All Forum Posts by: Ricardo R.

@Gabriel Valladares does the court/judge order restrict you from selling the home? If it doesn't my advice would be to 1) Determine what the market rent for the rental is; 2) extrapolate that out over a period of four (4) years 3) Apply that amount and a bit more as a discount off of the listing price of the home and 4) Sell it! 

To do right by her, tell her (or have your attorney do it) that you are selling the property and it would be in her best interest to sign a 4 year lease agreement rent free, make sure all correspondence is properly document in the event she declines to sign the lease (won't stop the sale) -- so that if there is an issue down the road between her and new owner you can show judge you approached it in good-faith and without malice; again probably something you should have your attorney carry out and to make sure you're not going to owe more after the sale. 

You'll take a discount on the sale of the property but the headaches you will avoid and the certain issues upcoming tenant/landlord issues and pitfalls that you will avoid... will be worth it... put it all behind you as soon as you can is my advice. 

I sent you a DM.

@Paul K. looks like you're on it. The worry is the 'refinance' to a lower interest rate, which as you have mentioned there is no guarantee and that's definitely not a good way to go about it... trying to project tomorrow's numbers favorably so that today's numbers can pencil out... that is just a recipe for disaster BUT just as you mentioned even doing so in a favorable/risky way still doesn't seem to project positive cashflow and even at it's best you would still be loosing $600/mo. once it is rented. 

Even at its best the situation could compound itself into an even worse position for you in the future... For example: If you turned your 2/2 condo into a rental with a negative CF of $600/mo.... in this scenario you are moving somewhere else, so it would be the NEW mortgage/living expenses plus the -$600/mo. of this 2/2 condo that would be factored in to your new expenses.... so your new mortgage mo. debt + $600.... BUT that is even assuming a lender would be comfortable with your debt to income ratio taking into account your then -$600/mo. ----- Typically a lender would give you income credit of @ 75% on seasoned rental property, so they could 'wash away' some of your mortgage obligation on your rental, for example: Mortgage = $2,000 , Rent = $2,000 - the lender would only factor $500/mo. as a recurring debt to you the other 75% is washed away BUT on a negative cash flowing property they may not be able to do that and it may actually look more like a recurring debt of $2,600/mo. to you (using example) -- which may actually not allow you to qualify for a loan in the future. 

Yes, buying and selling seems like the likely scenario NOW, but again it all depends when in the future you want to rent it. Also, it wouldn't be a bad idea to consider: 1) a different property type such as a duplex, triplex, etc. and/or 2) a property with a larger bedroom count or one you can make so; higher bedrooms = higher rent = more options; the buying price may increase a  bit too but usually the bump in higher rent potential overshadows it or 3) a larger down payment on the 2/2 to get it closer to CF. Something to consider. 

@Paul K.  I'll try to assist using your numbers. 

Okay, when I run your $630K VA with 0% down and at 7% over 30 yrs the P&I (principal/interest) payment I get is @ $4,191.41/mo. ------- Once your taxes and insurance are added your PITI monthly payment is $4,391.41 ----- HOWEVER, I don't know if the $200/mo. for taxes AND insurance you have listed is accurate or if that is for each but $200/mo. for BOTH taxes and insurance together SEEMS EXTREMELY LOW... please double check.

Okay from there $4,392 (PITI) + $700 (HOA) + $200 (Elect/Inter) = @ $5,292 / monthly

Of special note: I noticed that you included electricity & internet (utilities) but nothing else i.e. gas, garbage, water, etc. -- I don't know if they are included in the HOA or if they were overlooked. Also, unless cashflow from your current SFH covers these utilities in full then you should not include them in your current condo calculations either if you want a true apples to apples comparison, if that makes sense.

I don't really like the numbers of using this new condo as a rental later down the road, it just depends how much later down the road since rents typically tend to increase and outpace your expenses but as it stands, at @ 3,500/mo. rent potential you would be Cash Flow negative by about $1,500 a month !!! You would be LOSING $1,500/mo. if the 2/2 condo was a rental today... not an investment... the likely scenario would be for you to sell the condo later unless you were able to get the rents to cover your expenses and ideally actually come out on the other side as positive CF.

