All Forum Posts by: Jim Costa

We just went through this.  We own 10 properties and Had paid cash for 2 of them, at first of the year through a 1031 (8 financed).  If you fall in the  7-10 properties and you pay cash for a property you only have 6 months to refinance and pull your cash back out.  We did this on one that gave us 9 properties financed.  My awesome mortgage broker said he could only do 1 more loan.  For those that have been doing this for awhile, know it is hard to find a good broker that is willing to do the work and knows what they are doing.  When you are in the 7-10 category it is not easy to put together the loan.  When you are self employed it throws another layer of complication on top of this.  

Wanting to buy 3 more properties this year meant I had to start looking elsewhere.  Like 

@Jeff McRitchie  

1. Go commercial and look at investing in larger multi unit

2. Try to find a regional bank / portfolio lender that doesn't have a rule of 10 properties

3. Switch to flipping using hard money / private lending for awhile

We talked to commercial banks and the advantage is they are looking more at the property and the numbers than you.  If the numbers make since they will fund.  You need 30% down but you do at the 7-10 properties anyway. Terms aren't as favorable as a 30 year fixed.

I like the idea of dealing with smaller banks or credit unions that do portfolio lending (they keep the loans in house)  They can write their own rules.  You have to move up the chain on this.  You talk to the branch "mortgage expert"  and mention "portfolio loans with in-house guidelines that don't meet Fannie Mae 10 property restrictions" and you will get a deer in the headlight look.  I have had to educate many brokers and I am not an expert.  Takes some time to move up the chain.

I actually have a few loans just in my name, and a few in both of our names.  My wife can have a few in her name but she will need to qualify on her own.   Not the best option for stay at home moms.

Look into the LLC further. My broker mentioned this is another alternative. Here is Fannie Mae guide.

"The borrower is purchasing a second home and is personally obligated on his or her principal residence mortgage. Additionally, the borrower owns four two-unit investment properties that are financed in the name of a limited liability company (LLC) of which he or she has a 50% ownership. Because the borrower is not personally obligated on the mortgages securing the investment properties, they would not be included in the property count and the result is only two financed properties."    FM link

The key is to get them financed in the llc

We sold a property so back down to 8 but in the middle of a 1031 so we will be back to 9 financed.

Let me know when you find something that works.  We will be there hopefully by years end.  Jeff I notice you are in Oregon about 45 minute away.  My great broker is in Walla Walla Washington and is licensed in Oregon, Washington, Idaho.  He has done 5 loans for me and I have never met him.  I have spoken to him for countless hours and at all times.  I think he works 24/7. He also mentioned once I max out with him he has a great commercial broker at another bank.  I trust him completely.  Let me know if you want a connection.  I am a property away from that call.  I was hoping to buy larger units over 4 units so this would put us in commercial financing.  Not there with the down until we sell something. 

congrats on the  purchase.  Great rate for a non owner occupied manufactured home.  Unfortunately you are stuck for a year.  Do the improvements you need and try to get top rent that you can.  This will come into play when they reappraise in a year.  If you refinance during the first year they will go off appraisal value or purchase price, whichever is "LESS".   Look into the heloc,  might be hard to find if non owner occupy, easier if you are occupying.  Usually cost $0-$500 instead of 5K+ for refinance and won't affect your great first you have now.

You can capitalize on your equity by flipping which a lot of people do.  I have not done so can't guide you.  I have researched though and it is best to set up the correct business structure before purchasing so you can utilize as much tax benefits as possible.  If you flip and sell during the first year you will have short term capital gains and not be able to 1031.  If you wait after the first year, you can cash out at short term capital gains rate  or defer all taxes with a 1031.  If you live there for 2 years you can also exclude all taxes with primary residence exclusion.  Good luck and Congrats!  Time to find the next ... buy right!

Yes it is revolving.  If you pay it off it becomes available again.  They usually have a draw period.  I believe most are 10 years.  The nice thing is while you are using the credit the payback is usually interest only (cheap payments).  Versus a credit card that is usually amortized over 5 years.  You can use and pay back for 10 years.  After 10 years it converts to a pay back term and available credit is no longer available.  At 10 years you have 15K  of the 25K used.  The account switches over and the 15K You have to start paying back Usually amortized over the next 10 years.  The remaining 10 is lost or not utilized.  You can always get a new one in 10 years after the house has appreciated more.  

