My first rental deal, a short novel summary.

[Joel Ray Cotton]

Hello,

My goal here is to educate others on the forums of things that may or may not be covered in the thousands of posts on this wonderful website, that happened on my first deal, which happened to be a 6 property off market deal.

The Background:

I have been looking to invest in real estate for about 2 years now I have been passively looking at properties as I built up my cash roll. I have a single family home that I bought as a fixer upper in 2016 and have a decent amount of equity. (Owe 100k, house appraises for 160k, here forth will be called primary residence) I was looking at multi-families that I could buy and possibly fix up but here in St. Louis there are alot of investors that have contracting companies that buy up the wedge with lower contracting costs and make it not as feasible unless you find an off market deal. I then moved onto local Real Estate investing meeting where people were wholesaling, and a decent amount of local investors went to talk shop. I learned a decent amount and also learned that there are a lot of people making very risky decisions that work out because the market is still appreciating.

At this point I started looking at buying a single family property all cash from a foreclosure auction. In an area in Saint Louis that is considered North County but is south of I-70 as there is a decent amount of foreclosures but also a lot of families still live. Houses go for 30-60k all day with a various amounts of work needing to be done to them to make them rent ready.

Finding The Deal:

I was at a friend birthday party where I may have enjoyed one or two cocktails, too many, and was talking with a friend of a friend who mentioned that he was looking to get out of all of his 6 properties and would easily take 300k and cash out. That night I mentioned I would be interested to show a friend and would like the addresses. The following day I went and drove all the properties, all were in decent areas where people probably would've been scared if they just looked on a map. (Nice quaint, family neighborhoods) I went ahead and recreated the Bigger Pockets calculator into excel so I could evaluate the properties individually but also as a group.

Evaluation:

I went through the Bigger Pockets search bar and searched every single calculation and looked at the best practices for each one and put that estimate into my calculator. I have attached each my full spreadsheet where I inputted literally any information that could be found on the properties, as you can see its a lot but I am an engineer and an pragmatist. At this point I started researching loans and quickly figured out that to get an individual loan on each property was going to be a bear because of the Fannie and Freddie limit when approaching 6 loans. I will discuss how I handled this on the financing piece after this. Emails and Financials

I don't believe there are enough people discussing the different business strategies out there on these forums. May it be, a buy and hold strategy, a cash out refi (BRRR), fix and flip, and house hacking. Each have their benefits and some have some very high costs in regards to up front capital unless you put a Heloc down, do Hard Money Loans, or borrow from family. (Which a lot of bigger pockets people do and literally don't mention it anywhere)

After meeting with the current property manager and gathering the current leases, what costs are paid by the owner (trash, sewer), personal property cost, insurance cost, walking the properties, my spreadsheet came out cash flowing on all the Single Families. The condos were not at all. This was due to the Condo Fees, but also because the tenants have been in the places for 3-5 years and haven't had a single rent raise. Also a diamond in the rough was that the properties, because of them being a single family home appraised quite high.

The Financing:

I went through the typical Internet Search and found 5-10 mortgage lenders all of which rather scoffed at my numbers originally because they did not really work with investors; they just went through typical channels saying that I would have to put 30% down and that I would need to get appraisals and approvals at every level. Some even wanted individual sale contracts for each property. At that point it was becoming too unwieldy and one of the mortgage lender recommended me to the "VP of Commercial Lending", I was ecstatic! I set up a lunch with the "VP of Commercial Lending" and tried to talk shop with him in regards to my DSCR, NOI, what they like to see as estimates for property management etc. He then started talking about his background, how he overcame the odds and worked his way up to where he was at now bouncing between companies as opportunities arose. He talked about how most of his deals were multi-million dollar industrial deals and that this was nothing in terms of size.

We then started talking about financing and what they typically like to see in regards to the loan structure. 20-30% down based on risk, loan term (3-5 years callable on a 20 year term), I was comfortable them having a second mortgage on my Primary Residence. Asked if I was willing to write a letter pledging my 401K if necessary, and even mentioned my Accord; Then at the very end mentioned that a 5.75% interest rate could be had and he would just need approval from his boss. At the end of the meeting I said the following, “As a fellow salesperson I value building relationship with people who can be upfront and honest with me. I can come off as a little brash but if can come with your best foot forward, I don’t plan on going to anyone else to bid out this loan.” (His deal structure didn’t happen as I will mention later, emails attached in link, start from the bottom)
Emails and Property Financials

I left that meeting very confused, to get this deal done I needed to pledge everything I owned and have built to get this deal done. It did not seem worth it for ~$600/month, I started second guessing the whole deal. The buyer called me that day and asked what I was thinking in regards to value, I said, “To be honest, my calculations right now are putting it at 235k one of your single family’s needs to be evicted and your Condos aren’t even cash flow positive.”

I went home and decided to mention it to my girlfriend of 3 years who didn’t understand the first thing about properties, and the only thing she said at the end was “To be honest I don’t see how all these headaches and risk are worth $600/month” I then tried to explain the tax advantages and that even went further over her head. “You are trying to pay less in taxes? Isnt that illegal?”

