All Forum Posts by: Edwin Epperson

Quote from @Aaron Freeman:

Quote from @Edwin Epperson:

Do you mean to ask if a lender may require 20% D.P. on the entire Loan amount (purchase + rehab) instead of just the purchase?  If that is your question, no. I have never seen a lender require a D.P. percentage based on the total loan amount.  Almost always the lender is looking at the value of the property or the purchase amount, whichever is more, and requiring the D.P. percentage off that amount, not the full loan amount.

Yes, that's what I meant.  In your example the 20% is calculated from the property price, not the entire initial loan.  That was a surprise to me.

Regarding this comment:  "This means the borrower's money must first be in the project before gaining access to the construction funding."  ...
You can't be saying that the borrower needs to fund the construction entirely (spend $60k) in order to get access to the $60k.  If that was the case there would be no purpose to borrow $60k.  :) 
So I am missing something.   I am guessing the $60k for construction is paid out in traunches or based on phases/milestones of the project or something?  So the borrower needs to front, say, $10k and then will get reimbursed (hence "arrears"), and that continues until the project is complete?
Are these arrear loan payments based on milestones?

Hey brother, you're on it!  Everything you stated as an assumption is correct.  These 'milestones" are explained in your draw schedule.  This is a document that normally a GC or even you may provide to your lender that states, "By this date, X amount of work will be completed, and these major items will be completed" Think, demo, rough-in, finishing, final touch up etc...  This draw schedule then allows you AND your lender to hold your GC accountable (get it in writing).  

There is another document that should be signed by you AND your GC, and should contain the following:
#1: Breakdown in the phases of work
#2: Estimated Costs of each phase (Not detailed line item breakdown, thats in the line-item budget, which is a different document altogether that your GC should provide)
#3: Estimated completion date for each phase (Again this is not a hard date.  If your GC has not completed phase one on exactly the day they estimated that should not throw up flags,... several weeks... yellow flags, 1 month+ red flags!)
#4: CHANGE ORDER PROCESS!!  This is SOOOOO critical, that I cannot tell you how many investors DO NOT have this process detailed in this document.  MAKE SURE the GC provides you with exactly how change orders should be handled, in writing and they sign it, and you sign it.... then let your lender review it.  Whatever recommendations your lender makes DO THAT.  The lender is looking out for their capital, and as such their cautions are also going to protect their borrower.

Now this document with these 4 main points is called the "Scope of Work" or the "Contractors Agreement".  Many well-meaning investors call the Line-Item Budget the Scope of work.  Thats not the case.  Going back to understanding terms and definitions, this is one of those that can cause you delays if not clearly understand.  If your lender asks for a Scope of Work or "SOW" and a budget, they are actually asking for two different documents.  I can go on and on about the contractors and the pitfalls with contractors, but at the end of the day your lender should be helping you vet your contractors, because on a project needing construction, that they are funding, they (your lender) wants to have a successful project MORE than you do, believe me!

@Nicholas Anderson congrats on your first deal, and trying to find a way into the market in your current situation.  To be clear what do you mean when you say, "private lender"?  Three "types" of investment capital, #1 Hard Money Lender, #2 Private Lender, #3 Private Money.  Most people say they are looking for "Private Lenders" when in reality they are looking for Private Money.  I can dive into the nuances later, but the short answer is what type of loan are you looking for and then find the type of lender/ investor that will provide that type of loan.
I would suggest that you "Partner" with a private money person, to provide a hefty D.P. think 30 -40% of the purchase, and then using your good credit you qualify for a loan (purchase + construction) or (DSCR). This keeps you moving forward in building your portfolio, though now you're sharing the equity, and this method allows you to get your "family and friends" invested with you and you can build trust for more projects down the road.
Best wishes

@Tim Merritt, welcome to BP, and glad to see another Tampa, FL investor present.  I'm local, live in North Tampa, and always enjoy connecting with experienced and aspiring investors.  let me know if I may be of any assitance.

Quote from @Travis Nachman:

Quote from @Barton Thomas:

If you own less than 10 properties it makes sense to have each in their own LLC. If a tenant slips and falls and sues LLC 1, all your other LLC properties are protected. After 10 or so you may want to consider groups of properties in different LLCs, just to keep things organized without being untenable.

Isn't that a lot of paperwork every year? Also, does it make the refi harder owning them in an LLC?

Travis as @Barton Thomas recommended, it's not a new LLC for every property, yes that can become expensive both accounting and filings-wise. It's only after you reach 10+ assets or a certain valuation within the LLC that you should consider creating a new LLC. Obviously, depending on where you investing, having 10 SFR properties could easily push you close to $10M in valuation for that entity, which could make it a target for the "slip-and-fall" tenant crowd. I personally use a # of assets metric OR a $ valuation rule. I will not exceed a certain # of assets inside an LLC OR I will not allow more than $X million in valuation on that LLC. Typically I keep it at 8 -10 assets per LLC, or a valuation of 2.5 - $3M max per LLC.

@Aaron Freeman no such thing as a dumb question, the only "dumb" question is the one never asked.  Every lender is different, and some may lend the renovation amount + purchase/ refi, others only the purchase/ refi.  The percentage can also change based on the lender and other factors not being covered in the video.  The video I made made general sweeping statements, based on industry averages.  Also, words are important.... very important.  Words carry specific meaning and with that meaning covey expectations, truths, facts, etc.  You mentioned "...downpayment on the rehab portion..." I'm not entirely sure what you mean by that.  The term downpayment is normally inferred when considering how much of the purchase the lender WILL NOT FUND, thus the Borrower must bring to the table.  As far as construction funding, the term "downpayment" cannot be used. Do you mean to ask if a lender may require 20% D.P. on the entire Loan amount (purchase + rehab) instead of just the purchase?  If that is your question, no. I have never seen a lender require a D.P. percentage based on the total loan amount.  Almost always the lender is looking at the value of the property or the purchase amount, whichever is more, and requiring the D.P. percentage off that amount, not the full loan amount.
 

