All Forum Posts by: Victor Menasce

When you say HUD, I assume you're meaning that the property is a HUD owned property. There are a few things you should know. HUD properties are only available to local residents to owner occupy for the first two weeks of the listing. After that, it's opened up to investors and professionals if an owner occupant doesn't buy it.

The research can be done exactly the same way as any other property. The title company can do a full search for you. You can also research the deed history at the county recorder office. This is online in most counties in the country. 

Research on the local rental market can done with tools like rentometer.com. The past history of the property is not really an indication of what you will rent it for. You're probably going to improve it and charge more rent. But the comparable rents in the local market are important. 

The history of repairs isn't all that relevant in my experience. I prefer to look at the property and compare it's current condition against the checklists that we use for our finished property standards. 

The question of analyzing the deal, there are a lot of variables. There are many good education tools available out there on how to analyze a deal. I suggest you look for a good book on the topic. There are many out there.  

University is a great place to start investing. Student housing is a wonderful investment class. It's counter-cyclical to the broader economy. Even in an economic downturn, students still go to university. You can get parents to sign guarantees on the lease and the property condition. In my experience, if you deliver a quality product to students, they take great care of it. 

Once you move away, you can put property management in place, or sell the asset. I'm not seeing an obstacle. I do 3-4 transactions per month, almost all of them in cities thousands of miles from where I live. The critical item is to find a good core team to help you. Real estate is a business, and business is a team sport. 

I'm not seeing an obstacle. It's kind of like, "When is it the right time to start a family?" question. There is no ideal time. Some investors try to time the market. I prefer to maximize my time in the market. 

Non-real property items can include fixtures such as appliances, furnishings, and decorations like drapery and blinds, They may be listed on the lease for completeness. 

What you're probably running into is the bank's underwriting guidelines for residential investment property. 

Investment rules are tighter than owner occupied rules. Banks assume that you're going be take more risks with an investment property than with your own home. History has shown this to be true. 

Residential rules are much tighter than commercial rules. They assume that the borrower is the main source of repayment of the loan. They know that a vacancy is going to hit a borrower directly. In commercial, you have more units and therefore the performance of the loan has more to do with the performance of the property than borrower strength alone. If you tell the bank that you're getting money from your parents to help with the downpayment, you're telling the bank that you are a weak borrower. In my commercial portfolio, the banks want me to fund the downpayment, AND keep a liquid cash reserve. Failure to maintain a sufficient cash reserve is actually a condition of default under the terms of the loan. 

Note that there are many different banks with vastly different underwriting guidelines. Just because one bank says no, doesn't mean they all will. 

Are you looking for a high ratio insured mortgage? If so, then the underwriting guidelines for Fannie Mae and Freddie Mac will also be applied in addition to the bank's rules. 

Generally, if you've had the funds for more than 90 days, then the bank may consider the funds to be yours. That may help you get around the problem. 

Good luck.

The question of team makeup is the most important one of all. A good deal badly managed is no deal. So the team is actually more important because deals are everywhere. You can bring people into your team in one of four ways: 1) contract relationship 2) employee, full time or part time 3) partner or member of your executive team 4) advisors Pay close attention to each role you need and ask yourself which engagement model is appropriate. You can't build long term success with rented talent. Some roles can be outsourced. Others are core to the business. Make a conscious decision on how to bring each person in. For example, you would not make your book-keeper a partner. That role can be hired or contracted. The person raising capital should definitely be a partner. That can't be contracted out. It's core to the business.

Lenders have different ways of handling distressed properties. Prior to the note going into foreclosure, they could sell the note at a discount to get it off their books. That's not a foreclosure. The new buyer of the note would have to negotiate a loan modification or foreclose. 

However, if the note is backed by mortgage insurance from Fannie Mae or Freddie Mac, then there is no reason for the bank to sell the note. The bank will be made whole by the mortgage insurance. If they sell the note, then they can't collect on the mortgage insurance. 

Their choices are to 

1) Use a federally backed loan modification program, or 

2) Foreclose. 

The judicial foreclosure process requires the property to go to auction on the courthouse steps. Any shortfall in the sale price will be made up by the mortgage insurance. If it fails to sell at auction, then the property will revert to the bank (REO) and the bank may try to sell it on the open market. At that point, the note can't be put for sale since it has gone through the auction process. Once the bank sells the property they would go back to the mortgage insurer and ask to be covered for any shortfall relative to the amount owing on the loan including fees.

Notes usually go for sale when the bank is required by the bank regulator to strengthen the balance sheet of the bank by eliminating a portion of non-performing notes on their balance sheet. This is a result of the so-called stress tests that FDIC has put banks through since 2008. This is done to get the balance of deposits back in range for the bank.

Hope that helps clarify how the process works. Let me know if you have additional questions. 

I'm not a tax professional. 

But my understanding is that depreciation has the effect of lowering the adjusted cost base of the property when it comes to calculating capital gains on sale of the property. It's true that you can't depreciation to generate a loss in a given tax year. So if that's the case, you may be taking depreciation for no reason with the added cost of increasing your capital gain on sale. 

Consult your tax professional. I know many investors who are new don't have a lot of cash to spend on advice. But the advice is cheaper now, than it will be in the future when you're trying to fix a problem. 

I've made the transition you're describing. I've noticed a few things along the way: 1) Real estate investment is a business. In fact it is a pretty big business involving big numbers. Business is a team sport. If it's a solo sport, then that's called self employed and isn't a business any longer. 2) Most investors start with a little investment capital and limit the size of the business based on that small capital. They don't have enough money to do big projects. Small projects don't make enough money to fund hiring a team. 3) Unless you learn how to raise capital, you enter an orbit that you can't escape. The business will stay small. Developing this skill unlocks your growth. 4) Unless you aim bigger and start with a cross functional team, you won't develop the skills in the business to grow. 5) You need 5 distinct skill sets in your team A) finding deals B) deal analysis C) raising capital D) construction and operating management E) sales and marketing. Some people say "I'm a contractor, or I'm handy so I'll start rehabbing houses". Well that may get a couple of projects done a year. But it's only 1 of 5 necessary skills. You need the other skills to grow.

There are several types of capital that create success. 

1) Financial capital - Deals tend to chase money. If you have access to capital and become known for that, deals will come to you. I don't go hunting for deals. They come to me. Even if I'm working with funding partners on a project, I'm seen as the source of capital.

2) Relational Capital - Who do you know, and who do you have access to? It's really about access. Those relationships can have a multiplier on the capital you have available. I know so many examples of people who have put deals together because of the relationships they have. I experience this first hand, every day.

3) Reputational Capital - What kind of reputation have you built in the community? If you have a reputation of getting projects completed, people will come to you repeatedly because they know you can deliver. 

If you focus on positioning yourself in those three arenas, you'll have more outstanding projects than you can possibly undertake. It really is an all-you-can-eat buffet out there.

If you only have $10K to invest, perhaps consider investing in tax liens. You can make 17% with very little risk. Purchasing low priced properties with limited liquid cash on hand is risky. You're stuck with low end properties that attract more than their share of repairs. Low end properties cost just as much to repair. But they don't have the income to offset any major unplanned expenses. Replacing an air conditioner could cost you 3 years of cash flow to recover. The other option is to pool your funds with another investor and buy a better property.