All Forum Posts by: Paul G.

@Shiloh Lundahl It's on my calendar!!! Hoping I can make this event!

Thanks for the replies.. I'm not a huge fan of purchasing REO or rehab properties because I have a full time job doing something else, and use Real Estate as a side venture. So, while I could potentially be the money partner (and anything that doesn't require constant oversight, so sifting through data, picking properties, etc) in a REO job, that is all that I could possibly offer from a time perspective.

For your 401K for lending, I'm assuming you have a solo 401K?  I could potentially take a 50K loan from my 401K, but I really want to save that for an o crap moment if I ever have one.

What kind of capital does one need to have to really get into HML / Private Lending successfully? I'm thinking more than 100K as well...

So, I've come to a crossroads in planning for the future and I'm trying to figure out what my next move should be.

I like the idea of buy and holds and I invest in Arizona as that's where I currently live.  I would rather keep investing in state if possible.

I have two condos that I'm cashflowing about $600 (total) on after everything is paid for and reserves are stored. I have enough money in the bank to start looking for my 3rd rental property as long as I stay with the same size condos (80-100K condo, 20-25K down). (I expect around $200-300 per door in this market). That would take me down to nothing left besides my reserves for CapEx. What that means is I would have to start saving again (at about 800-900 a month). So It would take me a while before I could buy another property.

This is the safe option as my two rentals are doing pretty decent right now and I am happy with the tenants in them.

I have two other options that I'm looking into, but definitely am not as comfortable with.  Both require me to sell the two rentals that I currently have.  After my sales go through, I would have about 100-120K to play with.  

Option 1: Go into Private lending for small fix/flip projects.  This would potentially be less hassle as long as I vet the people borrowing from me.  But after that would be pretty much passive. (once I found a couple fix/flip investors that I like and am comfortable with).  I know there is quite a bit of paperwork and networking I would need to do to go down this route, but it's definitely interesting to me.  I'm curious as to what my returns would look like for this option (I know very little about this side, and doubt I have enough money to really jump in on this type of investing, but I want to explore it as I move forward).  Also, I believe the tax advantages of this method are worse off than owning actual real estate?  

Note: I believe how I would get involved in this sense would be to piggyback with a HML? Wouldn't be as lucrative, but would get me into the game so I can see how it's done in a proper fashion?

Option 2: Go big.  I like being able to see my investment and have some hands on duties with it.  Though if I went big, I would definitely relinquish all of the day to day and maintenance etc.  The problem that I'm running into is I can't really go big in Arizona.  with 100K, I could potentially purchase up to a 500K property.  So that would be roughly an 8 unit property.  60K per door.  Rents would be between 500-600.  I'd see about 900-1200 per month after everything has been paid.  The advantage of this is it factors in Property Management, so I wouldn't have to deal with it anymore, but it's still a wash if I purchase a 3rd unit from a cash flow standpoint.

From an economy of scale perspective, it makes sense to get the 8 unit:

More units to spread out risk

PM doing all work instead of me (which is vital if I'm going to keep growing) (Portfolio loan, so worse loan terms, but 1 loan instead of 3).

But more potential for turnover, more problems (most likely) as the units are more run down than my current properties, etc.  Also, I would now have to manage a 1031 exchange where I have to sell both condos at about the same time.

A lot of good advice here.  

One thing that I don't think I've seen yet.  Make sure to have enough reserves for (within reason) the worst to happen.  For me, since I invest in Arizona, that would be the AC dying in the middle of summer.  Which, mind you... It did. 6 months into my first rental property at the end of May, early June.  Not the best time for AC units to die.  We didn't have the reserves set aside, but luckily, we had enough to cover it.

For different locations, the worst could be something entirely different. (Heater in the winter in the midwest / NE for instance).

As you scale up, it becomes easier to stomach, but having 1-2 properties, a big ticket item can really put a dent into your plans.

I'm not advocating going overboard and saving 20K a property etc (as that would quickly eat into your purchasing power for more property), but make sure you have some money set aside and a plan.

To calculate interest rate on the payment: Loan Balance * (Interest Rate / 12)

To calculate Principal towards payment: Payment Amount - Interest Rate on the Payment calculated above.

A quick Excel spreadsheet will do all this for you.  Also, your interest you pay changes every month since your loan balance decreases every month. 

So, for your example given 100K loan, 5% interest, 30 year fixed.

