All Forum Posts by: Don Petrasek

Fannie Mae allows up to 75% cash out on single family investment properties (only 2-4 = 70% LTV) but I think there is a seasoning period (you have to have owned the property for X months)....check with a mortgage lender. I am just finishing up on one - have owned the property for a year so seasoning wasn't an issue.

What has worked for me is using my home equity line to finance the purchase/renovation, holding the property and using the cash flow to pay off any amount over what I can recover from a refi. A modified BRRRR strategy I guess- in this market trying to find a deal where you wind up at 70% all in can be challenging and 75%-80% can still be a good investment as long as you're cash flowing. Just make sure that you can pay off the difference with the cash flow in a reasonable amount of time - say 2 years or less.

@Elizabeth Justice could you borrow from your 401K and do the same thing?

calculate and consider the tax implications of flipping- there are a number of posts here on that, I think many people underestimate (or don't even think about) what you lose to Uncle Sam which to me makes flipping look a little less attractive

@Folashadé Shelton  You should base your reserves on 1) condition of the property  2) rental history/market.  I typically buy fixer uppers and do full upgrades before renting them so there's not a lot left to go wrong.  Because of that I don't keep a lot of reserves for repairs - usually 1-2x the cost the highest repair that I might still face (e g didn't replace the hot water tank or roof).  On top of that 1-2 months rent, more if the property could be high turnover.   If I had properties with old furnaces, roofs, plumbing, etc. I'd keep a lot more in reserves. 

Once you have multiple properties, you can relax these guidelines a little based on the likelihood of major repairs occurring on more than one property at the same time.....but having said that, trust me when it rains it pours and you should at least have a back up line of credit to cover you in the worst case scenario.  I put away a fixed amount per property every month and then periodically evaluate the balance.  If its beyond a comfortable threshold, I take some of it and either do capital improvements or pay down debt. 

Protecting yourself against a downturn is pretty simple.  Make sure everything you buy has cashflow (after all expenses and putting $ away for reserves) and don't ever put yourself in a position where you're going to be forced to sell any property at a fixed point in time.  I had a handful of properties during the 2008-2009 downturn....every one lost at least 25% in value.  But it was a non event for me as rents weren't impacted and I had enough cashflow so that they were indefinitely self-sustaining.  You just wait it out.

@Kevin Ely  I'm in Cleveland but work on the other side of town so don't have a lot of current knowledge of Warrensville Hts - I know it as solid blue collar neighborhoods but you need to screen well.....@James Wise who created the grading neighborhoods content that you referenced (which is the best description I've ever seen of the Cleveland market) I'm sure he can give you an up to date assessment...

Your calculations look good.  $890 could even be a little on the low side- I'm getting $925 for 2 houses I have in similar neighborhoods on the west side and the last house I had available was rented in less than 2 weeks to strong tenants.  

Looks like you have some rental experience so I'm sure I'm not telling you anything you don't already know but I'll say it anyway:   Having a paying renter is great, but I'd get the application they filled out and do a background check yourself.  I focus on 1) making sure they have verifiable monthly income from a stable job that equals 4x monthly rent (gross income) + 2) no history of eviction (at all even 10 yrs ago is a show stopper for me) or recent judgements >$2000 (the concern is that they're going to get garnished eventually).  Forget about credit reports/scores, you'll rarely see good ones in these areas.  You can look for evictions and judgements via public records which are easy to access here.   I've seen too many people buy houses with tenants included and almost immediately get into trouble....

To me, the bottom line return is what's important (Cash on Cash).  There's no magic return threshold, it depends on the risk.  Keep it simple.  Same way you'd evaluate dividends on a stock.  The numbers and assumptions in your report all look good - so my opinion is that 9% is a good estimate of the return.  The risk is that you wind up switching tenants more than about once every 2-3 years and take a couple thousand dollar hit each time you do so or have a major repair too soon.  Just like the risk with buying a stock with a 9%, 10%, 11% dividend is that the company can't sustain it with revenues.  The thing I like about real estate is that I have the ability to directly manage the asset.....which lowers the risk vs other investments.  plus you get the benefit of depreciation (which I don't think is included in your calculations).

The key for this property is management/oversight.  Its not a set it and forget it neighborhood......

Hope this helped.  Good luck. 

@James Maradits $100/sq ft is a good price to shoot for in our area.  But can also depend on access available (is your next neighbor right on top of you and can't get a machine in) + extent of the issue (is your storm line to the street OK).  

