All Forum Posts by: Spencer Vickers

@Cory Sparks

This is a great starting place for you in Commercial Investing and an incredible thing that you are taking the time to understand the intricacies of the deal on behalf of your buyer. I can already tell you will be a good property manager for them.

If you are looking for the basics, here are a few:

Average Occupancy

“T-12” Revenue, Expenses, and net operating income (Trailing or most recent 12 months)

First-Year Returns: CAP Rate is unlevered yr 1 yield. Understanding the yr 1 levered yield gives a good indication on how an asset will perform going forward (yr 1 is a whole lot more certain than year 5)

Here are a few things that may also be helpful but are really the investors’ job:

MSA (Metropolitan Surrounding Area) Drivers: Pop and Job Growth

Holding Period Returns: IRR, Cash-on-Cash, NPV (A quick Google search will give insight into these

This is probably a good starting place. Let me know if you would like more info.

@Michael Judkins

Regarding the land you found, usually a bank will leverage 40-55% of the cost of land and then 50-70% construction costs, so I don’t know if $250k would be enough to get started on a 600k lot + construction costs.

Run the projections at those leverage ratios and see how much equity you would need. You may need to raise some private money and/or get creative.

@Michael Judkins

I always like to have exit options.

Before you can really know what your options are, you have to find exactly what you’re looking for and don’t get distracted by the next “shiny object” opportunity. Happens to all of us. 😅

Ask yourselves a few questions including the following:

Do you want a similar-sized retail center for your development/acquisition?

If so, are you going to occupy the whole 10,000 sq ft?

If you will have tenants, are you excited about that or does the idea turn you both off?

Are there good property managers in your town?

What is your timeline? If you want to be out quick, I would not count on a development. If you can wait AND you have a stomach for downside risk (be honest with yourself), AND the MSA drivers —pop and job growth to name a couple— are headed in the right direction, a development may be the best thing for you both.

Regarding LoopNet, it’s okay for comps, but you’ll rarely find a good deal on there. Commercial brokers guard the good properties pretty closely, so you’ll want to reach out and get connected with a few of them in your area. Yeah, they can be a headache and you pay an arm and a leg in commission, but a good broker can really point you to a good property for your situation.

I hope these few notes are helpful! Good luck to you guys.

I appreciate the thoughts. I am a new MLO that connects my clients with mortgage bankers. Like you mentioned, I am a rookie learning the ropes. I want to make sure my recommendations are ethical and timely, so I figured I would get some alternate opinions.

If you have any other thoughts, feel free to post them here.

@David M.

Since the new home will be their new "primary residence", does the status of their rental need to change or they will have "two primary residences" on their loan documents?

Let's say they complete their refinance and then 8-12 months later they find that perfect home for them. At that time, they move into the new home and rent their current residence out. Do they need to update their lender and convert the property to an investment on the loan docs, or are they fine to leave both as a primary residence? As we know, a primary residence has more favorable terms on paper than an investment property.

Thanks for the thoughts and continued discussion.

I have a client that wants to rent out their home and purchase a new home. Here are the details:

Current residence that they want to rent out is on a USDA loan @ 3.75%. They have lived in the property for 15 months. They want to refinance the USDA and take out a conventional loan, so the USDA will be gone and the home will be on a conventional note at a lower rate (2.25-2.5%). Once this transaction is complete, they fully intend to live in the property for awhile while they search around for another home (>6 months).

When they find the new home, they want to take out a USDA loan on the new home. So at this point, they will have a Conventional on their first primary residence and a USDA on their second. When they acquire the second home is still up in the air.

Their question is should they call their refinance a primary, secondary, or investment residence and what will the new property be considered?

My advice to them was since they don’t know when/if they will purchase the new home and rent out their current home, they should list their refinance as a primary residence because it is: they will be living their for an undetermined time period. When they acquire the new property, it may need to be considered a secondary residence since they already have a primary. But that’s where it gets tricky because they will be living in the new home and renting out the original property.

What are your thoughts?

@Gilberto Fuentes Completely agree with the general consensus here. Especially if you have been wholesaling for awhile, find a good partner/mentor you can do an easy flip with to get some experience and see if you like it. If you do, then you can add that as a part of your “fortune building” strategy.

@Matt West I'm excited to see you succeed on this one! 

160-170K could be great, depending on the length of time you have to hold it. If you offer 170K, spend 40K on reno, you'll have to account for lost rents during the renovation period (vacancy) and remember to factor your holding costs in -- property taxes, utilities, financing, and any other cost you incur as a result of holding this property and not having tenants in the space. 

At those prices plus, let's say, 20K in holding costs (which is probably on the high end to be conservative), you're looking at 250K ARV - (170K purchase + 5K Vacancy + 40K Reno + 20K holding) = 15K Profit. This is of course assuming a flip; the numbers on a hold would be much different because of raising rents, more holding costs, etc. You would have to check the loan covenants with the lender you go with. Some will have a pre-payment penalty if you pay the loan back too early.

Sounds like a good deal! I would double check ARV comps, financing options (hence your original question I would think), and get a great contractor! I know BP has a contractor's list that might help to find one in your area.

The other thing to is to stress test your model. What I mean by that is if something goes south and you have to hold the property for twice as long as you planned for or one of your rehab/holding costs goes up dramatically, and you can still make money, it's probably going to be a good deal. 

If you can make money with these costs included, I say go for it!

I have been listening to BP for the last month, so I figured I should start interacting with the community.

I am a college student, studying finance with an emphasis in real estate, seeking to become a real estate investor. I have heard stories of investors starting out while they are in college and would love to start that now. I am most interested in commercial properties including office, industrial and large multifamily (100+ units), but I want to start small by either flipping or buying and holding single-family homes. I've heard a lot about wholesaling and learned from the guest contributors on the podcast that it is not as easy as all the gurus make it seem, so I'd like to learn what the BP community recommends I do now to get my feet wet. How do I start putting skin in the game when I don't have a lot of money?

Another factor: My wife and I are expecting our first baby in December. We have $500 in an emergency fund, so we can be covered for about two weeks. On top of that, we are able to cover our current monthly expenses and have about $200/month we invest into brokerage accounts. We have about $700 we could pull from these brokerage accounts to start investing. It's not much, but it's what we've got.

So, how should we start. We're in this for the long-haul. We're ready to work hard to find financial freedom.

Matt,

First off, what deal number is this for you? I'm looking forward to seeing how this one turns out for you. 

Here are some of my initials thoughts:
1) What does unit 3 look like internally compared to unit 4? Why is there a big rental income difference there? If the interiors look the same and the tenant for unit 4's lease is going to expire soon, crank that baby up. Also, I would look at comps in the area to see if you could raise all the units to current market levels. Careful at picking the right comps (similar appliances, state of the apartment, etc.)

2) Whether you go with private money or hard money, it doesn't really matter. I would honestly think a hard money LENDER would be better than a private money INVESTOR. The reason I capitalize those words is because a lender asks for a fixed percentage back on the money they lend (8% of $10,000) while a private money investor asks for tiered returns on their investment (10% of dollars  1-1000, 12% of dollars 1000.01-1500, etc). If the private money party wants a fixed percentage than that's easy, you can compare the hard money rate to the private money rate; however, if the private money lender wants residual cash flows,  it may or may not be more expensive, depending on how you structure the agreement. You'd have to do more analysis before you make that decision. 

All of that is a lot of nuance, but here is the basics: If you can make money on the spread between ARV - Purchase Price - Repair costs - Holding costs - Debt Service = Profit, go for it. Trust the numbers and go for it!