All Forum Posts by: Tim Hendricks

@Mike Gel It's the priority / order of who gets paid in the event of a default & foreclosure sale. The 1st lienholder will recover all of their money first. If there is any left after that, the 2nd lienholder is then in line, and so on.

Most mortgage companies want to be in 1st position, and therefore have the greatest chance in recovering their money in the event of a default. Typically loans in a 2nd position would have a higher interest rate, to compensate for the extra risk by being in 2nd position.

I don't know of any lender that would take a 3rd lien position @Larry Garber. If there's sufficient equity, why not take a larger HELOC in 2nd position and use the proceeds to retire the existing 2nd lien?

@Paras Newbe SA will have better cash flow, but at the expense of appreciation potential. The majority of the investable housing stock will be older, so you'll need to prepare yourself for greater repair & maintenance expenses.

You can get positive cash flow in the Austin metro. A typical recent deal I helped a client with was a $200K 1500sqft home in Kyle. Rented it at $1500/mo. His PITI, at 20% down, was ~$1250/mo. That $250 leaves a decent sized, but not huge, buffer for management, vacancy, leasing and repairs. Within that $1250, there's another ~$250 that is principal paydown, so there's really a $500/mo buffer ($250 cash flow + $250 principal) between your costs and income.

Accepting the potential of a small negative cash flow is a personal decision, and I'm sure you will find fervent believers in each camp here. My personal take:

1) I have a strong personal income stream that can take the occasional need to subsidize my investments

2) My goal is to focus on getting a large cash flow stream for when I want to stop or slow down working. $100-$200/mo is irrelevant to my lifestyle now (I'm very fortunate to be able to say this, and realize for many others that may not be the case). As such, I usually purchase properties with 15-20y mortgages vs. a traditional 30. That used to save you 50-65bps on your rate (not so much any more), so it was a net positive for my profit but definitely impacted cash flow. But having a paid off, income producing, & appreciation asset is my end goal.

3) The diversification that I mentioned in an earlier post. As your mix of properties grows, each one will be able to provide a buffer against each other. And if you stagger lease timing as well as property age/location, there's a low likelihood you will ever have an issue that will require you to open your personal pocketbook. When I had to drop $4K on a new HVAC system when we only had 2 rental properties, I had to dig deep to fund it. Now, with 20+, I can absorb a $4k expense each month with free cash flow. If you target 5 home purchases, and each one generates $250/mo in post PITI cash flow, you will have $1250/mo to absorb all of the below the line expenses - management, leasing, vacancy, repairs - and if managed correctly, you can *usually* internally fund all of those expenses, if not on a monthly basis, at least when viewed annually.

@Trisha Reaney Are there things that you have that you can "barter" for that education? Outside of studying BP and reading various books, you probably want to get some real world experience.

A person can bring value to an REI operation by bringing time, money, expertise or a network. Could you fund someone else's flip at a below market rate in exchange for being side by side with the investor? Do you have time to drive for dollars to knock on doors and drop off postcards in a target/farm area for an experienced investor? Or perhaps you have a great rolodex of either high net worth individuals that want to invest or high quality contractors that work for fair prices?

You know what you want - think about what value you can deliver in exchange.

@Tim McBride Welcome & congrats! Just remember now that you are in Austin, it's time to retire the Bears gear and get your Horns Up!

I know some local bankers, even one that went to Baylor, and would be happy to make an intro. DM me.

@Ken Morton I would use cash, HELOC or even a 0% intro offer credit card. As @Aaron K.stated, the fees will drive your effective interest rate way up on a such a small loan. If you have a good relationship with your local bank, they might also be able to do a personal / unsecured loan for that amount. It would be higher interest than a HELOC, but would allow you to carry the debt post-sale of your current home, if that was needed.

@Paras Newbe I may be biased somewhat, living and working here, but I think Austin is still a great place to invest. It's got a strong track record of employment and population growth, but is still less expensive than other major metros that have large & and growing knowledge economy. It being the state capital and home to a major university help, too.

1) as long as your investment horizon is medium to long term, yes, it is. If you are thinking short term (<3 years) you should really not be considering any rental property investment (transaction costs make entering and exiting properties in a quick manner prohibitive unless you are buying/flipping distressed assets). You should be able to generate positive cash flow, given the current low interest rates, after PITI. Once all non-recurring expenses are accounted for, you'll be closer to breakeven. But a decent size chunk of your monthly payment is principal reduction on your loan. That's a forced savings account, essentially, and impacts cash flow but not profit.

2) Read about various management companies here on BP, talk to your network, get some recos. Most Austin property managers are very used to dealing with out of state investors like your self - we get lots of clients from California & Washington.

3) For SF homes, you are probably best off looking in a 15-25 mi radius outside of the city core. Homes will be priced between $200-$250K, and should rent for $1500-$1800/mo. Buda/Kyle, Round Rock, Cedar Park and Leander are all good areas. If you are optimizing primarily for appreciation vs. cash flow, you can push a but closer in to the city center, but your price points will push to $300 and up, and the GRM/cap rate will suffer.

4) Other things to consider - are you only making 1 investment? That would dictate what kind of investment you should think about. If you are buying 3-4 homes, I would diversify the geos as well as the role in the portfolio - ie pick up a couple of higher cash on cash returns, and then 1-2 that are more appreciation-focused. Also, talk to a lender to get pre-approved. The market here is so hot that most homes will be listed Thur/Fri and under contract with multiple offers by Sunday night / Monday morning. You need to be ready to pull the trigger quickly when the right deal crosses your desk.

Best of luck!

Tim

@Raj Janakarajan as others have said, a 5th unit will likely be detrimental to your long-term value. You cannot get a traditional conforming Fannie/Freddie loan for a 5+ unit complex - you have to go commercial paper. That's typically more expensive and less favorable borrower terms, so it turns off a lot of buyers.

Depending on the part of town that it's in, a good exit strategy could be to do a condo conversion and sell of each unit individually. In that scenario, it would not matter if you had 4 or 5 units. But most of the Austin area 4plexes are in areas where there would not be demand for the condo. They were usually built in dense clusters and have not been well maintained, so you end up with a street full of run down properties.

@Chris Wolfe DM'd you two good options. Have you thought about handling it yourself? TX evictions for non-payment of rent are very straightforward, and most of the courts in the Austin metro accept e-filing. Real estate brokers can represent you in court for a non-payment eviction in addition to an attorney. The filing fee will be <$200 but a typical attorney fee will run you another $400-$600.

Making money off renting a DT condo, especially with any debt, is a tough proposition. Those buildings tend to be very trendy, too - the new / hot buildings from 10 years ago are now dated and not getting top of the market rents or sale prices. If it's a $15K annual drag, I would unload it now.

Mena,

Congrats! Austin has been a great market. And the 1% rule is pretty much dead here, unless you find a very distressed property as @Jeremy VanDelinder mentioned. 0.6-0.8% is a better range to use.

Leander is a great submarket. Schools are good, and it's (relatively) close to the NW Austin tech employment hubs. The biggest watch out is property taxes - that part of town, esp newer developments, tend to have higher tax rates due to MUDs/PIDs/WCIDs. Tax rates vary across the Austin MSA from 1.8% to 3.2% of market value. 

Leander, while a great part of town, tends to appeal more to families than what your typical duplex renter/resident would be. If you want to be in that market, I would look more at SF. If you want to be in a duplex, consider Round Rock, closer in NW Austin, or S/SE Austin. 

You should be able to get a 4-5 cap duplex (a true cap rate, after accounting for vacancy, leasing, management, R&M, etc) with decent appreciation potential.

Good luck and welcome to BP!