All Forum Posts by: Andrew Thomas

TL;DR - Creative finance ideas?

For those who actually want details about the deal, in order to provide more relevant ideas for financing it, I present the following novella: 

K & B live nearby, and are building a new, bigger personal residence about 10 minutes away. Closing is later this month. 

K & B are open to consider RE investing, but they would want a very passive role; zero interest in becoming landlords, etc.

K & B loaned me 50k, with 12 month simple interest, on a joint venture agreement in 12/2021, to purchase a BRRRR deal. Buy, Rehab, & Rent stages are now complete, and I'm in process of getting a Refinance. Once that's complete, I can pay them back; the 57k payback is due 12/2022.

They plan to sell their current residence, where they lived almost 20 years, on the MLS. Zillow estimates 300k-ish as is. In order to pay down the liability / principal on the new house, and pay off other consumer debts, they want to sell & be cashed out, rather than taking on an "owner finance" deal. They both make good W-2 incomes, probably close to 200k combined. They might be willing to consider a partial owner finance, but definitely not interested in a "20-30 year, small DP" kind of deal. 

I'm trying to think of a creative way to finance their house, so I don't have to come up with 20% down ($60k) for a "normal" investment loan / bank loan.

It's "officially" a 3/2, split-level, 1800 sqft, with a large partially-insulated shop building, and a small outbuilding (2-story, playhouse on top / chicken coop on bottom), on about 1 acre.

I say "officially", because it is really a 4 / 2-3/4 house. It's a split-level, and they turned the two-car garage into an "apartment" area; they removed the garage doors, sided the exterior walls to match the rest of the house, insulated, drywalled, & painted the interior walls, etc. The floor & ceiling are still unfinished (concrete floor, insulation & joists are visible). Currently, they use the "apartment" for B's "work from home" office area, the laundry area, a 4th bedroom area, & and this year, they added a 3/4 bathroom (sink, pot, & shower-only, no tub). 

In addition to stairs going from the "apartment" up to the living room & the rest of the house, the garage apartment area has two exterior doors, one to the parking area, the other to the ground level back deck & back yard. The main level & above garage apartment is a "normal" 3/2 house, slightly elevated back deck with stairs down to ground level deck, hot tub, big fenced yard, etc. 

Their oldest daughter A married J about a month ago. The newlyweds currently live in the "apartment" 4th bedroom & use the 3/4 bath. A & J are also building a home, about 30 minutes away, scheduled to complete in October. Therefore, K & B plan to keep the house until at least October, so that A & J have a place to live until their home is finished. So, K & B will be listing the house going into winter / holiday season. This could make it harder to sell on the MLS, but housing in our area is limited, so maybe not.

My thought is that the garage "apartment" would be a good Air-BnB type space, while the upstairs / main level could be a "regular" rental. It's about 2 miles to the interstate, an hour from Chattanooga and an hour from ATL. I think the location would be good for both STR and LTR perspectives. It's also within 30 minutes of at least four hospitals, so mid-term travel nurse rental might work. Additionally, as there are two colleges and two universities within about 30 minutes, potentially even a "rent by the room" might work.

The exterior was painted 2-3 years ago, and LVP was installed about 5 years ago. Interior needs paint. Apartment needs some renovation to add flooring, ceiling, and interior walls to make a bedroom, closet, etc, in order to list on STR sites, and to separate it from the rest of the house, but it should not be a big or expensive deal to do this.

Additionally, the lot is big enough to place a tiny house, or add RV rental storage parking area... maybe even another house.

K & B had originally planned to add a second home for their daughter, but then she got married and both parents & newlyweds decided to build new houses. I'd have to get an engineer to lay out property lines & setbacks, but I think the lot is large enough. It is a rural area (chickens are allowed :) lol ) so the building codes and zoning regulations are pretty relaxed. The neighborhood is becoming more of a rental subdivision over time.

Since K doesn't want to owner finance, I'm looking at getting a mortgage for it. I'm trying to get my wife to consider that we could "house hack" in K & B's house, get a low down payment on it, turn our home into a rental (which it was before I bought it from my landlord), and live in K & B's house for a year, then repeat. She is not interested in moving until / unless she gets a house she "wants", and she doesn't want K & B's house. She also doesn't really like our current residence, for that matter, but "even though I don't like it, if we stay, then we don't have to pack". So, we may just stay where we are. 

Next week, we become "empty-nesters" as our youngest leaves for college. I work full-time corporate job, plus 2 part-time micro businesses, plus REI. She works part-time, and has been a SAH mom for the past decade. I'm looking at the numbers of an investment, she's looking at the "homey" part of where we live. She doesn't try to talk me out of things, but she's also not interested in REI, and doesn't listen to podcasts, so I feel I'm trying to make REI ( & retirement planning) happen alone.

I'm thinking about getting tickets to the BP-Con in October for both of us, as I'd like to get us on the same page. It's expensive due to hotels, cross-country flights, two conference tickets, etc. I think she would be willing to go, in large part because if I go, she doesn't want to stay home alone, and it would be a "mini-vacation". 

