All Forum Posts by: J. Martin

FHA highly recommended, as long as you can get into contract with it.. That's what I did.

They should count 75% of existiing rents (or appraisal market rents if vacant) toward qualification ratios. Great for qualifying for higher price! Go big if you're limited on capital, because it's real tough to get another one!

Good luck!

Thanks @Sarah Lam ! Looking forward to it.

I took a look at your investment goals. Looks like you and @Johnson H. are drinking the same kool-aid on the Texas market.. No one in here likes the Bay?!?

jk Looking forward to hearing about the Texas story and meeting everyone. See you then!

I did 3.5% down FHA on a quad/4plex. Then 20% down on non-owner occ 2-unit. I think you can do 20% down on quad also. But FHA is the best deal ever if you're going to buy more later! Ask your banker/ loan broker to run each of the loan types/downpayment scenarios and send you the spreadsheet with the PITI calcs so you can see how the leverage changes things and think about what you would do with the extra money you don't put down.

I was about to do 25% down conventional on a 'duplex' non-owner occupied (actually two houses on one lot/parcel) after my FHA purchase. But I took a slightly higher rate to do 20% down instead (I didn't even think it was possible, and asked my loan broker right before we locked our rate, and he said no problem, just higher rate.) I did it through a broker in the SF Bay Area who placed the loan with Land Home Financial Services, out of Illinois or Michigan I believe. I think they're all over the US.

I'm not sure if you're just trying to avoid the PMI, but the 3.5% down on FHA for a rental property (and a big chunk of cheap, 30-yr money) is the best deal out there if you ask me. Put 3.5% down instead of 20% (and ask for a 2-3% sellers credit for closing costs) and save the other 16.5% down for your next deal! I think the FHA rate was cheaper than conventional when I bought also. If you're not going to buy more, or have unlimited capital, no worries then. But I challenge you to go find 30-yr fixed rate financing for equity money anywhere, let alone at those rates (even factoring in the PMI until you get to 80% LTV). I got lucky on my timing, but my 30-yr fixed FHA is at 3.25%. And that downpayment allowed me to do deal #2. You have to be careful with it. But one of my very smart friends once said, "If cash is king, then leverage is god."

Get out the phone book and call up some local and national banks and ask them what type of options they have. Also look up a loan broker who can shop around to different banks. If you're willing to have a 10-yr or less loan, there are a lot of small banks looking for commercial loan volume. They might lend on your portfolio of properties if you're going to have that much volume. Check around, don't forget to tell them how much business you want to bring them over the longer term (including deposits), and good luck!

There are a couple hurdles you may run into here.

I see many appraisals as a bank regulator and have looked at a lot of different options for cash-out financing as an investor. First, with the appraisal, is that it can be very difficult to determine what the appraisal price is going to be until it's performed BY THE LENDER who is going to provide the financing (unfortunately, they can no longer take the appraisal that YOU ordered like they could pull off back before the S&L crisis.) I've seen these all over the place, depending on the comps chosen, weight on adjustments, and internal bank scrutiny (sometimes they will actually send it back to the appraiser for edits.) You can try to get a commitment letter from them before the purchase, but that would be difficult if you're trying to get a quick close done on a cash deal.

The other potential issue is that many banks will use the lesser of appraised price or purchase price, if the property is purchased in the last 1 year. I've heard of some exceptions with local banks if you get a commercial loan instead of a residential loan. This may be necessary anyway as it seems like the standard residential underwriting becomes difficult to qualify for after multiple properties due to restrictions on rental income qualification and debt/income ratios.

Hazard insurance on structure? Trash? Common area utilities? (besides the known expense of water, which you intentionally left out, even though you seem to know what it will be..) Are units individually metered for gas/water heaters? Is it customary for tenants to pay these costs in your area (or will your rents suffer unduely by forcing it on them?) I'll assume the building is not subject to an HOA. Trash is customarily paid by owner in apartments in SF Bay Area (or it overflows in backyard with tenants 'paying' for it.) Common area utilities are for any exterior lights/water/laundry room etc. I only have 1 water heater (gas) for the 4plex, which I factored in at purchase. Fortunately, laundry income pays for that and most of the water..)

