All Forum Posts by: Keith Linne

@Greg Dickerson 

@Nick Schoch

@Andrew Beauchemin

Thank you all for taking time to provide me with some additional insight as I pursue this deal! The PA is coming together, and we should have things under contract before the weekend. Then, the heavy lifting for due diligence begins. I will likely reach out with additional questions as they arise.

In order to beat out a very similar offer, I had to lump in 9 additional units (4-plex, duplex, and 3 single family homes). All of those are at very competitive prices. The plan as of now is to assume the CD on the apartment building and finance the miscellaneous properties as a package deal through a local commercial lender. 

We'll likely sell the 4-plex and duplex within the first year (they don't quite fit my target area, but are in great shape), and rehab, then re-sell, the single family homes (hoping to clear about $20,000 each on those).

This will be my biggest deal by far (just shy of $2,000,000 total), and I'm looking forward to pulling it all together!

@Luke Sass

I typically underwrite with 9% vacancy in mind on all deals (market is closer to 2-3% currently), as well as fairly conservative CapEx/maintenance budgets; however, I definitely agree regarding the stress test for a worst case scenario. I'll have a better idea of how close our reserves figures are once we work our way through due diligence, and I like your approach of allocating a rough % of gross revenue toward those items during initial underwriting.

As we turn units and increase rents, I'm planning on 12-month leases. I also completely agree the LTV is likely lender dependent. I'll continue conversations on that side, while assuming for the worst.

Thanks again for all of your feedback!

@Tyler Eastburn 

I agree with @Michele DuMond - in person seems better than online. I went through Kaplan for in-person classes when I obtained my license back in 2011, and again last year when I obtained my broker license. You need to be able to dedicate a significant chunk of time to the process during business hours; however, Kaplan does an excellent job of "teaching to the test". This allows you to study much more efficiently. In my classes, we also had a significant amount of beneficial discussion regarding numerous topics.

I also agree with @Jordan Moorhead - CE Shop is a great resource. I use them for most of my continuing education requirements, and I'm at a point where the convenience of online outweighs the benefits of the potential in person discussions. I keep my real estate broker license for my own deals and friends/family, and also to keep tabs on the market (I work full time as a general contractor), so depending on focus, in-person CE could be a good option as well.

@Luke Sass  Thank you for your input! Answers below:

(1) Units are currently leased, mainly month-to-month. The building is in a high demand area, and the current owner has had the property for quite some time (and hasn't been aggressive in staying in line with market rates). I'm allotting 12-18 months (underwriting for 18) to turn everything.

(2) The prevailing cap rate for the area is 7.0, and I used that to determine the value add as you described. The building has a mix of 1 bedroom (6), 2 bedroom (11), and studio (1) units. The 2 bedroom units are at least $100 below market each (potentially $150 each), and the studio and 1 bedroom units are about $50 below market each (average increase of ~$80/unit as you described). Works out to more like $250,000 in value add, unless we gain $150 on the 2 bed units (in my opinion, doable long term). Glad to hear I'm tracking properly here.

(3) Before refi, the property runs at 1.3 DSCR and after refi roughly 1.25. I've spoken with multiple local commercial lenders who are comfortable with a 1.2 DSCR minimum.

(4) The 80/20 vs 75/25 refinance breakdown is what I'm curious about. The lenders I've spoken with offer 20% and 25% down on new purchases. Since this property would be an assumed CD, does that have any implications (refi of sorts, versus a new purchase)? Will underwrite assuming 75/25 to be safe, and need to continue the lender conversations.

Hi everyone!

I began my real estate journey as a full-time rehabber (completed about 30 rehabs from roughly 2011-2014), and have since transitioned to full-time client work as a general contractor. In addition, I've been working to build my personal portfolio of investment properties. I currently own 2 triplexes (with a partner), a duplex, and 2 single family homes. I maintain both my builder license and real estate broker licenses, as I find it helpful to be able to keep tabs on the market. I've also been an agent on over 100 transactions. Based on all of this experience, I am very comfortable in the residential realm (1-4 units). 

I am always open to deals that make sense, and this weekend my agent brought me a very interesting 18 unit apartment building for sale. I'm hoping we can get this deal under contract (currently working against another offer, etc), and I'd love to gain some experience in the commercial world. 