Bottom line.

1 - Do you think it would be worth the expense for both of us to attend BPCon?

2 - What do you think of my potential rental ideas for this property? 

3 - Based on the background info (no or limited chance of owner finance, little chance of house hack, etc), what are some creative finance ideas? 

Since the BRRRR was my first REI deal, I'm sure K & B are more interested in "return OF investment" from the first loan, before they will consider lending more money for potential "return ON investment" for "owner finance" or any future loan. That is totally understandable. I'm looking for creative ways to benefit both families. 

Thank you in advance!

@Jason Deangelis - Brad offered some great tips!

Based on my experience from the BRRRR I just (mostly) finished... in process of the refi now.

Washer / Dryer - Originally, the house had side by side units, but I moved a wall, shrinking laundry room floor space. This meant using either a stackable or putting side by side units in the cellar, which is only accessible from outside the house (1950's brick ranch). I decided to provide a stackable, and bought it from FB Marketplace locally. One leveling foot was missing, and one was damaged, apparently from the previous owner moving the unit into storage. Unfortunately, when I tried to install the new feet purchased from the GE parts website, I discovered the female threaded "insert", into which the leveling feet are screwed, was also missing... and GE doesn't sell that piece. Seriously?! 

So, while I saved money buying a used appliance, I wasted money buying & shipping feet that I can't use, plus the value of my time for researching, ordering, going to the house, trying to install feet, researching a different way to fix the missing feet, etc. Plus the hassle for the tenant, who has to use a laundromat. Tomorrow, I'm going back over there to try fix it again. Found generic "adjustable appliance feet", plus an "non-vibration rubber cushion" under each corner. Rate this one as a fail on my part. :) lol

Refrigerator - Looked on FB Marketplace again, but the price wasn't much different between used and new for a "normal" fridge ... sorry, I don't think a C-class house in a C-class neighborhood needs an A-class fridge with 6 doors, glass panels, or a built-in TV  :) lol I decided not to risk saving $100-200 and potentially get a used "problem" fridge, so I bought new from Lowe's. I opened a Pro account, which gave me 20% off the first purchase, plus it is only $20 for delivery & setup. $20 was well worth not having to borrow a trailer, lift it over the door threshold, carry it in, etc. Rate as a win! 

Bathroom - There's a couple of local "liquidation" places that sell HD returns. One sells tools, but the other sells all kinds of stuff for builders and investors. I bought a BNIB $350 tub for $75. I also bought a $500 vanity for about $100. White sink, under-counter mounted into a slab of black granite, sitting on a white preassembled cabinet. The slab has one minor crack, but it doesn't appear to go all the way through the depth of the slab, and isn't visible unless the light reflects at just the right angle. 

Fixtures - I focused more on the look / color than the brand, so I originally bought a black Moen shower kit, and a black Pfister faucet for the bathroom, a really nice ventilation fan / light (light, fan, nightlight), and a Kohler kitchen faucet, all antique bronze or black, all from the same HD resale store... These all ended up as fails. 

When the handyman went to install, we realized the plumbers had installed Delta shower valves during rough install, so the Moen didn't fit. I didn't realize shower valve bodies were different sizes. I bought a Delta at the local HD, so now I have an extra Delta shower valve, since I already had one in the wall. They didn't have any black Delta shower kits in stock, so I bought bronze... Then, the black Pfister vanity faucet didn't match the bronze Delta shower. Also, the ventilation fan / light was missing the entire plastic fan & light cover. So, I ended up leaving the original two switch fan / light in place (after I paid the electrician to install a three switch leg). 

The other accessories I paid retail at the local HD. The original plan was to flip this house, so I wanted stuff to match and to have something other than chrome for best buyer appeal. So I installed Delta faucets on the vanities, Delta towel hooks, Delta mirror, etc, all with a bronze finish, all from the same style family. 

Tile - Look for a "tile factory outlet" store in your area. Get "rectified" tile, as these are exactly the same size, which apparently makes your installer's job faster and easier.

The bathrooms, and possibly kitchen, may be a great place to splurge on tile. Instead of a fiberglass tub / shower surround, I went with an oversize white subway tile, with a "ripple" texture. It was about 3x the price of the normal subway tile, but even with the niche, the total square footage for a shower surround is such a small surface area that the additional cost is pretty insignificant in the overall cost of the house, and should be covered by the increased ARV. I was able to find a large format (either 16"x20", or 18"x24") Italian ceramic tile that looks like marble, and was on clearance. I had just enough to do the install plus a box, in case one gets damaged. I had them install this on the floor in the primary bath and kitchen, replacing the 90's vibe of the 12"x12" tan tile. Make sure to seal the grout after install to help keep it looking good. Additionally, I've been told tile is generally "tenant proof" and holds up well to kids and pets.

