All Forum Posts by: William Morgan

Angie,  

You didn't mention the ARV of the place. My thoughts; There's really no net cashflow here, so I'm hoping you're buying a lot of equity? Since interest rates have increased I have begun to use the Land Trusts (LT) for buying Sub-To. That's what I would do in this situation given the nice low interest rate. Sub-to is complex enough, and adding a LT adds a little more complexity to it. There are fundamental concepts to Sub-to and additional considerations with LT's. I'm not wanting to sound condescending at all, however if this is your first time doing a sub-to there's a lot to learn about.

Disclaimer aside, my short answer is create a land trust, transfer into it, adjust/replace insurance, redirect all accounts, and establish a bank account for the Trust.  My company has developed detailed internal procedures for these so, just understand, I'm simplifying the process quite a bit here. 

But the first question is how much equity will you have on day 1?

I find myself coming across more development opportunities and I'm needing some better "back of the envelope" criteria to help separate the wheat from the chaff.  Almost every deal requires spending some amount of pre-development money to bring the project into better focus.  However, at some point you should be able to come to a  go/no-go decision based on the numbers, after which you would kick the deal or renegotiate the price.   So, I'd like to poll my Commercial/Developer friends, what does your "back of the envelope" criteria look like in order for you to proceed with a development project?

1.  Do you look at the projected:  

    - Equity Multiple?  

- IRR?

- COC return?

        - Other?

2. What minimum values do you assign to them? 

    Example:  "I like to see no less than a 2x equity multiple and an IRR of 15% on a 2-year build-out"

Asking for a friend :)

Lily,  (this is not professional advice, please consult with an attorney or financial advisor)

1. One risk of a HELOC is they could freeze the line. Many banks did this when property values dropped between 2007-2012.

2. Another, less likely but still possible risk is that they could (depending on your HELOC's details) call the funds "due" on short notice. Even in the depths of the Great Financial Crisis of ~2008 I did not hear of any banks doing this. It would severely harm a bank's reputation to do so. But many/most HELOCs do nonetheless have that provision.

3. Of all the risks, this one is the most likely to bite you. You buy a rental using a HELOC as a downpayment. You plan to refinance the deal 6-12 months down the road with an increased loan amount that cashes out your HELOC so it's back to a zero balance. However, interest rates have continued to go up causing your house's value to drop say 15%. Since a typical home loan will require an 80% Loan-to-value, you now will not have enough equity in your house to get the HELOC refinanced because the home's value dropped 15%. So you are kinda stuck with no way to cash out your HELOC. AND, since interest rates have been creeping up your monthly payment on that HELOC has also increased. Having said all of that, the extra amount it costs you to make the monthly payment on the HELOC probably won't be devastating but it would affect your bottom line.

@julie 

@Account Closed there are 4 ways a rental property provides its owner a return….and you are only focused on one of them - cash flow over expenses. A better and more accurate picture evaluates all 4. 

In more desired markets you will often see Landlords buying and renting properties that do not cash flow and may not even cover their debt service!   While you may initially believe these landlords are foolish, many of them will go on to make far better returns than someone who only looks for a property meeting a 1 or 2% rule. This is of course is a very broad stroke observation with some important caveats.   

The key to understanding why this may be true is by understanding ALL of the ways a rental property provides returns to its owner;

 - Cashflow over expenses 

 - Appreciation (both price and rent)

 - Principle pay-down

 - Tax deductions 

Case Study: I purchased a home for $550k five years ago. PITI was 3600/mo. I could rent for $3200/mo when it was purchased resulting in a negative $400/mo after debt coverage. Sounds like a terrible investment right? And yet this property's performance far exceeds those properties I bought meeting a 1 or 2% rule.

Sure it takes a slightly more sophisticated approach. And you must consider the market cycle and timing (e.g. now is a terrible time to try this)   However, this is one reason why you see some folks buying investment properties that do not make sense using a 1% rule.  And yet many of these folk’s returns will blow away those who only buy 1 or 2% rule properties, caveats notwithstanding.

Now, don’t get me wrong, not everyone who buys a Property in a desirable market will not automatically make great returns.  But savvy investors can and do make great returns when done right.  

Hope that sheds a little light. 
W

@Chris Seveney. It was definitely a good experience.  I don't think I'll pursue more (I have two businesses as it is) unless I bump into them, but now I feel more prepared.

Yep.  It's the best deal the IRS will give you these days.  Get it while you still can!

@Chris D'Auria I have been mulling the same thing. I don't have a definitive answer for you, but I'll share what I am planning to do (pending Atty's input). I plan to buy the property(s) in the name of my children. I can loan them the downpayment money and gift them a portion of its repayment each year until it is diminished. (you can gift $14k/year tax-free I believe) I intend to place the property into a Trust that I manage on their behalf. Proceeds can go into tax-deferred accounts (529, IRA, etc).

My intention is to help them avoid capital gains taxes upon my passing while also providing income for their savings now.

I won a suit for Specific Performance which gave me a judgement for the property. Since the occupants have been living in it for free they will likely require and eviction to get them out. I have not acted on the judgement yet, which means I do not yet have title to the property. I am waiting until I have a reasonable chance of actually gaining possession of the property should an eviction be necessary. Otherwise, I could be in a position of having title to a property I cannot possess while having the privilege of PITI for it!

CA EVICTION MORATORIUM QUESTION:  Since the occupants (who were also the Sellers) are not tenants under a pre-existing lease (or any lease for that matter), am I able to evict them NOW if they refuse to leave?  OR do are they likely to enjoy protections under the eviction moratorium?

Does anyone have knowledge of a scenario like this?

2nd Update: I resold the loan for $128.5k after receiving 5-months of P&I payments.  Doing the math in my head (never a good idea) I think I made about a 30% annualized return (or a 15% one-time return).  It was a good learning experience. 

Disclaimer: I'm not asking for legal advice, that's what my lawyer is for.

I was awarded a property via a judgment. In order to receive the property, I must act on the judgment which essentially means having the clerk of the court facilitate the transfer of title to me. The occupants who were party to the judgment are still living in the property. If I act on the judgment I could own the property (and pay PITI). What about the occupants? Do they automatically become tenants that enjoy CA eviction moratorium protection?