All Forum Posts by: Chris H.

Seems like one of those "good for me, maybe not good overall" scenarios.

Opening up lending with less regulations will almost certainly result in market improvements as banks can get more money out to people via easier purchases, refinances, creative lending, etc.  That boosts the market.  That helps all of us investors who already own property, because the market will go up.  It also helps us investors trying to do creative deals right now.

However, that creates the risk/possibility of risky or predatory loans hurting people.  Which could result in a crash later down the line- but us buy and hold investors will be fine if we used the window to get a lot of good long-term financing.

I don't support/not support the bill.  I don't know the banking industry well enough to have a truly expert opinion on whether it's overall for the best or worst.  But, it'll definitely at least be a short term positive for most of us investors, regardless of whether it ends up positive or negative long term for the country.

Hello,

I apologize if the title sounds tasteless; but I try to do drive-bys and follow up on houses that look vacant, I'm not an ambulance chaser.  In the process, I found a nice little house with an overgrown yard and a board on the door with a small paper sign stating that no entry is allowed as the house is vacant.

I looked up the owner on the city's site, and then looked up the owner, and found that she was deceased.  The property is still in her name and has not been transferred to anyone.

I then went and pulled recording information from the city.  The owner had taken out a reverse mortgage in 2011.  She passed away in 2014.  In 2015, the bank filed Lis Pendens on the property.  The Lis Pendens is filed against the owner and a list of 4 heirs (plus any unknown heirs). In 2016, the city put some sort of recording on the title for substandard conditions, and I assume that this is what has lead to the boards on the door.

While the bank has filed Lis Pendens, the property clearly has not been foreclosed on as it is still in the original owner's name.  I'd prefer to save the house from foreclosure if something can be arranged.

Normally, I'd contact the owner and offer to short sale.  But...obviously, there's no owner.  I have names for all children from the obituary and the children named in the lis pendens action, but if they haven't inherited the house, will contacting them do anything?

What steps could I take to chase this down?  I assume the bank can't short sell it to me without the owner's approval, correct?  Can an heir do so, and do I need to contact all of the heirs in that case?  Will the heirs have any motivation to authorize the short sale, since they won't make money or take a credit hit regardless of whether it gets foreclosed on or short sold?

Sorry to resurrect an old thread, but I'm really interested in this.

What exactly do these laws prevent?

Do they prevent cash offers on properties that might be going in to foreclosure?  Or does it mean we literally cannot buy from distressed sellers?   Is there a way around it? (Such as having a realtor in between?)

And, maybe more importantly- what if the buyer is unaware of the distressed seller?  For example, if a wholesaler negotiates and gets the house under contract, and brings me the contract, and I purchase the house and give the wholeseller a fee...can the seller come back years down the line if I had no idea?

I have a property under contract for $160k.  I estimate the rehabbed value to be at $300k+, as a fiveplex.

The property is already divisioned as a fiveplex, and is in an area that is supposed to go through some major improvements next year in a plan that the city council passed to improve that neighborhood by making it more walkable and green.  However, this plan is very controversial at the moment with lots of opposition from businesses because it reduces the number of car lanes.  If the plan goes through, I suspect, 2-3 years from now, the property will be worth even more.

However, I'm having a very hard time calculating the total rehab cost.  A couple of the units need a complete overhaul.  There's a structural pillar that has fallen down in the basement (but everything seems ok).  Some of the plumbing is ancient and there's evidence that some parts have had to be repaired already.  There's mixed drywall and plaster.  The house is over 100 years old, older than any rental property I've managed.  All the heat is done by old radiators with a 100 year old radiant heat furnace in the basement coated in asbestos that can't be removed because it's too large.  There's a lot of question marks.  Rehab will probably run somewhere from $40-80k- big range because of all the unknowns.  I'm nervous because it's a bit different from the types of properties I have experience with.  On the other hand, I can take it one unit at a time.

I'm extra nervous because I'm working other deals at the moment that all have hard money loans and I'm worried about being overleveraged.

