are higher for more properties.


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## Master Mechanic (Oct 25, 2006)

FStephenMasek said:


> If the property is in an area in which you expect significant appreciation, holding and renting could be desireable.
> 
> My wife and I are landlords. We've never set foot in most of the property we've bought. Property managers work for 8% or less of the rent. You do have to manage them, but not deal directly with tenants.
> 
> We've decided to avoid loans, so own outright and buy with cash. If you do the math, the only potential advantage of having loans is the potential appreciation from having three or four times as many properties (downpayments are 20% - 30%). However, if you own outright, you do not have to worry about it being rented, the bank failing to pay the insurance and taxes, and such. You also have less liability, as you own fewer properties. Repair expenses are higher for more properties.


Avoid loans at 3%? Why? As long as rates are under 5% I'm going to try and put down as little as possible. Later on then I will hope to be able to buy cash. How many properties do you own. 8% seems like a lot to pay someone to watch a property....

Since I'll be doing the repairs myself, I'm not worried about this expense. 

All I want to do is create capital first(owning property) then create cash flow(pay down notes), then get liquid enough that I can fund my real estate purchases through the cash flow(buying properties cash). 

I can't see starting off buying cash and forgoing these amazing rates


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## KAP (Feb 19, 2011)

Master Mechanic,

Another avenue you should consider would be holding the mortgage. If you have the cash, great, if not, flip one or two to get yourself into the position of owning the house outright and selling it. Target the market that can't come up with 25% or the credit is good, just not over 720. Get 10-15% down, charge a 1-2% more, traditional closing costs, and the person paying the mortgage is responsible for the RE taxes, maintenance, etc...

Same as being the landlord, except you aren't responsible for all the headaches associated with it. They default, you start again... ANOTHER deposit, etc.

Now you get to let Compound Interest work for you as you are the bank. 

Buy a REO (Real Estate Owned - bank foreclosure) or other distressed property in the $10-$20K range, put what you need to to get it to market in the $75K - $100K range.

The reason it is appealing is that their mortgage payment will be at or lower than a rent payment, and they will have an asset. Even though they will pay you a slightly higher interest rate, the trade-off is that they can get it for less down payment and closing costs than with a traditional bank and qualifying is much easier.

The main difference being that whether you rent or sell, you still have to fix it up, but with being the "bank" versus landlord, you get CASH UPFRONT, and a COMMITTED owner. Most people won't put cash down and then default a few months later like renters.

A sign in front of the house would read - *"Why rent? OWN this house for less than you would pay with a bank. No realtors, no Banks, No Hassle. We are here to HELP! 10% (or 15%) down and closing costs and you are an OWNER, paying less each month than you would with a landlord. More info, Call 555-1212..."*

So a sample set of numbers would be...

$20K purchase price
$10K repairs
$30K total investment

SELL for $75K
$11,250 down payment (15% from buyer) - CASH to you
$348 / month in principal payments (you can choose to include insurance and RE Taxes if you want)
x 12 months
$4176
x 30 years
$125,290 
+ $11,250 down payment originally paid to you in CASH
$136,540 GROSS


And that assumes it never changes hands again, interest rates don't change, etc. nor does it include late fees... At least with this method, if you have to foreclose, you will get the property and another deposit for the next owner (hopefully at increased property value). IOW, unlike with renting, when you evict, you will get paid for your time.

And the best part is, unlike renting, where you are responsible for maintenance costs, RE taxes, etc. to come out of monthly rent, the mortgage principal payment is 100% yours (minus taxes), and the other stuff is the responsibility of the homeowner...

With this method, you get a 1/3 of your investment back UPFRONT, putting you almost three years ahead than if you were a landlord, and you have a much more committed monthly payment. By the end of year one, you will already have recouped more than 50% of your investment... on to the next...

