All Forum Posts by: Evan Kraljic

Excited to present here, thanks @Mike Moe!

Fix and flip with hard money/private money is starting the game on hard mode, and doing it with only 14-15k in liquid cash is not even close to enough buffer in my opinion. Yes, technically you could buy utilize a hard money loan on a property where purchase + repairs + all other costs (lender points - 2-4% for HM, closing costs, holding costs) equate to 70% of the after repair value. In reality, if you're starting with no experience (and presumably no construction background, or you would have mentioned it?), you will have trouble accurately estimating the rehab and you absolutely cannot trust wholesalers #s in my experience, as they're overly optimistic because they're marketing a deal. I could write until my fingers hurt on why starting with a flip with 15k or less is a bad idea, but I don't want to sound too negative. 

With all that said, I think house hacking is a much better way to get started in real estate investing, because it doesn't require a lot of starting capital, you're not dependent on a single exit strategy (selling your flip for a profit), and the execution risk is a lot lower. At this point I would say your best bet is to speak with a mortgage professional. @Tim Swierczek has helped a ton of househackers and probably people who started in very similar financial positions.

With that said, from my investor viewpoint I still think 15k is too low of starting capital in most scenarios. I think having 10k-15k AFTER you close would be reasonable as that is probably about 6 months of reserves depending on how expensive the property is. If you want to buy a property that needs work I would add to that, but depending on the condition you can remodel as you go, starting with smaller projects like painting/flooring that may be a couple thousand depending on your scope. For loans, 5% conventional or 3.5% FHA on a duplex could be a good option, but I believe FHA does have a 1.75% upfront premium that gets charged so I would look at it more like 5% as well, plus closing costs. I would always try to have the seller to cover closing costs to preserve as much of your own cash as possible though, because cash reserves in the most important way to mitigate risk. Buying a cash flowing property is high on that list too, but with low down payment and high interest rates that can be a tall task. You may find one in North St. Paul, I don't know that area super well though. Jeff Schemmel is an agent who knows househacking and St. Paul pretty well so he could help you out there, not sure why I wasn't able to tag him here but I could connect you with him (or Tim, if you reach out to him).

200k for a house in Minneapolis is very cheap, and the housing stock is old here. If you purchase a property like this I can almost guarantee that the expenses you're underwriting will not be high enough, unless you have a great property manager who manages these buildings and can give legitimate data on this. Even a good realtor will fall short here, but they could provide some general info that may impact your decision making. 

Too get more specific, a water heater is going to cost the same whether it's replaced in a 200k house or a 2 million dollar house. Also, a lot of these cheap houses are falling apart, so unless you're remodeling you may have more repairs than normal. Not to mention managing properties in the C or D class areas can have it's own set of challenges and expenses associated with them. Again, talk to a PM about this, or an investor who owns these types of buildings. Licensed professionals can't steer you out of any certain location, but they can give you the "real talk" about how it is to operate the buildings and help inform your strategy. 

The Twin Cities market has been steady, it's not likely to boom like some of the sunshine states but it also has a very diverse economy and is pretty affordable relative to other metropolitan areas that size, so it is also going to be more resilient to downturns. Which I think is arguably more important at this moment since we've already seen the boom and some of those cities (Phoenix, Austin, Boise, etc) have had a pretty significant correction, albeit still much higher than the pre-pandemic prices. 

Also I wholeheartedly agree with @Bryon Andrews last point. My general theory on real estate investing is that it's good to be aware of the macroeconomics, but ultimately at the small scale it comes down to your ability to find and create value at the property level, independent of those macroeconomic forces. I underwrite my deals for stabilized yield after the remodel and also how much margin am I creating in terms of ARV minus my all in costs - purchase + closing costs, remodel + holding costs - I'm not factoring in any rent growth/appreciation to make the deals work. That all should be considered, ESPECIALLY on commercial assets, but if I have to get down to that level for small multifamily properties it probably means it's not a good enough deal.

With that said, you say you live in CA so I understand why you're asking these questions. I'm going to be inherently biased as someone who's lived here almost all my life and currently invest here. With the US as your oyster, I think the Twin Cities would be an okay choice but probably not my pick of the litter, and that has more to do with the regulations that have been implemented for landlords here, which will continue to get worse especially if Minneapolis elects a more "progressive" mayor and city council. PersonallyI think people over-react to these a bit too much, but it's still a pain in the *** to some degree and if you had any choice I'd pick a more business and landlord friendly area to invest. 

