All Forum Posts by: Adam Gollatz

Well then.... 

You could start them off on whatever term lease gets them to your desired date, say 6 months. That might turn off some renters who would be afraid of you not renewing forcing them to move, or you raising the rent. The other downside is that they might leave after 6 months, and turnover has costs. To mitigate that, you could offer an 18 month lease. Downside is they could turn out to be bad tenants and a long lease could turn them off too. If you want to get really fancy there is what some of the big apartment buildings do. They offer any lease term you want, but they just charge different amounts for the different periods to guide you into an optimal renewal time for them.

Personally, given my market, I would just do the 1 year lease with a 60 day renewal. Approach them ~80 days before the lease is up, and ask if they want to resign and at this point ask them to sign a 6 month lease to get on track with a June move out date. At this point you should have some sort of professional relationship with them. Give them a week to decide and you have 70ish days to find a tenant if they dont want to resign.

They are on a month to month lease? The best thing to do would have been to have the previous owner renew their leases for a 6 month term as a condition of the sale. But thats more than likely not an option anymore if you're closing at the end of the week. Check the current lease and see what the move out notice they have to give is, chances are they only have 30 days, but the previous landlord could have wrote in higher. I had 60 days with my inherited tenants.

What are the current tenants like? When you walked the property are they clean? Are the rents at market value? It takes a lot of effort to move and if you're in a colder climate chances are they dont want to move either. Id say signing a lease with unknown tenants just to insure they dont move out is a waste. Depending on the tenant and how long they have been month to month, you taking over and wanting a lease signed could cause them to move out.

How do your tenants pay rent? Check/cash/money order or some form of electronic means? The reason I ask is when I was in college, the landlord managed a bunch of college rentals and had a system that would email us. If your tenants are tech savy you could probably set up an automated mailing list or text message service.

Sounds strange, but it actually used to help me pay on time.

I bet that property management company isnt looking so expensive now, is it? Why was the city doing inspections to begin with?

If you want to keep it win win Id say roughly something equating to 10% annualized interest. For them, it beats the stock market and for you it beats paying 3-5 pts and 8-12% interest.

All the more reason to fix the doorbell!

But in all seriousness, if thats the only damage, you got off lucky. I dont know the area, but chances are you can find a better tenant anyway and it only cost you a door.

Cant really offer PM company recs, being that Im local I self manage. My advice would be factor in management to your numbers. That way you can try to self manage in the beginning and if it doesnt work out, you could turn it over to a PM. If you have a fully renovated property in the right area and a friend thats local, id say its doable. 

When you lock it down, share or message me the address and I'll give you my unbiased 2 cents whatever thats worth.

Hey Bob,

Mind sharing where its located? Sounds like you are thinking of self managing from Washington state, is that correct?

Who's to say what fair market value is? If its listed and not selling, Id be willing to bet its not at fair market value.  If a seller has no money tied into a property, the property is paying for itself, and the seller has no immediate need for the money, they might not budge on price. But if any of those conditions change, they have motivation to not wait and should welcome any reasonable (thoughtful) offer. Dont go around just offering x% under listing.

I make offers based on numbers, mainly rent and expenses, so I dont feel bad about my offers. I guarantee you that I spend more time coming up with a number, than they do saying no. I wouldnt take a low offer as an insult either. Being insulted would apply emotion is attached to the property, which is never good for business. I dont sell enough properties to recognize names of low ballers, but like anything, you can get a reputation in this business. 

There are several schools of thought on that and I'll give the most generic answer possible, sorry,  It really depends on how you leverage. I haven't invested in real estate through a major downturn but from talking to people who have, this is what I picked up. 

Be careful relying on leverage (or money you cant afford) to complete a project. If you are developing or rehabbing an unlivable rental, you run the risk of losing your money to complete the project and holding a major liability while you wait for prices to rebound so you can do cash out refi's/helocs, etc to complete the project.

Be mindful of your renter pool and what would happen if the job market took a big hit. For instance, is your renter pool dependent on one industry or company? Is your rental priced at the highest end of the rental market? If you are renting high end condos or mansions and the economy tanks, your renter pool might move into more modest housing, leaving you with much higher vacancy that you cant afford. People will always need a place to live, its just where they can afford to live is the question.

As for the mortgage with yourself, below is what I was referring to. Its designed to help you get around some of the LTV limits and waiting (seasoning) requirements. Its important to know that at the investor level banks offer their own products and terms can vary. Ive had some that say they need 12 months and will only do 65% LTV and others that will do 75% and 3 months seasoning. Its best to talk to a lender ahead of time and let them know what you want to do and they can help guide you. Let me know if you still have questions.

HOW TO CASH OUT ON 1-4 UNITS
Receiving a cash out loan on an investment property can be a very confusing item. This post is designed to bring some clarity to taking cash out of a property with a conventional loan and help you navigate the sometimes-challenging cash out rules for properties. Admittedly, this post will probably be for the mid-level to expert level investor. There could be some important items in here if you are just starting out but it might get confusing in a hurry. If you have any questions, then please reach out. Lots of people on this forum can answer questions and many are very helpful individuals.

