All Forum Posts by: Account Closed

@Rick Bassett Dodd Frank reform and changes in tax policy will definitely influence the price of the SFH market. For example lowering the regulatory burden on small banks may increase their ability to lend. I believe that most of these changes will have a marginal effect on home prices. There are three items that if changed would have an enormous impact on the housing market and should be watched carefully. Without major changes in these three areas I think it is very unlikely we will return to bubble like prices. Making investment decisions based on projections of significant appreciation will likely end badly. 

1. Income/Asset Verification Requirements: Prior to the crisis lenders were not required to independently verify the income and equity of borrowers. A borrower could fill out a form with inaccurate income and net worth figures. Using these inaccurate figures allowed lenders to turn around and sell these loans in the secondary market claiming they were high quality loans. After the crisis lenders were required to collect documentation that verified the stated income figures. Technically you can currently get an FHA loan with a 600 credit score and 60% debt to income ration. While this standard is pretty low it is far better than pre-crisis loans given to people with no incomes. Eliminating this requirement would significantly increase loan activity leading to a quick increased home prices. If this requirement remains in place it would be hard to return to pre crisis level appreciation. 

2. Fannie/Freddie/FHA Credit Standards: Prior to the crisis these government owned entities were encouraged to continually loosen standards in order to maintain their growth and short term profitability. Subprime loans guaranteed by these government entities were still considered high credit loans which could be bundled together to create a AAA security. This obviously left tax payers on the hook for billions in bad loans. Since that time these agencies have increased credit quality standards. If these credit standards are again loosened subprime lending and the mortgage backed security market will drastically increase leading to a boom in housing prices. If these standards do not loosen all of the other changes will only have a small effect on housing prices. 

3. Student Loan Debt: The majority of new home activity has been concentrated in the high end market. A big reason for this is that student loans have made it very difficult for middle class people to qualify for home loans. Any government action that reduces student loan debt or makes qualifying for a loan with student debt easier will drastically increase the demand for middle class homes. If nothing is done on the student loan front the middle class will remain unable to qualify for loans. 

@Courtney Araujo I only invest in buy and hold properties and not flips so would only use that portion of the spreadsheet. That is what I meant by only being concerned with that portion not that I thought something was wrong with it. 

In my opinion the CAP rate is appropriate for comparing new construction projects or properties that do not require any significant improvements. In these cases the cash flow structure is basically the same (downpayment up front followed by NOI of some sort)

When you are comparing a turnkey property to a flip or trying to determine whether you should upgrade a rental to increase rent or live with the lesser rent the cash flows are not similar and the CAP rate is not able to reflect this variance.

Underestimates Value of Turnkey Rental

If you can buy a turnkey property for $200k with 20% down and have NOI of 10,000 you would prefer this to buying a $100k property that needs $100k of work and also has NOI of $10,000. One requires $20k down to make $10k while the other requires $120k down to make $10k. The CAP shows the investments are equivalent (both have 5% CAP).

Underestimates Value of Improving Rental

When you are comparing buying and leaving a property as is vs buying and improving to increase rent you need to be able to incorporate that the rent increase will last for years. The CAP rate only uses one year of NOI which does not reflect this reality.

@Courtney Araujo This is great! I am only concerned with the hold and rent portion of the spreadsheet but it is a great way to stress test different rent rates or to analyze whether improvements are worth the increased rent they will bring. 

The only comment I would have is that I think the CAP rate should be the NOI /( Purhcase Price + Repairs + Closing Costs) but the CAP rate is a useless measurement anyway.

@Garrett Canter Most umbrella policies provide limits in excess of general liability, automobile and employers liability. It is generally relatively inexpensive for the amount of additional limit but does not necessary broaden coverage in any significant way. 

Jay Hinrichs LLCs and insurance are not mutually exclusive choices. I agree you should have an insurance policy regardless of how the property is owned. Insurance on an LLC provides coverage for the LLC and its members so the legal costs would be covered. In reality there is a very definite precedent establishing that the owner of a security is only liable for the amount of his investment. For someone worth 10s of millions of dollars this is a very significant consideration. Again, the reality is LLCs don't make sense for most small sfh investors who manage the operations of the business.

Rebecca Dittmer Greg S. Member managed LLCs do not protect member managers from personal liability and therefore do not offer much protection for that member manager. However, another person can enter the LLC as a passive investor whose only role is to provide capital. The operating agreement would state clearly that the investors only interest in the LLC is that he provided capital with the intention of profiting from the operations of the managing member. In this scenario the passive members interest in the LLC is considered a security and that members liability is limited to his investment in the LLC. This means he can not be sued personally. This structure protects the investor and encourages investment. An LLC protects you from personal liability If and only if your interest can be defined as a security.

Developers and general contractors typically have a liability policy that provides coverage at all of their projects throughout the policy period and do not need project specific liability. The most quality builders risk policies are catered toward these larger developers and therefore do not offer liability. A quality BR policy provides replacement cost coverage for materials owned by you and your subcontractors, have no exclusion for theft, vandalism leaking pipes or water damage. These polices are designed to ensure prompt payment after a loss without the need to determine fault or whose property was damaged. The alternative can result in months of project delays, legal fees and fighting among contractors. In my area a quality BR policy premium is around .21/100 * value of the property. Project specific premises liability for one project cost around $150-$200 and can be purchased by any agent that deals in real estate. I would recommend paring one of those policies with a quality BR policy. US Assure is my favorite BR carrier. For a 200,000 property this would be a total of around $620 in total premium. Using multiple policies can be a bit of a pain but the pricing and coverage is well worth it. Once you start doing 5 or more projects a year you can switch to a liability policy that covers all of your operations at a more competitive price.

@Gavin Carlson I require that tenants notify me of non emergency repairs in writing at my office and give the number of a maintenance man for emergencies.  This makes it much harder for picky tenants to make requests unless they are valid.  

@Account Closed You know better than me which coverage (and pricing) is best for your business. 

I would recommend you add your down payment, the cost of any materials that will be installed in the home and he cost to demolish and remove the remnants of the home if it is destroyed to the loan amount. This way you will be made completely whole in the event of a total loss. 

@Jerome Hanson Perfect summary of what I meant to say.  

@Jenny Gremillion If you get a 20% down loan you have leveraged your investment 5 to 1. You are generating profits from the entire asset even though you have only purchased 20% of it.  Paying down  a loan early does not generate anymore profit but buying another property with 20% down does. Leverage is the biggest driver of profit in private equity funds, hedge funds, REITS, Investment Banking and almost all occupations of the super rich.  

Without leverage you have to rely on huge appreciation in order to break a 3-4% return on a buy and hold rental. Flippers can make good returns buying properties with all cash.