All Forum Posts by: Randall Alan

@Huong Luu

In my opinion, presuming you need the money - it is better to cash-out refi the property.  It avoids having to pay the capital gains and lets the property keep appreciating while you still own it and reap those future rewards and more cash-flow from the property in the meantime.  Bonus - the interest on the loan is tax deductible!

You would not want to over-leverage the property though.  The bank will make you leave 25% equity in the property - but you also still want the property to at least cash flow some - so be careful how much equity you pull out / new debt you take on.

I would do a cost benefit analysis of what your actual gain is in cash-flow on buying a new property with a (currently) higher interest rate (if financing), versus just holding on to the current appreciated property and enjoying that cash flow.

All the best!

Randy

@Aldo Valeriani

You address the issue with the permitting entity by asking them what they need from you?

The answer will form around what work you are doing that requires permits.  Let's say you were replacing windows.  Where I'm at if you change the size of the window by 5% or more you have to have engineered drawings showing the changes.  So this involves hiring an architect draw up plans ($1,000 - 3,000 if I had to guess).  Then it likely takes hiring a GC to manage the project.  The GC is likely at least a couple of more thousand dollars.  Then he is going to hire subcontractors to do the job and you are going to pay them for that work as well.  In short - if you aren't licensed to do the work -  your services aren't going to satisfy the permitting agency.  Hopefully the permitting people are nice and will offer some guidance.  In a busier place, you might just be told to find a GC to "un-cluster' what you did.

For me, when this happened, I had to go and hire a certified plumber, and electrician, and framer to come in and certify that all the work my handyman did was correct - and to fix the issues that weren't correct.  Some of those included those previously mentioned windows.  We had to bring the 1925 house to 2023 code which involved un-installing 26 windows that were already nicely installed (in appearance) in the house, reframing them to 2023 standards (at the time) which also involved strapping the bottom of the wood framing with metal straps (mind you this all after we had already completed the inside renovation).  It cost $38,000 for the framer to take on the risk and do the work - and that does not include the cost of the GC, or architect, or plumber that was also required!)  I'm sure it was highway robbery - it certainly was based on the man-hours it took - but when you are in a desperate situation, you do what you have to do to get yourself out of it.  I will tell you he did a great job because very little interior re-work was required - but it was a substantial hit to the Reno budget!

Your GC will know how to apply for the correct permits.

Avoiding the issues in the future is a function of respecting the permitting process in the first place.  The whole reason they are there is to make sure work is done right.  They are literally on your side (as long as you are doing it right).  They are definitely not on your side if you are trying to work around them.  We found that by more or less falling on our sword and saying, "Hey, we want you guys happy... tell us what you need from us" they were more than helpful and once we had contractors they liked on board the process went perfectly smoothly.

I don't live near you so can't help with your locale... but hopefully some of it helps!

Randy

@Marina Wong

I will post this as a cautionary tale... up front - I know nothing about the company you mention.  So I am not speaking about them whatsoever.  But it sounds like they are just positioning themselves in the middle of your 'deal gone bad' to make some money for themselves.  A lot would have to go right for them to be able to help.  Notice how they presume they are going to buy the asset at a substantial discount from the lender.  Maybe that happens... but what if it doesn't?  Again, knowing nothing about this particular company, my bet is that type of company will require money up front just to consider whether they can help you out.  Maybe it's a processing fee, an application fee, etc?  So now you are throwing good money after bad probably without a guarantee of any actual performance of the company until much later down the line.  If you have to front money to them before they perform, I would be very careful.  I have personally seen that scenario take place and what ultimately happened was that the company just came back to the debtor and said, "You have to come up with $XXX,XXX for us to be able to qualify you for help.  In short, it was an unrealistic ask on the part of the company, and they knew it, but didn't care because they had already made their money off of the up-front fees they charged the debtor and ultimately didn't care whether the debtor got help or not.  My buyer was charged $4,000 by a company to try and get them a loan when it was pretty obvious they weren't normally qualified.  They ended up with no help, and less money in their bank account.  

So I would definitely do some independent research on any company that is actively offering life-lines to real estate companies in trouble.

All the best!

