All Forum Posts by: David Beard

Max, they do not have a limit. This is a $3bn savings bank. Here are the terms.

* 3/1 ARM (3 years fixed, then begins to float)
* 80% LTV
* 4.99% initial note rate for 3 years
* 30 years maturity and amort term
* No points or bank fees (underwriting,processing, and the like), though they're thinking of putting half point charge on
* 2% annual limit on rate change
* 6% lifetime limit on rate change (thus life cap is 10.99%)
* No "floor rate" during the floating period of the loan
* LLC titling is OK, w/ personal guaranty
* Will escrow for rehab and build into loan, supported by a "subject to" appraisal on front end
* Blanket loans are fine (multiple properties collateralizing one note)
* No cash out seasoning period - can buy for cash, then refinance next day for 80% of purchase+rehab
* 12 mths title seasoning needed to use new appraisal on a cash out refinance
* No limit on # of loans with the bank. There are total exposure limits per borrower that require escalation for approval.

I agree with Bryan that these smallish (15-50 units) distressed apartment complexes (mostly or entirely vacant) are a ripe opportunity. These are cash-only deals, too small to interest the major players, but the bank owner (or short sale owner) is very motivated to unload it.

I'm looking at a 50-unit prospect now that looks to be $10k/unit all-in, with $500/mth average rent (75% of units are 2BR) and tenant paid gas/electric. You can see that the gross rent yield is 60%, and the net would be around 30%. Even with some unpleasant surprises, should easily be 25%. A year down the road, with 75% LTV financing in place, the ROI on your investment is near 100%, year in and year out â€" before consideration of tax benefits and likely NOI growth.

As Bryan notes, you can also elect to sell when you've got occupancy up to >85% for 9-12 mths, as a 12-15% cap, scoring a huge gain.

Another nice thing about the home office is that all of your business related mileage will be tax deductible. If you don't have a home office, then the 1st trip each day to one of your rental properties, and the last trip home, is considered "commuting" to your place of work, and you can't deduct it. However, with the home office as your "workplace", all miles driven to/from there are deductible at the .50/mile IRS rate (For 2010).

With the 401-K, you are not really borrowing. The plan will simply cash you out of $20k of investments that you currently hold in the plan. They will determine the payment to amortize it over 5 years at the 7% rate, and you pay the so-called "interest" back to yourself. By paying it back as agreed, you will avoid taxes and early withdrawal penalties. If you leave your employment, it may be due immediately in order to avoid said taxes and penalties. You will need to investigate this. Obviously it will be hard to make the house cash flow using a 5 year amortizing loan. But if you don't need the cash flow, and you're getting a great deal, then I think it's a good alternative use of your 401-k funds. Most plans have limits on how many of these loans you can have in total, and how many you can do in a 12 month period. This payment on your 401-K loan will also not be considered an obligation for purposes of debt ratios (since you're paying yourself and if you stop doing so it only triggers taxes and early withdrawal penalties).

You could also refinance the other property you own and use the funds to pick up another great deal in this buyers market.

Thanks, Max. 7/1 ARM at 5.25% fixed is an unbelievably good rate. That's where they are right now?? Haven't gotten anywhere close to that around here (best is 6.25% on 7/1). The 7% floor seems somewhat high. This means that after the 7 year period, when it starts to float, the rate will be no less than 7%, correct?

I've found a 3/1 ARM at 5% w/ no bank fees, and can't go higher than 11% over the 30-year life (floating rate will be 1yr tsy + 3.50%). They also do full rehab lending, and have no seasoning for cash out refi's. That's my favorite right now, I think.

Couple of issues to consider:

* 75% of units are 1BR; this is a negative, will lead to high turnover and higher vacancy rates. Frequent prepping of units (paint,cleaning, flooring) will jack up expense ratio, so you'll need to factor this in and be very conservative.
* Buildings this size can't afford a full time maintenance and leasing agent, I don't think. It may well have one or both, accounting for the high expenses.
* As Jeffrey pointed out, find out why it's been sitting, find out what offers they've gotten, why did the prior owner fail (mismanagement, paid too much, etc.)

Josh -- check with some small banks in your area and post back on what you find out, if you don't mind. If you have success, I think many would be interested.

You are "subprime" and that lending market with banks and typical mortgage brokers is defunct. You may want to consult with a credit expert who can lay out steps to optimize your credit score over the shortest time frame, to get you in the game ASAP.

In the meantime, you can potentially utilize your capital to buy, rehab, and sell properties (i.e. flipping), particularly those beaten up houses where only cash buyers compete.

Of course, if you have friends/family that would lend you funds for a year or two at 8% until you can establish your credit and refinance, that would be your best option.

Hard money lenders are typically 6 mth deals (maybe 1 year), so I'm told, so you really don't want to use them for a project you want to buy-and-hold, not knowing when your credit would eventually be good enough to refinance them out. A flip on an apartment project, where you have 40-50% of your money in the project, is something they may consider.

Also, credit unions can be decent sources of money, but they're not on the FDIC list. Just google for listings of credit unions in your area.

I've found it is also very helpful to look at banks that are based in adjacent counties. They almost always will lend in your county as well, and if they're a satellite county to a larger urban area, they may have come through the RE crash a little better and are still doing investment property loans.

John -- you've got a bonafide house rented for $350?? I'm getting that on a 1 room efficiency in a moderately low rent area. Yes indeed, an increase is in order.