All Forum Posts by: Daniel Ditto

I have heard many people say that a down economy is the time to buy investment property. I also see the benefit of low interest rates in an up economy where lending is prevalent. 

I confess my buy and rent experience only exists from 2013 on and that whole time the economy was growing. In some ways I look forward to a recession for buying potential now because I have several flows of income and I see how those would be even more valuable for purchasing other assets when the economy is down. That said I'm a little confused about where you would go for investment loans when lending tightens in a down economy. Is it mostly based on relationships of trust you build during the good year? Just trying to be forward thinking here.

@Nathan Gesner given that you work in property management I'm sure you know the industry better than most of us but I thought I would make one comment. If the margins are so low, which I believe you that they are, then why is anyone doing it? Maybe this will add some insight @Michinori Kaneko. From my observation most small management groups fall into managing other peoples property because they are already managing their own robust portfolio and they see the big cash in the power that bigger management comes with. 

Since property managers usually manage their own property they get the cost of what paying someone else for management would be returned to them. That could be reason alone but it isn't. It also means that they sit at a great pivot point for economies of scale on all kinds of things and they are a magnet for good deals. By the time you have hundreds of properties and units you manage/own it starts to become cheaper to hire your own handymen, plumbers, rehab guys, etc. You can pay them a wage for their work and then charge extra on their services to your clients so that you are making income off of every service that is provided. You have control of their labors so that if there is an emergency at your own properties or those you manage you can direct them there instantly, saving time, damages and money and keeping tenants happy. You can also more effectively develop relationships with suppliers, titling companies, real estate agents, banks, wholesalers, insurance agents, law firms, service providers, government housing authorities, inspectors etc etc. 

There in lies the true power of economies of scale. Hypothetically If I own 5-15 duplexes representing 20-60 tenants in a community and especially in a city, very few service providers and suppliers care about what I am doing. On the other hand if I represent 400 units and thousands of tenants I've become a relevant factor in almost any market and people are seeking my business which gives me negotiation power.

IMO the biggest benefit to property managers appear to be the ability to naturally land lucrative deals on properties that only come to them because others in the market know they have influence over a large group of investors. They get approached by bankers, wholesalers and brokers looking to unload numerous foreclosed or brokered properties quickly. This benefit cannot be overstated because managers attract these deals like flies and they can pivot to either collecting the most lucrative deals for themselves or making margin in wholesaling to their clients.

I was with one property manager when he got a call and email from a bank that they wanted him to bid on 20 residential duplexes and single homes. We went and looked at about 10 of them together. It was like a million dollar deal but he was confident that he could turn around and resell them to his clients before the deal even closed while keep a couple for himself. The same day we had to visit one of this guy's personal property for a showing. It was a huge 3 unit apartment building where each apartment was about 2500 square feet. He had bought the property for something like $60000-70000 and each unit was making around to $2000 rent. He told me his return was about 50%. I was blown away on how he could get that deal and he just said contacts come to him with deals all the time and now he doesn't even keep anything that isn't going give him a 30% ROI. Anything less he just resold to his clients.

Years ago I wondered how property managers can do what they do on the small fees their receive. Now I see management and associated fees as the tie between the manager and the investor which enable them to take advantage of the market in all kinds of ways. This probably isn't true for all managers but I don't know how many of them are even making it otherwise.

@Michinori Kaneko that is the only fee I am aware of. I would guess he builds some pricing into the maintenance work his guys do. They are the same guys he has do rehabs for me and they are very reasonable so the costs don't seem outrageous.

@Alex Smith sounds like you are using an broker to find you insurance. Is that right? I have shopped insurance for both my full time employer on everything from liability and workers comp to company wide auto and EPLI. I have also shopped insurance as a landlord. The truth is that brokers/agents represent both carriers and their clients (you and I) and often they have close relationships with particular carriers. 

To clarify that means that they are not usually shopping your policy to all carriers like many people think they are, it is simply not feasible and no software exists that lumps every carrier together because that would work against the control the carriers have over their products and pricing. An agent will have maybe 10-20 core carriers that they go to based on the volume and size of the deal. That is why you can ask one broker for best pricing and they give it to you and then you go to another and they give you their best pricing from an entirely different carrier. If they were both shopping in the same place they would come up with the same policy.

With that in mind I would tell your broker that you are going to ask other brokers to look as well. Call several other brokers and tell them what you need to pay or else you will need to sell the property. Tell them you are willing to get a letter from the electrician who worked on the rehab or whatever that carrier needs. Get loss runs that show you only had this one claim (if you had others that might be the problem.) Tell the brokers your current broker is not coming through for you and explain your plans to keep adding additional rentals long-term so you need a carrier you can rely on and ideally renew each year for a reasonable price. Brokers are sales people. They will work to secure your business because they want you long-term. There are thousands of insurance companies an all you need is one that will see the opportunity for your business and look close enough to see the risk is not as high as other carriers seem to think it is.

Sorry this is happening and to your best rental! Good luck!

 

Don't credential until after they see it and want it. Showing timing all depends on if the place is well in order and clean when the potential tenant wants to see it and if you have an agreement or know the tenant is cool with others looking at the place. Sometimes it is actually a benefit for a potential tenant to see what the rental looks like with someone in it. If your tenant did a great job decorating and utilizing the space tastefully than that will definitely be a plus to a visiting potential. If its a mess or damaged than its a no go.

I pay 10% of rent in St Louis no matter the number of properties but my manager is full service and worth every penny. Does everything except pay sewage and taxes for me. He regularly finds me new properties to purchase at rock bottom prices and will rehab them with a full service rehab group that he has a relationship with. He gets them past inspection and has a great relationship with most of the inspectors in the city. I'm sure he is making something on rehab and maybe sales transactions as well but the cost is so low and he does so much for me that he deserves it. The demographic most of these properties service are low income and high maintenance as well so it is not easy to find a manager willing to service those genre of properties.

