All Forum Posts by: Chris McKay

Quote from @Harry Brooklyn:

Hi Chris - I realized I wrote a mistake. I know they all are important for NOI and cashflow. What I meant was should Cap Ex and a property manager be factored into computing Cap rate and DSCR?

Cap rate is more for performance of a building, where CapEx is more for reserves. DSCR is what a bank would calculate so I'm unsure if the bank would use CapEx and a property manager in their calculations.

I want to make sure I'm using apples-to-apples comparisons.

Sorry for the late reply. So, the answer to your question here is generally yes! That said, each individual lender will vary slightly in HOW they underwrite expenses for your DSCR, so it's very important to ask each potential lender about their process. This gives you the best heads up when going through options!

Hope this helps,
Chris

Quote from @Harry Brooklyn:

Hi,

I am budgeting for the basics for my NOI (and taxes, insurance too):

1. Repairs
2. vacancy rates
3. CapEx
4. Property manager

All of these factor into my CoC returns, but actually should they be factored into the NOI, which I need for Cap rate and DSCR?

Yes, absolutely. They're legitimate factors and expenses that must be included in any NOI calculation.

Unless you're a sell side agent and want to play with the numbers to make it seem like the property cash flows when it really doesn't. Lol.

Hello Renata,

I'm in a similar situation to you at the moment, and am currently going through the process of setting up my first few deals in the US. I can offer you my thoughts on the matter from that perspective, and I hope that it's helpful to you. 

The most important thing for overseas investors expanding into a foreign market is to leverage the experience that you have in your home market. I have experience here in multifamily in my local market, and so I want to target similar types of properties in my search back in the US. Whatever experience you have can lend value, even if it's not from investing directly.

Second, I think that property location comes after the location of your support group. Real estate investing is not passive in most forms, and it's incredibly important to have a team of people to support you in your endeavors. The area in your target country where you have a group of people dedicated to help you through acquisition and management of your rental trumps nearly every other consideration when trying to narrow down a location in my opinion. 

A lack of oversight can easily turn even an A-class location into a nightmare. If you have people in Florida that you trust with your money and have proven themselves to you, that's what matters most. That said, playing the appreciation game is a very personal decision. Going into a rental property break-even means that you'll likely be footing the bill for unseen expenses if even a little thing doesn't go according to plan. If this doesn't bother you, continue as planned. 

I hope people more familiar with your local market will be able to better assist you on that end. 

Good luck!

As someone else pointed out, the goal of a refinance after renovating a property is to get out your down payment as well as some extra due to the increase in assessed value. You can then use this money to continue expanding your business.

There are a number of ways that you can use financing to cover your construction costs for renovation, but it's important to weight the pros and cons of each. Before I address those, I want to point out something that caught my eye in your post. Asking a bank for a 600k loan on a 500k house with 100k in rehab means you're looking for 0% down? 

If this property needs enough rehab work, many banks won't consider lending on it to begin with. You having no skin in the game would make them additionally wary. For DSCR products and private/hard money, they're going to want a much higher LTV, especially if this is your first deal.

Before you go looking further into options, do note that using bank financing like a 203k to cover construction costs comes with a lot of extra paperwork. They require forms from the general contractor of the project before releasing any funds. Initiation of these loans can also take a bit longer than normal, which could hurt your chances of closing if the seller grows impatient. In such a hot market, expediency is such a valuable commodity, and being able to close promptly will greatly increase your reputation for future dealings in your market.

Good luck.

It's hard to say without knowing the rest of your financials, but 7.5 with 2 points and change is pretty standard in today's market for an investment property. 

The only two things I see you could do would be either to owner-occupy or to shop around to other lenders who need your business. Are you locked in to using the builder's lender? 

That said, unless you have a track record or something to offer, 6.5 no points for an investment property is a very lofty goal in this market. 

Quote from @Peyton LaBarbera:

@Chris McKay I have been researching some more plans and I came up with starting a holding company LLC as a parent company for each of the subsidiary LLCs that will on their own protect each property separately with this I will also be able to utilize an S-Corp which will be attached to my Holding Company LLC and each subsidiary LLC will transfer the funds into the Holding Company LLC to cut down on my self-employment taxes by paying myself a W-2 along with dividend distributions paid out to the owner aka myself throughout the year.

 Gotcha! That's definitely an option, but please, please hit up your CPA and/or RE Attorney before filing your papers because this route will increase your filing burden. It'll be necessary to talk to professionals familiar with YOUR specific tax situation in order to address the pros and cons of using an S-Corp. You'll have at least a 1k increase in fees, so try to walk through multiple scenarios with people who know your filing situation and whether or not it'd be a net benefit for you. Good luck!

True answer is that nobody knows. Anyone who tells you otherwise is lying. The best that you can do is to stay true to the numbers that allow your strategy to work, and don't succumb to bidding wars if it means you buy a bad investment. 

Housing markets are also incredibly regional. If you're having too much trouble in your local area, it could be an idea to branch out into other markets as well if you scope them out and deem them good areas to invest.

At least in my area, commercial listings and higher priced SFH are beginning to cool down. The type of property that you're searching for will also dramatically impact the attractiveness of the property to other buyers. Sub 350k SFH are still hot in most markets.

Quote from @Peyton LaBarbera:

@Stuart Udis My only concern is if in the worst of the worst-case scenarios someone goes after one of my properties if I have multiple properties in the same LLC then they can now just go after everything. But correct me if I am wrong that is just my biggest concern

Thanks again @Stuart Udis

You are correct. In the instance that the corporate veil be pierced on one LLC, any properties within that LLC would be open to target. That said, you have to weight the pros and cons of each system. You mentioned that land trusts may not be a good fit for you due to the cost, but LLC formation does also require filing charges. They have annual fees to maintain as well.

I would seriously consider at least getting a quote from your insurance company and then shopping around. You'd most likely be surprised at the affordability of increased coverage. Increasing your liability limits under your contract to 1-2MM+ per house can probably be done cheaper than creating an LLC depending on the exact area you invest. A 5 million dollar umbrella policy wouldn't run you more than 1000 a year in most states. Depending on the amount of flips you're doing, it could be a good option. 

It depends on exactly what you're trying to protect each property from. If your goal is to shield your personal assets from a suit that emanates on one of your flip properties, an LLC alone won't really hold up in many cases. It would be a better investment of your resources to get improved coverage on the "proper insurance" you have, including an umbrella policy that covers all of your properties.

I have heard of some of my acquaintances set up land trusts within LLCs to help with anonymity, but they are cumbersome and require a fair amount of money/experience to set them up. Also, I'm sure that someone can correct me if I'm wrong, but I'm relatively certain that this necessitates you to work with cash or private money. Most banks won't lend to properties held in land trusts.

Lastly, there are cheaper ways to get into land trusts, and people online will advertise "easy to do" self options, but if you have the personal assets to mandate this method of estate planning/asset protection, I think it's worth paying the few 100 bucks it would cost to get a lawyer experienced in real estate law to write them up for you.