Randy

@Charlie Green

I'm sure a checklist is out there... but I would suggest that any functionally usable checklist isn't going accurately to serve the objective you have laid out... mainly because there isn't a checklist that can anticipate everything you are going to run into during a rehab.  Many rehab issues are hidden... it might be termite damage, or damage to the subfloor, or mold behind concealed panels,  etc that will not make itself known until you are long closed on the property and deep into the renovation.  

The other variable you are going to run into is the assumption that you can accurately price a renovation based on 'just the problem you see'.  It's one thing to find all the issues... it is another for you to be able to know what that is going to cost to fix it from a contractor that may not be walking the property with you when you are doing your inspection.  That variable alone could be huge.  As an example, my in-laws called a company to replace a tub with a walk-in shower.  The people they hired quoted $18,000 for a job that I could have gotten done for $6,000 through my network of vendors if I had been asked.  The way I see it, there are 'retail contractors' (wear the fancy shirts, drive the wrapped vans, advertise on TV, etc)... and there are more 'wholesale contractors' who maybe do their day job on their off time and charge a lot less and show up in their personal vehicle.  But the factor of 3 difference in the price above sort of shows you the issue you are going to run into.  

Beyond that, there are always change orders that come up where your contractor comes back to you and says, "We've got a problem, and it's going to cost $X,XXX to fix.  Permitting can open up a whole other can of worms where they insist you bring something up to 2025 code, and not the 1925 version it was built under.

It also depends on who is sourcing the materials, and what their objectives are.  You can buy crappy cabinets from the box store made of particle wood, or nicer plywood cabinets with soft close hinges, etc, or you can have custom cabinets made to your exact specification.  Those are three entirely different price points.  So you have to know going in what level you are rehabbing to, and which path you are going to take for any given issue - to which there are always multiple at different price points.  If you watch the rehab tv shows, their GCs are usually aiming at the high end of what they could expect, with the hope that it costs less than that once they get all the way into the job.  You could call those accurate quotes for the rehab service in question... but you could also call them "well padded' quotes to make sure the contractor isn't going to lose money on the job.

There are also some house systems that are difficult to judge.  Like a septic system and how well it is functioning.  Are you going to pay the $500 to pump the septic to see how well the drainfield is working? Probably not... but that is a $7,000 - $10,000 unknown variable you just factored into your checklist in the blink of an eye in the event you eventually have to replace it!  

Experience is the best teacher.  We can guesstimate a small bathroom to cost us $3,000, and a larger bathroom to cost of $6-7,000 with b-c grade consumer finishes and such... but my suggestion at the end of the day is to add 20% to your best guess rehab budget because very rarely does the price ever go down.

Can you see how it's relatively impossible to get within $1,000? And I guarantee you if you speak with a contractor that does, they already did the math and factored in the 20+ % to make sure they can meet your objective and deliver the service at the agreed upon price!

Hope it helps!

Randy

@Matt Wan

You would want to get with your lender or title company.  They are really the only ones that can give you an accurate answer to your specific situation. Perhaps others can chime in.   

Randy

@Matt Wan

The key to understanding being “in person” is that you can be “in person” anywhere there is a notary or other person who can certify your signature… typically.  Some documents require “wet” signatures… meaning hand signed.  But when people are out of town / out of state the title company can hire a mobile notary near you and they will fedex the documents to your local area to sign.  There is usually extra charges on closing to pay for that service… but it is minimal.

All the best!

Randy

 @Raul Velazquez

I would suffix what others wrote by saying that you need to understand that real estate really is a longer term wealth strategy - even though that is what you say you don't want due to your age / starting point.  You will make more money on appreciation when you sell your property than you likely will from the monthly cash flow.  Natural appreciation usually takes holding the property for at least a few years (just depending on what the RE market does going forward).  You can force appreciation by rehabbing and such - so that might be a shorter term way to go?  We saw huge appreciation in the 2018-2022 inflation run up, but that has significantly slowed these days in my opinion.

From a rental perspective your monthly income per unit after all expenses with a typical 20% down payment is likely $100-300 when you find a property that will cash flow. (And I would tell you to not buy a property that doesn't cash flow unless you have significant resources behind you that could absorb anything that could come at you - like replacing a $5,000 AC one month followed by replacing a $1,000 hot water heater the next).    The $100-$300/month amount is just a generalization - but the point is, on a monthly basis you don't see a huge income per property - and you also have to absorb repair expenses and such as well.   

