All Forum Posts by: Kody Crouch

Wouldn't it be nice if the seller's did inspections up front to save everybody the trouble of thinking about this? That's how most homes are sold in the Bay Area, and every nice house has at least 3-4 offers over list price, some of the cash, and none of them with any contingencies.

However, you should absolutely always DO inspections. And even more, you should back out if they don't meet your requirements.

That said, there is a situation where you could waive inspections, ONLY if you must.   (EDIT: I want to emphasize that I don't think this is a good thing to do as a habit or to be sneaky. But it is an option that most people overlook.)

If you are going to have a finance contingency anyway, you can waive the inspection. If the inspection makes you want out of the deal, just let your lender know you won't be completing the application, and then let the seller know you will be unable to meet the financing requirements, so that they can move on quickly. 

The down side in this case is you lose the ability to negotiate the price after inspections.

@Ryan Oblak  David Greene is a real estate agent in the bay area. You can hire the man himself to help you find a place to house hack.  https://www.biggerpockets.com/users/DavidGreene24 

I don't know about SF specifically, but the way to do it in the peninsula or east bay is either buy a place with lots of bedrooms and rent out the extra rooms individually, or buy a place and then create a second unit - either convert the garage or build an ADU in the back yard, or both.

People use FHA loans to househack all the time. I don't know why you wouldn't be able to do it.

@Michelle Martin if you are working with a traditional bank, and they are having a hard time understanding you, try using the terms "technical refinance" and "delayed financing". They very likely offer what you are looking for and just don't realize it because it's not one of their more common products. They might require the mortgage to be in your name, even if the property is under your LLC.

PS: since you're in California ask a real estate attorney or your CPA about the Delaware Statutory Trust and find out if it's a good fit for you.

@Daniel Lopez that's a tough spot. You didn't say how bad your credit score is, but I know most banks require 620 for any kind of mortgage, but FHA can go much lower. They can do 10% down payment loans if you have a 500+ credit score. They also will sometimes count the proposed rent on the second unit towards the income requirement. That means your 50k might even get you into that 400k duplex you mentioned. https://www.fha.com/.

A second answer to address your specific questions.

Market - @Joe Kaliher answer and David Greene's book will give you a lot of good info. All the cities you mentioned should be do-able with 50k, but not in the types of areas where BRRR is most successful. Sometimes a smaller city near the metro areas can be a great place to find similar appreciation as the city, but with better cash flow and lower entrypoint. I'm not an expert on Colorado, but think about a place like Broomfield except cheaper.

Long-Distance is scary - yes! You have to put so much faith in other people for it to work long-distance. David Greene's book gives very detailed advice for how to vet your "team". He emphasizes that the team (realtor, lender, contractor, property manager) are the most important determining factor.

Is BRRR do-able with 50k? - absolutely.  When you find the deal, run the numbers, and sanity-check it with your team, you will know if it's going to work.  I have seen deals on this site at exactly that price point, but most people working at those low-value homes are experts in the local market and usually live nearby.  You'll definitely be relying on your team to give you good advice and execute. A small miscalculation of the cost can completely change the outcome.  Search around this site, try to find the podcast episodes featuring people that have done it like that, and figure out a plan.

@Daniel Lopez Are you sure you want to sell your home in order to do long-distance BRRR? In most situations, this would be an example of sacrificing long term goals for a short-term goal. Your home is not an investment strictly speaking, but your home equity can be put to work toward your investment goals. Every mortgage payment you make is giving you additional equity in your home, and you will lose that by renting.

1)  If the numbers are right, you may be able to BRRR your condo. You didn't say what city you're in, but in a 1-bedroom condo you can probably put in recessed lighting, change the light switches and outlets, put in hardwood floors, re-finish or paint the cabinets, install granite countertops, and paint all the walls and ceilings for less than 15 grand.  After that you can do a cash-out refinance to get more than you put in.  Granite countertops and recessed lighting might even be overkill for your neighborhood, but those are just some examples of what you can do in a condo.  Some very successful investors would even recommend vinyl floors instead of hardwood. Maybe you can save even more by doing the painting yourself.

2) If you analyze the idea above and saw it won't cash flow, or you won't get enough cash from the refinance to be able to buy a new place, then you can do the same renovation as above, except you sell it. If you've lived their for more than two years you can keep the profits tax-free.  Use some of that profit to buy a modest new home, and put the rest toward future investing. After two years you can do the same thing with your new home. If your new home has more bedrooms you can house hack that too and you've got another piece working toward your investing goals.

3) If you have equity in your home (or you can force a little more equity by doing some cosmetic renovations), you may be able to refinance and lower your monthly payments, then take out a HELOC to use for real estate investing. You still get to access some of the equity without having to give up your house.

