All Forum Posts by: Michael Andrews

Hello BP community, we're interested in moving into a new home (fixer upper we can eventually rent as well) to free up our existing house that we have hacked to use as a SFR. We attempted to get a mortgage for a new home for $300k ($250k for the house, $50k for remodeling), which would be totally feasible with our income of $160k and current debts. However the bank we approached had no interest in counting the potential rental income for our existing property toward the DTI calculation when we applied and were rejected for the loan.

We currently operate a 12 unit property owned by our LLC and were thinking about asking the lender on our commercial property if they would finance purchasing our existing home so it would be owned by the LLC to remove it from our DTI calculation. This of course would increase the interest rate of the loan and reduce the term from about 28 years (we just refinanced) to 20 or 25 years, blowing a hole in our potential cash flow.

Hoping there are some alternative options to overcoming DTI and house hacking with multiple conventional loans.

@Andreas Mirza Thank you for this comment, this is exactly the type of feedback I am looking for.  I am very, very concerned about over-leveraging, and being brand new to investing in real estate I have no real experience in determining what is an appropriate amount of debt.  I feel like it's the one subject that most people ignore on BP when contemplating growth and risk, and I have had a very difficult time determining what my risk potential should look like.  

I really want to grow within a moderate risk tolerance, where debts are covered and there is still positive cashflow even at the worst of times.  I am not planning on retiring from my career as a software engineer to live off of this real estate investment business until I have grown the cashflow up to $100k+ per year with leveraged properties.  By my estimation that means I would need to acquire between 8-10 more properties like this 12 unit, so the timer in my brain is ticking and I want to make intelligent choices on my journey to that goal.  

So the question becomes how do you people manage leverage?  What is your tolerance for risk and reward?  Is there a moderately safe method for pushing the accelerator and growing with equity, or do you just leave it alone?  

I love rain on my parade, please make it downpour so I can learn something!

I recently purchased a 12 unit building which came with a very high appraisal value at $95k over the purchase price (which I put 20% down on). I found a local lender that is willing to do a LOC at 80% LTV on the property at the appraised value, and I am interested in finding creative ways to use that equity.

I was contemplating using that line of credit to offer private money loans to a local flipper/developer and start out in the note business. I was wondering if anyone has gone this route of using a LOC for private lending and what expertise is needed and legal ramifications there are for using borrowed money to make loans?

@Joe Splitrock  You're correct the capital expenses are equal to a two bed, however many two beds in this area are renting for the same price or less.  And to add the tenants in this building are all 55+ and take IMMACULATE care of their apartments, so much so you could eat off the floor.  The existing stoves are probably 15 years old and don't look like they've even been used for more than a year.  Also, the expectation in these units is very basic appliances and features, so the overall costs of capital expenditures is very much on par with the rest of the market.  

I do agree though, If I could find the property you're talking about with anywhere near a decent cashflow in my area I would be all over it.  This just happened to be the first deal that landed in my lap that made financial sense.  We'll see in a year what has transpired and pivot from there.

Thanks everyone. I was not aware a 1031 exchange required a year, so those tax complications alone make it a bad idea to immediately sell. Couple that with the fact this is a great deal that should produce awesome cashflow for the foreseeable future I am definitely going to hang on to it and look at doing a HELOC off my personal residence which has a ton of equity waiting to be tapped. And when this property has "seasoned" I will approach my local lenders to see if I can either do a cash out refi or a HELOC to grow the farm.

My end goal is to retire on the income from my assets, and right now I want to grow as quickly as possible. Being brand new to REI I have been reading through endless concepts on how to muster up capital, what types and classes of properties to acquire, whether or not to keep an asset or sell, how to structure for tax benefits, etc. It's been an amazing six months of learning, but I have to admit I am starting to get to the next level of analysis paralysis in which I start choosing the long term path for my investing. I've jumped the hurdle on how to find a good deal, but now how do I step it up and put my foot on the accelerator?

So far my comfort zone is MLS properties, financed by local banks, and just far enough out of reach of the masses that I am competing with other high dollar investors that it makes the market a bit more competitive for me. Should I stick with this route by saving up another $80k-$100k to make a big purchase, try and risk selling for equity when I can; abandoning great cashflow in hopes of bigger/better, or maybe look at vacuuming up some smaller properties in the short term to put my savings to work in a more incremental fashion and sell them after some appreciation to get into another larger multifamily? Should I put my savings in a short term investment vehicle for modest appreciation while saving up?

Just too many forks in the road ahead that all look appealing, but the goal is get out of the rat race as quickly as possible!

I just purchased my first investment property, a 12 unit (1 bed efficiency), for $412,000 with monthly gross rents of $5785. There was fierce competition on the property, which is justified because the most conservative NOI is around $2850 giving it a CAP rate of 8.5% and a nice COC return around 10% - 16% depending on how expensive lawn/snow/water/common area utilities are for the year. The property appraised for $505,000, and I was planning on making some minor improvements which should support or grow that appraised value and the rents. So I am wondering if I should even hold on to this property or try and grab that free equity and get my cash back to move on to a bigger deal?

@Russ M.  That is exactly what I was looking to do, and it seems you've been able to include much more into the agreement than I hadn't originally thought of so that's amazing advice!  Do you provide the credit after the month of completed work, and how meticulously do you keep track of the tenant's upkeep?

I am under contract on my first property, a 12 unit that is home to many retires and I was looking at ways to cut costs right off the bat and the dollar amount for lawn care sticks out like a sore thumb.  Currently the property pays $3300 for lawn care in the short Wisconsin summer, while not totally unreasonable I was thinking for half that amount I could purchase a decent lawn tractor for the property and do the mowing once a week myself to save quite a bit.

Then the idea of either reducing rent in exchange for one of the tenants using the tractor once a week to mow the lawn occurred to me.  Has anyone successfully made a deal with a tenant like this and were there any liability issues, misuse of the equipment, or unfulfilled obligations that made it a sour deal?

@Beverly Meola The seller provided a very rudimentary expense list for 2017, but did not provide anything else.  I am asking for their Schedule E filings for the last couple years to get an idea of what they're profit/loss looks like.  I did start estimating capex by usable lifespan and came up with about $300 per month in savings, however that amount is based off everything on the property.  Maintenance seems like it would be lower than other properties as the tenant base is far more gentle on the property than an average person would be (from what I saw touring the property).  

What I am really wondering is a couple of things.  Whether I should be calculating reserves for maintenance independently of capex, If maintenance can be saved in an account up to a certain dollar level and kept at that amount ongoing for the life of the asset, and if I should front load capital for items like a roof if it's brand new or if I should put those dollars to work acquiring more properties and start saving for those items down the road a little ways (honestly don't know if this is a bad idea or not).