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URL:  https://boards.fool.com/down-side-of-leverage-11839660.aspx

Subject:  down side of Leverage Date:  1/20/2000  9:50 AM
Author:  b06mjb Number:  16 of 14356

Here is a no-money-down deal I did recently. So far, the investment has not been a good one. It illustrates some of the dangers of leveraged real estate investing.

I saw an ad in the “Commercial Real Estate” classified section advertising a quad apartment building in an up-and-coming neighborhood near where I live. The price seemed reasonable, it was a FSBO, and the ad said “owner will help.” Investors are buying and renovating houses like crazy around here, so, even though I had never bought anything bigger then a duplex, I figured it was worth a look.

I also saw this ad on the internet a day before it was published, so I was the first one to call on the ad. Apparently, he had many, many calls.

The building is all-brick and very solidly built. It's probably the sturdiest building I own. It was in the super–hot area, but the street is not all that great. Plus there is a big apartment complex next door to it. This puts pressure on my rents, since I can't get too far out of line with their rents.

Despite those misgivings, I thought the upside to the area was very good, so it would be worth the near-term headaches. I proceeded.

I talked to the owner and got all the details. The units were fully rented at $540. He indicated no trouble renting at those prices. He said he had a recent appraisal, which he thought was a little low (I agreed), and was willing to sell below that amount. He also said he would refund some money after closing to help with the down payment. [This practice occurs frequently in the investment community. If you have no ethical problems entering into this type of transaction, DO NOT let your agent or mortgage broker know about it! Feel free to begin flaming me about this.]

Needless to say, I was interested. I went by and looked at a few of the units. They looked pretty good. (Recently renovated, according to the seller). Since the terms and price were good, I offered him a deal that would net him about 7% below his asking price. I included an inspection clause, loan approval contingency and complete down payment refund. If everything worked out, I should get in with nothing down, have about $500 positive monthly cash flow to handle expenses and get a property that has a good chance of nice appreciation. Even though I knew $500 @ month was tight, I figured, all things considered, it was a good gamble.

To be continued…



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