All Forum Posts by: P.J. Bremner

@Ory Kelley

My first property was purchased with an FHA loan and I used my parents to co-sign because my first job out of college was commission based and they needed 2 years of W-2 to use commission income. It is definitely possible. I also refinanced 9 months later into a conventional loan, took my parents off of the loan and dropped the MIP (FHA version of PMI) and was able to qualify for another home purchase shortly after. I did not go FHA for my second purchase because I wanted to avoid deal with MIP and refinances again, did 10% down conventional loan with LENDER PAID PMI (they raised the rate to pay the mortgage insurance ahead of time).

As far as living in the unit for a certain period of time, this can be quite the gray area.  Mortgage fraud is a serious offense, but I don't think this is one of those cases.  The ideal period to stay in the house is 12 months.  I've been told by lenders that you can qualify for another mortgage after 9 months with a legit excuse (moving closer to work, bigger house for the family, cheaper house to lower bills, etc.).  Another thing I have been told is that INTENT is not the same as REALITY.  You must INTENT TO OWNER OCCUPY the property.  You can have all the intent in the world to live in the new duplex you just bought, but what if your parents get sick and you have to move home to take care of them.  Do you really think a mortgage company will take you to court for mortgage fraud because you decided to help family instead of fulfill the clause on the note?  Also, if you get a mortgage and make payments on time in full, do you really think the mortgage company is going to look into your case to see if you are legit?  This would be business suicide, to take a PERFORMING NOTE and turn it into a NON-PERFORMING one?  No way.  Get the mortgage, pay your bills, stick to your plan, don't ever commit fraud to harm others (getting owner occupied loans and moving out early isn't hurting anyone unless you stop paying your bills), and keep on pushing forward.

@Conor Aylward

Great question! As I stated above in this reply, I had my parents cosign for me as non-occupants to help with income qualifying. As a parent, you can also gift down payment to your child to help, so that should cover all the basis. They will base the rates and qualifications on the occupant's credit I believe, so if she is a "ghost" (no credit history) then that might be the only road block you come across. Definitely get in touch with a lender in your state that knows FHA loans inside and out. I was a loan officer in 3 different states for about a year, I know the FHA guidelines are super lenient so I would say you should be good to go but definitely get pre-approved (NOT pre-qualified, which means absolutely nothing) with someone in your state to be sure.

@Collette F.

I think you are confusing honest, no-bs answers for name calling and uneducated responses.  You need to think about the community you are approaching for advice.  Most of us on here are experienced business owners, landlords, real estate investors, etc. so naturally we will be biased towards the INVESTOR side of things.  Most landlords have had terrible experience with pit-bull-like dogs.  It very well may be the sweetest dog in the world (I volunteered at a humane society for a few years in college, pitbulls can be the nicest dogs and great for families) but unfortunately you need to come to understand that perception is often times more important than reality.  If your dog is perceived as a threat, it is a threat and other people will do everything in their power to protect their family and home against said perceived threat.  Investors listening to your story will look at it from the risk/reward side of things as well and be biased against past issues they have come across.  You get a unique view point here that you probably won't get with people you associate with daily (big assumption, but probably accurate).  They see a dog tearing up property, that has gotten out multiple times and threatens neighbors (again, NOT REALITY but the PERCEPTION).  While not all comments on here are helpful or even valid, there are definitely some really good points here that I think you would be short-sighted to dismiss.  Big takeaways:

• You are only responsible for the damage caused by your dog to the fence.  I agree that she should provide an itemized bill for the repair.  Most likely she used an under-the-table handyman for the repair or did it herself and charged you a nominal fee for it, either of which isn't the proper legal way to handle it.
• $100 to have someone come out to repair a damaged fence is ridiculously cheap.  I've paid several hundreds to properly repair a damaged section of a fence from my handyman that does things 50% cheaper than a contractor.  It often cost more than $100 just to get a professional to show up, let alone labor and parts for the repair.
• Your dog is PERCEIVED as a threat by the community, do everything necessary to keep it from getting out to avoid future issues.  Crate training and holding is never a bad idea.

