All Forum Posts by: Shane Pearlman

Hi Judy.

I look forward to meeting you. I will post the date for the next Coastal Meetup later this week (aiming for Friday Jan 16) which will be in Capitola. 

Local cashflow is super challenging. Julie & I had some real luck buying multi-unit (duplexes in this case) that needed some serious work and brining them up to market, but that took some real capital. Happy to chat about it.

It is kind of like asking me, blonds or brunettes? You can get a fast off the cuff answer, but ultimately the answers are kinda meaningless. Its whole package that matters.

The right answer is nuanced and starts with your personal goals and investment philosophy. There is a lot to like about nearly every asset class once you learn the ins and outs. Your goals for cashflow vs equity growth, your ability for loans, your capital, your experience all play into the right property type. 

My SFRs were great for appreciation. They allowed me to buy in a 80%LTV. They were 3Br in solid neighborhoods in a strong metro area. I never had a single vacancy and with a single exception had phenomenally easy tenants. They didn't cashflow much. The fact that they did at all was a hybrid of having done substantial remodels and buying at the market low in 2010. Today, you can't cash neutral without putting 40-50% down.

My Duplex - Fourplexs cashflow really well (for major metro west coast). Enough that my wife is now a stay at home mom. The tenants are solid but turn over a bit more. The loans are 70%LTV and the prices were higher, so I have more skin in the game. Repairs are easier, I had to replace one roof rather than four of them. When one unit is vacant, the hit on cash is more balanced.

I'm almost out of Fanny / Freddie loans, so soon, the answer becomes multi 5+ by the nature of the US lending industry.

If you generate legitimate leads, add me to your list. I buy multifam (or very well priced single) in Scotts Valley, Westside, Live Oak, Capitola, Soquel, Aptos. Town only, no mountain properties.

That is awesome! My wife & I have done 2 in santa cruz, one in live oak and one in capitola (although I held them long enough to get the long term capital gains). Hope to meet you at the next Santa Cruz meetup. just trying to figure out the date with @Troy Fisher.

Hey @Jason Panick ,

As a local investor, I've found myself and helped a few friends through the same issue. The question is one of a strategic gamble and the stress you want on you and your family. There are a few options that might be worth considering:

#1. Refinancing / Repositioning

Don't assume that what you have is how it has to stay. There is the possibility that refinancing, or even investing a bit more money into the deal can change its place in your investment strategy. 

We had a duplex in scotts valley that we lived in one side, rented the other. We bought it in 2007 and it lost about 1,000 a month (@ my 6.5% loan) if I was to rent both sides. Not the best investment really. But from the perspective of living in it, I was fine since it got me a 3br in a great neighborhood and cost me less monthly than buying a stand alone 3br would have in SV. When it came time to move back to town though, we had a real debate. We were upside down so selling would suck. I could afford to carry the loss, but only if it made sense. We had tried refinancing a few times but were too far under water. Eventually I found a lender who was willing to refinance the property from the perspective of our entire portfolio rather than the property alone. As in, we had enough equity among our 4 rentals that if someone would let us move equity between properties, then LTV worked. We ended up having to bring some money to the closing but the math was excellent (a guaranteed 37% annualized return on the cash). It was an adventure and took a lot of finagling, but the net different was a reduction of mortgage carry cost of over $2,000 / month between the 4 properties. It changed this duplex from the worst performer to the cash cow of our portfolio. Repositioning the cashflow from one property to another fit our investment plan as we wanted to keep the duplex long term, but two of the properties we pulled from were on the schedule to be 1031'ed and this was a great tax free way to put the money to work.

If you have 80k lying around earning 2-5%, you might consider refinancing and using that to buy the loan down (depending on what return that gets you). the math will make it clear if that is a good idea.

You can also look at other rental modalities (vacation rentals etc) that lead to higher cashflows although in honesty, that is basically like taking on another job, and with a new baby in the house, I wouldn't go there.