At this point, I went to Bigger Pockets, researched and found that there was not a single consistent thread between any of the Commercial Loans people were getting. I started reaching out to my local network asking for Commercial Lenders and personal references. I found 8 lenders to reach out to and scheduled face to face meetings with them. All of which, had one common thread, there were all VP of Commercial Lending! In the background, the first Commercial Lender came back and said Congrats I got the loan approved with the terms we discussed at 6.875% on a three year callable, NOWHERE near the quoted 5.75%. Then added that I would need to get Appraisals, Inspections, and there was a prepayment penalty. I then fired off an email and told my first commercial lender that I did not find his terms very favorable and asked if there was any wiggle room. I have attached the emails and let’s just say it got fun, as you can see there were many “Thuds on the table.”

Each lender came back with varying deal obligations and as you will see below Commercial Lending is the Wild Wild West: 

• The first didn’t want a second on my primary residence but wanted 30% down and for me to pay for inspections and appraisals on each property (6% on 3 year callable, 20yr). 
• The second lender didn’t want a second on my house could do internal appraisals, 20% down, and didn’t require inspections (6.1% on a 5 year callable, 20yr). 
• The third lender wanted a second on my house but offered to do cover TPI, Third Part Inspections, and would complete internal appraisals; it would have a prepayment penalty, and added that I would need to have an account at their bank where the rent was to be deposited. They would require a LTV amount of 70%. (5.75% interest on a 5 year callable, 20yr).
• The fourth lender is who I ended up going with, he came back and stated that they would complete internal inspections, and appraisals. They would only require 20% down, I was to start a bank account with them with a starting balance of $7k, no prepayment penalty, the loan was drawable at any time up to the original loan amount. (6.2% interest on a 5 year callable, 20yr) Through some shrewd negotiating, I got them down to 6.05%.

The Deal:

I ended up floating them the verbal offer of 235k but they were not budging and came back at 300k being a fair number. I let the deal sit for a week while I went skiing in Jackson Hole and when I was back, met with the property manager, asked what he thought needed to be done to each property. I went ahead put together an offer for only the single-family homes on a Special Contract for a 162k. After some evaluation and some inside info from a friend I found that he had a cash offer for 155k, As-Is. I went ahead, updated my contract, and gave him an offer of 165k. After two days of evaluation the seller came back that he would need to sell all of them in a package deal or he would sell them off individually. We went through and I played middleman saying that the Condos did not cash flow an my lender would not allow me to get a loan with that high of a LTV. He came back and stated that all he wanted for the condos was 120k.

Knowing that this was my original number of 285k I stated that I would be willing to do this if he seller financed me the down payment, at 4% for 5 years for these condos and I would give me a Second on one of the condos. (Later switched to the second on the problem number two house, which also has the lowest value) He agreed and I went through and put together a deal for 285k.

Things that I added to the contract that I believe are awesome are the following. If possible, ask that all properties be rent ready at time of purchase. (Saved me $1000s) Prior to the deal in due diligence, Ask for all the move in inspections and photos, The Leases, and Security Deposits. One thing that I messed up on was not stating in the contract that all security deposits were to be transferred through escrow and that turned into a whole ordeal. 14 days inspection contingency is necessary, and if possible I would definitely ask for the tenants inspection so you can find our if they are happy with the property manager and or rental itself.

Title Company:

I went through and asked for references for title companies again from lenders and friends. I went ahead, emailed them, following up with a call explaining that I am an investor and would be completing a single loan with all properties and I would like a quote. After three quotes, I got back a competitive quote and called each of them to ask what was included. The one that could explain it best I picked, they also happened to be the most recommended.

Oh my lord did we find some issues in title, Single Family home, One, was purchased from a families estate by the sellers father who happens to live next door. The title company who cleared the title didn’t show a clear chain of title. The lady (Betty) who owned the house, husband’ (Jack) died in the 60’s, Betty filed a letter stating that the title was to be transferred to her name but apparently only 50% of it transferred. When the family’s estate sold the property, they did not record Jacks death certificate and an approval by his/her descendants approving the transfer. After talking with the original Title Company, they stated that they would look into it, 2 weeks later I got nothing from them. I had to track down the daughter on Facebook and asked her to contact the original title company to get it handled. The gentleman at the original title company wouldn’t call the daughter back. I ended up leaving the gentleman a very stern voicemail stating that they were legally liable for this mistake and I will come back to them for my time including my title companies time for this if he did not call her back immediately. He ended up going to her house with a mobile notary the day before closing and handling it. It didn’t get recorded in time so we had to push closing by three days.