My question for you pertains to financing. I understand financing vs delayed financing vs cash out refi vs refi in residential (and most of the nuances that come with each); however, I am unsure of how all of this (if any of it) comes into play on the commercial side, being that Fannie and Freddie don't run the show. 

In this case, I'd be assuming an existing CD balance ($1,125,000 @ 5% interest only, 4 years remaining), and bringing a 20% down payment as a mix of a private capital and my own capital. Are there any restrictions regarding refinance in the commercial world (seasoning periods, 70% LTV max, etc), or can I simply complete a standard refinance when the time comes (80% LTV, 20-25 year am, 5 year rate lock, etc)? Any issues if I involve private capital (loaned, no ownership %) on the down payment side of things, or is it best to use my own capital only?

We're aiming to purchase the property, turn units, and raise rents to be much more in line with market. This should be doable in 12-18 months. After stabilization is complete, I'd like to pursue the refinance to free up capital. 

Here are the deal specifics:

Purchase Price $1,410,000

CD Balance $1,125,000 balance

Down Payment $285,000

ARV ~$1,700,000

Refinance at 80/20 = $1,360,000 new loan balance (leave $50,000 of capital in the deal).

I apologize if much of this is beginner stuff - just working to understand the other side of the investing world! I have begun discussion with a few local commercial lenders; however, I was hoping to get some input on BP from the experts on the commercial side of things. Any input is greatly appreciated. Thank you!

@Justin Klinghagen Glad to hear you knocked out your first deal, and I appreciate your transparent feedback regarding the entire process!

The textbook definition of market value is "the amount for which something can be sold on a given market". As such, I've always struggled with how much power the appraisal process gives one individual (especially on FHA deals, as the first appraisal sticks with the property for something like 6 months).

I rehabbed properties full-time from 2011-2014, and we had our share of "discussions" with appraisers when properties were (what we deemed to be) under-valued. I got to the point where I provided 3-4 very accurate comps to every appraiser, prior to the appraisal process, so they knew I understood the market should valuation come up short - that step went a long way in preventing issues! Although you had some issues with the total value-add in your basement, I believe the extra beds/baths will be well worth it long-term in regards to commanding higher rents, better quality tenants, etc.

Sorry to hear about the terrible timeline you ended up enduring as well. I work full-time as a general contractor in the Twin Cities, and meeting timelines is top priority (and the focus of about 90% of our time/effort!). Unfortunately, there are many contractors out there who promise the world, and then come well short of expectations as construction progresses.

I couldn't agree with you more on the cabinetry side of things. With all of the RTA (ready to assemble) and box cabinet options out there, it almost always shakes out close to break even between painting existing and replacing the cabinets (assuming you use a good painting contractor who is finishing things to last). Plus, as you mentioned, you then enjoy the flexibility of improved layouts and updated hardware (soft-close, easier to adjust, etc).

I take a very similar approach to you - you have to get your feet wet before you can truly learn what works/doesn't work. I've had my share of both home runs and failures. As long as the wins outweigh the losses, it's all worth it.

Glad to hear everything is now fully rented, and I hope you are able to pickup your next property before long! If you ever have construction questions, etc, I'd be more than happy to grab coffee/lunch, or simply exchange emails.

Thanks again for sharing your experience!

@Andrew Postell I thought that may be the case - I'll do some digging in the other forums. Thanks again for your expert input in the 1-4 unit space (I focus on student rentals that fall into that category), and for the timely response!

@Jacobus Rex Unless all of the block is core filled (rare, and typically top course only at window openings), a run of the mill circular saw should be just fine. In fact, I typically use my lower end Ryobi for that type of work, as I'm not as concerned about it being over-worked/burning out.

At the potential new opening, think of it like you would a main floor header system - the new header doesn't need to sit on the block, but instead be supported by trimmer studs on each end (one trimmer for each side is all you need with that small of a span, and the block essentially functions as king studs to hold everything in place). You need to wrap the new window opening with green treated lumber anyway, so the old ribbon/rim joist spans from block to block (super solid), and you can then use a fine saw, sawzall, etc to simply cut 1 1/2" off the end of any joists that tie in. This provides a "slot" for the new secondary header component to slip up into place from below. Pin that to the rim joist, then install your trimmers beneath. We put the bottom sill of the new opening in first, run the trimmers down onto that, tap-con all of the window framing into the block, and then foam all gaps, etc. Hanger the joists off the new header, and you're all set. Once it's all said and done, you have a solid header (that's likely overkill).