The resale shop also sells light fixtures, door knobs, ceiling fans, etc. The prices are about 1/2 to 3/4 of new. However, based on my experience... make SURE either the box is sealed (brand new overstock or last year's model, etc), or that ALL the parts are in the box (if it was an open, obviously returned item).

I'd recommend spending your money on stuff people can see or touch... upgrade to new Decora switches, new toilet, new fixtures, doorknobs, etc. That should help you get higher rent or appraisal. Stuff people can't see they don't value as much in many cases... think, attic insulation, insulated windows and doors, etc. 

Hope that helps! :)

That was the same thing I experienced as well here in the Atlanta area. They would show up, walk the property, take measurements, say they were going to send a quote, and then I never hear back from them. Since it was my first BRRRR, I didn't really have a good estimate on pricing, time required, etc. Definitely made the rehab challenging. The rehab took about six months, rather than the three months I was expecting.

I definitely agree with the suggestions about Facebook. :)

My home is in a rural-ish area, and people drop off unwanted dogs out here from time to time. We can't take them in, as we already have three doggos in our "pack", and the house is too small for any more long-term. We post the dogs, and within a couple of days, they are taken in. Most local areas have groups or individuals on Facebook who are willing to take in or temporarily shelter dogs until they can find permanent families for them. 

I have finished the BRR portion, and am in the Refinance portion now, getting documents together for a few lenders to consider. I'm almost 53, and this is my first investment property other than my personal residence. 

I had a few bad experiences with real estate in the past, so I had ZERO interest in being an investor until 2020. I didn't know where to find good REI advice until 2020 when I discovered MeetKevin, which led me to BP when Kevin was a guest on the podcast.

You all are off to a great start, running with BP, and getting good advice so young... dadgum whippersnappers... get off my lawn. :) lol

Steven,
You mentioned a couple of things in your reply above, regarding ... "DSCR terms around 6% for 10 year ARM" vs "30 year fixed at 7+%". As you mentioned, "rates are volatile in a upward direction". 

I'm curious how these two points work together, and how to determine the best funding option ... ie, fixed vs adjustable. With rates moving higher, would it be better for a "buy & hold" perspective to look for a fixed rate that is set for 30 years, or one that will change in 10 years? 

I just finished the BRR portion, and am in process of talking to lenders now. One is offering 70/30 LTV fixed for 30 years, another is offering 75/25 fixed, but one suggested I consider an 80/20, with a 5 year ARM on the 80%, as "this will provide better cash flow in the short term". He thinks rates will drop to >4% in early 2023. My concern is that if rates continue to climb, and we end up with a double-digit rate (like in my parent's era), the 5 year ARM could end at a bad time for refinancing.

@Kevin Wilson I was listening to a BP podcast again today, and David reiterated his belief that a person does not have to get 100% of the money back out for a BRRRR to be successful. His basic premise was that getting 100% of your money back out is a "home run", and not every "at bat" will end with a home run.

As I understand it, if you are able to cover your mortgage, taxes, etc with the rent, you are very unlikely to lose the house, and are able to safely hold for the long-term. Over time, appreciation will increase the home value, tenants will pay down the mortgage, and you should be able to refinance again later to pull out more cash.

I agree that it is nice to have more than one exit available. I originally planned to BRRRR, but the seller is a flipper. He suggested I flip for quick cash, but the margins were REALLY slim. With rates running up, pricing seems to have softened a bit, so "Exit Strategy 1.0" (trying to flip / sell) would probably diminish the already small margin to where I'd be upside down after paying realtors, taxes, lenders, etc.

The tenant moved in last month. 

Now I'm getting documents together for lenders and hopefully find a DSCR type loan. The "Exit Strategy 2.0" is to lock in a long-term mortgage, get rid of the HML (used for the purchase) and credit cards (used to fund rehab materials), and pay back my JV (used for holding costs & contractors). The second part of that strategy would be to pay off / pay down the HELOC on my primary (which was used for the down payment). So, it looks like I'm back to the original BRRRR plan. :) lol

Appreciate the feedback on this, as I had a similar question. Just finished renovations on a house, and got it rented about a month ago. Thankfully, tenant loves potted plants, and brought a bunch, so now the curb appeal is better. :) lol

I only have one rental, so take my input with a grain of salt. 

My listing accepted up to 3 dogs, up to 30 pounds each. $300 non-refundable pet fee, $25/month pet rent. Ended up with one 70 pound boxer who thinks he's a lap dog. :) lol In any case, the tenant never even batted an eye at the added expense, and said she'd looked at other places which would not accept dogs. To "dog people", that mutt is like a member of the family.

The teacher at the REIA's LTR boot camp had over 35 LTR houses two years ago when I took the class. His house purchase criteria is 3 bed, 2 bath, big fenced yard, in blue collar areas. He said that way, tenants move into his rental with their stuff, kids, and dogs, and then never leave. One of his "mental criteria" is that he wants tenants who have 1-3 dogs.