I know this community well as I have been reading and following it for years.  Like anything else, we have some real ***holes on here, but the majority of people on here are very selfless and caring, trying to help complete strangers just because they can and not because they are obligated or benefit from doing so.  Try to think about where the advice is coming from before you dismiss it.  Best of luck with your troubles!

@Chris T.

I have a very close friend that has owned an insurance brokerage for 30+ years so I get no-BS answers from him regarding insurance products. He explained that there are certain instances where an LLC may make more sense than getting layered insurance (such an an umbrella with regular rental insurance). One of the big ones that made the most sense to me is this: If you have 10 properties under and LLC and someone sues your LLC, they can take only the assets in the LLC, so at most you risk the 10 properties but not your personal assets, savings, etc. If you have those same 10 properties in your personal name, you run the risk of losing EVERYTHING without coverage. If you have an umbrella policy, it will protect you against 99.9% of the lawsuits that will ever threaten you. The benefit is that IF you get sued, the insurance policy will generally pay off the suit and you keep the assets. The LLC will only separate your assets but not protect them from being liquidated. If you have tons of assets and can afford to lose some without making a dent in your finances, then maybe take the risk? But for $400/year to cover all my rentals, my vehicles, personal home, etc. I think it's a steal. AND a write off!

@Lucas Carroll

One thing to keep in mind for others who are dealing with this is the legal and insurance side of things.  If you have illegal additions to the property, you open yourself up to huge liability issues because they were not permitted.  I've seen additions that were done with much better quality without permits by non-licensed workers, but the city and lawyers don't see it that way and any kind of incident that occurs will most likely find you at fault because the lack of permitted work.  For the insurance side, I would venture to say if issues arise in the unpermitted part of the house, insurance companies will use any angle they can to not cover the damages.  I'm not 100% certain on this, but I was warned of something similar to this by a good friend who has owned his own insurance brokerage for 30+ years.  If everything is not done by the book, they will use it to weasel out of paying.  Both situations are still quite unlikely, but it's something to consider if you are making a business decision.  One bad lawsuit could sink your portfolio, so it may not be worth the risk!

@Tony H.

It all comes down to how you want to structure your business model.  The way I have it setup, the low deposit is attractive alongside the month to month.  The easier you make it for people to move in, the easier it will be to rent your rooms.  I can have a room filled within 2 - 3 days of posting the ad, and 95% of my tenants are amazing.  You do get the occasional bad one, but like I said before they tend to weed themselves out.  I think the small deposit size attracting good tenants is worth more than the money I have on hand to fix issues when they move out.  And again, I have LOTS of data on this and almost never keep a deposit.

As far as what others are saying on here is totally accurate!  It is often times not legal to rent out a bunch of bedrooms in a house without getting permits to run a hotel/motel/rooming house.  That being said, I have spoken with city inspectors who really couldn't care less unless you are having a negative impact on the surrounding area.  For example: If you have 7 bedrooms and they are all undergrad kids throwing parties all the time, clogging up the streets with cars so nobody has parking, pissing off the neighbors, etc. THE CITY WILL BE CALLED AND YOU WILL BE SHUT DOWN lol.  However, if you have great tenants who respect the house and area and you don't go overboard (putting 8 bedrooms in a 1,500 sqft house, allowing house parties, etc.) then you will most likely be just fine.  Another caveat to this: if you are in an affluent neighborhood, it will probably not work too well.  I've learned that rich neighbors (or at least ones with expensive homes) will definitely find out what you're doing and try to shut things down.  If you're in a working class area and you take care of things properly, nobody will ever inquire.  Final point on this: we can all think of laws that are in effect that are never prosecuted.  Don't run a slum house, make it nice, put great tenants in there and limit your risks.  

One last thing I want to touch on: This may or may not be a scaleable business, but I would venture to say it's just a good starting point and not something to build an empire on.  I am expanding into other areas of real estate simply because the fact that as I get bigger, obtain more homes, the results IF everything is shut down by the city is, while still very unlikely, catastrophic.  For example, you rent rooms out in your own home that you currently live in.  If the city says no more, you still live there and pay a mortgage which you would have anyways.  If you have 3 homes and you're currently not living in any, you now have 3 mortgages plus rent/mortgage for your primary.  Use the 10x rule and make it 30 homes, now you're in deep doodoo.  You can make a ton of money with this, but my personal opinion is to keep it small, expand into other areas of real estate that are much more secure and then maybe eventually sell these room rentals off.  They are a lot more work and nobody can manage them but yourself, but it will definitely help you get tons of cash flow on the first couple deals.

