All Forum Posts by: Melissa Dorman

@Hannah Atherton check this out! 

@Jason Brown the total income is $9,750 and by February it will be $9,950. Rents vary from $1,850 to $3,100. Two units are 5 bed 3 bath and the other are 3 bed 2 bath. I have plenty of room to increase rent on two of the units. About $1,000 more cash flow once those are at market rents. 

Hey @Trace J. the lender I used was Umpqua and they are a portfolio lender. They can be more flexible with their criteria. They called it maximum CLTV, (cumulative loan to value) to decide how much loan I could get and the seller loan had to be at least 5 years in length.

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

Purchase price: $1,225,000
Cash invested: $100,000

I call this my "Freeplex" because the cash back I received from my commission as an agent ($30k) and tax savings from a cost segregation ($70k) meant I didn't pay a dime for it. Check out the details below on how I got there....

What made you interested in investing in this type of deal?

I wanted to buy a large 4 unit to do a cost segregation on to create tax shelter (look it up on costsegregationservices.com). The cost seg resulted in $70k back in tax savings, which was more than my down payment. I was intrigued by the size of the property, great location, and upside once I got the building performing and renovated.

How did you find this deal and how did you negotiate it?

One unit was vacant (which I could occupy for my loan). During the inspection period, I discovered 2 of the other units were 4-8 months behind on rent. I negotiated the seller pay cash for keys to one unit ($9k) & I got the other non-performing tenants performing 2 weeks after closing. Additionally, I negotiated that the seller do a new exterior paint job ($20k), $6,500 in landscaping, and $5,700 in deck work to transform the exterior to attract new quality tenants.

How did you finance this deal?

Purchased with a conventional loan at 80% and seller financing at 15% with 5% down (No PMI!). The seller is carrying 15% for 10 years at 5%, interest only or more payments to support cash flow.

How did you add value to the deal?

Once the non-paying tenants moved out right after closing, I renovated their 5 bed 3 bath (2,600) sqft unit and got it rented up for $3,125. I spent $40k on the renovations and it turned out great! Additionally, the value I added was thoughtful win-win negotiation as the agent to ensure all parties walked away happy.

What was the outcome?

With $100k total invested between down payment and renovations, it now cash flows $1,850 each month (after PITI and cap ex etc). Since my cost seg will give me $70k back and my commission was $30k, I am ZERO dollars into the deal and cash flowing. I also discovered a historical lot line between the two buildings, which means I can divide the 4 plex into 2 duplexes and net another $300k or more down the road.

Lessons learned? Challenges?

It is extremely hard to get a loan on a 2-4 unit above $1,050,000 (conventional loan limit). The week of closing I thought it would all fall apart because the lender couldn't get PMI for the loan. Fortunately, the seller was willing to carry 15%. I highly recommend involving the seller to make the deal work. I originally thought it would cost $15k to renovate the remaining unit...but turns out I should 2x my budget and add some more! Everything is always more expensive than it appears at first.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

I worked with Umpqua Bank on the the conventional loan. They have an amazing 5% down owner occupied loan. It allows you to received 3% back in credit from the seller, which you can pay all the PMI upfront at closing. I didn't have any PMI, so I exchanged the credit for repairs with the seller so I could still use it.

In the last month, active home shoppers have experienced the first jump in interest rates that we have seen since May 2020, when rates were very unstable at the beginning of the pandemic. Since that time, the federal reserve has kept interest rates artificially low to prop up the economy.

As a result, this past year we have experienced record low interest rates, not seen since 1946!

However, those who just began shopping have a false sense of "loss" when the rate jumped .5% in a matter of a few weeks. I have heard client's say "Interest rates are rising?... Should I stop shopping?"

My answer: Absolutely not. Lemme explain why...

It's been said that "the enemy of good is perfect". Yes, if you bought in January 2021, you likely timed the interest rate market perfectly and there will be no lower rate for years to come or maybe ever. Congrats. However, historically speaking rates are still extremely low. Don't miss the bigger picture. Take a look at the chart below and see anything below 5% is a great rate!

