All Forum Posts by: Sam Applegate

I want to start off by saying I don't know anything about Toledo. Below are some general comments:

From a high level, if a building is built in 1901, its hard to believe nothing needs to be done.

Second, if the seller just spent $120k, why did it only sell for $120k?

I'd want to understand the vacancy a little more as well. Have they been sitting empty for a while? If they are so easy to rent, then why are they vacant.

If we look at it strictly on a numbers perspective and we assume everything you said was correct, we'd have $93,600 of stabilized revenue. Let's assume a 50% expense ratio which puts your NOI at $46,800. That would make your cap rate 39%. Which is unheard of high.

I agree with the other comments.

It's also worth mentioning to look at the number of parcels. As an example, lets say you are buying 6 units. The property is made up of 3 duplexes. If each duplex is individually parceled then you should be able to get 3 separate residential loans. One for each duplex.

Underwrite your deal with new debt to see if it can handle a refinance/an increased debt loan. My gut is it won't work since it barely cashflow now. 

I'd look at renting out the other unit and then replicating what you just did with a different loan product. The interest rate obviously won't be as good but maybe you can find a deal with minimal cash down.

@Nick Sarangoulis

It’s important to spend some time thinking about your strategy and what you want to accomplish. With so many variables and decisions involved, it’s tough to give a precise answer.

One option, as @Melvin List suggested, is to use an FHA loan with a 3.5% down payment. With $15,000, you'd have around $425,000 of purchasing power, though it might be challenging to buy four units in Arizona with that budget. It'd also require you to move to AZ.

Another option is to work hard to find an off-market deal that is below market value, which would give you instant equity and get you closer to your four-unit goal.

First I'd determine whether you are willing to move, if you are then it will give you a lot more flexbility since you can use a FHA loan. Then I'd determine whether you want 4 units. If so, do the math for the average price per unit and whether you can purchase 4 units with $15k down.

@Mario Morales

I'd look at the rental income and compare it to the cost of each situation to determine the return on cost. If converting a commercial unit to residential costs $50k and only brings in a few hundred dollars more in rent, it might not be worth it.

@Nima Malboubi

I personally think that the risk is relatively low with only four units. If it's low-income housing, it typically involves higher risk, but if you have good, trustworthy tenants, the hassle of changing locks might not be worthwhile.

@Chris English

I agree with @Greg Kasmer about bringing up the possibility of seller financing. This might be a great route to go.

I'm also a little confused about whether you're trying to buy all 150 units or just six of them. If it is 150 units at $30K per door, that would be a $4.5 million purchase price. It could make sense to bring in an investment partner.

Another option, since it sounds like it's a handful of smaller properties, is to get a group of people together and divide and conquer the units rather than having one master portfolio with LPs and GPs.

Feel free to DM me if you want to discuss strategy; I'm happy to help.

@Dawn W.

There will always be varying opinions on whether long-term or short-term rentals are better, but here’s my personal take.

I favor long-term rentals because they make the investment more passive. I’m comfortable sacrificing a bit on revenue in exchange for steady cash flow, lower expenses, and fewer headaches.

However, if you come across a standout property with a pool and great amenities in Scottsdale, it could be very beneficial during spring training or for bachelor/bachelorette parties. For most investment properties, though, I think long-term rentals are the way to go.

@Leo Gregoire
To answer your question directly about cash for keys:
In rent-controlled states like California, you can sometimes pay 10 to 20 grand a door to get them out.

I have never had to go this route before. Whenever I threatened eviction or gave them eviction notice paperwork, they always left. I also own properties in landlord-friendly states where there's no rent control, so I don't need to pay someone to leave in order to increase the rent.

To address the other points in your post:
This is why having a proper purchase and sale agreement is so important. You can include a clause in there stating whatever you want, such as the tenant needing to be out before closing or not signing any leases before closing. So, if the deal is contingent upon the removal of a person, I put that in the PSA.

@Zehua Zhou
I've looked into this situation quite a bit before. From my perspective, the main issue I encountered is whether you're allowed to transfer ownership from your personal name to an LLC. Typically, loan documents prohibit transferring ownership.

If you transfer ownership to an LLC, you'll typically need to switch the insurance to the LLC's name. When you do this, your bank will often be notified of the change in the insurancer's name. While this rarely happens, it allows the banks the opportunity to call your loan, claiming you've breached the terms of the loan agreement. This means they could require you to repay the entire loan balance.

People involved in the loan business will often say this situation never happens. However, given the recent rise in interest rates, if you're locked in at a 3% rate and the market is now at 7.5%, there's a possibility that the bank might call your loan if you've violated the loan covenants. Many people believe this won't happen, but it's a risk that exists. So, it's something you need to be aware of and consider.

If your goal in moving the property to an LLC is to protect yourself, it might be simpler to buy an umbrella policy to cover yourself against any issues. This can be beneficial for both your real estate investing and your personal life. So it's like killing two birds with one stone.