All Forum Posts by: Stacy Spencer

Seller financing could be just the thing!  Put together your selling points and you may want to prepare 2 offers... one that cashes the seller out completely (some combo of cash and 3rd party loan on your part) but with a lower price and then one with a higher price but all seller financing.  Make it tempting!

Don't give up!  Just change markets.  CO and FL are too hot... great if you're a seller but lousy for buyers.  I don't see any cashflow in those markets and rents aren't keeping up with prices.  If you're looking for cashflow, you might want to try OH or TN.  Since you're on the islands, you may want to look at Hilo/East Big Island too.  The population in Hilo is growing very fast and my neighbor is making nice cashflow on her Hilo and Volcano rentals (both long-term rentals, not vacation rentals).  But property management is more expensive in HI so maybe not.  In OH or TN you'll pay 8-10% property management fee which is much more reasonable for cash-flow investors.  If appreciation is more your goal vs. cashflow, I've heard Atlanta and North Carolina (Charlotte area I think) are both attracting new employers/jobs which is always a good for appreciation.  (I'm a cash-flow investor though so haven't researched those markets further, just hearing positive feedback from appreciation-oriented investors.)

We personally had lousy luck in our first market (total bust after many offers) and our team wasn't working well together either (our property manager thought our realtor wasn't doing his due diligence and was showing us terrible properties vs. our realtor thought our property manager was a prima donna who only liked Class A properties ... they certainly weren't partnering to bring us leads). We finally had a mentor recommend we try other markets - and voila we acquired 10 cash-flowing properties in 12 months! Also, while I have purchased MLS listed properties, our best properties were never MLS listed - our property manager and realtor referred other investors to us - a real win/win!

My recommendation is 1) pick new markets that will cash-flow (even when looking at MLS listed properties) and 2) focus on developing your team in your new market and let them do the work for you!

There is a lot that goes into this equation including how long you plan to hold the properties, how many loans you already have, cost of the buildings, exit strategy and more. But for a real down-and-dirty comparison, I recommend getting loan quotes for both so you have concrete information on your two scenarios including closing costs, LTV and other terms. I also recommend getting insurance quotes for both options. Finally, check into the details on zoning - that can have a huge impact on future value and exit strategies.

I've purchased both, so a few thoughts for you to consider:

• The two quads will allow you to use traditional Freddie/Fannie mortgages which include low interest rates and lovely 30 year terms. However, closing costs can be higher and you have to jump through traditional bank hoops. Also, if you already have a number mortgages, your LTV changes and I believe you max out at 10 loans. If you're close to that max, you may not want to waste the loan given a similar return on both options.
• Commercial loans have generally had shorter terms (they may amortize over 30 years but require balloon payments in 5 or 10 years) and higher rates, but I've also been able to have lower closing costs and better LTVs (every situation and lender is different though).  If you don't have a commercial loan yet, there may be some value in establishing one and also your business credit score vs. relying on your personal credit.  This really depends on where you are in your business though.
• If the loan amount is high enough, perhaps you can get the Fannie Mae Multi-Family small loan program which would allow the best of both worlds on the 8-unit.
•  Other expenses:  Insurance is generally more expensive for commercial properties and provides a less generous benefit.  However you need to weigh 2 policies with 1 and see if the premium is actually lower.  (Be sure to understand the terms as well, especially as relates to partial losses.  Many people only cover up to their purchase price but if you have less than replacement value policy, many residential policies will allow 100% policy value pay out on partial losses but many commercial policies prorate any loss based on the value of the policy compared with the cost to rebuild.  You could end up with only 45% or some other prorated amount of coverage if you're not careful in understanding the terms.)
• Capital expenses (repairs):  My personal experience has been that I really only save on roofing by buying one 8-unit vs. 2 quads.  Most other capital expenditures (bathrooms, furnaces, A/C, windows, doors, etc.) are really per unit and should be a wash under either scenario.  Exteriors (siding/stucco/brick) are tricky -- having to reside an 8 unit will be more costly than 1 quad and you likely won't have to deal with both quads at the same time; but sometimes you can do a buildings exterior repairs in sections or just one side.  I haven't really found a significant cost difference in capital expenses for my quads vs. my 5 or 8-plex.
• Refuse differences?  Where I have my properties, the per unit for refuse removal is the same for 2 quads vs an 8-plex but my area has only 3 units or less as 'residential'.  Check the refuse removal for both options and include that in your analysis
• Zoning - Look at the zoning for each building.  If a building is in a mixed zoning area it may give you more future exit strategies (e.g. I have an 8 unit on a busy street which can also become retail stores or mixed residential/retail if I choose in the future).  Also look to see if zoning changes are allowed.  Some areas will allow buildings to deconvert to fewer units but will not allow expansion.  

