How To Determine a BAD Real Estate Deal

hey guys we're going to underwrite a deal in boise idaho which is an overinflated market if you go and look at the statistics it's actually the fastest growing city in the entire united states but i had somebody send over a deal to me today shout out nick thank you so much out of idaho so i'm going to show you how quick it is to underwrite a deal okay so here's the deal address and purchase price so here's the address we'll pull this up on google i'll i just want to see the google maps version of it purchase price is 500 grand at five point eight four percent interest that's a very random interest rate i don't know what that's about the seller wants fifty thousand dollars down so ten percent down so ten percent down is actually really low name one investor going out and getting commercial loans or lines of credit that are only requiring 10 down it doesn't exist this is what's great about creative finance i can go buy things for 10 down with no credit check so even though you might be a brand new investor and you assume everything with creative finances zero down zero percent interest it's not sometimes we buy deals with ten percent down we're going to just see if this is a good deal tonight okay so fifty thousand dollars down that doesn't kill the deal for me but then the seller says right here they want twenty five thousand dollars 000 additional down payment one year after closing so that means 75 000 in my first year okay well check this out this even makes it worse and the seller wants another 25 000 payment after two years from closing that's kind of a problem that means in the first two years i've put in a hundred grand assuming i'm not paying an assignment fee i'm not giving the seller uh or i'm not paying closing costs which i know i will and then i also assuming i don't have to clean up and repair the property i don't know that let's get into it so the seller wants monthly installments of 1100 to begin after three years from closing interesting interesting interesting all right let's look at this that means that not only am i going to have a payment of 5.84 interest on 450 000 i'm also going to have an additional hundred dollars on top of that this deal is sounding really bad all like all the other sounding really really bad um most people watching this video are gonna say not it's not a deal for me but let's just keep watching and at least knowing how to say no is just as good as knowing how to say yes it's basically a duplex two separate meters in great condition okay let's look at the photos everybody says everything's in great condition oh this actually is kind of in great condition let's look at this it's cute okay it's a carport isn't this amazing that something in freaking boise idaho would sell with a freaking carport looking just like this for 500 000 and people say it's in great condition guys it's in boise idaho okay this ain't no freaking hollywood hills and look at this it's a freaking rental unit for five hundred thousand dollars it's not in great condition at all look at this in my carport there's no insulation these are all the photos you gave me there's even the utility closet hasn't even been painted the carpet is renter grade carpet it's that stupid idaho and you this guys is a very idaho and utah thing to do with your drywall it's total hey public service announcement to utah and idaho get better dry wallers we don't like that kind of drywall it's gross okay now you have a dome light they don't they don't have a freaking ceiling fan in the house and they've got renter grade carpet really cheap everything's cheap and it looks like crappy kitchen okay great so here's how i underwrite a creative finance deal okay i'm gonna look at a couple of things if you guys haven't seen this video already there's a video on our youtube channel of why do people buy real estate it's a really great video and it blocks these things out so number one what's the number one reason why people buy real estate is cash flow now you'll see that most real estate investors are going to be looking for a 12 percent cash on cash return minimum so that means if you put in 10 000 is your total cost into the deal then at the end of the year you want to make sure you have a 1200 return that's 12 cash on cash return pretty simple if you don't understand that you got to go back to third grade okay i put in 10 grand a year later i have 1200 that's a 12 cash on cash return so most investors look at 12 cash in cash return so um for me this is what most investors are looking for so let's say that in my first year i already know that i've got 75 000 in my first year because the seller wants 50 000 down and 25 000 at the end of the first year so that's 75 grand this is not looking good that's a lot of money to put down most of the time i'm putting very low amount of money down 10 20 000 okay so 75 000 down plus just because i give the seller 75 grand doesn't mean i own the property i have to pay for closing costs so let's put five thousand dollars of closing costs in there and then i already know that the person sent the deal to me wants 15 000 assignment fees so guys this is not looking good that means i'm gonna put in at least ninety thousand dollars into this property before i ever even get a tenant in the property so if i was looking for a twelve percent cash on cash return on ninety thousand dollar investment what would that need to look like that means i would have to bring in nine thousand it would have to be ten thousand eight hundred dollars would be twelve percent cash and cash return and when i say cash and cash return this 10 800 needs to be net income net like everything's paid the seller's