All Forum Posts by: Chad Olsen

congrats! This is a great find. I hope you have the numbers worked out. Would be interested to see your numbers and your thought process on how your analytics works.

@Matthew S. I'm glad that this was helpful. To answer a few of your questions.

I would leverage his W-2 and buying power now while he has it. As you stated, in 2 years he will be retired and much, much harder to get a conventional loan. Additionally, having cash on hand is much better than having equity on hand. You can't eat equity. It is mostly a personal choice/situation and you have to feel it out. But there are many ways to skin this cat. If need be get your 10 conventional loans first and then figure out how to refi them all into a blanket mortgage and start over.

So, making sure that the financing works for you and not against you. As many gurus out there say "you make your money when you buy." I find this to be mostly true, but with the caveat that "you make your money when you buy with the right financing."

A great deal is a great deal, but bad financing is the fastest, and most common, way to kill a great deal. We should all know how to calculate the cap rate so I won't go into that. Investopedia defines the loan constant here. Essentially, this is the inverse of the mortgage payment. It is based on the interest rate of the loan, the duration of the loan, and the compounding factor of the loan. For instance, an interest only loan of 7% has a loan constant of 7%. But a 30 year fixed loan of 7% has a loan constant of 7.98%. And a 15 year fixed at 7% has a loan constant of 10.79%. So, if you were to go out and get "the best 15 year mortgage" out there as many gurus suggest to get rid of the debt faster you would actually get rid of it much faster. Because you would lose your shirt and the property! You have to know your spread. spread is calculated as Cap Rate minus Loan Constant. If it is negative you are in trouble. If it is positive you have a chance if you manage it right.

So, if you had on the same property a cap rate of 7% the interest only loan would be neutral to you at the end of the day. Not great, but not bad. Any volatility in the property would be dangerous if not disastrous to you. Now the 30 yr fixed is nearly 1% negative. So you are going into the deal at a disadvantage. This is where knowing your numbers is key and making sure you have reserves. But, if you took the gurus advice, and got the shortest term financing out there you would be nearly 4% negative! Any tax, inflation, cash flow, etc advantage you think you are going to have is going to be eaten up from the moment you sign on the dotted line.

Now some may say that 7% is high. Ok. I'll give you a phenomenal rate of 4% on a 15 year fixed. You know what? I still wouldn't do this loan because the loan constant is 8.88%! Still 2% negative on the deal! And you are on the hook for the full PITI if you have a vacancy. The larger the spread is, the higher volatility you can handle in your asset.

That got a little long, but I think that this is a very important point that nearly all investors I've talked to miss. The deal has to be good, yes. But how you pay for the deal is more important. There are three sides to every deal, the asset, the capital to buy and the finance structure. The way you structure the finance is probably the most important of the three, and the least understood.

And last, bummer about the inherited place. But if you aren't going to pay taxes its good. Just be careful about repatriating money and any tax consequences that may bring. I think that the same concept still applies though where you can use that money as a good portion of your emergency fund and reserves and the rest used as down payment money on financing for turn key rentals.

Good luck!

I agree with everything here! I'm also in private lending. And rental real estate. And alternative investments. And financial education.

I spend time learning how to get better at what we are doing now and what we need to be doing next. The most fascinating thing of late is all the aspects of our lives that we take for granted and just do. Those things have ways of paying your back in a massive way. I just got back from my favorite event and have some new ideas to put into play. 

That being said. @Don Konipol has the right idea. If you are trakcing it, you can change it. I love the analysis on knowing how much your time is worth and hwo to best leverage your investement of time and resources! The question then becomes, how many $100k deals can you do in a year to set you up for success in the coming years? A strong financial education is key to making well informed decisions and then taking appropriate action.

Good job to those here who have made the choice and taken the action to do it! Keep on learning and sharing!

@Matthew S. This is a great post! Lots of great ideas and it is clear what the "why" is here. Which is the most important aspect of any investing!

I would agree with earlier comments about staying clear of the multifamily unless you really know what the areas are like, we have a duplex and it was not our best investment choice.

As for your plan about buying turnkeys and using cash flow to buy more/live on, this is one of my plans as well. We are in the midst of doing a 1031 on one of our rentals and turning it into 6 turnkey's in Indy. I would be happy to connect you with the team we are using offline. The analysis that I did/do when acquiring new property is make sure that the asset is a good deal first. That is a single type of analysis, lots of which can be found here on BP. The next is understanding how you are going to pay for it. It sounds like your dad has cash which is good. I would recommend that he holds back 12 months of living expenses for himself and 6-12 months of emergency funds for all current and near term properties he is looking to buy. This will make him look much better on paper for bank financing and keep him liquid enough to deal with issues should something happen.

Next is understanding the finance structure of the deal. Putting all cash or 25% down sound like the main options. I personally would leverage the properties. Or if you buy all cash, then do a cash out refi when you can. This is where the second step of deal analysis comes in. Just knowing the Cap rate or NOI or other property specific numbers loses its power. You need to make sure that the finance around the property works for you and not against you. I calculate the loan constant of the mortgages that I get and make sure that it is less, much less if possible, than the cap rate of the property/portfolio. This is where you make your money on a deal. As an example, I am doing this 1031 and I have built in all the aspects of owning the properties as well as significant reserve growth for the properties to cover myself, and still have a spread of over 1% between the cap and loan constant. This is where the money is really made in a deal.