Now considering a more affordable condo of say... $540K that equates to a PITI of @ $3,793+700 /mo. + $700 (tentative) + $200 = $4,693/mo............. Now assuming this $540K condo is a 2/2 and follows similar rent numbers and now excluding eletc./internet from expenses that means that you would have fixed expenses of @ $4,490/mo. --- you would receive @ $3,500 in rents which still equates to a loss of @ 900/mo. BUT I like these numbers much better than the first... projecting that you will try to turn it into a rental in the future when rents are higher and assuming you can push rents a bit higher, you may be able to decrease the $900 loss into a $0 loss and maybe even a CF positive. 

One major thing that concerns me is that we haven't even factored in other expenses such as vacancy, maintenance, CapEx, etc.

Personally, if you are set on buying a condo as a primary residence, I would buy in the more affordable range and would go in with the PRIMARY likely exit strategy to sell later down the road... my SECONDARY strategy which would hinge and be dependent on timing, rents, market, etc. etc. would be to rent... it's one of those scenarios where... it might make a great rental for you down the road but as of RIGHT NOW, it does not. 

I hope this helps. I'm a Veteran but I want to thank you for your service. I sent you a DM, I hope you can assist. 

@Ned J.@Ray Hage @Steve Milford I think this is a case where you just have to let the OP do this own thing for him to realize what he doesn't know. The post starts out with the OP stating this is his first renewal and OP is seeking advice... then... OP gets advice from more seasoned investors and PM's that do this day-in and day-out for a living... then... OP makes his case why his method 'is best' but which doesn't make sense... even though it's OPs first time. The fact is the OP doesn't understand that he is (will be) required to mitigate losses to the Tenant regarding any SD he has in hand... so while he is thinking that a longer lease of 2 years will give me 'security' he doesn't understand that if the Tenant moves out on month 1 in a 24 month lease, he is not guaranteed to keep the 2mo SD because he is required to 'mitigate' loss and re-rent in a timely manner. He also seems to be under the impression that a month-to-month lease takes more work than a term lease (1yr or 2yr) where in actuality its the other way around. 

Again, I hate to say this but... this seems to be a case where you just give someone enough rope and then just let them figure it out in the real world and hope for the best. 

 Ok, I was trying to figure out what type of loan product you would be using but I'll try to assist with info given. Yes you can get cash back at closing, how much depends on the type of loan but if its a typical residential loan 1-4 units they usually allow up to 2-3% Seller cash back so one way to do is: 1) Negotiate the purchase price down first with Seller; 2) Then offer more than what you negotiated and ask for it back at closing as a credit. Ex: Property listed at $350K, you negotiate down to $320K (3% of this is @ $9,600) and then increase your offer to $329,600 and ask the Seller to credit you back $9,600 at the closing table. --- This is the same to the Seller as if it was a sale on $320K (slightly few dollars for the seller on closing costs) and you get a check for $9,600 at closing -- THIS HOWEVER DEPENDS ON THE LOAN PRODUCT YOU ARE USING, some allow up 6%, others only allow certain percentage but don't allow you to go over your actual closing costs, others calculate it based on your down payment, etc. etc. etc. - how much you can get back at closing depends on the loan product. 

So lets say you are putting 20% to purchase this property, well if you are able to get back 3% at closing well that means that essentially you only put down 17%... now PMI/MIP is usually not good on a primary property but this is an investment property, so PMI/MIP might make sense depending on what you are trying to do... so lets now say that the lender will also allow you to only put down 10% as a down payment, you will incur PMI/MIP but you run the numbers and your cash-flow is able to easily absorb it . Now in conjunction with your 3% cash-back at closing that now only equates to 7% down. So expanding on the example above: Example 1  - $350K listed property, you negotiate with Seller a lower purchase price to $320K and you stop here... it would equate to @ $64K out of pocket from you, not including closing costs 

but now you put it all together... 