payment's been made the management's been paid utilities taxes insurance all that stuff has been paid and there's buffer for like repairs broken windows a pigeon flies into the you know fireplace knocks it all down whatever it is i gotta make sure that after all my expenses i net in my pocket ten thousand eight hundred dollars in order to hit that twelve percent cash on cash return i'm already looking at this rinky dinky little property in boise idaho do i think this property is going to net me 10 800 i don't know but i would tell you 10 800 is the minimum cash flow that i would need in order to even look at this deal any deeper so that's step one what's my cash on cash return it would have to be 10 800. so let's go back over here okay i don't care about the interest rate i don't care about the term i don't care about any of that stuff the first thing i want to look at is cash on cash return so they say it's a duplex and i kind of feel like i don't have enough details okay let's see let's pull it up oh man this is such a piece of this is this is why boise if if there's a market correction boise you guys are going to get your ass beat there's like there's no possible way that you guys are going to be okay i'm just telling you how is it that this house right here this house right here is selling for five hundred thousand dollars with ninety thousand dollars down there's no rental income whatsoever that's going to give me that in return look at this so they're like it's basically a duplex okay so where's the duplex is it this little shed right here or is it this dog shed right here where's the duplex so this is the main house okay and this is the do this is what they call the duplex okay so this is great we're learning a lot right we're looking at the deal right people say how do you underwrite a deal let me show you so we're going to go over to bankrate.com i go to i go to their mortgage calculator they have a really good mortgage calculator and let's figure out what our payment would be because the by the way the whole seller who sent this deal to me they didn't tell me what the payment is going to be to the seller they're going to make me do the work if you're going to send me a deal that the seller is interested in seller finance then send me what my payment's going to be so i can figure out my cash on cash return without doing the work so check it out i'm going to go punch into the mortgage calculator let's make this a little bit bigger 500 000 and i'm going to put down 10 percent 30 years interest rate was what 5.84 which was super weird so check it out look at my monthly payment you look at this it breaks it down property tax insurance hoa fees there's no hoa fees there so three thousand forty six dollars a month all right now we have something to talk about okay so that means if i have a payment to the seller of three thousand forty six dollars a month for the five hundred thousand dollar purchase okay three thousand and forty six dollars per month is my monthly payment all right cool so in order for me to net ten thousand eight hundred dollars a year on this for a 12 cash on cash return i've got to bring at least three thousand dollars a month in okay uh let's see what if i divide this by if i if i divide that by 12 it should be 900 a month okay so i i need to net in my pocket 900 a month for a 12 cash on cash return okay that means i've got my payment then i'm going to take 20 for cap x okay what is 20 of cap x cap x means capital expenditures things that are going to come up during the duration of me owning it it's going to cost me 20 a year to maintain this property so that means 20 per month so that's an extra 600 a month that i have to worry about now is it gonna be six hundred dollars every single month no sometimes it'll be one air conditioning unit per year might be six thousand dollars or the hot water heater and the carpet or what have you those things sometimes build up and you might not spend any of that money until year two and then when year two comes around you spend twelve thousand dollars fixing the roof the hot water heater and the air conditioning unit so you got to make sure you're putting anywhere between 15 to 20 percent of your income to the side okay so that's 600 a month is what you're gonna have to put to the side okay so three thousand dollars a month is my payment i'm gonna i definitely have at least 600 a month that i'm going to be putting to the side now that means if i want to make my 900 per month i've got to be able to rent this property out for 3 thousand at least six hundred for the capex and nine hundred dollars for my cash on cash return so that would be thirty five uh fifteen hundred so i've gotta buy rent that thing out for four thousand five hundred dollars a month roughly in order to hit my minimum 12 cash on cash return all right let's look at this so let's check it out so let's go to printometer here watch me sign up for this guys i spend money to give you guys value i'm spending 200 on this youtube video just to give you guys a silly answer okay all right so let's pull up the address boise idaho hawthorne drive make this a little bit bigger for you all right uh look back smart okay rent i don't know what the rent is you tell me what the rent is you dumbass okay so i bet you i don't even okay if you're a wholesaler and you send me a deal and you make me guess how many bedrooms and bathrooms this is this is why buyers stop replying to you is because you make me do your job do you want me as you want me as a customer do you want me as a customer do you want me buying your stuff or do you want me going through and doing your job but you still want me to pay you 15 000 assignment fee for