All Forum Posts by: Mark J.

@Brent Coombs Absolutely sensible and that's pretty much how I've been thinking about it. However, after analyzing the property using another investor's spreadsheet and seeing the results, I was concerned maybe my calculations or assumptions were off, particularly from a tax perspective.  Appreciate you taking the time to give this some thought!

@Mark 

I'm typically a buy-and-hold investor and purchase foreclosure properties, renovate, and rent (BRRRR strategy). Generally, there's a significant initial renovation (capital improvement) which on my analysis spreadsheet I've essentially been calculating / rolling into the total acquisition cost of the property. I've seen other analysis spreadsheets that account for the purchase price and the reno/capital improvement separately (perhaps for tax/accounting purposes??).

However, if I separate the purchase price and reno/capital improvement, the cash flow analysis is negative for the first few years (since capital improvements are charged against annual cash flow). But if I combine the initial acquisition cost (property + closing costs) plus the initial reno/capital improvement into one number (purchase price), the cash flow analysis is positive, seems clearer to me, and that's what I've been basing my purchasing decisions on.

Which way is the best method for getting most accurate picture when analyzing a property that's likely a hold for at least five years?

Many thanks in advance!

I actually have two PLOCs, one for $100K and one for $80K. I recommended this approach to several other investors I know and they were all able to achieve similar results. I'd rather not mention the specific banks I use but I will tell you that I only approached small local / regional banks (not Chase, Wells Fargo, etc.) The PLOCs are uncollateralized and not tied to any asset, such as my primary residence (that would be a HELOC). A PLOC is basically just a big ol' credit card.

Now, it wasn't easy. I contacted 25 banks, got meetings with five different banks, and was approved for four, but turned down two who had weird conditions (such as holding the title in their name until I flipped or refi-ed it or had high rates or only offered a PLOC at some ratio based on my financial situation). The point is-- keeping going until you get the terms YOU want. If all you get are NOs, ask the bankers for specifics why you were turned down and them begin to remedy those and try again. Speaking of trying again-- this happened to two investors I recommended to the same banks I use-- they were turned down initially by the banker, went to a different branch of the SAME bank, met with another banker and were approved. So, remember, you're dealing with people and getting to that YES is not only about black-and-white numbers.

Strongly recommend having an excellent written proposal put together, put all your financial documentation in it (make it EASY for the banker-- don't come in with a shoebox of documents and expect them to make sense of it) and be well-prepared for the meeting / interview. I also had excellent credit, a long W-2 history, low debt-to-income ratio (very important), and of course the best asset-- ME! You've got to establish yourself as knowledgeable, confident, and definitely have a clear business plan for what you plan to do with THEIR money. Know and use the financial jargon (e.g. what your debt-to-income ratio is) that bankers use to evaluate you and calculate your risk as a borrower.

Using the PLOC is pretty simple-- I transfer money from the PLOC to a checking account at that bank and then write checks/withdraw cash. As part of my flip or buy-and-hold plan for each property, I'm very conscious of my holding costs, so I want to only have PLOC money out working "in-the-field" for a few months at a time.

And remember, if this will be a hold property and you go to get your cash-out refi, many banks want to see that you've owned the property for at least six months, so you'll need to plan for that. And many banks also have a minimum amount they want to lend (typically $75K). So for me-- the minimum ARV for the properties I purchase has to be at least $100K post-reno so I can get 75% of it back in the cash-out refi. Now, of course, there are MANY other refi options and sources of money you should research, including non-recourse loans (typically 8-10% interest) which are based solely on the financials of the rental, not your credit/finances.

Long answer to your short question. ;)

Here's my slow, but steady game plan that could work for you (or anyone).

1) Get a Personal Line of Credit (PLOC) from a local bank. Actually, get two if you can. ;) You'll need to be persistent, have a >650 credit score, low debt-to-income ratio (could be an issue for you @ $40K per year, but a long W-2 history helps a lot), and a good proposal & presentation when meeting with the banker.

2) Use the funds from one PLOC to purchase a foreclosure / REO / off-market property that needs work and is priced (or obtainable) at >= 30% discount from MLS comps. Try to get at least a $80-$100K PLOC.

3) Use your own funds, a low-interest credit card, or a second PLOC to fund the renovation.

4) Conduct a disciplined and cost-conscious remodel.

5) Get a cash-out refi at 75% ARV. Pay down the big PLOC to zero and pay down the reno PLOC or other source of funds. If it all works out well, you could have zero of your own cash invested, a low-interest 30-year loan, and a steady cash-flow of at least $400 per month on an gradually appreciating property that has actually cost you nothing out of pocket.

Here's the breakdown of this in action from a recent purchase of mine:

This was nearly a perfect deal, except for the $4,500. Although I could have kept the $4,500 as an outstanding balance on the PLOC (at 4.75%) and pay that down with the monthly net cash flow, I decided to just pay that out of pocket get the PLOC back to zero outstanding balance. The way I looked at it (at the time) was that $4,500 invested in the stock market or any other investment vehicle would never earn me a $6,600 annual return.

So, basically for $4,500 out of pocket, I purchased a 3/2 rental property in a good neighborhood, got a low-interest 30 year mortgage that the tenants are paying off, created $23,000 in equity, and net $6,600 (before taxes) per year.

This is a quick, back-of-the-napkin sketch of the strategy that I use. I'm on my fifth property now.

Be VERY, VERY careful.

In FL at least, HOA liens do survive foreclosure. I have a friend who just lost $8K to an HOA lien after buying a townhouse at the county foreclosure. Get a copy of the HOA bylaws and research what rights you have and what responsibilities you will inherit. I do know that nationally, HOAs have gotten very aggressive about collecting on unpaid HOA dues. It's easy money for them and their lawyers.

Call the HOA and try to get an idea of how much the lien is if you can't find it in the county records (which you should be able to). Remember, you'll be responsible NOT ONLY for the original lien amount, but also the INTEREST (and any subsequent years of unpaid dues). That's what got my buddy. The lien was about seven or eight years old so it had been collecting interest (at a very high rate) all that time.

Hi Dottie-- If you're interested, the South Shore Real Estate Group's monthly meeting is being held on Thursday, March 2 in Riverview, FL from 7:30-9PM at The Alley at Southshore. I'll be giving a free presentation all about buying foreclosure properties in Hillsborough county and surrounding areas. I'll be covering the entire online auction process and my five-step screening process so that you can bid with confidence! ;)

For more info, PM me.

YES.

@Timothy W. - Serious offense? That's hysterical. I had a significant issue with an unlicensed contractor. I filed a report and about two weeks later got to speak with a detective. He basically said they were down to three investigators for the entire county and that he won't get a chance to even look into my complaint for six-to-eight months. Over year later, I finally got a call from the detective and had a couple more conversations and that's been about it. 

It may be a serious offense on paper, but reality is a big *** fire.

Hi Peter-- I'm a late-comer to REI myself and also recently moved to the Tampa Bay area. Feel free to reach out with any questions!

Welcome Jonathan! Feel free to PM me for insights in the Tampa area market.