All Forum Posts by: Steve Miller

Anybody have success with a specific lender for 75 LTV cash out refis - particular on 2-4 unit small multifamily (pure rental, non owner occ). I've always had a lot of success with FirstBank, but they've recently gone to 70 LTV for cash outs of this type, and I'm really after a lender that will do 75 or better.

1) Choosing to sell and pay capital gains on recent appreciation (rather than 1031, which is a valid option), you are effectively "recession'ing yourself" through taxes and transaction costs rather than a theoretical anticipated recession that may or may not occur in the near term. Assuming that you don't have an incredible opportunity (completely different scenario if so), it's much better to simply continue to rely on the assumption that real estate will, on average, increase by somewhat above the rate of inflation over the longer timelines that actually matter (20, 30 years). 

2) Something not discussed on these "when is the recession coming?" threads enough: the data for what these kind of scenarios look like is readily available! Again, given that history gives us a pretty reliable sense of what the longest term appreciation trends will be, simply build the business to withstand the short term negative outcome. For many regions, that scenario was 2008-2012. The data for what happened to both housing prices and rents exists, on sometimes as granular as a neighborhood by neighborhood basis. My advice would be to build a spreadsheet with that data, make sure your reserves can cover a worst case scenario. Then, just for fun, make it a little worse so you can sleep better at night. If you believe in the 20-30 year future of your region (think demographics and jobs), this approach will work just fine. 

I think about this or lot! From the variety of answers, it's clear that it is personally subjective (as it should be) based on personal income, current cash flow from your portfolio and the historical track record of the region (the Great Recession provides us an excellent model). In my opinion, the worst outcome is having to sell a property when it is at a cyclical lowpoint. I suggest that you put together your own, personalized stress test for such a scenario. Here's the sequence I used to build out my worst case scenario:

1) Look at historical performance, which should be region-specific and is publicly available data. Some areas are more cyclical than others. My area has seen two major pullbacks in real estate prices - the late 80s and 2008-2011, that were 13% and 22% (blended across the region), respectively. Ultimately, I'm not too concerned with short term price fluctuations - it's about having the liquidity to survive a 3-5 year recession and the associated declines in rents. In my region, rents actually did NOT decrease during that time, but I still build in an assumption that they would decline in lockstep with the pricing to err on the side of caution. I use a 20% multi-year decline in rents as my stress test. In my area, such a decline in rents specifically has no real historical precedent, so I feel comfortable using that figure. Your number will probably be different.

2) Apply that to your current cash flow model, and combine it with some negative outcomes. Add some larger capex items (a roof, heating system, maybe a multi-month eviction). Make it kind of ugly and scary and at the far end of what you think could happen if you had some really bad luck. 

3) I think your personal income should come into the equation to a certain extent. How stable is your employment, and are both members of the family employed? Dual income or single? What is the worst case scenario that can happen here? If you're living off the cash flow, it's a much different picture. How long does the scenario chew into your cash reserves? For example, I know that if for some "worst case" reason my portfolio was to start costing me several hundred dollars per month rather than making me a few thousand, I know with a degree of certainty how long that can go on and how long I'd be willing to subsidize it with my own income. 

It's part of the reason there are so many answers to this question...my only suggestion to you would be to play out some of the out there, scary scenarios (in a quantifiable way!!) and see how you do not only with regard to the new property but also with your current portfolio. I'm actually not particularly pessimistic about the future at all, but I sleep a whole lot better having my portfolio ready for some pretty terrible theoretical outcomes.

@Dan Baker What's up man! That's kind of what I was thinking, but I don't think I'm going down that road. What I was thinking was actually just renting the whole backend (technically two units with two kitchens and two entrances) as a single 5BR entity, which would end up being a great value for the right tenant. I guess that gets into the question of what defines a duplex...how many legal lease agreements are assigned to a given property? I just want to be on the up and up. 

And yes, if I wasn't so entirely emotionally wrapped up in proximity to trails I might consider a house hack outside of Golden :) 

Hi All -

I am currently considering a property that has 3 "units" but is zoned as a duplex in Denver. The third unit is a basement unit that has been occupied illegally for a number of years. My understanding is that outside of the necessary requirements (closets and egress windows), a zoning variance would need to be granted by the city for the basement unit to be occupied legally. Has anyone ever been down that road, successfully or unsuccessfully?

I think the key to all of this is not to pretend that cash flow and appreciation are these binary things and you need to choose one or the other. Earlier on this thread, I saw "Don't buy for appreciation" - this is true in part but really should be "Don't buy ONLY for appreciation or without substantial reserves". While I think everybody is a fan of their own market, there are plenty of markets that have a balance of both, mine included. While there is no guarantee that significant appreciation will occur in a given market, there are real-life things that drive local growth: Are people moving to the market? Is the economy diversified? Is the economy based on factors that have strong prospects over the next 25-30 years? Should you build your entire business plan around this kind of growth happening? NO! Will it happen like clockwork in perpetuity? NO! Are there real life, non-"rolling the dice" reasons this kind of growth is happening in these markets, YES! And the cap rates reflect that!

