All Forum Posts by: Hannah Hammond

It's pretty much a given that you will not have top quality management in the MHP business @Hannah Hammond.  The key to a successful MHP investment is not the management, it is the systems.  There is training and assistance available out there.  Don't be afraid to make a $1,000,000 offer on one of those parks in your area that is listed for over $1,000,000.  Remember too that if you set your closing date correctly the rent credits and security deposits are buyer credits on the closing statement.  On a 75-100 space park that could be a substantial sum of money.  Most MHP investors accept that their investments will be some distance away.  With the proper systems it shouldn't be a problem.  Factor in your travel expenses when you evaluate the park. The owners will typically expect that.  One to two hours travel is minimal.  With good systems and mediocre managers you will not have to be there very often.

@Hannah HammondI wish I had such a problem!  I will give you as brief an explanation of what I would do as I can but this type of discussion tends to get a bit lengthy so bear with me.  First of all I haven't read all of the suggestions above but I have scanned a few and I have seen many suggestions for purchasing residential multi-units (2-4 units) and small commercial units.  I have also seen a few suggestions on flipping.  Flipping may be a great way to turn the $200,000 into more money but there are a couple of things you need to bear in mind regard to flipping.  

Flipping is not a passive investment strategy.  Flipping is a job or it can be a business.  You will have to perform or pay someone to perform the duties involved.  These duties include but are not limited to finding and qualifying properties, purchasing properties, designing and planning the renovation process, finding and qualifying subcontractors, hiring and contracting subcontractors, inspecting subcontractor work, releasing draws to subcontractors, marketing the home and selling the home.  In my opinion, flipping is typically a speculative venture that carries with it more risk than buying and holding property.  Flipping typically is a good way to build cash reserves but not long term wealth.  Be sure that your "OPM" is open to the idea of greater risk and will provide this loan non-recourse before jumping in.

When it comes to buy and hold properties you should consider the following items.  Money is made on what is commonly referred to as spread.  This is the difference between your interest rate and your cap rate.  If you purchase a $1,000,000 property using the $200,000 (20% down payment and bank or current owner carries a note for the balance) your aggregate interest rate will most likely be around 6%.  The minimum spread should be 2% or more depending on how long you plan to hold the property.  In todays environment of low interest rates it should probably be closer to 4%.  The reason for that is that most analysts believe that rates will go up 2% in the near future.   If your spread closes you will have trouble.  Commercial loans are typically amortized over 20 years and have renewals or balloons at 5 year intervals.  If you found a 10 cap property you would be in good shape even if your interest at your first interval jumped up two points (giving you an aggregate interest rate of 7.6% and a spread of 2.4%).  Your initial cash on cash would be over 15% and your cash on cash after first renewal would be over 11% depending on your principle pay down and closing costs.  

With all of that information in mind you would be well served to download a free copy of the "Viewpoint" report from IRR.com. This report tracks trends in commercial markets for A and B class properties. The commercial market has been hot for the last couple of years due to low interest rates and REO's. This has driven the cap rates to mid single digit territory. Finding a B class or better commercial property at a 10 cap will be difficult if at all possible. You will find that as the class of the property decreases the cap rate will increase. The reason for this is that the higher cap rate theoretically equals out the risk, vacancy and collection loss. Be very careful with this strategy. Even though the purchase cap rate may seem high and your initial return will be attractive, you must consider the internal rate of return on lower class properties. There are ways to forecast this and you may see that a C class at a 10 cap is a worse deal than a B class at a 7 cap.

There is another asset class that is often overlooked that will allow low default rates, high collection rates, low vacancy rates, and can typically be found for 9-12 caps.  That is mobile home parks.  Arizona is a great market for mobile home parks.  If you would like to learn about this class there is no finer study guide than that offered by Frank Rolfe and Dave Reynolds through the Mobile Home University (mobilehomeuniversity.com)  be prepared to shell out about $600 for the study course and $2,000 for the boot camp.  