4) Are there duplexes or triplexes near where you live? Selling the condo to get into a House-Hack might be a good option to remain an owner while bringing in some rental income.

5) If there are no duplexes, a 2-bedroom condo will work.  My wife and I used to rent out our second room on AirBnB and that paid two thirds of the mortgage on our condo in Mountain View, CA.

There are lots of ways to do it without going back to renting. Try to be creative and find a way to get started in real estate without giving up your home.

@Cody Burke There is nothing wrong with that loan structure. Please PM me their contact info :) 

You mentioned the amortization structure, but when you have a 12-month interest only the idea is you would likely refinance. Remember there are people doing this exact kind of deal you described with a 10-11% hard money or 7-8% private loan. Then they just refinance after the rehab. If the rehab is big enough you can usually use the appraisal value to calculate the LTV in the refinance. If it's not that big, you'll have to wait six months (or sometimes you can join a credit union and refi immediately after the rehab using the appraisal ).

I would suggest that whatever you decide, you should make sure to apply that new policy to all your tenants equally to avoid any type of discrimination accusations.

Maybe you can just make a policy that gives a three week grace period for tenants who notify you in advance that the rent will be late.

Leverage is a tool.  You should use it to the extent that it helps you achieve your goals, but never to the extent that it puts your goals at risk. Ask yourself specific questions to find the right answer.

* What equity and cash flows do you expect to gain if you pay cash?
* How much would your cash flow and equity gains/losses be affected if you bought two houses financed at 50% LTV?
* What about 5 houses financed at 80% LTV?
* How else can you mitigate risk? Should you leverage 2-3 houses and maintain a large cash position?


Imagine some scenarios and compare the different ways to buy.  I'll go through some here, where all the homes are 250k, they rent for 2500 with pro forma monthly costs of $1350 with no mortgage, and $2370 with a 200k mortgage and $1960 with a 125k mortgage.

ways to buy
1) cash - Pay 250k cash for a single home.
2) high leverage -Pay 50k and borrow 200k each for five homes.
3) slight leverage - Pay 125k and borrow 125k for two homes.
4) hedge your high leverage purchase with a cash position - Pay 50k and borrow 200k for 3 homes. Keep 100k in reserve.


Initial scenario

1) cash buyer has 250k equity, $1150 monthly cash flow, and no debt.
2) The highly leveraged buyer has 250k equity,  $650 per month cash flow, and 1m debt.
3) The slightly leveraged buyer has 250k equity,  $1080 monthly cash flow, and 250k debt.
4) The cash position buyer has 150k equity, $390 monthly cash flow, 600k debt, and 100k cash.

Notice that for the slightly leveraged buyer there is not a tremendous cash flow difference from the cash buyer.

In a good market, let's say after 5 years, home value has gone up 20% and rent has gone up 10%.  

1) The cash buyer has 300k equity, $1400 monthly cash flow, and no debt.
2) The highly leveraged buyer has 590k equity,  $1650 monthly cash flow, and 910k debt.
3) The slightly leveraged buyer has 375k equity, $1580 monthly cash flow, and 225k debt.
4) The cash position buyer has 360k equity, $990 monthly cash flow, and $540k debt, and 100k cash.

The leveraged buyers (including the cash position) are all far wealthier, even after only 5 years, and two of them already surpassed the cash buyer's cash flow. If the cash buyer were to refinance and pay off 90k of his debt, he would also have higher cash flow than the cash buyer.

But how about In a major crash? Let's say after 5 years home value has gone down 40% rents drop by 10%.  With home values depressed, the guy who kept a cash position can purchase 3 homes that will cash flow $320 per month each.
 
1) cash buyer - 150k equity, $900 monthly cash flow, and no debt.
2) high leverage -  no equity (underwater 160k), Losing $600 per month. 910k debt.
3) slight leverage - 110k equity, $580 cash flow per month, 225k debt.
4) cash position - has no equity (but not underwater),  $600 cash flow, 900k debt, and 10k cash.

In this down scenario, the cash buyer is temporarily the best, but both the slight leverage and cash position scenarios are in great shape.  As the market turns back up the cash buyer will be envious of their positions.

So look at the high leverage strategy, and ask yourself - how would I survive this scenario? If you can not give a sensible answer then that's too much leverage for you.  Consider a less leveraged position or keeping a cash reserve as a contingency.

@Tom S. have you ever looked into the difference between an LLC and a Delaware Statutory Trust? I've had several recommendations from investors that Californians investing out of state should use DST instead but I am trying to actually nail down the legal differences.