All Forum Posts by: Demetrius Potts

@Ray Harrell

Full price

10% down

10% interest rate

10 yr term

OP: Send me this lender's phone number after you close your first 100% loan, please.  Thank you.  

A word of caution to all who are interested in 30-50k houses in Milwaukee. The math does not work - for a long term buy and hold.

One thing I have come to realize doing rehabs is that every house needs a complete redo inside and out evry 30-40 years give or take, depending how well it was bulit and cared for. Some systems will last a bit longer - electrical and plumbing is typically good for about 60 years. But anything else from windows, cabinets, roof, driveway has a design life and will eventually get to the end of it's useful life.

Most people understand that with cars - after 100,000 miles you start to see more repairs and after 200,000 most cars are done. Houses are no different. You can patch it together and "drive" it a bit longer, but you are already living on borrowed time.

A complete rehab for a typical Milwaukee home will run around $35-50 per sqft, depending on things like do you replace the siding or just paint it. Understand that if you just paint wood siding, all you have done is defer the replacement a few years down the road, but it's still there.

There is a big difference if you rehab for a flip or if you rehab for a buy and hold! A good flipper has to recognice that you don't recoup the cost of all new plumbing. Buyers will not recognice and value the expense. For a buy and hold it makes sense to replumb the entire house (and investigate the sewer lateral!), because you it will reduce your repais and capex expenses for the next 30-60 years.

The problem with cheap houses is that the only source of income to pay for both capex and repairs is cash flow - after you have already paid for PM, vacancies etc. Do the math.

Also, you should be keenly aware that on this type of investments you have disabled the two main wealth generators of real estate: principal pay down and appreciation (both natural and forced). Together with CF those are your 3 sources of profit as an investor, it used to be 4 with tax write offs against W2 income, but that's been gone since the 1980s.

Cash flow is necessary, but if you look at the big picture you understand it's small $s and never amounts to much wealth. To me the whole point of REI is to generate wealth, but if cash flow is your only source of income and that gets drained by capex and reserves faster than it comes in, you are looking at a money pit.

Once you understand this and see it, you can't un-see it.

I am not here to bust dreams, so how can you make it work with cheap houses? 

First you have to fully understand the math on your investment over it's life cycle. I defer to J. Scott's books here on BP, study them and you will have a better understanding about capex over time. Second, pic a property that is in good shape ("low milage") and will run for a while without the need of major capex and repairs - and then plan your timely exit before you start bleeding. Third use the cash flow to buy an investment that does actually performs on cash flow AND your main wealth generators principal and appreciation.

@Andres M.,

Hello! Congrats on joining BP!

In my opinion, no. A distressed home that's been sitting on the market for an usual amount of time is not always a red flag. As a matter of fact, it could be very advantageous for you to work that deal! Here are a few reasons why working a property with very long Days on Market (DOM) could be favorable:

1. Less competition - if unseasoned investors are looking at these types of homes and thinking, "This house has been on the market for over 100 days. There must be a reason no one is buying it," then that means that there is a smaller pool of potential buyers because the houses isn't an "obvious" deal. You won't be competing with the entire market for this house because the investor with a lack of experience may not have the patience to see something like this through. Maybe there's nothing wrong with the house. Maybe it's simply listed too high and the seller is unwilling to budge (for now).

2. Less competition and attention on the listing gives you an opportunity to build rapport with the seller and the seller's agent. Call them 2x per week minimum and tell them you want the house very badly, but you cannot take it unless you get it at x price. After a few weeks of this, or longer, you've spoken with the seller quite a few times. IF and WHEN they finally decide to lower the price, who do you think their first call will be? YOU. Because they know you, like you, and hopefully trust you.

3. Time is your friend. Honestly, if you're looking to purchase investment opportunities on the MLS, and you're getting them on day 1-5 and they're good deals, or you win a highest and best situation, you likely overpaid for the house due to competition. Look at the deals in areas where there's value, but the house hasn't sold yet. These sellers are getting antsy. I'm telling you, this will help!

It takes some time to gain the patience for the investment game, but you'll learn soon enough! Please feel free to contact me with any other questions you have. I'd be happy to help!