Just some thoughts... 8^)


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## Metro M & L (Jun 3, 2009)

Leverage (borrowed money) magnifies returns and losses. If you put down 100000k and get 10k in rent your ror = 10%.

If you put down 10k on 100k pay 7k in mortgage and get 10k in rent your ror = 30%. 10k - 7k = 3k profit against 10k investment. 

And lets say the home appreciates 20k over five years.

Annual return on just the appreciation (not including rent) would be 40% per annum if you borrowed.

Annual return on that 20k appreciation is 4% if you paid cash for the investment property.


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## cncrestoration (Nov 6, 2011)

8% not bad i have 32 high end condos that i manage at 11% and the owners come in 2xs a year and check on their propertys and we go to dinner and they leave..Never even met their tennents.Takes the headache from them,but its good bussiness


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## Master Mechanic (Oct 25, 2006)

KAP said:


> Master Mechanic,
> 
> Another avenue you should consider would be holding the mortgage. If you have the cash, great, if not, flip one or two to get yourself into the position of owning the house outright and selling it. Target the market that can't come up with 25% or the credit is good, just not over 720. Get 10-15% down, charge a 1-2% more, traditional closing costs, and the person paying the mortgage is responsible for the RE taxes, maintenance, etc...
> 
> ...


Kap,

I have never thought of doing this.... 

That is a great idea. I think I'll have enough backing to go down this route in 3-5 years. The numbers would be a little higher in my area, 150-200k total investment, but after a few good flips that sounds like the way to go. The interest on mortgages is amazing. Holding the note is better than paying the note!


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## SDel Prete (Jan 8, 2012)

Master Mechanic said:


> Kap,
> 
> I have never thought of doing this....
> 
> That is a great idea. I think I'll have enough backing to go down this route in 3-5 years. The numbers would be a little higher in my area, 150-200k total investment, but after a few good flips that sounds like the way to go. The interest on mortgages is amazing. Holding the note is better than paying the note!


That sounds like where I'm located in NJ. 

Paying 20k for a house and putting 10k into it to sell it for 75 sounds real nice just nothing is that cheap around here.


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## KAP (Feb 19, 2011)

Master Mechanic,

*"That is a great idea. I think I'll have enough backing to go down this route in 3-5 years."*

I don't know your cash position, but 1-2 properties flipped, and you can be on your way to being the bank on the next one.

*"The numbers would be a little higher in my area, 150-200k total investment, but after a few good flips that sounds like the way to go."*

You must be thinking the MLS (i.e. - retail). That's not what you want... you want WHOLESALE. These are bank REO's (foreclosed homes that they need to get off their books, as it affects THEIR credit rating and ability to open additional profitable mortgages), fire-damaged homes, distressed properties (i.e. - run down and abandoned), probate (deceased person - relatives need to sell quick, because they can't afford mortgage or taxes), real estate auctions at the courthouse (tax deed - you pay back taxes, title is transferred clear, mortgage company and any other lien-holder pounds salt), etc.

Go to your local RE Club and talk to other investors about who they use for BirdDogs. These are people for whom you give criteria of properties you are looking for and they in turn go out and find it, and then you pay them a flat fee or % of sale (flat fee is best). You will find a wealth of knowledge at these meetings.

As a contractor, you are in an ideal position to not only to be able to assess repairs, but get it done quickly for turn-around... when working on it, let ALL the neighbors know that you are fixing it up to sell it, and if they know anyone who might be interested in OWNING instead of giving all their money to landlord to rent a place they aren't really happy with to refer them to you and if they buy, cut them a check for $500. Best advertising you'll get. Let them know that while you are working on it, the buyer can even choose COLORS and other options (that you charge them for). The line you are looking for is right at or no more than 10% in mortgage, RE taxes and insurance than in what they would have paid in rent.

