All Forum Posts by: Sam LLoyd

I don't know what else is in your market, but if this came up in mine, I wouldn't go after it.  You need to plan for the 8% vacancy.  That only gives you $100/month cash flow.  This does not pay you at all for management.  My personal goal is to get $200 door cash-flow for self managing... and yes, this is hard to find.  That being said, here are some more thoughts...

1st... how solid is this loan quote? I haven't been able to get that high of an LTV without owner occupying. If you have a commitment letter for this loan, that changes things a little bit. Yes, the cash-flow is way below what I would like, but to get into a duplex with that little down would be great... and your ROI would look better.

2nd... are these expenses numbers that you found yourself, and how solid are they?  In my market, this is what I would do.... have tenants pay for trash (Alaska lets you do this in a duplex)... get better insurance (I'd get a policy for around $1200 here), and drop your maintenance budget a bit since a lot of the big ticket items have been done (but I do most of my own work).  So, I don't mean to second guess you, but if this is the best deal in your market, and you can get that financing, these things might make your numbers a little better.

3rd... if you want this property, I think you have the right idea... I would have done 5k or 5% over asking, but I don't have a feel for how much competition you have.  The only properties I've bought with multiple offers, I offered 3k over and 6k over.  I picked the 3k just to get over the asking price, and 6k just in case someone else picked an even 5k.

I hope these thoughts help.

Hah! You are where I was a year ago. Plow ahead and figure it out as you go. HELOC? Haven't found a bank that would give me one.... The terms are great, and the ability to pay the money back and then re-borrow when needed is an awesome tool for an investor. Cash-out? I've been able to continue to run these through my mortgage broker... I've done 3 cash-outs, in the last 2 years, using the funds from the first 2 to buy another 4plex, and now I have the funds to go after a 7plex. Benefits of this are even better rates... and the fact that it was a tool I could use.

Hard money?  Only use hard money if it's the only option you have.  I've used it before a couple times, and was able to make a little money doing so, but I would have made so much more if I had been able to use my own cash.  The biggest reason to use your own cash instead of using a hard money loan is that it gives you more exit strategies.  If you do a flip or a rehab and for some reason it won't sell or refi.... then you don't have crazy interest rates.  I know you mentioned not borrowing more than you could cover, but think about it... if you have 100k in the bank that you are paying 5% on, then borrow 100k from a hard money guy at 15%.... you are paying 20% on that money... instead of the 5% if you used what you have.

Over leverage? This is a concern. My advice.... don't think of your purchases in percentage of debt or LTV... rather look at the debt to income. So what if you owe 95% On a million dollar portfolio... if your income is 40% above your expenses... you can be secure in an inflation proof investment that has a margin large enough to cover any market adjustment.

As far as refinancing the 3rd or 4th time? Unless you are measuring your real estate goals in months instead of years, there are too many changes to the financial institution's requirements to make long term plans. 10 years ago, you could get properties with 10% down and no PMI... If I could do that now, things would be way different. DTI and LTV, as well as interest rates are going to shift up and down over the years, so I say take the best rates and terms you can get that make you money and move onto the next project. Develop the experience and network to take down the next deal when you come to it.

Yes, check with an appraiser to see if this will count as a bedroom.  I'm only speaking from experience with appraisers in Alaska, but I'm thinking weather or not it is a bedroom, and/or weather this affects the appraised value is going to be determined by which appraiser you get on your refinance.  Make sure you have plenty of room in your numbers when you go for the refinance.

Is this a flip or hold?  If it's a flip, I'd leave it be, get it sold, and move on...  If it's a hold, you'll have to make your decision based on what the demographic is.  I tend to think that couples or families with one kid that rent a 2bd will easier on the unit than having a bigger family in a 3bd.  On the other hand, I think you might be underestimating the pros.... if the building comes with outside storage sheds, and each unit has their own laundry, in addition to the unit being larger (I'm assuming the downstairs unit will become a 3bd.... If your remodel is done well, this will become a more desirable couple units.  So, if it only takes a month more... you have the money.... and you aim to hold it for a while... I would do it.

Another note:  I don't think this will help the sales price much.... the outside sheds probably won't add to the appraisal, and the appraiser may not call it another bedroom since the only access is through another room (laundry).... so your appraised value may not go up much.