@Tony H.

You have a lot of info to cover here so I apologize in advance if I miss some stuff or go off in an unrelated tangent... lol

1) You need to check with the city zoning regarding "Non-related individuals that can live under the same roof".  I've only dealt with this in R1 which is NOT for duplexes.  Most cities will allow 4 - 5 unrelated adults to occupy the same residence, anything more is not allowed.  That being said, most places really don't care if you have more people in.  Or if they do, it's really not easy for them to find out.  So, if you play your cards right, make sure you know the neighbors and treat them well, you'll probably be fine renting out more than that.

2) I really hate using numbered rooms or letters.  It's really cheesy and unappealing, not to mention it's difficult to remember which is which.  I like to label my rooms by a defining characteristic: Master, Large room, Side room, west wing, etc.  Then when you are showing the room, you are showing the "West Wing Room" instead of the "Room E".  A little psychology goes a long way.  As for leases, it really depends on how you structure the agreement.  If you are renting to 3 people that are moving in together, they all go on the lease together and are responsible for the lease TOGETHER, so if 1 or 2 drop the ball, they are all legally responsible.  Personally, I don't like this approach for the room rental business model.  I go with individual leases that ONLY pertains to their room.  They legally have access to the common areas and are responsible to keep stuff clean and orderly, but they only have legal lease on their room.  I do this because often times people move out and you would have to find a random person to fill that may or may not get along with the others, etc. and it's hard to get them to share a lease with someone they dislike.  I personally only do month to month because if I don't like someone there, I don't renew their lease.  No need to evict, etc. just don't renew the following month and give them 30 day notice to leave.

3) Fortunately I have not had the need to evict anyone (I manage almost 30 rooms for the past 5 years).  I've been able to just get people out since it's month to month.  I tend to deal with college kids, so it's very easy to get people to leave.  If they think nobody in the house likes them, they feel the social pressure and just move out on their own lol it sure beats going through legal.

4) I think you are barking up a tree that you probably shouldn't.  My average rent per room is about $750/month (I include utilities, furniture, house supplies, etc.) and I only collect a $300 deposit.  I've had to keep a deposit twice, once because they skipped out on rent and moved out middle of the night and the other was because the angry Ex-BF bashed in the door lol the repair wasn't even $300 but she felt so bad she told me to keep the deposit as she left.  You can use the deposit for anything broken IN THEIR ROOM.  Unless they are all on a master lease, you cannot charge everyone for damages done by one or two people.  In my experience, when you do room rentals, you make so much more money than a regular rental, you should NOT BE CHEAP.  Tenants will break things from time to time, they will clog common area toilets, they will break the washing machine, etc. etc.  If you start to nit-pick and push costs on everyone, when in reality it's only a single person that ever does all the damage, then you will lose good tenants.  There is a saying in business, "Don't trip over dollar bills trying to pick up pennies".  Don't do this lol.  Example: I clear about $2k in one of my homes each month after all normal bills are paid.  I probably get 2 - 3 plumbing calls per year ($60 per trip), 1 - 2 appliance repair calls (about $100 per call) and a few minor things here and there.  If I rented the house out normally, I would be negative cash flow, but I could charge the tenants these fees.  Instead, I suck up the $400 extra in expenses per year, put a smile on my face when I head to the bank and learn to have thick skin :)

I hope this helps, let me know if you have further questions.  I would be more than happy to share my knowledge in this area.

@Lucas Carroll

I recently went through the same ordeal with a HELOC. The appraiser was looking at the county assessor web page which showed the property as 1,900 sqft, but it has been added on to since the 1920's, it's a frankenstein house at over 3,300 sqft now. The appraiser was only interested in the assessor data and needed me to pull permit info for the additions. They had records of all of the work that was done, but they did not post any sqft data on said permit info. That being said, I threatened to kill the deal if they didn't accept the stuff I turned in from the city, which was all paid for and signed off by inspectors and they reluctantly accepted them. Without permits, in my personal experience, you will NOT get the added value on the appraisal. I hope i'm wrong, because in order for all that work to be permitted you may have to open up walls and go through weeks of inspections and other crap they make you do. I'm all for standards and safety, but often times the city is in dire need of money so they find every way they can to milk you.

