All Forum Posts by: Ken P.

I have an opportunity to buy a condo at an older complex where our LLC already owns 22 units. All the units bought to date have either been through conventional commercial bank financing, or owner financing. The latest condo, however, is being sold as the assets of the deceased former owner are liquidated and passed to the heirs. It hasn't been updated in decades, and needs renovations. My company has renovated many other units in the complex and is ready to tackle the work, and in the past we've always been able to put 20-25% down and $3-$4k into updates. The total usually comes to around $8k cash to control a unit worth $25k to $30k.

In this case though the estate wants to sell the property outright, and it will take ~$6k to update.  Because of the condition we might be able to pick it up for $13 - $15k, taking total cash required to ~$20k or more after updates.  This is enough to buy three units financed by owner or a bank, or even a small house, so it isn't something we want to do.

Our commercial lender isn't lending any more (nothing we did, they're just going in a different direction with their new loans), and our other business bank isn't doing any RE loans either. We could use our HELOC, but are paying it down, and don't want to increase lending against our primary residence.

Any ideas? Maybe a HELOC against one of our other rental properties with substantial equity? An ideal solution would be a loan with 4 - 5 year payback @ 5% interest, which is typical of our owner finance deals.

@Franklin RomineAny equity gain going in would come from raising NOI on the entire package of condos and selling them as a MF package, where price = NOI / cap rate. There isn't much of a market for these units as retail condos any more, unfortunately. In fact, they were apartments at one point, converted to condos, and now are in essence reverting to apartments. As apartments, although I haven't tried to sell or refinance them, I believe based on similar units that they are worth about 20 - 25% more than I'm paying.

We have a deal to add 3 more rental properties to our portfolio, bring the total to 24. This particular deal is a long-term investment play, with no immediate cash flow, but good ROI from loan principal paydown, and good cash on cash down the road. Here are the details:

Three 1 BR condos in a complex where we already own quite a few units were for sale by a tired owner.  Two of the units, located one on top of the other, were fire-damaged about 6 years ago, and were completely rebuilt by insurance.  They have new drywall, new hardwood floors, new kitchens, new bath, new windows, etc.  The only thing not updated is HVAC, which is in the basement and not affected by the fire.  The third unit is in a different building where we already have a unit, and needs substantial updates.  We've updated 13 identical units over the past 2 years, and know with confidence that renovations and new appliances run around $3500 - $4,000 to get them to the point where we're proud to rent them and they rent quickly. 

Financials:

$80,000 purchase price negotiated for the package ($28k x 2 for rebuilt units, $24k for older unit).  $16k down (20%), with land contract financing for the balance at 5% for 6 years.  Rent is $550 x 3 = $1650, LC payment is $1030/mo, and with taxes, insurance, maintenance, lost rent etc. we'll be losing about $100/mo cash flow.  Principal repayment averages $10k/yr.  Cash flow will be $300 x 3 = $900/mo = $10,800/yr from year 7, on total out-of-pocket cash outlay of ~$27,000 over 6 years.  Not a get-rich quick scheme, that's for sure, but seems like a good opportunity because incremental workload is low given our existing units there.

We have a $100k HELOC via Citizens Bank in the Midwest at 3.25% variable (but it's never changed) with $50 annual fee, interest only. We used $60k two years ago as down payment on 18 apartments, are paying it back from cash flow.over 5 years.

It depends on where you're going and the speed you want to get there.  Michael Blank and some of the  podcast guests, such as Serge Shukhat in the most current podcast #131, have said it better than I ever could - forced appreciation (value add) is possible in larger apartment properties in ways that are impossible in single family rentals.

With SFRs, the value of your holdings is determined by the values of comparable properties. With apartment buildings, the value is determined by the cap rate for similar class of building, and the NOI of your building. Anything that you do to increase the net operating income increases the value of the building, which increases your equity, benefiting you when you refinance or sell.

Perfect timing on your question.  This afternoon my wife and I have a meeting with the  financial adviser who manages our stock and bond portfolios, and one of the key areas of discussion (for us) will be use of self-directed Roth IRAs.  The adviser is fee-based, not paid by commission, so we're hoping for some honest discussion.  I'll have more input for you after the meeting.

I have bought 1 BR condos, and am continuing to do so.  Here is the latest we're finalizing details on:

Purchase price $25,000, with $5,000 down

Rent $550

Land contract $377 (5 year payoff, 5% interest rate)

HOA $125/mo

Property taxes $67/mo 

Maintenance/lost rent $41/mo.  This is much lower than typical, but unit was completely renovated after fire damage about 7 years ago.  

Cash flow -$60/mo during land contract. Total out of pocket contribution over 60 mo $3,455

ROI 47%1st year of land contract, from principal repayment

ROI over 5 yrs 239% from principal paydown, assuming no appreciation

Cash flow $320/mo after land contract

Cash on Cash 37% after land contract, assuming $5,000 down and closing expenses of $2,000 and total negative cash flow of $3,455

So, I do buy into negative cash flow situations, but at reasonable interest rates, with low cash burn and high rate of return after the land contract is paid off.  The unit you're looking at with those terms doesn't look attractive on any of those counts.

Christopher, for a large investment like the one you're contemplating, I'd recommending going to Michael Blanc's site themichaelblanc.com and paying for his apartment building calculator.  It's small potatoes in the big scheme of things, and it will help make sure you don't miss anything.  You'll need the resulting numbers for any serious discussions with possible investor partners.

Are you working with an experienced investor from your local REIA? If not, another recommendation is to join a BiggerPockets local meet up and find someone active in the multifamily space who can walk beside you during your first deal.

For single family, duplex, triplex, and quad residential property, unless you're buying a free and clear property on land contract (owner financing), you're going to have a hard time getting a loan in the name of your company.  Banks will demand that your name be on the title, and many loans have a 'due on sale or transfer' clause that causes the loan to be due in full if you transfer the loan from your own name to an entity name.  You'll find when reading stories on BP that most often this clause is NOT invoked, but there are plenty of posts from investors whose loans were called due.  

Commercial real estate (larger multifamily properties or office buildings) are different, and in this market it is expected that an entity will hold the loan for the property.

For SFRs, there really is no reason to have the property in an entity, at least until you reach the limit on number of loans in your name, at which time you can refinance with a portfolio lender.  You'll get a better interest rate buying in your own name.  If you're doing it for legal protection, your best protection is proper tenant screening, and proper care of the property once you have tenants.  You can easily add $1m or more in umbrella insurance to the homeowners insurance policy to cover the worst case scenarios, at low cost.

From your question it looks like you haven't spent much time researching this topic yet on BP.  I highly recommend searching and reading, and then asking questions about something that may still be unclear.  There is a wealth of information here on BP, and with a search or two it's not hard to find what you're looking for.

Go to look at your properties during the daytime, and if you must go at night, don't go alone.   It's not worth the risk. This is advice from someone that lived in Detroit for years and now owns rental property literally across the street from Detroit. Many of our tenants are former residents of Detroit who've left seeking a safer place to live.