All Forum Posts by: Don Konipol

Quote from @Chris Seveney:

Quote from @Don Konipol:

WEALTH BUILDING thru real estate investment was a specific strategy originally popularized in the early 1960s.  It was an outgrowth of Richard Reno’s transforming his commercial real estate brokerage from the traditional model to one concentrating exclusively on real estate exchanges.  Reno completed exchanges involving as many as 23 participants!

The premise of “wealth building” in real estate is that the investor consider any transaction, deal, etc that INCREASES their net worth (wealth), given an acceptable level of risk.  An example would be when offering a property you own for sale.  Most of us would put the property on the market as a cash (to us) transaction.  But, someone committed to wealth building would analyze whether their wealth could be increased further by offering the property for sale with seller financing.  In many instances a significantly higher sale price can be obtained this way, often paired with an above market interest rate of the note.  This is because the seller is opening the sale to a much larger number of potential buyers; possibly “users” rather than just investors, and eliminating cost and red tape in buyer’s obtaining third party financing.  If the seller can “wrap” the new note around  a lower interest rate existing note, the wealth created can be even greater. 

Of course nothing is “absolute”; the astute investor will need to also compare the wealth increased by simply holding on to the property; holding and improving the property; and selling the property for cash and reinvesting the proceeds.  The major point is that the investor is continually evaluating their options as to each property they own, property they can buy, cash position, etc., with maximum wealth creation as the goal for every decision. 

I’ve used a less “intense” version of this throughout my real estate career.  I’m interested in learning from other investors who used “wealth building” and investors who haven’t - let us know what you think about it and your experiences. 

 Early in my career I was a buy / maximize value / sell investor / rinse and repeat. Today I am a buy and hold investor because its more passive.

For my strategy I want to hold real estate AS LONG as possible and have someone pay the principal and interest on it and expenses.  For selling real estate, we only sell if we see there is  a far better oppportunity in the immediate future and basically swap asset for asset.

We recently sold a vacant piece of land that we had which we did offer seller financing vs. traditional sale - we ended up selling it traditional all cash even though seller financing could have gotten us more $ but the buyers wanted a very low interest rate and we looked at it as cash in hand and invest it and the cashflow was not far off so we evaluated risk of just take the money now.

@Chris Seveney, 

@JD Martin

@Jay Hinrichs
 My gut feel is that, a lot like myself, successful, experienced real estate investors utilize some MODIFIED version of strict wealth building decision making.  Sometimes, it’s not even a formal analysis, just gut feel.  However, I’ve come to believe while this kind of “wealth building LIGHT” approach will result in capturing the majority of potential wealth increase available in any given situation, there’s still a lot of potential wealth that “got away”.  And I’m in no way suggesting that the investor strictly take the “greater” wealth option in every decision; just that the investor become fully cognizant of the options, risks, and returns available. 

As an example - It seems that there are a number of investors (on BP) who hold a belief that seller financing can’t possibly be beneficial for both the buyer and seller.  An even greater number believe subject to transactions are somehow “bad”.  Heck, there’s one poster who believes the technique is inherently evil!   While I acknowledge all the potential pitfalls in utilizing some of these strategies, I have had great success with both seller financing, wrap around financing and subject to.  I’m not talking about seeking out properties on a continual basis where an investor can utilize these techniques; I’m suggesting understanding these type transactions and analysis to see if their utilization can enhance the investors wealth vis to a much greater extent that either holding the property, repositioning the property, or a cash sale. 

Quote from @Jay Hinrichs:

Morning Don,

Exchanges in the 60s  was this starker exchanges or pre 1031  I know Starker exchanges started with the Starker Timber family in Oregon when they were exchanging Timberlands to basically try to block up their holdings with other Timber concerns or private land owners..

I am unfamiliar when the 1031 IRS rule actually came about.. ( I guess I can google it LOL)

Selling on terms and wrapping was something my Father deployed in the late 70s and big time during the Carter interest rate debacle.. So I do find it amusing that all those Morby followers think sub to and wraps are something he invented .. But hey have to hand it to him his timing was perfect to try to teach rookies those strategies. 

1921 - was the beginning of 1031 exchanges, Striker in 1978 introduced DELAYED exchanges 

However, imo, too many people commit to exchange rather than sell simply because they want to avoid paying taxes - at any cost.  When you add the fees charged by intermediaries and the “cost” of possibly exchanging for an investment that may not meet your needs, and the ultimate tax to be paid at the time of cash out, the cost could be far more than paying the fairly low capital gains tax, especially if the sale could be times to a year in which other income is not “recognized” or offset by losses. 

