All Forum Posts by: Dan Kennerson

You are correct!

In doing my diligence, it seems both to not be profitable due to very high management (required for compliance) and maintenance needs, and to have significant upside for a long time until that goes away. 

Would be fantastic for someone trying to offset taxes for the next 10 years, not for me right now. 

Quote from @Juan Mora:

this place sold for $180k in 2011 so I don’t see how it jumped to $775k in 12 years.  Insane. Not even my Carlsbad place quadrupled in price. 

 So, bought not long after the great recession in what has been one of the hottest markets in the US? 

Not to mention, it's entirely possible value was added. Did it already have the ADU? Those got a lot easier in the last few years. Was it renovated?

lots of reasons it might be worth that to someone. 

Hey BP!

I'm looking at an apartment building in a decent area (B/C class but well maintained, clean, and friendly small-ish town) and I'm trying to find the catch. 

I found this BP post which led me to this document, which lined out some of the realities behind the tax credits and repositioning opportunities, but I'm a bit perplexed by this property still. 

Frankly, it looks like too good of a deal, and I'm trying to understand why. It's fully occupied, generating about 1.6% of its' asking price in monthly rents, and has a waiting list of prospective renters that could fill ~35% of the units. No notices given in awhile either, so people are obviously happy to stay there, and rents are being collected. 

It has a required reserves that can be built up over the course of 10 years, and aren't a big deal. It has one person on payroll at a decent pay rate, but it's a large enough building that that salary doesn't make a big dent in cash flow. Maintenance, landscaping, etc. are all outside contractors and reasonable rates. 

I guess I'm trying to figure out what I'm missing, It's not often that a property comes up for sale on a 17% Cap rate that doesn't have serious issues, but I am not finding the issues. 

Are Section 42 buildings a big hassle in paperwork? Audits (which I know happen every 3-5 years)? tenant screenings? 

Thanks for any and all insight!

Unfortunately in a market like San Diego, the driving factor is much less about what makes sense for an investor, and much more about what makes sense for someone trying to get into something in an expensive market. 

If Zillow is saying 775, it will probably go for 775 plus or minus 20. They do some pretty good comp research. 

It's important to remember, especially in real estate, it's only worth what the next guy will pay for it, and in San Diego, I suspect the next guy will be stoked to have his mortgage go from $5800 to 2500 because he rents the larger space, and now he's spending less on his mortgage than he was on rent. 

(these numbers are completely off the cuff, I don't know much about SD except how much I'd like to have a second home there. )

You'll have to calculate this on an individual basis by the property. 

As you said, 20-25% down is usually the minimum. 

You'll have to meet underwriting for the Debt Service Coverage Ratio (DSCR), meaning your NOI will have to be 120% or 125% of your Debt Service, depending on the lender. This could increase your required down payment, or, hopefully, give you a negotiation point.

But the biggest variables in this are Operating Costs and CapEx. Are you hiring a manager or running it yourself? Are you hiring a landscaper, pool service, handyman? those costs will add to your reserves if you're playing it smart.

How new is the roof? Windows? HVAC? Does the pool need work? how is the pavement? Each of these, and everything else in the property, require maintenance and replacing at a certain frequency plus occasionally when you don't expect it. Smart operators set money aside for CapEx every month, and you'll want to have a reserve for this before buying, commensurate with what you expect may fail before you can save additional dollars.

You could probably buy with just the down payment, but the lower your reserves, the higher your risk. 

Quote from @Kristina Szwaja:

Thank you kindly for the response. The purchase price was originally $75,000 in the RTO contract. I have currently have about 38,000 paid into it that can be deducted from that 75,000. It does need some work(updating) at this point so I was also thinking maybe a cash out refinance would be better. Does the DSCR loans do that or which type of investor loans would be good for this scenario?

Thanks in advance

I would check your RTO contract for details closely, most of them will not credit the rent towards the purchase price. Instead, generally, they charge you rent, and a RTO amount, only the latter of which will go towards the down payment. 

Uncommon to see DSCR options on something that small. You'll often see DSCR start at a mortgage of 125k-200K. 

At that range, I wouldn't expect cash flow- you're going to spend that money in repairs over time pretty easily. 

However, if the area is growing, improving, etc, your equity may come up over time, and your tenant will be paying you money that will go towards your principle in your mortgage. 

I would be willing to bet adding a third bedroom would improve your rents significantly, so that may help in your cash flow. 

Where is the property? Is it in a good neighborhood? How old are the appliances, fixtures, etc.? What's the HOA fee? Is the HOA fee a part of that payment? What does the HOA fee cover?

Lots of details can help us help you to evaluate the property. 

MLS is unlikely I would guess, otherwise you wouldn't be asking.

Drive for dollars, find a local wholesaler through a meetup, Post an ad on craigslist, and even though they always seem a little cringy, you could even post bandit signs. 

Be ready to do more work through most of these avenues to get your first acquisition than a standard transaction, that work will be what gives you the opportunity to secure the deal at the price you need to make money. 

Quote from @Brian Eastman:

@Dan Kennerson

As a disqualified person, you cannot lend to or otherwise transact with, benefit from, or provide benefit to the IRA. The only way for you to add capital to the IRA is through normal retirement plan contributions.

Someone who is not a disqualified person can lend to your IRA (or a wholly IRA owned entity like a checkbook IRA trust).

 Is this something a qualified intermediary could legally overcome, or is that still a disqualified transaction? 

Really appreciate your info!

@Brian Eastman, thanks for the info on the checkbook IRA trust, that makes more sense.

I am not wondering if my IRA can loan to it's own company, that seems obvious.

I am wondering if I, as what would be a prohibited person to the dealings of the IRA, could loan money to the IRA's company, or if that would be a prohibited transaction, as my understanding is I still can't do work for my IRA LLC or Trust if I'm the beneficiary of the IRA.