All Forum Posts by: Scott Ellis

@Joel Owens and @J Scott Thanks a lot. I think I was confusing my self because I assumed my first year would have no return, but then I set up my financial analysis spreadsheet starting at the first year the project is completed and having monthly expenses and income. Just backing up a year would include all those negative inputs and lack of income during the construction phase, thus giving a more accurate long term IRR.

Joel, I think it helps to understand that this deal is simply framed as a ground-up development and so part of the deal is that no returns the first 18 months is offset by outsized equity growth in the years to follow.

Thanks again.

Hi @J Scott, Thanks for replying. I own and like your books. My main question is more from the standpoint of development in general—How do developers look at the pre-dev and construction phase from a financial return standpoint. Do they calculate, say, a 5-year proforma IRR with 0's for the first year or two that it's under construction?

If your project will produce a 10% CCR, but it takes a year to build, do you view it as having a 2-year CCR of 5%?

In my case, he's not a partner yet. I was planning to fully fund through pre-development and bring on 2-3 investors for the construction phase, with my contribution being about 1/3 of the total needed.  My agent said he'd be interested to simply parter with me on it 65/35. We reached a verbal agreement until I have a formal plan in place to present to him and his brother.   

I approached him about contributing a portion of their funds early to help cover some of the predevelopment soft costs like geo-tech and architect fees. His response was "can you pass along your vision and the potential return on this initial $X, then I can pass along to my brother for his comments."

Thus, I began wondering how developers typically handle the discussion of returns during the early phases. Is it as simple as "We don't get returns until the project's complete" or are there financial models the include the early phases as part of 5-year projection.

I don't think the risk is too high—it's simply higher now than it will be when there's a completed A-class building sitting there leasing up.

A followup based on how this played out. My bank (Umpqua Bank) did not require the HELOC to season. As soon as it was payed down, I could turn around and use it again; even though the money to pay it down came as a large sum from an outside account.

Though, as things turned out, I ended up getting a commercial loan instead, so the lender was not picky about where the source of funds came from.

Hi there.  I'm purchasing a 4-unit property to redevelop with a bridge loan for pre-development and then will be getting a construction loan after we're permitted by the city to redevelop a new 10-unit in it's place.

I'm pitching a partner to put up 60% of our down payment for the construction loan. He would not be an investor, but an equity partner in the LLC. I'm putting up 40% and acting as the deal sponsor/asset manager.

I've put together our financial analysis for the stabilized property, but I'm curious if any of you could point me toward resources to learn about the financial analysis during the pre-dev and construction phase. 

Our risk is highest during predevelopment, lowers during construction, and is lowest once the property's stabilized.  Yet, with no income during the year of construction, I'm struggling to factor that into our 5 year projections.  I'm personally just planning to have that dead equity until the property is complete and rented, but I'm struggling how developers typically handle that.  

I don't want to pitch a partner to join the deal during the riskiest part and then begin earning returns a year down the road once the risk comes down.  Yet, I also don't want to necessarily pay out X% returns for his investment while my equity is just sitting there.

Thanks a lot for any insight!  This is my first development project and am finding it's a steep learning curve.

@mitzmichael, of COURSE it was stressful, but only to the point that we could have simply walked away from the deal once the initial financing fell through. 

I would consider your long term goals when debating refi vs HELOC. If you want to get money out, do your rehab on the new property, and then pay the money back and be done for a while; I'd vote HELOC—minimal expenses and you can draw from it and pay it back whenever you like.

If you want to slowly build your portfolio, I'd probably recommend a cashout refi. You'll get a chunk of cash and lock in that debt for a long term at a low rate. You can purchase your investment property and do the rehab (BRRRR strategy). Then, when you refi the investment property and get your cash back out, you'd use that to repeat the process on a third property, not to pay back your first property.

Another consideration is how accurate you are in how much money you'll need. With a HELOC, there's a benefit of paying interest only on what you take out. You could take out $20K for your repairs. Then, three months later take out another $10k for a roof. Then take more out a year later for something else. With a cash-out refi, you'll get a big check up front, and then start paying interest on the whole amount right from the start—not a problem as long as you have a use for the money.

@mitzmichael, as to why our lender waited so long to get the secondary approval, I think it was simply lack of experience.  He said he'd done several before, but maybe not at the same scale.  Our renovation budget was slightly more than the actual initial purchase. I can understand that our broker's company didn't want to get stuck with it should the secondary buyer back out, but I don't think our broker realized that was required until a few days before our original closing date and his manager was reviewing things and raised his eyebrows at the renovation budget.