What I would do if I had the same offer as you, I would purchase a 100 space mobile home park at a 10-12 cap, perform the recommendations in the study course using the 10/20 method.  Once I made my profits on paper I could refinance and cash out my financier while keeping the park, keep the park and collect large returns, or sell the park and 1031 into a larger park.  Before you discount this asset class consider that the two largest investors in the space are Sam Zell and Warren Buffet.  Thats my two cents.

Hannah Hammond another benefit of starting with smaller flips and holding your capital is the ability to create a flipping portfolio. You then will be more attractive to other partners for extra capital for much larger projects i.e., larger
Multi family opportunities. Go get em!

@Hannah HammondI am curious as to why you have not done a deal before if as you say..."I am a realtor and have lived in this market my entire life, I know the neighborhoods like the back of my hand and am very comfortable when it comes to knowing whether or not a property is in a good location" how do you know what is a good deal or not?

At 19 years of age to take someones $200,000.00 and try to make sound investment decisions is somewhat dangerous. I am also curious how someone who has $200,000.00 would want to risk such an investment with a novice property investor. No disrespect intended here. It is just that you have no real deal experience, you have limited real life experience in real estate given your age and I doubt that it would turn out OK for either of you. Your comment..."I am an aggressive investor though and am wiling to risk for great reward" leads me to ask who is taking the risk? It's not your money!

If you are serious about having access to these funds then I would suggest that you start with a small deal and see how it goes. Diving in with another person's $200,000.00 is foolhardy to say the least. Starting small limits your exposure and allows you to learn how things REALLY work in this business.

I admire your desire to succeed and the fact that you are young and keen to "have a go" is great, but don't do it with other people's money. Earn your own and then do it. That way if you should happen to make a mistake it's your loss not someone else's. This way you can be an aggressive investor.

@Hannah Hammond,

I am on board with @Jay Hinrichs.

The first question I would ask is, if this money defines a partnership vs. a loan (meaning you are not making payment monthly)?

If so, then this would be very enticing. Regardless if he is retrieving 10% interest or a 50% cut of profits... This could be the start of a great relationship.

But like everything else, this should be placed in writing and each role needs to be defined, first. Once this has been established, then you should proceed with an investment. IMO, fix and flip would be the best route to go.

Look for distressed properties that you could potentially buy outright, however if possible, pay arrears and use existing note as your lender... This way you don't tie up all your funds at once. In the event (not likely), the bank/lender calls the loan due, then you can cover it... But you should be in and out of any given (average - contingent on location and market) flip in four to six months.

Start off modestly, and don't bite off more than you can chew. Keep it simple and create a modest return... As you build trust with your partner, then you can move to a bolder position.

There are too many intangibles and unknowns to really establish the perfect answer, but this is my opinion, the best approach in a nutshell.

Just my two pesos.

Big Henry

I would be careful on that one, for a bank to forgive, for what i am guessing about $600,000 on a loan so that it can be sold for 1.5. Tells me it is about to go into foreclosure and may need a lot of repairs. i would take a good look at the place, but it may also be a great deal to jump on because they must need the money. make sure it is in a good area and has current and potential renters.

The problem with 10% on $200k is the monthly  P&I 1,755 plus tax and insurance.  This is going to be tough on a $200k buy and hold property.

I think the play is to borrow enough money for the down payment on a property.  You should do a commercial property 5+ units, so the evaluation is on the property not your credit.  You could theoretically leverage a $1m property.  The bank loan would be more in the 5-7% rate.  Which is a viable place on a multi family.  

Depends. How much are you willing to lose?

Hi Hannah,

It's seems like you're leaning towards buy/hold investing versus flipping. I'd look for value add MF properties in which I would use the loaned $ on repositioning. After I've increased the properties income I would refinance and pay off the private $.

As others have mentioned, 10% can be hard to overcome on a typical buy/hold.

Personally, with not having any other fees associated with the private $, other than the 10% interest, I'd use it to flip SF homes until I've built up my own $ to get into buy/hold properties. 

Good luck,

Casey