All Forum Posts by: James Kojo

 Here is my DD checklist for when I take over a property.
To be honest, I almost never get all of these, but I ask regardless (and put it in the purchase agreement!)
A word of warning: this might overwhelm, and potentially scare-off an unsophisticated seller, but I buy 100+ unit properties, and most sellers are used to this kind of stuff.
I presented this list once when I was buying a quad from a small-time seller. You can imagine the response.
I hope this helps!


James Kojo

[] Previous 24 monthly operating statements
[] Current rent-roll
[] Tenant Ledgers for past 12 months.
[] Copies of all resident lease agreements and applications
[] 2 most recent months of all utility bills for common area and currently vacant units.
[] Copies of all existing service contracts and agreements.
[] construction and other warranties still in effect;
[] Insurance loss runs for the previous 5 years
[] Most recent survey of the property
[] Any environmental reports and description of any environmental remediation.
[] all licenses and permits or certificates of occupancy or other documents indicating compliance with any applicable governmental requirements.
[] As-built building plans
[] Copy of each floor plan.
[] Copy of property brochure.
[] List of all property phone numbers (including general office line, fax, modem, internet connection, maintenance, security, etc.)
[] List of all websites, domain names, social media accounts, or any other means of advertising or marketing associated with the property in whole or in part, whether transferrable or not.
[] List of all trade names or intellectual property associated with the Property.
[] Staff listing

@Vibhu Arya : for 4-units and below, you will most likely want to use a residential policy similar to the one you may have on your primary home. Those are offered by most of the well-know providers that you probably already of (Farmers, State Farm, Amica, etc.)
The lender can provide specific requirements for hazard coverage, but it mostly around protecting them, not you, so the minimum requirements may or not suffice for you.

One difference between what you might get for your personal residence vs your quad is that you don't need to insure the contents, and you probably want higher liability coverage. You still want to buy the normal hazard coverages (fire, wind, hail, earthquake, or whatever natural disasters tend to occur in your area.)

Another difference is that you probably don't need any loss-of-use coverage (i.e. hotel expenses if your house is damaged.)

Most residential providers will have a policy that is tailored more towards rental homes in the way that I describe above. They may call it a "landlord" policy, but is usually just the same residential policy with tweaks in the coverage limits. That might be a good starting place.

On commercial policies, there is often a provision for loss-of-income, which *I believe* is typically *not* found on a residential policy, so you may need to budget reserves if the quad becomes uninhabitable while it's being repaired. You can self-insure over this possibility, or ask the provider if they have some provision over this.

In terms of liability coverage, a general rule of thumb is have enough liability to cover your net-worth. The thinking there is that they probably can't take what you don't have! :)

Hope that helps!

James Kojo

I use the CBRE cap-rate survey, and the IRR Viewpoint report.

As of the last Viewpoint, Class-B suburban multi-family in Minneapolis is 6.0. But like the CBRE report, that's going to be for larger deals, so you can't put too much stock in those reports if you're chasing smaller deals. Still, that's probably a reasonable floor.

@Maria Luna : it sounds like you're off to a pretty good start, since you already have a small portfolio.

If cash-flow is truly your goal, then you may consider shifting your portfolio out of appreciation (i.e. low/no cashflow) markets like SF. I'm guessing if you took the 200K out of the SF property, you'd be cashflow negative on that property? If so, you would have to make additional cashflow in your out of state properties to make up the difference on top of your 5K goal.

Further, taking out a $200K HELOC would effect your debt-to-income ratio (DTI), which may disqualify you from the additional debt you need to purchase your new properties, unless you can get non-recourse debt. You'll have to do the math or ask a mortgage broker.

But let's say my assumption is incorrect and that you could tap the full $200K equity at cash-flow neutral and DTI isn't a problem. That gives you a capital base of $350K for your new projects. 5K/month is 60K/year, which amounts to an annualized 17% return. That's doable, but a bit on the aggressive side, given that you'll also need reserves and you won't yet have much economies of scale.

So, I wouldn't plan on being able to do both projects in one shot. More likely, you'll have to snow-ball. That is, buy a value-add property, rehab it, and then do a cash-out refi to start your next project (BRRR as everyone around here likes to say.) :)

Just make sure to have adequate reserves AND a plan-B in case there is a downturn in the economy!

Another idea is to invest the full $350K passively, which may get you close to what you need depending on the operator. A discussion of the pros/cons of active vs. passive is beyond the scope of your question, though.

Yet another idea is to start a syndication yourself, which would allow others to invest in your deals along with your own money, giving you way more leverage.