Time overcomes low cash flow to some degree... rents go up while your mortgage stays the same and your tenant pays down your mortgage.  That helps some...but your variable expenses also go up too - property insurance & taxes - so a lot of your rent increases go to offset rising variable expenses.

I started at the age of 47 in 2018 and we bought properties fast and furious - 12 the first year, 10 the next, and 9 in 2021 and currently have 38 properties.  Because of the relationship between lower housing prices back in those years, and how rents have increased since, we have good cash flow on our portfolio.  But the thing to know is it is that is not easy to duplicate in todays market.  Very little cash flows at 7% interest with houses that have doubled in price over the last 5 years.    

Wishing you all the best - but wanting you going in with your eyes wide open!

Randy

@Lee / Lisa Colon

The biggest secret is to figure out how to start and not just keep sitting on the fence.  To buy a property you need at least 3.5% down if it is a property you are going to live in (be it your own house, or a duplex, triplex, etc).  So you start by saying, "Do I have this money?"  If yes, you may be ready to start right now... if no, you figure out how you are going to get that money.

There is now a program where you can put down as little as 5% on a multi-family property even if you don't live in it.  This is WAY better than what used to be the minimum of 15-25% required down on an investment property.'

My suggestion would be to go to an independent mortgage broker (someone that has access to multiple lenders - not like a single bank like Bank of America, etc, where they just offer their own loan product).  Tell them your objective, and let them more or less pre-qualify you - telling you what you would need, or need to do credit wise to be ready to take your next step to buy your first property.  

From there it's a matter of finding the property that you qualify for and that will hopefully cash-flow each month as well.  My personal opinion is that it only makes sense to buy a property that cash flows today.  You will hear others say that isn't necessarily a requirement (ie. future rent appreciation, forced appreciation, lower future interest rates, etc).  But at the end of the day you have to be able to afford to pay the mortgage each month - and if you are upside down on the income side of the property that can be difficult at times.  Think of possible complications - like your tenant quits paying the rent and it takes 3 months to get them out of the house... can you afford to carry the payment if something like that happens?  This probably leads to a discussion of having adequate reserves in your bank account.  Keep in mind when things break, you have to fix them.  It might be an $800 water heater, or a $5,000 air conditioner.  We had a 2 month run where we had to replace 7 air conditioners in those 2 months (we own 37 units).  We maintain maintenance reserves - but that was still a strain even budgeting monthly for those expenses.  With just 1-2 properties you aren't going to run into something that extreme - but just realize that it is your responsibility to fix the things that break and you need to have reserves in place to do that.

As soon as you have "deal one" done -  you will be ready to look for your next deal - but realize that the banks / lenders have a lot of measurements they judge you by - like Debt to Income ratio.  They will often require you to have a year or two's income from a property before they will let you count the rental income to offset the debt the property generates.  But, in short, you start saving up to buy property number two and your lender will let you know what it takes to make the second one happen. 

Hope it helps!

Randy

@Dwayne Rowe

We did a consolidation loan through a commercial banker (basically a multi-property DSCR loan) where we took out one loan that paid off 5 higher interest rate properties, and took out cash as well at the same time.
Pretty much any regular bank / lender is going to require themselves to be in first position on all the properties... so I don't think a HELOC type solution is going to work across multiple properties with multiple lenders. Individually a HELOC could possibly work if there is enough equity where it made sense.

Randy

@Geoff McFarlane

You have 5 years to be able to take advantage of the ~$500,000 gain exemption.  This would let you rent out the house for the next 3 years if you wanted and still get to take the gain.  In that time if you are netting $1,500/month - that is $54,000 worth of rental income you would make over the next 3 years.  Realistically you would expect the house to continue to appreciate during that time as well... even if at 3.33% appreciation - that is another $50,000 in appreciation you would make in the 3 years - give or take.  So I would continue to hold the property - but I would be sure not to miss the ability to exempt the gain - so be sure to sell within 5 years.  This would likely take coordination with a tenant at some point - (ie - plenty of notice to them that they must vacate in order for you to sell the property)

Since your current home is free and clear -  you could do a cash out refi or take out a new mortgage on the new house to be able to buy your paren't house and pay off the mortgage.  If they have a good interest rate it might be worth looking to see if you could assume their loan to take advantage of the lower rate.  

My 2 cents.

Randy