All Forum Posts by: Jason Turgeon

Huh. Glad everyone else is crushing it, but I am not. 

I finished a rehab of a 2-unit (separate buildings, SFR in front, garages with apartment over in back) in SE TX in late February. It's a quality rehab in a decent neighborhood. We had a tenant in the garage apartment inside of a week. March 6 we had an application for the SFR but they had dogs and because of the shared property my PM advised we turn them down. Not sure that was a great move in retrospect. COVID19 started heating up right around then. The SFR is still vacant and I just dropped the price from $1400 to $1275. We have had a few showings but no takers. PM says showings are off by 75%. If I don't get someone in by next week I will offer free rent for the rest of May. So I'm at 10 weeks vacancy on that unit and counting.

My class C property in the next town over with 22 units has also been getting hammered. Quite a few tenants struggling to pay, vacancies up. I lost money on it last month, my worst loss in 12 years of landlording.

@Chris Mason Unfortunately my bank wouldn't allow me to request another appraisal, even if I paid for both. And my rate lock was set to expire this week so I was over a barrel - if I rolled the dice with a new loan and a new appraisal, I'd be guaranteed a much higher rate and higher closing costs on top of it. We closed on Tuesday with the low value just to guarantee ourselves at least some cash on hand during the uncertainty ahead. But I am nowhere near the cash position I wanted to be in, and will have to defer the majority of the much-needed renovations we were planning on doing. 

@Todd I would have been happy to do that but this is her first foray into private lending and she's a good friend. She's not comfortable with the more sophisticated techniques yet, so I just want to pay her back quickly. 

@Chris Mason I expected a slight discount but $300k is absurd. She was able to walk through our unit and the outbuildings and got pictures of their unit. I also gave her past appraisals and architectural drawings. She came in almost 30% below what I expected, and almost $200k below the appraisal we got 2 years ago, and since then we've done about $30k of work and the market has appreciated. Being conservative is one thing, being punitive is another. Our bank approved the remote appraisal, after all. And had the tenants complained to the city, I would be in court. Boston is not joking around with tenant protections during this. After the loan is funded I will be filing a complaint with our state board. 

Use other people's money, they said. Leverage, they said. Harumph.

Mortgage 1: My personal residence (duplex) in Boston. With rates low, my promo rate on the HELOC expiring, a bunch of exterior renovations I want to do, and prices at an all time high in Boston, I thought February was the perfect time to refi. I called my private banker (sidebar: switching to a private bank was the best business move I've made in years), he put me in touch with his mortgage guy, I got a great rate, low fees, we're off to the races. This is a plain vanilla cash out refi 30 year, except it's Boston so it's a jumbo loan because even a 1 bedroom fixer in Boston is a jumbo loan. We submitted the application the end of Feb.

Then COVID19 hits, things got delayed, but I have a great bank, no problem, it will just take a little bit longer...and then one of my tenants gets sick and another one says he only has one lung and they don't want the appraiser to walk through, and the mayor issues a statement backing up tenants in exactly this kind of situation and my hands are tied. The appraiser gets hard to deal with because she's "essential" and she's upset that she has to work from the pictures my tenants took instead of walking through their unit and I can see things going sideways. And all of a sudden my appraisal comes in a full $300K below what we anticipated, which translates to us getting only 1/3 the cash out of the loan we'd planned on. And of course, when you appeal an appraisal it just goes back to the same appraiser, so we're SOL. My banker breaks the news that if I don't close this loan he may never be able to give me another one because I am pretty much the last jumbo loan that will ever close in America, especially at pre-COVID rates, so I hold my nose and do it. The world is ending and even 1/3 of my planned cash is better than no cash, but now we can't afford to do the renovations we'd planned on and I just reset my 30 year clock and paid thousands in fees and it took 9 weeks...but at least the loan is done. Only we still don't have the funds, that won't happen for another week for some reason. So I am still anxious until I see them hit my account.

Loan 2: Your basic BRRRR. 2 units we bought in SE TX in the fall. As with all rehabs, it took too long and cost too much, but we got it done. Now I just need to refi and place tenants. Started in January working with a local CU, upset that they gave me 4.5% when I wanted 3.9, but it's not a huge loan and I want a local banking relationship and already have a loan with them on another property. They promise closing in 4 weeks. 6 weeks later, on the first really scary COVID day as the markets are cratering, just a few days before closing, they call me up with some BS excuse about not being able to lend to out of state owners (remember, I already have a loan with them on another property) and cancel the loan. They even have the gall to try to get me to pay for the appraisal they ordered. I refuse and they back down. So much for me trying to build a relationship with a local lender. Strike 1.

No biggie, I am working with a HML on some other stuff, he's great. He quotes me 5.8% and tells me it will be done in 2 weeks. I just want to pay off my private money lender at 9% who is a personal friend, so I'm happy. This is crazy low for HML. Then he tells me the rates have dropped, which is also unheard of. He quotes me 5.5% at 70% LTV and I am overjoyed. We move forward, but he's getting cagey. Then two weeks later he sends me new terms with rates closer to 6% and no more than 60% LTV and a full year's payments in escrow, plus all kinds of fees. By the time they're done, I barely have enough left to pay off my private loan. Pandemic or not, this deal sucks and I walk. Strike 2.

