All Forum Posts by: Stuart Udis

It varies. The prize for rental SFH's has always and will continue to be appreciation. With elevated interest costs, insurance and construction/ other misc. opex, it's become more difficult to sustain these SFH's long enough to enjoy the appreciation. Look at the trends of many of the national builders....higher end homes. This is because lumber, rough mechanicals, site work costs don't vary much whether its entry level or higher end housing besides likely using engineered instead of dimensional lumber assuming larger homes with wider spans.

More to your point about building multi-family, in Philadelphia I am finding it more and more challenging to build multi-family housing. I believe the efficiencies are being overtaken by new costs. I am sure many other cities are experiencing the same building code introductions between fire rating and STC assemblies, sprinkler system types, increased costs of mechanical equipment, namely HVAC equipment. With these added cost figures the numbers are getting tighter. Many of these costs don't apply to SFH' and suspect that along with the well-defined buyer pool is why SFH development is still desired by many.

@Jadon Grant I believe you misunderstood the lenders requirements but as a baseline, lenders have different guarantor requirements. I've seen some lenders require all members sign, others require anyone with membership over 10%, 20%....it depends. Depending on the borrower this can be negotiated as well. I suspect in your case the lender you spoke with is requiring all members with 20% ownership interest or more to be a guarantor. Expect to give at least 20% of the upside to the guarantor. 

I doubt a lender will accept a guarantor who holds 1% ownership interest. This is because there is established case law indicating a benefit must be received to be held personally liable for a loan guarantee (can the lender go after the borrower personally in the event of a default). Not only will the 1% fail this test, but it will also be difficult to find an investor willing to take on the risk for 1% of the project upside. I've seen guarantor fees paid out that aren't aligned with ownership interest but haven't seen a guarantor who holds 1%.

As @Drea Na stated, cash out is difficult. I'd imagine a partial return of capital is more likely. Leverage is a valuable tool if used responsibly. Most don't and that's often an investors downfall. Another reason why investors fail to use debt responsibly is the inability to distinguish between 75% LTV on a $1M property and $100K property. It's far easier to find yourself upside down on the 75% leveraged $100K property because many costs associated with owning and operating real estate are harder to absorb with the $100K property with some fixed or nearly fixed whether its a $1M or $100K property.

Lenders, real estate agents, property managers,  wholesalers, turnkey providers, attorney, accountants, contractors, insurance brokers and any other service provider who posts on these forums is selling. The services that are sold is the real issue. This is sadly due to the expectations of today’s novice real estate investor. When I purchased my first property (passively at the time) in 2012 the mindset and expectations were different. So many now get involved expecting to replace W2 income, live off cash flow, go from owning a duplex to a 50-unit apartment building or building a subdivision and rely on social media influencers who misrepresent their holdings and their ease of success and expect the same. 

While these expectations are not realistic, being the real estate agent who advises the investor it makes sense to save up rather than buy the property lacking fundamentals because the lousy SFH in Cleveland, Detroit or Philadelphia (just examples) is all that investor can afford or the tax professional who pushes the investor to purchase the terribly performing STR for the sake of depreciation rather than advising the client on the long game and tax benefits of sustained well performing ownership, or the attorney who uses fear mongering tactics to sell expensive asset protection services to the investor who holds no assets and the list goes on. The commonality is the ability to sell a service where there is instant and tangible results regardless of whether they hold true value overtime. Now more than ever, being a true fiduciary to your client means you will lose business. Many of these service providers are out of the business just as quick as the investor who take their marching orders and this is a cycle that is on clear display in the forums.

I haven’t seen an investment opportunity presented on these forums where there wasn’t a lender praising the spread (and there are some terrible deals floated in these forums), a completely impractical entity structure floated to be directed by someone they should move forward, the insurance broker ready to sell additional umbrella coverage without understanding the posters business or informing them they should focus more on risk shifting to their vendors policies…you get the idea. 

You don't see the investor who first posted the terrible deal come back to the forums and share they couldn't obtain funding, you don't see the investor who owns one SFH but spent 10K on a holding company, WY management LLC and a FL land trust come back and share the slip and fall still lead to a lawsuit and wasn't even covered by their GL policy because they operated grossly negligent, or the investor who had to redirect their W2 income to cover the monthly deficit on the property that was supposed to eliminate their tax burden.

