All Forum Posts by: Chad Duncan

@Brian Kohtz property management, broker, or analyst for a commercial real estate firm.

@Danny Leyva Who would you send a deal to? Someone who sent you a few bland letters, or someone who tries to get to know you and connects you with other resources? Deals come from specific networking, being a friendly and inviting person, and sending deals to other people. You can also sign up to a network in your area by going to investor meetups, or create it if it doesn't exist.

Why do you think that is the "regret" for investors? It's inflation. The longer you hold, typically, the higher the rents, the higher the equity, the higher the appreciation, etc. I'm assuming that you did the math correctly and $50k is the amount you will likely receive. This is how you do a quick comparative analysis on it;

1) Look at the all-in costs of selling and buying. This is usually 6-7% of the total value in question. An example: say your home is $250k and the new duplex is $350k, the total value in question is $600k. As well, let's say the 1031 exchange fee is $1k. In this case, your loss is due to fees that are $40k (assuming 6.5% all-in costs). This doesn't include any taxes and the risk of not finding a like property within the time frame given through the 1031 ruling. 

2) All of your gains in your current property will be used to pay down the next property, the $50k, as anything else is against the 1031 ruling. Up to this all that has happened is a net of $10k going from your current property to the next property ($50k gain less $40k in sales fees).

3) Now take the potential gain in rent for the new property. You will want to look at the total net cash flow of the new property and subtract what you are currently receiving for the property you have. Let's use your example, you would gain about $210 per month ($540 - $330). 

4) Divide the annual potential gain from the cost of exchanging. In this example, it would be $2,520 ($210 * 12). This would result in a potential expected return of 6.3% ($2,520 / $40,000). This is a very "back of the envelope" calculation. 

There are other things to keep in mind: 

- new mortgage costs (total interest paid) for the new property vs the old

- if the next property is more expensive how much more cash will go to equity per year than the previous one?

- Are there strategies to make your current property perform better, to avoid the costs of exchanging?

- How long would it take you to save up to purchase the duplex while still keeping your current property? 

- Look at this from a long-term perspective. What scenario would provide the most cash flow in years 10, 15, 30? This is a good reason why people kick themselves for selling early.

I advise people to be very careful when they purchase a property as the costs to sell it and buy another is more than it's worth in most cases. Single-family homes shouldn't be investment properties, they are meant for people as a primary residence and as such are very expensive on a per-unit basis. The more units you have under one roof in the name of the game, so keep that in mind next time you look at more properties. Look at large investment groups, what are they doing?

An HOA is there to protect the look and feel of a neighborhood. If they allowed people to rent by the room, you would have too many cars, traffic, and make the neighborhood look dumpier (you can't tell a tenant who has a crap truck not to park there). As well, if you think that the HOA wouldn't know if you had multiple tenants renting by room, you are mistaken. You have neighbors, and those neighbors don't want a ton of coming and going from a house next door. Even if you have good tenants, they will tell the HOA.

If the HOA hears about it and enforces it, you are now stuck with the bag of kicking them out prior to the end of their leases. You will most likely have to pay HOA penalty fees, fees by the state if they have tenant rights in place and potential lawsuits from the tenants. When you buy a home in an HOA you are signing a form saying you will comply, and trying to push these rules will only make your life harder. As well, generally not adviseable to "stretch" rules, as you are dealing with people's livelihood.

This is why you need to analyze the property/area with this in mind. This would be considered a political risk, and you should assign more risk to an area with more rules. If you aren't familiar, your expected return, aka discount rate, is determined by three areas; 1) risk-free rate (aka 10-year treasury bond) + operational risk (aka political, tenant credit quality, state, location, etc.) + liquidity risk (aka are you going to sell it? if so how long does it take to get your money back). Going against legitimate associations and ruling authorities is a game that you will most likely lose.

Has the property manager not done a good job up to this point? Is your main reason for self-managing, cutting expenses, or do you think you can do it better than your property manager? Would you be able to let your tenant put in a new carpet and you cover the cost? 

As for tools, being well rounded with excel and an account at Zillow should suffice for most things. If you haven't already, I suggest you look into landlord insurance and eviction insurance. 

Vegas took one of the hardest hits in the 2008 recession, as speculators were rampant there. The majority of renters are severely affected by the tourists in Vegas. Keep that in mind. In my opinion, if you can only afford to buy a duplex, etc. in a bad neighborhood, keep saving. It's not worth the headache and they generally take way longer than you think to "get better".

@Steve Sorensen although the lower down-payment provides a higher return on paper. It does so with a higher amount of assumed risk. In the event of default, or you can't make a payment, how would you and this individual deal with that? Especially if it's due to a bad market and that person needs the money.

Don't spread yourself too thin. If you don't have enough for a 25% down payment, chances are you don't have enough to ride turbulent times. As well, what happens when something big happens, like a pipe bursts underground and insurance won't cover it (happened to me 5 days after I signed papers)? You can't refinance as your loan to value isn't sufficient. This is why large companies choose wisely when using leverage, and usually put a lot down and ensure large resources are allocated towards what if scenarios.

@Jonah Cervantes be careful when using the VA loan with the 0% down. The loan is mainly for getting a primary residence you don't plan on selling or refinancing anytime soon.

If you use it for multifamily and take advantage of the 0% down, find a value-add property with an after repair value better than 75% loan to value. I did this and it paid off, but it could have went the other direction as well.

Real Estate Finance and Investments Risks and Opportunities by Dr. Peter Linneman and Bruce Kirsch, 5th Edition. It’s a staple to the MBA Real Estate program at Wharton (#1 Real Estate Program in U.S.). It is based in commercial real estate, and residential real estate is very much correlated with it.

If you want a structured study program around it, check out the REFAI certification at getrefm.com. 

Why get a seller financed loan? Usually the rates are much higher, terms are worse, and the main exit is by refinance that is also costly. Especially with the low interest rates, the chance of increased interest rates in the future are high. You would be forgoing a fixed low interest rate mortgage for that? I’m curious why. If it’s to have a lower down payment, your return may be a bit higher, but so will your assumption of debt risk. That, and your loan to value could hurt you down the road for a refinance if the housing market flattens, or worse, declines a little. That, and if the seller has an option for a balloon payment, the chance of you defaulting is higher if both scenarios play out. 

If getting seller financing is due to impatience, and wanting more doors, rethink and challenge those feelings. As well, talk with an attorney experienced in this area. If you want to see the risk you assume, look into the terms a typical mortgage document has. It’s incredibly complex, and for those who have a lot of experience in the lending arena.