All Forum Posts by: Pete M.

@Alyssa Esquivel Will you have a lender for the property? If so, they'll require flood insurance if it's in a flood-risk zone. You can check the FEMA flood maps here: https://msc.fema.gov/portal/home

Here's a third-party site I like to judge risk based on many more conditions, but the FEMA flood maps are still the source-of-truth for lenders:  https://floodfactor.com/

Also, make sure your insurance understands whether you'll be living on the property or not.

Kim's options are good, but you can also consider partnering with someone.  They bring the capital to the table, you bring the time and expertise, maybe?  More food for thought.

I don't think you have enough equity to make a cash-out even possible, to be frank, so a rate/term refi is probably your best bet. You may be able to find a HELOC to free up some cash, but it likely won't be a ton right now with the market uncertainty. In any situation, a refi to lower your interest seems like a no-brainer. Shop it around and see what you can find for rates and fees... I just got my primary refi'd at 3.15%, and I know others who've gotten into the 2s.

@Ryan Guffey There are a lot of variables that go into any decision, as you can imagine, and those will vary from person to person. With rates being near historical lows, now may be a good time to refi your primary, but you also need to consider how much you stand to gain from doing a cash-out refi (limited to 75% LTV) vs a rate/term refi (80-85% LTV). Rate/term refi won't get you any more cash up front, and may even mean you have to pay some cash to close; you could then couple this with a HELOC. A HELOC is a good way to tap into that capital in the property, but you'll be paying interest on it while the money is out, so you'll need to factor those costs into your returns and strategy.

What do you think your primary is currently worth, how much do you owe on the mortgage, and what's your current interest rate?  How much cash do you need to get started?

@Alex Olson  Will reach out to Adam, thanks!  I'll let him know you sent me.

Who are you using to insure your 5+ unit properties?  I have a quote from an insurance broker for an 8-unit in KCMO that I'm evaluating, but wanted to get some quotes from a few others as a sanity check.

Thanks in advance.

DM'd you, @Alfonso Montejano

Glad I searched a bit, as this is a situation I'm going through right now. Let me use some hypothetical numbers for a hypothetical property to speak to. Let's say the property is in a B area that's desirable, older building, and has a lot of deferred CapEx (structural [like floor joists need to be replaced, brick work needs to be repaired, few walls in basement reinforced] roofs, etc) and all units need to be completed updated--it's a value-add opportunity through and through, as rents are also well below market.

• Collected income from T-12: $66,800
• Operating expenses from T-12: $30,200 (does not include CapEx or debt service, ~45% of gross income)
• Resultant T-12 NOI: $36,600

• As-is potential annual income: $78,000 (basically, if the vacancies were filled and 100% collections on rents)
• Assumed market CapEx: 6.5%

• After repositioning annual income: $112,800
• CapEx required to reposition: $200,000

If we use a simple T-12 valuation at 6.5% cap rate, that'd be $36,600 / .065 = ~$563,000 valuation.  Again, based on actual reported income, which would include realized vacancy.  Question:  How would you price in the $200k of CapEx that the property desperately needs?  Just subtract that $200k from the $563k = $363k?

If we use the potential as-is income of $78k and same cap, and assume a 5% vacancy rate and 45% expense ratio, that'd put us at: $78,000 * .95 = $74,100 (Effective Gross Income); then, $74,100 * .55 = $40,755 NOI. Finally, valuation with as-is potential income would be $40,755 / .065 = ~$627,000 valuation. Question:  Any again, how do you factor in the CapEx that has been deferred?  Just subtract it from the offer?

In line with the above, what would you define as CapEx that would warrant being taken off the offer price? For example, suppose this building, being older, needed significant structural work to reinforce floors, repair exterior brick work, replace windows, repair roofs, and all of the interiors needed to be heavily turned (new countertops, sinks, appliances, showers/tubs, toilets, flooring, paint, fixtures, etc) to hit the pro forma numbers.

I'm poring over various spreadsheets to analyze a deal (like Michael Blank's SDA, even though this isn't a syndication) and Joe Fairless' free simplified calc sheet, but I've got some nagging questions on when to actually use certain values... hence the above scenario/question. I realize MFR is a competitive space and we may be required to "pay the seller for work they haven't done" by paying a premium over the valuation based purely on the T-12, but there still needs to be "meat on the bone" for our strategy of eventually recapturing our capital after repositioning.

Thanks in advance.

Not being an agent or FA myself, you're best off talking to someone who is, and having them deep dive on the policy.  There are costs to setting it up, and not every dollar in the beginning will be available, but more is as it grows, and eventually even more.  While that does mean you'd have less dollars to use, and therefore a loss to the time-value of money, it's relatively small portion of the money put into the policy, and only closer to the start.

Yes, there's interest if you take the money out of the policy.  For my policy, the interest is equal to the dividend rate (at worst), so it nets to zero.  I do have to pay the interest separately, though, but the policy is also growing at the same time.

The ACV is much less than the death benefit, and any money borrowed out is subtracted from the death benefit.  If you have a $2MM policy and you've borrowed out $200k, then the death benefit pay out will be $1.8MM.

As for "$1 doing the job of $2", I mean that for every dollar I put into the policy, it's both buying me whole life insurance (which isn't term or tied to my employment), and I can borrow (or collaterize against) that same dollar for real estate investing purposes.

There's no significant difference in the time-value of money in this situation, though.  You put money into the policy, and it's generally available very quickly to borrow back out.  It's not like you pay into it for X number of years, and then it becomes available; you have access to the ACV the whole time while it's growing.  Even if the returns were only 2.83% (which is low), that wouldn't be instead of gains you can get through real estate investing.  You can do both!  That's why I say it's like making $1 do the job of $2.