We will cover:
1. The conventional rules for a cash out loan
2. Buying a home with cash
3. How to properly structure buying a property with cash

1. The Conventional Rules For a Cash Out Loan
Fannie Mae and Freddie Mac are the Government Agencies that sponsor conventional lending. Most banks will have these loans as an option. There are other loan types as well but for brevity we will limit this post to the “Conventional” lending (Fannie/Freddie).
• Conventional Loans limit your cash out on an investment property to 75% of the “After Repair Value” on a Single-Family home (70% on a 2-4 unit home). This is also the same percentage that you need for a non-cash out refinance (more on why that is important later).
• If you purchased the investment property with a loan, then conventional loans will require you to wait 6 month to take cash out.
o This rule does not apply if you purchased the home with CASH (more on that in section 2).
Let’s explore some examples here:
• If you purchased a property with a 15% down conventional loan (85% loan to value) and you wanted to get cash out, you wouldn’t be able to do so since the cash out limit is 75% of the “Loan to Value”. The MAXIMUM cash out you can receive is 75% of the value of the property.
• If you purchased a property with a loan, but did the rehab on with your own cash, then you would need to wait 6 months to get that cash back. Keep in mind you could only receive 75% back of the After Repair Value.
o So if you bought a home with a loan of $50k, it required $30k in renovations, and it appraised for $100k after the repair work was complete then….
 You would refinance the $50k loan, receive back $25k in cash…since $75k would be 75% of the After Repair Value.

2. Buying a home with Cash
Buying a home with cash has become increasingly popular for many investors but often an investor will be caught with the restrictions to cash out loans if they need to get their money back. There is a plan to avoid this entire section (In section 3) but it is important for us to know about these restrictions. If an investor is buying with cash and flipping they get their money back when they sell the property. But if they are seeking to hold a property for any length of time and want their cash investment back there are some important rules to understand with conventional loan:
• If you buy a property with cash (or with a HELOC) you can receive a cash out loan on Day 1.
o There is not a 6 month waiting period with receiving a cash out loan if you purchased a home with cash or with a HELOC
o BUT you will be limited to the amount of….
 Your purchase price + closing costs (costs when you purchased the home)
 OR
 75% of the “After Repair Value”…
WHICHEVER IS THE LOWER AMOUNT (super important)
These rules are important to understand so here are two examples:
• Example 1: If you purchased a home with $50k of cash, and put $30k of renovations into the loan, and the home was worth $100k. 75% is $75k and $50k is your purchase price. So you could only receive $50k in your first 6 months of ownership since the LOWER amount is your purchase price. After 6 months you could receive the full 75% of the ARV.
• Example 2: If you purchased a home with $80k of cash, put $5k into the home, and the home was worth $100k. 75% would be $75k and your purchase price is $80k…so the lower amount is $75k.
When buying a home with cash you can absolutely get cash back right away but you will be limited to the lower of those two amounts.

3. HOW TO PROPERLY STRUCTURE BUYING A HOME WITH CASH
With these rules, you can see how it can be confusing to get conventional lending when buying a home with cash but there is absolutely a proper method to structuring your deals when buying cash. Here’s the secret:
• Create an LLC and have the LLC lend you a mortgage on the property you are receiving.
The reason why this works is because instead of you needing cash or receiving a cash out loan, we are now refinancing a loan – your loan. There no reason to wait any time or have any “whichever is lower” rule come into play. We are just refinancing a loan.
Here’s how it works:
• You create an LLC
• You buy a home
• Your LLC gives you a loan for the home
• You file the deed for that loan at the county courthouse
• You use the money from the LLC to buy and fix up the property
• Once the property is completed, your conventional lender comes to refinance the loan
• Your conventional lender runs title and sees there is a loan.
• Your conventional lender refinances you into a new loan, and cuts a check to your LLCâ�¦a check in the amount of 75% of the value.
Please don't confuse this 75% with a "cash out" amount. The non-cash out LTV on a refinance is also 75%. We are refinancing a mortgage. Your LLC's mortgage. Essentially your LLC has become the bank/hard money lender/etc. However you want to think about it. You get to set the interest rate (it can be 0%) and you get your investment amount back sooner.
Some things to think of:
• To file a deed at the county courthouse is $100-$150 in cost (depending on which county)
• And you want that note to be pretty close to 70% of the ARV for the property if you don't want to bring any money to closing. 70% will allow you to roll in your closing costs. If you want it to be at 75% just keep in mind you would need to bring your closing costs out of your pocket to complete the refinance.

The above information is designed for the "conforming, conventional" loan types that face this 6 month cash out restriction. There is an entirely different loan type that I will call "portfolio" (sometimes referred to as commercial loans) that may not have any restrictions. "Portfolio" loans come from the bank's own portfolio of money...thus the name. So the bank may not have a 6 month requirement but they also may have MORE of a requirement. Since each portfolio loan is governed by the bank itself you would literally have to call every bank out there to find out all the different portfolio loan options. However, most will not lend on such a small loan amount that you have. Most banks won't lend conventional money that amount either...but some will. Seek out a bank that would lend that small on a conventional loan and then perform step 3 above.