All Forum Posts by: Robert Feol

Hi Glenn!  There are many choices of places to invest obviously, and I would imagine your impetus for out of state investing is primarily due to your ability to leverage capital and take advantage of lower priced markets.  This recent article from Realtor.com really may be a great guidepost on your search:

https://www.realtor.com/news/t...

I think your research ideas as stated in your post are excellent, obviously.  It is important to note that crime statistics may be difficult to interpret relative to a City's particular value to you in terms of placing capital with the goal of seeking a return.  In Memphis, for example, where I live, we have crime statistics that would scare off any investor, generally speaking.  However, when you dig deeper, or speak with local turnkey providers or real estate agents in Memphis or other cities, it becomes more of an exercise in seeking out which areas to AVOID and which areas are really able to provide a safe haven for your investments, and more importantly, peace of mind.  The areas you really want to avoid, generally, also tend to be the same areas where the crime statistics are heavily concentrated.

I hope you have an awesome experience as you begin your search for real estate. 

rf

@Stephen Akindona and I have been working with @James Wise for almost a half year now, and our experience has been nothing but exemplary.  I'm not trying to get involved in someone else's dispute in any way.  But I do think it is important to point out that we followed James Wise and were impressed with him from the start, and in all of our business dealings with him he has been extremely honest and delivered everything we were promised.  

It seems sometimes in these public forums it is easy to disparage someone, and hard to recover sometime since posting something these days seems to become truth because it is 'on the internet.'  We would have no issue acting as a referral for James Wise if anyone is thinking of doing business with him.  Our experience has been fantastic - without exception.

Hi Anita!  It looks to me - and my opinion isn’t all inclusive here - that the amount of cash you have to put in to a deal, coupled with the risk of assuming a large mortgage, and potential exit profit being so small relative to the risk - I think there may be better deals out there?  I don’t know your circumstances obviously or your goals so it’s hard to comment in any way other than a general perspective.  

Also, something that makes me wary is the 30k the owner is asking.  Usually, the transaction engineer gets cash from the owner to take over payments, and it is not uncommon for the owner to subsidize the monthly payment for an indefinite period of time.  From What you described - it seems like this deal favors the owner heavily and places an exorbitant amount of risk on you.  I have found picking the right deals is the key to success.  I hope this helps you! Stay encouraged and keep looking at all options.  You are doing great!

rf

If your goal is to generate a monthly cash flow(looks like $3500 under an Air BnB model less your subject to PITI and he 85k in debt service, assuming you financed that also) - why not dump this deal which has 26 years of debt service left on the note and significant cash needed to do it, and go and rent a similar house which is fixed up in the same neighborhood - and then Air BnB it? 

You save 85k in cash, and if you negotiate properly with a good landlord and tell him or her your will handle the normal wear and tear items on the home(most Air BnB proprietors who are Superhost keep their units meticulous) if they handle the large maintenance items like roof, HVAC, etc. - Now you have your Air BnB unit but you don't have to come out of pocket a dime. 

This is a newer model many investors who want to generate cash flow are looking at.  Skip financing and debt service, etc.  Lease an existing home and make money off the net income after rent and minor expenses.  Your costs stay reasonably fixed.  A great way to test your tolerance for this without the 350k obligation.

There is value in owning rental homes, and I own many.  But in this case - forget giving the owner 30k of your cash!  Keep it and think outside the box.  Hope this helps you!

Hi Adam

These are excellent questions and a great primer for understanding how your real estate investments actually 'net' you money. I'll use your example but the first piece of advice I can give you, which has helped me greatly, is - make sure you have a great CPA who UNDERSTANDS REAL ESTATE. Many do not own or really understand real estate. Your local REIA would have a good recommendation, or someone on BP may have someone in your area who comes highly recommended.

Your question boils down to this - what is my tax liability on a gross income of $1,000 monthly.

Let's say you own the home for a year.  The IRS wants to know how much you actually 'made' vs what is deductible and/or depreciable so it can tax you based on actual income.  It's measured, like all tax filings, as a function of annual income.

So, for your example:

$1,000 monthly gross income x 12 months = 12k GI(Gross Income)

Less your PITI, as stated: - in this case, your example is $700, x 12 - $8400

Leaves you with a NOI(Net Operating Income) of $3600.

Now technically, this would be taxable, however - you need to factor in Depreciation, and other expenses which could be claimed based on your tax status as a real estate investor, assuming you qualify.

Depreciation, as you may know, is your building cost, less the land value, based on the time of purchase, which can then be 'depreciated' over 27.5 years.  Lets assume your 'building cost' is 100k/27.5.  This gives you a 'depreciation' of $3,636.36 annually, which, when applied to your cashflow, results in a $36 'loss' per year.  

What is important to note here is that you would NOT have any tax liability due to your depreciation.  You made money, but through depreciation you actually 'lost' money.  Strange, I know.

As you develop your portfolio you can also start to explore 'componentization', which is a way you can deduct improvements in full in the year they occur one time.  

Again, make sure you have a good CPA to help you navigate the complex world of IRS rules.