I ask my friend if she will just refinance at 5.5% over 10 years, or pretty much whatever terms she wants. She thinks it over and says no. The markets have spooked her and she wants her money back. Strike 2.5

My PM knows someone, he swears she's great. I call her on March 23 and ask her if she can help. She promises she can get the deal done and be closed by the end of April at conventional rates. She's cagey on the rates but I let it slide. Desperate times and all. It's a full doc loan. Weeks go by, we provide mountains of documents, I ask for rates and terms a half dozen times and never get a straight answer. She's making me nervous. We finally get a handwritten PDF today with rates and terms and she's got me at 4.875 and $6900 in fees on a $140k loan. And she won't take the appraisal I just got from the credit union at the beginning of March, so now I have to sit here and stress that this appraisal will also come in crazy low while also being bent out of shape that I'm getting nearly hard money rates on a full doc loan. Maybe I should have just gone with the HML at 60% LTV, at least I'd be liquid by now. Oh, and we haven't placed a tenant for the larger unit yet after 2 months on the market, which makes me even more nervous for the appraisal. My PM says showings are down 75% across the board.

And here I sit, waiting for strike 3...

Take it from me. Just use a GC. You won't save any money doing it yourself, but you will get ulcers.

In Mass, you wouldn't be able to get financing with an illegal unit. There are lots of illegal units here, but when those owners go to sell they almost always find they have to rip out the extra unit, usually by removing the stove but often by also removing any unpermitted work and bringing everything up to code. I've seen some sellers learn some extremely painful lessons by trying to cheat the system.

And yes, you could end up in jail if someone dies in your illegal unit. The laws are there for a reason: 

https://www.bostonglobe.com/metro/2012/02/03/quincy-landlords-sentenced-three-years-prison-for-renting-illegal-apartment-where-father-and-sons-died-fire/q2yvAzz6ogXToqReE77CxJ/story.html

https://www.metrowestdailynews.com/article/20070119/NEWS/301199976

@Cody Weber I mostly just use it to analyze deals and decide if I want to learn more. I don't mess around with future equity/cash flow projections. A deal has to make sense from the very beginning to be interesting to me. 

I just got a quote from them that is well below half what I am paying with Farmers on a property in Southeast Texas where hurricanes are a regular issue. Farmers was about 20% cheaper than the next closest competitor. This could save me over $2000 a year. But I am nervous about what happens if I need them. Has anyone completed a claim from them? How do we research an insurance company to make sure they have the right kind of reinsurance in case there is a hurricane or other major catastrophe with lots of claims?

@Priscilla Y. you don't have to pay capital gains taxes on all of it. Just on your actual gains. @Dave Foster can help you ballpark what the gains are, but your CPA probably needs to provide the actual number after it's sold.

The calculation is Sales Price - purchase price - improvements (new roof? new appliances?)- sales costs (commissions and closing costs) = your gain

There is also depreciation recapture. If you wrote down the value of the property every year on your taxes, that comes back to haunt you now. And the taxes are different for your gain and your depreciation. But the original 30% down payment you made is not a gain, it is just you getting your money back (unless you used a 1031 exchange for that down payment originally). 

So in your case, if your accountant depreciated it $21k/year for 5 years, the calculation is roughly this:

$1M selling price - $575k purchase price - ~$35,000 in selling costs (assuming you list it yourself as an agent but pay 3% to the buyer's agent + assorted costs) = $390,000. Then you also take off any major improvements like a new roof. You can either pay 15% capital gains tax (~$60k) or do a 1031 exchange. 

For the depreciation recapture, if it was $21k at 5 years, that is an additional $105k that gets added in as regular income to your returns, which can really hurt if you are already in a high tax bracket. So you want to delay paying that as long as possible, which is what the exchange is for!

If your mortgage is $350k and the rest of my numbers are correct, you get to keep about $155,000 tax free, which should be roughly what your original down payment was. You can do whatever you want with that money.

Did you live in this house for 2 of the last 5 years? If so, you can exclude some of the gains. 

You are also free to keep some of the cash out of the 1031 and just pay taxes on that portion you keep out. So if you want to put $100k in each of your kid's 529 plans, you can do that for only a 15% penalty now, but that money will grow tax free until they are in college (but check with your CPA to make sure I got that right)

Remember that 1031 exchanges just delay taxes. Eventually you have to pay the tax man, although it is possible to push that out for a loooooong time with proper estate planning.

And as a part time agent who does all the investing in my relationship and also juggles a day job and an art hoby, I get where you are coming from. This is a lot of work! Fortunately, our kid is in daycare, so I can spend some time focused on investing. You might consider paying someone to help out with the kids a couple of days a week while you handle all the details. One of the benefits of out of state investing is that it forces you to work with a property manager. So I actually spend less time on day to day property issues with 24 units than I did on 2 units. Just make sure you pick someone highly experienced who you have a good rapport with. You do NOT want the cheapest PM in your town! I have settled on a strategy of picking a PM first and then working with them to find properties.

Here's one way to look at things. Even if you invest in a safe class A property somewhere with only a 5% cash on cash return, barely better than a CD, you are still getting over $30,000 a year on your $650k of equity. And you should be able to get at least double that without being especially aggressive or finding the world's best deal. I am able to find 20% cash on cash by focusing on Class C properties in the middle of the country, which would give you $130k annual revenue. 

Good luck! You're in a great spot.