All Forum Posts by: Arlen Chou

@Forrest Jacobs that is great you are making these moves already. Are you planning on investing in New Orleans area or back in Kansas City? The highest barrier to entry for you will be getting a loan. You are making the right moves in having a W2, but that might get harder as a full-time student at Tulane. I would suggest that you make the rounds at the local real estate agencies and see if you can get a job as an admin. You will be able to keep a W2 and also be exposed to real estate, basically a 2 for 1 deal! Start building up a relationship with a small local bank. With smaller institutions, you will have a better chance of getting better service if you have funds already with them. Get on to meetup.com and look for local real estate meetups. Make yourself valuable to the host and help with signups, etc. Over a 2 year period if you are consistently attending you will eventually become a "regular" and a person that newbies will gravitate towards. Just keep things in perspective, you are really young so you have a ton of time to make it big. Don't get discouraged if things don't move as fast as you feel they should. 

Good luck!

-Arlen

@Emmanuel Cano finding the deals is not the hardest part of getting into real estate, the most difficult part is getting the money to invest. How much you need is really based upon the market that you are trying to get into. Not only do you need to save money but you have to get your income up so that when banks look at you, your DTI will be in your favor.

You can basically do this in 2 ways: get a partner that has good income and finances or take the time to build yours up. 

You made mentioned that you were thinking of moving out of your "house" and renting it out. Do you own this house? If you do that is an important leverage point for you. Is it big enough to get roommates and "house hack"? Typically any income from this won't be added to a DTI calculation, but house hacking is a great way to start saving money.

Do you have the time to do a "side gig"? If you have a car, doing Uber/Lyft is a great way to make extra cash AND learn neighborhoods.

Good luck!

-Arlen

@Greg Link I would assume you have good interest rates on these loans, so I don't think it makes much sense to go do a refi. Are your loans all with the same lender? In the past, I have reached out to my lender and asked them to give me a HELOC on the value of my primary residence PLUS a couple of investment properties. This essentially created a giant revolving line of credit. I would use that money to buy a property as a "cash buyer". Once I acquired the property, I would place debt on that property and pay back the loan on the HELOC.

Basically, I created a process where I looked like a cash buyer to the seller and took the pressure of funding a loan off of the front end of the purchasing process. This allowed me to take my time to find a good loan without worrying about not being able to close. 

Good luck!

-Arlen

@Robert Adkins This is not often discussed, but it is pretty typical for commercial lenders to still take DTI into account for newer investors, even if it is technically a "commercial" loan. Once you have a larger portfolio and a longer track record, you will be able to negotiate this away.

One good cash-flowing deal is not enough for them to believe that you won't make a mistake with a larger sum of money. I would personally keep the rental, and start building up the track record so you will be able to get past this barrier. It will obviously take longer then you planned, but you look young which probably means you have time on your side.

I ran into a similar problem when I first started out. I am not sure where your primary market is located, but I am in the SF Bay Area. I leveraged the crazy appreciation we have in this market by doing a cash out refi. After a few properties under my belt I was then able to move away from doing cash out refi's to a HELOC that was tied to my personal residence AND some investment properties. This gave me a very large credit line that turbo charged my purchasing power. This is not a fast process... it took me about 5 years to get to that point. Once I got past seven properties, going for a commercial loan based upon the potential performance of the target property became substantially easier.

Good luck!

-Arlen

@Andrew Koster you should start by deciding what your end goal is and working backwards: Do you want to be a developer? Do you want to be a landlord of just 4 units? Do you want to expand and hold multiple properties. Are you looking for cash flow or wealth creation?

If the properties are contiguous and if the zoning is right, easiest thing to do would be to do a package sale to a developer and then 1031 into an apartment complex. A step up from that would be to get the project entitled and then sell it. Much of this has to do with the actual location of the property, but I would definitely look into that. This would be especially be attractive if all of the units are empty.

If you just wanted cash-flow, fixing up the units and renting them out should not be difficult. You could then do a cash out refi after the renovations and a "seasoning" period and then invest those funds into something else. 

Those are just a couple of options. There are a ton of driections for a relatively large block of land in San Jose. Just think about where you want to be and then decide on a path.

Good luck!

Arlen

@Vincent R. I am guessing that this is an add on to your previous post about your mother's potential investing strategies. At a $3k loss per month, you would be better off just handing a check over to the family member on a monthly basis. There are a TON of unseen issues that come along with being a landlord that can suck up cash very quickly: repairs, potential lawsuits, etc. 

The only way to make buy/hold work in the Bay Area is to find value add properties and figure out how to turn the under market tenants so you can renovate and get to market rents. In the "rent control" haven of the Bay Area, those are not simple tasks. Assuming this is related to your mother, what happens to her if they extend the covid emergency eviction moratorium? How many months can she carry a 1 or all units without rents coming in? Some people are made to "lawyer up" and make things happen, but first time landlords rarely are ready for the battle. 

