All Forum Posts by: Nick Rittmann

Hi all, I'm considering paying cash to acquire a property, then rehabbing it, and then doing a cash out refinance once I've got it fixed up (basically, a BRRRR).

My concern is my debt-to-income ratio. I believe it's roughly ~40% and I'd hate to buy a property with cash and then find out that lenders won't do a cash out refi (essentially meaning I'd have to keep all of that money tied up into the property) because my DTI is too high. Is DTI a factor for lenders when doing cash out refi's? If so, is it much of a factor (enough to prevent them from doing a cash out refi)??

Thanks,

Nick

@Janice V.

That's some awesome info, thank you for sharing, Janice! For whatever reason, we never considered using a USDA loan because we never thought of Maui or the area around Kona on the Big Island to be "rural", but hey, it's not our definition of the word that matters, but the governments! That's a GREAT idea

We've also noticed that a LOT of properties listed in Hawaii are listed as "single-family" when in fact, they have, as you mentioned, an Ohana, and/or, say, a unit above the garage, a studio on the ground floor, etc. and you would think, be listed as a "multi-unit"? 

If you don't mind my asking, what were some of the reasons you chose Maui over Oahu or the Big Island??

@Brian Eastman

Thank you for the reply, Brian. That's some great info and I appreciate the level-setting of expectations and any possible tax implications. 

If I follow you correctly, you'd most likely recommend the use of a self-directed account to buy, repair, rent, and hold a property as its the only strategy which provides true "rental" income from of a "traditional" tenant and provides the best tax shelters, correct?

Hi Bigger Pockets,

My family and I are considering moving to one of these 3 areas:

->Tampa/St. Petersburg, Florida

->Fort Myers/Cape Coral/Naples, Florida

->Oahu (Honolulu), Maui, or the western side of the Big Island (Kailua-Kona) in Hawaii

With that said, here are our MAIN considerations:

#1: Warm water and warm weather

Everyone in our family loves the water and why we've narrowed our search to these 3 areas

#2. Schools
On top of having good public schools for our kids to attend, my wife used to be a teacher and is currently an assistant principle, so a state/municipality that values our educators in terms of how they treat and compensate them is also important for us

Both the Tampa and Fort Myers areas are relatively affordable, Hawaii ...yeah, not so much, but I believe we can overcome that obstacle (more on that below). Basically

#3. We MUST house-hack
A.) FHA & Multi-Family Units:
4-unit multi-family is preferred, but not necessarily required, especially given how difficult they are to come by in some markets. I forget off the top of my head if it's a one-year, or two-year commitment to owner-occupy the property if you use an FHA loan(which we fully intend on doing to take advantage the 3.5% down requirement). Upon fulfilling the length of time required by the FHA for owner-occupants, we move out and really reap the rewards from a cash flow perspective, and either repeat the process entirely and buy another multi-family, or purchase and move into a single-family home (that's a "good" problem for us to save later on!)

**We're a little confused though on the loan limitations the FHA has. Here's why:

The stated FHA max limits are dependent on location, I get that, BUT, for example, the basic standard mortgage limits for FHA insured multi-families in Honolulu are as follows:

2-Unit: $923,050

3-Unit: $1,115,800

4-Unit: $1,386,650

HOWEVER, even though the max limits as shown on HUD's website for Honolulu show those that I've typed above, on the same page, if you scroll down a little bit, they go on to state, "Section 214 of the National Housing Act provides that mortgage limits for Alaska, Guam, Hawaii, and Virgin Islands may be adjusted up to 150 percent of the new ceilings."

So, if I follow this correctly, if we were to move to Honolulu and purchase a multi-family, we could actually borrow a max of $1,470,475 for a 2-unit, a max of $1,777,375 for a 3-unit, and a max of $2,208,825 for a 4-unit ...is this correct???

B.) Real Estate Investment Potential: 

Ideally, we'd like to AirBnB out the other units as we live in the other as we *should* get a better return than if we were to rent them out to a tenant. In the 3 markets were considering moving to, we'd expect some seasonal fluctuations in demand/pricing elasticity, but overall, would expect to have some relatively healthy occupancy rates year-round (say, 70-80%)

Appreciation would be more the icing-on-the-cake than anything, so a properties ability to CASH FLOW is more important to us than the rate with which it may appreciate in value. In terms of monthly expenses, we'd LOVE to get close to breaking even ...when we're living in one of the units and cash flow isn't an expectation of ours ...while we're living in one of the properties units

We're desperate to pack up and move to one of these areas tomorrow!! If you'd be willing to share any advice, thoughts, concerns, or which market you'd pick and why, WE'D LOVE to hear it and be forever in your debt!!!

Thanks for reading!

-The Rittmann Family

Hey Bigger Pockets,

This question for you all is simple: How do you QUANTIFY areas of a city that are experiencing gentrification?

By that, what I mean is, what data points/sources of data, have you used in the past, or that you currently use, to help you identify a spot in town that is either experiencing gentrification, or is likely to experience gentrification.

