All Forum Posts by: Mike Wood

@Joseph Chiofalo The properties that have conventional loans are in personal names (can't hold them in LLC and be compliant with Fannie/Freddie requirements to be best of my knowledge).

I have several duplexes that are financed with conventional 30 year Fannie/Freddie investment loans, but I have reached my limit (10). I am wondering how to proceed to acquire more properties. When I talk to my local bank, the options appear to be only a commercial loan with relatively high interest (currently 8.5-10%), 75% LTV max and maximum amortization of 20 years. When factoring in the rate and term, almost every single deal I look at is a looser due to debt service (unless the LTV is something like 50%). I believe the primary issue is the 20 year term on a typical commercial loan.

My current focus is on buying and hold duplex properties, and around me that put the total acquisition costs around $200-250k, with total monthly rents being 1.0-1.3% of the purchase price.  I have also looked into small apartments 4-10 units, but found they have an even harder time to cash flow with current rates.  

While I understand that current CAP rates have not necessarily adjusted to the new interest rates, which might be some of the issues. I am wondering how others have continued to finance purchases beyond the 10 Fannie/Freddie loans (that have very nice rates and 30 year terms).

@Marc Shin  I have ten duplexes, with four of them being up/down units.  While I occasionally have a tenant complain about being in the downstairs units, it is rare.  I dont find any issues with keeping them rented.

Quote from @Jamie Parker:

Quote from @Mike Wood:

@Jamie Parker  I would start talking to local banks/credit unions that do investment property construction loans once you have identified the project and have some details.  Just asking about vague concepts is likely to get no good responses (banks might think you're just dreaming).  You will need to big picture things like, house area/neighborhood, size, costs, timeframe etc. 

I think most banks will require you hire a GC/Builder prior to closing the loan.  You have not mentioned all your numbers, but if you pay cash for the land, you should be able to use that as part of or all of your required equity in the project.  Unfortunately, building houses is very cash intensive.  

Lastly, I personally think right now is a hard to build houses.  High interest rates make the costs of the construction loans very high (~10% at a bank) and with mortgage rates so high, there is little buyers out there which could lead to long holding times.  I build to rent, and currently find it very hard to make the numbers work right now with new builds in my area.  In addition to the rates, material and labor cost remain very high.

In The buil-to-rent space, is the lending broken up in phases? Acquistion, construction, long term financing?  Or do you have capital or relationship with lenders? After finishing a project, are you renting for 1.5x mortgage, 1%(seems tough to hit 1% on new construction) or…str? 

Jamie, it depends.  If the plan is to stay with a commercial loan, the construction finance and permanent loan can be one product, with typically a 12 month interest only period during construction, then rolling into a principle and interest payment afterwards.  But to get the best rates, you would want to do an initial construction loan (typically 12 month interest only) and then refinance into a investor residential loan (think like typical 1-4 unit mortgage product).  
I believe the % your referring to is monthly rental income of purchase price/cost.  I have not normally seen it as a % of the mortgage.  In my market, my duplexes all gross more than 1% per month of the price/cost (2% is impossible in my area).  They do well.  There are expenses other than just the mortgage costs (like taxes, insurance, utilities, lawn care, maintenance, etc) that would have to be taken into account.

@Jamie Parker  I would start talking to local banks/credit unions that do investment property construction loans once you have identified the project and have some details.  Just asking about vague concepts is likely to get no good responses (banks might think you're just dreaming).  You will need to big picture things like, house area/neighborhood, size, costs, timeframe etc. 

I think most banks will require you hire a GC/Builder prior to closing the loan.  You have not mentioned all your numbers, but if you pay cash for the land, you should be able to use that as part of or all of your required equity in the project.  Unfortunately, building houses is very cash intensive.  

Lastly, I personally think right now is a hard to build houses.  High interest rates make the costs of the construction loans very high (~10% at a bank) and with mortgage rates so high, there is little buyers out there which could lead to long holding times.  I build to rent, and currently find it very hard to make the numbers work right now with new builds in my area.  In addition to the rates, material and labor cost remain very high.

@Jamie Parker The answer to your question is money.  If you need to borrow money to build the project, how will you get the financing.  With no experience and not crazy strong personal finances to pledge to the bank/lender, its doubtful many banks/lenders will provide the construction loan on a spec build.  Simply too much risk for the bank.   

If you can do the finances, simply hire the builder.  If not, then you will need to find a builder that has access to capital to fund the project.

Personally, I would never partner with a builder, I hire them.  That puts all the risk and all the reward on me.

Currently most banks want 25-30% of the total costs in cash/equity/downpayment.  Most will take the value of the land as part or all of the cash/equity/downpayment.  I don't know of any banks any more that will do a construction loan on investment properties based on completed value (i.e the finished value with the built in equity).

@Bryan Bissell  While such a product exists, its not cost effective for a pool of small rental properties. I have asked my agent that handles my duplexes (but also offers policies that could cover multiple individual properties) and was told it would be substantially more than the combination of individual properties.

@Christina Greaves  Absolutely let the tenant know that they must pay you for the utilities that you paid since they moved it.  I have the same thing happen often with water bills on my units.  The local water utility is exceptionally bad and difficult to reach, so it is often a month or two after move in that I can continue to pay the water bill.  I remind the tenant they have to open the account and they owe me for the bills. Most of the time they agree and jump on it. 

@Daniel Sobin  Getting landlord policies in New Orleans right now are almost impossible.  The only viable option is Citizens, and the rates are just stupid right now.  I just finished a brand new construction rental insured for $220k and the lowest rate I could get was a $4800.  2 years ago that would have been $1800.  If the property are more than 10 years old, every agent I have talked to says that there are no companies current writing landlord policies other than Citizens

@Josh Urrutia  In my opinion there are a couple of reason that you don't see many 4 plexes being built now a days.  First is likely zoning. While most of the country is ok with having duplex houses next to single family houses, the not is generally accepted with 4 plexes.  Second is cost (on a $/ft2 basis), due to the need to use the commercial building code, which increases costs (on a $/ft2 basis).  1 and 2 unit residential properties use the IRC residential code, but anything 3 units and above have to use the IBC commercial building code, which has alot more requirements, and adds cost.  While the market might be able to over come the cost issue (if rents are high enough), the zoning is typically the killer.  In my area, the zoning required to build a 4 plex is the same zoning as building a 100 unit apartment complex.