All Forum Posts by: Stuart Udis

I believe improving the value of property, whether it be land or renovating existing building improvements should always be primary. If you allow re-assessments to dictate your real estate business you are going to leave money on the table. You also may find the entitlement process could open the door to developing the land as opposed to selling if you are concerned the cash requirements are too high. There are banks who will treat the imputed equity the same as a cash contribution. It can be quite impactful if significant value is created through the entitlement process. By way of example, we are involved in a project where a use variance increased the density from 5 single family homes to a PUD consisting of a mixture of 30 townhomes and condos. This led to a favorable appraisal and financing at 88% LTC all thanks to $1.1M of imputed equity created through zoning change. This is the power of the entitlement process if done successfully. This is only one example, but the owner of land with favorable entitlements possesses a lot of flexibility including but not limited to contributing land as part of a JV or selling the land at a premium.

Are you purchasing a single-family or mix-use/multi-family building? If it's a single-family house and properly zoned as such, this is not an issue. You will be required to obtain your rental license  after you take title. If you are acquiring a building with multiple residential units, it's important to first verify the use permit if still on record and more importantly the last active rental license matches the number of residential units.  Frequently the underlying zoning district differs from the historic use and it's not uncommon for the original use permit records to be lost (even by L&I). This is when the rental license is most important. The license can lapse for up to three years but after 3 years, L&I may not honor the historic use. Since this is discretionary its best not to leave this to chance. I have seen instances where an invoice has been issued for the retroactive licensing fees and in other instances less cooperation and the need to apply for a new use permit or even worse a variance if the use is not permitted by the base zoning.  Along with maintaining certain rights not available to landlords without a rental license in Philadelphia, the license should be viewed as an insurance policy protecting the use in instances where the base zoning differs from historic use.   In this case the rental license was active as recently as 2022 which is helpful, but it's also good practice to have the License and Inspections Affidavit of Continuous use completed by the prior owner as an extra precaution.

Are you interested in the tax or foreclosure sales? I would advise against the tax sales. It is difficult to obtain title insurance within the first 12 months of the deed recording and the notice obligations are frequently called into question resulting in succesfull appeals by prior owners. 

Land in more marketable locations will generally hold value better regardless of where in the cycle we are. Is there an opportunity to seek entitlements that could improve the use and increase value of the land you target? By way of example could there be an opportunity to seek approvals to build denser housing than the base zoning allows? This time is well served to obtain any necessary approvals so the land is shovel ready when the market conditions improve. The entitlement process can be lengthy depending on the municipality and local requirements and in many instances if variances are required or sought, the timeline can be stretched even longer. Now is an opportune time to undertake land acquisitions where value can be generated through the land entitlement process.

100% financing should not be viewed as a likely scenario. If the project happens to benefit from significant entitlement, lenders may treat the increased value (the imputed equity) as your cash consideration and therefore offer 100% or close to 100% financing, but you would have to create significant value for this to be considered. Unfortunately there are many "real estate gurus" out there selling courses and mentorship that misleads many into believing real estate investing can be accomplished with little or no money. Real estate investing is a capital intensive business and those who are most successful generally have liquidity or access to LP investors who can satisfy the equity portion of the capital stack. If the equity is an obstacle, I would suggest focusing your time and energy on building relationships with LP investors rather than seeking out 100% lending relationships. It is a more sustainable business model.

I would strongly advise against undertaking capital improvements with only a lease interest. You are better served transferring title and using seller financing if obtaining traditional lender financing is not plausible. However, doing some quick math, if the agreement of sale price is $250,000 and you intend on spending $100,000 on improvements, the total transaction costs including settlement and financing costs should not exceed $400,000.00. With the $100,00 you intend on using for the renovation, you shouldn't have any issues treating this as the equity portion of the capital stack and securing a bank loan for the remaining $300,000 with some added contingent funds available.  You should also speak with your accountant as there are likely long term capital gain benefits that may apply depending on the hold period you will miss out on using your approach.

There are plenty of lenders who will amortize the loan over 25 years, this will certainly help. However, in this high interest rate environment, cash flow should not be your sole focus when analyzing your return. By focusing on deals through this narrow lens you may overlook properties that have characteristics that will perform better over time through capital improvements, improved management etc. Focus on the quality of the underlying real estate and financing terms that offer the greatest flexibility rather than best rate and thus best cash flow today. Keep in mind you will likely want to refinance in the next 24 months as most expect rates to calm. Depending on your loan, there may be high transactional costs associated with exiting your current loan earlier and if that is the case you may come out ahead paying a higher interest rate with lower or no pre-payment penalties even if the cash flow may suffer for the next 1 to 2 years.

If your decision making solely relates to cash flow in this high interest rate environment let alone any stage in a real estate cycle, you are too narrowly focused on one element of the deal. Sure, cash flow suffers and its more difficult to secure financing in the present environment, but there are plenty of economic benefits to be gained from a well-executed business plan coupled with the right acquisition in any market. Cash flow will come when rates calm but don't allow cash flow to be the sole factor in your analysis.

I agree with Chris. It's very difficult to align interests when your JV partner is the contractor with limited exceptions. I am surprised a contractor with 3 complete projects worth of experience is a requirement for you to obtain funding. Typically lenders want to vet the contractor but haven't come across a partnership requirement. I would recommend searching for other lenders who offer a construction loan product. If a lender finds you to be a satisfactory guarantor, there is a sound thesis behind the project and you retain a vetted GC, you shouldn't have trouble funding a project but you have to be able to satisfy these three requirements.

LLC's certainly offer personal protection if used correctly but there's no need to form an LLC until an acquisition has been identified. At the same time, don't operate like you are invincible because the deedholder is an LLC. 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. Performing these steps consistently and you will avoid far more liability than merely owning real estate through an LLC.