Things that add value/sizzle are:

- Hook-ups for washer and dryer
- Pull-outs, garbage/recycle, cutlery dividers, dishwasher, and ice-maker line in kitchen
- Lights in closets
- Double-closets if you have the room
- New toilet
- If no air conditioning, and Central Air not an option or too expensive, ceiling fans in living room and bedrooms

What you DON'T want to do is to make the home MORE than it's neighbors so it is the oddball, but rather add sizzle with the useful amenities.

The homes you want to target are STARTER HOMES... work your way up to the larger homes.

Make the curbside appeal neat and clean...


*"The interest on mortgages is amazing."*

LOL... why do think the banks are in that business... :laughing: Remember, that with a mortgage, for the first decade, it's mostly interest... now instead of YOU paying interest to someone else, the interest goes to YOU..

*"Holding the note is better than paying the note!"*

The advantage you have here is that you can play it either way. When you OWN the home, you can either mortgage it to a buyer or rent it out. When YOU are paying on the mortgage while renting it out, that is all you can do, and you are responsible for all the maintenance and RE Taxes, Insurance, etc...

This is also true if you decide to go down the rental path... If you OWN the property versus having a mortgage and renting it, more PROFIT is returned to you, and you don't have to sweat rental vacancies as much as someone with a mortgage does. Leveraging money by borrowing is great UNLESS you get caught in a cycle like we are in now...

When you OWN the house and sell it to someone, holding the mortgage, all those other expenses go away, which means more PROFIT for you. 

There's a reason banks aren't in the renting business... even with the GLUT of homes they currently have...


I see from your website, that you are in Bensalem, PA... A couple of sites to get you started... 

http://www.pa-reo.com/listings

http://realestatecenter.bankofamerica.com/pages/map-search

http://www.auction.com/Pennsylvania/Philadelphia-County/residential-real-estate-home-auctions.html

Check Google for banks in your area and add forcelosure or REO and see what they have. Remember, the price is the ASKING price. With auctions, try to find "absolute" auctions as they are the ones where the highest bid, no matter what it is, is the winner.

Best of luck... 8^)


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## KAP (Feb 19, 2011)

For our NJ friends...

http://realestatecenter.bankofamerica.com/pages/map-search

http://www.auction.com/New-Jersey/r...b|9144745929&gclid=CIiIhtit3K0CFUOo4Aodvh-pmA

Opportunity is all around...

Look for HUD & VA foreclosures also...


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## mike717 (Dec 30, 2011)

KAP said:


> Master Mechanic,
> 
> Another avenue you should consider would be holding the mortgage. If you have the cash, great, if not, flip one or two to get yourself into the position of owning the house outright and selling it. Target the market that can't come up with 25% or the credit is good, just not over 720. Get 10-15% down, charge a 1-2% more, traditional closing costs, and the person paying the mortgage is responsible for the RE taxes, maintenance, etc...
> 
> ...


I would not do this. It will really mess with your DTI ratio and you can only get so many loans in your name. You won't have a lease to count as income not sure a bank would look too kindly on this practice to count the income because you are technically violating the mortgage agreement where the bank could call your note. You can put a house in a trust and get around that but you are still selling the house. You no longer own it you are the bank what happens if they trash the house and stop paying, you don't get to evict them you have to foreclose. 

Around here people do wraps and AMPS and many other creative financing where they basically get a house from someone selling and leave the mortgage in place. They pay up mortgage so it is current and sell it to someone else for 10-15k down. They then have to pay a note service company to bill the new owner. All while violating the mortgage agreement. I think when interest rates start to go up again banks will be calling all of these notes where the owner isn't the person who got the loan. I don't want any part of that mess. I see lots of lawsuits there.


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## KAP (Feb 19, 2011)

mike717,

*"I would not do this. It will really mess with your DTI ratio and you can only get so many loans in your name. You won't have a lease to count as income not sure a bank would look too kindly on this practice to count the income because you are technically violating the mortgage agreement where the bank could call your note. You can put a house in a trust and get around that but you are still selling the house."*

You misunderstand... re-read my post... I am not saying to get a mortgage, and then sell the house and hold a mortgage for someone else. You can't do that... would not pass title search.

