All Forum Posts by: Jonathan R McLaughlin

@Thomas S. banging the same drum louder does nothing to increase the quality of your argument it just makes more noise. 

Leverage is one tool, a powerful one as you have said, and perhaps the most powerful for most of us. "Done right risk is higher but not significantly"--lots of room for thinking in the phrase "done right" ?

Someone blindly following your "advice" as gospel to expand would think that maximum attainable leverage all the time and in every property was the only path to building a portfolio. Lots and lots of reasons why thats not true in every sector in every moment in every cycle and in every type of real estate and you can find plenty of evidence on this board and elsewhere to show it. 

And moving from the tiny to the big: in addition to my own investing I've had the good fortune (?) to work directly with a few of the billionaires you describe and they use debt and cash and assets in a much, much more nuanced way than you have ever described, in their real estate investments and other investments as well.

One last thing:  your posts are read by many here eager to learn. What is your intent towards them? Phrases like "hoarders" "don't understand math" and the like seem more designed to insult and to put down than help. 

We made our initial money such as it is in Boston, especially Jamaica Plain and Cambridge, but can't touch it these days. Pick your spots in Franklin county (and Berkshire and Hampden for that matter) and I think you can do well, especially as the rail infrastructure and links to NYC and Boston get ever stronger. Check out that 91 corridor and the increase and investment in commuter rail travel. New train stations, wifi connections and a growing virtual economy all bode well for smaller communities that have some community and vibrancy/.

We have invested in Pittsfield and like whats going on there. The town took its hit in the 80s and shows good signs of coming back/being stable...better restaurants than most, returning native sons/daughters, arts, etc and its starting to see significant investments from Brooklyn and Boston investors. 

We really like the vibe in Greenfield and its potential as the Franklin county seat. Good mix of new hipster--Kambucha factories for god sake!--and a "green building" vibe and as well as  service economy professionals) varied and appealing housing stock and decent price to rent ratios in good locations. Lots of tired houses too.

Echo the comment on Essex county and I've heard very good things about Hudson. And for industrial (not retail!!) the 495 route both north and south has great potential. We are on the North and its proximity to both Worcester and Manchester as well as logan for freight and the increased squeeze on industrial 128 parcels bodes well. That would translate well to Georgetown/Haverhill etc. And of course its a winning lottery ticket if Amazon shows up :)

Unfamiliar with the practicalities of the term as well, would love to know  @Jay Hinrichs do you mean overnight loans etc?

At the risk of being embarrassing, Jay, huge fan of your posts and generous spirit and have learned a lot from you, thank you.

Unfamiliar with the term as well, would love to know it @Jay Hinrichs do you mean overnight loans etc?

At the risk of being embarrassing, Jay, huge fan of your posts and generous spirit and have learned a lot from you, thank you.

Sheesh, must be the cold medicine. Andrew's posts were great but was trying to respond to @Joshua D.

Hey Andrew: 

1) Misspoke about the LLC...harder to get 30 if you HAVE one and I would have one...is what I meant to say

2) on "purchase" not "purpose"

3) You label the $35,000 "surplus" but put it in your calculation, yes? I'm missing something probably but I don't understand that #? Are you saying you can put down only 20K because of the valuation? 

Hi Andrew,

So we jumped into this world not so long ago with mixed use 14 unit. I like the simplicity of the BP calculator too and use it. Good luck with this and I hope our experience can be useful. Apologies if this is stuff you have gone over:

loans: Most commercial loans won't amortize over 30 years, certainly if you are not in an LLC (and boy I sure would be with this and wouldn't want my other properties tied to it). So if you want to refi out keep that in mind. 20 years much more common and 25 still common but less so. Under 2M you may be able to get resets every 5 years with no balloon and you may not. YMMV and would love to hear. If you are figuring a 10 year hold factor in at least one reset when you run your rate. They tend to average higher so you are a little exposed there

vacancy/turnover: you may have the actual records but I'd up that a bit. Also turnover at that rent range likely to be high and refresh necessary. If you are paying property management they will likely charge for a lease-up fee (half to full month) on every turn in addition to their regular fee. Same for tenant placements. We have a turnover line item in our budget separate from vacancy. According to her records looks like you are already running over 5%. Offices have very long vacancies and really aren't that appealing to people in that context so I might up even more.

You will need to refresh apts.pretty often.

