All Forum Posts by: Milton Rivera

@Wilson Lee

I would take a three (3) prong approach:

1. Fact Finding - Contact the subcontractors that have worked with him in past.  They may know something and more importantly find out if they have done any work on your project and whether they have been paid.  This is where some of the liens can come from. Get dates on when the project started, the phone calls and emails you have forwarded, etc. Call the city/county to check on the status of any permits that may have been pulled and see how this would be affected.  The replacement contractor may need to transfer under his name.  Also, you can reach out to his insurance and/or bonding company and notify them of the issue.  
2. Put him on notice - Draft a letter officially putting on notice and demanding he re-engages otherwise you will be forced to complete the work and he would be liable for any cost overages.   I would contact the local GC licensing board to get an understanding of what the timelines are in your jurisdiction.  I have seen three (3) to thirty (30) days with seven (7) being typical. 
3. Develop a revised scope of work and get pricing/schedules from alternate contractors and get them ready to go.  You may need to check with the lender as there may be a process in which they have to approve any contractor changes. 

Good luck,

Hello BP,

I was wondering how do you evaluate/determine your comfort level with regards to leverage. 
Typical SFH lender guidelines allow for (75-80%) leverage on properties and consider your debt to income ratio. Portfolio lenders typically follow the same (75%-80%) rule and consider the additional income from your properties and perhaps relax on the debt to income ratio and as long as the deal makes sense and generates positive cash flow. Based on the latter approach, you can essence acquire an infinite number of properties. Obviously, individual preferences, goals and risk tolerances play a key role. I was just wondering what type of guidelines investors are using when it comes to leverage.

@Charquis M.

What are you looking to accomplish by establishing the LLC? In general, this is a risk management strategy, there is also a tax strategy that could be involved (talk to your attorney and/or CPA).

As mentioned, if there is a mortgage, the bank can call the loan (highly unlikely if payments are being made). There are some costs involved with creating and maintaining an LLC. Another risk management strategy would be to purchase an umbrella policy (some property manager may require you to have one to manage the property), this, in essence, covers you for a range of extended risks.

A more prudent risk strategy would involve both.  Also, consider what your equity in the property is.  If you owe 90% of the value, the likelihood of someone suing you to get that 10% is not very likely but if you own the property free and clear attorneys are more likely to take on those cases since there is more money available to settle. 

@Nicholas Layton

I do not think is an issue of ignoring all of the other benefits (debt reduction, equity buildup, depreciation, etc.).  

The single most relevant reason to evaluate cash on cash return is that allows for an easy comparison between different types of investments.  How does the return on your down payment compare if you were to leave the money in the bank, versus purchasing stocks/bonds, or buying a rental property.   

@ Jessie Newton

This is a classic scenario.  It does not sound like there is a clear contract and hence the remedies are limited.  Based on the information provided, you may want to cut your losses and move on. 

• What is the process to replace the builder/contractor on the construction loan?  The bank should provide some guidelines on that.
• All parties (contractor, bank, and homeowner) should draft the scope of work to be performed in as much detail as possible (example this type of carpet, this type of doors, etc.)
• Once the scope is agreed upon, the contractor is to provide you an estimate and a schedule (consider using a guaranteed maximum price type contract, this basically holds the GC to a ceiling).  There are things that they would be entitled to in terms of a price adjustment (in your example, if lumber prices skyrocketed for a specific reason beyond his control then usually the owner is on the hook, however, there are measures to limit this exposure).
• A contract can be drafted using the scope of work, estimate, and schedule (you can include liquidated damages - this is a sum (not a penalty) of what it would cost you if the project is not completed on time - think daily rent and storage rates). 
• The new contractor may discover quality/installation issues from the previous contractor.  This is where you can try to force the old contractor to perform (let him know of the deficiencies and copy his insurance/bonding company) to get him out to correct.  Note this is a performance and not a subjective issue (example, the electrical panel was not properly installed vs. I don't like the tile color).
• You can always file a lawsuit against him for non-performance and get his bonding company involved but this is a long process that may cost you just as much as the cost of repairs in legal fees. 

@Vincent Plant

1. It sounds like your cash flow is slightly less: consider setting aside 10% of the rent for repairs (paint, carpet, plumbing, etc.) and 10% for capital improvements (new roof, new HVAC).
2. Consider paying any debt with high-interest rates (anything greater than your cash on cash return).
3. Save the balance for your next deal.

Good luck,

@ Cada Schacher

I believe that you would need to meet the two-year threshold.   Having lived in the property for one year how much equity did would you actually build?  Unless you completed some major rehab and/or expansion the appreciation should be 10% or less and when you account for the costs of sale (realtor fee, closing costs, etc.) you may just break even.  If you did show capital gains the taxes on it should be minimal (I think it is 20% in the asset was held less than a year and 15% if it was held over a year in most cases).

It sounds like you are considering turning the property into a rental, this might be the better route.  You may qualify for the best mortgage terms and build further equity into that rental. 

Good luck

@Benjamin Pifer

Hello, to my knowledge there is no restriction on this as long as the construction was performed by a licensed general contractor and followed building codes/permits. 

Good luck,

@Justin Michael Johnson

Please bear in mind Real Estate tends to be a long-term game.  

What is the driving the move out of current home?  It sounds like you purchased it because you like it and the neighborhood.   You did not buy it as an investment play but it met your needs at the time. 

 It sounds like you considering three options:

1. Sell it.  If you were to sell it and make a $5k return on it, is that worth the trouble of making all of the renovations/upgrades, coordinating contractors, and listing/selling the property?
2. Turn it into a rental. I am assuming you meant a $150/month cash flow ($1,800/year). If you were going to invest in other rental property, have you considered your investment criteria (cash on cash return and/or cash flow/per door per month)? If so, how does this home measure up? On the downside, if you turn this into a rental property immediately, what financing options would you have to secure your next property (assuming that would become your primary residence)? Would that also be a VA loan?
3. Buy a rental investment property.  You may be able to put the 20k-30k that you were going to put into your current property and put the down payment on a rental.  That may result in a higher cash on cash or cash flow return since you would be acquiring as an investment play.   

The good thing about real estate is there are many different avenues one can take.  You just have to figure out where you want to go.

Good luck,

@Kevin Parsley

I will privy all this with the standard, it depends (in this case what the lease says).   Based on the information provided, it sounds like the property manager went through their checklist and followed standard procedures.  The termination of a lease most likely needs to be in writing like all contract documentation to ensure both sides are covered. If there was a discussion of terminating the lease early, that would have triggered the move out procedures (including when the property would be vacated, the turn over conditions, assess the wear/tear vs. damages, and completion of the move out inspection).  

A few things that may help from the tenant's perspective:

• Is there a copy of the move-in and move-out inspection?
• Did the PM provide a copy of the estimate for "clean up and damages"?
• Did the PM put the tenant on notice of being in default (in this case, did they notify the tenant in writing that they were breaking the lease and/or other lease violations?)