All Forum Posts by: Evan Kraljic

My target COC return is dependent on what kind of financing I'm using, and can be a moving target depending on other workings within the deal. An extreme example Brandon Turner used to talk about was that if you're cash flowing $1/month but have no money in the deal you have an infinite COC/return, but it's still probably a bad deal if you're returns and overall margin is so small, then it's just not worth your time. This comes into play a lot when you're looking at a low down payment option like househacking vs. putting 20% down.

If you're only going to have 20k into a deal with a househack, then a 12% COC return is cash flowing $200/month, which isn't really that much and if you're under estimating any expenses that can go negative in a hurry. So I wouldn't pay too much mind to COC return with a low down payment loan.

Conversely, with a low down payment loan there will be times where you could possibly get a deal with more modest cash flow but if you were able to buy well below market then you can get a pretty nice equity multiple that will far exceed the cash flow you're going to receive. 

For example: Scenario A you put 5% down on 400k property that should be worth 450k. It cash flows 2k/yr, so you're COC return is only 10%, but you captured 50k of equity with just a 20k down payment. Scenario B - you paid market value for a 400k property, but it cash flows 5k/yr. You're COC is much nicer at 25%, but it's only amounting to 3k more/yr vs. scenario A, when in that instance the 50k equity gain is far more important.

So it's a balance for me. If I'm going to be putting down 20-25% then I'd be expecting 12% COC or higher. For househacks, I underwrite them a little differently because the low down payment can real

Frey isn't going to go for it, and the city council is more moderate that some might think and probably won't go for it either. I'm against rent control is essentially all forms, but it's quite absurd to propose that strict of an amendment when it's literally already been dubbed a failure in St. Paul in less than a year. They have since loosened restrictions on it which is good. 

No one wanted to build in St. Paul anymore, and the same stuff will happen in Mpls if it gets approved with similar conditions. The twin cities have actually done a pretty good job of delivering new apartments and rents have stayed relatively affordable here. Rent control will absolutely stymie that progress. 

Hey Zach, there are a few good ones in the Twin Cities that I like going to, including the one @Alyssa Strom mentioned. I'm hosting one at my remodel project month on Thursday, January 5th in South Mpls. If you're interested in that one I can DM you some more info on it!

The ARV is 300k and you're considering spending 100k+ on foundation work plus a full rehab after that? And you're in East St. Paul, before a potential recession? Sounds like a great deal... if you like losing money. I don't mean to be an A-hole but I just don't see how in your right mind you'd even consider this. The seller would need to pay you for the original transaction for it to make sense #s wise

Nice, that is an awesome portfolio you've got going and great interest rates across the board. I would say that with a HELOC on one and looking at it for your primary residence that would be pretty optimized in terms of the amount of leverage you call pull from your existing equity... so you're already in a good spot.

Just off the numbers I think the best move from a standpoint of getting more capital so you can quicker, would be selling duplex #2 which has the lowest ROE. But it's so much easier to make these decisions on a spreadsheet vs. in real life, especially when you've got great debt on the asset, and it can feel like a backwards move since you're temporarily going down in units/cash flow, and it's a difficult market to buy back in and get cash flow right now. Not to mention the potential tax implications so obviously consulting with a CPA/tax strategist and looking at a 1031 is what I'd want to do before selling a rental. I'm in a similar spot (a bit further behind) where I know in order to scale I'd either need to sell of some of my existing portfolio, find a money partner, or be patient and work on using that cash flow to save towards the next down payment, keeping my ear to the streets for any good opportunities I might be able to jump on in the meantime. Option 3 has been the route I'm taking so far

Edina is a fantastic location for rentals but I can't advocate for buying something with negative cashflow even after taking into account your rent increases and you self managing. You're estimating expenses are probably low at 33% of gross rents including prop taxes and insurance, and even with that I have you buying at a 5.9 cap (71k NOI after stablization/1.2 million PP) and you're borrowing at 6% interest rate, which isn't a good buy to me.

If it don't make dollars, it don't make sense.

I think this is a scenario where you really gotta dig deep into the numbers and figure out what are your best performing properties from the return on equity perspective, and which ones have the best debt (aka lowest interest rate and hopefully long term fixed rates).

I would likely recommend against a cash out refi because you mentioned closing on these properties in the past few years, so I'm guessing the rates you'd be looking at now are quite a bit higher than your existing debt. When people talk about a cash out refi, if you refi at say, 8% (realistic for investment rate right now), you don't just have to beat 8% to make it worth it, assuming your existing debt is at a lower rate.