I have one slow-payer like you describe, but I charge the late fee EVERY time, and he knows it will be charged if the rent comes in late. It always gets paid. But I live on-site, so the communication is easier. (harder to avoid me). There's also a decent reason I could verify, 1.5mo deposit, the unit is being kept in good condition, and rents are at the upper end of the market. So do I work with him? Yes. I'm basically well-secured, the late portions are small, I collect them all, and a late fee on many months.

If rents were below market, had a thin deposit, unit not well cared for, receive frequent calls from tenant, and/or attitude.. that would probably be a different answer. In between these extremes, it's a trade-off. But define what that is for you, make the tenant stick to a plan, and be ready to pull the trigger if you need to. What is vacancy and rental price trends in your neighborhood? What is your existing rent relative to market? What kind of deposit do you have and what is the condition of the unit? How much do you trust the tenant? How much of a headache is this? You may find that he starts finding the money on time somehow when there is a financial penalty for not doing so. Or you'll have to make a decision on whether or not the risk of how this winds down is worth the turnover to you..

Others on BP will tell you to file all paperwork the minute they are late and start eviction proceedings by the 5th. But I'll work with them a bit with the circumstances I have because I feel pretty well secured with the deposit, condition, and have a close eye on everything on-site. Your circumstances may be different. Good luck with your tenant. Hopefully both of ours start to get on track!

I would switch the order..

1) Keeping the management company honest, and switching if need be.

My properties are local, so I drive by personally periodically, though not frequently, because I have a very trustworthy manager who lives very close (soon to move in my unit). I think this is especially important if you're in a lower-income area.

2) Taxes - Uncle Sam needs to be paid

(and insurance - can do through escrow or have property manager do it. they should provide you accounting at end of year.)

3)) Cashing rental checks? How does that work, can you have the management company collect checks?

Yes. You can have it sent to them and they will deposit into account for you after netting their fees and repairs out. (But watch out! Last one I talked to wanted a month's rent on "deposit" with them to cover any unexpected expenses, etc above the money remaining with them. Ask them what services are included - and what the fee is for leasing out a unit when you have a vacancy, lease renewal fees, etc)

Good luck! Having a great team of people you can trust is important if you want as hands-off investment as possible, from what I've learned so far.

One other idea:

Negotiate a debt/equity combo with equity preference given to those that are also bringing good volume/rate on debt for you. e.g., investor can buy in 25% of the equity if they also bring 75% of the purchase price as loan to you at 8%.. Scratch each other's back to get everyone what they want: they can have their equity, and you can lower your cost of funds, w/ more profit on your ongoing deals, and drawing more loans for you from those who want the equity slice. If you have the volume coming through, why not get them all closed and make more money all the way around the table..

A strategy that I used in my last rehab project was billing the partnership directly for my time, including a performance bonus in the lease-up for achieving top of market rents. (aka outperforming the local property manager's quote). For the rehab time I was going to spend on a project with a 50/50 equity deal with a passive investor, I estimated the time I was going to have to spend. Then gave them the option of paying $XX/hr for actual hours, or a fixed amount of hours about 15% higher than my estimate to cover some wiggle room if something popped up, and the fee was fixed. Because it is a 50/50 partnership, they are paying half, and I am paying myself the other half (aka, partner is paying me directly for the 50% of partnership work that I am performing on their behalf.)

It wasn't a point of contention or anything. I just told him that he's a passive investor and I don't work for free, so someone would need to do his share of the work. But that I would guarantee I would be putting more care and effort/oversight into the project than some hired local guy because of my direct interest in seeing the project succeed. And I'd just finished doing it successfully on 4 other units. So I had the evidence/experience to show in the same neighborhood. So I made a few thousand dollars to help pay for my equity. It was a relatively small job on a small house. Now I wish I would have taken more equity instead of cash though. Even if it's not a lot. But figure out what your time is worth to you, what it is worth to your partnership, and what it is worth to your partners in the savings over purchasing a much more expensive, totally-rehabbed building. Then figure out what type/amount of compensation you want. You should be able to justify the ROI from your work, or it's just not adding enough value..

As a good friend convinced me long ago, you don't get what you deserve.. You get what you negotiate for. (That doesn't mean squeeze the last drop of blood out of your partners, but find something that works for all of you.) Good luck on your future projects, and don't give up your time for free unless someone's bringing something to the table that you absolutely must have, or you're going to marry her! (and even then, be cautious! lol)