All Forum Posts by: Dan C.

@Brandon Smeltzer I would encourage you to find a deal where you find an opportunity to create value, making the refinancing scenario realistic. Purchasing a property for X and refinancing it for X+Y without doing anything, would be a red-flag in my opinion to an appraiser - unless there was a significant upward trend to support a higher appraised value. Here's a very simple example of how a buy/hold investor would utilize a refinance to not have any money out of pocket:

Purchase price: $100,000

Repairs/Improvements: $75,000

ARV: $250,000

Conventional Financing @ 75% ARV: $187,500 Loan

At the time of refinancing the investor would actually recoup all of their money and be able to take out up to an additional $12,500 (depending if they want to max out the LTV on the loan or not). Buy investing an additional $75,000 to improve the property - they've generated $150,000 in perceived value.

This works well if you have all cash to fund both the purchase and renovations -- However, if you're cash short -- there's always a way -- some banks offer purchase + renovation loans, you can use hard money / short term construction loans, and a variety of other creative ways discussed throughout BP.

Thanks,

Dan

@Radhika M. Sorry. Guess my verbiage of "assuming" and "estimates" weren't clear. My analysis was not wrong. It was just estimated as the original post gave us no concrete information to the PITI calculation. I appreciate the feedback though.

Hi Steve - I found this post very intriguing so I spent some time doing a quick analysis.

Ball park for commercial loans I've always read about is anywhere between 20-35% -- typically on the higher end. But let's say you find some lender willing to give you a 95% LTV loan -- On the $1MM 4-plex property.. you'd have payments of (ballpark estimates):

950k loan @ a commercial rate of 6% = $5,695/mo towards principal / interest

+Maintenance / Vacancy of 15% = $14,400/year ($1,200/mo) (this is 7.5% for maintenance, 7.5% vacancy -- possibly not high enough -- but a quick estimate nonetheless)

+Insurance (assuming 1% of loan) = $9,500/year ($791/mo -- just under $200/mo/unit -- might be a bit high..)

+Taxes (assuming 2% of property value) = $20,000/year ($1,666/mo)

= a total of $9,354/month to own the property because you're so leveraged

Thus, you need each of those 4 units to pull $2,338/mo to break even --  You said gross annual rent currently is $49,200/year -- that's $4,100 / month (or $1,025/mo/unit) -- you need to more than double each units rent to be profitable. Is this realistic, regardless of what upgrades you can make?

Additionally, I don't know your financial situation, but do you have enough financial income to cover multiple vacancies on top of all your other obligations. I would just hate to see yourself so over-leveraged that a 2-3 month blip on 1-2 units could potentially lose you the property and send you into foreclosure.

All-in-all I'd personally rather see you put the $50,000 in a safer investment. You can find many duplexes, or even triplexes in the $175k-300k range. A $300,000 tri-plex pulling $1,200/unit would result in a 9.41% cap rate -- using the same percentages for criteria in my PITI calculations above (exception -- interest rate lowered to 4.25%) and yield a 26.92% CoC return. You'd achieve an IRR of 5.38% and have an NOI of $13,461/year.

The only way I can realistically see that property selling for $1,000,000 is if someone buys it all-cash or close to all-cash. It does not currently pull enough rental income / unit to be worthwhile otherwise. An all cash deal would still only yield a 1.23% cap rate -- assuming $20,000/year is going to taxes, $9,500/year to insurance, and you have $7,380/year in maintenance/vacancy. I'd rather put my $1MM in a money market earning 1.1% and not have to deal with the hassle of tenants! Time is money.

Hope this helps one way or the other!

Best,

Dan

Use a registered agent service. 

-https://www.legalzoom.com/articles/why-do-i-need-a-registered-agent

Also, before you go through the hassle of setting up a new LLC -- I'd advise you to reach out to various lenders and identify a couple of lenders you can work with who will actually loan to this new LLC.

Unless you plan on performing full-cash deals - you need to have a couple investor friendly lenders lined up for when closing your deals, or use creative financing. If you can't get anyone to lend to your LLC (banks want a name to tie the loan to), it doesn't make sense to continue wasting your money setting the LLC up correctly. 

Maybe look into an umbrella policy with your insurance company to provide additional protection as an alternative, when you begin to grow.

@Steven Shotts - Here's a link to the Fannie Mae Eligibility Matrix.. I'd advise you to take a look at this and perhaps you can use this as leverage in your battle with the banks. 

https://www.fanniemae.com/content/eligibility_info...

I have been finding more and more frequently that a larger portion of people you'll deal with at the big banks don't have any idea of the difference in max LTV based on the type of transaction you're looking to go through with.. (i.e. investment vs. primary vs. secondary home).

Hope this helps! Best of luck.