#2. Wait it out

If you can truly afford the 700 a month without causing any financial risk, then it becomes a question of math. First off is the question of your loan. Is it fixed? at what time horizon. This really affects if you want to wait it out.

The house will cost about 30k to sell (closing fees / 5% realtor fees) excluding holding cost. Assuming your price is 10k under owed value, that is a 40k loss if you try to sell right now. it would take 4.7 years of carry cost to match this loss. If rents go up, then the window is longer. In the mean time though, you are also paying down the mortgage and adding to equity. Depending on where you are at in your amortization schedule & your interest rate, you are probably paying down the principle by 600 - 900 a month right now. 

What are the odds the property value will put you positive in 5 years? I'd say reasonably high, but you never know.  It is a gamble, but if you have good cash buffers, it isn't a terrible one.

You could also manage it yourself, which if you pick the right tenant is not that bad a chore as PMs take a good chunk. 

One other note to consider in the equation is the state of the HOA. Is it well funded. Do they have a history of assessments? Nothing like a bad HOA to really destroy cashflow.

Remember, we aren't talking about whether or not this will turn into an epic investment. It won't. The question is if with 3-7 years of patience, you can turn a potential loss into a gain or recoup. The other key question is compared to what? What opportunity cost does keeping this property result in. 

#3 The Swap

Considering the property from the perspective of an investor is one angle. Looking at your personal housing needs is another. A good friend of mine did a shortsale with an upfront purchase. He make enough money / had enough savings that he was able to buy another home while holding this one. In the meantime he listed his previous property for sale. The key was to make sure that his new home closed before a shortsale occurred, and therefor he was able to pick up his new home using his unblemished credit. Perhaps debatable on the ethics, but not absurdly.

#4. Short Sale

It sucks, but you will survive. Lots of americans have. =)

Come to the next Santa Cruz meetup and we can swap stories and brainstorm other ideas.

Hey @Loren Thomas 

Welcome to BP. We have a couple fourplexes in Magnolia and I am a huge fan of the seattle core right now. As an investor who has mostly focused in west-coast high-growth / blue chip type areas, I pretty much ignore the 1%, 2%, 50% or any other blanket rules out there. So far, what I have found is that each deal has its nuance, each market its own driving economic factors. 

When I look to invest, I care about job growth, wages, residential migration, gentrification and other trends that indicate the direction of a neighborhood. I'm a buy and hold buyer, so I need to see what I believe is either stability or growth. Seattle right now is experiencing strong job growth, large companies are doubling down, and a number of decent areas (west seattle, magnolia, ballard) are really improving another notch. Once I am comfortable with the timing of my market, then it comes down to deal analysis.

My wife and I are in a very similar situation as your family. We don't need cash income at this point in our investment cycle. I'm interested in growing equity. The property has to carry itself with sufficient buffer to survive a couple unfortunate years. After that, its just gravy. I'll take it, but I'd much rather find a property poised for substantial equity growth. Part of that is buying right. Often that comes down to running a LOT of properties through your spreadsheet, and getting to know your numbers well.

I guess the question to start with: what is your ideal investment? Do you want to get dirty a remodel? Do you have the cash / buffer to experiment? How much management do you want to do personally? What other opportunities do you have for your cash? For example, I have consistently earned 7 - 9% annually on our cash at lendingclub. It takes 0 effort on my part, and the risk is already factored into that return. So when I look at a real estate deal, it had better exceed that.

Happy to chat about it more some time. They have a spreadsheet deal calculator available here, or I'm happy to share my spreadsheet if you want to play with it. =)

We considered the flip, but since you have to sit on it for a year in order to 1031 again, and I'm not confident in the timing right now (as you stated @J. Martin ), I went blue chip instead. Even if the market tanks, these are brand new, cash positive and in a strong area. Fine place to park my money for a while. And since it is a "4-plex", I was able to lock 30 yr financing.

Miss hanging out buddy. I'm trying to get julie to buy off on me taking a few days for your event, but have to travel on business for a week and change before, so the prospect of me leaving again is not met with glee. Trying to convince her to bring the kids for the day.

