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J Scott's Starting Out FAQ
In another thread, Josh suggested creating FAQs of topics that are often discussed/asked by newer investors on the site. While this isn't inclusive of the awesome contributions by hundreds of other contributors here (I'll try to compile something bigger when I have the time), here are some of the topics that I've discussed in the past -- both blog posts I've written and forum posts I've started -- that seem to get brought up over and over.
Don't know if this will be helpful or not, but thought I'd post it just in case...
How do I determine if a property would make a good flip deal?
http://www.biggerpockets.com/renewsblog/2010/03/10/determining-maximum-purchase-price-mpp/
Can someone provide an overview of how to analyze a buy-and-hold investment deal?
http://www.biggerpockets.com/forums/88/topics/51836-the-basics-of-real-estate-investment-deal-analysis
Does someone have an example Rehab Analysis Spreadsheet?
http://www.biggerpockets.com/forums/67/topics/51045-basic-rehab-analysis-spreadsheet
Does someone have an example Rental Analysis Spreadsheet?
http://www.biggerpockets.com/forums/88/topics/51334-sfh-rental-analysis-spreadsheet-
How do I estimate ARV?
http://www.biggerpockets.com/forums/311/topics/73160-primer---estimating-arv
Does someone have a video tutorial for explaining "The 50% Rule"?
http://www.biggerpockets.com/forums/311/topics/72246-the-50-rule-video-tutorial
Any suggestions on making sure I do well on my upcoming appraisal?
http://www.biggerpockets.com/renewsblog/2011/01/19/controlling-and-conquering-your-appraisals/
http://www.biggerpockets.com/forums/312/topics/55307-controlling-your-appraisals
Should I get my real estate license?
http://www.biggerpockets.com/renewsblog/2010/02/24/should-you-get-your-real-estate-license-investors/
What should I look for in a real estate agent?
http://www.biggerpockets.com/renewsblog/2010/03/03/traits-of-a-great-real-estate-agent/
http://www.biggerpockets.com/renewsblog/2010/08/11/is-your-agent-a-great-agent/
Anyone have a sample contract for their contractors?
http://www.biggerpockets.com/renewsblog/2010/02/17/whats-in-a-contract-contractors-rehabbing-real-estate/
Any advice on managing contractors?
http://www.biggerpockets.com/renewsblog/2010/04/14/6-rules-for-managing-your-contractors/
What is Internal Rate of Return (IRR) and how do I calculate it?
http://www.biggerpockets.com/renewsblog/2010/09/02/introduction-to-internal-rate-of-return-irr/
@ J Scott, so I've been buying real-estate for a few years, and increasing my portfolio, but one of the questions I have, in your opinion, what are some of the processes need to be put in place to be more successful and grow a real-estate business. I think this is my weakness, but I'm honestly not sure where to start!
Thanks,
Daryl Anderson
Originally posted by @J Scott:
Originally posted by :
Banks aren't lending to investors just now.
Huh? I currently have approvals to refi several properties using both conventional and portfolio lenders. A partner of mine just got approved for a 7-figure loan for an apartment deal. And I know many people who are borrowing from local banks for flips and buy-and-hold properties.
I'm not sure where you're getting your information. There are plenty of banks lending.
To investors or to business entities? There's a difference.
In my experience, investors are not getting loans from banks right now as investors.
In these fora, investors report that they are not getting loans as investors right now.
In my investing group, investors report that they are not getting loans as investors right now.
Business entities, on the other hand, ARE getting commercial loans, though entities with light or shallow credit are facing some stringent requirements.
"Whales" (high "stakes", long / broad / deep experience) like yourself and your colleagues are likely the exception and not the rule.
Originally posted by @David Dachtera:
To investors or to business entities? There's a difference.
In my experience, investors are not getting loans from banks right now as investors.
In these fora, investors report that they are not getting loans as investors right now.
In my investing group, investors report that they are not getting loans as investors right now.
Business entities, on the other hand, ARE getting commercial loans, though entities with light or shallow credit are facing some stringent requirements.
"Whales" (high "stakes", long / broad / deep experience) like yourself and your colleagues are likely the exception and not the rule.
I guess I don't make the same distinction between "investor" and "business entity." I've borrowed money in my own name (conventional HUD loans), which I guess is as an investor. And I've borrowed money in the name of my business entity (portfolio loans, private money), which is as a business. But, either way, it was me borrowing the money. Whether it was in my personal name or my business' name was just a formality based on the requirements of the lender.
