All Forum Posts by: Zach Westerfield

@Haley Thornton start with areas you know. If you know areas very well, you can find properties that other out of town investors miss. It is also a key to owning long term rentals to choose good areas

@Alejandro Saenz First off, there is a tradeoff in BRRR and BRRR calculators to consider. They higher the ARV, the higher the potential loan amount at Refi. At some point, the Refi loan my kill the cash flow. Dont let this kill your interest in the deal, you can take a lower loan amount to make the property cash flow, and tap the equity in other ways. Or you could sell the property as a flip.

What you are touching on is the key issue for almost all real estate investors - finding good deals. Keep in mind, many books were written and many "experts" were made after 2009 - in a market where deals fell out of the sky. That market doesnt exist anymore, but you can find deals. However, the competition is stronger than in the last decade by far. If its an easy deal to find, someone else has already found it. In fact, if you find a deal, go ahead and ask why someone else hasnt bought it. I have found deals in this market, and several of them on the MLS. However, they were major rehab projects which I wasnt afraid to tackle.

Once your research and learning gives you the basics, focus on a niche that set you apart. for me its old houses, and houses in really bad shape. The other option is start your own direct marketing, but this is competitive as well, and involves learning a whole new business. The secret on real estate is out, and nearly every market is saturated with buyers. The good thing is, unlike the stock market real estate is local, and there is no national exchange. Look for properties in less crowded areas. I have been finding properties in small towns where i grew up, where i intimately know the area. 

Finally, remember a deal doesnt have to be a perfect BRRR to be a good BRRR. The goal is to limit you capital investment, to maximize your return on capital. That doesnt mean eliminate your investment. In the standard way of buying rental properties, you have to put 25% cash down. So any deal you do that allows you to put less than 25% is better than the norm. If you leave $10,000 in a deal that cash flows $150 per month, thats still an 18% cash on cash return. Try getting that in the stock market.

Are there points for the hard money loan? What hold period are you estimating? given its a major rehab ill will assume 6 months. Also, I assumed 2 points for hard money. With these assumptions I'm showing just under $6,000 in holding costs (included utilities, taxes, insurance, interest). That puts me around $87K with closing costs. If you factor in closing costs for the refi (i used 4%) total capital requred comes out just below $92K, so your numbers seem pretty good. 

if you can refi out 75% of 120K, looks like a great deal!

and i meant "act" not "and"

@Ryan A Rodriguez-Wiggins The rules you are referring to are bank rules, not necessary the law. The risk is when you sign up for a mortgage, you sign a contract. Breaching that contract could be considered mortgage fraud, which is breaking the law. Im not an attorney, but I do believe breaking the law includes and "and" and "intent". 

In reality, its up to the banks to enforce the contract, if they want to. the majority of Fannie Mae backed loans get sold a few months after closing, so the banker you are dealing with isnt even the one holding the loan. Most times they get sold to large national banks, who have better things to do than audit one little loan. So, if you bought a property and intended to stay there 12 months, but something else came up after the fact, you technically did not intend to violate the mortgage when you signed it. As long as you make your payments, banks almost never look into these. 

to answer your question, with most banks if you refi into a owner occupant loan, yes the 12 months starts over. Also, by the book most banks have criteria outlining how many nights you have to be there to qualify as "occupant". I dont remember exactly but its something like you have to be there 20 or 25 nights a month. (Ive had jobs where i traveled 300 days in a year so technically broke this lol). 

In general, banks write very detailed and overarching loan agreements to cover their own A**. Much like a lease agreement with a tenant, this gives them the legal right to enforce it if they want to. However, whether they do, or whether it even makes good business sense to start a legal battle with a paying customer (it doesnt) is up to them. 

@Daniel Hemmings do you have a hard money lender lined up? I wouldn’t count on tenants to cover those payments. Instead, I would factor in the cost of the hard money and add that to the amount borrowed up front.

4300 a month for mortgage and expenses seems high, if you want to break that down i can dig into it further. Are you trying to BRRR this deal, if so what is the most amount of money you want to leave in the deal?

Generally, your projections are based on numbers after repositioning (refi). A general rule is to not factor in rental income during the rehab period. At least one of the units will need to be vacant to renovate, and the combo of new ownership, ongoing renovations and raising rents can usually drive the other tenant away. Its best to budget 0% occupancy in your holding costs until reposition. 

