All Forum Posts by: Phillip Dixon

Hello!

My wife and I are jumping in head first into a new real estate plan and I'd love some advice on how to property structure our endeavor. We are going from a pretty normal living situation, to a MUCH more complicated one, and we'd LOVE your advice. We are additionally looking for a CPA, and we have already received some legal council.

We own a single family condo on the north shore of Massachusetts, and just purchased, with the help of my father, a 4 unit apartment building in the same city. Because of our mortgage conditions, we are going to be moving out of our condo, renting it out, and into one of the 4 units in the new building.

My father's conditions for assistance were a loan for down payment, along with funds for renovation work. He would like to see a 7% return on his investment, interest paid monthly, and his money back when we eventually sell or cash out refi (~10 years out).

Our current intentions are to live in the new building, rent out our primary, and short term rent the 3 units adjacent to our unit in the new building. I did manage hotels for ~7 years, and have some experience with Airbnb currently.

We are unable to place the new building into an LLC due to the mortgage conditions, so we are instead going to put it in a trust. We are also going to move our original condo into a trust. We also currently have an LLC set up for our short term rental operations which we have been already running out of our spare room in our home which will cease when we rent it out. In total we will have 1 LLC and two separate trusts.

All that said, I guess my questions are as follows:

-We need to set up an operating bank account for renovation work for our new property, should we set this up through the trust, through our existing LLC or just pay using our personal accounts? My father, my wife, and myself will all need to funnel money through this account to fund the project.

-We have been told about Umbrella insurance from friends. Should this be something we consider?

-Will my father be able to transfer money into the LLC/Trust account without it being seen as a gift?

-When the time comes to pay back my father, will we be able to distribute proceeds from the sale/refi as we see fit?

Thank you SO much, I know this is a bit of a wacko situation! So many things are changing for us. I want to use every resource possible!  I know advice varies on market, etc, but I appreciate anything and everything! =)

 Hey Sanat! A response like this is exactly what I was hoping for! Thank you for this! I also appreciate you mentioning to hold onto my shirt if I go private investor route! =)

 Yes! A great question! So we pour a lot of money into retirement benefits & some investments. Additionally, both of our incomes have seen increases in the last few months that brought us to where we are now. We DO have cash on hand, but mostly consider it to be an emergency fund. We also bought our current home about 2 years ago and invested a sizeable down-payment to keep our debt to income as low as possible.

I do think our cash position will change drastically in the coming months & years, but there have been several offerings in our market recently that have made us really tempted to move quicker than we thought! 

 That's a great idea! I'll try to talk with a bunch of them!

 Thank you Justin!

 Thank you!!!! Will do!

Hello there!

Quick shot in the dark to anyone with more experience than I do! My wife and I would like to buy a multi-family, but we do not have a bunch of cash to put down! We own our home, about 80k in a 500k loan, asset probably about 600k value in todays market. We net about 220k in salaries & compensation. Our credit scores are both well above 800. We want to buy a investment property priced at about 700k, with little down but finance about an additional 200k for improvements. We have a good understanding of our city & local market, and think it would be about a million dollar asset and cash flow positive by the end (we'd be adding a 3rd unit to a duplex). Would any lender even consider this? =)

Quote from @Randall Alan:

Quote from @Phillip Dixon:

Quote from @Randall Alan:

Quote from @Phillip Dixon:

Hello!

My wife and I are just working on building up some equity. We have a little bit of a suicide-run plan to try to buy a multi-family, and looking for a reality-check if we're going to hard, or perhaps into something that isn't possible for us. I totally welcome all opinions, positive or negative!

On the north shore of MA, we currently own a ~1500 Sqft Condo with about $70k of equity, but the value of our home has increased from about $500k to $630k via local comps & my realtor's estimate.

We are looking to purchase a multi-family local to us. The numbers seem to be in our favor, as well as some changes to local zoning. The home is listed at $720k, but we think we could get in at $680k. There are two units, currently TAW- rented below market value. The units are in tough shape and we'd like to finance additional money for reno & an ADU addition- I assume that we could refresh the interior and convert the attached garage space (200sqft) into a 350-400sqft rent-controlled ADU. I am pretty well locally connected and am not overly concerned about permitting/zoning.