Hope that helps!

James Kojo

Obviously, different people will have different preferences, or they wouldn't have multiple products! :)

The real question is about your exit strategy. Try to align the term of the loan with the planned exit time of the property (or the next refinance.) Give yourself some room in case there's a downturn and you either can't or don't want to exit.

My personal preference is a 10 year term, and I wouldn't take anything less than 7, for that same reason.

In terms of "hassle", the only hassle is that you're going to have pay a bunch of money if you exit early. However, keep in mind that  agency debt is often "assumable", so you may be able to simply transfer the loan to the next buyer, without paying the pre-payment penalty (although there is going to be some assumption fees for the transfer.)

Another consideration is that if you're going through Fannie Mae, there's something called a "supplemental loan" which can help you, or the next buyer, to re-leverage the property if the equity has increased a significant amount.

Hope that helps!

James Kojo

@Jermaine Perry

Even if you don't "Take the plunge" now and invest in REI, you should be "sharpening the saw." What I mean by that is, start educating yourself, and deepen your knowledge about how you might go about it, as well as start building out your network in potential market. You are young, so you will almost certainly have a fantastic entry point sometime in your lifetime, if not multiple.

Hope that helps!

James Kojo

@Brad Swearingen this kind of deal is what we in the industry refer to as a "heavy lift project," and a completely empty community is probably one of the heaviest lift there are. This is not a low-skill investment. It will take a lot of skill, time, effort and money. I see you've listed yourself as a flipper/rehabber, so if you're considering this, hopefully you have the resources needed, and perhaps you've done something similar with a  few highly distressed SFRs? If not, I would waive you off of this project unless you have a rock-star team ready to back you.

That all said, with great risk often comes great reward. If you actually have the right stuff to make this work, it could be great. I agree with @Bjorn Ahlblad: you need to come up with a pro-forma income/expense projection. Taking a bit further, do so for each year of the hold cycle, with realistic occupancy levels on each year.

hope that helps!

James Kojo

Recourse vs non-recourse is more about the personal guarantee than it is about pre-payment penalties.

For the record, I have both, but I'm in the process of switching most of them out for non-recourse agency debt.

A very important factor to consider (maybe the most important?) is how much risk you're putting your own net-worth in. As investors and entrepreneurs, we naturally see the upside. At the same time, most of us have been around long enough to remember 2008, so we know bad things happen. A non-recourse loan allows you to limit some of your downside while you're playing offense (shooting for above average returns.)

On the other hand, if you have a net-worth that you're willing to put on the line for any particular deal or have sufficient fire-walls in place, then you can be more aggressive.

At this point in the cycle, I would advise caution. Play defense even when you're playing offense.

Hope that helps!

James Kojo

@Mary Schr: since this is not a cash-flowing property, and you don't have the ability to force appreciation (aka value-add), then the only way to make money left to you is waiting for appreciation.

Unlike most people you'll find here, I don't poo-poo the idea of betting on appreciation, so long as it's done in a thoughtful, intentional and well-informed way. I live in CA, where RE appreciation has made more millionaires than just about any other strategy.

That said, I think almost everyone would agree with the statement: we are probably closer to the top than we are the bottom. Are we at the top now? Who knows, but the downside is probably bigger than the upside at this point. I've been selling my appreciated CA assets over the last 2 years. I may have missed the peak, but I've definitely missed the trough!

So, if the only feasible exit strategy for you is appreciation, then you may want to consider selling it, especially if you've had a decent run-up since you bought it. 

That's my $.02. Hope that helps!

James Kojo

Ask your lender if they have specific requirements for insurance coverage. They often will in the commercial space. Don't wait until the week before closing to figure out that you don't have the right coverage, like I once did! (haha)

One difference between typical residential and landlord insurances is that you need to consider is if you want/need loss-of-revenue coverage (i.e. something happens to your property that makes it temporarily un-rentable, like a car crashing through a unit.) Most people need it, but some people have enough buffer that they can "self insure" the loss-of-revenue. ymmv.

I would definitely recommend umbrella liability coverage up to at least your networth. Just know that it's actually a double-edged sword. It protects you in the case of a lawsuit, but having a very large coverage amount also makes you a more attractive target for lawyers.

Also, did you ask if your regular residential insurance company would be willing to extend insurance on these properties? When I was doing SFR investing, my residential insurance company eventually covered up to 7 of my homes. They had a special landlord policy in which none of the personal property was covered.

Hope some of that helped. Good luck!

James Kojo