If you are counting on rental income to cover expenses during the renovation, you are asking for a bad situation. I dont know all your details, but 170K is a major renovation, newby or not. If you are going to tackle that, make sure you have plenty of cushion in case something goes wrong. If you go over budget or over schedule, you better either have reserves set aside or a plan to cover the negative cash flow. Think worst case scenario - Both tenants move out after closing, so no income coming in. Renovations goes 30K over budget and takes 8 months. if you can hold on during this, it could well be worth it. but you dont want to lose the property if you cant hold. 

Dont mean to scare you aware, could be a good deal. By the way, I had a very similar situation (went over budget and over time), but was able to push through and it all worked out in the end, and turned into a great property. 

I would have him complete the screening process, then add him onto the existing lease as an addendum that all parties sign (including tenant). Make the tenant aware that he can stay, but she is still responsible for the lease and payments. In a way, you are allowing her to sublease. My leases prohibit subleasing, unless the landlord consents. What happens between him and her is irrelevant, as long as she holds true to her end of the lease. I recently did this with a good tenant who found a roommate and wanted to add them halfway through the lease. She has excellent credit and has been great, but the new tenant has terrible credit. However, I let the tenant know this is not a divided lease, or rent by room. ALL parties are responsible for rent, and I only bill through her. 

If you take this route and the lease ends in 3 months, his lease is up as well. If he wants to stay, he will have to apply and sign for a new lease. 

@Cole Shope First i am not an accountant, but there are big tax benefits to BRRR.

First, you avoid or defer capital gains tax - BRRR involves improving a property to increase the equity. This equity becomes a capital gain, and when you realize that capital gain (ie sell) you owe taxes on it. In the case of a fix and flip that occurs in less than a 12 month timeframe, this is considered short term capital gains. With BRRR, you are holding the property, and once you hold it more than 12 months, you now swap to the long term capital gains bracket, which is typically a lower tax burden.

Second, you dont pay taxes until you sell, and after you hold for 12 months you are eligible for a 1031 exchange. I wont go into those details here, but with the 1031 you have the potential to defer taxes indefinitely. 

Third, as you asked, yes the renovation you complete can mostly be depreciated as well. Talk to your CPA on this, but you can also cost segregate the renovations and accelerate depreciation up front. This is not possible with flips. Capital improvements such as roofs, kitchens, etc can be depreciated on different schedules. 

There is another tax advantage of BRRR which I have not seen mentioned before - Property Taxes. This would definitely vary state by state, but I have done BRRR's in Florida which by law can only increase property taxes a maximum of 10% per year. When you buy a run down property, many times what you pay for that property is less than the taxable value determined by the local tax assessor. If this is the case, you can contact the tax assessor and show them you closing documents, and they may lower the assessed value which in turn lowers your property taxes. After renovation, your value goes up but many times the assessors don't bother re-evaluating. In the Florida case, this becomes the new baseline and taxes can only increase 10% per year. I have properties that have appreciated 100% over what i paid for them, but my taxable value is still slowly increasing from the purchase price. I pay a lower property tax rate compared to other properties in the same area.

@Mitch Polatin it depends on what you plan on doing with the money. There are pros and cons either way. Both usually require 75% equity or better in the property. 

With a line of credit

1. you are more flexible, and dont pay interest if you arent using the money

2. usually pay less fees up front

3. usually get processed faster

4. can usually get interest only payments

Cons  

1. they usually have floating interest rates

2. technically the bank can take the money back if something happens and the money is in your account, such as a market collapse

3. they usually are on 3-5 year terms, so you need a plan to pay them back by then 

For a Refi

1. we have record low interest rates right now, you can borrow money and lock that in for the next 15-30 years. 

2. repayment terms are spread over 15-30 years

3. fixed interest rates

cons

1. higher closing costs up front

2. you are always paying interest on the money

a lot depends on outside factors. I had trouble finding banks that would give me a line of credit on my investment properties, since they were not in first position and I live in another state. However, when interest rates sank, I did a cash out refi. Since my rate lowered 150 basis points or more, i was able to take cash out and my monthly payments barely changed (went up $90/mo between 2 properties)