What I was referring to was to buy the house CASH at a discount though the various methods already detailed. When you OWN it free and clear, it has nothing to do with your DTI, as there is no debt, you OWN it. In fact, it does the opposite. How you buy it cash is up to you. Whether you already have the cash or have to do a couple of flips to get it is how you get there... Point is to own it free and clear and then sell it and hold the mortgage.

*"You no longer own it you are the bank what happens if they trash the house and stop paying, you don't get to evict them you have to foreclose."*

Same as you would with a tenant who trashes it... Fix it up and start over... Difference is, you already have the equivalent of almost three years "rent" in the down payment you received in the the beginning when holding the mortgage, and you will also have the NEXT down payment also when you re-sell it and hold the next mortgage.

So your choice is... 

1. Have to evict a renting tenant with no money upfront, fix the place up with only one months security (on average), and then go out an re-rent.

or 

2. Hold the mortgage, go through foreclosure and evict, fix the place up BUT you started with five-figures upfront that you get to keep and then collect ANOTHER five-figures from the next person you sell to...

Either way, you have to evict, and find a new person and fix it up, but only one gets you TEN'S of THOUSANDS that you get to keep in your bank account for the hassle... 

Does that make it more clear?... Go with option #2... 8^)


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## SDel Prete (Jan 8, 2012)

Thanks for the links kap. I will have to check into them and look around for more. I would like to find out more info about some auctions at my local court house if they have them.


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## mike717 (Dec 30, 2011)

KAP said:


> mike717,
> 
> *"I would not do this. It will really mess with your DTI ratio and you can only get so many loans in your name. You won't have a lease to count as income not sure a bank would look too kindly on this practice to count the income because you are technically violating the mortgage agreement where the bank could call your note. You can put a house in a trust and get around that but you are still selling the house."*
> 
> You misunderstand... re-read my post... I am not saying to get a mortgage, and then sell the house and hold a mortgage for someone else. You can't do that... would not pass title search.


OK I didn't catch the buy with cash part. There are lots and lots of people around here buying and selling with the original mortgage still on the property. They call it owner financing. It doesn't require a title search, what they do this they just deed the property over. I think they are nuts but owner financing after paying cash I could see. I still prefer to use the banks money, not mine


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## KAP (Feb 19, 2011)

*"I would like to find out more info about some auctions at my local court house if they have them."*

If I recall, NJ is a Tax Lien state with a 2-year redemption period, meaning, you pay the back taxes and the taxes for two years (at 18% interest), and if the homeowner does not redeem it (i.e. - pay back taxes AND interest) within the time-frame, you get the house...


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## KAP (Feb 19, 2011)

Mike717,

*"There are lots and lots of people around here buying and selling with the original mortgage still on the property. They call it owner financing."*

That's Sub2 and/or Lease/option... different animal... When the house sells, title search is required by mortgage company. If YOU are the mortgage company, you should also require it, and the buyer pays...


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## SDel Prete (Jan 8, 2012)

KAP said:


> "I would like to find out more info about some auctions at my local court house if they have them."
> 
> If I recall, NJ is a Tax Lien state with a 2-year redemption period, meaning, you pay the back taxes and the taxes for two years (at 18% interest), and if the homeowner does not redeem it (i.e. - pay back taxes AND interest) within the time-frame, you get the house...


That's good to know. I mean even foreclosure listings and such too. You seem to be very knowledgeable in this. I suppose you do this often?


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## KAP (Feb 19, 2011)

SDel Prete,
*
"I suppose you do this often?"*

I haven't done tax lien certificates before, though I am interested in biting the bullet on that... Have done... Auction, private sale, tax deed...

