All Forum Posts by: Stuart Udis

This doesn't pass the sniff test. Reminiscent of the " I have $3M to invest, how should I deploy my capital posts". 

1. If you've bought and sold hundreds of properties in the past two years how is flipping 10  homes a month scaling? You are already doing that volume

2. If you've transacted in hundreds of transactions over the last two years and have 15 employees how are you funding the current operation? Most at this level are not coming to BiggerPockets forums for advice on how to scale. 

3. If you are selling hundreds of homes, its highly irregular to only have 6 rentals. Especially in this market.  Based on your own numbers, assuming at least 200 sales in the last two years &  having only 6 rentals means at least a 97% success rate in absorbing your flips. That's quite high. Most doing this volume are forced to turn more of their inventory into rentals. 

@Katie Camargo Don't expect the acquisition lender to provide better terms. In most instances the lender will be focused on the contract price. A refinance is a different story. However you have to be mindful of the cash flow. Most lenders will also look at debt coverage ratio which limits leverage at this time due to higher interest rates. That's why you see so much trapped equity in properties owners cannot access. 

@Harsh Poshti Some of my investment focus in the past few years has been geared towards mix-use assets. As a general rule of thumb if the property has a ground level commercial requirement in order to show sufficient hardship to seek a residential use change the property should be located in a location that is not conducive to commercial use i.e residential street, close but not as marketable as properties located on neighborhood's primary commercial corridor etc. 

You received some feedback from @Mija Aguilera who has local expertise and knowledge of the area and I am interpreting his comments as the location is viable for commercial use. Therefore you should speak with a local zoning attorney and architect to determine the viability of a use change. It is also helpful to determine the precise commercial uses that are allowed. Most municipalities have different mix-use categories which dictate the precise commercial use that's allowed.

A few additional observations on mix-use assets and how I approach them 

(1) they are generally more difficult to finance than multi-family assets so expect lower leverage terms even if the property performs just as well if not better than a multi-family property and therefore price this into your acquisition

(2) I focus on mix-use assets where at least 80% of the income is generated through the residential component. I prefer properties that are heavily focused on the residential component  because mix-use assets receive far less attention than multi-family assets. For illustration purposes, it's quite normal to acquire a mix use building consisting of 9 residential units + 1 commercial space for less than a 9 unit multi-family building would trade in the equivalent location because the commercial space is an automatic disqualifier for many investors. This is something I've found in Philadelphia where I invest and the  same holds true in many markets. Also having a higher proportion of revenue generated through the residential component of the building does make financing easier. 

(3) The exception to the 80% rule I abide by is when the commercial space is leased to a credit tenant with a proven & sustainable business  or where the space presents the opportunity to attract a neighborhood amenity F&B operator (this is most beneficial in instances where you have a larger localized portfolio where these commercial tenants can positively impact the value of your overall residential portfolio). This may not be a worthwhile pursuit if you don't fall under that category because there is some added risk involved.

4. To reinforce what I said about making sure the credit tenant is proven and sustainable all you have to do is look back on the past 15 years or so:

2009-2012: frozen yogurt 
2012-2014: “new and improved burger” spots
2014-2015: spin class
2015-2016: megaformer and Pilates
2016-2017: poke bowl
2021-2022: "new and improved cookie" spots
2021-2023: indoor golf
2024: pickleball

(5) If you are in a situation where seeking an F&B operator, be aware at this time these operators are seeking very high T&I allowances which may not be a worthwhile investment for you to make.

@Taylor Cave  You make it sound like you can place 8 students in an 8 bedroom house and collect $500$-650/bedroom. It doesn't work like that. That's a spreadsheet that doesn't transfer to a real life leasing scenario because its not permitted within the zoning code.

If the property is zoned RM1, then  perhaps you can lease to 8 unrelated individuals by converting the building into multiple units. If the building is currently recognized as a single family residence,  then you are changing use and presumably will need to sprinkler the building and satisfy other fire rating and STC rating requirements not to mention the added costs of having to run mechanicals for multiple units, multiple kitchens, additional bathrooms etc.  which make the retrofit more costly. Costs may disqualify the opportunity even though in theory it can be converted.

I believe its important to set expectations and if this is an 8 bedroom RSA5 home just as an example you very well could be looking at a building that's obsolete and again even if it is RM1, depending on the costs of the conversion, still potentially obsolete. Sometimes back of the envelope underwriting is ok, but not enough information is available here to suggest this is a $520k-$580k opportunity.  

