All Forum Posts by: Darius Ogloza

I like to reason from the point of the worst case scenario.  Assume you co-sign and your partner loses the proceeds of the loan in Vegas.  You will lose your collateral/land ($1 million).  What happens after that will depends on which of you has more reachable assets or, in case neither of you do, the bankruptcy law.  

It seems to me that by co-signing AND securing the loan, you are taking on a double portion of risk.  A fairer allocation of risk here would entail your partner signing for the loan and your providing the collateral.  In this way, you are each out $1 million in liability in the event the loan is not repaid.     

As to what this means in terms of equity split, reasonable minds can differ. I would insist at a minimum on a 66%/33% profit split if I were asked to cosign and secure the loan.    

Is the developer/GC providing materials and labor to the partnership at his cost?  Some kind of mark-up on costs?   

What happens if the construction loan is insufficient to cover the cost of finishing the project?  Who ponies up additional capital?   

What happens if your developer/GC friend bails on the project or screws up and you have to finish with a third-party? Does original developer/GC retain an equity interest nonetheless? 

Your contribution of land to the project is equity - I do not see why you are characterizing it as a "loan."  I think you need to pick a horse and reason from there.  

Happy to chat, Olya.  

@Ann Mclean

This seems to me a straight up numbers word problem. You provide some information from which a few numbers can be derived but we need your full PITI after you refi to offer any sound advice. Since the property have been remodeled as of yesterday, you should expect no or virtually no capital expenditures over the next 12-24 months ergo comparing the rent to your PITI should give you a good sense of the maximum gain/loss you should expect as you attempt to wait this market out. Moreover, if your housing market seasonal? If so, try to arrange the length of the rental (if you go down this path) so that the property becomes available for sale during the high selling months.

The picture becomes clearer when you take inflation into account.  $78,000 1986 dollars is the equivalent of about $218,500 today.  That's your actual price baseline.  There are still  swatches of the U.S. in which you can find houses in the $200,000-$300,000 range (this was even truer prior to the post-pandemic run-up in national housing prices) which traded in the $50-$80 range back in the mid-1980's.  In essence, there are places which experienced little or no appreciation whatsoever (despite nominally having "higher" prices) and places in the U.S. which have experienced  massive appreciation due to the usual suspects of causes: population movement (generally west and south), more restrictive building regulations, topographical features, climate, economic development, etc.  

My response, embedded in the following the post, gives you a fellow Bay Area resident's perspective:

https://www.biggerpockets.com/forums/48/topics/1137397-balti... 

Speaking especially to fellow California-based investors, viewing this excellent post as exposing "Baltimore specific" problems would be inaccurate.  Based on my personal experience in other areas (Rochester NY, Toledo OH), you will find similar problems if you buy without adequate, on the ground personal research and/or simply rely on the standard out of state turnkey model on which to build your REI dreams.

It seems that people living in LA or SF or Orange County etc. see what appears to them to be ridiculous low housing prices and ridiculously high rents relative to those low prices and think that playing this arbitrage opportunity will be easy.  

There are four facts that should not be overlooked.

One: The fact is that for every buyer who is blinded by $$$$$, there is a repeat seller who knows the market better than you do and who is not buying,  but is selling to you.  Who is going to win?  

Two: The city leaders in these places do not represent you - the out of state investor - and do not care about your interests.  They see you as an easy source of tax revenue and/or as a bucket of ready cash that's needed to bring its derelict stock of housing into some semblance of shape (e.g., lead paint laws).  

Three: There is no such thing as a "landlord-friendly" state. Evictions are universally handled at the local level an, again, as an out of state investor, you have no friends in those local courts whose usually elected judges will need the votes of your tenants at some point in their tenures. Trust me. As an out of state investor, with a name that appears on court papers as "I make money off the locals LLC" you will get repeatedly home-towned no matter how good your local lawyer happens to be.

Four: In my personal experience, fewer than half the tenants in class B-/C+ and lower areas pay their "share" of the section 8 rent and seldom cover the utilities. If you are eager to go section 8 expect to receive the government's portion of the rent as full rent and to have to cover the utilities out of pocket even in the case of SFR's (in multi-units you end up paying water in almost all cases anyway). You might be pleasantly surprised by the occasional $100 coming your way from the tenant but I have found that to be the exception rather than the rule.

Bon chance

Betting against San Francisco has been a loser's game since 1849.  No reason to believe the trend will not continue.  

On the tax question, take a look at the instructions for FTB Schedule S - California credit for double taxed income.

The most intelligent move I ever made was buying a house in the Bay Area (Mill Valley) as soon as I could afford to do so in 1997.  We paid $445,000 for a 1,550 square foot ranch house with a backyard full of 100 year old redwood trees (saplings, really, about 120 feet tall).  We put 10% down on the property ($45K) and financed the rest with a 30 year mortgage.  My family back in the Midwest thought we were insane for buying a modest home at such a lofty price.  There was no way the price could go higher!  We lived there for 10+ years and then I made what turned out to be the second most intelligent move I ever made: I held on to the property as a rental when it came time to upgrade our living situation.  Now essentially paid off, the property produces about $60K net in annual income and would sell for about $2.2 million.