Good luck and if I can be of assistance please do not hesitate to contact me.

rf

PS Disclaimer I am NOT a CPA and IRS rules are subject to change so please verify what I am offering here with your CPA!

Thanks @James Wise!  Stephen and I are so excited to be working with you and bringing in depth information about the Memphis Marketplace and specific neighborhoods!  

Hi Aly!

I have had an excellent experience with Air BnB and I hope you do also.  General contractors can bring you some peace of mind, but they come with a great markup.  Do you have a renovation background? 

For my Air Bnb remodel, I hired some independent carpenters, painters, and plumbers,  It saved me ALOT of money.  I also had purchased a foreclosed condo which happened to have a large number of pieces of new furniture in it, which helped me save on furnishing costs.  Try to save money whenever you can, and this project will pay you back in spades.  
These days, I handle all of my own contracting through hiring the specialized pros for each category like carpentry, etc..  I think you will find that this method, especially for an Air Bnb, will be a cost effective way for you to earn your way to superhost.

As always, if I can be of assistance please do not hesitate to contact me!

rf

Hi Abigail!

Owner financing is always desirable, the tradeoff being - as you stated - having to come up with the rehab monies and down payment.

Have you considered private lending?

With a private lender you could:

1) Offer the owner(ask for) a discount on the 15k in exchange for a lumps sum of cash at the closing, and;

2) Finance you repair costs, leaving your credit line intact for emergencies or other deals, and;

3) Not have to worry about any 'cash out refinance' technicalities when you refinance, fitting nicely into your BRRR strategy.

Granted you would have to have a reasonable fee structure with your private lender.  But assuming you have this in place, 100% purchase + rehab financing, even at a higher interest rate, keeps your money 100% intact.  And, assuming you refinance after two months, the interest costs should be negligible.

Based on the ARV and your price you should have no trouble finding a private lender to finance this deal for you. Hope that helps! If there is anything I can do to help you please let me know!

Hi Lee

I'm reading through these posts and, while so many of them are full of information and certainly all aimed to help, I am not sure any of these have delivered the encouragement you need.  I reread your initial post and from my perspective, everything you describe is very encouraging for you to successfully begin building your portfolio.  A few things to note:

1) Your credit is very strong

2) You have, against many odds, been able to amass investment capital to make a successful down payment and realistically, maintain some reserves.

3) You obviously have been very cautious and conservative spending two years in the 'look' phase.  It is clear you are looking for the right deal and your gut is telling you that real estate is something in your family's future.

All of these are very good characteristics which will serve you VERY well in your real estate journey.

A few thoughts:

1) If you are struggling to find deals that fit your criteria, broaden your search. Wholesalers, members of your local REIA group, REO Agents, the list is endless. Also don't be afraid to broaden your geographic search, surrounding areas and suburbs of where you live.

2) Financing - from your post it seems like you are concerned about leaving 'money in a deal. Capital preservation is obviously important, although not every deal can be a 'zero down'. Granted, it depends on the ARV vs your purchase point plus rehab. A better way of financing your first deal can be to use a private money lender to fund the acquisition and rehab costs, and then refinance. This can avoid onerous seasoning requirements and the potential for you to be forced to keep your investment dollars for an interminable time in a home, even with permanent financing, for invariably falling under 'cash out refinance' technicalities.

Consider:

Scenario A: You find a deal worth 100k, with a purchase price of 50k and 20k in rehab needed.  You go to your lender and ask for a loan.

You: I need 70k for a home worth 100k.

Lender: We will need 20% down and an appraisal.  Are the lights on and ac installed?

You: No, it needs about 20k in rehab

Lender: Well, that falls under a construction loan and the requirements are(drones on), becomes more complex and you still put 20% down.

You: Can I get money back from the refinance?

Lender: Well, there are seasoning requirements and we cannot give cash out(drones on)....5.9%(drones on).

Now consider scenario B.

Scenario B: You find a deal worth 100k, with a purchase price of 50k and 20k in rehab needed. You go to your PRIVATE lender and ask for a loan.

You: I need 70k for a home worth 100k.

Private Lender: Ok. When do you need it?

You: Soon.

Private Lender: I will lend you all the money but I need to be cashed out in 6-12 months.

You: Ok

Then, you get your prequalification letter from your permanent lender - all of your investment capital is still in your bank account and you have gotten your purchase and rehab monies - and your refinance scenario is based on 75% of your appraisal value(ARV), which allows you to look like this on the refinance side:

You owe private lender 70k(assume this includes points and fees)

Appraised Value: 100k

Long term lender lends you 75k(75% of appraisal).

Long term lender rolls in closing costs and you still have a loan of 75k(or slightly less).

Summary:

You keep all your money in this scenario

Your private lender is ready to lend to you on the NEXT deal you find

You have no seasoning requirements to deal with

You are able to close your deals more quickly.

I understand that that this is predicated on you finding a deal that has a post rehab equity position, but they are out there!  Keep the faith.  And if I can help you in any way please feel free to contact me!

Robert Feol