Be extremely careful with retirement funds. When people are young there are decades to make up losses, but after a certain point there literally is not enough time to make it back up.

Do not mix business with philanthropy, most especially when it involves family. Real estate is a business, treat it as such. You should never be ok with taking a loss. If the goal is to help family, then be clear that you are forgoing profitability and any semblance of best business practices and that you will bleed money. 

I don't mean to be harsh or condescending. I have just seen too many people go down this road and end up creating deeper problems within the family and killing their dreams.

Good luck!

-Arlen

@Vincent Roache I am guessing that this is an add on to your previous post about your mother's potential investing strategies. At a $3k loss per month, you would be better off just handing a check over to the family member on a monthly basis. There are a TON of unseen issues that come along with being a landlord that can suck up cash very quickly: repairs, potential lawsuits, etc.

The only way to make buy/hold work in the Bay Area is to find value add properties and figure out how to turn the under market tenants so you can renovate and get to market rents. In the "rent control" haven of the Bay Area, those are not simple tasks. Assuming this is related to your mother, what happens to her if they extend the covid emergency eviction moratorium? How many months can she carry a 1 or all units without rents coming in? Some people are made to "lawyer up" and make things happen, but first time landlords rarely are ready for the battle.

Be extremely careful with retirement funds. When people are young there are decades to make up losses, but after a certain point there literally is not enough time to make it back up.

Do not mix business with philanthropy, most especially when it involves family. Real estate is a business, treat it as such. You should never be ok with taking a loss. If the goal is to help family, then be clear that you are forgoing profitability and any semblance of best business practices and that you will bleed money.

I don't mean to be harsh or condescending. I have just seen too many people go down this road and end up creating deeper problems within the family and killing their dreams.

Good luck!

@Shannon Park the reality on the ground is that you will find people who are successful in EVERY market. People say "you can't find cash-flowing deals in the SF Bay Area" all the time, but I do. People say the taxes in Texas will kill cash flow, but people make it work. This is your first deal, you should not be looking to hit it out of the park at your first "at bat". Your focus should be to get on base and not strikeout. 

You can do all the analysis you want and look at employment growth, housing demands, taxes, etc. and you should, but once you get past the basic analysis you need to look at intangibles like what support you will have in that market. Once you have a few properties under your belt, then you can get more sophisticated. 

Remember the first time you drove a car... It was not about driving the fastest or longest, it was about making sure you did not hit anything. 

Good luck!

-Arlen

@Vincent R. your mother sounds like she will be in a very good place in a year. I am not sure what a "substantial" retirement income looks like, as it depends on the person and their needs. If she is NOT looking for wealth generation nor additional income then taking the risks and headaches of getting into being a landlord is probably not the best idea. Wealth preservation is very different than wealth creation. There are many easier and less risky roads to venture down to hedge against inflation. 

What she needs to do is do a financial life assessment and figure out if she has enough existing funds and retirement income to provide for the lifestyle she wants for the next 20-25 years. She should definitely take health care, vacations, etc. into account. Many people at that age figure out that it is easier and actually more fun to have a part-time job to add to the pot over the retirement years than it is to worry about large capital investments like a single rental. 

Good luck!

Arlen

@Betty Chou there is not enough information in your post to make an educated decision. Where is your property located? How much equity is in it? What is your current interest rate? What would the unit rent for if you decided to rent it out? Do you have money for a down payment in your new market or do you have to sell? Do you even want to be a long-distance landlord?

If you do want to be a landlord and you are ok with being a long-distance landlord and IF you have equity in the property AND rents in the area would support a higher mortgage payment than the current payment, I would consider doing either a cash-out refi or pull a HELOC on the property BEFORE moving. Depending on how long you have held the property and the equity in the unit, there is a strong possibility you will be able to hold on to the property, have it cash flow and protect a low-interest rate.

The reason you would want to do this BEFORE moving is that you will get a lower rate on a "primary" residence vs an investment property. Additionally, once you convert the property into a rental you will be able to sell it at a later date in a 1031 exchange. The beauty of this method is that you get money out of the property WITHOUT it being a taxable event. When/if you do sell it in a 1031 exchange it becomes a tax-deferred event. Basically, you will potentially save a ton in taxes.  

Good luck!

-Arlen

@David O. the HELOC strategy can definitely work, I have been doing it for years. But you must understand that it is a "line of credit", not a loan. It is essentially a giant credit card. A line of credit can be canceled by the bank at any moment. If the bank were to cancel your LOC when you were not expecting it, you could find yourself in trouble. I am just saying that Wellsfargo has made the first move, other lending institutions could follow... or they might not. It really depends on which way you believe the economy will move and what the lenders will do.