Example 2: $350K listed property, you negotiate with Seller to lower purchase price to $320K, You also now increase the purchase price to $329,600 and ask for a credit from Seller at closing in the amount of $9,600 and you now also determine with your lender that 10% down is an option and after factoring the PMI/MIP it makes sense... this now equates to only @ $23,300 out of pocket not including closing costs --- SO YOU WILL GET TO KEEP $40,700... which you can use for funds for your BRRR.

It is important to note that by putting less of a down payment which also requires PMI/MIP this will increase your monthly mortgage obligation in two (2) ways; 1) your payment will be higher simply because your loan is now more because you are putting less down and 2) because you are now incurring PMI/MIP monthly.... this is why you HAVE TO MAKE SURE your cash-flow numbers are still okay and are able to absorb this... if they are... then why not? if it allows you to use your funds for your BRRR which may not be possible otherwise.

Again, this all depends on the type of loan product you are going with and even the type of lender. I sent you a DM on BP I hope you can assist. I hope this helps. 

 @Agustin Conti I don't think you are understanding me or perhaps I'm doing a bad job at communication. Agustin, a '2 year lease' means NOTHING, because it is no different than a 1 year or 40 year lease as far as the Tenant is concerned...  the TENANT CAN MOVE OUT AT ANY TIME AND YOU HAVE NO RECOURSE OTHER THAN TO KEEP THE SD (MAYBE)... so why offer a 2 year lease?.... there is no added 'security' for you...it's an illusion.. because again, the Tenant can break lease anytime they want. What a 2+ year lease does do is LIMIT YOUR OPERATIONS, you can't do anything aside from the lease during that period and your options are extremely limited. In regards to mitigation by performing inspections... yes you are thinking along the correct path BUT again, is there any 'bite' to that? what are you going to do if they refuse inspections... go straight to eviction? .... you need to start thinking in regards of escalation of force and leverage. 

@Quincy Amekuedi I'm not a lawyer but the provisions you attached below are quite standard across multiple types of leases. Yes you can do both, you can terminate the current Lease and/or increase the rent if you give the proper minimum 30 day written notice. Written notice should be delivered to Tenant via USPS (or as otherwise outlined in the lease) and you should retain a 'proof of mailing' for your records --- ALSO check with your county (or your lawyer) to see if they have a standard 30 day notice (month-to-month) form they use.  

Now the provisions you have included above SEC.15 & SEC.17 only allow you to terminate the Lease but you can increase the rent via the Sections indirectly via another lease agreement or modification to the current agreement. For example: Sec.15 only allows you to terminate lease with 30 day notice --- Sec.17 allows you to make changes to the lease BUT ONLY if the tenant agrees to it in writing. 

So to raise the rent, you can do it a few ways. Method 1: You would execute via Sec.15 by giving a 30 day written notice to terminate lease and then draft and send the tenant a new lease agreement reflecting the new rent. If tenant agrees and signs new lease, then you have new rent; if tenant declines the tenant is required to move out. 

Method 2: You would execute via Sec.17 first by giving Tenant notice that such and such sections (rent section) are to be updated to reflect $X,XXX in increased monthly rent. Just like method 1 above, tenant has to agree and sign for this to take effect; if tenant declines then tenant can continue with current lease agreement UNTIL you execute Sec.15 and give them notice to move out. In this method, the tenant can continue to rent until you tell them to move out if they decline the modification.

I sent you a DM on BP; I hope this helps.

@Agustin Conti great to hear you are trying to take a go at it yourself. I'll try to assist:

How to renew a lease with a tenant without a realtor: Basically just take the current lease you have now between you and the tenant and update the new lease term and the new rent amount. 

What are the advantages of doing a multi-year lease: Advantages to you... none. 

