All Forum Posts by: Stuart Udis

It's common to see pre-payment penalties in this loan product and now lenders are less inclined to negotiate these pre-payment penalties down knowing rates are expected to continue to decrease which incentivizes the borrower to refinance. At this time, you might come out ahead using a hard money lender who does not charge a pre-payment penalty. When looking at the whole picture, you may pay higher finance charges for the next year or two but could theoretically still come out ahead if there's no pre-payment penalty. Also, some lenders I work with do not charge the pre-payment penalty if you refinance with them, or it is reduced significantly. That is something to ask your lender.

The entire property insurance industry experienced re-pricing over the past few years. Construction costs are up significantly and as a result so are the replacement costs the underwriters rely upon in formulating your policy / premium. It can never hurt to seek additional insurance quotes. Some carriers tend to be more aggressive in certain markets. This is something your insurance broker should understand & be able to assist with.

Debt used to purchase real estate is a powerful tool. However, no differently than any other type of debt it must be used responsibly. There are a lot of investors who are bringing money to the table to refinance properties right now at rates that are 2 or 3 times the rates of the mortgages that are coming due. There are also plenty of investors who are getting crushed by pref equity which is effectively a form of debt given its senior position to the GP's equity that cannot be paid back due to the constrained financing market. It's important to point out the risks if not used responsibly.

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

4,000 SF Mix-Use building consisting of three apartment units and 1 commercial space. The building was acquired vacant and will receive updated and separately metered utilities, new kitchens, bathrooms and in-unit laundry. Other capital improvements include a roof deck, new windows, new roof and upgraded common areas. The ground level retail space will be marketed for rent.

Public records indicated the building was only 2,500 SF but contained two permitted additions that were never calculated into the public records square footage. Two of the vacant residential units were already laid out as 2 bedroom units but the 3rd is large enough to be converted into a nicely designed 2 bedroom unit as well.

Anyone who saw this building on the MLS likely dismissed the building right away based on the public record characteristics. The point I want to get across is real estate investing requires physical interaction with property. It cannot solely be done from behind a computer. This building once renovated will operate at a true 9% cap with a 35% expense ratio in an appreciating Class B location but was dismissed by many solely based on how the property was represented online. Get out and walk properties. There are opportunities right in front of you that you are missing out of on if you are behind a computer all day.

I am not familiar with the Baltimore market let alone what constitutes a "Class C" neighborhood in Baltimore but I would personally never buy in a lower tier neighborhood as a strict cash flow play. Eventually a capital improvement event or turnover costs will eat up all of your rent margins. It may not be in year 1 or year 2 but eventually when the cap ex event occurs, it will wipe out years of cash flow. If you are going to purchase in a class C neighborhood do so in neighborhoods that have characteristics that suggest the neighborhood will transition into at minimum a lower middle class neighborhood where home ownership becomes more prevalent. The cash flow will keep you afloat until this transition occurs and as soon as it does, sell and re-invest the equity generated through the appreciation elsewhere. That's how you make money investing in class c markets, not off of cash flow.

Banks will expect to see some skin in the game from their borrowers. Each bank's lending parameters will differ but expect 70-75% LTC/LTV in instances where you are merely purchasing the property without any improvement plans and in some instances up to 80% LTC/70%-75% LTV for construction loans. If its a property that you've owned for a period of time or you've created value through zoning changes, physical changes or new leases then banks will allow you to pull your equity but the seasoning period will vary depending on the bank. The leverage I shared is typical of banks, you can probably do better with hard money lenders. Just be mindful if you are originating a construction loan, a bank that lends up to 80% LTC often means 80% of acquisition price, soft costs, settlement costs and interest payments. This usually equates to less out of pocket cash than a hard money lender who advertises a higher LTC as most require the borrower to pay settlement costs and interest payments monthly instead of having those cost figures capitalized in the loan.

House flipping is attractive because the high velocity turnover of capital if done successfully but as Scott points out, purchasing the home correctly is the most important factor in a successful flip. The transaction costs of buying and selling a home (particularly the sell side) really eats into the margins. You may find buying what might appear to be a lesser cash on cash return rental asset that's held long enough to take advantage of more efficient long term capital gains tax treatment, while paired with the benefits of the depreciation might yield a better after tax return than flipping a home.

@Alecia Loveless while not the theme of this forum I believe your sister might be approaching her Texas SF portfolio incorrectly. What many SF portfolio investors fail to realize is the appreciation in changing markets is the capital event that makes owning SF homes a worthwhile investment, not necessarily the cash flow the homes might spit off each month. Most SF portfolio investors focus on cash flow and purchase in stagnant or low barrier of entry markets that see minimal growth. The most successful SF investors are those who identify markets that have growth potential and transition into owner occupied markets. Based on what you described it seems that transition has occurred. The time is now ripe for your sister to sell her homes to home owners who will be attracted by the better schools and infrastructure you pointed out in your post. Your sister will not only enjoy some great realization events, but will be able to take advantage of favorable tax benefits or even 1031 the gains into better cash flow opportunities. The fact pattern you provided is actually one of the best ways to scale your portfolio, but many spend all of their time focused on managing their SF portfolios and fail to take advantage of the opportunity to transition or scale into better performing assets once the appreciation event has occurred. 

Don't allow underwriting properties as a BRRRR be the lone criterion you rely upon. Focus on buying quality real estate. You can purchase a distressed SF home in many markets in the US, renovate the home, obtain an income approach appraisal and get your money back. In most cases, you will likely never see the equity convert to a realized gain and 2-3 years of cash flow will be eaten up by one major capital improvement event because the entry level SF homes struggle to absorb the cost of the repair. To put this another way, would you rather leave your $40,000 of capital in a property for 2 years and then walk away with a $50,000 realization event when you sell the home or in those 2 years complete 3 BRRRR transactions, become frustrated by the reality of owning the low income housing and then sell 3 homes after 5x as much work with no gain? I am not suggesting you can't acquire a BRRRR home (although it's more difficult right now with the higher interest rates), or you will necessarily fair better with the purchase that requires you to leave your $40,000 of capital in the property. I am merely using this as an illustration of how the BRRRR method might lead to owning more homes but not necessarily lead to better return on your money or time. Don't allow the recoup of your money to be the lone decision on whether the property is a good investment.

@Neal Patel you will need to attract both debt and equity.  The debt will be concerned with the real estate, operating experience and balance sheets of the guarantors.  Equity partners will take a deep dive into the real estate,  proposed structure and the sponsor. You and your partner as the sponsors should be able to articulate the value you bring to the deal. Merely locating a good deal is not in itself marketable today where there are plenty of opportunities.  The equity partners also want to understand where the GP's capital contribution is coming from and who is responsible for the debt? A larger deal as you propose will often have a silent or Co-GP whose balance sheet is relied upon. There is nothing wrong with this, but the LP's will want to understand who all of the players are. Lastly, you are likely going to be seeking some larger check writers. This is a more sophisticated form of capital, so its best to retain top tier legal and accounting advisors. This will be expected by the capital you are trying to attract.