If you are really interested in this, I would recommend looking up your local Real Estate club and go to a couple of meetings... most investors I've been in contact with are freely open to helping newbies, and so I try to do the same... help where I can... 8^)


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## SDel Prete (Jan 8, 2012)

KAP said:


> SDel Prete,
> 
> "I suppose you do this often?"
> 
> ...


I'll check into a local club. Id really like to get into flipping foreclosures then renting some or holding the note.


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## mike717 (Dec 30, 2011)

SDel Prete said:


> Thanks for the links kap. I will have to check into them and look around for more. I would like to find out more info about some auctions at my local court house if they have them.


Look in your area for a class about buying at foreclosure auctions. Some of it isn't complicated but you can get into trouble also. 

For instance some foreclosures allow the person losing their house to purchase it back for up to 6 months so after you buy it you need to hold it for that long before work begins. The instructor said the only time people want them back is when you have completely renovated it.

Another example he had was a guy bought a 2nd mortgage for 20k cash, which leaves the 1st mortgage in place. He didn't do his homework because the bank that held the first sold the house 10 minutes later and he didn't own it anymore.

All I say is be careful and RE investment clubs have lots of people who like to talk. 

It is interesting but I just don't have the cash to buy at an auction so I have never gone to one. Watch the tv show "flip men" to see what you can get :whistling


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## SDel Prete (Jan 8, 2012)

Flip men is entertaining and I know its a gamble but a gamble that is good to make. Also bank owned homes that I can see first can be flipped and such. 
I had a buddy who went to a short sale to check out a house. Waited 3 months till foreclosure and bought it and saved 100k. Now that don't always work out as things can change but it was great for him haha. He now lives in it.


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## Master Mechanic (Oct 25, 2006)

KAP said:


> SDel Prete,
> *
> "I suppose you do this often?"*
> 
> ...


Kap,

How do I get a mortgage note written up? I'm assuming a real estate lawyer? A banking lawyer? 

I think after 3-4 rentals I would be interested in doing something like this. This option really ties up a ton of cash, unless the buyers decide to sell the place in 3-5 years and pay off the note in whole, or refi. Also, I had a client that did this, but at 7%. 3.85% at 30 years is basically paying for inflation, to put out 200k and only get 3% back is a little tough for me to swallow. 

In 5-10 years it will work out real well and since your post I'm going to implement "being the bank" in the business plan.


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## Master Mechanic (Oct 25, 2006)

Btw,

I think this thread would be a great sticky. Their is a ton of info in here. I've learned a lot,

Larry


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## KAP (Feb 19, 2011)

Master Mechanic,

*"How do I get a mortgage note written up? I'm assuming a real estate lawyer? A banking lawyer?"*

Real Estate Lawyer in your state... always use a lawyer and limit your liability...
*
"I think after 3-4 rentals I would be interested in doing something like this."*

I would think after 1-2 flips you would... :thumbup:

*"This option really ties up a ton of cash"*

Which is why it is important to buy right... 

*"Also, I had a client that did this, but at 7%. 3.85% at 30 years is basically paying for inflation, to put out 200k and only get 3% back is a little tough for me to swallow."*

You are forgetting the initial 10-15% deposit ON TOP OF the GUARANTEED 5-6% return, which you can RE-INVEST and COMPOUND your return. That's the sweetener... 

I still don't understand why you are stuck on $200K? As you can see from some of the links I provided, you have homes already available in your market for this strategy. And the market you are serving, you would not be providing a mortgage at 3.85% (most can't even get that rate unless everything is completely in order and their credit is 750+, in which case, they don't need you). Your rate would be more like 5-6%...

The idea is to go after the homes that when bought would be less, even or no more than 10% more than renting. It negates the 5-6% interest even being an issue... 

A $75,000 30-year mortgage (which gives them purchasing power of $89K with 15% down) at 6% is only $449/month (principal only). Most places, rent averages $500-$700. So even with adding RE taxes and Homeowners insurance (which they MUST carry), it works out to around the same they would pay for rent. That's what you are trying to accomplish. Showing them the folly of paying a landlords mortgage instead of OWNING an asset themselves and having their money work for THEM...