For example, say your in a scenario where you owe 300k on an existing property and your interest rate is 5%. And lets say you could do a cash out refi to get 100k cash back, so new loan would be 400k, but interest rate is 8% (ignoring closing costs). Interest paid on your old loan in year 1 would be 5% of 300k, or 15k in yr 1. On the new loan it is 8% of 400k, so 32k in yr 1. So even though you are accessing 100k in capital (actually less because of closing costs), you're paying 17k more in interest, so you should be meeting higher than a 17% on that 100k to make the cash out refi worth it. Which is going to be difficult in a softening market. 

For accessing capital I still like the option of HELOC on a primary residence, because although rates are variable and definitely going up (probably will stabilize around 8% depending on your lender), you only pay interest on the $ you've drawn so you can evaluate on a case by case basis if the deal is worth it. And closing costs are very minimal, basically the cost of the appraisal plus another several hundred maybe? What is your LTV on your primary? There are a lot of local banks in MN that lend up to 90% LTV on personal residences.

Can you give a breakdown of your cash flow and monthly payments/interest rates for each property?

Welcome @Dumisani Thomsen! I'm also a serial househacker in Minneapolis (2, hoping to do #3 in 2023 or 2024). The BP community is awesome but I highly recommend joining some local facebook groups that are more active and going to investor meetups. I can send you some good ones if that's of any interest to you? I have no affiliation, just enjoy the value I've gotten from them - both informational and relationships too! I'd love to hear more about how you structured your househack stack financing wise and what you're looking to do to scale up to 16 units

There's nothing wrong with starting small to see how much you like real estate investing before committing to something like small apartment complexes. If you decided to househack a duplex for your first investment, you're getting exposure to real estate while the stakes are a lot lower (figure out what you like/don't like), probably save money on rent with tenant rent offsetting some of your mortgage, and you're doing this with a very small initial investment since owner occupying allows you to purchase for 5% down or less. That way even if you do decide apartments are the way to go, you haven't depleted much of your capital, which will be critical and probably the biggest hurdle for getting into a commercial asset, and you have at least some background in real estate that you can sell to brokers/lenders when they ask you about it. I'd definitely work on getting the credit score up, right now you'd probably have to go FHA to get a decently competitive interest rate which can limit the pool of available properties. Once you're in the 700 or 720+ range conventional can often become a better option. But definitely just talk to a mortgage lender on that and they'll set you straight.

Also, I see you listed Royalton as your location. If I'm not mistaken, I think @Daniel Anshus is from there and has helped some of his hometown friends buy there. He also invests in the twin cities and has a small apt building, so regardless of where/what you're looking to buy he'd be a good guy for you to connect with on what you're looking to do.

@Roy Palmer I think you're wise to be looking into programs like this even if you can afford a low down payment. It's very important to preserve liquidity when possible starting out, as that will allow you to solve any problems that could come up (property or tenant issues) and for planning your next moves. And it's clear you've already done your research, because while NACA is an incredible program for homeowners, it may not be a fit someone looking to househack multiple times since they require you to stay at the property, as you alluded to. I know a loan officer who offers a down payment assistance program through his bank that is actually specific for multifamily properties that could work great for you, although I know it has certain qualifications so you'd need to check with him to verify, but he can definitely tell you what loan and down payment assistance will work best for you based on your situation future goals/aspirations and allow you to treat your real estate investing journey like a game of chess - thinking several moves ahead.

Some things to consider - If you're geared towards building up units and cash flow and willing to live in a 3 or 4 unit I'd recommend doing that first, since bank underwriters are more likely to let you move from a fourplex to a duplex, but not the other way around, assuming you're utilizing an owner occupant low down payment loan (wouldn't matter for strictly investment property, as you'd expect). With that said, if you're going for a 3 or 4 unit I would not recommend FHA for your first loan as it has a self sufficiency test where 75% of the rents need to exceed the PITI payment, which is hard to find in our market especially at the current interest rates. Note that duplexes don't have this stipulation. The first loan I used was a HomePossible 5% down conventional - it has lower PMI than FHA, no up front mortgage insurance premium charge (I think this is 1.75% of the loan amount, charged up front), and doesn't have the stigma associated with FHA that some sellers will perceive (I think this stigma can be avoided with a good agent/lender to make your case, but figured I'd mention it regardless). I also was able to get a $1500 borrowsmart grant to cover some closing costs which I believe is still available depending on the lender you work with, not a huge amount but this was over 10% of my closing costs on my first cheap duplex, so not insignificant either! The income limit for this loan in 80% of the area median income which, is actually a pretty high # at $94,240 in Hennepin county. I do know of a construction loan for house hacks where you could potentially bring zero money to closing if the deal is juicy enough (high after repair value once work is done), but I honestly wouldn't recommend that for a first investment unless you're comfortable with the construction process. It would also be available after you've used 5% down conventional and/or 3.5% down FHA loans so maybe once you've taken on a rehab or two you have that as another tool in the toolbelt for you.

Let me know if you have any other questions!