All Forum Posts by: Arthur C.

 Had to tag you here since I didn't tag you in my last reply. 

True, good point on your last paragraph! Every deal always involves risks no matter how big or small deals they are. However, you're correct that there are ways to minimize risks. The biggest thing we should primarily look at is the property foundation as well as the condition of all major appliances and the roof.

By the way, I know you are a strong advocate of BRRRR keeping all 'seed' money from cash out refi after completion of project rehab. I see it is pretty difficult to do it in the DC market because the market rent does not reach to the point where they would cover mortgage monthly payments in its entirety and all other expenses as reserves after the cash out refi at 70-80% LTV. I'd definitely imagine it definitely works in your state but not in DC. What suggestion do you have? The only place nearby from DC I could think that BRRRR model may work pretty well is in Baltimore, MD but I have not become comfortable doing any project there yet. There are certain areas in Baltimore that are in good areas but becomes bad area just one next block. I feel like I know DC market better than other areas, which is why I decided to stick with what I feel comfortable with so BRRRR model doesn't work well for me.

In addition, when I mentioned I could have so many options to do with my property, I recognized the fact I did not mention that I could also even convert the single family home into two condo units building, which you may notice in my profile that I've completed the ground bottom up construction of two condo units building next door of the property I sold. The properties in the area are very valuable because of their designated zoning (RF-1), which allows owners to convert to two units as a matter of right. There are a couple of 2-unit condo buildings nearby in the certain area that were sold for $625-650K for the bottom units and $695-$700K for the upper units. This is one of the other reasons why I bought the property. This is easily a jackpot to bring in more cash upon their sales for future deals if fully executed effectively.

Sorry for this sort of lengthy reply. ;)

Arthur

 Joe,

You've got a quite interesting perspective and I totally respect that.

Yes, I forgot to mention that both properties have same sqft of each floor on the main and the upper level. When adding a basement to the property I bought, it will have the same sqft in total as the one I already sold. 

Sounds like you are not a strong advocate of buying properties without ever taking a look at them inside and out? If so, are you suggesting that no one should ever buy properties on Auction.com? It is my understanding that they don't allow access prior and during the auction. This is where a lot of wealth potential can be made for investors. As you know, they can be risky but that's why they are usually bought at low price as a result because it comes with a lot of risks. That's how I viewed the property sort of the same way. I felt like I know the market well enough to recognize this deal as an opportunity. 

How do we build our wealth if we should only invest in deals without risks? I thought $485K was definitely a huge steal, especially in this certain area where it is highly desirable. 

Again, I totally respect your perspective and I am always learning everyday.

Thank you,

Arthur

Thanks for your bluntness, Joe. Not many people would put these words as you did so I truly appreciate it.

1) I figured I may not have been clear about ARV. I used to own a property literally right across the street as my primary residence for 7 years and sold it for $685K in 2018. The property I was talking about doing the project pretty much has the same features in terms of number of bedrooms and bathrooms. It is 3 bedrooms with 2.5 bathrooms. The only major and clear difference between these properties is the lack of basement as it seems like it is a crawl space rather than basement when looking from outside through the fence under the front porch indicating the door access is rather short in height.

2) If it requires more cash reserves, I'm actually okay with increasing the reserves. The cash on cash return will still be good if it were to increase another 300-500 more. Most importantly, I am high likely not going to bleed in red, which is the main goal in my real estate investing. 

3) You're correct. Before I bought the property, I knew this was going to be a huge risk but I always believe I have good instincts. The former owner is really a nice lady (she has been the only one living in the property) and has been heavily involved into leading and notifying us the neighbors re: our next community meeting about safety and many other various things. I just have my doubts there are any significant damages to the property caused by her and especially the major appliances because it was fully rehabbed back in 2012. I could be wrong but you would know the odds are rather smaller when you know it was rehabbed back in 2012 than if you never knew when the last time it was rehabbed. I  just hope that I am right. Again, I fully acknowledge this risk before the purchase. 

4) You're likely correct about this. This is duly noted and I may have to increase my estimate in rehab costs.

5) I've talked with several lenders and they confirmed they can do 80% LTV but it will be at a higher rate. At 75% LTV, the rate will be more favorable and something I'm actually open pursuing for.

6) If it does not appreciate much as I expect in the next decade, I'm fine with it. It is a long term investment and the demand is always strong in the area. In fact, DC market is always going to be pretty strong due to increasing # of government jobs and the new Amazon HQ2 is going bring in more people to DC. 

Frankly, I really have so many options to do with this property. Alternatively, I could move in the main unit and rent out the basement instead to help lower my mortgage payment. That is definitely a good problem to have, in my opinion. 

Please do share more ammos here if you can think of others. I definitely welcome them. Again, I appreciate your honesty and your feedback. I wish there are many people like you.

Happy Holidays!

Arthur

Hey,

Thought I’d reach out to this community to get your perspective particularly on the numbers that may differ from what I have just to ensure I have the right “capture”.