The reason interest rates are going up is because inflation is taking place. Rewind to the beginning of the pandemic; the government asked people to stay home, many businesses failed, people lost their jobs, so the federal government also took on the responsibility of pumping money into the economy through stimulus plans to keep our economy afloat. It worked....But this money didn't just come from reserves we had built up. No, the government also created new money by printing it. And a year into this, we are finally starting to see the impact of our old dollars lose value as new dollars fully entered the economy; this is called inflation. For example, a product purchased for $1 in 1913 would cost $ 26.25 in October 2020. Inflation isn't new, but it might very well be accelerated by the amount of new money printed last year. How much new money, you may ask? About 1 in every 5 dollars is a new dollar. Let that sink in.

You own assets, like real property! You see as the dollar loses value it will cost more dollars to buy a house. If you are one of the lucky people who already owned a home, then you are rising with the tide of inflation. If you do not, then you miss out. Worse yet, your rent will increase with inflation as well. Historically Portland has seen a 5-7% increase in rents year over year. As inflation increases, this percentage will likely rise as well.

The take away: Be prudent and buy a home with a 30 year fixed rate mortgage. Then sit back and rise with the tide of inflation as you watch your home value climb while all the other expenses rise with it. Rest assured that at least your monthly mortgage will remain the same, despite inflation all around us.

@Tyler Combs Thanks friend. You have been a big inspiration along the way! @Kevin Manz yes 2 bedrooms in middle building. 

@AJ Shepard I inherited the PM. Tried shopping around through BP network but didn't turn anything up worth making the big switch. 

@Evan C. In regards to dividing the note: I originally had a promissory note and deed of trust on the seller financed property that had provisions allowing me to divide the note into smaller sub notes ,as long as the smaller sub notes all added up to the same total for amount and monthly payment as the original note. I also had the ability to recollaterialize (or move) those notes to another or more than one property, as long as there was equity and cash flow sufficient to pay the notes placed thereon. Thus, I divided the original note into two notes. Took one and placed it on my other properties in second position (plenty of equity), leaving only one note on the original property of about $350k. The refinance was for $560k (value $820k) so I got cash for the difference ($207k) and paid off the $350k remaining on the property. Now I am just left with $350k on my other properties in second position. I used the $207k for the downpayment for the 20 unit above. 

Probably just one more property and then I should be done for a while. I'll be retired next year and I want to focus on traveling and enjoying life for a bit. Slowing down. Writing a book. Thanks

Investment Info:

Large multi-family (5+ units) buy & hold investment.

Purchase price: $825,000
Cash invested: $11,000

This deal is all about using other people's money and it starts with a previous property. In 2018, I bought a triplex in Portland OR using selling financing. in 2020, I split the mortgage note in half on that property and recollaterialized one half on my other properties in second position while leaving the remainder half on the triplex. That left the property with quite a bit of equity.

Then I did a cash out refinance to receive $207k of the banks money to put down on this new 20 unit property. All in, I had about $15,000 of my own money in the deal for the down payment.

This 20 unit complex is composed of 3 buildings. There are 16 one bedroom units and 4 two bedroom units. Since commercial lending dried up during Covid19 (with good reason), I did a wrap note on an underlying seller financed loan. Fun fact: I actually negotiated my payment to be lower than the seller I bought from by doing a 35 year amortization.

Rents were about 25% below market rent and I was buying at a 6 cap in Ohio (not great), if I'm honest. Still it was bringing in $9,200 a month on paper with a $3,000 mortgage to my sellers. Plenty of room for error... right? Of course, buying a C class property in a B class neighborhood during a pandemic comes with it's challenges. The first six months has involved 2 evictions (of tenants living in jail), solving a $1,000 a month water leak, and generally cracking down on tenants skipping payments from previously relaxed management styles. Luckily I have a 6 year balloon to get the units to market rent and all paying on time. Numbers are looking quite good on the back end with a 30% estimated IRR. Time will tell.

What made you interested in investing in this type of deal?

I began looking out of state for better cash flow and where I could afford to put in property manager.

How did you find this deal and how did you negotiate it?

My great realtor in Dayton, OH found it off market for me.

@Luka Milicevic thanks! Are you local to the market? If so, where in the 7 cap areas (specific neighborhoods) have you seen good appreciation and stable tenants?

My market has a mixed bag of 4-6 caps but the 6 caps are pretty rough to manage and have seen poor appreciation.

I’d need to use a broker, as I’ll be investing from afar. But I will fly out and get well versed in the neighborhoods first. If you know of a good commercial broker, DM me. I’d love to get set up on a listing alert.