I have heard good things about Rentler but I have never used it myself.

With little experience I am trying to understand how you make the decision between the type of institutional financing you go for on a buy and hold rental property. What I have seen discussed on BiggerPockets has only served to confused me more and more. I assume these options have been discussed and compared in these forums before?

I have a 5/20 year balloon on some rentals and I honestly didn't know enough to consider otherwise because that is what the banker said is standard. Its worked out well so far but my lack of knowledge on the subject still gives me goosebumps. The only conventional I have ever done is on my home which I plan to eventually convert to a rental but with low interest rates it seems to me that getting a conventional for 30 years would be a no brainer on any property if that is an option.

Is the financing method even up to you or is it just what the loaning institution is willing to do? Are there other options besides a balloon loan or conventional?

Are there factors? Like whether the rental will be or is held in an LLC? Does the borrower's collateral matter (like using equity from another property vs cash)? Does the amount of the loan matter? Is a conventional loan simply based on trust established between the borrower and lender? Is conventional only available for a live in landlord? Are there regulatory issues at play here?

I'm a mess on this subject. Anything you understand, resources you can point me to or educational courses would be appreciated.

Big thanks @Alexander Felice,@Steve Tarrell, @Craig Jeppesen! These were perfect answers. I'll keep it shorter in the future so its easier to absorb.

To give a little background I recently took a 5/20 year balloon loan (if I understand correctly) where the loan amortizes at the rate of a 20 year loan but after 5 years the balance of the loan is due. Basically what I did was use 65% of the equity in 4 of our 6 single home rentals that we owned outright to purchase an additional 4 rentals outright, bringing us to 10 total- 4 mortgaged and 6 owned 100%. This was done back in June, before I was really exploring BiggerPockets so I didn't have this forum to ask. Since then all of the new rentals but one, which is still being completed, have renters who will occupy next month. 

In that sense everything is going according to plan and I honestly do not have a problem with the loan thus far. It was set at 6.125% through a small bank in St Louis MO, the payments are very manageable and they seemed good to work with. I approached another bank before the one I selected about such a loan but they were not interested in the small account with me and in the demographic of the properties I am purchasing. 

To give more context, these properties are inner city low income section 8 rentals which cost me around $40000 when purchased and are worth about $50000 after they are fixed up. I understand the hesitation from the first bank on this sector of homes as the expenses and turn over are generally very high. I would never manage such properties myself because of all the hassle but I have a great friend who manages in that sector and he is a rock-star and is making my landlord life fairly easy.  I have been at this for about 6 years and my properties have averaged about 15-18% return after all expenses per year with some years being much better and some being much worse. Up until June of this year I have been purchasing about 1 of these properties each year and I roll the income from each towards buying another property as soon as I can afford to do so while taking no disbursements as of yet. I do not rely on this rental income, other than as a mental safety net for if things ever got tough for any reason. My salary from full time work  provides for my family's needs.

Early this year I decided we have done well enough and the market is competitive enough that I wanted to gobble up a few more of these properties to accelerate my purchasing a bit. Since I have been purchasing with cash up until this point my knowledge about loans and loan options on income producing rentals is limited and that is where this line of questioning comes from. What my banker suggested is that a 5/20 year balloon is industry standard. The research I did on this was limited to a few friends who mostly purchase with cash like myself and through google but it all seemed to confirm what the banker said. My concerns are two fold:

1. Barring total disaster I can pay off the amount over 5 years but it puts a wrinkle in my plans. Ideally I don't really want to do this since it will severely limit my ability to continue to purchase additional properties which is really my reason for going this route in the first place. If I have to suspend additional purchases until payoff then I have complicated my process with little benefit to myself. That might put me only slightly, if at all ahead of where I was by purchasing properties at a 1 per year pace. To this concern my lender said I could just seek another 5/20 year balloon either from my current lender or another at the end of this loan period but I still wonder if that is a likely scenario or hopeful thinking not supported by reality. Last thing I want to do is rely on that scenario by going ahead and putting most of the rental income towards new purchases and then find at the end of 5 years that I cannot get a new 5/20 year loan and need to pay the balance back in full while its all sitting in the unsold equity of my rentals.

2.Did I have other institutional options? I simply do not know enough to say that a 5/20 year balloon was my only reasonable option on the table. If there are different options where I could do a 10 or 20 year loan or a 7/20 year balloon or who knows what else is out there than that seems like a better option if my fears in concern #1 are accurate. Can I simply take loans on a new property with some % down rather than using equity from current rentals to pay for others? Obviously if I could buy rentals with a 30 year loan like is often done for home purchasers then everyone would do it because it would be a no brainer IMO but my limited research does not seem to say that is the case. Maybe I could get a better loan if I was richer or if my properties were ritzier and worth double. Not sure. If the risk with a 5/20 year is not high I would love to rinse and repeat in even a year or so and use the equity in my other 6 rentals to help me buy another four or five properties. It only makes sense to grow with OPM if the option is there, understandable and not overly risky. Getting to around 20 of these properties would be a complete game changer in moving this purchasing process along. I have been playing very patient thus far and will continue to do so if the loan options don't make sense.

Anyway, your knowledgeable thoughts would be appreciated. Sorry to wax long but I feel the purpose behind my getting the loan and information on the type of properties is relevant to understand my goals and interest in what type of loans might be out there. If you know of other good non private options as far as loans go, understand the implications of a 5/20 year loan or if you see other risks I do not I would love to hear about them.