For this strategy, the homes you want to target are 3-4 bed, 2 bath... For rentals, 2-4 bed, 1 bath (less plumbing issues to deal with).

Best of luck... 8^)



P.S. - the following site gives you an estimate range of rents... http://www.rentometer.com

.


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## Acres (Feb 12, 2011)

Kap thanks, a very interesting view..


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## maninthesea (Nov 11, 2008)

I purchased some land last year that was sold by a bankrupcy court. It was a learning proccess for me. It was a california bankrupcy court selling land here in Guam. 

Previous owner had not declared the land in Guam as an asset but court found out about it. 

I was able to get the price down to $52K and had my offer approved ahd gave a deposit of 20% but I was haveing problems getting financing of $25K as a loan becuase no one wants to finance land loans here, only home.

They notified everyone that had previously bid on the land and accepted an offer for $54K and even took deposit even though my offer had not expired. I was pissed that an accpted offer with deposit was not a contract and anyone could come in and outbid me at anytime. But aparently thats the rules for bankruptcy sales in califonia and until the judge accepts the offer in court hearing all else is subject to change. So I took out personal loan for $20K @ around 9% and made offer & deposit on morning of court. My offer was highest and I was accpeted.

I then paid off the personal loan in around 5 months to keep from being killed on the intererest.

So the bad thing about bankruptcy sales (at least in california) is you dont have a deal until the judge says so. The good thing is with bankruptcy (at least in california) the seller does not have the right of redemption to buy the place back EVER. 

Here in Guam they can get back a forclosure if it is forclosed and they pay back the forclosed loan within a year. They then must pay for improvements done by interm owner but interm owner must have recipts and proof of all improvements.


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## FStephenMasek (Jan 22, 2010)

Master Mechanic said:


> Avoid loans at 3%? Why? As long as rates are under 5%


 You won't get that rate for investment property! You will also need 20% to 25% down for investment property.


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## FStephenMasek (Jan 22, 2010)

Elyrain said:


> ...in San Diego...flippers are buying a house(be it bank owned or short sale) for $200-250k, putting no more then 50-75k into them, paint, tile, carpet, appliances, that's it. Then selling them all day long for 400k.


 I met a San Diego real estate agent who told me he is doing flips at about those numbers. However, he is installing all new kitchens and bathrooms.

I'm interested in trying a few. 

Buying at the trustee sale auctions is also interesting, but a great deal of work. The most important things are obtaining good comps so you know what it will appraise and sell for, checking for liens, seeing all of them as close as possible to the auction date, and knowing the fix-up costs. Sitting all day at the auctions is necessary, as they come up in random order. 

We recently bought a house in Las Vegas. It was built in 2006, has three bedrooms and 2.5 bathrooms, and is in a nice location. We have $95,000 in it, and it is rented at $995. When the economy comes back, it could easily double in value. The $61 per square foot we have in it is significantly less than the cost of building the structure and buying the lot.


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## FLIPPING KING (Jan 11, 2012)

some things to remember is once you quit your regular job you will have a very hard time getting loans for houses, and every bank i have worked with counts rent profit different than a 9 to 5 job, if you keep them as rentals that 20% you put down will take years to get back, make sure you have extra cash put aside to cover repairs on ever house and enough so you could make ever payment on all the houses in the same month (worst case). and trust me people will tear your house up and move out without telling you and wont think twice about it. i dont know what price range ur buying in but for me personaly i make off 2 flips more than i made in a year at my 9 to 5 so it was a no brainer to go full time and now im building cash reserves and then ill hold houses as renatls. and if you get a LLC or INC. you can have as many rentals as you want and it will protect you if you get sued (seperates you from your business). this is my 2 cents :thumbup:


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