Single Family, Two, had a predatory lending loan against it. The lady who owned the house in the 90s had TransAmerica Financial Solutions come to her door and offer her 30k against her house. When the house was purchased in 2015 somehow the title company did not find that they still had a lien against the house. Luckily, they had a title policy against the house, but the title company is closed because the upper management was embezzling the Title Policy money and wasn’t actually purchasing the policies. Thank the lord that this was actually had one. I had my title company contact the Stewart title company contact the legal department and ask for an indemnification clause of my title company still covering me. They stated that they would look into it but it would take 2 weeks. At that point in time I asked the seller to also contact Stewart and say that they would like to file a lawsuit. After that email Stewart sent an indemnification clause immediately.

TransAmerica Financial Solutions had a ton of supreme court cases against them for predatory lending. They eventually declared bankruptcy, closed up shop and sold that portion of the business. This is where it gets fun, Whirlpool announced that it would be selling its appliance financing division to TransAmerica and somehow it was rolled into a company called Household Financing Corporation (HFC). This place also purchased the debt of TransAmerica Financial Solutions. During the time TransAmerican closed up shop, they “lost” all the paperwork showing that you had paid your loan in full and would not record that it was paid through the city. So if there was an older person who paid their loan in full TransAmerica would mail them something saying they paid it in full but that wouldn’t get recorded with the city. Once that person has passed most of their heirs are none the wiser and throw away all the paperwork showing it was paid off. HFC in possession of the debt with “no paperwork” would re-package your debt and sell it to creditors who would come after liens on your house asking for proof of payment. After paying on it for 20 years she cleared the loans, but there is not proof. So here I am with a rental that is insured for the cost of the property hoping that they don’t try to pull that **** with me. Good news is the title clears in 2032. (Definition of buy and hold)

Things I learned:

• You can literally ask for anything once you gain a relationship with a lender.
• Make your own spreadsheets/evaluation tools otherwise, you are relying on someone else’s understanding when you don’t have your own.
• Make sure you do your full due diligence yourself as it’s your responsibility no matter what, this comes to appraisals, inspections, insurance, property management, tenant management, contractors.
• Pay for Adobe Acrobat DC, pdf editor, it saved my life in regards to editing PDFs and getting signatures. I know people love docusign but DC is way more integrated.
• Title Companies are complete joke until you need them, and make sure you get your copies of your Title policies full documented after sale. Also if there are two names on the policy and one of the owners change make sure to update the policy.
• When bidding insurance companies make sure you know if they are a DP1 vs a DP3 policy, and research the differences.
• Put the damn properties into an LLC, you don't need the risk associated with having it in your own name.
• Treat the whole thing like a business, get your own LLC, EIN, separate bank accounts, etc.
• Evaluate your expense correctly, those are your coffers of risk, do not count on that money for cashflow. Only pull from them for expenses and/or once they are full.
• Commercial Lenders have a fun way of calculating interest. I have never been so pissed about something buried in the terms and conditions in my life. They calculate interest based on 360 days a year instead of 365. It is known as Actual/360, or 365/360. Therefore, you end up paying 1% extra over the life of the loan or effective .05% more on your interest. (Remember when I did the shrewd negotiating earlier, half of that went out the window with this calculation) I ended up researching it and its pretty crazy that its legal. All of my lenders said that it was the profit the bank makes and they don’t know why it’s in there or the history behind it. They do not legally have to show you on your loan commitment that this is how they calculate it, they only have to show you on your loan calculation which normally you only get the day before your closing. This ultimately comes from the short term Bond Market where they were trading bonds on a hour by hour basis and it was easier to calculate not including leap years, and months that have more of less than 30 days so they just standardized 30 days a month times 12. Whoever invented this and buried it in the T&C’s is my idol and if anyone knows who this is please let me know, as I will fly anywhere to shake his hand.
• In the end I should of gone with lender #3 as the properties appraised at 65% LTV without anything down. Who knows how internal people sway appraisals though so they can get what they want. This would have left 36k in my pocket though which would lead me to my next deal right away.
• If you are buying a condo to rent make sure you find the insurance agent that insures the whole building and make sure you or your LLC gets added to the Master Policy. In my case it allows me to drop Earth Quake insurance from my individual policy as the whole building is covered. At first I thought about keeping it but there are laws against an insurance company double paying, which is garbage but alas it is canceled.
• When shopping for lenders make sure that in the excel document that you declare your assets edit their document and specifically state that they are not allowed to run your credit without your authorization. They dont always communicate between the lender and underwriting and they will go ahead and just run your credit and then you have to explain something theyve heard 100 times "No I usually have an above a 800 credit score its just because they ran my credit without asking"
• Create a dropbox or gmail account specifically for the properties where you can store all the important documents.
• If you are doing investing and have full time job, good luck and godspeed, this became a second full time job and I ended up losing a long time girlfriend over it.
• St. Louis is horrible for a long term appreciation play unless you buy into an up and coming area which will cost your a premium up front and lower your Cash on Cash return hoping for appreciation on the exit.

I am typing this over lunch so I am not re-reading this or checking for grammar. Be easy on me folks. I hope this helps the first time investor as I see a lot of people jumping into deals that DO NOT cash flow. 

All the best,