All Forum Posts by: Nathan McBride

I would not accept a balloon payment, unless it was something like 10+ years out, giving me plenty of time to figure out what to do to get out of it.

I think the seller just wants a long term cash flow stream and is not super interested in continuing with his real estate ownership.  Let's just say he especially does not like performing maintenance part, judging by the appearance of the property.

I’m looking at a piece of property in an area that could be a great opportunity to ride a wave of appreciation as others around it are being renovated.  It's currently mixed use and is basically as close to the major university as you can get.  It also comes with an extra lot, which makes this one of the few properties with adequate parking in the area.

The problem is the seller knows what he has, and is not super motivated to sell. It looks like it will not be possible to reach a deal with bank financing that will meet my cash on cash ROI requirements.

He has, however, given me indication that he would be open to seller financing, even saying he's done a 40-year note with someone on a different property.

I don't know if a 40-yr amortization is in play on this property, but before exploring it with the seller, I wanted to gauge the feelings of folks here.

What are everyone's thoughts on going to a 35 or even 40-year note to force cash flow?  I would absolutely not accept a prepayment penalty, and crazy a high interest rate is out of the question because of cash flow constraints.

It seems to me that it is an opportunity to take advantage of cash flow as I allow the property to appreciate or even do some light improvements to force appreciation.  If the area redevelopment never materializes, at least I still have my cash flow.  Am I missing something?

TLDR:  Is a 40-year note a good idea, assuming no prepayment penalty and reasonable interest rate?

My vote between the two would be SFH (though I personally invest in small multifamily). In my market, condos do not really appreciate and can be hard to liquidate, unless you are willing to sell at a discount. The SFH market appeals to a much more diverse group of potential buyers (investors plus retail buyers), so the exit strategy is much more straightforward.

Financing on condos can be difficult, too, but you can often find investment condos with a much lower barrier to entry for a cash deal.

All of that said, if you can get a crazy good deal on a condo so that you can afford to discount it if necessary when you go to sell and the cashflow offsets the appreciation that you are likely forgoing, I don't see a problem with it.  Just be sure you have a good handle on the association fees and any limitations on investment properties in the community.  

I've had great success working with a local bank for commercial loans on non-conforming properties.  The big banks are really after properties that fit into nice, neat boxes so they can easily sell the notes on the secondary market.  Local banks are often looking for loans that they can hold onto and use to generate income.

The bank I use has a minimum DSCR of 1.2, but I personally would not go through with a deal if DSCR isn't at least 1.25-1.3 (with very conservative expense assumptions).

I love commercial loans for the flexibility (buy with an LLC, creatively apply seller credits at closing, negotiable closing costs, etc.). They typically have a slightly higher rate (by 0.5-1%) and a 20-year amortization, but I look at that as motivation to work to find deals good enough to make up for the lost cash flow potential.

If I had $1M and just the idea that I wanted to get into REI (i.e., no actual, real world experience), I would invest $800-900k in some kind of low fee ETF or mutual fund (or REIT if you really want to put it in real estate) and take the remaining $100-200k and invest in one or two small apartment complexes - using leverage. I would definitely try to partner with someone local who has some investing experience.

Once you get one or two deals under your belt and are sure this is the route you want to take, pull the rest of the $800-900k out (which would have likely increased to $900-$1M through capital gains and dividends over the 1-2 years you have it invested) and accelerate from there.

@John Warren to say this place hasn’t been updated in awhile is a huge understatement. 

I wasn’t planning on getting anything fancy. The 2k was for replacing all the old ranges including removal and installation labor. 

I’m just trying to see if this is something you would do proactively while a tenant is in place or when I improve the units as they turn over. 

These are all inherited tenants. Some of which have been there for 8+ years. So they may not be leaving for some time. 

I had a repairman at one of my properties the other day to look at a gas wall heater. 

The heater is of 1940s vintage and a big time fire and CO hazard, so now I have some new heaters en route from Amazon to replace all of the outdated heaters on the property. 

While he was there, I had him look at the pilot light on an oven that was acting up. He recommended that I proactively replace the ranges that have continuously lit pilots, again because of the fire/CO risks. 

In this particular multi family property there are four of those ranges, so probably looking at around $2-2.5k all in for installing new ranges. 

My question is whether or not it is worth proactively replacing these ranges. I’m going to replace the one that’s acting up and one in an empty unit as an opportunity to upgrade to stainless, but the other two work fine, and the tenants recently renewed their leases. 

Does anyone else recommend replacing ranges proactively? I have CO/smoke detectors in the units. 

@Ashley Zhang You need to find a new commercial lender. The 20% down payment is one of the positive aspects of a commercial lender that offsets the shorter amortization and higher rate. The flexibility in what they can do is what primarily makes them attractive to me. They find deals conventional banks won’t, as long as they meet profitability requirements. They don’t have to fit all of their loans into the standard “boxes” that traditional banks are bound by.

@Ashley Zhang A seller credit is essentially like cash back when buying a car. I pay the seller an agreed upon price, the credIts aretaken out of the sellers proceeds and the title company typically applies those credits toward closing costs or escrows credits for repairs. The commercial bank in this case allowed us to apply all of the repair credits instead of holding them in escrow. Deals are always out there. Just be patient and persistent (and sometimes creative). Don’t rely on financing to make or break a deal. The deal should be able to stand on its own.

@Andrew Merritt Have you considered installing a ductless (aka mini split) system? I’m looking into doing that for a property I just purchased, rather than ponying up for a true central HVAC system. An agent recently told me that mini splits usually appraise as central HVAC. I have not verified this with an appraiser, yet, though.