As far as financing goes, the the longest term you can at the best loan constant possible. Then if you want to mitigate your risk on the deal you can run the numbers and see if the property can handle a 15 yr mortgage or not. If it can and you don't need the cash, then I would say to pay the amount of the 15 year note on your 30 year note. This will pay down the note much faster, giving you peace of mind, having the tenants pay it down for you. Also this will give you huge flexibility. If something happens and you can't pay the amount of the 15 yr note, then you can drop down to the actual payment on the 30 yr note. This way you won't lose the property or get really sideways. It may not stop it, but it could give you 2-6 months to figure things out rather than 1-2 months. 

Lastly, I would recommend that your dad sit on all his cash at this point, and do a 1031 of the inherited property into his turnkey's in a specific market. I know it's not really spreading things around geographically, but if you can get 5-10 properties in a market buying you a new house every year or less, then you can afford to look around more. This gives you economies of scale in a specific area and can increase your yield on the properties. For instance, if you you sell the inherited property for lets say $600k ( I know it will be more) and assume 6% closing costs on that end. That leaves you with $564k in proceeds that are now tax free to invest in new property. This is now your down payment on whatever new stuff you want to buy. Assuming there is no note on the $600k. So, let's say you want to do the $90k property in Indy, since thats what I'm most familiar with. That's a down payment of $22.5k/SFR. That yields 25 doors. TWENTY FIVE! You will have to deal with closing costs and such, so either you come out of pocket or you reduce somewhat. Still even at 20 doors with a cash flow in the area of $200/door that is $5,000/mo in positive cash flow. That could be the final deal you ever need to do. I admit that getting the mortgage for this will be the hardest part. We've been looking for a while for a smart banker, and have yet to find one. But if you learn how to cover your downside really well and just let the upside take care of itself. YOur dad could be set for life. And doing this after could set you and your sister up for life as well.

I have some other ideas as well. But I'm looking back and this has become a very long response. ;-) Please feel free to reach out to me with any questions. Good luck! Let us know what you end up doing!

This is an interesting deal. I'm not in that market, but do have a number of colleagues that are if you need funding or help.

I would recommend looking at the cost of demo and construction very closely before you get to far down on the deal. Find some local contractors/GC's who do this kind of work and ask them about the process, costs, snags and anything else. An idea that comes to mind though is to demo the 5 family home and if possible, depending on the area and such, subdivide the lot into 2-3 SFR's and sell them as retail. This is a pretty complex process, but could yield some very impressive results for you and the area. The advantage is that the two on site rentals can be utilized as collateral and cash flow for loan payments while you get the big property done.

Good find! Just make sure you have all your ducks in a row. Let us know how it goes!

this is a good problem to have. Though I think the first thing you need to consider is refinancing, what looks to be, the 15 year mortgage into a 30 year mortgage. This will reduce your monthly payment dramatically. The loan constant on a 15 year mortgage is significantly higher than on a 30 year one. This will reduce your over all risk and make it that much safer of you do rent it out.

Then if you have the cash flow you can make the same payment as a 15 year note. The advantage is that you are still paying down the note but if something happens you can go back to playing the 30 year payment and not get sideways on the house.

Happy to talk more about it is your have questions.

Like it was said earlier, it's a personal choice about what your risk tolerance is. I personally am risk averse and want to take the mortgage. That may seem counter intuitive, so let me explain.

If I put the whole 100k into the property to purchase then I have no leverage left to get a loan if I need one. Additionally, I also now have no reserves to cover something, with the property or personally, should something come up. And I can't get a loan because I look bad on paper.

That's not too say that the mortgage is not with out risk. You can have a great deal, a home run, and Mrs it up because of your financing. Or lack there of. Bigger pockets has tons of great advice on how to analyze rentals. Use it. I do. But know that the property is only a third of the deal. Every deal is actually composed of three things.

The asset, the capital used to but the asset. And the capital structure. Just because you can get a mortgage on the property, didn't mean that is the right mortgage for you or the property.

There are a few key metrics outside of selecting a property that you should take into account. The first and most important is your reserves. Your need to have something that works for you. Next is the debt coverage ratio. DCR=NOI/Annual debt servicing. This number needs to be no less than 1.15. And the higher the better. Next you want to calculate the break even ratio. I forget the exact equation right now, but this needs to be no higher than 0.85 and the lower the better. The last thing is to calculate the loan constant for a given offering. Take the call rate and subtract the loan constant. If the number is negative don't do the deal. Look for new financing.

This is what I do when I've found property to buy. You should do what works for you, but don't just do something because of something you read. Look into it and check the numbers and make sure it works.

I'm happy to talk more if you have other questions. Good luck!

congrats! That's amazing. Good for you on taking action and making solutions appear!

@elena, perminant insurance is a big part of any investors portfolio. And many do not know enough about it. That being said, the answer always depends. Depends on your situation, point in life, in investing, etc. 

After having gone through this education myself and with my wife very recently the best advice i can give is to talk to people who are doing what you do and have been successful with insurance. You know you want insurance so talk to people who have it. We just subgenres my wife up for her first WL policy and term. I have an IUL and term.

Different people on this thread say either or. But the best answer is BOTH. Term and perminant both have good reasons for being aquiared. The big term policy is good for when something happens and your family will need the money now. The WL takes some time to grow into a useful cash source for your life/business, but can be the best money you spend. If you haven't heard of the intimate banking concept, look that up and learn about it. It will change the way you think about money.

Tactically, shop for the best relationship in an agentand someone who isn't going to shoehorn you into something so that they get a great commission. Price isn't as important as service and knowledge in this decision. This is something that you will be involved in for a long time and it MUST be set up right at the start or it can burn you.

PM me if you want to talk further. Is be happy to share more and unbridged you to the agent we selected.

Good luck!

@James Stokes contests on making it happen. My wife and I have 14 month old twins and are expecting our third on Friday. Yes in two days. 3 under 2 will be "interesting" to say the least. Let us know how you are doing!