@Becky Hoffman If one member of the LLC does not care to have any claim to the property as you describe why can't the partner merely be removed from the LLC. The 2024 business return can reflect the change of ownership to two 50% partners (or however the ownership interest is split between yourself and the other remaining partner)? A huge wasted expense re-titling the property to a new LLC.

@Paul Bogard Any real estate agent who promotes themselves as an agent who is a specialist on renting out bedrooms should be moved to the bottom of the list of people to take real estate advice from..... Do you really want to live in a house with a bunch of random people? What happens if and when you move out? How are you going to monitor what's going on with a bunch of randoms living together? Seems like a nightmare and not one I or most others would ever care to take part in. 

This example: under contract for around $700k with 2020 Philadelphia city appraised value at around $890k. Thus, conservatively, this property is worth $860-$920k -- which is the reason for the $60k spread.

I am completely confused by this......

@Austin Cox I believe the problem here is you've been accustomed to using VA loans which are close to 100% financed transactions and you are comparing your options to the terms you've obtained in the past. You say the property is worth $120k-$180k more than the contract price and it appears you are looking for a lender who is willing to cut you a break on terms because of the built in equity. Unfortunately lenders will only be looking at the contract price based on what you've shared, not the built in equity regardless of whether the property actually appraises as well as you expect. There are circumstances where lenders will give credit for imputed equity but that's when the borrower has owned the property where appreciation has occurred, entitles the property or does something more than merely sign a good contract which appears to be the case with your purchase.

It sounds like you've exhausted your VA loan capabilities but if you haven't, your options are VA financing with less capital required up front and PMI or alternatively using a loan product that requires more up front capital and no PMI. If the appraisal actually substantiates your expected built in equity you can always refinance and its up to you in the meantime to decide whether you want to go the capital preservation route (VA) or alternatives. You should also consider transactional costs associated with all options as that could play a factor.

At the end of the day, a lot of the decision making hinges on the actual value your appraisal returns. It is a bit of a red flag that you can't narrow down on a value and are expecting a potential $60K swing (120k to 180K in equity). This is significant when you are looking at loan products that tell me the size of the transaction you are considering. More to the point, in Philadelphia the maximum FHA loan amount for 3 family of $863K. It's one thing to have a $120K-180K range in expected built in equity when you are looking at larger transactions but that's quite a spread given the size of your transaction which leads me to believe your valuations may not be entirely accurate.

@Aditi Chaudhuri When you say your property is a half mile from campus, are you a half mile south towards Center City and near Broad Street or are you half mile north, west or east of campus? There is an enormous difference in marketability based on how you answer that question. You will have difficulty renting to Temple students if you are a half mile from campus and anywhere other than south and near Broad Street. 

I don't personally invest in real estate near Temple's campus but have good relationships with a few peers who owned considerable portfolios in the area. What I've heard through them is as follows: The student body has changed drastically over the last 10-15 years. Temple now attracts students from more affluent backgrounds in the Philadelphia suburbs (kudo's to the school for raising it's academic reputation). However with that comes parents with the means to pay more for their children's student housing. The real estate closest to campus was previously the most marketable real estate for  students  who wanted live off campus, but now many are living in different neighborhoods (Center City, Fairmount, Manayunk, Fishtown/Northern Liberties). As a result, there is less demand for off campus housing in the immediate area and its become easier to lease housing closer to campus if you are a Temple student wanting to live near campus.

Keep in mind there  is also a narrow windows to lease to college students and if you miss their leasing windows it becomes difficult until the summer to lease units. Also, have you verified if you can lease a home to 8 unrelated individuals? I do not believe that's allowed in Philadelphia. Lots of red flags here with this property and location based on what's been shared. 

@Jared Khan I sure hope there's more to your investment thesis than buying in Cleveland "since the price point is attractive". More to the point of your post, most lenders will want to see where the down payment sources are coming from and will not look favorably at someone who is using credit card debt to cover the down payment. Most who use this strategy are ultimately lying on their loan apps.

Using debt to cover down payments is always a risk. Most do so believing its only temporary but s*** happens in this business..... timelines get stretched, appraisals come back lower than expected, rates remain high longer than expected etc. etc. and what's intended to be a short term solution often adds quite a bit of strain to the property and your business. This high leverage strategy becomes even riskier when you're investing in low barrier/lower cost markets.