All Forum Posts by: Ty McAllister

Hey, my wife & I are Dallas based, we currently own 5 rentals in Minneapolis but are looking to diversify with a rental in Fort Worth Area and looking for recommendations from any agents/investors on the area. Current thinking is student rentals close to TCU seem to have the most attractive cash flow but appreciate any feedback.

There are lots of different opinions about wrap mortgages.   Many real estate investors swear by them, other people say they should never be used.

The reality is that wraps are a little complicated if you have never done one and hold some small risk of a bank calling the note but CAN be a useful tool when used correctly with two (or three) willing parties

Regarding the terms of most residential mortgage terms, specifically the "due-on-sales clause", they generally say that the lender "has the right to call the note" but not the obligation.   Another way to say it is they CAN call the note but they don't have to...

We have done a lot of seller financing deals, a large number of which were wraps and we have never seen a bank call a performing note due.  We also work with many other investors who would say the same.   It is expensive for banks to foreclose and potentially have to sell the house - they would almost certainly lose money.   Banks like performing notes. So, as long as you keep paying the loan on time, you are fairly safe.   

Some precautions to consider:

- Make sure the person who is the borrower of the underlying bank mortgage fully understands the implications  of a wrap, as well as the buyer

- Consider a 5 or 10yr balloon note (vs. 30yr fixed) if you are worried that the seller may have 2nd thoughts down the road

- Buyers should need to bring a significant down payment to the deal so that they have skin in the game

- If your state allows a Deed of Trust for the wrap note, I suggest using that document (vs. a Mortgage) as it will put a lien on the house allow the Seller to pursue a non-judicial foreclosure if the buyer does not perform.

- The home insurance after the sale (the new owner is the "insured") should retain the name of the previous owner(payor of the bank note) on the insurance as "additional insured" so as to not set off any alarms with the bank.

- Use a 3rd party loan servicing company to collect all mortgage and escrow payments and make all appropriate payments to the bank lender as well as seller finance lender.   The bank lender will generally make the property tax and insurance payments directly.

I will say, there will likely be other, perhaps contrary, opinions on wraps on this forum.   Your risk tolerance plays a role in whether you get involved with wraps or not....

Good luck!

So as the title states,  what're some opinions when it comes to buying a starter home, below budget, VS buying 4 bedroom home that may stretch budget 40% of post tax income.

Reason being and things I see, buying a starter house..living in it for 5 years, only paying off interest, and then moving again.  So why not buy a primary that I know I can and will grow into with the serious girlfriend.  May stretch now, but with dual income it becomes extremely affordable.  No moving, relocating, and buying a house that don't need anything major for ~10 years is great vs coming in below budget and I have to do a roof year after next.

Be careful to monitor your effort/reward ratio.  Sure, you CAN earn more than 5%, but at what effort expense and risk?  I for one have no interest in  starting from scratch on the learning curve into a completely different sector like notes, but thats just me and I'm more at the sunset of my career cycle than the dawn.

I can tell you from experience that it doesn't get more passive than debt-free on the 19 I paid off. I would need at least 30 more tenants to equal the cashflow I now keep.  When I pay off the balance of my portfolio and primary in 9 years, cf will increase another 50% with no additional work.  

I'm still buying, but with cash.  Buying non-bankable houses or 'odd' commercial type assets with minimal competition.  Diversifying into business non-RE related as well to keep things interesting and give back.

The tax savings argument to keep the mortgages is bunk.  Send me $10k and I'll return $3500 to you any day of the week. And that's being generous on my part!