Payment 1: 100K Loan balance * (5%/12):

Interest: 416.67

Principal: 120.15

Payment 2: New Loan Balance 99879.85 * (5%/12)

Interest: 416.17

Principal: 120.66

@Nicholas Aiola so if I'm reading that right, there are no NEW tax advantage/disadvantave for holding in an LLC (standard LLC, not S/C Corp)

And yes, CPAs, EAs, and tax accountants are going to be worth their weight in gold next year with the potential for a number of loopholes!

Is there any appreciation that can be expected? Is the ARV 20K? If so, most likely your only option is a personal loan which will be in the 9%+ range and <10 years.

If ARV is something like 60ish K, you could buy on a personal loan, then refi out of it into a traditional mortgage.

Some banks will do <50K loans, but they're few and far between and 20K is probably too low for those banks as well.  You might be able to qualify and get into something with P2P lending, but again, the repayment terms are going to be much shorter than 30 years.

I think it's better to show the end of the day prior, which will put my morning wakeup into context... Needless to say, my body tells me I need 8 hours of sleep... I'm just a bad listener it seems.

10PM - get in bed.

10:30PM wife is asleep, I start RE research on my phone

12AM Finally tired, fall asleep

7:00AM Wakeup 

7:15AM Wakeup try 2

7:30AM Wakeup try 3

7:45AM Wakeup try 4 (If you couldn't tell, I've gotten extremely good at turning off (not snooze) my phone without actually waking up.

8:00AM Crap, I wanted to get up at 7.  Rush through hygeine, feed/play with dogs, coffee

8:30AM out the door for work

No food.  I'm never hungry in the morning.  But I also eat "lunch" at 11AM, so that kinda counts right?

9 to 5 or 6 Work

6-10PM - Make dinner for wife, play with dogs, watch hockey (most days)

Pretty standard day for me.

@Shiloh Lundahl we ended up closing on this property 10/6.  The appraisal came back much lower (which actually worked out better for us).  It came in at 87K, which we lowered our offer to (and they accepted).  We know why the offer came in low, so I'm not worried about it at all.  Another property in the complex just sold for 106K in 4 days, with the same upgrades we plan on doing.   Sorry I missed the get-together btw.  Got hung up at work :(.

Our tenant agreed to (and will start paying) an increase in rent next month of $800, with no changes to the property beyond adding 3 ceiling fans (a reasonable request).  I decided the raise to $850 immediately wasn't worth the month or two of vacancy I would incur + renovation allowance if she left.  We settled on $800 with the agreement to raise again in 6 months.  So, that way I can slow roll out the raise in rents.

I don't have the actual numbers off-hand, but our total Debt Service (PITI) is about $414 a month.

My tenant doesn't want to leave, but I have transitioned her to a month-to-month lease.  So, I've factored in 0% vacancy.  I know this is unrealistic to maintain, but for this year, that is what I'm banking on.  My tenant has been on time so far with the rents, so unless something crazy comes up, I'm going to assume she will be a long-term tenant as she has done everything she possibly could to make sure she doesn't give me any reason to kick her out... LOL

CoC: 7.1%

Cash Flow: $175

DSCR: 1.51

GRM: 9.06

Not great, but not bad. Definitely upside potential when we want to put a little money into the property. Similar units that have some upgrades can be rented around $900 (the return from the upgrades I don't think would be worth it though as the break even at this point would be about 7-8 years). More importantly though, a second property under my belt with a ton of upside to BRRR when I decide it's time. And, because we had to put less down and don't need to do the upgrades now, I'm already looking for my next :).

I will give an example of my two properties.  I'll try to make the analysis similar to @Shiloh Lundahl so you can have two similar points to look at.

Prop 1: Mesa, Arizona Condo

Purchase 72k

Rehab, holding costs, closing fees, etc. 22K + 3K closing costs for refinance.  For a total in of 25K

Bank Loan 58K (20% down)

Refinanced up to 90K (after owning for 4 years)

My total in: -$9,000

No Lease Option, though I may look into it for this property.

Monthly cash flow after all expenses $141, yearly $1700 (Should be able to get monthly cashflow up to 191 next month)

Cash on Cash Return: Infinite (prior to cash out refinance, I had a 15% CoC return. But refinance paid for my second condo, and now I'm in a position where I'm looking for a third)

Prop 2: Mesa, Arizona Condo

Purchase 87k

Rehab, holding costs, closing fees, etc. 30K

Bank Loan 65K (25% down)

My total in: $30,000

Monthly cash flow after all expenses $210, yearly $2,525 (This property is below market rent right now, but I bought it with an existing tenant (so 0% vacancy), so I'll be raising rates over the next year).

Cash on Cash Return: 8.49%