All Forum Posts by: Greg Franck

This is not something new. We have seen this for quite some time as well. To Nathan's point a quick phone call and deposit clause should help to eliminate potential problems but not always. The biggest challenge in my view is not being able to meet someone before they move into your unit. We typically like to meet an applicant face to face during a showing. This provides us with valuable insight and in many cases has helped us avoid what may have been a problem. In order to accomplish similar when renting sight unseen, we will face time or video conference with the prospective resident and conduct a virtual walk through of the unit. This allows for us to read the prospect and for the applicant to get a more in depth (as much as possible) view of the property. 

@Nathan Gesner love the clause!  Thanks for sharing...

 Outside of inflation and demographic / inventory challenges what key data points are you using to prove out this thesis? The reason I ask is that we are looking to step into another multi family sooner rather than later.  While I agree with your statement I was curious as to any other data points that I may need to take into account. 

@Anthony Michael Great post. It will be interesting to see what happens and I am appreciative of all of the posts others have shared on the subject. 

I am of the same mindset as many here, I believe the demographics and inventory shortages tell one side of the story. Large pools of wanna be buyers and limited availability of existing / under building of new homes for decades keep the supply / demand imbalances in place thus keeping upward pressure on pricing. One the other side you have rate increases pushing borrowing costs up and "inflation" pushing RE values ever higher. Because of this I am doubtful we see a "crash" but wouldn't be surprised to see a drop in asking prices and a switch to a more buyer friendly market. 

The most interesting argument I am following about downward pricing pressures is the sale of assets (houses) by the institutional investors that have stepped into the RE investment game. A significant number of existing single family homes have been swept up by large funds as investment as well as build to rent (new construction / development). RE is not an efficient investment vehicle for these large funds. What happens when they see opportunity (better total return) elsewhere and start to sell their portfolios to realign capital? Is the demand there to maintain price stability?  

Tom,

We base ours on percentages that I have found to be appropriate based on the market, improvements to the property, and property age. Normally we are at 5% credit loss / vacancy reserve, 8% repairs, & 2% replacement reserve. This could be adjusted up or down slightly based on the three items I listed. This money is held off the top of gross rents and maintained in an account as cash until it is needed. I.E. we simply let its grow and grow. It is important to note our initial return calculations are based on this as well so this money is assumed as an expense and not included into our cash flow metrics from the start. You may be in a different position. This strategy however has allowed us to grow substantial reserve funds and sleep well at night. 

The sad truth is that most of these tenants don't understand why rent increases are occurring at such an alarming rate. Is the same not happening with food and energy?  You can easily see that if the basics of life such as shelter, food, and energy continue down this pathway things only get worse. Us LL's are just an easy villain to paint. The Biden Administration has already took aim at "investigating" energy companies to ensure that they aren't "price gouging or making excessive profits". This went no where and faded out of the spotlight. This kind of slight of hand will continue until the masses wake up to what is really eroding their quality of life. 

@Barrett Johnson have you received complaints from the tenants? As Jeremy stated the work you are suggesting is going to be time consuming and come with a price tag. Seems to be overkill. What I have found in the multi-family space is that the tenants expect a level of "noise" if you will such as hearing other residents enter and leave, etc. In order to promote the tenants ability to quiet enjoyment of the premises you can put simple rules and regulations in place. The rules should set time windows for events / actions that may cause a nuisance for another tenant, such as running washer / dryers, playing musical instruments, playing stereos, etc. These rules will set guidelines that you can enforce if you do receive a complaint. The best part is they cost you nothing out of pocket! Best of luck to you.

@Charles D. Smith Thank you for your response!

@Brandon Plombon Thank you for the insight. This is an option that I have not explored with my lender but will bring up during my next discussion. 

We are to the point in our investment career to which we will need to use a commercial loan product or private money to acquire our next property. I have built a great relationship over the years with a Regional bank who is more than willing to work with us, so this is the route of least resistance we are pursuing. I have a firm understanding of commercial products and function however I am not accustomed to the short term duration (3-5 years). This is the basis of my question for those of you who utilize commercial products regularly (or originate loans). 

To provide some insight into the type of property and condition we are looking at acquiring with this product, think multifamily residential ideally 5 door or more turnkey type property. We will look for some value add potential to push up rents (updating a kitchen or bath, updating fixtures, appliances, etc.) but not expecting a large project as we just don't have time. This property would also be something that we would look to hold in our portfolio for a length of time (greater than just the initial loan term). 

This being said the current environment is concerning to me with all time low rates and the Fed signaling they will begin to tighten next year into 2023. I have to plan for the potential that when it is time to renew the term for a 3 or 5 year product I will potentially face much higher rates and higher cap rates. This obviously can have drastic impact on our ability to refinance or sell at favorable terms. How are you underwriting your deals to account for this risk or what strategies are you using to reduce this risk?

@Dwayne Clarke congrats on working through your first deal. Outside of the fact that I do not know your specific financial goals and the NOI of each property you reference. I am going to make a suggestion that many might not agree with here but.... don't be afraid to slow down! If this is your first deal and you plan to manage the property (which you didn't mention whether you are self managing or not) there is a learning curve. Not rushing into to other deals right of the bat will allow you to focus on the basics of residential property investing; including the economics, learning how to manage, not to mention whether this is something that you actually LIKE doing.

From a financial perspective: If you don't have a money partner this will also allow you to align your balance sheet and position yourself to be more lendable for Fannie / Freddie long term debt while you season your first deal for refinance. The income you describe should allow you to take multiple mortgage loans with long term fixed debt (if your DTI is appropriate). If you plan to hold property for the long haul I would highly recommend conventional 30 years on as many properties as you can. Also for consideration on the conventional mortgage front, lenders will want 6 months reserves for each property you own (PITI).

I hope this is helpful...  best of luck to you.