All Forum Posts by: Christopher Reeder

Each lender and property might create a different set of requirements and end result.

I had a quote last week for a quadplex that came in at 25% DP, 8.125% with a fixed 30-year term.  This product did come with a pre-payment penalty, too.  Purchase price was greater than $1.5m.

My experience with foundation issues has been limited. I bought a 1920 SFH that had a chimney foundation that was failing. A structural engineer recommended piers to provide a rigid support. The company I used put three 25-30' piers into the ground under the chimney to correct the problem. Cost was certainly less then your estimate.
I’ve also dealt with sagging subfloors which required new joists due to termite damage. This is more extensive because the crawl space was too narrow so we had to go from the inside of the home. 

It is all manageable with the correct trades and adequate planning. Be aware sometimes these indicators could lead to more extensive repairs as you open the walls/floors up. 

Kerry makes a good point that financing a multi-dwelling, single parcel property can be challenging.  I ran into this same issue with a property I bought that had 4 dwelling units on the parcel.  First, check the zoning for the parcel.  Is it conforming, meaning the multi-dwelling units are allowed.  This can be done by checking with your local government's planning dept. (city, town or county).  If it is an allowable use, you will need to hunt for a local bank that is willing to lend on the property.  This is the tough part but not insurmountable.  I went through 5 or 6 banks before finding one that was willing to do a portfolio loan on my parcel.

One other item to consider is the value of the property. You mention a cap rate, but with the parcel having 2 units, the appraised value will be determined based on the sales price of similar properties in your area, not the net operating income (NOI) the property can generate. The bank will be looking at the NOI for purposes of debt coverage, but the appraiser will not take this into account since the property is <5 units.

Kerry's counter for better owner financing is the best way to go.  I'd do further due diligence because when the balloon term arrives, if the owner is not willing to continue, you will need a backup lending solution.  Another way to counter the owner is to ask how much he/she wants to make each month on the payment.  You can back into this figure with terms which could avoid getting hung up on single components of the lending calculation (rate, DP, amortization, etc.).

 Good morning Michelle.

As an investor focused in Polk County, FL and with several properties on the east side of the County, I can tell you Winter Haven is a thriving community with a lot of expansion (much like all parts of Central Florida) happening.  Demand is strong across Lakeland, Auburndale, Winter Haven and even south into Lake Wales from my experience.  Polk County has one of the most diverse workforces in the State of Florida so jobs abound across a lot of industries.  The closer you are to I-4, the more jobs are focused to e-commerce, warehouse distribution and logistics given the high number of large warehouse locations that have been built and occupied the last 5 years.  Amazon alone has 4 facilities in Polk County and sees this part of the State as critical to their distribution network.  

Small multi-family can be tough to acquire depending on your selection criteria.  Diligence and some creative uses for the property can make a deal work in this market.  

Good luck in your search!

@Tom Seigold

I’ll preface this response by saying I’m not a tax accountant and my reply is based on my similar circumstances to you.

The simple answer without getting into a deep dive of your specific tax situation is rental income will be taxed as passive and be subject to your ordinary income tax rates.

Your retirement income will also be taxed at the same rate. If you expect your taxable income to grow beyond your W2 income levels, and we presume the historic low tax environment will be higher in the future, it is best to pay tax today because it will be less than paying tax on the same amounts in the future.

Chris

@Manny Garcia

I’ve run across the scenario you’ve described a few times with local banks in my market. Each institution has their lending criteria to control their risk appetite. You sound like you have found many that have similar criteria when determining their risk for cash-out refi’s.

Conservative banks like to have borrowers with cash in the deal. As investors, we are working to have the least amount left in the property after the refi. Many times these are 2 premises that will be at odds with one another.

If you acquire a property that needs a renovation and refinance, I’ve found it can take 4-6 months to complete this full cycle. In speaking with a lender yesterday, they indicated their time to close is pushing 60 days. That leaves 3 months for renovation and a month for lease up to support your estimated new value. This scenario isn’t that uncommon currently. The 6 month seasoning when taken into this context is reasonable.

I'll add one more idea to consider which Brandon Turner mentioned a lot in podcasts. Leaving $5, $10 or $20k in a deal does not make it a bad BRRRR, it just might not be the home run. A lot of us are building wealth hitting singles every few months.

Chris

@Levi Hannon

Great question as part of your due diligence and analysis of the property. I can share 2 scenarios with you I recently experienced.

I bought an occupied duplex from a wholesaler. Rents were significantly below market (~$300 each). Property had code violations and was in disrepair. Purchase price was $64k with an estimated market value after stabilization/repairs/market rents of $200k. I bought the property occupied and have been working through the mess. Both tenants were MTM. One eviction completed on the non-paying tenant and the second eviction pending. Repairs have been ongoing. By the end of March, property will be rehabbed, rented and refinance in process. The spread of $134k = heavy lift to get the property performing correctly.

Second property I acquired was from an owner. I asked for the units to be vacant at close date. 4 of the 5 tenants were MTM and $300-450 below market. Property condition was near market level rents. Owner would only initiate 15-day non-renewal notices but did not want to manage the tenant exits. We settled on the notices and I’ll manage any hangovers. So far so good on this one.

My preference is always to take units vacant where rents are significantly below market. If they are close to market and tenants have good pay history, provide increase notice at takeover and get to work. As others have said, you always must honor any lease agreements in place.

Chris

@Josh Darley

If utilities are stated in the lease to be the responsibility of the tenant, hold firm and let her know her responsibilities.

2 tips, if you aren’t already doing them.

1. I specifically stated which utilities the property has in my lease and who is the financial party responsible for them.

2. I have a 1 page welcome letter I provide to each tenant upon move-in which covers some basic items. One of which is the utility providers, their contact information and landlord/tenant responsible party.

Though your other properties have not had this experience previously, one of these solutions could help you in the future avoid an unnecessary inconvenience.

Chris

@Steven Barr

It is possible the current owner and/or property management performed the rehab and get the units occupied several months ago. This enhanced the marketability of the property and stabilized the income streams. Depending on the specific market, rents could have increased beyond their projections of a rehabbed property resulting in the spread they have quoted.

As others have said, a 1-4 unit will be valued based on comps and not based on NOI * cap rate. The option to maximize rents after acquisition is a selling feature to support their asking price. Perform your market research to validate rents for this type of unit in this market can support the figures they have advertised.

In the hot markets, sellers are pushing rent proformas which in turn elevate their asking price. Though this logic is linked, one’s own ability to execute the seller’s advertised plan can be different than what can actually be achieved by the buyer.

@Michael Greer

Depending on your personal financial position, a bank would provide better rates. The down payment might be lower at 20% or you could find some banks asking for 30% for an investment property.

As a 6-plex, the property will be a commercial loan that will likely have a rate reset at 5 or 7 years.

The benefit of seller financing is you do not need to go through an underwriting process that a bank will require. This process will evaluate the property and your finances to determine if you qualify. If the property is producing less than 1.25x debt service coverage at time of takeover, the bank will require a higher down payment or not lend on the property. Your costs to close the acquisition will also be lower through seller financing (appraisal, survey, origination fees not required).

You mention a 7-year term. Is this the balloon term or full amortization term? You can improve your cashflow by asking the seller to amortize the debt over 30 years.

Back to the quality of the property….if it needs rehab, improvements and repositioning in your market, seller financing can be a great option to acquire it. Perform your plan to improve the quality of the property and then in year 2 or later, approach several banks to cash out refi the debt. This could even provide you liquidity at closing that you can use on your next project.