All Forum Posts by: James Kojo

With regards to qualifying as a RE pro, my understanding is that the time spent looking for deals for your personal portfolio (which is probably a majority of the time) doesn't count towards the 750 hour requirement, as that's considered investment activity. However, actively managing your properties does count. So make sure you know what activities count and which don't, so you can keep accurate "records" of your 750+ hours.

Hope that helps!

James

@James Danchus : Ok, so then you're targeting "residential class" properties (1-4 units). The commercial brokers that were mentioned before won't have a large inventory of those on-hand, but they may have some, so you can try.

You're strategy will differ by market. For example, in my home area (SF/Bay Area), buying off the MLS just doesn't work because there is so much demand for housing here that you can't find cash-flowing deals on the open market. I've heard some people are making off-market deals work here, but i've never come across one that did. So, I don't buy where I live.

For off-market deals, you'll need to do direct marketing or find people who can find the deals (wholesalers.) direct marketing takes many forms, and there are many strategies for doing so (mailers, cold-calls, networking, driving for dollars, etc.) It can be time consuming and/or expensive, and your mileage may vary, from what I hear. That said, off-market is definitely better than on-market if you can get them!

For my 1-4 unit properties, I've bought almost all of them off the MLS, but they are almost all out of state. For these on-market deals, I like to either pounce on them very fast (same day as they are listed or sooner) with an all-cash, 10-15 day close OR I find listings that have been languishing on-market for a long time and see how motivated the seller is.

Another strategy that has worked for me is to let the listing agent know that if a deal falls out of contract to give me a call and I can swoop-in and get it done fast. Many times, a seller will take the highest but flimsiest offer, which has a high likelihood of falling through. By the time it's fallen out of contract, they are just tired of the BS involved in dealing with a flimsy buyer, and are willing to take a small discount to "just get it done."

For non-distress properties (low-rehab), it's harder to find great deals for the obvious reason that they are pretty easy to sell to end-users.

I've since moved away from residential class MFR to commercial. Things work a lot different there.

Hope that helps!

James

for those of you who can't see the doc, try right-clicking the broken image and either "view image" or download it.

@Jeff Shelton like I mentioned, paying 2 origination fees is unusual. Is comland a mortgage broker? Usually they take their cut by charging points or by taking a kick-back from the lender. I'm not sure I've seen one which takes an origination fee, processing fee and underwriting fee. That just seems excessive. 

The appraisal fee seems very high, but I don't know the market. however, 500 to review the appraisal seems unreasonable.

That all said, if you have a hard-to-fund deal with special circumstances (OOS investor, condos, 8 unit), you'll have to go with unconventional financing so you're really at the mercy of your lenders. They can charge you whatever they want, and it's up to you to either try to negotiate or find better terms elsewhere. If you can't, then plug the numbers into your model, and make sure the deal still makes sense.

It looks like you're pretty far along this deal, since it's supposed to close in 3 days, so i'm guessing you're in a take-it-or-leave-it situation. After this deal, you're going to want to make it a priority to find and establish relationships with local banks who deal with OOS investors, so you have more than 1 lender.

One thought: are the units individually parceled (i.e. do they have their own parcel number?) If so, you can take out up to 8 residential loans instead of a single commercial loan, although I don't know if that would make your fee situation better or worse, but at least you could shop them.

Hope that helps.

James

@James Danchus

Can you give us an idea of your parameters, investing style and target market?

We may be able to give you advice a little more specific to your situation. 

To answer your general question, yes direct marketing works, but it depends. :)

James

@Jeff Shelton

Yes, a lot of those fees are high but most of them you should be able to shop for. 

For instance, All origantion fees should have been disclosed to you when you locked the rate. 

Further, can you explain what comland financial is? Usually only the lender charges an origination fee. 

Perhaps if you provide more details around the structure of the deal it may help. 

James

@Ellie Miller : Just to make sure we're talking the same language, you're asking about Cash-on-Cash, which is your return after leverage. Cap-rate is your return without leverage (as if you paid cash.)

The bigger the spread between your mortgage interest rate and your cap-rate, the better your CoC will be.

Tacoma is part of the Seattle-Tacoma-Bellevue MSA (Metropolitan Statistical Area.) Average cap-rates for stabilized B and C properties range from 4.75-6%, so the spread between those numbers and typical investor interest rates is pretty slim. That said, averages can be misleading, and you're not buying "average" properties because you're a bad-*** investor, right!? :)

Still, you'll be swimming a little up-stream to get decent cash-flow numbers in a low-cap MSA like Seattle.

