All Forum Posts by: Nicholas Fehr

There's an incredible, one-of-a-kind mid-century home for sale in my area in Los Angeles. I think it would be such a cool Airbnb, but I have no experience in short term rentals. It definitely pencils nicely as a STR (more on that below), but I'm worried for two reasons: 1) Entering the LA market with a STR since they require it to be your primary residence, and 2) The "backup plan" of converting it to a LTR doesn't look super pretty.

I'm thinking it's a pass, but wondering how others would approach this?

Scenario 1: Short Term Rental. $1m purchase price (30Y Fixed @ 4.5%, 80% LTV)

Y1 NOI: $54k, Debt Service: $49k. DSCR: 1.09(!)

Y10 NOI: $93k, Debt Service: $49k.

Exit at year 10 and make $1m in profit, including cashflow over life of the deal, resulting in a 19% IRR.

Scenario 2: Long Term Rental (backup plan)

Y1 NOI: $30k, Debt Service: $49k. DSCR: .6(!!!!)

Y10 NOI: $50k, Debt Service: $49k.

Exit at year 10 and make $470k in profit, including negative $113k cashflow over life of the deal, resulting in a 7.8% IRR. Or hold forever and watch the profit gradually increase.

I've reached out to three companies who perform cost segregation studies and only received a response from one of them, despite my attempts to follow up with all of them. I received a predictive analysis which outlines a potential for $260,000 in bonus depreciation for my $1,425,000 property. The estimate for the study itself is coming in at around $7,500. Even though this is tax deductible, this seems like a lot to pay. I can afford to move forward with this, but wondering if anyone in the community has any input here. How much do you typically pay and how responsive are they? Would gladly accept A+ recommendations!

Investment Info:

Small multifamily (fourplex) value add.

Purchase price: $1,425,000
Cash invested: $300,000 (inclusive of $20k rehab cost)

What made you interested in investing in this type of deal?

I'm starting out trying to build my portfolio. I plan to acquire one fourplex every year and build up a portfolio that will support my family with passive income. If all goes well, I will graduate into commercial deals / syndications / private equity.

How did you find this deal and how did you negotiate it?

MLS. Paid $200k over asking. There were 20 other offers. Knowingly overpaid based on existing NOI, but was delivered with one unit vacant and another tenant left during escrow, leaving us with two vacancies and a lot of value to add. Seems like a lot of small multifam in LA lately is priced at ARV, which is crazy. Fortunately, I had the cash to renovate and climbing rents made this easier to say yes to.

How did you finance this deal?

Bought it with an 80% LTV 7-year interest-only ARM at 3% interest. Being my first foray into multifamily, I wanted debt that would ensure I could cashflow right off the bat to finance improvements. I'm in a high appreciation market, so paying down principal isn't as important to me. I know full well that rates will go up, but if I can refinance longer term debt after stabilizing at a much higher NOI, then I can lock it in long term and still cashflow AND get some cash out. Yes, I know I missed out on a once-in-a-lifetime opportunity to lock in extremely low long term debt ¯\_(ツ)_/¯

How did you add value to the deal?

Renovated two units and will be renting them at market rent. Plan to turnover the remaining units over the next couple of years and then refinance.

What was the outcome?

I fully expect to stabilize with $30k of annual cashflow with my current debt service. Cashflow will double when I am able to turn over the remaining units, at which point I plan on locking it in longer term. Even at higher interest rate, will still provide a similar amount of cashflow to now ($30k+), and a refinance should return my original capital. From then on, I'll refinance as I see fit, taking out big chunks every 5-10 years and using that to fund more acquisitions. Lots of ifs, but regarding downside risk, I expect to be able to service my debt when it goes up in 7 years and still cashflow. If I had originally purchased with a 30 year fixed, I would have lost >$100k over the first few years while renovating. I wasn't comfortable with the elevated carrying costs as a newbie, knowing that the rehab could have been a disaster and the possibility of cash-out refinancing is never a guarantee.

Lessons learned? Challenges?

I've learned the ins and outs of doing this kind of deal. Nothing specific, but the hands-on experience means I will be more equipped to evaluate further deals and may be quicker to get them stabilized. No significant challenges so far, everything has gone smoothly.

Even though rates have gone up, that seems like a very high interest rate. In January, I was able to do the same thing at 3% with my bank. I would consider reaching out to a good mortgage broker to see what other offers are out there. But it totally depends what you plan on doing with the money! If this allows you to purchase another property and this one will still cashflow, it could work out in the long run. If you're using it to perform a flip, HELOC could work.

Are you interested in flipping or BRRRRing this one? If BRRRRing, have you modeled out how you'd expect it to perform? Are you comfortable leaving $100k of equity in the deal after refinance?

Like many other commenters before me, I agree that a motion-sensing switch and an LED bulb should do the trick. It should cost next to nothing to operate. That said, if you are looking for another option, a smart bulb like Philips Hue would enable you or your tenant to control the light remotely and make use of the automations in the Hue app. I mention it in case it helps anyone else with similar issues.