This isn't question isn't meant to solicit anecdotal/qualitative responses like:

"I drive the same road every day and have watched the properties go from being shacks that are barely standing, to getting torn down and replaced by new apartment complexes" 

-OR- 

"whenever Starbucks builds a store in an area of town where most of the properties are eyesores, distressed, or are mostly rented out... if Starbucks is building a store in that area, I know it's going to be up-and-coming"

That type of advice may be beneficial for some, but much more circumstantial and prone to inaccuracy. Rather, what metrics, what trends in the data, what data points can be combined and/or aggregated have you used to really help you identify an area of a market that's undergoing gentrification, or has data/trends that are displaying a high probability of an area that is about to experience gentrification??

I (and our fellow investors) would love to hear any of your thoughts and insights you're willing to share!!

Thanks,

Nick Rittmann

Hey Bigger Pockets,

Firstly, bear w/me on the exorbitant length of my post. 

I've already spoken with a couple of financial consultants about self-directed 401k's, but all I get from their perspective are the specifics/details on how the financial vehicle in question (self-directed 401k) functions. NOT, advice or strategy on HOW to maximize your return by using this type of financial vehicle. That's where you all come in. But, on top of that, I've been dabbling in real estate investing for over decade now and either my either naivete (entirely possible), or ignorance (also, entirely possible), I was NEVER aware of "self-directed 401k's" until a couple of months ago when the topic was brought up on a Bigger Pockets podcast that I happened to be listening to. By posting this, I'm hoping to do my little small part in spreading awareness about this beautiful, yet all-to-unknown option that I'm sure many of us can tap into and help springboard our real estate portfolios, but just don't know that it exists. 

To get started, I'm looking to switch my 401(k) from one of the default options that my employer affords us, to an outside company where I can manage it myself as a self directed account. The reason for this is simple: so I can use the funds to invest in real estate

My 401k is 100% vested and currently has a value of around $180k.

Yes, I realize the stock markets are doing well right now and there's inherent risks to doing this such as the opportunity cost of missing out on any gains accrued from the stock markets and/or potentially losing money from investments in real estate. There's no need to harp on those aspects and besides, I'm here on a real estate investment forum soliciting advice real estate investing, not stocks, bonds, index funds or any of that other boring stuff where you have virtually no ability to improve the value of an asset Sooo, with that little diatribe out of the way...

Per my understanding, I've outlined below how the process works for investing in Real Estate using a self-directed 401k. Also, I'll be using the following hypothetical figures to help illustrate the power of using a self-directed account, but more importantly, so someone calls me out if any of my info or comprehension on this isn't correct!

Balance of Self-Direct 401k: $150k

Purchase Price of  Investment Property (single-family house): $75k

Cost of Repairs to Flip: $25k

Cost of Repairs to Rent: $10k

ARV (After Repair Value of House): $150k

1.  I transfer the funds ($150k) from my employer-provided account manager, to an outside firm who specializes in managing self-directed 401k accounts (I'm 100% vested, so this should not be an issue ...or, so I would think?)

2. Once the transfer is complete, I can then use those funds to purchase real estate for any investment purchase (so long as it's not for the purpose of being owner-occupied, or in some other way to be used by my family as their residence) 

3. I find a property I like, with the numbers used above, and when making an offer on an investment property, I'm seen as a "cash buyer", correct? (provided the offer doesn't exceed my cash balance in my self-directed 401k account)

4. In being a "cash buyer" there are several major advantages from having the flexibility to purchase any investment property you wish because 

a.) There's no need to be concerned about a property qualifying for financing from a lender

b.) You can close more quickly on the property

c.) You pay less in acquisition costs to buy the property (lender associated fee's, etc.)

d.) Due to these factors, if making an offer on an investment property where using a lender IS an option, your offer carriers more leverage in the seller's eyes (which may also mean you can offer a little bit LESS to the seller because of these factors)

4. Upon purchasing the investment property there's NO need to use a hard money lender, a private lender, or any other lender of any sort because I'm funding 100% of the costs associated with both purchasing the property -AND- repairs 

a.) This in turn, substantially improves your margins/return-on-investment because the interest and fee's you'd otherwise have to pay a lender are non-existent ...right?

5. Depending on what I decide to do with the property (flip, rent, AirBnB), determines how I earn my return into my self-directed 401k:

a. FLIP - Simplest, most straight-forward scenario

After completing the rehab, I sell the property and the proceeds I earn from the sale of the property go directly back into my self-directed 401k account. 

b. RENT - this is where it gets a little sticky for me

After completing the rehab, I refinance, the proceeds from the refi go directly back into my self-directed 401k, and any cash flow generated from the property are free and clear (aside from taxes), yes, or no?? Am I missing something here, this seems almost too good to be true...

-OR-

After completing the rehab, I refinance, and not only do the proceeds from the refi go directly back into my self-directed 401k, BUT ALSO, any cash flow generated by the rent from the property go back into my self-directed 401k?

-OR-

For some unknown reason, you're not allowed to refinance a property that you bought using a self-directed 401k??

C. AirBnB - the exact same to the rent scenario -ONLY- instead of using the rent proceeds generated by tenants as the cash flow vehicle, its you use the proceeds generated by guests nightly/weekly/monthly stays

I hope this all makes sense. 

PLEASE LET ME KNOW WHAT YOU THINK!!

Is this the stupidest thing since Blockbuster turning down an offer to buy Netflix, as brilliant a strategy as Google buying YouTube way back when, am I by chance I'm missing something here??? I appreciate ANY and ALL input

Thanks,

Nick Rittmann