WEALTH BUILDING thru real estate investment was a specific strategy originally popularized in the early 1960s.  It was an outgrowth of Richard Reno’s transforming his commercial real estate brokerage from the traditional model to one concentrating exclusively on real estate exchanges.  Reno completed exchanges involving as many as 23 participants!

The premise of “wealth building” in real estate is that the investor consider any transaction, deal, etc that INCREASES their net worth (wealth), given an acceptable level of risk.  An example would be when offering a property you own for sale.  Most of us would put the property on the market as a cash (to us) transaction.  But, someone committed to wealth building would analyze whether their wealth could be increased further by offering the property for sale with seller financing.  In many instances a significantly higher sale price can be obtained this way, often paired with an above market interest rate of the note.  This is because the seller is opening the sale to a much larger number of potential buyers; possibly “users” rather than just investors, and eliminating cost and red tape in buyer’s obtaining third party financing.  If the seller can “wrap” the new note around  a lower interest rate existing note, the wealth created can be even greater. 

Of course nothing is “absolute”; the astute investor will need to also compare the wealth increased by simply holding on to the property; holding and improving the property; and selling the property for cash and reinvesting the proceeds.  The major point is that the investor is continually evaluating their options as to each property they own, property they can buy, cash position, etc., with maximum wealth creation as the goal for every decision. 

I’ve used a less “intense” version of this throughout my real estate career.  I’m interested in learning from other investors who used “wealth building” and investors who haven’t - let us know what you think about it and your experiences. 

Quote from @John McKee:

I'm familiar with PPR and 7E Investments.  What others are out there I should be looking at.  LMK and thanks!

First determine if you qualify as an accredited investor.  If not, your options are more limited.

Quote from @Christopher Bell:

Quote from @Drew Sygit:

@Christopher Bell have done several assumptions, land contracts, etc.

You state property value is $298k, but what is loan amount?
- What would the sellers walk-away with if they sold on market and paid agent commissions?

What will happen to property tax & home insurance amounts once you convert to a rental?

Even with 0% down, negative cashflow ONLY makes sense if something offsets it.

If the property has no equity, can't see any value-play.

 Tax and insurance would remain the same - Loan amount is $296k. If they sold with an agent they would walk away with about $280k. My wife is an agent and her getting the commission helping them buy another hose was attracting me because with the commission we get a rental for about the $280k with her commission so more/less below the market value. Plus the commission pads the negative equity for about 2-3 years (assuming 100% vacancy and self managing - which is tight).  

It does seem that the general consensus is that it's likely not a very good idea. There is a lot more risk than reward on this deal it appears. I just like the area, see a future in appreciation here, and thought being able to get an asset for $0.00 down and maybe tlose $300/mo in the long run might pan out in 3-5 years. I'm in a position were earning the 4-5% on the current cash can be utilized to offset that $300/mo loss in cashflow. 

I don’t think your position is necessarily wrong, you just need to do more thorough analysis. You need to establish ROI under various assumptions, such as value increases (or decreases), rent increases, vacancy rates, repair and maintenance, etc.  Then utilize a weighted average so as to more heavily weigh the more likely (higher probability) outcomes.  Or you could just go by “gut” feel. 

Quote from @Garry Miller:

Quote from @Mike Grudzien:

Garry,
I'm surprised that working at this level of real estate development and deal size that you and your partners don't have at least a dozen lenders in your back pocket that deal at that level and like your work....
I'm interested in seeing the answers here.

 Great question  - we've had a lot of success with these not quite dozen, but 7 lenders and they're all in on their respective deals to finance the Vertical construction, secured by the housing assets yet to be built.  This request is for a short term, construction/bridge loan so we can get through the infrastructure phase only.  More transparently - it gets us out of the land bank holding phase now.  Available cash is servicing the debt, with construction partners on the sideline waiting to be put to work.   Thanks for the clarifying questions - I hope this opens up some more perspectives about how to solve for this opportunity! 

1. You’re trying to replace equity you don’t have with debt.  The “horizontal”construction, while sometimes can be partially financed by debt depending on developer track record, is more often regarded as the “skin” in the game put in by developer either theirselves or thru a syndicated equity offering. I get requests for this kind of financing all the time from mortgage brokers who don’t understand the equity / debt relationship.

2. Texas is somewhat unique in that a bond can be issued which will cover some of the cost of the infrastructure development. The bond will be paid by an improvement district tax paid for by the property owners.Their are two underwriters who handle these type of bonds.  However, qualification is quite difficult because the underwriters are selling these bonds to their longtime clients and excessive defaults will kill their business.  The first thing the underwriters consider is the financial position of the developer.  Unless that’s solid they will go no further. Secondly they require the developer to place 25% of the bond issue amount in escrow, so for a $20 million bond issue that’s $5 million.  Then if the total does not cover full infrastructure development they require a plan that covers the additional amount required. 

