All Forum Posts by: Jim Fredo

Matthew, in general, that makes sense. However, commercial properties are appraised using the income basis.

Income based makes sense in emerging markets where multi-family properties that are sold are in poor condition. However, investors are renovating and holding, not selling. Therefore, sales comps do not reflect the true value of the property, at least not until renovated buildings are sold. Because the cash flow is so good, we typically hold for at least many years.

I had this situation in another neighborhood. The commercial buildings (6-units) that were renovated were not sold. Fortunately, we were able to get an income-based appraisal for the two refis we did for 6-unit buildings.

Does anyone know of a commercial lender, who loans in PA, who permits income-based appraisals for residential rentals with less than 4 units?

I had a tenant like this. I told her that I didn’t think it was a good fit. I said I didn’t think I would ever satisfy her needs and offered to let her out of the lease without penalty. She agreed. I offered to let her move immediately as long as she paid the rent until I re-rented. Or, she could stay until I found a replacement tenant as long as I could show the house. Naturally, she didn’t like either option and instead wanted to move immediately without obligation. I reiterated that those were very fair options that I presented. 

I never heard from her again and come renewal, she renewed. 

I’ll tell you what I DID, and then what I’d do. 

I lived in LA under similar circumstances. Traditional investment properties were way too expensive. So, I purchases 4 buildings (18 units) in Eastern PA. I knew the area because I grew up in PA. I found a local property manager. The cap rates were amazing. I was set! WRONG! I learned several things:

-Owning remotely is difficult. My property manager Was ripping me off and there no other managers to be found in that area. (I switched to a tenant as the manager).

-Cap rates in low income look amazing, but are tough to achieve. Vacancy and damage is high.

-I will forever avoid shared utilities, but I’ll spare you the ugly details. Let’s just say 85 degrees, open windows, and shorts - in the winter.

Now for what I WOULD do:

-My biggest hurdle to owning my first property was the 20% down payment. I passed on $200-250k bungalows in West LA because I didn’t have the deposit (right out of college.) Plus, that was an insane price - a mansion where I came from. Those same bungalows were worth just over $1M at the peak of the ‘08 boom and $1.4M as of last year. Talk about a missed opportunity.

-If I had to do it again, knowing what I know now, I would have bought a duplex (wait for the market to crash for the best pricing) and used FHA (3.5% down) financing. Live in one unit. The rent on the second unit will pay your mortgage (or most of it). Eventually, you can move on, and keep that as a solid rental, or cash out and purchase other investments, or start an empire in a less expensive city.

Good luck and happy investing!

Technically, if you sell to an LLC your lender could demand payment in full. The reality is that they don't, as long as they continue to get paid.

For a paper mortgage, I simply mean a note or mortgage agreement between you and the LLC without taking formal steps, such as filng the note with the county recorder. I'm assuming a single-member LLC (and that you trust yourself). 😄 If the LLC has partners, then I would recommend filing with the county.

If you file your second mortgage with the county and want to refinance the property later, you lose flexibility because your note would have to be satisfied to close a refinance. By not filing, the LLC still owes you the funds, but you can be more flexible with keeping a positive cash flow.

I should add that when you sell to the LLC you will need to pay the transfer tax. This should be factored into your analysis.

For the two year rental, if the numbers work, you could form an LLC and sell to that LLC at full market value while you can still qualify for a tax-free sale. The LLC could refinance to pull out funds for other investments, assuming the property still has a positive cash flow. Or, the LLC could pay the existing mortgage and you provide a paper second mortgage to the LLCand have the LLC repay you over time (or when the property sells.)

John, I lived in Los Angeles for many years, so I can relate to the numbers not making sense. During the last LA bubble, I received calls offering shopping centers for a 2% cap rate. When I bulked at the cap rate, they said it was a good rate - normally it’s 1%.

In my opinion, that’s a speculative purchase, counting on price increases to justify the purchase. 

With that said, even in such crazy markets you can find good deals if you are flexible and/or creative. Just a few ideas: 1) You can find a property that needs renovations to reach full potential and account for the renovation in the purchase price.  If you can, do the renovations yourself to keep the costs down. 2) Find a seller who will offer an installment land contract with terms that enable you to have a positive cash flow. 3) Find private money partners who will defer their returns.

It’s not easy, but it’s possible. Just remember, if it were easy, everyone would do it. 

Crazy rules! The reality is you have a loan and home that works for you. If you are not comfortable ignoring the rules, just don't rent rooms for the year. Also, if you decide to get a serious boyfriend/husband during that time, make sure he's a jobless freeloader, so he doesn't violate the mortgage.  :-D

It will all work out well. It's only a year.

Congratulations! The first one is the toughest. Good luck with them and your future portfolio.