All Forum Posts by: James C.

Johnnie,

How big is the job? if it's small it sounds about right. If it's large, then there should be a provision for construction draw funding in your note/contract somewhere.

Good luck,

Jim

Zach,

I don't know what you mean by "floodwaters", but AE is certainly a flood zone. If you own a MHP, then you are responsible for maintaining flood insurance on the buildings owned by the MHP. Theoretically, you should not be responsible for providing flood insurance for mobile homes in the park that are paying lot rent, but are owned by someone else. Park owned homes that are pledged as collateral for the loan would require you to maintain flood insurance. 

Keep in mind that you can have your title company provide you with a map, and areas with buildings outside the flood zones on the FIRM map are not required to have flood insurance. This may have changed, so double check on that. 

So, determine what you need to pay for, how much it will cost, and make sure it comes off the expenses side of the ledger, so that cashflow is correctly accounted for, and price accordingly.

Good luck!

Jim

James, 

What you are talking about is using the bank as the equivalent of the secondary market. For lots of technical reasons, they won't generally do this. You might be able to get a factor to look at it.

You have a couple of options. You could whole loan sale, and just take the cash and run. You could sell a partial, and retain either a tail or split the cash flow. Another option is to find a warehouse line for performing mortgages and place the loan on the line. Good luck finding one, as they are difficult to get, and expensive. I had a hard money lender that had a warehouse line, and I had a bit of it. Their interest rate was 12% and they were charging me 18%. They only had a certain small percentage that they could lend on loans and their own defaults. I've seen hundreds of warehouse lines, and the reporting requirements cost a small fortune.

The trouble with all of the above is that as you go down the chain, everyone needs to make more money, because they are further away for the origin, and have more risk. More risk requires more return. If you are comfortable with 8%, anyone buying your mortgage will want 18%. Unless you have hundreds of millions of dollars of mortgages that are all identical and meet certain requirements, you aren't getting good pricing.

Again, this all depends on what you want to do. Do you need all your cash now for the next deal? Do you need some cash now, and want cash flow later? Do you want to arbitrage the loan payments vs. a line (private or individual)?

Once you know what you want to do, then it's setting it up and knocking it down. Lots of homework to do when it comes to notes. On the surface they look all nice and easy, but it's a tough, details oriented business that demands all your attention.

Good Luck,

Jim

Gavin,

Since your tenants are month to month, you should have the ability to change their tenancy on that period (in one month). You will need to check with the local laws. I would determine how they are treating the property, and why unit 2 is vacant. If you find out that the family is up until 3am partying every night, then out they go. If they are a relativity quiet family that keeps decent hours and takes care of the place, then keep them, and if needed hold the rent for a period of time. If you make improvements to the property, it's always easier to justify a rent increase. 

I utilized my real estate person to show the property, write the leases and pull credit/background. They screened tenants based on my written criteria for that process. I got to examine all the evidence and approve or disapprove the potential tenants. It cost me 1/2 months rent, but for me it was worth it. Basically, my agent did the legwork, and I did the analysis. 

Hope that helps a bit.

Good Luck!

Jim

Lisa,

Depends on a couple of factors, namely the loan program, and the bank's tolerance. Your best bet is to be talking to banks prior to doing any exit strategy. 

At this point, I would be talking to local banks and their loan underwriters to see what your best bet is for the refinance. 

Keep detailed records of any work you do (financial and photo), and create a "brag book" that you can bring with you to your banker to make your point. 

When you are putting your numbers together for a fix/flip include the maximum cost for your financing, and don't try to skimp on those numbers. If you have 1 year hard money, assume that it will take 1 year to do the project and figure all that in. You might be done sooner, but every once and a while, you could run long. it's a great piece of mind knowing that you have as much breathing room as possible.

In that vein, I always recommend getting the longest term loan available, and paying it down on the shortest schedule possible, assuming no net negatives to the prepayment.

Hope that helps.

Good Luck!

Jim

Cody,

Depending on how many units you have, you could have a waiting list of folks for your units. 

In general, the sooner you have a tenant in, the better. In my last deal, the sellers allowed showings to prospective tenants while I had the property under contract. We closed, and I had a tenant in within a few days after closing. I didn't have a waiting list. I utilized my real estate agent to do all the advertising, showing and paperwork, since they have a list of potential renters.  In addition, my agent screens potential tenants based on my written renting criteria, a huge bonus! I paid 1/2 of the first months rent, and really got my moneys worth. I don't want to be in that part of the business, so I outsource it. I'm ok being in the maintenance management end, so I handle that part of things.  

If I was doing it myself, I would factor in between 1/2 and 1 months rent, the same as I would pay someone to do the job.

If you want to be in the house renting and property management business, that is different (or in addition to) being in the property investment business. Most folks that self manage do so for one of two reasons. The first is that most property management companies suck (think Pareto Rule) , and no one will look after your property (investment) quite like you would. The second is "saving" money on expenses, if I don't pay a property manager, I "make" more money. As previously stated, that puts me in the property management business, in addition to the property investment business. 

Hope that helps!