The particular development I’m involved in spent about $400,000 on soft costs to be able to provide the necessary information to the underwriter - this was in addition to all other soft costs usually incurred in development. 

Quote from @Christopher Bell:

I might be crazy but…..would you?

Scenario: 

Have a chance to assume a loan that has 28 years remaining, 5% interest, and in a very quickly growing suburb of Raleigh NC.

The townhouse would lose approximately $300/mo. Total payment is $2150/mo and market rent is $1850-$1900/mo. 

Loan assumption Is essentially at market value $298k, but the $0 down outside of closing cost on loan assumption are what’s hooking me. I can put 25% down and get a $300k Townhome to cashflow near 0.

Also, the family is looking to buy a SFH and would be using my wife (realtor) to buy. Therefore, we would make about $8000-$12000 in commissions from the purchase.

Am I crazy to be considering this? 

All improved real estate properties have long term “depreciation”, not in the accounting sense but in the real sense that systems wear out and need replacing (HVAC, roof, flooring), the property requires updating to be competitive, etc.  While it may be in ten years time that the roof needs to be replaced, the roofing component of the property is using 10% of it life every year and hence the true cost of this depreciation should be borne each year, not all at once in 10 years.  If not recognized as a yearly expense, the owner will be unpleasantly surprised when they go to sell and the offers are $20,000 under what a property with a newer roof would bring. 

Hence, thinking that mortgage payments which even if they include tax and insurance escrows are the only expenses is incorrect.  Overall, property depreciation average at LEAST 2% of value on an annual basis. So the real expenses associated with owning a $300k property is about $6,000 in “depreciation” in addition to all other expenses. 

Further, unless the property is rented long term to a credit tenant these will (probably) be tenant turnover. A landlord would.d have to be very lucky indeed to own a property long term and never have a tenant do more damage than the security deposit amount. But even so, wear and tear items are not covered by a security deposit.  If a tenant has been in a property any significant amount of time, it’s more than likely painting will be needed to make the property competitive with other rentals and to obtain the maximum rental amount.  In all but the hottest rental markets it’s also likely that there will be times when the property is vacant.  Therefore vacancy expense should also be calculated.

Depreciation is sometimes disguised by inflationary increase or other increase in property values.  But the two should be considered separately.  In the given subject property, the $300 monthly “loss” (should be somewhat modified for the amortization amount of the payment) would actually be closer to $1,000 when depreciation and vacancy loss is taken into account.

Offsetting  this is property price appreciation.  This is an area where hindsight is 20/20 and everything is obvious only after it occurs.  And while IN GENERAL real estate prices have appreciated for the last 80 years, a friend of mine told me that his family home in Detroit purchased by his parent in 1961 for $20,000 was sold for $3,000 in 2010.  

The second “offset” is rental rate increases. Obviously if rental rates were to double over the next 10 years the profitability of this investment would look very different.

Here’s the bottom line.  The purchase price of this property is not at investor pricing; it’s paying retail for the benefit of “nothing down”.  But two years of negative cash flow, especially if repairs are needed, maintenance is accounted for, or should vacancy occur, and the investor would be “in it” for the down payment amount anyway.

Btw, do you mean you would actually assume the loan; with qualifying with the lender and accepting personal liability?  Or do you mean doing a “subject to”  deal? 

Quote from @Chris Seveney:

Over the past few months, we've seen a noticeable uptick in non-performing loans hitting the market—particularly in the investor space.

DSCR and fix-and-flip loans are making up the bulk of this volume. We estimate nearly $200M/month of non-performing product is circulating across the platforms and networks we monitor. These are typically investor loans that were originated in the last 2–3 years and are now showing cracks, largely due to overleveraging, slowed market velocity, or project mismanagement.

On the owner-occupied side, we’re starting to see more inventory—but with a big caveat: many of these loans were originated during the COVID years at 3–4% interest rates. These borrowers aren’t always far enough behind to justify a meaningful discount, and the low rates can present a risk profile that doesn’t pencil out especially assuming they will file BK which many have done. 

What are you seeing out there?

Are you noticing more non-performers hitting your desk? And with today’s economic backdrop—high consumer debt, inflationary pressures, and tighter credit—do you expect volume to keep climbing?

Would love to hear others’ perspectives.

I can only speak of the commercial mortgage market

In the last year two simultaneous issues
1- interest rates for good borrowers/property in the commercial space went from 4-5% to 7-9%.
This of course meant all those deals purchased at 5-6 cap would be running negative cash flow after debt service at same pricing.  So, those with fixed rate mortgages can only sell; at loss; those with variable rate have negative cash flow.
2- qualification for refinance much more stringent - some investors “trapped” in a negative cash flowing property worth 20% + less than they paid. 