In most cases, basement water issues should be able to be resolved by exterior digging only - this should include new drain tiles and waterproofing the walls + backfill with #57 gravel or similar material.  To me, the interior systems are treating a symptom not solving the problem - you need to keep the water out of the house in the first place, not just get rid of it after it comes in.  You're right in running from anyone who isn't focused on the source of the problem.  And @Amy Beth is spot on, get a few opinions, especially good are those from someone who isn't going to bid on the digging like a plumber.  Its surprising how much trouble a bad gutter or minor grading issue can cause....a good plumber has experience with sump pumps and floor drains & can usually make a decent call on what the real issue is.

This is also the type of job where going with the lowest bidder can be dangerous.  There's a basement waterproofing guy on YouTube - Daniel J O'Connor - who has some great educational videos on the topic (they're also pretty entertaining) -it would be worth your time spending 30 minutes watching him.  If your property is on the west side, PM me and I can give you a couple names to try.  

@Adam Craig sorry I didn't see your latest post before I wrote mine.  I had the same problem in Fairview- they require contractor registration and that limits the field which makes prices go up.  The good thing about that though is that the guys who are registered tend to work in the city a lot and know the inspectors so you don't run into issues with failed inspections.  Unfortunately you may just have to bite the bullet on this one and pay what they're asking......

Glad you posted that pic, I was imagining steps right up to the house like mine.  My guess in looking at this is that a new footer is going to have to be poured and then 8 or 12 inch block set to support the steps and then the brick veneer set to match the house and make the city happy.  That may get expensive.  I wouldn't be shocked to see $2000 or so quotes, maybe more.  The thing you have to remember is that whoever does it has a minimum of 3-4 separate trips to the property in order to let things set up - its not a quick one day job.  I've found masons to be few and far between at the moment in our area due to all the work available + I'm guessing whoever does it is going to have a pull a permit which some may not be willing to go thru.  Hopefully you can find someone who either has a creative way of making the city happy or is looking to fill down time.   Good luck, let me know if I can help in some way. 

Hi @Nina Ricci  are there any particular areas in Cleveland that you're interested in?  city limits only or suburbs too?  Try talking to @George Hoover - did 3 transactions with him last year (west side Cleveland, Lakewood, Fairview Park) and he did an awesome job for me on all of them.  very consistent and quick follow up.  Based on west side multi families I've been watching, the market is as hot as I've ever seen it here....so be ready to act quickly once you find something.  Let me know if I can help with evaluating areas or individual properties.

@Adam Craig Its going to depend on how bad the remaining block/foundation is and I'm assuming you need to have the top slab repoured too?  (which would be concrete?)  If so, concrete prices are crazy if whoever does it gets a truck there are minimum delivery charges which I'm thinking are something like $500 by itself.  

I got this one done in Fairview Park over the Summer.  It was part of a package deal but as near as I can figure this was about $1000 -$1500 worth of the total.   And they also did the back part of the driveway so had concrete there.  The mason bought the 2 lower steps - they poured the upper pad in front of the door.  Based on what you've said so far, I'm thinking you're project is going to be in the same range.   Fairview said no way to pre-fab (even for the back steps)....I'm guessing Cleveland Hts would say the same...

@Liz C. are you doing a conforming FannieMae/FreddieMac investor loan? (seems likely with a 30 yr amortization) I'm getting ready to close on one in Cleveland at 4.5% with a half point. cash-out refi at 65% LTV could have gone as high as 75% (I got a good appraisal for once)......I think there are rate adjustments (up) for condo and multi-family but even with those, >5% seems quite high to me. I may be wrong but I don't think there should be that much rate adjustment across the US on conforming.....

Before going with the conforming loan, I got commercial quotes that were 5.25%-5.5% with one or two points 15-20 year amortization. The advantage with those was that I could have closed in my LLC name......but the benefit of the 30 yr amortization coupled with the fixed rate outweighed that enough for me to deal with the mounds of paperwork and putting property back in my name for refi. The commercial lenders were quoting either 5 yr adjustments or balloons.

@Andrew Slay  can you provide some more details as to what you're looking for?  what types of properties, areas you're interested in, price range.....are you flipping or buy/hold?  If you post more detail, I think it will be easier for Cleveland BPers to help point you in the right direction.