All Forum Posts by: Pete Harper

Quote from @Nick Belsky:

@Pete Harper

If the DSCR thresholds are not met, then it will cause your down payment to be higher... It's no so hard to find DSCR loans for 5+ units at 70-75LTV. They have to cash flow enough to support it. Many lenders push the DSCR minimum up some for 5+, some do not. I have been pricing these some this past week at mid-7s to mid-8's on 30 year fixed. Your not being quoted a crazy rate...

DSCR loans are lite doc loans. We would ask for rent rolls and such, but it normal for 5+ unit. Not usually looking at tax returns or personal income too much either... some do, but many do not.

I am a bit biased towards DSCR so I will not be able to offer you many cons with them. For investors, they are superior to conventional financing for a variety of reasons to me. Of course, not all would agree. The only potential issue with them for me is the prepayment penalty. They don't factor as an issue for me, but some get really hung up on them for whatever reason.

Are you working with a broker by chance?  Brokers can offer insight into a variety of financing resources that can help match you up with a program that fits exactly your scenario.

Cheers!

I not sure I want to get locked into another loan with penalties.  Our first investor loan was with Visio.  They had a 5% penalty for early refinance.  At the time rates were 6.5%, we totally missed out on the opportunity to refinance when rates dropped.  This same loan is now going to reset to 9% after 5 years.  I'd rather not repeat that mistake again.  In all likelihood rates are going to drop in the next couple years, I'd like the option to refinance.

No, I'm not currently working with a broker. For portfolio loan I have a direct relationship with the bank.  They already have all my financial info.  When I purchased a property last June they didn't require any additional information.  

I'm looking at financing options for the potential purchase of a 6-unit apartments by my LLC. The property in question is an older 6-unit apartments. The property is fully rented. However, way below market rent. The property is priced right for condition. Our strategy is to fix the property up and raise rents to market rate for long term hold. We have a good track record with this being our 9th similar acquisition. In the past I have used portfolio loans from a local bank. I have a total of four loans with this particular bank, they have been very good to work with in the past. My only issue is the current interest rates. I'm being quoted 8.75% on 30yr fixed, 25% down, no fees. I know rates are up but I wanted to look at other options. Ive heard a lot about DSCR loans and wanted to see if they are a good option. We have cash reserves for renovation so I don't need funds beyond purchase.

Pros and Cons for DSCR loan in this situation.

Thanks, Pete

Quote from @Bill B.:

Are you sure on your long term capital gains tax? You’re using 30% I thought it was usually 15-20%.

As mentioned don’t forget 25% depreciation recapture “tax” of approximately (80% of $205k times 25% of (3.63% times the number of years held.)) (a little under $1,500 a year.)

You might have a hard time finding a lender for a $250k property with a $216k downpayment. (You have to reinvest all cash received or that will increase your tax. Unless you can pay the rest from cash on hand.)

 Bill, I'm using 25% LTCG; $175k x .25 = $43.75k  No state tax in Texas.

Good point, I did not include depreciation recapture.  That is a bit more complicated. Using your number of ~$1500/yr held 4 years is $3000.

I have a couple options on the small balance load.  I could hold onto more cash and take out a bigger loan or make up difference from cash reserves.  I have a portfolio lender that is willing to make small loans.  We did a $64k loan earlier this year.  It all depends if I find a second property or not.  Here I was looking at worst case where I only identify one property and not able to use the entire 1031 exchange value.  Dave's answer was spot-on.  

Quote from @Sean O'Keefe:

@Pete Harper there's also option 3 to consider (that you didn't mention). Sell property, don't do 1031 exchange, and get cost seg on the new property. 

.

.

.

*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

Just so I understand your option.  Basically option 1: $175k capital gains with $43.75k long term capital gains tax.

Perform a cost segregation study on new $250k property and somehow "find" $175k in new deductions to off-set $175k income.  Is that even possible to write off 70% of the value in the first year?  Please explain?

I have a property that I want to sell and do a 1031 exchange into another property of lesser value.  I want to confirm my understanding of the 1031 exchange rules are correct.