That may call for a strategy shift. For low-cap areas, investors mostly look for total ROI (Return on Investment) opportunities which may or may not have a cash-flow component, but usually has an appreciation component. For example, you can buy a fixer at a 6-cap, rehab it, lease-up, and stabilize (also known as a value-add or forced-appreciation), then sell it at a 6-cap or lower. This generally works for 5+ units, which are considered commercial class residential.

Another appreciation strategy (which is generally poo-poohed by the BP community) is just buy for appreciation: Buy a stabilized asset, and hope the market gets hotter than it already is, then cash-out when it goes up. This generally works for residential class (4 units and below), but also can work in commercial since cap-rates are also fluid.

Hope that helps!

James

@Jeff Owen : Look them up on the county tax collectors website, and see how many "parcels" are associated with the property addresses.  Each parcel has a unique parcel number. 

I'm willing to bet that they each have their own parcel number, in which case it's definitely a portfolio of residential units. You should also be able to see the zoning for each parcel, which should tell you if it's a SFR, small MFR, or larger MFR.

As you probably already know, residential units are primarily valued by comps with some consideration given to NOI (for 2-4 plexes.)

By the way, you should be doing this for all properties that you are purchasing during  the due-diligence phase anyways.

Hope that helps!

James

@Doug Webb for commercial class residential (5+) units, the general guidance you'll get is that you should be taking possession via an LLC, as there are no real advantages to not doing so besides the minor overhead of forming and maintaining the entity. In my state, owning an LLC is quite expensive (800/year), so the risk/reward calculation is a little more skewed, but still generally makes sense for larger MFR deals.

The debate really heats up if you're talking about residential class (1-4 units) as there are material advantages to owning under your personal name. Search for LLC vs umbrella insurance policy to get an idea of how controversial the topic is. :)

Hope that helps!

James

@Lewis Jerico : some very good specific advice on this thread already. I'll give you some high-level, strategic advice.

You need to take inventory of the resources of you do have as well as the ones that you don't and find strategies that maximizes the utilization of your resources. 

You have already identified that you are low on a few critical resources: cash, experience, network and education.

Resources that most young people do have are: Time, energy, and cognitive capacity (you can adapt and learn.) In the most general terms, we refer to this as "hustle."

So: trade time/energy/capacity for education. That's easy. read books, listen to podcasts, read forums, etc. Likewise, those resources are easily converted into a network: attend REIAs, meet with other REI's, find partners, etc.

To get experience, leverage the resources you already have as well as your new resources (education and network), to find a way to add value to an existing endeavors: volunteer to bird-dog, underwrite, property-walk, drive-for-dollars, fix things, etc for others.

Then the harder part: cash. By this point, you should have enough education to know what strategies are available to you. House-hacking with an FHA loan is a good way to get "cash" in the sense that you're leveraging the gov't to fund your "deal." Likewise, seller financing is another possible strategy. Wholesaling is another strategy that requires very little cash (which I'm not at all familiar with myself, so ping others who are.) Flipping is yet another strategy in which you can leverage your resources.

In short, the field is a lot easier if you have cash, but if you don't have cash, you'll need to leverage your "hustle" a lot more. Don't discount the value of hustle. It counts for a lot in this business!

Hope that helps!

James

@Tony Nguyen Great question. 

I'm roughly in the same boat as you. Most of my MFR units have been acquired recently. However, I've been investing in SFR in California for a while, including the last down-cycle. The NAV for my portfolio took a huge hit, but I rode it out, and it ended very well in the end, but it was a nerve racking period.

What I would suggest, and what I'm starting to do more of, is to do a stress test of your current deals and portfolio. Figure out exactly where you start losing money in terms of rents. Calculate that as a percentage of current rents, and that will give you an idea of just how vulnerable your portfolio is. If you can tolerate a 50% drop in rents, you're probably in very good shape. If it's 10-15%, then you may be vulnerable. (those are numbers I just made up to illustrate the point.)

10-15 year balloons sound very reasonable considering historic interest rate cycles, but it depends on when you started them, obviously. If any are coming to the end of their terms (and hopefully to the end of their pre-payment penalties) consider refi-ing them early.

Also: have some cash!

Hope that helps.

James