Yes AI is an issue but the poor messaging and terrible advice is a bigger problem.

You can seek out contractors who work with lower initial deposits and work on net 30 payment periods. It is normally easier to work with contractors who have the financial means to accept these terms in larger or more complex projects. In many cases as you are experiencing, the smaller projects require access to more liquidity in proportion to the total project than larger projects because of the types of vendors most readily available to work with.

The two most challenging time intervals for draw construction is the initial work if there's an upfront payment before a draw knowing you may also be placing an order for windows at this stage which could have a long lead time and towards the end when kitchens, appliances and finish materials are all purchased in a short time interval. It's important to plan for this. Since you already have the funding originated, perhaps you can enter into an agreement to borrow $10-$15K from a friend or family member for a few weeks to get you to the first draw. Its an easier ask being able to show the repayment funds are available.

Have you verified the zoning allows the subdivision? If not, you will need a variance. You should verify this with a civil engineer that's familiar with the local land use and development standards. The civil engineer will also be able to help verify access to utilities, set back requirements, storm water management, if applicable etc. That's where you must begin. From there you have to verify there is enough margin to cover the site work/infrastructure and vertical construction. 

I would imagine 1500 SF homes given the amount of site work I suspect will be necessary will be an inefficient built. That's because many of the hard vertical costs won't var significantly if its a 1500 SF vs larger house. I would recommend speaking with a local real estate agent who understands the housing market very well to ensure you are building a marketable product rather than arbitrarily deciding on a set square foot product. 

Lastly, while preparing to take care of your parents is admirable, you have to decide if this is the best way to provide for them later in their lives. You may come out ahead taking on smaller projects where it's easier to generate lower risk equity and returns and then taking those gains down the line to help your parents. This seems like a heavy lift of a project for two nurses.

I would imagine it would be easier to find a lender to offer construction financing for 70%-80% of the cost.  Construction loans typically release funds as work is completed. It may be difficult to get a construction lender comfortable with what you are seeking. What if you run out of money? What if the funds you set aside are allocated to some other emergency?  A lender doesn't want to lend on construction unless there is a clear and controlled path to completion. While there are plenty of failed construction projects financed by lenders, what you propose adds additional risk. This is why lenders typically like to see borrower's equity contribution allocated to the project first and the lender then covers the rest of improvements and in some instances soft/carrying costs.  

It would be different if this was a stabilized or even completed yet vacant property. Lenders love low leverage requests under those scenarios. 

Equity is how you generate wealth, but cash flow is necessary to cover debt service, operating expenses and to help accumulate reserves. Basically, cash flow is what makes rental real estate sustainable and allows you to exit at the most opportune time. Without cash flow, many fail to realize the ultimate reward.  

@Heath D Wallace The first thing that strikes me as odd is your explanation on the work being nearly complete, yet no duct work followed up by your second post that the original contractor is completing finish work while the HVAC contractor you selected is completing the HVAC scope. Rough plumbing and duct work are typically the first rough in trades, this seems like an awfully inefficient construction site.

Setting that aside, you have a contract problem above all else. Based on the limited information shared about no contracts, I can infer there are no warranties for work, there's no assurance there are licensed and insured workers performing the work therefore no additional insured protections. You are not alone in the way you approached this home renovation, many in your shoes struggle with the same issues on their earliest renovations but the real lesson to be learned is to vet your contractor and take the time to execute a contract that covers timelines, payment schedule, scope of work, finish spec allowances, insurance, warranties and a number of other key contract provisions intended to protect you. A GC that balks on a contract is an easy and inexpensive way to vet and eliminate a contractor from consideration. I suspect the GC you selected wouldn't have been awarded the work if you handled the pre-construction activities. Something to consider the next time around.

Your logic is flawed. If a homeowner doesn't have children or sends their children to private school, they will still be subject to the same assessment rate as their neighbor who relied on the school system. Your tax bill would be no different if your tenants did not have children attending the public school.  This is how municipalities generate revenue. As the property owner, if you do not pay your tax bills the municipality will lien your property and can even sell the property at a tax sale. If you don't like how the local taxation impacts your cash flow you can increase your rental rates but if your rental rates are too high, you will lose prospects to other landlords.