Last week, my partner and I were approved on three conventional refinances of single family rental properties. If we do the refi, it will have to be in our personal names, as that's the requirement of the loan/lender. I wasn't approved because I'm a "whale" -- I went through the same approval process that anyone else would go through. I simply needed reasonable income, good credit, the down payment and an appropriate debt to income ratio.
I have three relatively new investors (all BP members) who I've loaned money to in the past several months to buy/renovate several rental properties -- they have all been able to refinance out of my loans into conventional loans. I don't know if the refinances were in their own names or a business entity, but if it was a business entity, it was an entity that they started just for the sake of getting the loans.
@Christina R., @Anil Samuel - I'll let you guys comment if you'd like...
So, if you are finding that investors are having trouble getting loans in their own names, it's probably due to the types of loans they are pursuing. And, I would recommend they consider starting a business entity if the lender is requiring that -- not only will it help them get the loan, but it will provide some additional liability protection as well.
Of course, if the reason they aren't getting the loans is due to income deficiency, low credit, lack of down payment or too high DTI, that's the same problem that's been around since the beginning of real estate lending (with the possible exception of 2005-2008 :).
I am getting commercial loans approved for my clients with lenders in most states. Fixed rates & 25 year amortz. However, there is a distinction. Owner occupied for business owners up to 90% LTV full doc UW SBA. Investors (non owner occupied) commercial buildings, multi family 70% LTV (conservative) some full doc, some no doc (based on asset performance) but always personal guarantee, credit score of 680 or better and NO BK history. Good luck...also try your local credit union, some like to do deals.
Yes - the Renatus classes teach to NEVER hold property in our own name if it can be avoided. So, business entities and business entity structures are more common than here on BP.
We are also taught how to do deals with none of our own money or credit. So, institutional lenders are less of an issue for us. Where necessary, we also find credit partners where lenders demand a personal guarantee, and structure the deal to satisfy that requirement. More often than not, alternative lenders play a big role in the acquisition and repair stages of most of our projects.
The banksters' own statistics show that since they slashed and burned consumer credit, some 74% of debtors still have bad credit, even 7+ years after the crash. So, alternative lending sources are gaining traction.
Originally posted by :
,
Yes - the Renatus classes teach to NEVER hold property in our own name if it can be avoided. So, business entities and business entity structures are more common than here on BP.
We are also taught how to do deals with none of our own money or credit. So, institutional lenders are less of an issue for us. Where necessary, we also find credit partners where lenders demand a personal guarantee, and structure the deal to satisfy that requirement. More often than not, alternative lenders play a big role in the acquisition and repair stages of most of our projects.
I confused about who is trying to get these loans that you say they can't get and the reasons why those loans are being denied?
Is it the investors trying to get loans when they don't have money in the deal? Is it the credit partners trying to get the loans, but can't for some reason?
Regardless, lending guidelines have only gotten easier the past couple years, and again, for anyone with income, down payment, good credit and low DTI (the same requirements that have always been in place), I'm not seeing any reduction in qualification for loans.
Perhaps you can be more specific about who and why loans aren't being approved?
Additionally, I've found that private money is in incredible abundance. I personally know a dozen people -- including myself -- who have cash (their personal cash or retirement funds) looking to lend. They just want to find investors with good deals, a small down payment and a little bit of experience. We're all having trouble finding those people -- generally because the deals aren't very good or because the investor doesn't have any down payment.
That may be where you're going "wrong", for lack of a better way to say it.
First off, you're probably encountering people with no REI education. They're "trial-and-error"-ing it, or "so-and-so said (whatever)" or something they've done before but squeaked by on because there was enough slack in the deal to make it work.
That likely also means they don't know how to properly structure a venture, partrnership, etc. to meet lender requirements when the deal is considered as a whole.
Another possibility is that your lending criteria are incompatible with the deal the way it is or needs to be structured to make it work and it should never have been proposed to you in the first place.
In general, we find that the best and most successful deals occur when the investors are educated and also when the lenders are educated. preferably the same education so everyone speaks the same language on the same level. We typically include details of our education in the loan package. Some lenders even ask about getting educated with us so they can do better diligence and more effectively verify the deal analyses they've been presented in the package. As we attract private lenders, we also educate them on self-direction and avoiding IRS pitfalls when investing in a deal.
Oh, yeah - that's worth mentioning: in some cases, we don't borrow from private lenders - they invest from their SDRPs in our deals. That way, to the seller(s), the entity looks like it's doing the deal all cash.
Originally posted by @David Dachtera:
That may be where you're going "wrong", for lack of a better way to say it.
Why would you say I'm "going wrong?"
