I'm currently coaching a guy who used to work construction for me, and the following examples might help some.
He can get the first time (or haven't owned for three years) fed tax credit of $8,500 as long as he does it this year. Currently, he is paying $1,250 rent. He could buy an older house near where he lives on a FHA 30 year loan with a 3 1/2% downpayment for a cost lower than rent even including property tax and insurance, excluding deductable interest. Good deal.
He could buy two houses on one lot, rent the other and have a $250 net payment. Great deal.
He could buy a larger piece with four smaller houses and live free. Screaming deal. Stunning leverage. The loan he can get go up to $417,000.
To qualify for these loans he needs 6 months employment, 2 years of good credit, at least two years since a foreclosure and three years since a bankruptcy.
He can potentially get the loan again 6 months later and rent the first property for a positive cash flow, as long as he has a good excuse, such as being closer to work, or more bedrooms. You have to actually live in it. A third or 4th loan of this type is harder, but not impossible. You'll get a visit from the FBI (seriously) talking to you about mortgage fraud if you don't live in it at first.
All the money he saves on rent and gains in cash flow should be saved. Then he can buy a 2 - 4 unit rental for a 20% downpayment, 30 year money 1 3/4 point fee. A friend of mine is buying two foreclosed 4 units each like that, side by side, so it runs like an 8 unit apartment, but way better financing. You are limited to four loans like that.
After that they want to see 25 to 30% down. Plus, 30 year money is harder to get. When you get there, start laddering your mortgages so not too many come due in the same year. This will help you avoid an interest rate bomb.
We are in one of the great investment opportunities of our lifetimes. It isn't often that low, cash flow properties and cheap money are available like they are now.
Rates could go up, so the opportunities may end. At that point we hope inflation will occur on our rents, with the interest rate locked in for a long period. The buys are good enough that rents could fall 20% short term with unemployment, without hurting you. It is a plan that can weather some deflation, and make you a lot of money with inflation and higher interest rates.
The numbers for this work best in blue collar areas, where the rent to value ratios are best. A buddy from Canada was visiting me and looking over my shoulder as I was looking at investment houses. He is a bit fussy, and said "Can't you find a better area to invest?" I said "Yup. If I bought a house like this in La Jolla the rent would be double! The price would be five times higher, and I can't figure out to cash flow that with a mortgage."
Historically, in San Diego, small older houses sell for about twice what an apartment building sells for, per unit. This would be reasonable, as the house has more bedrooms, and a yard, and will achieve higher rent. Right now, because of the collapse in house values due to kinky mortgages, houses are selling for about 1.2 times what apartments are selling for. Anytime I see a ratio change, it usually changes back. It may mean houses go up in value, or apartments come down, or, more likely, a combination of both. My buddy in construction in the example above can then sell his original fourplex, now with good equity, and 1031 tax deferred roll over into an apartment building with better cash flow on equity. Rinse and repeat. These ratios may be true in your market.
Think about it. The market needs us now. We can take up the oversupply of foreclosed homes, create construction jobs, turn vacant homes into quality rentals, then make them available in the market to buy when demand and prices are higher. We will tend to smooth the bumps in the market.
The real estate market should be bottoming sometime in the next 18 months. It is a good time to get ready for a massive transference of wealth. If you buy positive cash flow foreclosed houses along the long flat bottom that I expect will do you well. The best buys are the ones that need some work, like boarded up windows or missing a sink or toilet. These are not habitable by mortgage company definition, and the average buyer cannot get financing. If you have cash or a line of credit, you have very little competition. Some of these can be bought at great discounts. You need a cost effective contractor, otherwise the profits just end up in his pockets. My contractor just did $15,000 of work, according to the termite report, for $5,000. That's the kind of efficiencies you need. After you fix them and rent them you can then take out conventional financing on the purchase price plus the repairs.
Repair work is tax deductable against other income. A roof is a capital expense that goes in your depreciable capital account, but most other things are considered repairs. You can deduct $25,000 a year against your other income. If you spend at least 750 hours a year on real estate, your deductions are limitless. When you sell the property the previously deducted income comes back in as capital gains, with the lower tax treatment. If you do a 1031 tax deferred exchange when you sell the tax is pushed even further into the future. A good accountant will tell you that tax deferred long enough is almost the same as tax not paid. You get use of the government's money to earn a return for decades.