I put out feelers received an offer to buy the contract from me wholesale at a price that would net me $35k profit.  On the other hand, I strongly feel this neighborhood is going to skyrocket if the city's plans go through (looking likely).

On the one hand, it fits in to my goals of increasing my number of doors- on the other hand, I've been trying to get to 10 conventionally financed properties and a five-plex would require a commercial loan.

What is BP's thoughts- should I close on my contract and finish the property, or sell it to the wholesaler for $35k profit now and reinvest that in to another deal (less hard money, less risk)?

But then you're going to get the house at the average comp.  That's not a good deal, that's an average sale price.

The problem I see with this example is that someone trying to sell the house for $50k over market value is very unlikely to sell for $50k under.  

Let me know when you do the next one!

 Local lender.  Is willing to lend 85% in this case as he agrees that it will be worth more with the rents raised.

I'm estimating what the property's value would be at a 7% cap rate, which is around standard here. So, NOI (ignoring financing) divided by 0.07 tells me the value at a 7% cap rate. By this metric, I'm paying about 85% of the value of the property.

The current rents are $650/mo.  They can be raised to $800/mo; the property manager that came recommended to me guaranteed at least $775, free management until raised to that rate.

At time of purchase, my financing would be:

15% seller finance- $120k @ 5% interest only - $500/mo

85% hard money- $650k @ 10% interest and 3 points - $5,416/mo

Any work/rehab needed- estimating $40k @ 5.5% interest (HELOC) - $183/mo

I do have some cash, but I'm going to put it all on the HELOC for the number crunching.

So we're looking at $6,100/mo with initial financing.  After raising the rents, I would refinance with a bank.   A 30-year, $840k mortgage @ 5.5% interest would be a $4798/mo payment (ignoring taxes/insurance since those are already in the numbers).

"What is your estimated holding time?"

However long it takes to get all tenants up to $800/mo.  They are month to month.

"Are all units currently occupied? If so how will you handle the Rehab?"

Most of the tenants are month to month.  Raise the rents.  If the tenants opt to move out, perform the rehab.

"Analyzing the Cash Flow with what you have provided looks like this to me:

Income = $650 (current rent rates) * 6 = $3,900"

There's a mistake here- it's 6 duplexes, so income is $650 * 6 * 2 = $7800.

But there's free property management until each unit gets to $800.  $800 * 6 * 2 = $9600.

So: using the 50% rule:

Income: $7800 initial, $9600 later

Expenses: $3900 initial, $4800 later (this is why I don't like the 50% rule...this doesn't make sense)

NOI: $3900 initial, $4800 later

With initial financing, both are loses, but with refi'd financing, the second one is break-even.

This is why I don't like the 50% rule; raising the income won't raise most of the expenses.  By the numbers I actually entered, we're looking at $2000 or so income after the refi, assuming 100% financing but not including maintenance/vacancy.

I've been stuck in a bit of analysis paralysis the last 24 hours, and it's driving me nuts.  I've never purchased a deal this big.

Here's the basic deal:

I have the option to purchase 6 almost identical duplexes as a package for $770k.  Each duplex is two units, each unit is 2 bed, 1 bath.  (Two of the duplexes have a garage as well, the others car ports.)  Total of 12 units, as a result.

With recent market upticks, they should rent for $800/mo/unit.  They're currently rented at closer to $650/mo each.  I have not used a property manager in the past, but the one that came recommended to me has offered to, if I take the deal, work for free until they're brought up to market rent, which he said is $775-825, because he's very confident in it.  His rate is 8% of the rent and half the first month.  He says it is in good condition and each unit will take between $2-5k in cleanup (mostly carpet, paint).   I'm going to just estimate $40k in repairs and consider this a $810k purchase.

I have not personally walked through yet, but the property manager did (he came recommended by the broker, who walked the property manager through with him).

The seller will finance $120k of the duplex package at 5% interest.

The recommendation I've received is: buy it using hard money for 85% of the purchase price and the seller finance for the other 15%.  Then get the rents raised, and refinance (either in a commercial loan as a package, or conventional) away the debts.  That will get me all of the units with 100% of the purchase price financed, and I'm only out the repair costs.  Downside?  $20k in points on the hard money (3 points on $650k).