Capex: In general (not always) you will be dealing with less emotional, more experienced investors, so for instance if the roof is old or the windows etc factor the need to fix that into your projected sale price, since even if you don't someone will include the need to do so. I might add one time-based fix to your capex (i.e roof) in addition to the foundation and keep the same #

Flexibility: You will have to be attentive to permits and immediate repair and will have more scrutiny than on single families. A complaint will draw the relevant agency far faster with a multi like this, so be prepared...you will be less likely to phase in a repair over time for instance. If the fire department or BOH takes a notion things can get ugly quick, so don't cut corners (this advice is repeatedly ignored by all of us, which is fine till things go south). Anti-discrimination, lead issues, etc. All are under much more scrutiny and you don't necessarily get assumed to be a good guy. Snow MUST be cleared immediately, side walks etc. 

Insurance: seems low, I might double that, but you should be able to get a quote. Having an umbrella/liability policy a must. 

Other: random taxes and permits I'd check, as well as the method of commercial taxation, and whether they bump it up on purpose. She mentioned electric and didn't see that there ($100/month for common areas perhaps?). We have wifi in our Western MA multi for 75 a month and offer it free to tenants as an amenity and that seems to be a plus. 

Maybe this is the biggest one: $2200 a month for the gas guys from that one apt is a huge part of your return  How stable is that? I can't imagine its truly long term, or is it? Put that at regular rents and you are likely break even at best in cash flow based on my quick scan. That could be a nasty shock.

Hope this helps. 

Hey Brent, apologies for missing your last post, got distracted! 30 year notes and increased cash flow is a great thing, especially compared to balloons. I jumped the gun on your situation and figured those weren't an option since you seemed in commercial. I long for fixed 30 year notes!!! 

Would be curious about equity cash allocation on the notes and as Allen (and, Thomas!) said you have a lot more options with what to do with your cash...go chase 10%!!

@Thomas S. Just to echo @Gabe N. point, the world is a grayer than you always paint your corner of it. Just as an example, 4% is actually an excellent return if you are allocating it to some kind of savings vehicle.

Banks treat you differently with better debt ratios. Refi and cross collateralization are easier. An experienced in-a-particular-area landlord like yourself receives more latitude on DSR likely; you have earned it. 

Good DSR can cushion a job/income change, new purchases and on and on. Strategic use of debt is vital, an automatic assumption that more is better in every circumstance is unwise, especially for those whose real estate investments coexist with other income, professional circumstances, retirement issues etc.

We are in an unprecedented period of liquidity over the last 30-40 years. Debt may not be as favorable compared to asset prices forever. Hedging risk can be a very smart play. It only looks dumb when things are going well or in a highly stable environment.

And I don't think your opportunity cost calculations factor in risk spread appropriately. You always list 10% as the benchmark return, not the return minus volatility, risk etc. An index  + a spread would be a better comparison and cash doesn't come off quite so badly in many scenarios.

But thats neither here nor there, just wanted to get some nuance of my chest and in there for @Brent Davis . Brent, my-worth-what-you-pay-for-it tactical advice would likely be similar to Thomas S. actually :  stress test the various loans under different interest rate scenarios since we have a rising rate environment. Refi sooner rather than later into one or more loans with as long an amortization as possible and ideally 5, 7 or 10 resets instead of a balloon. Maybe pay less attention to a particular quarter point or whatever rate and a good deal of attention to the timing. In any case, stagger the balloons and the resets as much as possible so everything comes up at different times and I think you will sleep better. Would love to hear about your journey.

@Ron Gallagher actually, a number of employer 401K plans don't make you pay the loan back when you leave, you just have to keep paying. And if you don't pay it back, it becomes a withdrawal, not a ding against your credit, though it will limit your ability to do it again and you do pay a penalty. 

One thing I haven't seen mentioned above is that banks want to see proof of reserves for most investment RE transactions and the 401k/IRA/other retirement plans can provide that. The various banks I've dealt with have always considered them sufficient. Thats actually a powerful real estate tool, and you still have the option of cashing a portion out later.

I've done all of the above with retirement accounts; 401K loans allowed us to buy our first primary home which skyrocketed after 08 , a cash out on a separate plan served as the downpayment on our first investment property, a self-directed IRA loan was proof of reserves for a larger deal and I think I'm missing an example or two.

Taken together the retirement piece of things has been our most powerful tool for real estate liquidity and I'm still in my 40s (barely, but still, not ancient :) 

 But this only works (alert, incredibly obvious point ahead) if there is money in the account. 

There is a great old saying "never excercise the option early" and it is very, very early for you....good luck.