All Forum Posts by: Stuart Udis

LLC's certainly offer personal protection if used correctly but most real estate investors form LLC's but fail to operate their business properly thereafter which can make it easy to pierce the corporate veil. Speak with a local attorney who is familiar with how courts in your jurisdiction rule on this subject and don't operate like you are invincible because the deedholder is an LLC. More importantly sign contracts each and every time you engage a vendor/independent contractor, make sure you have appropriate levels of insurance, and make sure any vendors/independent contractors you engage is properly insured and list you as additional insured. Perform these steps consistently and you will avoid far more liability than merely owning real estate through an LLC.

It's not uncommon for banks to offer 50% leverage for land and typically banks price both bridge as well as construction debt at WSJ Prime +1 point which isn't far off from the 10% you were quoted in today's higher interest rate environment. In most instances the acquisition of the land and entitlements are between 10-20% of the total development budget and lenders want to see this invested by the borrower first. This is why, when they do offer land loans the leverage is generally low. 

A few factors might be playing into why you are struggling to attract a lender. Is the land entitled (all civil and architectural approvals in place)?  Do you have any tenant commitments or is this entirely spec? What is your track record? Is there proof of concept in the market where you intend on building this strip center? Banks don't want to lend on land unless they are confident the borrower can develop the land and/or there is a clear market for the re-sale to an end developer. 

Why can't you merely network with real estate brokers and find a 60-unit apartment deal? It doesn't seem this "accelerator program" is offering anything of true value and quite frankly I am surprised someone such as yourself who has 10 years of experience and owns 50 properties would fall for a gimmick.

Is this a single tenant or multi-tenant property. It sounds like a single-family home based on the purchase terms you describe.  Regardless of whether the property appraises well, I would NOT suggest proceeding with any single tenant property where the mortgage payment is 43% of your gross income. If this is a multi-family building that is a different story as you will not be reliant on one rent check. Also are the mortgage payments alone 43% of your gross income or are all property expenses (insurance, taxes, etc.) included in that ratio?  Do you have substantial reserves set aside? Is there deferred maintenance or any cap ex you intend on investing into the property? Just because the inspection report was clean doesn't mean the finishes meet tenants demands and mechanicals could still be older.  Lastly, in many areas single family homes at price points that would historically attract home buyers are renting because many are opting to rent rather than buy until rates calm down. Consequentially, once rates calm down its not unreasonable to expect the rental rates to decrease as well. This will wipe out any excess cash flow expected once rates decease. Does this property fall in this category? These are all things to consider. 

A few other points:

1. You shouldn't rely solely on an appraisal report to determine whether this is a good deal. You should feel comfortable with whether there is good value at the time you make the offer based on your own market research. Learning more about the properties physical condition, title defects, familiarizing yourself with true building expenses are a few examples of items that might change your perception of value during a diligence period but an appraisal report finding should be low on the list. Appraisers are sometimes forced to make assumptions (and sometimes in the borrower's favor) solely because there are limited comps available. As an illustration: I built condos last year but missed the market due to contractor delays and rate increases and decided to rent the units. I had them on the market for a brief period of time for $450,000-$470,000 but obtained an appraisal a few months later when I refinanced out of my construction loan for $500,000/unit because there was no local inventory and the appraiser had to rely on other neighborhoods. It happens all of the time and for this reason don't rely too heavily on the appraised value. 

2. If your agreement of sale was drafted well you shouldn't need "a good reason" to terminate the sales agreement. 

New construction SF homes as rental assets can be a good investment but focus on homes that meet specific demand in the rental market. By way of example, I am seeing more and more people who might fit the financial profile of a home owner renting for longer due to delayed life events such as marriage or having children, or due to the financial burden of student loan debt but don't view themselves as renters and as a result prefer to be in a home as opposed to an apartment.  Similarly, I am seeing a lot of empty nesters/down sizers opting to rent as opposed to buying a downsize home but the transition from a home to an apartment is difficult and a new home is more marketable to this particular tenant as well. These are just a few examples.

With any new construction single home purchase, it's important to vet the builder as builder warranties are generally only reliable if the builder will stand behind it.  Also, keep in mind most builders who are offering rate buy downs are merely grossing up the sale price of their homes in order to offer the reduced interest rate. Most home buyers are wearing blinders and are more focused on their monthly payment as opposed to the value they are getting and as a result many of the larger builders have experienced record profits over the past two years by relying on rate buy downs to differentiate themselves from the market. 

A syndication that's suggesting or even worse is  promising an 18% annualized return for a 2- year investment period will be reliant on a realization event or will over raise equity and use the over raised equity as distributions. You have to ask yourself how likely the business plan is to yield the realization event in a 2- year timeframe. If the distribution will merely be return of other LP's capital, that's a red flag. It's also important to vet the sponsor. What is their track record? Are they personally invested? Are they responsible for the debt? Is there a silent Co-GP the syndicator is reliant on for the debt signatures or the GP equity? These are all questions you should be asking any sponsor of a syndication.

There's no set term limit for a construction loan. The terms will be dependent on the financed opportunity but generally a loan for a one off single-family build will be 12-15 months.  Some are solely construction loans but there are also construction to permanent financing products available. You can generally obtain better permanent financing terms from non construction loan lenders but this should be balanced against how long you intend to hold the property. The transactional costs of originating a new loan (existing loan payoff, appraisal, title, new loan origination etc.) may cost more than the improved permanent financing terms if the hold period is relatively short.

You can't compare profitability of developing land vs. renovating and re-selling a single home or quite frankly any other asset/investment strategy. Any strategy can be successful as long as the opportunity is acquired correctly and executed upon properly. Ultimately, the acquisition and the human capital involved is what will make or break any real estate investment. 

A real estate investor’s strategy should be dependent on the individuals financial means, available time to commit & and objectives. Nobody should pursue a particular strategy based on what others are doing or suggest unless the person offering advice is familiar with your personal finances and objectives. I would also urge you not to pay for any mentorship or courses that would teach any beginner or entry level real estate strategies. Most of these “gurus”  and educators will teach you how to purchase and renovate single family home or small multi-family property in a zero barrier of entry neighborhood that will only sell to another investor and the equity that might be shown on paper will never materialize to an actual gain. This is what they teach because it is easy to show quick & measurable results to justify the fees they charge. Basically these gurus and educators teach the person who doesn’t know how to cook how to boil water.

I am not suggesting you can’t or shouldn’t purchase properties in low barrier of entry markets. It can be a good stepping stone to help build a foundation for many investors who are just getting started. However, the information these gurus or courses teach and what’s necessary to begin investing is easily accessible on internet and you can surround yourself with a support system by networking with real estate professionals in your community. I am also not suggesting there isn’t a time or place for courses or paid mentorship, just not at the stage most seek such services.

If you are looking for a multi-family property that has sufficient cash flow to be a viable house hack option, attend local real estate networking events and build relationships with the brokerage community that represents the properties that fit your acquisition criteria. Also, resist the temptation to pay for any paid mentorship or courses. Anyone who charges a fee outside of normal real estate transactional expenses would be taking advantage of you.