Agustin, this should be pretty straight forward just draft a new lease update the dates and rent and send it to the Tenant for signing. You should offer the entire lease just updated preferable BUT can also just send the tenant an amendment/addendum which just extends the current lease to whatever date you both agree on. Regarding a 2 year lease, there is NO ADVANTAGE to you and in fact it is actually a disadvantage to you. Under any lease (any term from 1 month to 40 years) the Tenant can literally walk-away tomorrow and the only recourse you have is to hold on to the security deposit (and maybe not even that) because basically no judge will force a tenant to pay for a term they didn't use up BUT YOU, can not do anything until the term is up/tenant terminates, you can not increase rent, stop renting, etc. etc. and is also more difficult to remove a tenant until the term is expired.  My advise is stick to month-to-month or at most 1 year and no longer. I hope this helps. 

@Mathios Yonan no problem. Mathios, I DM'd you on BP, if you are able to assist, I would truly appreciate it. Thank you and good luck!

@Mathios Yonan okay Mat, I'll assist you in compiling a different point of view into your already formulated and ongoing research: 

Rising inflation costs: 

This is usually a good thing in regards to real estate and those that ALREADY own real estate because they, will likely see an increase in their property value and in turn their net worth. However, rising inflation usually contributes to higher interest rates so, those which are looking to purchase homes, or refinance homes or already own a home but which is financed via a variable interest rate loan product, will feel the affects in a NEGATIVE way, since they will start to feel 'priced out' of the market. 

Rising mortgage rates and higher monthly mortgage payments:

Again, this won't affect those in a free and clear home or those which own a home in a fixed interest rate loan product as much, in this sense real estate is usually considered a hedge against inflation BUT those in variable interest loan products and those new buyers seeking to purchase  or refinance an existing home will feel the effect. Keep in mind that increased inflation is in simple terms just a devaluation of money meaning it takes more dollars to buy the same item. This logic applies to mortgage products too, as in the costs it takes for a lender to maintain them. So since the cost to maintain such products by the lender now requires more dollars, those costs are carried forward to the consumer in the form of higher interest rates for the same loan products. 

This of course increases mortgage payments and decreases consumer buying power - For example: A $340K home in a 30 yr. 4.5% interest loan will have a payment of $1,723 HOWEVER the exact same home at 7.953% interest will have a payment of $2,484 -- THAT'S A DIFFERENCE OF $9,132/yr. FOR THE SAME HOME!!! Not even counting for all other inflation related costs that come with owning a home i.e. maintenance, utilities, etc. -- Now considering that the AVERAGE salary across the US is @ $59,500/yr. --- that difference equates to an increased 15% cost for the same home - that is just the difference in increase... haven't even talked about the total cost. I guess you can also see it as a decrease of 15% in purchasing power. Now a new purchaser seeking to buy a home will have the option to 1) not buy or  2) buy a less expensive property, so as to decrease their monthly mortgage obligation BUT someone which is in a variable interest loan product i.e. HELOC's, Commercial Mortgages, ARM's etc. WILL HAVE LIMITED OPTIONS and they will see an increased required monthly payment.

The expiration of COVID-related forbearance...

Decreased protections from these programs will only add to the impact that the latter example from above will experience and they will have even fewer options to avoid foreclosure. 

Discuss how these factors will change the foreclosure market...

Hard to tell as there are MANY other factors that affect the real estate market HOWEVER, you may see increased foreclosures but as long a real estate demand remains high then the logical remedy for someone experiencing increased payment requirements is to sell. The opposite however could also occur if demand for real estate declines, this could also lead to lower inflation, which would in turn eventually lead to lower interest rates and thus relieve the burden on those who previously experienced it... it's just a question of how long that process takes which will likely dictate how many foreclosures there are... interest rates tend to lag behind inflation weather up or down. So, because Sellers have the option to sell now during a strong real estate market and because if there is a decline in the market, it will likely lead to decreased inflation and decreased rates and thus in-turn 'rescuing' HELOC's and ARM's and Commercial loan products - I wouldn't expect there to be a larger than normal foreclosure rate BUT this will be dictated by the length of the process and by the length of the 'lag' between inflation and rates.

This was fun. I hope this helps.