All Forum Posts by: Vee K.

@Giovanni Isaksen : Thanks for the encouragement. I really appreciate it!

@Steve L. : We are talking about a property under $900K. When I originally structured the deal, with a low interest rate on the 2nd, my SDCR would be over 1.5. However, with the seller's rate, it dropped down to 1.05.

@Mike B.  : The 1st lender didn't indicate about withholding replacement reserves. But for my calculation, I did that anyway. That's part of the reason why I offered a cash price of 25% lower than asking price. 

The only upside is the long term billboard lease. It has 6 or 7 years left and a 3% increase every year. Our plan was to take over and place better tenants in place. Right now they have a registered sex offender living in one of the units. 

I don't think the seller or the agent will deal with me. I mainly wanted to know if I were overly conservative with my numbers. And how could I do a better job in the future so that seller's agents don't think I'm wasting their time.

Of course you do all the research before you head out. A few years ago, I flew to Cleveland for 2 weeks. I didn't buy anything then, but learned a lot. What I should have done was to do all my research back home then flew out. But instead I just flew out with a list of properties to see and all the realtors.

What I am going to do now is send out LOIs until I get an offer accepted. Then at that point I will fly out there.

This is a good topic and each of us have a different way of doing this. I'm doing the same process now and would like to get comments and feedback from the BP community as well.

• Pick a market
• Research REI clubs in the area and go to the meetings if possible
• Search for properties for sales in the area to find of sub-markets
• Determine the crime rates, economic data, population of town, median income, etc.
• Find out if these areas have any revitalization plan in place.
• Talk to local bankers, mortgage brokers, management companies and realtors. 
• Find a good management company

I'm sure I don't have everything. Please add to the list as you see fit.

@Joel Owens : I explained to the realtor that with the interest rate that the seller wanted, my DSCR would be at around 1.05 or so. My lender wanted to see at least 1.35 and up.

When it comes to out of state rental, you don't want to manage it yourself unless you are willing to travel there all the time. 

When my partner interview management company, he always asked them how they screen their tenants and what are the criteria they need to see when they place a tenant in our properties. Then you want to see the fee schedule and their reporting tools. We had a manager stole money from us because he would never report back to us how much money we had. 

You borrow $100,000 for 0% payment of $1000/month with a 5 year balloon. At the end of the term, you will have to pay the balance in full.

I recently sent in an LOI for a 12 unit apartment. The property is located in a C- neighborhood with a moderately high crime rate. The current management company allowed a sex offender to live in one of the units. The property has a long term lease for a billboard which make up about 13% of the monthly income without any maintenance.

At listing agent offered this property at a cap rate that is about 3 points higher than the market. He listed the property at 5% vacancy even though it's fully occupied right now. 

For my calculation, I used very conservative numbers. 

• Instead of using 5% vacancy, I used 10% because I expect a high economic vacancy for the type of tenant that was put in place. 
• According to the broker, operating expense ratio right now is at about 20%. The average ratio here is around 35-40% and more for all bills paid. I looked at the P&L to find out what was the highest cost for each item on the P&L for OE and add them all together. It was closer to 30%, so I used that.

I offered a 95% financed option (65% comes from a bank, and 30% seller carry back) at full asking price and the seller liked it. However, the seller wanted a high interest rate for the seller carry back loan which would drop the DSCR below what my lender allow. Seller 's agent at that point basically told me to not waste their time if the term doesn't work out. I offer a cash price of 25% below asking price and they didn't even look at it.

I'm sorry for the long post. Can anyone give me your feedback?

@Bob Bowling: I understand your concern for OP. But OP asked how to structure a deal like that, not to drive away from a deal like that. I'm a strong believer in providing solutions not problems. The OP asked how to structure a deal, I offered my opinion.

Who is going to maintain the property? Do you make your tenant maintain the property? If you did, then the same would apply. 

Pot smoking grandson move in with pregnant girlfriend? Does the lease specify who could live there? If landlord decided to allow that, then it's not our business.

Before you do any deal, you should always find ways to protect yourself. You should do your own due diligence. So I expect the OP to follow your instructions to find out potential problems in doing the deal. And yes, OP should get help from legal counsel to discuss the legal language.

Here is a thought, use these numbers as examples as I don't know your market. 

Offer to buy the property with owner finance with some money down.

For example, let just work with these assumptions and you can adjust accordingly.

ARV: $100,000

And say she wanted $20,000 to do whatever she wants. So either you have this or borrow hard money at 12% (Payment of $200/month interest only). Ask her to carry the $80,000 for you in whatever terms you two can agree on.

Let's say rent in the area is about $1000/month. You can rent the property to her at market rent of $1000/ mo and consider leasing it to her month to month.

Payments:

You charge her $1000 for rent.

You have to pay her a mortgage for her seller carry loan (let say the payment is $800).

You have to pay $200 for the hard money loan.

When all the math adds up, she will either pay you $200 every month to live there, or give you $200 credit toward the principle. Then you use that money to pay the hard money loan. 

When you do your real calculations you will have to also consider taxes and insurance, closing costs and points. 

Hope this help.