doing your job do your damn job give me the bedroom bathroom count hot damn all right so i gotta guess what the bedroom and i don't even now my numbers are not gonna be correct because you sent me deals and my daughter's using my phone so i'm not gonna freaking be able to call you all right thank you for making my job easy all right so i don't know what the rent is okay i know uh let's guess because it is a duplex so let's assume the duplex is a one bed the back unit's gonna be a one bed one bath okay one bed one bath then the main house i'm gonna assume it's a two bed one bath because it's so small so i'm gonna say collectively it's a three bed two bath all right let's see i don't know gosh damn rantometer this is what i hated about rentometer all right so here we go guys 2 000 a month rent rate 2 000 a month rent rate interesting all right so let's pull this up let's analyze this um view pro report i already paid for pro so here you go look at the rent rates by the way it's they've gone up like crazy and so they if you had a four bed i could rent it for three thousand dollars a month okay all right so it's giving me comps look at the rent right three bed two bath house three bed two bath two and a half bad house so here's the comps guys like this i'm i don't need to make this up somebody else is telling me this okay so i gotta rent this for four thousand five hundred dollars a month just to hit my minimum return but rentometer just told me rentometer just told me that the most is gonna rent for us how much two thousand eighty two dollars two thousand i can't even pay my sellers payment for that so all right if you're an investor looking for cash flow you now know this is not a good deal for you okay i already know i'm not going to put 90 grand in this to basically lose i'll lose right my payment to the seller is 3 dollars a month my rent rates two thousand dollars a month do you want to spend 90 grand to lose a thousand dollars a month guys you don't need me to analyze this for you like that is the most basic like go back to first grade it's not it's not hard it's not challenging to understand this so cash flow the number one reason why people buy pr the property is debt that's a dead deal for me as a cash flow buyer now there are other reasons why people buy properties what are the other reasons number two is appreciation okay you never want to buy property banking on appreciation so appreciation this is not a good deal to buy for appreciation it's not a good deal to buy for cash flow a good reason to buy a property is for depreciation i like that for this deal so if i buy a 500 000 house this is how depreciation works i'm losing a lot of people here by the way 500 000 i'm going to divide this by 27.5 that means that's the amount of years that the irs is going to give me a tax benefit so let's pull this up calculator so we're going to go 500 000 divided by 27.5 equals eighteen thousand one hundred and eighteen dollars or eighty-one dollars okay that's per year so check it out so i will get for 27 and a half years if i decide to own the property for that much i will get 18 181 dollars per year as a tax deduction okay and some people will say what is uh what does that mean just google tax depreciation real estate and you'll learn this it's very it's very simple it really is actually very simple now here's where it gets a little complicated is i could if i wanted to i could take seven of those years up front yes you can it's called accelerated depreciation and i could get a tax benefit of let's see one hundred twenty seven thousand two hundred and seventy two dollars all up front in my first year so at my tax bracket which is roughly 50 percent i would get real life tax savings of roughly 60 000 would i spend 90 grand in cash to get a 60 000 savings that's not a good idea so also depreciation is dead that's not a good deal depreciation okay the other reasons why people buy properties in real estate is because the mortgage pay down okay and because the interest rate is so high here 5.84 i'm really not paying down the seller a lot with that big juicy payment so that's really not a good deal either boom and then number five um is leverage okay there's no equity in this deal at all it's actually overpriced and so this is not a good deal for leverage the next one is inflation hedge this kind of goes in line here is that i don't think this is a good move here so i'd say no and then the seventh reason i buy properties because of the story i can tell about that property the only thing that would benefit me in buying this deal is number seven the story and the youtube title i can already think of it the youtube thumbnail is gonna say watch me buy this property like a dumb ass this is not a good deal it's not a good deal and i hope that you understand why it's not a good deal if you want to see how i underwrite morby method deals go over to that video and it should be somewhere around me here right here it's right here go watch the more we me go watch the morby method video is it here i'm not sure where is it i i'm not sure see in the next video [Music]

Channel: Pace Morby

Views: 25,635

Keywords: real estate, real estate investing, pace morby, pace morby creative financing, pace morby subject to, real estate mentor, investing in real estate, subject to real estate, real estate advice, real estate investing for beginners, real estate investing strategies, creative financing real estate, real estate for beginners, investing for beginners, how to invest in real estate, pace morby wholesaling, pace morby seller financing, subto pace morby, create deals, Meet ups

Id: 8g4ycLjfavE

Length: 18min 0sec (1080 seconds)

Published: Thu Jul 21 2022