A big piece of weather this is right for you is how you are financing it.  For example, I'm working on a 7plex right now, and the only way it's a good deal for me is because the seller is going to use my down payment to buy a piece of land that I have, that is hard to sell..... so for me it's taking a non-performing asset and turning it into a cash-cow, without a lot of steps in the middle.  Since this is probably commercial, I don't know what the terms you can get are..... but my guess is that this deal is a bit thin.  However, your expenses seem high, so you might be able to pick into those and find an opportunity.

Ok, I'll start out by saying my answer is based on the statutes in Alaska, so they may not apply to you... and it's been a while since I've read them, so I may not get things quite right.

1st... if you sign a lease based on a 30 day billing cycle, and they pay multiple months up front, the 2nd and 3rd months rent would be considered 'prepaid rent', which you might be supposed to give back to them if things break down.  If you sign a 90 day billing cycle, with the first bill due at signing.... then you don't give any back.

I'm not sure what quality tenants you usually get, but for such a short term, I might ask for a bigger deposit... since any damage done wouldn't be offset by a positive rental year.  Also, I would probably not rent to tenants with pets or young children, since the potential damage/cleaning could make it more of a headache than you get paid for.  Another option is just treat it like a normal tenancy... but raise it $50-$100.... that's the 6 month rate.  They might be fine with this, and you could make a bit of money if they end up staying for a while.

If it were me, I'd hold out for a year lease, and try my best to fill it before asking the last tenants to cover the vacant house... however, my market may be different.

homepath.com is a good idea.

A question I have is how much rehabbing you've been involved with.  You're talking about a long term flip.  I'd say if you've done a flip before, you know what you're getting into, and you should go for it.  Get your financing however you can.  If you haven't done a flip... I think 2 years is enough time to learn the ropes, but if you are not careful, you could end up losing a lot of money.

If you are hesitant, don't have any experience, and/or are risk averse, there is nothing wrong with sitting out the game for 2 years.  If you are very sure you'll be moving back, one option would be to try is establish a situation where your living expenses allow you to save enough money to get into the game when you get back home.  Also, you can keep tabs on the market back home...doing your research in that area while you are away.

 I know trying to time the market is always risky, but I don't think the market is going to go up much in the next couple years.  If the market you live in has historical swings, you might be well served by looking at the trends and seeing if the market is going up or down.  Talk to some local brokers who are also long term real estate investors before leaving.

Those are a lot of questions... Here are my thoughts on some of them.... rent:  You have to live somewhere, and rehabbing takes a lot of time/money, and is harder to do if you are living in the mess.  One house I rehabbed came with a treehouse that my wife and I lived in till we had it done.  However, rehabbing is a skill of mine.  If you can't fix the place yourself,  you probably shouldn't be planning on living in the mess.

future cash-out:  If your lender has a deed of trust against the property for the value of the purchase and rehab... you will be refinancing the 'loan'.  It does not have to be a cash out refinance unless you have other things to pay off like credit cards used for the rehab... or if you just want more money to play with. Cash out terms are a little worse, but with interest rates what they are now, I'd take the extra money every time.

How do you find these lender?  Talk to people you know, because that's a requirement.  However, without a track-record, this is going to be hard.

My advice:  Get your expenses down... save your pennies, and get an owner occupied loan for a duplex.  Depending on what these cost in your area, if you're dedicated, you can save up the 3% down, and living in the duplex with give you landlord experience, rental owning experience, and get your living expenses even lower (hopefully, if you buy right.)

To answer your who pays expenses question.  Here is how I've seen it done, which I'm trying to emulate myself.

Sign a master lease between the owner and the managing LLC. This way, the LLC is a controlling interest in the property to get around any statutes requiring a manager to be a real estate agent. The master lease will pay the owner 90% of gross income after expenses. Or 99-100% if you don't want to keep any money in the LLC. Then, everything to do with the property is done through and by the LLC... with a check or deposit going to the owner every month.

Question: if you're using a management company, don't they take care of all this? If the property isn't going to be held by an LLC, I don't think there is any advantage to complicating the process. The manager sends you money, the manager send you a bill... Pay more more insurance if you're worried about liability.

I like carpet because it's cheap to replace, and looks new again.  However, in kitchens and baths I use sheet vinyl... linoleum.  However, I have heard great things from local landlords about the plank vinyl... you have all the benefits of the sheet vinyl, but it looks a little more classy.. and I think the surface prep is less extensive.... much easier to tear out if you need to replace it.  I would not be concerned about putting it in bedrooms.  Tenants don't seem to have a probably finding an area rug if they want something else.  That being said, the biggest issue is noise.  If you have upstairs units, you might want to use carpet just to mitigate some of the noise for your downstairs tenants.