All Forum Posts by: Derrick Lloyd

@Michael Plaks Let me use an example to explain my question. Say I purchase a property with seller financing and an mortgage interest rate of 0% in 2020. I see that the 2020 AFR then was close to 1%.  Now fast forward to 2022, the AFR is closer to 4%.  Since the seller is not getting any interest from the payments, the IRS minimum interest would apply.  Would the minimum interest they need to pay to the IRS vary year to year with the AFR or would it be fixed at the 2020 AFR in this example?

@Michael Plaks I think @Hunter Davis was asking about adjustments to the AFR.  The AFR looks to be constantly changing.  So if you bought a property with seller financing in 2020 when the AFR was ~1%, would the AFR now at ~4% apply for the seller or would they be locked in the AFR at purchase?

@Connor Ryan I don't mind at all!  I have been focusing in south city.  Carondelet, Dutchtown, Bevo, Tower Grove South, etc.  These are the areas recommended to me by my agent.

@Megan Brooks I used personal savings to pay it back.  The way I see it is that its a lot less invested than 20% down and doing traditional financing.  Plus 40% return is much better than pretty much any other investment.

@Maxwell Ventura Good question Max. I used the HELOC to pay for the purchase and rehabs. The holding costs (interest on the HELOC) I payed out of personal savings. I had to pay for some of the rehabs from personal savings as well. The $11879 money invested was the money left in the deal after I refinanced, since the refinance wasn't enough to pay of all of the all-in costs.

The current strategy I have been focusing on is BRRR investing in St Louis. I use a HELOC against my condo in San Diego as my pool of funds. This BRRR was the 2nd I have completed in St Louis.

I found the property from a wholesaler I have networked with. The property is a 3 bed 1.5 bath, and it looked like a partially finished flip. I bought the property for $24000, and the original rehab bid was $26411. The wholesaler that I bought from does not allow inspection contingencies, so the risk rehab items that were not on the original bid were sewer lateral, water service line and roof. I did a worst case analysis of $35000 for rehabs, and the numbers weren't great, but were acceptable. ARV was predicted at $75000 and rent at $950

Unfortunately, this project ended up being a gift that kept on giving, except the gifts were certainly not on my wishlist.  

The first issues were the sewer and water service line.  After the sewer lateral inspection, it was determined that the sewer needed to be repaired.  In addition, I discovered that it was required for the water service line to be replaced as well.  Both of those costed $10300, which pretty much put me at the worst case analysis.

After those were done as well as the rest of the plumbing, they did a pressure test, which passed.  However, a couple days after, there was a plumbing leak in the one section of the house that the plumbing wasn't redone (since it was under foundation).  This leak flooded and clogged the basement.  Now there was a 2nd change order to fix the leak, unclog and repaint the basement, another $8900 down the drain (after they unclogged it, of course).

Last, there were some minor fixes after the occupancy inspection, $460.  Overall, the project went way over budget and lasted a lot longer than originally antcipated.

Despite all this, things worked out on the backend!  I was anticipating leaving in about $22k, not ideal!  But the appraisal saved me!  The appraisal ended up coming back at $90k, the absolute highest my agent and I thought was possible.  This allowed me to get a loan for $67500.  Here is how the numbers ended up turning out:

And I got even more good news after this.  Originally I predicted the rent at $950, but the property was rented to a Section 8 tenant at $1095, a very significant increase!

With the money invested of ~$11900, and nominal cash flow of $402, the projected return is 40.6%.  Not bad at all considering all the set backs!!

Here is another way to think about it, which is what I did when I bought my condo: House hack it with the goal of paying just as much or less than you would if you were renting on PITI + HOAs after your roommates rent. It would be hard to break even and have roommate or tenant rent cover the mortgage and other costs, but if you can bring your costs down compared to rent, then I would count that as a win. Plus you get all the tax benefits as well, which you don't get for rent.

I bought a 2/2 condo 5 years ago and have generally had the spare room rented constantly. It didn't need rehab when I bought it, but it has appreciated. Now, with lower interest rates and rising rent, I can rent it out and cash flow. As an added bonus, I got a HELOC on condo, and I used that to invest in the mid-West.

I think you have a good plan and one that needs rehab does add the potential for forced equity.  I plan to do something similar when I start looking for my next place.

Hi Mel, I am an out of state investor investing in St Louis and so far it has treated me well. One thing that I like is that the BRRR method works well there. Second the rent to price ratios are excellent. Another thing is there is a strong Section 8 rental market. My first property there has had a Section 8 tenant that just renewed lease for 4th year, and the government pays 100% of her rent - guaranteed income! According to my PM, the last rehab, which just got finished, has a Section 8 tenant lined up.

The list @Bennie Williams provided in phenomenal!  Couldn't agree more about the age of the properties and plumbing.  Something I underestimated at first, but have learned from.  100000% get a sewer lateral, luckily my agent told me this.  Find it early and you can budget it in and use to negotiate a lower price.

I have use a company that has both construction and PM.  This is good because they are incentivized for the rent fee on the back end.  In addition, I have a 3rd party inspector verify the construction work.  I send the bid and change orders and he goes line by line, and I have the contractor fix before sending final payment.

The good thing about St. Louis is the numbers are very small, at least compared to my market.  Worst case, the mortgage on a vacant property will not stress me financially.  This is a good thing to consider when comparing this market to others.  

Another update.  Finally got the property leased.  It took about 2 months before people applied, which was much longer than expected.  I requested the rent be lowered by $50.  My property manager didn't update the ads, but I think one of his employees told applicants over the phone that it was $900 instead of $950.  A tenant got accepted in June and is moving in this month!  Now I am working on the refinance portion.

One of my properties had a major fire caused by the tenant, and I am currently working on the claim with my insurance.  My question is if this loss claim will affect my ability to get insurance on other investment properties as well as my primary residence? 

I was looking for quotes for insurance for another property I have, and was denied by the company that insures the fire damaged house. I am guessing that I may have burned the bridge with that company from the claim, but my agent their said that this claim will follow me for 3 years and could affect my ability to get insurance. I had the home in my personal name, not an LLC.

Mostly looking for answers to prepare myself for future properties.

@Jonathan Newsome The rehabs are taking much longer than expected.  I had a property inspector look at it after, and there were several things I requested fixed before I send the final installment.  These have been taking a while.  But the property looks great!  Definitely a big turn around.  Right now it is listed for sale on several locations. Hoping to get someone on lease in 1-2 weeks.