I saw you made a post asking about Columbus, Ohio too. Strictly from an investment standpoint I would favor Columbus over the Twin Cities, but that's just my 2 cents. 

Thanks @Samuel Lindgren. My capital was redeployed directly into my HELOC that I was paying 8.5% interest on haha. No immediate plans for the next project, I'll be travelling in Europe in May and either moving right before or after that trip, so once that is set and I have a lease signed on my current unit I'll look at getting another pre-approval. Numbers on small multifamily properties don't look great though and since I've proven to myself I can execute in this asset class I'm trying to think a little bigger, so my plan will probably be selling one of my properties and looking at small commercial (5-12 unit) apt buildings. The bid-ask spread is pretty big here too, but if I'm spending time trying to find off market deals I figure it's worth a bit more in this asset size if you are able to close on something.

Thanks Drew! Yeah I was kind of surprised they were willing to go that high based on where it would put my cash flow at. The last thing I want is to do is decide to hire out prop mgmt only to find out I'm no longer hitting the DSCR, and then getting hit with a fee or higher interest rate as a result.

I like having that option though! Normally with banks it is the other way around haha

Investment Info: Buy and Hold Duplex in Minneapolis, MN

Purchase

Purchase Price: 302,500

Remodel Budget: 50,270

Initial Loan Terms: 5.125% interest rate fixed for 5 yrs, 25 yr am, 246k loan (80% LTV) - $1953/mo PITI. ~$410/month in HELOC interest payments

Initial Cash Flow/COC return: $599/mo cash flow, 12.95% COC return

*Note: Cash flow assumes 15% expenses combined for vacancy/maintenance/capex, plus $150/mo water/garbage bill, and $75/mo for lawn/snow. I did not count HELOC as cash invested since I deducted the I/O from my cash flow

Refinance

ARV: Appraisal was for 500k (lmao) but should be more like ~400-425k IMO. 450k at most.

Refinance Loan Terms: 5.625% interest rate fixed for 5 yrs, 25 yr am, $332,423 loan - $2562/mo PITI, wiped out HELOC costs

All in costs: $302,500 (purchase) + $6296 (closing costs) + $50,270 (reno) + $5257 (refi costs) = $364,323. Took out holding costs as it was ~equal or less than my agent commission here.

Cash invested: $364,323 - $332,423 = 31.9k

Final Monthly Cash Flow/COC return: $414/mo, 15.57% COC return

What made you interested in investing in this type of deal?

This property fit my buy box really well. It's about a 5 minute drive from my house and I own a duplex on the same street, so I know the area and tenant base well and felt confident in my rent projections.

I also was looking to do one more rehab before I could qualify for another owner occupant property, so this fit the bill as a potential BRRRR opportunity. It's not a crazy deal as it was listed on market, but based on comps I figured I could purchase and rehab for 80% of ARV, leaving little to no $ in the deal. But I also knew interest rates were set to increase with the Fed raising rates so it might not make sense to refinance, so I had to underwrite and be okay with the scenario of holding a chunk of variable HELOC debt as well.

Another thing I really liked was it had one unit vacant and another with lease expiring shortly after closing. The remodel here was a pretty quick 2 month turn and burn and residents were moved in after 3 months. We often think of returns on our money but I'm learning that return on time and brain damage are equally as important building a portfolio. For me, I much prefer to buy a building with a quick path stabilizing it to highest and best use, rather than buying something with way below market rents and turning over 1 at a time or dealing with displacing tenants in general. 

How did you find this deal and how did you negotiate it?

It was listed on market and I set up a showing right away, built some rapport with the listing agent telling her I owned 3 duplexes within a mile or two and that I prioritize being straight forward/easy to work with, and prefer not to negotiate over ticky tack items on an inspection since I’d be remodeling it regardless. That was attractive to the seller and helped get my offer accepted despite 9 total offers on the property (it was listed well under market). This is not an advertisement for myself as an agent as I only have the license to work on my own deals, but just a reminder that you can keep it simple and doing a little extra in terms of assurance of closing can go a long way, both for the listing agent and the seller. 

How did you finance this deal?

Worked with a local credit union. Commercial loan at 80% LTV, 25 yr amortization and fixed for 5 years. Initial interest rate was 5.13%. I used a 90% LTV HELOC on my primary residence to help fund the 20% down, and paid cash for the rehab, ended up refinancing with the same credit union to pay back the heloc funds and a portion of rehab and other costs (see more in outcomes section).

How did you add value to the deal?