I do over a dozens loans per year, and to date, I've never had one not repay. And they are almost exclusively short-term loans, so they absorb less market risk than longer-term loans and equity investments into longer-horizon investments. I don't know about you, but I'm pretty sure we're due for a market correction over the next couple years (not my opinion, just historical statistics).
If you're referring to the fact that I can't find enough deals to place all my money, that's because there just aren't enough good deals out there right now.
I presume your group is mostly focused on apartment investments -- personally, I wouldn't touch 99% of the apartment deals out there right now with a 10-foot pole. With likely interest rate hikes and market downturn that will impact housing supply, apartments are in for a big a correction in the next 5 years (in my opinion). So, if you're having trouble raising money for these types of deals, it's likely not a problem with money being tight (it's not), just a problem with smart, private lenders and equity partners not wanting to get involved in the typical apartment deal right now.
There are exceptions, of course. There are a couple apartment investors here on BP with a ridiculous amount of experience, and I know lots of people investing with them. But, they are the exception -- based on their experience, knowledge and sophistication -- not the rule.
I know lots of people who went broke in 2008-2010 by investing in large syndications without a good handle on the risks...those who are back in the game are sitting on the sidelines right now, as they see similar risks...
Originally posted by @J Scott:
Originally posted by @David Dachtera:
That may be where you're going "wrong", for lack of a better way to say it.
Why would you say I'm "going wrong?"
"We're all having trouble finding those people -- generally because the deals aren't very good or because the investor doesn't have any down payment."
There are plenty of good deals to be found. In my experience - as in yours, the dearth is in educated investors savvy enough to do those deals the way they need to be done instead of trying to fit a deal into the investor's niche. We only enroll about 4,000 new students a month nationwide. So, on that, we're well "behind the curve", so to speak. That won't even scratch the surface of the billions of dollars that go into retirement accounts every payday.
Actually, folks here do mostly SFRs with the occasional MFR here and there, mostly City of Chicago. There are a LOT of MFRs in Chicago the neighbors want to see cleaned up - people there are avoiding the gangland war zones.
Originally posted by @David Dachtera:
Originally posted by @J Scott:
Originally posted by @David Dachtera:
That may be where you're going "wrong", for lack of a better way to say it.
Why would you say I'm "going wrong?"
"We're all having trouble finding those people -- generally because the deals aren't very good or because the investor doesn't have any down payment."
There are plenty of good deals to be found. In my experience - as in yours, the dearth is in educated investors savvy enough to do those deals the way they need to be done instead of trying to fit a deal into the investor's niche. We only enroll about 4,000 new students a month nationwide. So, on that, we're well "behind the curve", so to speak. That won't even scratch the surface of the billions of dollars that go into retirement accounts every payday.
Actually, folks here do mostly SFRs with the occasional MFR here and there, mostly City of Chicago. There are a LOT of MFRs in Chicago the neighbors want to see cleaned up - people there are avoiding the gangland war zones.
You only addressed half my problem... That deals are hard to find. The bigger issue is finding experienced investors who have down payment for those deals.
I believe you mentioned that the investors in your group are putting it none of their own money. That puts all the risk...and none of the upside...on the lender. I know very few lenders or equity investors who are willing to do deals with the principal has no skin in the game.
That's why you're having trouble finding educated investors for your deals... Educated investors don't want to do those types of deals.
I refi'd the two properties into 30 year fixed Fannie Maes at 5%. There were in my own name because that's what it had to be to get the best terms on conventional financing so my thought is to "use up" all the conventional financing I can get. What I lack knowledge on is how these 2 income streams now factor into my debt-to-income ratio so hopefully I can continue along this path until all that conventonial financing is used up.
I have no problem finding deals. I'm on the mailing lists of multiple local wholesalers. Between them I can find more "good" deals (they either are or can be, in the right hands) than I can personally manage. Some of 'em I wouldn't touch, of course
As for the lending aspect, well, that's the advantage to being educated: As I mentioned earlier, you can structure a venture (PPM, etc.) such that SDRPs invest in it rather than lend to it. Our PMLs are more accustomed to that paradigm, anyway, and some of them actually balk at the idea of "lending". So, to assuage the lending-averse, the investment paradigm can be used. Thus, the venture pays "all cash" with no lenders involved.
We all have the same education - "you can't swing a dead cat without hitting an" educated investor around here.
Originally posted by @David Dachtera:
I have no problem finding deals. I'm on the mailing lists of multiple local wholesalers. Between them I can find more "good" deals (they either are or can be, in the right hands) than I can personally manage. Some of 'em I wouldn't touch, of course
As for the lending aspect, well, that's the advantage to being educated: As I mentioned earlier, you can structure a venture (PPM, etc.) such that SDRPs invest in it rather than lend to it. Our PMLs are more accustomed to that paradigm, anyway, and some of them actually balk at the idea of "lending". So, to assuage the lending-averse, the investment paradigm can be used. Thus, the venture pays "all cash" with no lenders involved.