We’ve seen a large increase in financing requests especially from borrower’s who 2 years ago would have qualified for institutional - bank type financing. 

Since there deals don’t pan out as refis we have approached current lenders with proposal for our purchasing their note at a discount.  While most lenders in this position are willing to discount, we’re finding they’re not willing to discount enough to provide the return we require as adjusted for the risk and current property values.  Many of these lenders are clinging to appraisals done 2-3 years ago utilizing 4.5 - 5.5 cap rates.   Many  of these incorrectly classified the property as better than it was so the appraisal was inflated value to begin with and with the increase in cap is even more out of wack.  

 The real estate “market” is not “smooth” with an instantaneous adjustment to new information.  People tend to “hang on” as long as they can either in denial as to changes in market value of hoping for the market to “comeback” and bail them out. Same with lenders.  

Chris, when I started buying notes back in 1980, I was paying something like 50 -55% of unpaid principal for PERFORMING notes, LOL.  Back the , with interest rates reaching a peak of 18%, sellers were owner financing at 9% to make the deal work.  After a couple years of they decided they needed cash, they were shocked to learn that their note was worth little more than half the value on the market.  But the better investment for the note buyer was defaulted notes - sometimes the property obtained in foreclosure was worth double to triple the note purchase price !  To discourage outside bidding, trustee sales were held in very remote locations; if anyone showed up to bid the sale was “delayed”.  This of course led to legislation aimed at curbing these abuses.  

Quote from @Amir Twig:

Lately I’ve been noticing some shifts, certain types of properties are generating way more traction than others. Curious where you are seeing the hottest leads.

Is it land, tired landlords, vacant properties, something else?

Would love to hear what’s working in your market right now!

Everyone is targeting “motivated” sellers - com[edition in most markets is fierce.

What’s needed is either (1) a LOT more money to spend on marketing than anyone else or (2) a unique approach that few are utilizing and that works. 

Our approach is to purchase notes secured by real estate where the borrower has defaulted and all paperwork for foreclosure has been filed.  We will then attempt to work out a deal with the borrower - sometimes taking majority interest but leaving the defaulted borrower with an agreed on minority ownership.  Other times we will end up taking full ownership - but either leasing the property back to the borrower (if they’re a user) or offering them an option to purchase.  Still other times we will complete the foreclosure ( it can take up to 3 years depending on the state and if their borrower files BK.  But our first effort is to get the borrower to agree to a loan modification and have them retain ownership and us getting g a performing note. 

We do this on commercial property with investors only, we don’t deal with homeowners. 

Quote from @Sunny Burns:

This is the story of how we – a family of seven on a single income – house-hacked our way from $0 to $3 million in real estate in less than 10 years, and how just three properties bring in $275k/year in gross rental income.

In 2015, at age 25, after renting ($500/month) a bedroom at my parents’ house for two years, my wife and I closed on our first real estate purchase: a four-family in Garfield, NJ (12 bed / 4 bath) for $430,000.

That one decision changed everything.

The purchase allowed us to live for free—and gave my wife the financial freedom to leave her teaching job and stay home with our then 6-month-old son.

Two years later, in 2017, we did a cash-out refi and bought a three-family in North Arlington, NJ—FSBO for $350,000 off Craigslist.

Two years after that, in 2019, we used a HELOC from the North Arlington property to buy a four-family in Lyndhurst, NJ for $620,000.

We’ve renovated nearly every unit in those three properties ourselves. So when Elon and Trump offered a federal employee buyout, I knew it was time. I walked away from a 13-year government career that had taken me from $50K to $147K.

Here's the kicker: these three properties generate a combined $120,000 in net income. We're incredibly frugal, so that's more than enough to achieve our financial independence.

Now, we're a stay-at-home family, planning to worldschool our five children. Leaving my career was a huge decision, but the freedom is indescribable.

I've only had the golden hand-cuffs off for a month, but it is truly liberating... I've taught my 5-year-old daughter to ski and my 3-year-old son to ride a bike. I'm finally able to pursue my passions, and every day feels like a breath of fresh air.

My hope is that our story inspires you to save strategically, invest consistently, and prioritize buying your freedom. It's possible—even with a big family!

Amazing how much  opportunity there is when someone is willing to save capital and invest that capital.  Meanwhile, because they’re unwilling to make the sacrifice to save capital, the vast majority of those claiming to want “financial independence” continue to look to low chance sales efforts like “wholesaling”, disguised as “investing” by gurus selling mentorship’s. 

Congratulations, well done