All new kitchen and bathroom in both units is where most of the money went. New light fixtures, paint in one unit (vacant unit was painted before listing), refinished hardwood floors. See before and after pictures.

What was the outcome?

I refinanced at a slightly higher interest rate (5.625 vs. 5.125 for purchase). Sounds crazy, but I received almost 83k upon closing the refi which I used to fully payoff one HELOC and put a dent in another. My interest rates are up to 8.5% and may get to 9% on the HELOCs so even refinancing at a larger loan amount and 0.5% higher interest rate, I'm still paying less in interest since I put those proceeds towards paying down my higher interest debt.

I could have actually taken more on the refi loan and approached a perfect BRRRR (lender approved up to 347.5k) but I choose a slightly lower loan amount for a couple of reasons. Main one being that I was limited by needing 1.2 DSCR here, and while my lender was willing to get aggressive with the expense ratio, I want to leave open the possibility to hire a property manager. Also, I like my residents and am happy with the rents I got despite leasing in winter, so I'm not going to push rents but I do expect taxes, insurance, and other expenses to tick up. I don't want to violate my loan covenants because I wanted to push the envelope, so slightly lower leverage made sense for me here.

Lessons learned? Challenges?

Honestly, it’s hard to make cash flow numbers work on 2-4 unit properties in the Twin Cities market, unless you’re willing to do certain niche strategies like section 8, rent by the room, AirBNB, etc. But these are almost always going to come with their own challenges and a lot of times the juice isn’t worth the squeeze, so to speak.

I self manage my small rental portfolio which helps make the #s work and I think this is a good thing to do while starting out to really learn the business, but I’m getting to a point where I know I could manage some more units, but I would much rather focus on the parts of real estate that I’m passionate about - mainly finding deals and executing on the rehab/value add components.

Challenges mostly revolved around having to lease out a different unit unexpectedly during a slow rental market in MN winter, and dealing with an onslaught of maintenance issues at my other properties. Mid December through Early January I easily had more issues than the previous 12 months combined, which normally aren’t too difficult to address but I was stretched really thin with the W2 and putting in another 30-40 hours a week finishing the remodel at this property.

These challenges made it clear that I need to hire out property management in the future, and to do that I will need to find better deals with a better margin to cash flow. My strategy for that is going to be trying to source my own off market small apt buildings (starting in 5-12 range). Don't get me wrong, it's still difficult to make the #s work here, but that doesn't mean I'm not going to try. Also when I learned a few years ago that commercial buildings are valued off the NOI that was a major draw for the process engineer in me lol, I knew I would have to work my way into that asset class eventually.

Did you work with any real estate professionals that you’d recommend to others?

I was my agent here and I’m not recommending myself - not as an agent at least, but down to talk investing.

My lender is Josh Anderson with Ideal Credit Union.

I used plenty of contractors here, you can DM me if you want some referrals

I feel for you Ben, sounds like you have an issue with unreasonable tenants more so than the heat, but there are some ways you can provide more even heating. So I'll go rapid fire with a few things that crossed my head reading your post. 

First off you said you've had multiple professionals out there to say it's working. For your sake you should get this in writing so you can show that as proof that you aren't blowing off the issue. 

I believe building code states that you need to provide heat to keep temperatures 68 degrees 3 ft from the floor. However I think most people with finished basements know that you can't really get to 68 unless you really crank the heat in the rest of your house, or install an electric baseboard heater. So that would be one option - Home depot sells cadets that you can hardwire (recommended), but they even sell ones that can plug in to outlets too, so that would be used in the one room. That's probably your easiest solution and relatively affordable.

It sounds like you have one heater for all 4 units - I'm assuming this is a boiler with radiator heat then? I would be curious to see what the quote for putting thermostats in each unit would be, sounds tricky but I don't know much about HVAC. I've had issues with uneven heating in rooms where bleeding radiators and tightening/loosening radiator valves at the inlet helped some with the water flow, but there's only so much you can do with these very old systems. I'm assuming if you're had professionals out and they're radiators, that you've already tried bleeding them. 

If you need any more HVAC people and you're around the metro, Dan Schmidt with Ideal Air is good. So is Metro Heating and Cooling

Congrats man! Househacking and adding living space to a duplex in south mpls was how I got started too, let me know if you want to chat sometime!

Also I don't think I saw this one on the MLS - did you snag it off market?

Missed last year's because I was knee deep in a remodel, but I'll be there this time around. Looking forward to it @Sean Blomquist!!