Brief background: I bought a foreclosed property consisting of 3 bedrooms and 2.5 bathrooms with no basement but rather a crawl space for $485K from someone who bought it from auction. Keep it in mind, the former owner is still living in it so I have never had the chance to look inside the property. However, I have known the former owner for a long time since 2011 enough to believe that the condition inside the property has to be at least nice with no significant damages. It was renovated back in 2012 when she bought so I’m confident it is still in good condition. Had I not known the former owner that well, I may not have bought the property. We are currently going through eviction process. Anyway, that’s just sharing a brief background for you before going further below.

Here goes the numbers I have...

* $485K - purchase price

* +$70K - excavation cost for 8-9 feet in height inside the 700sqft space along its reserves to add an English basement

* +$70K - turn basement into finished basement as a separate legal unit and some touch ups for the main and upper levels (I have a friend who can help out with rehab so keep that in mind when you think cost estimates may be low)

Total: $625K investment

I estimate the ARV for that property with "2 units" will be approximately $675k (this number is rather conservative). Most homes like this typically go for at least $700K based on my research.

So, my plan is after the rehab with waiting period of at least 4-6 months, I would request for a cash out refi. With assumption of $675K ARV, I would get 80% LTV of $675K, which turns to $540K max cash out refi.

When I get $540K cash out refi, I would essentially get all my cash back what I put in for purchase and rehab except for $85K that will stay within the property. I expect to get $4K cash flow monthly for both units. Mortgage monthly payment along with property taxes, landlord insurance, and $300/month in reserves would be approx $2,500, leaving $1,500 monthly cash flow.

Before you tell me that $300 reserves are too small to withhold or tell me to make sure I factor in other expenses such as reserves for vacancy, maintenance, and capital replacement, I am not too worried about vacancy. I live in my neighborhood long enough since 2011 to know the demand is very strong. It will be easy to find new tenants since my fiancée and I know a lot of people not far from our university alma mater that need places to live. As for maintenance and capital replacement, they will have touch ups and we will fix any repairs necessary before I start to rent them out. Not only that, keep in mind again, the property that the former owner bought back in 2012 was fully renovated so that fact definitely helps knowing that there are small odds of any significant repairs needed in the foreseeable future.

That said, this will result to ~21% cash on cash return ($18,000 annual net cash flow/$85K equity stuck on the property after cash out refi at 80% LTV).

I know for BRRRR (buy, rehab, rent, refinance, repeat) investors, the ultimate goal is to get all your money back after rehab but I am more than willing to have some of my money kept on the property as there are a lot of ongoing developments around this central neighborhood. The appreciation of the property will be very strong in the next decade so I am more than willing to have my money being stuck on the property.

Feel free to let me know what else I may be missing here and share at least something for me to keep in mind when doing this project.

I definitely appreciate your time and would welcome any your inputs you may share.

Wishing you all Bigger Pockets members in this community Happy Holidays!

Arthur

@Joe Splitrock

I think what you said is pretty clear. Appreciate your explanation.

It was just confusing when the new law specifically states that HELOC interests are deductible only if the HELOC funds are used to "buy, build, or substantially improve taxpayer's home that secured the loan". This is why I was under impression that HELOC interests may not be deductible if it were used to buy a rental property.

Yes, I do have CPA to work with. I just want to hear people’s inputs before we go through this together at the time of tax filing.

@Kyle J. Thanks.

Looks like you are correct. I asked that same question in other forum and one CPA stepped in and confirmed that it can be deductible. However, in my case, it won’t be deductible because I have no rental income produced yet and it has to be available for rent. Currently, I am going through eviction process (former owner still living in it) and I will start the rehab process once evicted and clear so it won’t be ready to rent out till in 2020.

Appreciate you stepping in and provided your inputs.

@Kyle J.

Thank you for your inputs. Do you have a source to back up your claim?

See link:

https://www.investopedia.com/taxes/tax-loophole-found-homeequity-loan-interest/

Specifically, it states, “What's more, the renovations have to be made on the property on which you are taking out the home equity loan. You can't, for example, take out a loan on your primary residence and use the money to renovate your cottage at the lake.”

Looks like HELOC interests cannot be deductible if HELOC funds are used to buy a rental property.

Question for you all in this community, can you deduct interest paid out of HELOC, which the funds were used to buy a rental property? It is my understanding under the new law, HELOC interests are not deductible for anything other than to "buy, build, or substantially improve the taxpayer's home that secures the loan".

In other words, you cannot deduct interests if you use HELOC funds for anything related to personal or to buy a rental property or even to rehab a property other than your property that is associated with the HELOC.

I come across one reputable site saying otherwise.

https://www.therealestatecpa.com/blog/who-said-you-cant-deduct-heloc-interest-interest-tracing-explained

@Matt Medvene

Thanks Matt. That’s what I am also thinking after doing some further research into this. Appreciate your time chiming in.