All Forum Posts by: Troy Hebert

Luka - if you’d like, PM me and we can have a more focused conversation on healthcare facilities. I’m a private equity professional and have invested in businesses in that space, but I think it’s off topic for this thread. 

Hi everyone,

I have been exploring some options buying properties (as previously posted) but have not found an attractive deal yet. A family member of mine owns ~8 rental properties, mix of annual lease and AirBnB vacation rentals.

He has been pushing me towards a couple areas on the coast in Florida such as Naples and Cape Coral. There are pockets of areas that have not returned to pre-recession levels but activity has been on the rise and he has been able to upcharge for vacation rentals in the area.

My issue is that when I look, there appears to be a large supply on the market. When I asked a broker about it, he mentioned these areas are predominantly retirees etc. who have passed away and the family is selling the home, or downsizing due to move into assisted living facilities.

I'm wondering if you agree or disagree with me here. I read about the aging population etc. and how it should be a tailwind for this type of market, but I think it's possible that as more and more of the baby boomer pass away, run through retirement funds (something like 60+% of retirees have less than $100k), unfunded pensions that never come to fruition, move into nursing homes, etc. that the price appreciation in the area is muted as there will be more and more supply in the market despite more and more investment money sloshing around. Surprisingly enough, I think the Millennial population is growing faster than the baby boomers, and thus one would actually look into areas where millennials are getting new jobs (Nashville, Austin, SoCal, etc.) 

Just a thought, maybe I'm wrong and more and more demand will be prevalent as more people retire, but when I look at the macro trends I get more concerned about projects luxury good sales (such as nice rentals on the water in Cape Coral) and more and more bullish on cost-efficient healthcare services (think adult day care centers that provide basic care but lower the cost on the healthcare system by keeping people out of expensive nursing facilities and into cheaper care).

Let's assume the FHA primary residence is not an issue. I believe you only need to live there for one year and I could consider that a separate expense. Without getting into too much detail in my current lease situation, I am already paying a high amount per month to live in a nice place in the same city, and am in need to upgrade in space so I could make it work.

Separately, I could have the $100k fund my down payment on a traditional loan. But then I will be paying the $3-3.5k per month out of pocket, which I initially modeled in and the deal still works pretty well (as my mortgage amount is much lower and that is reflective in my exit proceeds and not the Sellers as they are tied to the exit sale price), assuming there are no liquidity issues (I have a large enough W2 to cover this pretty easily). 

Hi everyone,

I am new to investing in real estate but somewhat educated with a deep finance background. I have stumbled across a property and structured a deal that could make a lot of sense, but there are some glaring deal killers if you took it for a rule of thumb approach. I get the sense I'm doing a stupid deal here, and will look back and wish I asked for advice, so hoping someone could shed some light.

Property is in the nicest luxury highrise building in a tier 2 city outside of a major city. Constructed 5 years ago and structured as a condo with HOA/common fees of $1,500/mo (yes that's right). Property taxes are another $1,600/mo. Very comparable 3 bedroom units in the building sold for $950k-$1.1mm a few years back. This particular unit has been on market for $1.2mm, $1.1mm, $1mm, and most recently $925k. Last sold unit was in the $800's. There have been some expensive add's like high quality paint, high end appliances, and really nice carrera marble since the purchase.

Seller owns it outright and is bleeding $3.2k/mo. (per HOA and taxes) and does not live there. It has been vacant for about a year and he doesn't want to deal with managing a rental, just wants it sold.

My question is would you completely stay away, at any price, given the large cash drag? My sense is that these condos are going to continue to trend down in price until they bottom out somewhere way lower than the asking price. Supply in the area has increased a bit and I think it's being reflected in prices. I am not an expert here though, and given how nice these are I can't imagine them selling in the $600's for 3Br.

Per MLS I can rent the unit out for $5.0-$5.3k/month and get someone in there pretty quick at that price. This is NOI positive, but my P&I will be $3k/mo. making it a clear negative cash flow rental at ($2k)/month.

Deal Structure:

I have negotiated a $700k purchase price, which I believe is significantly below market value. I will be using an FHA loan, and the seller will be rolling $100k of proceeds ($600k cash at close and $100k cashto sit in the LLC) for the pro rata % ownership of the property ($100k/$700k). I will use the $100k proceeds for the down payment ($25k), and $75k to fund operating losses at the rental for the next 4-5 years. So basically I am putting no cash down, and buying the property below market value, and have 4 years of cash to fund losses.

If the property sells for $750k or more, I'll make money. I will lose money below that because in order for him to roll the cash and fund the losses he will be entitled to 15% of the total exit sale price, not just the equity (so if we sold for $750k he would get $113k, with $637k remaining which will be roughly my mortgage balance + commissions). If it sells in the $850k plus I will make great returns (call it $80k on no cash investment). $1mm plus we are talking about $150k. I have no idea what would push prices higher to $1mm though, besides the fact that they traded there a couple years after the financial crisis.

Thanks guys

We don't make any money on a break even closing, right? Would just let the bank foreclose.

David,

I have many people looking to invest with me. I can get the capital no problem if the deal is suitable.

I'm not sure why that's an issue here though, I'm not tapped out on the renovation costs.

It's definitely easier for the bank to take it, but we are trying to do what's harder and make some $ as opposed to what's easiest (if there's a feasible opportunity).

Also, I confirmed, there was an as-is offer at $460k last year. Thats just enough to pay off the mortgage but not enough to cover broker and other selling costs, so he didn't pull the trigger.

David,

This is what the original plan was. Rehab it and sell it for FMV. But he doesn't have the funds for the rehab, so it was really a lost opportunity. I was coming in to enable the rehab and participate in some of the upside (think of me more as a mezzanine debt lender with an equity warrant).

Martha - on doing it myself, I am not local, so he would have to help coordinate contractors, let them inside, monitor it, etc. Also, I do not have enough funds for the down payment (which I assume is 20% so call it $90k?)

I really don't believe the house is worth $600k as is. More like $500k. There was an aggressive sales effort that did not come to fruition. I believe it is because a lot of the appliances, countertops, etc. are outdated.

Great answers guys! 

Greg - My "renovations" were really going to be similar to what you were describing. I have no estimate, so I was being extremely conservative (and adding some additions to the kitchen that could make sense). But maybe this is best.

On keeping it in the estate, he would not do that because any profits generated from the sale of the home would go to the estate. There are other liabilities in the estate that are not really his, and so he would never see the profits generated.

Greg - he was prepared to walk away from the mortgage held in the estate, given he has no additional capital to pay the mortgage plus the renovations to make a meaningful profit. There is no other beneficiary and he has no liability for the bank to foreclose. Once we decide to do this, he will then assume the mortgage and thus the liability, so he can't really walk away without having the bank come after him for the $450k. To your point about the bank not foreclosing if the payments are made, no payments are currently being made so we were hoping the bank would accept forbearance and renegotiation of the mortgage.

Is your fear that things could get difficult and he would just sell the house for the mortgage amount to cover it? If that were to occur, he would have to sell the house under construction/renovation as that would be the point for which he would walk. The operating agreement of the LLC will require unanimous decision to sell the home. The downside case is that he stops working on the project while under renovation, decides not to sell, and allows the bank to foreclose on his mortgage, now under his name. I suppose I would then have to step in and finish managing the contractors myself (not really any additional capital as I am funding the renovations) and sell the house, thus covering his mortgage and my renovation expenses.

The way I see it I am taking more capital risk here, with him taking the liability risk and his time. Maybe it is not the best deal.