@Troy Fisher - thanks for the reminder on the dates. Had it on my calendar but forgot to check.

@J. Martin - it was slow going but we found a builder who had 4 brand new 3br townhomes in magnolia he had yet to short flat (divide the parcel) and needed money (got him to come down 10% under market). That gets us a solid cap rate for the area (just over 5 cap) and possibly higher depending on the rents we get. Removed contingencies this week. I wouldn't call this my best deal ever, but it is in a solid neighborhood that is really emerging and has virtually no capex for a while. 

When I am on the 1031 train, sometimes good enough is a relief. And in the future, I'll probably do the lot split and sell them off one at a time.

Good call on the location @Troy Fisher . I don't think I can make this one (although there is a chance I might be able to sneak out after everyone goes to bed). I will set one up in mid /late november, if anyone has any preferred dates.

Hi Dennis.

You have my serious sympathies. I have yet to have a transaction that did not involve drama with a bank. Personally, I'm both blessed and cursed in this sense. But it has lead to a serious creative streak at the 0 hour. I'll run you through a few things I came up with in the last 5 years, which might or might not apply.

We are missing a little info which might help. Note / loan size, terms you are looking for, a little more about the property, more about the ownership structure (personal, business...)

#1. Portfolio loans / Lending on a larger property cluster.

Do you have another property / assets you can leverage?

We had a duplex which we desperately wanted to refi, but due to the tanking economy (thank you 2008), we got a lender, locked, got buy off / appraisal passed muster by the hair of my chinny chin chin. They had a backlog, took two months, then asked for another appraisal. Sadly, the second time it didn't pencil. #shafted. The difference between our 6.7% loan and the 3.625% loan locked was nearly 2k per month cashflow. We tried another lender. Failed again. After going through 9 different banks, I started pitching a different idea. We had enough equity & cashflow in our entire portfolio to pencil, maybe someone would refi all our properties at once and allow us to move equity around to qualify. It took a lot of phone calls, but I found someone who was able to get that deal done (he does loans in portland and if you message me, I'll get you an intro). We refinanced two duplexes and 2 homes, I ended up having to put 80k of our personal savings into the deal, which wasn't terribly exciting, but when I considered an annual guaranteed return of 30% cash on cash, that seemed like the best place to use the funds.

I don't have much experience in person with local banks, but I have seen people work miracles through relationships with bankers. I know you are out of time, so this is why I am not harping on that.

#2. Partners & Self Directed IRAs

There are people with IRAs and lots of liquidity who might be stoked for a solid, stable and reasonable return.

We had removed all contingencies on a property in 2011 and were days from closing. My primary investor stopped picking up his phone. I was a mess. I had personal put in 25k in earnest money and hadn't been able to get a hold of him in a week. My wife and I wouldn't be able to close alone. I realized I could either find someone with 100k cash to invest in 3 days or loose my earnest money. I started hunting. I ultimately found a family member who had retirement funds, and for the right level of risk exposure was interested in the deal. Originally we were simply looking for a couple year loan, but they decided they wanted to partner after seeing the details. They were very risk adverse. My wife and I had to personally guarantee the cashflow performa (very low risk), assume all cash calls (medium low risk) and they got to be in first position for any recoup when the property sold (low risk as I was buying cheap and forcing equity). 

There is also the possibility of a passive business partner as opposed to a note. My wife and I have angel / silent partnered in 3 companies which I believe in and contribute to our community.

#3. Business LOC / Loan

Any chance you can buy this asset through the business rather than personally? There is a chance that a business banker might see it differently than a real estate banker.

You may not have the business history, but does someone in your network? Is there a possible partnership with another company / venue / event promoter who can show a longer track record to remove that obstacle?

#4. Government / Non Profits

From your website, you look like something that could give a funded redevelopment agency of happy hardon. You are revitalizing, offering space for social contribution, commerce and community development. I'm curious if there are SBA loans or grants available to a space like yours.

Good luck @Dennis Adams and let us know how it shapes up.