In lieu of the 203k, we used our HELOC and an unsecured personal line of credit for the initial purchase. We then got a private loan from family friend for the rehab amount. For his loan, it was capped at 8 months at 6% with 2 points up front. Those were terms we offered him. He looked at his own HELOC at 3%, and thought "hmmm, that's short term and an easy way to arbitrage 3% for 8 months plus $1300 up front." This opened my eyes a little to the fact that wealthy people look at money differently than middle class people (like myself). I cringed and was so timid about approaching him because I thought it was this big emotional deal to go to him for money. He just looked at the numbers, asked for a written contract, and agreed the next day. I'm definitely going to consider private money more for future deals.

Hope that helps some.

@Mitzmichael Sumilang, a couple thoughts based on my recent experience. We recently tried to do a 203k loan to purchase a HUD home. At the last minute, our lender wanted to get underwriting approval from their secondary market buyer, which took too long and took us past our closing date. As a result, we had to close through other sources of funds, yet still got stuck with close to $4k in costs associated with the 203k loan. FHA covers a lot of fees associated with the loan as long as it closes. When our lender couldn't close the deal in time, FHA invoiced for all of those fees. So, do lots of due diligence with your lender if going after a 203k loan.

We've used our HELOC and a private money loan to purchase a property, rehab it, and then do a cash-out refi to pay everything down 6 months later. The process worked out well. What I like about our HELOC is that the first 10 years are interest only payments. If we have a balance at the end of 10, it converts into a 20 year fixed home equity loan. The benefit of interest only payments was huge during our rehab and is a significant factor when compared to a principle+interest loan when you're looking at cash flow.

We have a HELOC (interest only payment) as well as a separate personal line of credit that has a monthly payment of 2% of the balance. If we put $50,000 on both lines of credit, our HELOC would have a $170 monthly payment, and the other LOC would have a $1,000 payment. A big difference.

What are you doing with your home while you're renting in CO? I've talked to banks that will do a HELOC on a second residence if you consider it a second home or vacation home.

Hi @Tiberiu Gurau, I'm going to agree with @Mike Hanneman one this one.  If you're just getting started in real estate investing, I think you're better off going to this website's bookstore and purchasing some or all of the books. Also, scroll through the BiggerPockets podcasts and listen to 4-5 that are focused on how people got started or on specialists from various ways of investing—flipping, wholesaling, buy-and-hold.

My concern with most seminars is that you'll learn a few tips, but then you'll be pressured into paying $1,000-10,000 for more education that will really teach you all the "tricks and secrets to massive success."

That said, if you have money to spend on education, I'd be all for trying to find a local investor and paying them to mentor you once a month for a year. I think that'd be much more beneficial for you in the long term.

Welcome Charles, I bet a lot of people on here wished they'd started thinking about investing and real estate while they were still in school, so nice work!

Depending on your goals, my initial reaction is to just tell you to get a good paying job out of school. 

If you're looking to buy properties four units and under, most banks are going to want the loan/purchase to be in your personal name. If you're partnering with buddies, you'd buy the house in one person's name and then do a process called a "quitclaim" deed to transfer the property into your corporation. There are pros and cons and legal ramifications involved that you'll learn about down the road. When purchasing in your own name, having a good credit score and a good W2 income are going to be your two biggest factors in becoming financeable.

If you're buying over five units, you'll need a commercial loan.  For these, the banks look a lot more at the asset rather than the person.  With a single family mortgage, the bank wants to see that your income will cover the payments.  With a commercial loan, the bank wants to see that the property, on its own, can cover somewhere around 1.3 times the loan payments. So while they'll still want you to be a financially responsible person, they're looking more at the deal itself.

I think a good next step (if you haven't do so already) is to start researching personal credit scores—what factors to take into account and how to improve your score.  For many young people, just establishing credit in the first place is a hurdle for them. 

Are you at GU Law?  I live 5 minutes from there and would be happy to meet up for coffee sometime.  I own a couple of properties and am a little further down the path than you.  I would be open to sharing my own story about building credit, getting lines of credit from a bank, and purchasing and rehabbing properties. 

Best of luck!

Hi Gary,

How many units is your prospective deal? Another rule of thumb to look at would be if you're clearing $100 per door per month.  I'm in Spokane and doing around $200/door. My friend owns around 200 units in the area and says "if you're clearing a hundred a door, you're gravy."

I'll spend some more time looking at your numbers.