We all have the same education - "you can't swing a dead cat without hitting an" educated investor around here.
I think you're missing my point. Whether it's lending or an equity partnership, someone with money is typically going to be averse to working with a principal who has no skin the game.
If I lend to you or partner with you, and you have no financial investment into the deal, what's to stop you from walking away should there be a market correction or if the deal were to go south and become a break even deal? If you have no financial risk, that means you can walk away from the deal at any time and the lender or equity partner is the one who is screwed.
Why would someone with money want to put themselves in that type of situation? Novice investors who don't know any better might, but experienced investor won't. That's why you have trouble finding experienced investors, and typically rely on novice investors who you "train" as part of the deal.
Hey Guys:
If you are suggesting that nothing has changed from the Private Lenders then one of us is wearing "rose colored glasses". From my first deal in 1983, to 1987 [Ohio] compared to 1990 [Georgia] NOW 2015 in any state is like day and night comparison!!! Even in 2005 [Virginia-my last Private Lender] until 2016 is like day compared to night. Most Private Lenders now want the borrower to do a JV Executive Summary and present to them before they seriously consider lending. Even in 2005 NO Private Lender even asked of me to present a JV... It seems as though "the web we weave" becomes tighter and tighter for the borrower...or am I just imagining it. During 2015 and 2016 there were 56 Private Lenders with which I approached a possible project and possibly will have a deal completed with #56. There were 51 supposed Private Lenders with questionable motives! During the period 1983 through 2005 never did I need go beyond 3 Private lenders and maybe 2 to 3 weeks on any one project before the deal was completed and barely more than 18% to 20% of my money invested. But then, perhaps, I just imagined it...and even NOW starting in 2015, I have never had less than 38% of my money already in the Project and it has taken 24 weeks!
JohnR
Thank you, this post has saved me so much time rather than browsing endlessly on the forums, I just constantly find myself referring back to this page. Thanks J
Hi, is here some vocabulary with words and their explonation from the word?
Originally posted by @Aard-Jan Gaag:
Hi, is here some vocabulary with words and their explonation from the word?
Which word(s) did you have questions about?
Originally posted by @J Scott:
Originally posted by @Aard-Jan Gaag:
Hi, is here some vocabulary with words and their explonation from the word?
Which word(s) did you have questions about?
Sometimes when I read an article or a post I notice words which I dont know. So I though about a vocabulary but I will make a list by my own and post it in here and hope you can help me out.
I just wanted to say that this thread and @J Scott's wealth of materials and books have made my learning experience a lot easier. I currently pursuing my first Fix and Flip deal and I agree with J Scott that the deals are tough to find. Most properties I come across through MLS are way over priced for their condition. I am taking my time and waiting for the right deal to be found, but I have that luxury as I have a paying job. I agree that financing, especially HML loans, however is not hard to come by. I am pre-approved to get 90%LTC from a HML for my first flip. While the money isn't cheap, its a great resource for a new investor like me. I know I will be successful (thanks to BP and J Scott's material). I just need someone to take that first risk on me!
Thanks again!
You may have better luck with off-market properties. If it's on the MLS, everyone sees it which, of course, drives prices up and can even result in bidding wars.
My $0.02 ...
Agreed. I haven't really set up operations to market to off market properties. I am hoping my website will be set up in the next week or so, once that happens I will start sending out some direct mail if I don't get a deal off MLS.
For someone starting out, does it makes sense to LLC or Inc. your first investment or do you wait till you have multiple? Looking to secure my first investment property (small multi-fan, 2-4units) and hold for long term/cash flow.
Originally posted by @Nicole Pettis:
@Michael Spine You're welcome! Yes, it is only for owner/occupant. However fannie mae offers homepath reno loans to investors on some of their properties.
I plan on doing a blog when we really get going. Majority of the work that will be done with the 203k is exterior and the winter here in Milwaukee has not been kind. So we have been on hold:)
@J Scott You're welcome! Thank you for all of your amazing insight and sharing all of your knowledge! I am such an artist at heart and not a numbers person so all the forms you have on your blog are an amazing help for people like me!
did you ever start that blog?
@Patrick Martone
I have not. I have been so busy rehabbing other properties that I haven't had the time.
But when I start it, I will let you know;)
I'm curious how many independent investors end up getting their own real estate license and how difficult it is to find a broker to be housed under in such a situation. Sounds like a huge cost-saver in the long run.