Now that being said this is where newer investors may be confused as to WHEN they can access the construction funding.  Most lenders, myself included, fund construction in "Arrears".  This means the borrower's money must first be in the project before gaining access to the construction funding.  There are several reasons for this but the short answer is it allows the lender to protect themselves, as well as shift more risks to the borrower, which is the name of the game for lenders.  SOOOO.... in a sense there is the concept of a construction "downpayment" but it's not called that and it's not realized at the closing table.  It is realized through the draw process and when the borrower gains access to the funding.  I can explain more in detail but this post is already long enough.  

Quote from @Aaron Freeman:

Quote from @Edwin Epperson:

Also be aware that conducsting the BRRRR strategy will always leave untapped equity from your refinance. Happy to discuss my solution for this if youd like

Interesting! Yes, please share on how a BRRRR leaves untapped equity and your solution. I'll definitely learn something and maybe others watching this thread will too.

Happy to share, I also created a video that goes into detail why this is the case, but I cannot post video links here.  50,000 ft view for the purchase + reno side, the most that you will be able to get access to is 75% of ARV, though in today's environment the norm seems to be 70% Max LTARV.  This means even in the case of you having 800+ credit score the most that you could qualify for on a Rate and Term is 80%, and the most for a Cash Out is 75%.  No matter what you will never be able to qualify for the Rate and Term, and be able to pull out at least your downpayment.  So this means you will always have 25% - 30% equity in your deal, and you will always have 5 - 10% of tappable equity untapped.  If you would like to see the video (about 20 min) where I break down the numbers to help it make sense, shoot me a PM, and I'll share the link to the video.

@Brian Lewis most RE Attorneys can handle the drafting of the paperwork (Mortgage/ Deed of Trust, Note, Guaranty, Loan Agreement ect...). As far as the logistics, what exactly are you needing help with?  Based on who your custodian is, they should be able to help you with the logistics of moving money, and collecting capital with out triggering any issues.  I have several capital partners who use their SDIRA to invest in loans I originate, happy to jump on a call if you believe their experience is work exploring.

@Petronella Kerssens welcome to the wild side of FL RE Investing!  LOL!  Well, both places have strong reasons to invest (I personally live in Tampa).  Orlando of course has the parks, Disney, Universal amoung many others.  While Disney's foray into the political landscape may have soured US residents from coming, the international base is still strong.  As a side note, the parks, specifically Disney, have had their lowest attendance this year in the last 20 yrs I believe, notwithstanding COVID lockdowns.  It will be interesting what measures the executive team at Disney takes to boost attendance and customer retention.  Downtown Orlando is growing and experiencing growing pains by way of highway and freeway expansions.  The downside, Orlando heavily relies on the parks for secondary and tertiary revenue.  Depending on what moves Disney specifically makes could drag the overall market into a slump.  For example, I own two STRs 20 min from the parks, and bookings into 2024 are not coming as quickly or as long as in the past.  Orlando residents and vistors are not exactly near the ocean either, they must drive 1.5+ hrs to the Atlantic coast beaches. 

Tampa and the surrounding cities (called the Greater Tampa Bay Area), which include St. Petersburg and Clearwater along with numerous other beachside communities that are all mingled together, have boasted strong growth for the past few years, and honestly, there does not seem to be any cooling of this effect in the near future.  Several large financial offices have moved to Tampa, (Think Kathy Wood with ARK investments) as well the downtown and multi-billion dollar expansions such as Waters Street Community and the Midtown development, continue to push the availability of jobs, residences, and demand for real estate to fullfill these needs.  Greater Tampa Bay Area residents are anywhere from <5 min. to the beach up to 45 min.  Alot, of different reasons to support investing in either location.  Whatever you do don't just jump in into any investment.  Conduct due diligence, and research and make a well informed decision.

@Jay Hinrichs yes you are correct about CA, and even NY and FL for that matter, being that the min. loan needed by most investors would be in the multiple 100's not the mid 10's. I was not sure where Devon was located at, as he did not mention it in his post, had to go to his profile and see he's based out of CA.

I am familiar with fractional deed investing, but you bring up a great point about the pitfalls of fractional deed/ mortgage investing, who controls the rights to enact legal measure to protect the investments of those invested?  Who services the loan, and who manages the project?  I agree all these are reasons for most capital investors NOT to pursue this strategy, however I have been providing a solution for going on 9 yrs, and I also manage a 506(c) debt and equity fund.

Its possible just not common, and as you ascertained there are many pitfalls a capital investor should be aware of when considering investing in a fractional loan. 

@Aaron Freeman, great questions and I know it can be overwhelming. As a direct portfolio lender for over 9yrs, and now a fund manager I have loaned out over 150+ loans and deployed 25M+ in capital.  I've had bad loans and good loans, bad borrowers and good borrowers and Im confident in how I manage each one of these.  If I may share some of my experience,

your first scenario (3 different loans) exists but its much more expensive. Your rehab would be in 2nd position which is hard to get as well very expensive.

Your second scenario is the most widely accepted and used in the industry, 2x loans, first for acquisition + construction, the second for the refi.

Also be aware that conducsting the BRRRR strategy will always leave untapped equity from your refinance. Happy to discuss my solution for this if youd like