All Forum Posts by: Kyle Davis

@Scott Snow Thanks for the input, Scott.  We did use an approved feasibility study company to get that STAR report.  

Of the $500,000 raised so far, $400,000 of it is with other partners/investors.  Unfortunately, none of them have hotel experience but simply believe in the project and want to be a part of it.  

The other idea I had last night was instead of me being the only person to sign the personal guarantee on the SBA, I think all the investors should.  That way nobody feels slighted for taking on extra risk and not getting any reward for it.  If everyone takes equal amounts or risk, (at least in regards to the SBA personal guarantee), then everyone should be compensated equally in proportion to their ownership in the project.  But that down side to that idea is pitching to the investors that not only are they on the hook for 125% of their investment in the project, but now a $1,000,000 loan.

Hello My BP friends.  I have a situation.  I'm getting into the hotel investing scene and have a situation.  I'm planning on building a franchised hotel in my market location and already have many of my "ducks" in a row.  I got a slam dunk financing package, I hired a 3rd party feasibility study to create the feasibility study and give me a 10 year pro-forma (Which looks great by the way), have my contractor lined up and have everything ready to go except the down payment that the bank is requiring (20% down).  So here's the rub: The franchise actually recommends having at least 25% down (which in our scenario is $1,000,000).  I currently have 500k raised.  Technically, the bank will allow us to go forward if we only have 20% down (which is 800k).  I have a strong chance to lock in a gap loan fund to get us the remaining 300k, but at the end of the day that is a loan and I will have to pay it back.  The interest on it is slightly higher then the banks.  For the record, the bank quoted me 4.25% interest over 20 years, balloon at 5 years.  Gap loan is around 5% with same year terms.  Personal guarantee for the main bank is 125% of your cash in the project.  SBA is making one of the partners (probably going to have to be me) sign an unlimited personal guarantee on $1,000,000 of the loan.  (The other main bank is doing $2,000,000).

I've done many 0 down deals with single family homes, tri-plexes, etc etc etc and I'm perfectly comfortable with that model as I know the local real estate like the back of my hand and know how much to pay for properties to cover my rear end in case I need to liquidate. (Making sure I'm at 70-75% LTV AFTER I repair the property). But the properties I invest in are very cheap and if crap ever hit the fan with them I could easily pay for the monthly costs until they sold. But now this project is in the millions and if crap hit the fan and I couldn't work out a loan modification, I would have to declare bankruptcy. I could weather the 125% of my money in the project, but the unlimited personal guarantee on the $1,000,000 would screw me.

So where I'm struggling on is that I know it's a slamming good deal, the demand is there, the numbers make sense and I'm very confident in the project.  I've already spent 24k on the project so far so I've been putting my money where my mouth is.  But on all the other deals I've ever done I have always ran a "worst case scenario."  And I've always been comfortable with that scenario if it ever hit.  This one is different though as it would basically mean bankruptcy.  

That being said, is anybody on here in the hotel industry or large apartment complex industry that could throw a couple pointers my way?  

@Lesley Resnick I think that you might be using different numbers then me.  The properties are worth $450k, but I'm acquiring them for around $400k.  After about 3.5 years, the principal balance will be around $360k, which is 80% of 450k.  Am I looking at that correctly?  Thanks!

@Lennie Holland Thanks, Lennie for playing Devil's Advocate!  I actually greatly appreciate a person that will take my idea and chop it up in "what if" scenarios to see if the deal is still good.   

You are correct in that there might not be room for forced appreciation.  But the owner of the properties have been renting to the majority of the same tenants for years and hasn't raised the rent on them in years.  I've double checked the city Housing Administration and compared to other rentals of my own in the area to confirm that they are all under market rental rates.

The way I see it, is I agree with the theory "One destructive tenant and you're upside down"  But at the same time it's a big real estate deal to be made with little cash down.  I do have landlord systems in place where the properties are inspected every 6 months to help avoid those situations, but all it takes is one day to trash a place pretty good.  But I also can't operate in fear that every person I might rent to is going to destroy my place.

Let me know your thoughts on that!  Thanks!

@Lesley Resnick I was looking at the loan balance after possibly doing a 5 year balloon, and I feel like I would be at that 80% LTV so a refi should potentially work as long as real estate values do not go down within those 5 years. The area is notorious for being very stable and not going up or down in values over the last 8 years.

@Jeremy Viele Thanks, Jeremy!  I understand what you're saying.  I have analyzed each house individually and they all can perform at $100 cash flow a month (at least until I take Ned's advice from above).  

@Ned Carey I have not calculated anything for vacancy rate, management, reserves or turnover costs.  The vacancy rate in our area is incredibly small, but I should probably use a 10% vacancy rate to cover my butt.  I do my own management but am currently wrestling with hiring a manager.  I have not taken into consideration any reserves either.  What do you recommend for that?   A certain percentage of the rent?  Same question for turnover costs....

Really good points, Ned, thank you so much for making me think it through a little more.  Let me know your thoughts!

@Eric H. Thank you so much for replying!  The terms of the loan are 5.5% interest with an amortization of 20 years.  I told him I could balloon after 3 years and get the loan from a local bank, but after doing some amortization tables, I am hoping to extend it to 5 years to make sure there is enough equity to be able to refinance and still make the 80% loan-to-value.  The properties are all at 95% occupancy and the landlord (who is my main competitor in town) is notorious for keeping his properties at a level of condition that he would live in.  So I have been in all of them and 7 of the 9 properties need nothing done to them.  The other 2 just need minor things like paint.  The portfolio is worth around $460,000 in their current condition (I know this for a fact as my full time job is a real estate appraiser). 

@Ned Carey Thanks for replying! The loan arrangement with the seller is 5.5% interest amortized over 20 years.  The local bank is at 4.9% (In-house loan) so the difference is not drastic.  I'm also calculating cash flow as a NET cash flow, so that is Rental Income, minus taxes, insurance, repairs, and mortgage payment.  

Hello All.  I'm new here at Bigger Pockets.  Love all the content and blogs.  I got a question for experienced real estate investors.  I'm negotiating  a multi-house deal with a property owner that is retiring and wants to cash out via selling all his rental properties.  We are negotiating a purchase price on 9 of his properties in the town I work in.  The issue is that he wants full market value for all of his properties, but he will do seller financing via contract for deed and I need to basically only put in $5000 as a "good faith" down payment for all the properties.  After doing the math, without raising rents it will only cash flow all together at around $400 a month, which to me isn't very high considering the $450,000 purchase price.  I can probably talk him down to around $400,000 which will free up another $300 a month and raise rents to get it to cash flow at $900 a month.  My main concern, though is if it's still a good deal to purchase a small portfolio of homes at near market value just because the seller will finance it.  (For the record, I've been acquiring all my current properties at 75-80% TOPS of their After Repair Value).  Thoughts?  Thanks!