All Forum Posts by: Greg Franck

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.

@Patrick Thomas Dickinson The stress test is simply running my same evaluation numbers using 10% less in rents (reduce assumed market rent by 10%). For my underwriting I use a fixed percentage for replacement & repair reserves as well as vacancy / credit losses so this helps me to envision what the property will do in the event of a downturn. It helps me see whether the property can carry itself in troubled times. I have found this to be beneficial as a poorly operated multifamily generates less income translating to lower property valuation. 

It sounds like you have made up your mind on what you want to do. While I agree fully that the way to quickly build a portfolio is to leverage appreciation of value combined with loan amortization to create money for future downpayments, my point is simply don't fully rely on appreciation only at the sacrifice of cash flow. You need solid cash flow to service debts and operate the property effectively which in turn creates a more valuable property in the long run.  

In my opinion you should invest for cashflow first to ensure that you can service the debt and properly operate the property even through “tough times”. The way I underwrite this is using a less 10% of current rent modeling which will provide a stress test.  Conservative use of leverage doesn’t hurt either.

Appreciation should be a long game focus point. Most successful investors I follow seem to promote a refinance event every five or so years to harvest the equity and build their portfolio. This being said research your markets and find an area that offers both (be careful of the current environment, look at historical trends). Lastly I would also ensure that you save some of your current capital and ear mark it as reserve, if you are using govt backed loans for acquisitions, lenders will require 6 months of reserves for each property (PITI) you own. It also never hurts to have cash on hand to address larger issues that may arise within your portfolio. I hope that this helps you out.

@Wesley W. As others have said hire and professional for this as a misstep could result in a larger more costly plumbing issue. The other part I didn't see mentioned is that you should charge the tenant 100% of this service cost for the repair assuming your lease makes mention of tenant caused damages being their responsibility. I used to be hesitant about this however I came to find most tenants expect a bill when they do stupid. 

@Ana Rodriguez thanks for the clarity Ana, that is an animal of different stripes... Hope that you get an answer. I would be curious as well for my own personal knowledge. 

I would be more concerned about the indentures and HOA restrictions than an existing mortgage. From my understanding this has been the biggest battle for short term rental operators. I would imagine if you have questions about mortgage restrictions contacting the lender directly would be your best bet. In addition I am aware of investors who get conventional mortgages and use the properties as STR's without any issues or recourse from their lenders. If it was me and I wished to place the property in service as a short term rental I would simply move forward with this. Maybe someone with experience in this can speak to it? Figured I would share my perspective.

I would reiterate the point Nathan made in regard to developing a plan to have capital in the deal, no money down or tying up all of your money up in equity is typically not a good play. On that note, I would also encourage earmarking capital to support the deal if things go wrong in the form of a designated reserve fund. I am not talking about having cash to support the full value of the loan or anything, but certainly a reserve fund that can carry the investment through tough times. This will not only let you sleep well at night but also enable you to properly manage the investment I.E. repairs, replacement, etc when needed. Building a down payment and a reserve fund may prolong your time window to "be ready" to invest but it will certainly make your investment more productive and promote success. Glad that you are thinking about these things...  You are way ahead of the game at this point. 

@Rod Murray I would find an attorney in the state that you decide to register the entity. Certain states have more favorable treatment (ie protections ) for businesses. As @Peter Mckernan stated probably want someone who is well versed in the business venture / area you are pursuing to develop the operating agreement as they will have critical insights which could be overlooked by others. 

As others have stated here, inform the tenant that you will terminate the agreement once you find a suitable tenant to take the home. If this tenant is causing you headache already things will not improve in the future. You could also look at charging a buyout fee, a percentage of the balance due to satisfy your desire to be compensated for the inconvenience. This would obviously need to be socialized with the tenant prior. Either way anything you do get it documented in a signed agreement!