All Forum Posts by: Greg Franck

@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!

@Rod Murray Congrats on starting your RE journey!  My best advise in regards to a partnership is spend the money and hire an attorney to form an entity and operating agreement for you and your partners. This will spell out ownership interest, purpose, etc. It is critical that you do this. An attorney will use all of the necessary language so you won't have to worry about it.  Just make sure it is someone impartial to all parties. 

The only scenario you should consider is one in which you are are the hard money lender (for this individual) and your money takes first lien position in one of his deals. In this instance you should have a good understanding of the property and valuation in it's current state and ARV so that you can protect your interest in case of default. As a hard money lender you can make much better return than 10% once you factor in loan fees, points, and APR. As others have mentioned using SDIRA funds comes with restrictions. Also do your homework on this individual, ask to see his deals and what he owns. This will give you an idea if he is legit or a fraud.