I am closing on duplexes. 3B units

you can do a google search for 1031 or find tons of information hear.  In a nut shell:  Your primary residence you can sell with up to 250K for single or 500K for married profit and not pay taxes.  Rental property you can not.  For rental/investment  property when you sell it for more than you bought it you have to pay capital gains.  If you sell it within a year (flip) you have to pay short term capital gains.  If you have owned the property for more than a year than you pay long term capital gains (cheaper rate).  The government actually want to encourage investing in rental and commercial property.  Instead taking your cash out you can do a deferred 1031 exchange.  (similar to a 401k rollover).  You have to buy a replacement property for more than the property you are selling.  There are actually 3 different options.  The top 2 are You can buy up to 3 replacement properties regardless of price (the total has to be more than you sold), option 2 is you can buy as many properties as you want as long as they are not more than 200% of what you sold.  You hire a intermediary (usually $500-$1000) and when you sell your property the transfer the funds into a trust account.  You have 45 days to go find your replacement property.  Once you identified your property you let them know and you have 180 days to close on them.  After 45 days you can not change the properties you identified.  You buy your new property and roll all your profits into the new property deferring all your taxes into the new property.   The rule is it has to be an investment property not your primary residence.

A lot of debate over the minimum requirement but if you have a house you rent out for 2 years it becomes an investment property and you can take advantage of the 1031.  However it was a primary residence you can qualify for the owner occupy exclusion (above) if you have lived in the house for 2 of the last 5 years.  Owner occupy is a better way to go because profit is all tax free and you don't have to buy property.

The 1031 is a powerful tool to build your real estate portfolio.  It makes it easier to purchase larger properties or diversify selling one property and acquiring 3.  I hope this helps explain a little further. 

You can read some of my other posts on 1031 with examples. 

I feel 2-4 unit are best to buy when starting out to build your portfolio and cash flow until your family gets big enough or wants its space to move into single family.  If you can purchase 2-3 utilizing owner occupy low down payment you can spend very little money on your portfolio and have 12 units working for your cash flow in 3-5 years.  12 units at 600-1200/mo in most places of the country is enough to retire on even if you never buy another property.  Imagine investing between 18-25 never buy another property and you can retire at 55.  Not get rich quick but very doable.   

I realize life happens and sometimes it takes longer than expected.  I am more the tortoise than the hair.  I like the flips and fast money but lots of taxes and always chasing the next deal.  Buy and hold is where the independence will come.  You can certainly flip until you get enough money to buy and hold.  At the end you know who won the race! 

Buy Right!

@Gino Barbaro

I agree with you. That is part of the reason why I wanted these units so bad. Cap rates are hard to use for value on a duplex but I have looked at larger multi family in the area. You are lucky to get 5-6 cap rate in our market. That is why I bought 5 duplexes this year. Cap rates are better than I can get on larger multi family. I also open my buyers 1-4 unit properties. I figure once I get to market rents the (3) duplexes will have a FMV of 100K more. I'm fine with taking a 1-2 years to get there. Just didn't want to wait 4. My realtor who buys investment property really wanted these but had no cash to buy so gave to me. He said has other investors looking for 3B units and they are willing to pay the 100K more. I think I have a solid purchase all the way around. Just need to find a few more. I like @Wesley W.letter tells them why the rents are going up.

@Wesley W.

Thank you for the post.  I love the BP community helping each other out with things that have worked.  Learn from peoples mistakes so you don't have to repeat them and build upon their success to enrich your life.

Look at the HELOC as an emergency fund. If something comes up you can fix it. You can also use for down payment if you find another property. If you have 2 properties cash flow $600. You can pay down a 20K HELOC in less than 2 years and free up thee funds for another purchase. It is just a way to get some working capital a lot cheaper than a hard money loan or usually than an investor or partner. It's better to have it and not need it, than need it and not have it. Wouldn't you agree? It sound like you are on track and on your way. Congrats with this deal and hope you find more.

@Douglass BensonDo you have a sample of that letter?  I planned and negotiated in sales price to replace all the windows with new  dual pane.  I nice show that their is a new sheriff in town.  Justify higher rents.  A 10K improvement

I have always been about buying right.   These properties do cash flow, that is why I'm buying.   The under value is where I saw the opportunity. The last owner had for 10 years and never raised rents.  Perhaps I will raise modestly where I can and this might create an opportunity if someone moves out.  They will need 3-5K/unit when vacant that should easily justify rent.  New flooring paint and a few upgrades.  I counted on in my numbers.  I am concerned about the number of unfinished apartments that will be coming on line in the next 12-24 months.  I doubt many 3B and their cost will be higher. 1200-1500. 

Carleton Sheets help buy my first investment property 20 years ago.  100% hard money loan.  I bought with zero money.  The best $100 i spent for knowledge looking back.  Wealth of information at the time.  I went to NVR free seminar and paid for the 3 day seminar.  I was already an experienced investor and I was looking for the next step of knowledge.  I found that I already new 95% of the things covered.  A couple new ideas and concepts.  They wanted 40K for the next training.  Didn't have the money nor did I want to spend that much.  Met some nice people that paid the fees and still in contact with them.  I figured I would find information out there somewhere.  I found Bigger Pockets.  This was a couple weeks ago and I have just scratched the surface.  Their is so much information here.  I'm glad I saved the 40K and have found areas that talk about and go into detail the different areas that NVR touch on.