Good luck,

Jim

Jay, 

With the demise of the pulp and paper mills in Maine (especially in Rumford), the subsequent loss of jobs, and the exodus from the state, I'm betting some of that land comes up for sale. The saw log business is still there, so some of the older cuts can produce in the saw log arena. One nice thing is that the state purchased (traded for tax reductions) the development rights to large tracts of the land, so it can be harvested, but can't be built on. Makes for nice deer, bear, moose and small game hunting in the select cut parts.

Back in the day, I was trying to put together a deal on a very small (50 acre ish) parcel that included about a mile of warm water stream front. the price was good. There were about 20 old oak trees on the riparian way. They were big enough around that you couldn't reach around them, probably 5 feet in diameter. If I remember right, the logger was offering about 12-15K per tree. The owner of the land was adamant that if he transferred he would put a deed restriction in that no trees over 2.5 feet in diameter could be cut on the property. So, that went nowhere, AFAIK, he's still holding it... For it's size, it would have paid for itself and taxes for my lifetime if I could have cut 4 or 5 of them. Reminds me, I should get in touch with him again, to see if he wants to sell...

Jim

Ryan,

The partnership agreement can specify any form of compensation or not. So your dad could sign on the note, and receive no income or any compensation from the property. As a sole proprietor, he could have all the liability and none of the rewards. Don't you love how some folks make business decisions? ;)

The partnership agreement could be between LLC's such that his LLC receives no compensation because it only has 0.01% of the outstanding ownership, and yours has 99.99%. Additionally it could be constructed such that his contains all the losses, and yours all the profits.

Best to run possible scenarios by your accountant and attorney to make sure they work for Uncle Sam as well as you and your dad. I'd involve them in the conversation sooner rather than later.

Good luck!

JIm

Kurt,

Since you are already into S&B, you can very easily think of the value of real estate as the sum of the discounted cash flows at your reinvestment rate (IRR/MIRR). Buy and Hold real estate works out akin to the bond market.

How you want to do this depends on if you are levering, or paying all cash.  Your best Cash on Cash returns come when your levered to the hilt, but that comes at the cost of cashflow and increased risk. Paying all cash reduces your cash on cash return, but provides excellent cashflow and minimal risk of loss. Insurance offloads natural risk to 3rd parties.

For investment properties banks usually require 20 to 30% down. which protects their risk of loss. Hard money lenders, whose only recourse is the properties typically work in the 30 to 50+% down range.

The hard part will be deciding where you are comfortable with the risk vs. return curve. If I am personally signing on a note, I am comfortable in the 50% to 80% levered position, and make sure that I have enough positive cash flow (cash on cash return) to make it worth my effort, depending on property type/location etc. I don't ever envision running non-levered properties, unless it becomes an advantage to do so. 

Today, cap rates (Return on 100% investment equivalent rates) are being compressed to below 6% (I've seen some negative cap rates), and at that level, good corporate paper is getting to be a better deal. If I were to diversify, I would look at figuring a 6% return on my invested cash, and make my cash investment decisions from there. Again, it's always a levered vs. un-levered decision. If you are levered, it's an arbitrage play between your income from the asset and the payout on the leverage plus expenses of running the asset. 

If you are looking for more of a passive income stream, purchasing underlying performing mortgages is easier (not so hands on, albeit tougher to find good ones), and if purchased correctly, they produce better returns. I'd stay away from NPN's for passive income, as they can be management intensive, and really good portfolios are hard to find. Another avenue might be becoming a hard money lender, but again, that space is fairly crowded, and the availability of Fix/Flip deals that make sense is being reduced. Private lending is another avenue, but you have to know your underlying assets, and borrower, and there is an increased risk of loss, since many of those deals are pure equity plays, and you are completely passive in the deal. Other options include JV/Syndication or partnerships, but again, that is similar to a REIT, so you are back in the S&B space.

Some good (but older, with some outdated information, mostly on taxes and secondary market stuff) books on the subject include (all available on Open Library for FREE!):

Real Estate Finance Theory and Practice (I have the 3rd edition) Clauretie, Terrence M.

Real estate investment strategy - Seldin, Maury

Real estate investor's deskbook - Arnold, Alvin L (one of my favorites, very technical)

Sensible finance techniques for Real Estate - Reed, John T

Successful real estate investing in a Boom or Bust Market - Loftis, Larry B

The Complete Guide to Real Estate Finance for Investment Properties - Burges, Steve

Hope that helps. Let me know if you have questions, or need more information.

Good Luck!

Jim

Ryan,

Best advice if you are worried: create an operating agreement between you and your dad that specifies who does what, and how the money gets handled/divided. Your dad gets the mortgage, and you both go on title. Your bank should be happy with that, if not, find one that is.  You could always do it as a true joint venture, where your dad and you are on both the mortgage and deed together. Either way, you need an operating agreement. Did I mention the need for an operating agreement?

If you are going to OO the property, consider an FHA mortgage, where the gift is smaller, and doesn't need seasoning. FWIW, your banker should be giving you options as to what they can do to help.

Hope that helps.

Jim