All Forum Posts by: Judah Hoover

The past few years may people have leveled up the size of deals they are doing, and that's awesome. But don't be lazy or fall into old habits. Buildings with more than 4 units handle the trash differently. Its on YOU as the property owner to transfer those services, the title company won't do always it for you. The title company might not even know who the provider is. Don't get caught off guard the first time you do a mulit unit deal with enough units to trigger the local label of "commercial property"(sometimes its not until you get to 5 or 6 units), be proactive and set up the trash. Its better to haggle about the price, shop for service and all that right after you buy it instead of waiting 6 months and having a mess (sometimes literally) on your hands. I have even seen owners botch this and have 2 services billing them. Remember, your property is your responsibility. Others, like title companies, help... but its YOUR property.  

I am personal friends with Matt Faircloth and could have called him, but thought I might get better responses here.
In his famed book "Raising Private Capital", on pages 77 and 78, Matt tells of how he used to buy properties with HELOCs then refi them. But after the crash in 2008 he was stuck with 2 mortgages on some properties. He said with a mentor he could have structured these deals better and he wouldn't have had years of break even cashflow.
Using HELOCs seems to be a very accepted part of the BRRR strategy many use and I believe still advocated by Matt, so what lessons should have been learned? and how should have the deals been structured? What other ways could have have gotten to a positive cashflow solution sooner than waiting for the market to recover?

 Thanks David, great additional information. 

History is replete with stories of heros setting out to search for nearly unattainable objects that will grant the finder with great reward. Jason and his Argonauts sought the golden fleece, King Arthur and his Knights of the Round Table with their quest for the Holy Grail, Ahab had his white whale, even Fox Mulder and his search for the elusive “Truth” that was allegedly “out there”.

For the past few years real estate investors have searched, largely in vain, for affordable 2 to 4 unit buildings to do what is called “house hacking”. The object is to find a small multi-unit building, live in one unit and rent the others out. It is touted by many as the ideal entry point to real estate investing and therefore step one in building a portfolio of rental properties.

The challenge has been too many searchers and too little available inventory. So even though many blogs, gurus, and coaches teach people to set out on this crusade, precious few attain their goal. In the hot real estate market we have been experiencing 2 to 4 unit buildings have been gobbled up by seasoned investors. This has pushed up the values to the point where they don’t make sense for house hackers, or rendered the available options in undesirable locations for owner occupants.

All this is about to change. The troubles in the economy are going to spark investors needing to liquidate some of their current holdings to raise capital so they can weather the storm. Some of the properties they will be selling will make ideal candidates for house hacking.

More opportunities are out there or will be soon than have been in recent memory. Your aim should be to prepare and be ready for them. As I say to my four children whenever we are in parking lot, “Keep your eyes up and your head on a swivel.”

What makes house hacking so attractive to owner occupant buyers is the ease of and number of options for favorable financing. Because owner occupied mortgages have a much lower rate of default banks have lower down payment requirements, sometimes as little as 3.5% to 5%, and the interest rates offered are the lowest there are. Maybe not quite as low as an owner occupant buying a single-family home, but pretty close. When you move to more than 4 units, the lending laws change. Lenders treat properties over 4 units as “commercial” no matter if the owner lives on site or not. This eliminates many of these potential benefits.

With great mortgage options, and a very likely increase in inventories now is the time for the return of the house hacker! If you have looked to take advantage of this strategy in the past only to give up, this could very well be your chance to jump in the lucrative world of investment real estate. Call your lender and get pre-approved. Ask a trusted realtor knowledgeable in the rental market to start looking on the MLS for you. Contact local wholesalers and turnkey providers in your area and tell them you are in the market for house hacking deals. Who knows how long this window of opportunity will be open, don't miss it.

The return of OVERLAYS

Not Layovers, those are delays that happen at crowed airports. We aren’t likely to see them anytime soon… sadly.

I am talking about lending overlays. All banks assess risk differently and are permitted to set more restrictive guidelines than a lending program calls for. So if because of the times we live in a local lender decides to require a 640 credit score for an FHA loan when 620 would have cut it a few months ago that is an example of a lender tightening an overlay. In fact… FHA has a 580 minimum FICO score… any requirement higher is technically an overlay.

A more applicable example to those of us that invest in real estate is seasoning requirements. Some lenders will require 6 months, some 12… and some none at all as long as you can document the repairs and justify the increase in value.

This is important today and in the market times coming because whereas for the past decade lending standards have been converging and loosening, they are about to diverge and tighten, and how they tighten will not be uniform. As we recovered from “the great recession” lending programs looked more and more alike from bank to bank and it got to the point that there was very little difference. It also got pretty easy to get loans done.

Do not expect that to continue. Banks will always be lending to qualified applicants but how much they lend and how they will lend will differ. At bank A you may be able to get 80% LTV loans done as an investor, but at bank B they may only go up to 75%. To mitigate the increased risk bank A will require a higher credit score or look closer at the Debt Service Coverage Ratio (DSCR) of the loan.

Establishing relationships with local bankers is always important, now more so than ever. It is also a good time to talk to mortgage brokers, because they can do much of the shopping for you and have wholesale relationships on the back side. Many mortgage brokers are “brokers” in name only. They are actually lenders that then sell the loan on the secondary market. I spent 10 years as a direct mortgage lender. I called myself a mortgage broker because it’s a term people understood, and I had great relationships with my wholesale channels. For example, I could get you a Wells Fargo loan at a better rate with less overlays than you could get if your mother worked there.

The times ahead are going to be interesting, but I have seen corrections before. I am excited for what we are going to see. The market ahead is going to be very different, but there is always opportunities.

Best I can tell Ron LeGrand is the one that invented or came up with the Maximum Allowable Formula we all call MAO (pronounced Mayo).

ARV times .7 minum rehab amount = MAO.

I am sure investors used similar foumulas before Ron. I am just interested if anyone knows if Ron is the one that coined the term "MAO fourmula"

and while we are on the tipic, is he the one that coined ARV??

@Brady Boyer I have used Carey and Assoicates like @Eric Drum mentions. They have done busiess taxes for me for several entities over several years. They have changed hands a few times in the past years. I have also used Gift and associates. Ask for Shawn Brubaker. Great company, great guy. Use my name when you talk to him.

INVERSELY!!

Now I am tracking with you. I read half of this post in disbelief.  Took me some time to recognize what you were saying is that cap gains taxes should be INVERSELY indexed to inflation. 

Coming from a banking world I think of a fully indexed rate as an index plus a margin to arrive at final rate. 

but you make a great point. sadly it will never happen, government needs inflation to happen and the double taxation on it.

so very much looking forward to it!

Kenneth, these are very easy things for almost any attorney to do. You will have to pay them for their time. I recommend checking out the local REIA, my understanding is that AZ has a great one.