All Forum Posts by: Marc Izquierdo

@Ray Harrell that would be ideal but unfortunately they are the only applicant right now.

Interesting.  Thanks for the quick responses everyone!  It’s a bit weird to me that I can just say “you did not meet the minimum standards” and provide no more info when they have paid application fees.  If it were me, I would want more info if I were denied but I guess it’s safer to keep it simple and provide the adverse action letter with the screening agency.

Hi Everyone,

I am denying two applicants (co-applicants) that applied for one of my units.  The two applicants are not married.  I mainly communicate with one of the applicants.  After I denied them, she is asking for some more details as to why I won’t accept them.  How much info can I provide to the applicant that I’m talking to about the other applicant?  Can I say that their credit score didn’t meet my requirements?  Can I bring up a judgement?

Let me know what you think!

Thanks in advance

Marc

Hi everyone!  

I was recently playing around with the numbers on a duplex that I just finished up the rehab on and am in the process of finding tenants for.  While I was playing around, I had a question about Cash On Cash Return that I wanted to get some other investor's opinions on.

So mostly everyone knows that COCROI (Cash on Cash Return on Investment) is the cash flow you receive after all expenses divided by the total cash invested into the property.  However, I see some situations, more so in multifamily investments, where there are some grey areas with this simple equation.  For example:

Lets say you buy a SFR and after the down payment, closing costs, holding costs, and repairs it costs you $50,000 before you get a tenant in. If you're receiving $500 per month in cash flow after expenses ($6,000 per year), then your COCROI is $6,000/$50,000=12%. But my question is, at what point do you stop adding to that denominator? For example:

Say your property is up and running but one year you have to replace a hot water heater and an A/C unit and you end up losing $1,000 for that year.  Does that loss get tacked on to the denominator in the COCROI calculation?  So going forward, would you calculate your annual COCROI as Annual Cash Flow/$51,000?  I would think not.  I would assume that you would still take your cash flow for the year (which would be negative) over the original $50,000.

To expand on that though, say the original SFR example house is a multifamily property. With a SFR, it seems easier to calculate COCROI because there is a hard line as to where your initial investment (the denominator) ends (after the rehab is done and the tenant moves in). With a multifamily property, that denominator seems like it can sort of float and I cant seem to figure out when to stop adding capital expenditures to the denominator of the equation. For example, you acquire a duplex and one unit is vacant. Both units need to be rehabbed. So you leave the tenant in while you rehab the other unit. You finish the rehab on unit 1, get a tenant, and in total it costs you $10k. You move on to rehabbing unit 2 which again costs you $10k to rehab and get a tenant in. So your total capital expenditure cost during rehab was $20k. However, during the rehab of unit 2, a hot water heater goes out in unit 1 and will need to be replaced. Would that amount be included in the denominator of the COCROI calculation? Since the rehab is still on going but another CapEx item needs to be replaced, would you call that part of your "initial investment"? It seems like COCROI can be a bit subjective for multifamily. I wanted to get some opinions on this.

I was thinking of not including CapEx items (including the initial rehab) in the denominator at all and just call it negative cash flow. So the only things called my "initial investment", or the denominator of the COCROI equation would be the down payment, closing costs, and holding costs. So if the rehab took me one year and costs $20k (CapEx) and I had $50k in closing costs, holding costs, and down payment, my COCROI would be -$20k/$50k=-40% for that year. Then the next year (say I made $6,000 in cash flow), my COCROI would be $6,000/$50,000=12%. So in two years the Average Annual Return would be (-40%+12%)/2 years = -14%. Eventually we would get back to a positive percentage. So I'm thinking using something like that makes more sense? During the initial analysis (before buying the property) I would maybe drag out projections for 10 years to see what the Average Annual COCROI would be?

Sorry for the novel!  Hopefully this doesn't scare too many people off.  Let me know what you guys think!

Thanks in advance

Marc

@Warren Juall

Good point.  I could see that the bank would want to see proof that I have borrowed funds ready to use as a down payment so I could close.  Maybe a signed promissory note might be enough?  However, why would they want my private lender to be approved for a loan also?  I don't see the private money posing any risk to the bank.

@Sasha Mohammed

That makes sense. I can understand a lender not wanting to get into a third position as the LTV increases. I don't plan on purchasing with none of my own money in the game. I think that is important to have. However, I could see myself trying to structure something where I have a bank loan for 75% and provide the remaining 25% myself, then trying to get maybe 1-2 investors to fund the rehab. I have met with a few people who have already expressed interest in doing this with me. So I could see myself having maybe 2-3 people who want to invest with me but with relatively small amounts at first to sort of test the waters. So lets say I have 3 people who want to invest 10k each to fund a rehab. At this point could I offer them 2nd, 3rd, and 4th position liens as security? Or is there no security left to offer other than a personal guarantee (or other assets I own)? I want to see what others do or what could make sense in that situation where you have multiple people who are willing to lend small amounts to fund a deal.

@Alina Trigub That does make sense.  So if I offered someone 2nd position to cover the down payment and found someone else to fund the rehab, how would that be structured?  A third position doesn’t make sense so what security can I offer to them?  Just a personal guarantee?

@Theo Hicks

Thanks for the input.  Long term means for myself, not necessarily for the investors (unless we negotiate such).  Ideally I’m seeking short term debt with the plan of refi’ing them out after 6 months to a year.

@Alina Trigub  in most cases, 3rd position or greater probably wouldn’t hold much weight.  However, what if there was a situation where a property costs 200k.  I get a loan for 160k from a bank, get 20k from a debt investor with a 2nd position, and another 20k from another investor at 3rd position.  Thus adding up to the full purchase price.  At this point, in theory, bank forecloses, property is sold for 200k, each lien holder is entitled to their share of the profit.  

To build on my question, say I find another investor to fund the rehab costs.  I can’t really offer any more lien positions because there isn’t enough equity to secure the debt.  So what would I do?  What sort of security would I offer someone like that?

Hi everyone,

I’m interested in raising debt for small multifamily deals but I have a few questions about it and how I want it to work with my proposed strategy.

One of the things I'm wondering about is how to structure a deal with multiple debt investors and what security they can be offered. For example, I find a duplex for 200k that needs 20k of work to get rented and operating. Since I only have one deal under my belt, I'm assuming that potential investors won't be comfortable with lending me 100% of the project cost. So my strategy would be to get a 70%LTV loan and mortgage from a bank and find maybe 1-3 debt investors to finance the rest. So at the end of the day I would have one loan from a bank (1st mortgage), a second loan from an investor, and maybe a third from another investor.

My questions are: Is this a feasible strategy? What type of security can I offer the investors? Can I give them 2nd and 3rd mortgages? How would a bank feel about that? If I can’t give them mortgages, then I guess I can only give a note and personal guarantee?

If anyone can offer some info on how to best structure something like this I would really appreciate it.

As additional info, I plan on buying in an LLC with a commercial loan.

Thanks in advance!