A side note, my appraisal was a "drive by" and not a full-on $500 home appraisal so they didn't actually go inside and measure the sqft, but i'm still quite confident that they will not use the added bedrooms because they were not permitted.  I've seen deals fall apart because appraisals come up short when work done on the house was not permitted.  I'm by no means an expert in this area, just speaking from a couple years worth of experience so hopefully my comments are misguided and you can get all the money : )

@Anthony Cline

Most of the commercial/portfolio lenders I have spoken with look for 75% LTV so your numbers sound acceptable. The only issue you may run into is that the $60k loan isn't very appealing. For a bank, it costs the same amount of money/man power to originate a $1M loan as it does a $100k loan so they generally like to see larger amounts. Most banks will have a minimum loan amount. A possibility would be to purchase multiple properties and have the bank finance them all as a package deal. If you intend to go the Fanny/Freddy route, then you will just have to follow their guidelines to qualify for the mortgages.

My personal opinion: be careful with hard money, especially with long term buy/hold. If you have plenty of cash to bail yourself out of a hole (evictions, trashing the place, etc.) and still be able to make the interest payments then it might be a reasonable option. If I were in your shoes, I would do my best to get Fanny/Freddy loans (you can get up to 10 by yourself, up to 20 if you're married and title each property individually). It sounds like you have fantastic income, which should help you a lot getting these loans. It might even make sense to buy a duplex cash, fix it up, rent it out and refinance the cash back out with a Fanny/Freddy loan. This is the BP-made-famous BRRR strategy. Tons of info on here about BRRR if you search it.

Glad to see other people in our age range with good income, frugal spending habits and a desire to expand through real estate.  Go kick some ***! 

@Grady L.

When you take out a HELOC, there are no restrictions on what you can use the money for. They don't care as long as you make your payments on time. Often times they don't even bother asking you why you were applying for it (unless it's the loan officer who is trying to convert you over to Cash Out refi so they get a bigger loan - more commissions etc.) You could literally take the money out in green cash and sleep on it if you wanted to. Using both HELOCs to buy another property would be fine from the bank's perspective, but you would have to be extra careful with your due diligence because if the deal goes bad, you lose the rental and you're on the hook for the primary residence too.

As far as things that change when you go over a certain amount, most banks will charge a higher interest rate for a larger HELOC (the banks I was inquiring with had their limit at $150k) and they will generally require a full appraisal at that amount as well. If it's under, they do a "drive by" appraisal, which basically means they make sure the place isn't a dump on the outside and then pull comps off the MLS. Because of this, I have seen conservative estimates so if you're expecting a high appraisal, don't hold your breath. You never know though, appraisals are about as good as a roll of the dice (never know what you're gonna get).

Oh, one last thing. Having a HELOC does affect your ability to finance other properties because they will use the max HELOC limit for qualification purposes. An example of this: If you have a HELOC of $100k max, but currently have $0 balance on it, they banks will qualify you as if you have the full $100k pulled out. So let's say your payment at $100k is $1,000 per month, this $1,000 will be used against your DTI. Hopefully you have enough income to offset that! Hope everything works out for ya : )

@Eddie Quimby

I like the idea of using a HELOC to help fund projects. I currently have a HELOC on my primary and using that to fund whatever my liquid cash cannot cover for any giving purchase. The only problem I see for you would be your LTV numbers. Typically you can get 85% - 90% of your LTV out for a HELOC, so if your property is worth $345k and you find a bank that will lend you 85%, you are looking at $293,250 minus the balance of the 1st mortgage: $293.250 - $265,000 = $28,250. This would be the MAX you could take out, assuming the appraisal comes back at $345k. Just be aware, appraisers for HELOCs are pretty conservative in my experience. My HELOC property should have been around $550k - $600k easily and they barely gave me $502k. I am an experienced real estate investor and real estate agent so I know how to run my own comps and the appraiser was off by a bit in my opinion, but you have to play by their rules. Hope it all works out for you!