All Forum Posts by: Marc Jolicoeur

Maddie, 

You have a lot of questions. I don't know if I can answer them all but I do have something to add.

I assume you are going to live in one half for a while at least before moving on and keeping both halfs as rentals.

Consider the location and what type of resident will be renting from you, and being your neighbor.   The two NE Mpls houses you linked have really bad school ratings.  That will largely drive away a certain type of clientele.   Young couples. room mates, and singles love parts of NorthEast.  As do artists and blue collar workers.  It is becoming hip to live there and still cheaper to rent than in Uptown.  However, it will be difficult to attract families with school aged children because of the schools situation.

Anyway location matters more than price.   There is a wide range of different customer profiles for each area you listed.

If I was in health care, I would try to find pockets near hospitals where there are more like minded people wanting to be close or within transit of the medical centers.    Near the U of M, Richfield, and Powderhorn Park are areas that might be good options due to proximity to medical jobs. 

To address some of your questions.....

1. Getting prequalified 5 months before you move does not really make sense. It will not work.  You will need to be prequalified again in May, or whenever you are starting to shop.  You could consult with a mortgage broker now however to understand better what types of loans and properties you should be targeting.  You cannot lock in an interest rate this early.

2. Best deals buying in a hot sellers market like we have today is to intentionally buy a fixer upper.  Buy one that needs some work and you will definitely reduce the competition.

3. If you fix up a property top to bottom with an FHA 203K loan, your ongoing maintenance cost should be manageable. You would be able to easily plan on 5% of gross rents to cover anything that comes up. Then - plan for capx like roofs, windows, driveways, siding, HVAC systems. You should inspect these when you buy with an estimated date of when they will need to be fixed.

4. For reserves, 6 months is not a hard and fast rule.  I would budget for 3 months of expenses due to lost rent and for having to replace carpets and paint if the renters damage your property above what damage deposit you collected.

5. For vacancies, you can plan on 5% for vacancies as long as your property is in good shape and you carefully screen applicants. If it's been renovated and in a good school district, you should never have more than one month of Vacancy on average every 2 years.

6. Make sure you can cash flow after accounting for all of the expenses and debt service.   Doing this math is eye opening.  Make sure it will cash flow after you move out and both units are rented.

7. buy now or later?  I think interest rates will go up - but if they do, values will go down accordingly.    Its probably a wash.

@Matthew Haskins Try getting a mortgage from a bank at 2.2% downpayment ($2,000/$90,000)!!

Most bankers will want to lend you 75% or 80% of purchase price for an investment. They will require you to bring $18,000 cash to the table for an 80% LTV loan. Even if you did the C4D for 6 months of seasoning and then got a refinance at the appraised value of $97,000 then you would only get a loan for $77,600 so your cash in the deal would be $12,400 not $2,000.

The Contract for Deed is simply a contract you negotiate with the seller and if they are willing to accept only $2000 for down payment you have almost no money out of pocket in order to make your $475 per month.  That is a very very high return on your investment.

As to why your payments are not decreasing the principal, that does not make sense to me.  You can structure the deal any way you like. Your contact with the seller could very well decrease the principal at the same rate as the original mortgage loan is scheduled to do it.   The way you described it is really simple to explain and you call these payments "interest only" which means the seller would get a small amount of equity on the back end when you finally sell the property or take out a new mortgage.

If pursuing the C4D, it is my limited understanding that you really should disclose the fact to the seller's mortgage bank.  They should be notified on this deal or else they could call the original loan due if they felt they could re-lend that money at a higher rate.  

Another risk of C4D versus getting a mortgage is that you need to ensure the seller pays the mortgage. He may stop paying and simply collect your payments until the mortgage bank forecloses.   You would be screwed and could be in trouble if you sold the property to another person on C4D.   I am sure this risk could be mitigated by making all the payments for him and gaining access to his mortgage account.

If you are going to be all-in for less than 75% of ARV I am pretty sure hard money is your answer.

The payments cost more per month but you are also going to leverage the experience of the lender to ensure you indeed have a great deal to flip and they will get the opinion of an appraiser too.

I don't know for sure but I do not thing multiple inquiries will hurt your credit score. You can shop around.  Your score takes a hit for the credit enquiry whether you have it checked  once or 5 times.

Plus bankers will only pull credit reports to confirm what you told them up front.   They should pull credit only after they have already decided that you would be a good lender.