Everybody I know that invests in Denver likes to complain about the prices and how hard it is to find a deal. These are the same people that have made significant money over the last years from the same property appreciation. Tax free, or at least providing them with options to leverage their new equity in a tax deferred manner. That is something that comes up far more infrequently on these types of discussions - that appreciation gains are significantly more tax-advantaged than cash flow. You can't take a "tax loss" in perpetuity or when you have outsized cash flow gains - you need to pay the piper at some point, especially if you are still a W2 earner with a relatively high incremental tax rate. I can assure you that I'd rather have to figure out how I can recycle 100k in equity than figure out how I can pay taxes on 100k in taxable cash flow.

Here's the best part: you CAN cash flow in these "hybrid" markets (outside of the commonly used extremes CA/NY vs. the midwest). Just not at the rate you might in the midwest or other cashflow markets. Am I making life-changing cash at my current scale? No! I could absolutely get a better cash return in other markets. But I certainly cash flow enough to break even (7.5-8 cap on average) in the worst of downturns coupled with appropriate cash reserves.  And I made a whole lot more money over the last year from appreciation (both forced and market driven) than I could have made in cash. 

Using "number of doors" as a metric is pretty useless in and of itself, because it provides no context. It would be like someone saying "I want to own 10,000 shares of stock by 2021". Shares of what? At what price? It's a useless metric. Part of what makes real estate investing fulfilling is that it is a tangible asset - you can go see what you are investing in any time you wish. And for that reason, I understand the inclination to describe one's investments that way. It's fun to say that you own 10, 100 or 1000 units. But it is completely irrelevant without context. 

I'm a firm believer that anybody that is in this for the long haul needs to have a business plan with specific metrics they can track on both a monthly and annual basis. For buy and hold, it's pretty simple: capital deployed and return on said capital. There are plenty of metrics for this, some better than others: ROI, ROE, Cash-on-cash return. None of which have anything to do with the number of units owned. If I'm deploying a certain amount of capital to my business, I ultimately want as few units as possible given the same return to reduce overall complexity. Personally, I tend to gravitate towards larger units (3BR and 4BR) just so I can have less tenants with the same capital deployed.

@Dr. Jordan E Smith I would not suggest going to audiobook route for the Frank Gallinelli book I suggested. It's basically a reference book - it has charts, equations etc. I suggested it to you because it's the exact opposite of some other books (Rich Dad Poor Dad, The Millionaire Real Estate Investor, etc.) that might get you pumped up to go buy some real estate but then leave you thinking "how do I actually do this?" from the perspective of actually analyzing prospective deals or the performance of your current portfolio.

Jordan - I'd focus less on the "per door" number and more on your return on investment. Think about it - you could deploy the same amount of money for one large unit (say a single family, large condo, etc) or a 4-family property. By nature, the 4-family is going to cash flow less on a "per door" basis, which means that it's nearly impossible to use this metric to compare properties on an apples to apples basis. It's an irrelevant metric. When I first started investing, I used cash-on-cash returns (annual cash returns/cost to acquire) because it seemed to me a logical way to compare the investment to others, like you might look at a stock investment. Over time, it became apparent to me that even that metric is somewhat flawed because it's so easy to jigger the numbers (ie the same property will have a different "cash on cash return" if you put down 10%, 20% or 30%). In my opinion, cap rate (net operating income/price) is the best way to judge because it's a constant. 

The apples to apples comparison thing is particularly important when you then consider that whatever market you choose to pursue is going to have differing definitions of what the market will bear for a "good investment". Denver looks different than Georgia which looks different than Cleveland from a cap rate perspective. It will even vary across asset classes, neighborhoods and quality of tenant (higher end properties in general will yield lower cash flow and lower cap rates, which isn't the end of the world, it's just the trade offs you are making when you choose a subset of the market in which to invest). Here in Colorado, I have properties ranging from 7 caps to my best, which is a 9.2 cap at the time of acquisition. That's my definition of "good" and they are challenging to find in my market and for the class of housing that I seek for my rentals - probably less than 10% of listings I see in my market have a cap rate in excess of 8. But at least now I have defined standards - either something that already is, or I can make into something exceeding a 7.5/8 cap - instead of spending my days ruminating about how the perfect deal is going to come to me. At the same time, there are folks on this site, particularly in different markets, that would not touch my 8 cap with a 10 foot pole.

This book reads more like a text book than some of the other real estate books out there, but is very good for getting a basic grasp on how to look at basic metrics to analyze a deal: What every real estate investor needs to know about cashflow by Frank Gallinelli.

@Eric T. I have had a very positive experience investing locally. Obviously, we've been the beneficiaries of unsustainable price growth in the short term, but I still believe very much in the future of the market here overall relative to national trends. It's much harder to find things that cash flow here than they might be in other segments of the country, but the underlying demographic changes (population and job growth) make it extremely appealing on a 10-20 year time scale, even if we don't see the gains (highly unlikely) that we've experienced over the last 7-10 years. Appreciation will still outpace national averages, even with a slowdown.