Dan

Looks great! Excellent job.

Congrats - one thing to keep in the back of your mind when buying multi-family with little money down in expensive cities, are the conforming loan limits - or the maximum loan a lender can give you and it still be considered a conventional mortgage. I'm not sure what the limits are in the areas you're looking in Massachusetts, or what the property values you're looking at are, but perhaps something to talk about with your lender!

As an example - in Chicago, IL (Cook County) they're as follows:

1 unit $365,700

2 unit $468,150

3 unit $565,900

4 unit $703,250

This is helpful as you can automatically weed out properties based on the loan limits if you don't have a lot of capital to put down.

As far as looking for properties - keep doing your research, but I'd suggest connecting with a real estate agent... and be picky with you who select. You'll want to find someone who knows the area, knows and understands real estate investing, is knowledgeable about your target market, understands what you're looking for, and who will be patient with you as you look to acquire your first property - so be upfront and honest with what your expectations are from the agent. A good agent will be able to send you daily feeds of new properties on the market for you to sift through, can pull comparable sales ("comps") to give you an understanding of how the asking price compares to what's actually sold, and to give you a perspective of how the market has been doing over the past 12 or so months. Additionally, the agent should be able to provide you info as to what rental rates in the area around your future purchase are, how long properties have taken to be rented, among many other things - Let's not forget an agent will also take care of things like scheduling visits to properties you want to see.

Best of luck!

Dan

Reaching out on behalf of my dad, who owns many buy/hold rental properties in the greater Indianapolis area. He's owned many of these for 20+ years.

He's just bought another property and it closes on Friday. He reached out to the insurance company he uses to insure all of his other properties and he was just outright denied. 

The insurance company has told him that since there have been 5 claims within the past 7 years on 5 separate properties they are unwilling to insure this home. While these claims are true, each one is a legitimate claims -- 2 of which were for minor issues resulting in ~$300-500 claims, one involving theft and vandalism for roughly $4,000 (someone stole the central air unit and cabinets), and the other two are on his primary residence -- hail damage, etc. All of the claims have gone directly to repairs, he has pocketed none of the money. 

To add to the frustration - he bought a house around Butler's Campus around March of last year, and he had no issues getting insurance then... He hasn't filed a claim between then and now either! Further fueling the fire -- the insurance agent mentioned the previous owner had filed a claim on the property within the past year or two, for theft. Why would this have any weight into his chance of insuring the property? 

Regardless - I am curious if others out there have been in a similar situation, and if so - do you have any recommendations? He's going to shop around, he's just baffled that this has even happened - first time in his 30+ years of being a landlord.

Thanks in advance.

Best,
Dan

Thanks all! Appreciate the great feedback. I was initially reaching out to hear if anyone had anything the knew of that would be unusual since it was with a family member.

A quick update: Accountant stated that as long as we treat it as a a loan and follow the IRS's AFR (applicable federal rate) as our interest rate and have that documented in the agreement of the loan, we should be OK from a tax perspective.

(for anyone in a similar situation, these rates change quarterly)

Further, we most definitely will have an attorney draft up the contract to ensure we're covered. While family - we most definitely want to keep business separate.

Thanks again.

Hello - 

I'm in the process of purchasing my first Single Family Investment property and I have a few questions as to how to go through with the purchase -- My Father has offered to be the bank as I don't have 25% down for an investment property -- but we believe this property is a solid deal and I would like to capitalize on that.

Background:

• My father has offered to pay 100% of the home in a cash offer to assist in getting a better deal, 
• I would be responsible for paying ~25% of the loan back inclusive of interest, within 12 months (essentially, the entire first year would be spent building equity and repaying the loan)
• At which point in time, I will be responsible for going to the bank and getting a 75% LTV mortgage for the remainder of what is owed to repay him his capital.
• The purchase price is low enough on the house that there should be no concern regarding depreciation or 12 months time being enough to pay back enough for a 75% LTV to be possible.
• When the offer is agreed upon, whatever the purchase price may be, would be the exact same price as what the contract would be. Therefore, there is no "gifting" of equity, or trying to screw Uncle Sam.

Essentially, as I do not have enough capital for 25% down, and I will not be living in this property - I'm curious as to how this will look to the IRS. 

Questions:

• Can we legally put the house in my name? (I know in working with lenders in the past, any money in excess of $15,000 is considered a "gift" and needs to be taxed appropriately).
  • Further, those funds typically have to sit in my account for ~60 days. -- but we aren't using a lender here.
• Should my father put the house in his name and we transfer ownership at the end of the 1 year agreement?
  • What happens when he "sells" the property (aka title transfer) to me at the end of the 12 months? 
  • Would he incur any taxes?

Any help / understanding is greatly appreciated!

Thanks,

Dan