All Forum Posts by: Andrew Eherts

@Erick Guzman Hi Erick! Nice to find another Las Vegas local. There is a lot to unpack for appreciation, since its a fairly complex relationship between many variables. Here are some hard and fast things I look for to signal anticipated expansion phases. This is the order I follow when researching new markets.

1) The Price Index: coined by Las Vegas broker Ted Federwitz (Key Realty), this metric tells you the relationship between home prices and their economic fundamental, which is rent. The function is (Median Rent x 12) / Median Price. This is basically the gross yield, and it will sit between 5% and 11% or so in a healthy, cyclical market. A low price index implies the market may be peaking, while a high index indicates you may be entering expansion. Using price index as a starting point, I move on to....

2) Appreciation momentum: how is the market performing year over year? Is appreciation over the last 12 months greater than the 3-year moving average? The 5-year moving average? If a market appreciated more over the last 12 months than it did on average over longer periods, you have potential momentum. Once you narrow your list further based on this, you can move on to...

3) Demographic data: are people moving in or out? Are median incomes rising or falling? Both of these indicate whether or not there will be an increased demand for home ownership. If you have this along with a high price index, you will probably see prices start to climb. You will find your most promising markets (and it will probably be a short list), so you can then turn to...

4) News: once you have an idea as to what markets are undervalued compared to rents (high price index) and promising population metrics (income and expansion), check the news. I recommend the city's economic development association or the chamber of commerce. They love highlighting where jobs are expanding, what new companies are coming in and new projects that will better the city. Companies coming in, large land development projects and housing starts are great data points. This is a bit more intuitive, though, because its tough to quantify.

Now, appreciation is very complex, so these points are really directional and there is definitely more statistics and math involved. However, if you have a bunch of promising indicators lining up for a certain market, you have a pretty good chance of experiencing outsized appreciation. You can start with Zillow data to get median rents and prices, and you can continue narrowing down as you work through each point.

@Katie Panzica Hi! Congrats on going under contract! That's huge, and you should feel proud.

I'd say define your goal. Are you trying to buy income? Then turnkey works well. Do you need to gather working capital to rinse and repeat? Then flipping or BRRRR would address that. Are you speculative? Then you can buy & hold or hold/develop land.

To your question regarding DTI, banks will definitely be watching it. This is where you might need to get a little bit creative. Can your investment tolerate a hard money loan with their high rates and short terms? Or would you be better off raising money through preferred equity or private lending? Looking into more unconventional financing strategies might be warranted if you can't go through a traditional bank or credit union.

I get the CBRE and Costar daily RE economy updates, and all they are talking about right now is "Buy distressed for huge discounts."

This is the real wealth transfer. Happens in the real estate markets just as often as the equity markets, oil market, commodities markets, any market. Prices don't move--they are set.

This is part of the rub when it comes to BRRRR. When you improve the asset, you'd look for rents to follow almost linearly (maybe a bit less depending on prevailing rent/price ratios).

In the end, you are financing a property worth $450k with rents of $1,300. That's a pretty low R/P ratio, and the debt service is what really kills this post-refinance. It's essentially a R/P 0.3%, leaving very little breathing room for debt service coverage. 

Basically, the prevailing market rents in that market do not fundamentally support the ARV. Again, this is the issue you can encounter with BRRRRing certain markets.

Let's focus on the controllable, which is the amount of financing you get. You can lower the debt service considerably by changing the amount you finance. Maybe leave 10% or 15% in the deal and see if the asset can survive the debt payments. Most banks look for a net operating income of 1.2x the debt payments (or a 1.2 debt service coverage ratio). 

Whatever your net operating income is, divide by 1.2 to find your maximum monthly payment, and you can work backwards from that to arrive at your maximum financing to still cash flow. 

@John Rickgarn what a great post--there is so much here. All too often people (and admittedly, myself) chase volume, but a quick read-through of this emphasizes the importance of slowing down and focusing in on due diligence. 

In general, how many deals would you say you look at before pulling the trigger and getting an offer out?

@Jake Kavitski yes loan terminology can be cumbersome! The promissory note is half of what we would colloquially call a mortgage. You have the promissory note saying "I pledge to pay this person (or entity) X dollars per month over Y years at Z interest rate", and the actual mortgage itself which pledges the property as collateral for the promissory note. 

You will see some investors who do the pen and napkin style of promissory note, others will point you to all the free forms available online. I always recommend you talk to an attorney once you have the terms set. You can either have them vet a document you find online for holes or you can draft one from scratch. There is a cost associated with that, but you would have closing costs regardless if you were to approach a bank for the loan.

Hi @Jake Kavitski looks like you found yourself in a good seller financing situation. If they want to be done with the property but still collect some income, you can avoid banks altogether and do a promissory note with the seller directly. This way, their capital gains are distributed to them over a period of time equal to the note's term. 

For example, if they want to spread it out over 5-10 years, you can do a 30-year amortization and refinance when they are ready to be taken out. You can tailor the note to fit their needs, whatever they might be.

@Luke Nesler I'm sure you've come across it, but my favorite resource is David Greene's book on the subject. I've read it cover to cover several times and cannot recommend it enough. 

@Laura Janosko this is a great breakdown--thanks for taking the time! I've always wanted to get into lower-income housing since one can provide a much needed service where there is little supply. 

To your point, however, seen very tall barriers to entry in this space once you start dealing with directly subsidized development (like LIHTCs). One of my professors is a developer heavily involved in raising capital commitments for these and says competition is fierce for those credits. And with recent tax legislation, there is less of a market to sell them (although I don't know if that will keep up given the fickle nature of our national leadership). Do you have any thoughts on this?

We have a few clients who keep their rental properties on HAP contracts, which seems to be a way easier way to break in. My only concern is not having control over rental rates, and one is at the mercy of the regulators setting them. If you have experience with those, what successes and failures have you seen?

@Tesho Akindele that's perfect--thank you! I was looking to dispel some of my mental blocks especially in areas with strong fundamentals. After all, there needs to be something positive about the area that outweighs the negative effects of crime if indicators signal appreciation momentum.

I appreciate all your time you dedicated to helping me through this one. Thank you again so much!