I keep going over the numbers again and again and I can't decide if this is a great deal or average.  I've always done single family homes before.

The numbers look good to me, but the margins are slim- then I look at maintenance since there's 6 properties with 6 roofs, and I question myself.

I crunched all the numbers, and if I take purchase price + points + rehab costs I get $835k.  

Total monthly rent: $9600

Total monthly costs: $3097.67   (taxes + insurance + utilities + management + 3% vacancy)

Total net: $6502

Total net @ 5% vacancy + 5% maintenance: $5830.

Estimated mortgage payment (100% financed @ 5.5% interest): $4798

Total take home:  $1704 w/o maintenance, $1032 with 5% maintenance.  (Is 5% enough?)

Analysis methods:

1% rule: Pass. Comparing to single family homes...if you take out the utilities ($190/mo), you get a net (before tax/insurance) of $1410/mo.  By the 1% rule, I can pay up to $141k per building .  Each building would cost $139k after points and rehab.

50% rule: Fail.  The 50% rule is to assume taxes/insurance/vacancy/maintenance/property management is 50% of the income.  After subtracting utilities, the principal/interest is slightly more than 50%, which means slightly underwater.

Basic ROI: Pass. If I'm out of pocket $40k, to make (after vacancy/maintenance) $1032/mo, I'm making a 31% return on my $40k.  That's pretty good.

PITI-to-income: On my SFH's, which I BRRR on, I usually get numbers like 900/mo rent on 600/mo payments, or a 1.5x ratio. On this property, it's $6.5k rent on a $5k mortgage, or a 1.3x ratio. Slimmer than I like.

Cap Rate Analysis: If I add up all the rents, and subtract all the costs, take the net with vacancy and maintenance, and divide the total NOI at 7% cap rate, I get a value of $166.5k per building. I would obtain each building at $139k (after points + rehab). I am getting the building for 84 cents on the dollar based on this. I normally target 75 cents on the dollar.

However, I haven't used property management on my SFH's. When I look at the last two- PITI-to-income and Cap Rate analysis- the numbers actually look identical to my SFH's if you take out the property manager. (1.4x ratio and 73 cents on the dollar- value rises with less expenses in cap rate analysis.) So maybe I should expect this slimmer ratio because I'm using a property manager, and I'm being too picky.

Last negative issue: holding costs. With hard money + owner finance + HELOC fees for my rehab money, holding costs will be $6108/mo. However, rent will not be at market initially, which means I'll be losing money for the first few months until we get up to market rents, and then I'll be barely breaking even or taking a slight loss until I get the refi. And I'll be praying that the duplexes appraise well enough to refi most of it.

What is BP's thoughts on this?  Am I overanalyzing a solid deal that requires almost no work on my part (property manager will clean up the units and move in new tenants), or rushing to grab a deal that isn't much better than retail?

Hi David,

I'm interested in more specific details on this as I'm trying to accomplish similar things.

Did you have large savings going in?  The problem I find with turnkey options is that you generally have to put 20% down as an investor, which means your savings dry up pretty quick.  To have 1.5 million in rentals, you'd have to have 300k cash off the bat.

If you did it without large savings, how did you acquire it?  And how is your cash flow so large?  It doesn't seem to match up with numbers in my experience, and I'm curious why/how you're doing it.

In my case, I've been doing a BRRR strategy- buy a house, fix it up, refinance to get my original investment back, and stick a renter in there. I end up with ~25% equity in the house, but no money out of pocket, and I can get another. But the cash flow's margins are slim enough to make me uncomfortable, and I have to put a lot of time in to getting each property ready, so I can't picture getting my cashflow up so high so fast.

My goal is to be able to end my full time work, so getting my cash flow up like you have as fast as possible is exactly what I need to figure out how to do. I'm planning to start applying the BRRR strategy to multifamily units soon, and I'm taking out HELOCs on a lot more of my properties so I can do more without lenders, so I'm hoping I can speed things up a lot.