Phillip, 

I can give you some quick feedback on the deal from a buyer's perspective if you can share what the property taxes and insurance would typically be for this unit in your area.

Common questions for townhomes that greatly affect the value are:

- Is it currently rented and occupied and what are the lease terms?

- What does HOA pay for?

- What insurance does HOA pay for?

- is the HOA in good financial standing with plenty of reserves?

- what is the HOA fee?

- is HOA allowing rentals or charging fees to have a rental be allowed?

- What % of units in the HOA are rentals? This affects the ability to get conventional secondary market mortgages on the unit.

- Is HOA FHA approved. Will FHA allow a buyer to get a mortgage on these units?

- What are the rent comparables in the same HOA and same neighborhood?

- What repairs are needed to make this a typical rental?  Are floors worn out?  Is paint needed?  Very common in my area that carpets and paint are needed.

- What repairs are needed to make this appealing to homeowners?  What does it look like versus other renovated units?  Ugly old white appliances and all the renovated ones have stainlesss?

- Is there anything "unique" about this style of townhome (vs competition).  For example, in my area single level townhomes go for a big premium, and homes with a master bath or a two car garage are worth a lot more than homes without master bath or with only single car.

If any of the above can create a situation where selling to a typical landlord investor using leverage; or selling to a first time homebuyer will not work smoothly.  The seller may want to sell to an investor because he perceives an issue with any of the above and the extra headaches it will cause and chances of deal falling through or taking too long to close.

@Oscar Brooks I think what you are discovering is that South Minneapolis is just not cheap enough, and especially west of 35W.   

There are a few active investors on the Minneapolis local forum that are buying duplexes in and around your area and are making it work by buying at a serious discount from retail prices.

Also, most investors are doing 20% or 25% downpayments which makes a big difference on the cashflows.

I would recommend expanding your search criteria;

- Expand to include the areas east of 35W up to Lake Nokomis and south of 46th st.   No longer commute times to school/work from there.  Way easier to get around in that part of South Minneapolis and quick access to the crosstown freeway.

- Consider Richfield.   Lower price points. Potentially lower taxes.  Easier traffic.  Up and coming appreciation possible?

- Focus closer to Uptown or LynLake areas where you can get premium rents.  Risk here is the building is 100 years old instead of 70 years.

- Search specifically for REOs and Short Sales and fixer uppers.

That said, I don't know if its even possible to get a listed property that works in these areas.  The key is to find the off market deals and buying direct from the seller.  

@Brett Goldsmith Correct - we waited until market day 90 to submit a counter offer at 84% and it was an FHA short sale held by HUD.

Similarly, I got a HUDhomestore.com bid accepted last November that was at about 83% of current market value minus repairs. I think it was on HUD HomeStore for about 60 days (in a very hot sellers market).

84% seems to be a magic number with HUD? These are slim deals but they do (barely) work. Kept one as a long term rental and the other was a profitable flip. Both were townhomes with HOA with missing appliances so very little competition from owner occupants or investors.

@Evan Uribe Check out the Minnesota, St Paul, and Minneapolis local forums here.  Also, read intros from many local investors in the Roll Call post here.

Keep us posted on how the short sale goes.  I did one last year and the bank accepted 84% of current unrepaired value after 90 days of being listed. 

@Alan Silber  Check out the Minnesota, St Paul, and Minneapolis local forums here.  Go ahead and read intros from many local investors in the Roll Call post here. 

Do you have any General Contractors lined up?

I can also recommend Bill Wallace.

@Kyle Kipka Keep in mind that if you sell your condo you may need to pay taxes on your profit.  Long term capital gains may cost you around 15% (depends on your financial situation)

One risk for keeping the condo is HOA risk. If keeping long term, there could some day be a special assessment to replace the roof, or the decks, or parking lot, etc. The cost of this may end up in a special assessment, or a higher condo fee. Higher fee could scare away potential buyers in the future and overall it puts a lid on property values.

Again, I would use a long term horizon to determine which way to go. If you think you will want to own it long term, I would keep the Condo and use the $500 a month to invest in something else every year.  

Here is another idea: You could borrow about 50K (75% LTV) if you got a mortgage on the condo and the renter would pay it all off, and you could use $30K cash to refi your home to a lower payment. Then use the other $20K cash to invest in a third property!