Once complete- even with zero down I estimate- $5092 monthly mortgage (including financed rehab). Both units would potentially rent for 2600/unit. The ADU would additionally add $1500 (set by local ordinance) of potential rental income. Totaling $6738 monthly rent collected. Even budgeting for $1600 of monthly expenses (including vacancy and repairs) we still end up in the clear.

-We aren't overly concerned about turning a huge profit. I figure, in time, as rent increases & we are able to refinance, our profit margin will grow.

-Average yearly increase in property value of a little over 6% makes this feel like a small risk as we could cash out.

-We have just enough income to float the second mortgage in case hell lets loose. Renting our current home in an emergency scenario would help too.

-We have some cash on hand, but I'd prefer to hold it as it's our emergency fund.

Am I insane? If not, would a lender ever agree to do this with me? There is risk there, but plenty of escape plans.

@Phillip Dixon

As soon as you say your next purchase is "not my primary house" - most every (typical) lender is going to say "You need 20-25% down to make this purchase happen." They want investors to have 'skin in the game'. They won't be left holding the bag if your investment fails. So I see the "zero down payment" line in your chart as a non-starter. There is more to these calculations, like your income as to qualifying for the loan for one -but a better approach might be to buy the house as a new personal house of your own - even if it meant selling your current house. It would definitely lower your down payment requirement for starters. Then you could renovate one side while living in the other, and make the ADU addition as well. After six months or so, you could move out of your Current house, buy a new house, and then rent out the remaining units in your rental. The selling your old house isn't so much required - but might make it easier as far as qualifying goes. Also, I would want to know that your ADU will definitely happen - otherwise your numbers would really stink as to profit versus expense. I'm not a fan of a deal where you are potentially upside down if you can't get through all the changes required (ie. adding the ADU). Like, what if you run out of money, or it takes a year to get through permitting, etc. Now you are carrying the house upside down for an extended period of time. Could get ugly. We had 6 months of setbacks when we went to update windows in a 1925 house. Had to bring the house to 2022 building code for everything we were changing. Cost us $50,000 we weren't expecting. We still came out ahead because our deal had plenty of profit in it, but it was definitely disappointing and frustrating. We missed the peak of the market to sell (as a flip) and ended up making it into a rental. Food for thought!

All the best!

Randy

Thank you so much for this Randy! These are excellent thoughts! I know financing could be tricky, we'll see what that hits! You've also convinced me that I'd like to add some ADU permitting contingencies to a potential offer. Even if it took us a year to float- I think we'd be okay. It's phillipso hard to break into this when you don't have a bunch of cash to put down!

@Phillip Dixon

There are probably other issues with your numbers (sorry).  You likely will not get a 6% loan in today’s current rate environment on an investment property.  You are probably at least a percent low.

You will also have issues financing rehab costs as well unless you do a special program like a FHA 203k loan… that will really limit your options on financing to just a few programs which you can Google more on.

Also, right now we are in a depreciating market (ie. Housing prices are falling in general)… so I don’t think you will see a 6% increase in values in the short term.  Plus, costs are going up significantly… like property insurance, and maintenance expenses. 

My gut says you could find deals with better numbers and less risk - even if it meant investing  remotely - even though I’m not a huge fan of the additional expenses that remote investing entails.

I wish you the best, but would encourage you to do some comparisons on other properties that are straight rentals without major renovations to see if they are easier / more straight forward avenues to get into real estate.  We pivoted to single family rentals after starting out in multi-family - mostly because they are just so much more common and easier to find compared to multi-family.  That’s not to say that multi-family isn’t great - it just seems far harder to find one that is a good deal compared to single family. 

Randy 

 Thank you for this Randy! Frankly I was waiting for someone to say that- my numbers are fine, but with it being my first shot, I wasn't sure what to expect. My neighborhood is really, really, tough to break into- and this property is only a block from mine. So I figured it may be wishful thinking =) Thank you!

 Thank you Bruce! That's so true!