All Forum Posts by: David Lao

I live in CA and have owned several rentals in central PA for four years. It's in an area that is known to cash flow, but not appreciate due to a declining population. I've been thinking about selling a rental or two (with or without taking advantage of Section 1031)... 

At what price points does it make sense to pay a Section 1031 intermediary to do a S1031????  50K? 100K? 500K? 1M?  How much does it cost?

The option would be to hold onto the rentals until I die.

I generally agree with the comments of others, and I agree with Eric 100%. You can waive all contingencies, but the brokers who represent buyers generally recommend against it. Waiving all contingencies are probably best for those who have done significant due diligence using the appropriate professionals and with a high risk tolerance to unexpected high cost repairs. I personally don't recommend waiving all contingencies as well, but ultimately, it's the buyers choice. 

Without increasing your purchase price and waiving contingencies, the next best thing would probably be to have documented evidence that you have the financial capacity to close, and the ability to close quickly. You'd minimally want to have a pre-approval letter and proof of funds for the down payment and closing costs. You could put a higher down payment, which doesn't affect your total price, but some sellers will see you as financially prepared. You can also show proof that you have more funds than you'd pay for (either through a pre-approval letter or through your personal financial documents), although some buyer agents would advise against showing more than you're willing to pay.  To close quickly, you'll probably want to work with a lender with the experience to close ASAP since the lender is often the bottleneck in a real estate sale.

Thanks Will for your valued insights. Good point about the FHA loan being assumable. I definitely didn't factor that in. The Cash to Close is the very reason why I wanted to go with FHA in the first place -- I was hoping to just put 3.5% down. As it nears 25%, it becomes less enticing compared to a conventional loan. I really wish my decision is as clear as yours! In my case, the FHA monthly payment (PITI+MIP) is higher than the conventional monthly payment -- by about $900/mo. I included specific numbers in my response to AJ.

Also, could you elaborate on how the MIP becomes irrelevant after a refi? I assume I'd need to refi into a conventional loan since it seems that all FHA loans have MIPs and for at least 11 years... at least in 2021. My concern is that by the time I have 10% more equity, the interest rates would have risen above today's low levels. Reference: https://www.fha.com/fha_requir...
 

Thanks AJ for your valued insights. I'm definitely tempted to go with the FHA loan because of the reduced down payment. 120K is a lot, but at some point the FHA loses its advantage as it approaches 75% LTV, in which case I would go with conventional without the MIP and UFMIP.

I would be negatively cash flowing for as long as I live in the 4-plex, but after moving out, I expect to net -$360/mo on the FHA loan (85% LTV + PMI) and +$560/mo on the conventional loan (75% LTV + no MIP). I'm not super worried about the cash flow since I'm not remotely close to retiring. I'm also netting +$2K/mo. off my other rentals, which makes me less worried from a cash flow perspective.

Although the FHA loan has a lower interest rate (2.25% vs. conventional's 2.75%), the FHA loan has a higher monthly payment in all scenarios due to the 1.00%/yr MIP:

1. 1. FHA with 15% Down vs Conventional with 25% Down:

• - FHA: $3608+$773=$4381 (principal, interest, and MIP)
• - Conventional: $3456 (principal + interest only) 

1. 2. FHA with 25% Down vs Conventional with 25% Down:

• - FHA: $3203+$686= $3889 (principal + interest + MIP)
• - Conventional: $3456

To me, the MIP is like an extra +1.00% INT rate that it goes away after 11 years (or after refinancing out of it). So, the FHA loan is like a 3.25% INT rate loan (with 16K of UPMIP) that reverts to 2.25% after 11 years. The FHA loan will cost more per month due to the MIP. With the conventional loan, I'd have an additional ~$120K of usable cash.

@Nicole Nichols

With interest rates so low, I think it’s a good time to sell. You only need to wait 1-2 months before spring time. The seasonal effects on sales price might be worth considering, but with the pandemic and shelter-in-place going on, it’s hard to say for sure whether the seasonal effects would be as prominent this time around.

Graph of prior local sales price by month (for a house.. I couldn’t find one for a 4-plex):

https://cdn.filestackcontent.com/bWGge43Q24HesKmml0dA

Source:

https://www.bayareamarketreports.com/trend/oakland-berkeley-real-estate-market-conditions-prices?fbclid=IwAR0VP6yBDAmZ6iobj_83S0C-FVoHAn32Kg-kr4Y1uVrapqQYboQo_8Lr5Ss

I’m in West Oakland. DM me if you’d like to connect in real life.

I'm in contract to buying a 4-plex in Oakland for 1.1 M. I plan to owner-occupy one unit and rent out the other three. I wanted to take out an FHA loan while putting just 3.5% down, but due to FHA's self-sufficiency test, I need to put down at least 15% down (said my loan officer). Here are the two options that I'm deciding between:

• A: FHA 30-yr fixed @ 2.25%/yr with ~1.00% (~$760/mo) MIP (for first 11 yrs) and ~1.75% (16K) UFMIP, and requires 15% (165K) down

• B: Conventional 30-yr fixed @ 2.75%/yr with no MIP or PMI, but requires 25% (275K) down

- I like A because I can have a bigger cash reserve while shorting a more US dollars. 

- I like B because there's no PMI, MIP, or UFMIP.

- Btw, I have limited cash for the down payment and the seller is not interested in financing.

As a buyer, would you prefer A or B? And why?

I'd max out the ROTH IRA ($6000 in 2021), which allows earnings to be withdrawn tax free at starting at age 59 1/2. I'd then invest whatever other savings that I have in RE to hedge against inflation, collect passive income, and reduce my taxable income with depreciation.

$1 M and invest it. Just need a 12% ROI to get $10K/mo, which is probably easier to accomplish with slight leverage.

I used Haluk for my last flip project in Oakland. We had him install new circuits, multiple recessed lights, ventilation fans, upgrade breakers, and multiple indoor and outdoor receptacles to bring the system up to code. He's licensed and easy to work with. DM me if you need his contact info. 

It may take years before his daughter owns it. If you'd like to try to buy it now, then here's what I'd do:

1. Pay an appraiser ~$500 to determine an opinion of value. Ask the appraiser how he or she accounts for physical condition. You can get two opinions and take the average of the two. It'd take the guess work out of it. You can use that number to negotiate with the seller.

2. The seller seems to already understand that what he keeps is more important than what he grosses in the sale. Remind him that he'd save 5% off the sales price by selling directly to you and bypassing brokerage fees.  

3. Go the next step and try to work out a seller-financing agreement that works for both of you (check with an attorney). For him, he'd spread out his capital gains over multiple years and would probably pay less taxes (check with a CPA). You can explain how it can be like supplemental retirement income that he'd get by the month. For you, you can use the 30-year conventional mortgage interest rates of ~2.75% as a benchmark for what the interest rates should be for the seller financing agreement. You can also explain that you're open to refinancing out of it with a conventional bank loan if he wants the income sooner for any reason.

I've never done seller financing before and am neither an attorney or tax accountant. I'm just a local in Oakland (30+ years) and am an active agent and investor (rentals and flips). These are my two cents for what it's worth.