Even with the deeper well/grade, it may be worth the time and effort (assuming it's to add another legal bedroom to boost property value/rents); however, that's totally dependent on your market and exit (or hold) strategy.

I agree with Mo's insight regarding the basement - there are some good options to clean things up and gain space; however, it depends on your overall goal. If you're holding as a rental, I would only finish the basement if you solve the moisture issue first; otherwise, you're opening yourself up to angry tenants if storage boxes, furniture, etc get wet. If you're flipping it for re-sale immediately, you'll want the issue solved (if the space is finished) to avoid liability (or you'll need to disclose wet basement at re-sale, which can be a deterrent). If it's simply to gain space for yourself for the time being, could be a good move.

My experience (both with rehabbing and now residential client work) is that 90%+ of moisture issues can be solved by simply installing gutters with down spout extensions (or keeping existing gutters clear), and re-grading around the perimeter of the house to ensure positive drainage away from the foundation. Re-grading, coupled with a poly underlayment beneath river rock, etc, does wonders. In extreme cases, interior drain-tile may be necessary; however, if you have a sump, a system may already be in place. Even an entirely new system typically only runs about $6,000 (depending on the size of the basement). We always use closed cell spray foam for our basements as well, which keeps moisture out (or forces it directly into the drain tile system, if present).

Hopefully this information is helpful and the header description above makes more sense. Feel free to reach out any time with questions!

@Mo C. Looks like you guys do awesome work! We operate in the Twin Cities as well (mainly focus on Hennepin County). If you ever want to brainstorm about business, etc, I'd certainly welcome the opportunity to network!

@Jacobus Rex I work full-time as a general contractor in the Twin Cities, and we install them frequently as part of our basement finishes. We've taken pretty much all approaches, depending on conditions (excavation, hand-digging, heating, etc). Although the digging can be a bear, it really isn't too tough of a project (though the right tools make a huge difference).

If you're utilizing an the existing opening (replacing a typical ~30x18 lookout window), no need for a header since you aren't modifying width (in reality, a span of <3' is extremely short anyway, even if new, since the rim joist is sitting on block on both sides). Just make sure you meet all egress code requirements (pretty easy to find them online, and your contractor is likely well versed in the subject; however, let me know if you'd like them PM'd over to you, for reference).

I highly recommend you over-dig the opening depth by 6-12" and then back fill the bottom with pea-rock or river rock (while sloping the bottom of the opening away from the house). This allows for better drainage should the well get a lot of direct rain. When conditions are heavy clay, we frequently tie drains for each well into an interior drain-tile system (though this is when we're finishing the entire basement). 

Cutting block walls usually can be done with a standard circular saw and diamond blade (as long as everything isn't core filled). Since block is hollow, you simply score the opening to cut through the "walls" of the block, and then use a sledgehammer for get everything out.

The sump is likely an issue for the "new" opening; however, if you can adjust location slightly, installing a new opening is no big deal (assuming similar 30-36" total width in the block). We typically just shorten any joists that tie into the rim above the opening so we can slip in another framing member (if the rim is 2x10, a 2nd 2x10, etc). Then we hanger the joist off of the new doubled header, and it's good to go. Obviously this can vary slightly depending on the property, so it's best to verify with your contractor or a local structural engineer if there's uncertainty.

Good luck with the project!

@Jacobus Rex - With how mild the winter has been so far (generally speaking), this shouldn't be a huge issue. 

Once you break through the frost layer (thickness varies depending on severity of the conditions and how long things have been cold) it's essentially just normal digging/installation. If the ground is extremely solid, some companies will use a propane fueled heater to thaw the top layer before digging (you see supercharged versions of these all over in the winter when utility companies are feeding new underground lines). In addition, companies who specialize in egress windows often use a mini-excavator for digging (rather than hand digging). Those machines are more than capable of breaking through the frost.

You may notice some settling in the surrounding ground area come spring, as the ground thaws and any air pockets around the egress "cage" fill back in. Let me know if you have any additional questions regarding the general installation process once the hole is in place.