The other items I had were already covered by others so you should have plenty to consider in your evaluation.  ;-)

I chose my mortgage company because they agreed in writing not to call the Due on Sale Clause when I transferred my property to my LLC. In this way I benefit from the better residential mortgage terms and still have the LLC have some assets (the equity in the property). I transfer the property and insurance at about the same time. Everything is up front agreed upon by all parties. My insurance company and mortgage company were both informed before I even purchased the property. (My lawyer indicated no concern with the Title insurance which he procured - but I'm going to follow-up on that with the title company just to be sure.) The down side is the loan is still on my personal finances and my LLC isn't developing it's own credit rating.

Great idea, @Joel Owens!  Thanks!

@Joel Owens Thanks for your feedback. Yes, no surprise a lender wants skin in the game, especially from a new company. I have no problem with the property being collateral. I think the challenge I'm running into is my loan amounts are too low for commercial lenders and residential lenders don't like to finance to an LLC. I'm buying low cost duplexes, triplexes and quads so it's not the primary market for commercial lenders. I'll chat with a few more lenders to get more feedback. Thanks!

@Mark Creason, they are charging about $1500 for this service which includes a year of working with a corp. credit coach, routinely checking and correcting any errors in PayDex score and connecting us with lenders who will lend to a real estate business and will report monthly to the top 3 credit bureaus. To me the value would be in finding lenders who will work with my business and not require everything to be purchased by me and then vested to my LLC. But I haven't found anyone who has worked with them so I'm unsure how successful and helpful they really are.

I've been spending a lot of time "smiling and dialing" to numerous lenders and just haven't had luck finding lenders who will lend to my LLC. My properties all flow, but still the lenders want the loan in my name.

Do you have other ideas for how best to establish corporate credit and find lenders who will loan to my LLC? I appreciate your input.

I am a cash-flow investor with 5 multi-family homes. I'm currently financing everything under my own credit and then vesting it to my LLC (with my lenders knowledge and approval). It's a hassle and I'm not effectively establishing corporate credit this way. I want to instead purchase or refinance properties directly with my LLC.

I was contacted by a company called American Wealth Financial. They indicate they can help me establish corporate credit for my LLC, more quickly navigate to an 80 Paydex score and also connect me with lenders who are more likely to provide unsecured loans to my business (and also help to quickly report credit to the top corporate credit reporting agencies.

Has anyone worked with American Wealth Financial or a similar company? Any good/bad experiences to share?  Does this sound like a good next step or am I missing more simple or effective ways to establish commercial credit?

I appreciate any advice and feedback.  Thanks!

Thank you all for the warm welcome!

Here's where having (or quickly getting) a network/team in the area of the property is helpful.  I only buy properties outside of my state because... well, Hawaii is pretty darn expensive and often overpriced because of the shear 'ooh' factor.  In the states where I purchase, I quickly find property managers, realtors and inspectors who can be my boots on the ground.  My property managers are often 'retired' general contractors, so they are great at giving me estimates on repairs and what they think the value will be after the repairs.  I get information from all 3 on the market and how appraisals are comparing to sale prices; what repairs will be needed, cost of repairs, etc.  If your target market is individual home owners and the market is hot and people are routinely paying well above appraisal price, you won't care as much.  If your target market is cash-flow investors (or investors and owners), this gets even trickier to evaluate.

Appraisals are interesting.  Sometimes I care a lot about them, sometimes I don't.  If you are going to sell to someone who is financing the property, the appraisal can matter a lot.  Here's some important considerations:

1) Was the appraisal done only on sales comparison approach?  (This is where the appraiser only compares the value of the property to other recent sales -- looking for comparable houses in the area.)  If so, this is a significant factor for traditional mortgage lenders; any purchaser, whether they are purchasing to occupy or to invest, who is using a traditional mortgage in their own name will care about this.  They will only be able to get a loan on 75-80% of the appraisal amount and they may not be willing to pay for the difference between the appraisal and purchase price.

2) Did the appraisal include an "income" approach?  In my experience, this is seldom done on single family homes unless they are currently operated as an income property and the appraiser was told to evaluate it as an income property.  I have seen significant differences on the value of a property using an income approach vs. sales comparison approach.  I've also found that most of the appraisals I've seen would provide both approaches but often favored the sales comparison approach in making the final appraised value.  Still, I've paid more than the sales comparison approach for my rental properties when the income approach (and my own personal analysis) showed the property would cash-flow.  

3) Who is your most likely purchaser?  Someone who wants to occupy the property or someone who wants to use it for cash-flow investing?  If you are likely to sell to an investor who is interested in cash-flow, it will help if you know how to evaluate the property from a cash-flow investor standpoint.  You'll need to do market research on rents to see if your proposed sale price will yield a positive cash-flow for those investors.

I hope this is helpful.