All Forum Posts by: Jonathan Sher

Cool

What exactly are you buying? These properties appear to have loans with some bank and have been sold to a buyer using a wrap. You can't buy the properties, those have been sold to the end buyers. I don't see any indication the original lenders are wanting to sell their notes. Are you buying these wrap notes?

But it doesn't really make sense to talk about a down payment when buying a note. So, I'm confused. That's a bad thing. This deal is convoluted. I don't like convoluted deals.

It seems that turnkey sellers are sprouting like mushrooms, not unexpected giving all the distressed inventory being snapped up.

Current practice by the largest turnkey sellers strikes me as questionable. Here are actual properties for sale on the sites of two of nation's largest turnkey companies, who enjoy preeminent reputations in the industry.

Company 1:
Sale Price: $109,900
Down Payment: $21,980
Closing Cost: $5,500
Total Investment: $27,480
Monthly Rent: $1,125
Monthly PITI: $725.68
Monthly Management: $90.00
Monthly Cash Flow: $309.32
ROI: 14%
Price Per Sq Ft: $73.00

Company 2:
Purchase Price= $89,150
Monthly Rent= $825
Taxes/Insurance -$135
Management Fee -$35
Monthly Expenses -$170
Monthly Income x12= $7,860
Yearly ROI= 8.82%

OK, if you've on BP longer than 30 seconds, you'd quickly see that there is no vacancy, maint/repairs, or capital reserves. Really?? How do they ignore these items, you ask? Well, in most cases they offer a Year 1 guaranty of net operating income, and teh possibility of purchasing a maint. plan for later years (though the cost of this plan is not included, and at any rate it's not going to replace your roof or your old furnace).

Plus, they point out that the properties are nicely rehabbed, in solid neighborhoods with high rental demand, tenants are rigorously screened, and to cap it off, the buyer may well sell the property at a big gain well before these repairs and capital expenses start hitting (remember, you presumably "captured" a boatload of equity when you purchased), at which time you can roll into another property.

At any rate, if you hold the property, the assumption is that Years 2-30 will experience none of these expenses.

Yes, these other items (vacancy, maint/repairs, capital reserve, evictions, etc.) are assumptions, but they are nonetheless highly predictable over time. We all know this, it's common sense.

So the question is: why do they do it? Does using higher expense assumptions depress the yield assumption to the point where no one will buy? Perhaps, especially if you're selling at relatively low gross yields anyway. But still, the net yield (assuming a more realistic 45-50% expenses/vacancy/capital) is considerably better than most alternatives.

Maybe it's this: they like you to lever up so that you can use your capital to buy multiple properties (meaning multiple sales and higher prop mgmt and maintenance residuals from tending to all these properties). However, this levering wouldn't make any economic sense for you if the true net return (cap rate) barely exceeded the borrowing rate. So it's vital that net returns be portrayed as materially higher than the borrowing rate.

It's usually the smaller, newer companies that are at least acknowledging these expenses, though they often understate them (vacancies at 5%, maint/repairs/capital at 5% is common).

I'd love to hear insights from others on this. It would seem to be in everyone's best interest in the industry to have reasonable standards for illustrating expected performance on rental real estate. No one wants, gulp, heavy handed government regulations to address all the disgruntled future investors/constituents...

I would be intersted in what title people have to say but I would never expect there to be a payout from a title insurance claim. Noramally when there is a claim the title company pays to defend your position and not actually cut you a check. you will still need to make payments on your loan during this. The lender policy covers several things but the main thing it does is insures the lenders lien position. This is very important when loaning to someone you dont know because title companies often delay recording the deed of trust and other liens can be recorded during the gap. For your situation it might be less important but I would still do it.

Not sure this is in the right forum but, I finally finished my remodel after a little over a year, mainly worked on it in my spare time/weekends.

http://specialtyceilings.com/wordpress/

I bought it for 22k and put 8.5k into it.

Hoping to rent it for 750-800.

I have some before pictures somewhere, i'll try to find them, but basically new everything except roof.

Let me know what you think, this will be my second rental.

Sounds like a lenders policy, as a hard money lender I believe it to be best practice to cover your lender for the full loan amount. It is an additional fee, but it insures your family members retirement against any potential title defects up to the full loan amount (assuming it is beyond your purchase price). If the money is coming from a retirement account be sure you get the wire ordered with plenty of time to spare, every custodian is different in how quickly they move. Don’t forget to get your hold open policy for resell.