Best,

Van

 HI Brett:

We don't have a limit on number of properties financed. 

But minimum loan amount is $50K to $1M max. (1 to 4 units)

Hope that helps. 

It's done 1 of 3 ways.

1- All Cash sales. Not many people have the funds so this isn't feasible for most.

2-Buy multiple properties through Conventional Lending (Fannie Mae/Freddie Mac) type of Conventional loans, which I don't recommend. Although you get the best rates, they count and recalculate your overall personal debt ratio each time, making it harder to qualify; they use personal income and tax returns as part of the approval process, you can't use all of your rental income to qualify for the next loan. You can't buy in a company's or a Trust name to protect you from liability and lawsuits; you can't combine all your different mortgage payments into one Portfolio Loan; and you're capped at 6 and 10 properties depending your program.  But despite all the drawbacks, many people still do it.

3-Use Non-QM (Non-Qualified Mortgage) products AND use BUSINESS CREDIT to supply the down payment.  First with your near perfect credit score you can enroll in a program which can get you 5 or 6 business credit cards, which you are the personal guarantor.  You can advance the entire amount and pay back the minimum each month often o% interest 6 months to a year.  You then just transfer the funds to another card and start the process all over again.  Use the advance funds as down payment using a Non-QM loan.

The advantages of Non-QM loan would be that you can buy in a company or Trust name to protect you from liability, you don't have to submit any pay stubs, tax returns; they don't calculate your personal debt ratio; approval is made primarily on the asset's ability to generate income; you can combine all mortgage payments into ONE simple payment; you're never capped at how many properties you can own and often there's no Seasoning and Sourcing of Down Payment.  In other words, they don't ask where it came from and how long you've add it (most don't at least). The drawback is that these loans are more expensive requiring 20% down payments; costing upfront 1-2 points maybe more; and slightly higher interest rates than conventional mortgages.  In my opinion its worth it if you plan on doing this full time or at least draw a significant amount of income from it.

There you have it.  I'll PM you if you want to discuss further!

@Demetrius Potts sounds like you're dealing with big PM Companies that have outsourced staff that is clueless.

Like @Nathan Gesner, we do this all the time. We sign a management contract AFTER inspection passes and mortgage approval, so we can takeover on day 1.

You may want to read below on how to find a better PMC.

In our experience, the #1 mistake owners make when selecting a Property Management Company (PMC) is ASSUMING instead of CONFIRMING.

It's often a case of not doing enough research, as they don't know what they don't know!

Owners mistakenly ASSUME all PMCs offer the exact SAME SERVICES and PERFORM those services EXACTLY THE SAME WAY, so price is the only differentiator.

So, the first question they usually ask a PMC is about fees - instead of asking about services and HOW those services are executed.

EXAMPLE: PMC states they will handle tenant screening – what does that specifically mean? What documents do they require, what credit scores do they allow, how do they verify previous rental history, etc.? You’d be shocked by how little actual screening many PMC’s do!

This also leads owners to ASSUME simpler is better when it comes to management contracts.

The reality is the opposite - if it's not in writing then the PMC doesn't have to provide the service or can charge extra for it!

We have a 14-page management contract that we've added our real experiences to over the years, with the intent of protecting both us AND the landlord. Beyond the Monthly Management, Placement & Maintenance fees, all other fees in our contract are IF EVENT -> THEN fees.

We don’t know any PMCs to recommend in the area mentioned, but since selecting the wrong PMC is usually more harmful than selecting a bad tenant, you might want to read our series about “How to Screen a PMC Better than a Tenant”:

https://www.biggerpockets.com/member-blogs/3094/91877-how-to-screen-a-pmc-better-than-a-tenant-part-1-services-and-processes

We recommend you get management contracts from several PMCs and compare the services they cover and, more importantly, what they each DO NOT cover.

EDUCATE YOURSELF - yes, it will take time, but will lead to a selection that better meets your expectations & avoids potentially costly surprises!

P.S. If you just hire the cheapest or first PMC you speak with and it turns into a bad experience, please don’t assume ALL PMC’s are bad and start trashing PMC’s in general. Take ownership of your mistake and learn to do the proper due diligence recommended above😊