Exchange property: Cost basis is $205k; Sale price $380k, Loan $164k leaving $216k equity

Without doing 1031 exchange I would have to pay capital gains on $175k with $ 43.75k in long term capital gains tax.

Now if I were to do a 1031 exchange on new property: Sale price $250k The difference is $130k with $32.5k long term capital gains tax.  The 1031 exchange is $11.25k favorable.

Ideally I can find a second property to utilize the $130k doing a 1 for 2 exchange with the total purchase price over $380k.

Thanks, Pete

Investment Info:

Small multi-family (2-4 units) buy & hold investment in Fairfield.

Purchase price: $85,761
Cash invested: $22,000

1970's Duplex in small rural town in Central Texas. I found the deal by sending out "Yellow Letters" to all the multifamily owners in town. I was contacted by the guardian for a gentleman that just moved into assisted living. Over six months waiting for the court to approve the sale. Our plan is to hold this as a long term rental. Update: The right side renovations are complete. Unit is now rented at $950/ month. The left side decided to stay as-is at $700. $1650 total Solid 2% deal.

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

Long term buy and hold for cash flow. Solid 2% deal

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

Negotiated deal with owners guardian. Took 6 months to close the deal with court approvals. Used inspection report to negotiate half cost of new roof prior to closing.

How did you finance this deal?

Conventional 30yr financing

How did you add value to the deal?

Renovated the right side increasing rent from $500 to $950.

What was the outcome?

Long term hold with great cash flow.

Lessons learned? Challenges?

Patience.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Represented myself on negotiations. This was an off-market deal

Quote from @Justin Brin:

Quote from @Pete Harper:

I would make a suggestion on your target market strategy.  Look at secondary markets in the path of progress from major metro areas.  We are doing well outside Austin, Dallas and Houston. 

 You are suggesting not to focus on main metro areas but secondary areas?

 Correct.  Don't invest in Austin but along the I35 corridor going North.  Similarly along the I45 corridor from Houston.  Hwy 75 North of Dallas is another good area.  

Quote from @Justin Brin:

Quote from @Ali Nichols:

@Justin Brin great lead in for discussion, thanks for putting that together. Generally speaking, we have the same approach - avoid areas that are heavy in renter friendly regulation (i.e. CA). Then TX is tough right now because of property taxes. And then, Florida is difficult with insurance right now until that stabilizes. 

Then, when we look at Atlanta and Charlotte we see a good amount of supply because of the footprint of large institutiional buyers (i.e. invitation homes).

That leaves the midwest (OH, IN, MO), TN, and the one off markets like Tucson and Albuquerque. Personally, we have had success in small multi-family across OK, TN, MO, KY, IN, OH. 

Did taxes went up in Texas?

Regarding Atlanta and Charlotte institutional buyers are buying up the market?

From all these stats "OK, TN, MO, KY, IN, OH" which one is your favorite? 

Property taxes in Texas have always been high.  With no state income taxes they government needs to get their money somehow.  Unlike CA there is no Prop-13 cap on appraisals.  Appraisals keep going up every year unchecked.  We own 8 properties in Texas, every one went up in 2023.  Same in 2022. Low prices might look attractive but your total property tax burden is about 2X California.  Make sure you account for this in your underwriting.  

I would make a suggestion on your target market strategy.  Look at secondary markets in the path of progress from major metro areas.  We are doing well outside Austin, Dallas and Houston. 

Quote from @Raymond Schmitt:

Here's an update on Waco plant....not looking good https://wacotrib.com/news/local/business/development/s2a-wac...

 I was going to say, nothing but a field of weeds at the Waco location.  I believe the Paterson CA facility is just a circus tent.  Nothing is real, all their home photos are CGI renderings. 

Quote from @Joshua Bautista:

How do you guys analyze a property? Based on what metrics?

BP has excellent calculators available for free in the tools section of the website.  I believe you get 5 free free uses.  I "borrowed" the formula's and created my own spreadsheet to quickly analyze deals.  Save both your good and bad deals and you will quickly get a feel for your target market.