All Forum Posts by: Jeff Copeland

This differs from City to City. 

Try googling "My City" + "Are fence permits required?"

If that fails, call the local building & permitting dept. 

Plumbing, electrical, termite damage, and settling/foundation issues would be my main concerns specific a 100 y/o property. 

Everything else (roof, etc) would have been replaced many times over in the past 100 years (and is not unique to an older bldg). 

It's not uncommon to still discover things like galvanized supply plumbing, cast iron drains, orangeburg sewer lines, ungrounded wiring, aluminum wiring, and even old knob and tube. 

Termite, foundation, and settling issues are usually more obvious, but still worth looking out for. 

As long as you hire a solid home inspector, they'll be looking for and documenting all of these things. 

It's great practice to go through these analyses in order to learn the numbers, and the ins and outs of investment real estate. However, there are a lot of holes in your analysis:

1. What makes you think the seller will (or can) hold a not for $1M? (How much do they owe on the property, that will be a limiting factor). Check out https://www.biggerpockets.com/...

2. The seller is highly unlikely to take $300k below asking, let alone do that and offer $1M in seller financing. 

3. You are highly unlikely to find a commercial investment property loan at 20% down and 6% interest. Commercial financing is going to be at least a point or two higher than the prevailing rate for homeowners, and will be much more focused on the debt service coverage ratio (DSCR), which in your analysis is around 1.0. Banks don't lend on "break even" scenarios. They want a DSCR of at least 1.25. Which means with $6k in NOI, you can afford debt service of $4800/mo max. Typically, the only way to get there is to put more money down.

4. Likewise, the seller is not going to want to hold a $1M from a poorly capitalized and overleveraged buyer.

5. The lender (and common sense) will require you to have some cash reserves going in. Even if you could buy it with these numbers, you won't be bringing in any cash flow on this deal, How will you pay for a broken HVAC or other surprise repair or capex in the first year? I realize you have budgeted for maintenance and capex, but if will take time to build up those reserves - What happens if you need a $10k roof repair a week after closing? It happens. And then you'd have to choose between fixing the roof, or paying the mortgage. This is exactly what the lender seeks to avoid when underwriting the deal.

6. Closing costs are likely to be much higher than 1%, and you'd have to fund your insurance and possibly property taxes up front (either direct to the carrier, or through a mortgage escrow), which, again, requires liquid cash. 

7. You'd also have a conflict between your lenders on their mortgage position. Neither of them is going to want to take a second position lien. The bank could not, the seller likely would not.

I'm not aware of any requirement for "one door only" when it comes to construction loans (unless you are specifically looking at some kind of SFH or ADU loan product).

Find another lender, ideally a smaller local or regional commercial bank. 

Note that it helps immensely to have a relationship with said bank - For example, try to get an appointment with the branch manager or VP of commercial lending, and explain that you're looking to move over some deposit accounts, establish a line of credit, open a credit card, and seek a construction loan. Now you're actually bringing them some business, rather than just looking at their loan products as a commodity. 

I would anticipate zoning and permitting being a much bigger issue than the lending part. In many residential zoning districts, an ADU might be allowed/permitted as a secondary use. But in this context, and ADU usually means one dwelling unit. So you might want to clarify with the municipal zoning department exactly what will be allowed in terms of zoning and permitting before spinning your wheels on the financing side. 

1. Work with your current PM to make it a smooth and amicable transition. Check your property management agreement to fully understand any early termination fees. Better to check now than to get caught by surprise later on. 

2. One thing people often don't think about is the fact that the timing is important. It's generally best to allow your current PM to collect all of the rent for the month, then make the transition. This allows you and/or your new PM 3-4 weeks to get notices out to your tenants advising them of new management, new payment methods, new maintenance processes, etc. You don't want to do this on the 28th of the month, then find that half of your tenants already paid the old PM for the next month's rent.  

3. Make sure your security deposits and any prepaid rent get transferred to you (or to your new PM) by the old PM. You don't want to realize 9 months from now when a tenant moves out that you no longer have their last month's rent and/or security deposit to disburse. 

Good advice here already. We're going to start seeing this a lot over the next year or so. Up until now, appraisals (looking back 6-9 months) have supported prices from 6-9 months ago. Not anymore. 

Pretty soon, 6-9 months ago will reflect last Fall, when interest rates spiked and sales stalled. 

1. We are in "mid swing" on a market cycle, and for some of the reasons you outlined, we may see a softening in real estate prices (or at least slower price growth) for the next couple of years in some markets.  

2. Cash flow is obviously great, but it's only one way investors make money in real estate. Appreciation, debt reduction, and tax savings are also big pieces of the puzzle. 

An investor buying a property without a real estate agent has nothing to do with wholesaling. 

Wholesaling, at least the kind that gives it a bad name, as it's often taught by gurus, consists of:

1. A buyer with no money and no intention of closing a transaction* finds a distressed seller and gets their house under contract well below it's actual value, with very little earnest money deposit, and a very liberal inspection contingency (say 15 or 30 days). 

2. Now they have 15 to 30 days to find an actual buyer with actual money who actually does want to buy the house. 

3. Before and/or during their marketing of the house for sale, they build a "buyers list", often through guerilla marketing such as bandit signs, scrubbing email lists, etc.

4. They assign the contract to the end buyer, charge then an assignment fee, and the new buyer steps in and takes their place on the contract/purchase. 

Best case: The distressed seller loses out on lots of their hard earned equity because they sold at a steep discount. (But to be fair, they may have also been saved from a looming foreclosure or whatever. *There are legit ways to do this if you have the intent and the funding).

Worst case: On day 29, the "buyer" cancels the contract, and loses nothing, and leaves the seller in even more of a bind, having wasted 30 days with their property tied up by the bogus contract. 

To be clear: Not all wholesalers are crooks, obviously. But there's no denying that some of them use sketchy practices that skirt around state laws designed to protect consumers. 

My first question is do you have life insurance? You might consider increasing your life insurance coverage to account for the mortgage, so your estate is net positive, and so your executor can make the mortgage payments while your estate is settled. 

Your heirs would inherit the asset at it's value at the time of your death, called a stepped up basis (which is one reason you might not want to put them on the title beforehand, otherwise they would get hit with a larger capital gain if/when they sell it). 

So if it's worth $500k, and $500k is owed on the mortgage, their best option might be to sell it and just dispose of the asset and break even. But of course that depends on a lot of factors, such as how much it would rent for, and whether they might need to live in it. 

I do not believe the mortgage would affect their credit if it were to go into default before your heirs take possession of it or assume the mortgage. It could become a foreclosure wrapped up inside a probate case. 

This highlights one of the risks of VA loans. Veterans often finance 100% of the purchase price, and many even roll the VA funding fee into the loan, which leaves them upside down on day one. This is not too bad in an appreciating market. But if the market takes a dive it can leave them in a pickle if they need to sell, or in a case like you described.

I'd suggest doing some estate planning with an attorney and mapping out a comprehensive strategy that takes into account your assets, liabilities, and insurance.