All Forum Posts by: David Beard

It seems obvious that the ability to create equity through a renovation and savvy marketing is very real. Uh... flippers capture these profits all the time.

As long as there are retail sales comps of "good condition" properties occurring in the immediate area of your distressed/REO/short sale subject property, such that your ARV's are real and not made up, then of course you can create equity.

Now, if 80% of the sales in that area are distressed/REOs/short sales in the prior 6 mths, then that's another matter, and you need to be cautious about being able to realize forced appreciation.

Many retail buyers can't or won't even entertain the idea of buying a distressed property, due to financing issues, lack of funds to renovate the property themselves, hassle factor w/ living in a construction zone for a month, aesthetics, all kinds of reasons. Of course, these buyers will look at your beautiful new flip and sign... of course, make sure it will appraise out with good nearby comps.

This is just common sense. I haven't even flipped a house yet, but plan to start soon.

T_Willi - to clarify, you must do the four conventional loans FIRST. Any other non-conventional loans that you have in your name that are secured by 1-4 unit properties will also be counted when you go in later to get conventional financing on future deals. So sequencing is very important. The only loans that wouldn't "count" toward the total would be those on 5+ unit properties.

However, note that there are several conventional lenders that will allow you to have up to 10 loans, though you have to look harder and the underwriting gets tighter when your # of financed properties exceeds 4. You'll need FICO of 740, cash reserves of 6 mths PITI on all properties, and LTV no more than 70% typically.

It doesn't sound right to me. Even if you materially participate in real estate rental activity, it's still considered passive income in the context of real estate investments.

Real estate investors do benefit from a special rule which permits up to $25k of passive losses to be deducted against ordinary income in a tax year, but this begins phasing out for married taxpayers starting at 100k AGI, and completely phases out at 150k AGI.

If your properties are generating tax losses (after depreciation and interest), then you can probably find much better cash flowing deals, though I acknowledge that higher end rentals in certain areas can make sense as a longer term cap gain play.

If you can be deemed a real estate "professional" (some rules involved here, but you need to do RE 750 hours a year and generally can't have another full-time job -- or your spouse can also qualify if they're on title to the property), then you're not subject to this 25k passive loss limitation. You can also take some additional deductions such as the home office deduction, that would not be available to you as a mere "investor".

That's my interpretation, though I'm not a CPA.

This is not a reference to differences between the rent you're charging and "fair market rent".

Expenses should be considered to be 50% of "Gross Potential Rent", which is simply your monthly rental rate * 12. "Collected rent" is less than this due to vacancies and bad debts. That's my interpretation.

Hoang, let me run your scenario by my conventional lender at US Bank, to see if there would be a chance you could do loans on all five of them concurrently (talking about 30yr fixed rate loans around 5.50% currently).

Your debt ratios will be fine. Your liquid reserves may need to be shored up for a few more months to get them all done. You could potentially refi a couple of them initially, then do the other three in a few months. Can you confirm that none of your three credit scores are below 720? You may want to pull them all if you haven't done so. Also, I assume your wife has been at her job for a good while? Or at least in the same profession for the last couple of years?

Thanks.

Your calcs look good, and the deal looks good as long as it's not in a blighted war-zone area.

As far as prop mgmt, you should include a 10-12% placeholder when computing the cap rate, because:

* you may move and need a PM
* you may get sick of managing properties and need a PM
* you may get so large that you need a PM
* you have a regular job and your spouse is fed up with you being the PM around the clock, so you need a PM
* your time has value...

If you provisioned the deal on having a PM, then it'll still cash flow nicely if you ever do in fact need/want one.

Scott -- on decent 2 to 4-unit properties in the mid-west, I've been looking for gross annual rent yields of 30% if tenants pay their own gas/electric, and 38% if the landlord is paying for the units' gas heat and/or their electric. Always find out right up front who pays the utilities, if it's not posted in the ad.

The denominator in this calc is your purchase price plus any rehab that you need to do right up front to knock out deferred maintenance.

This should get you to a 15% net return after all expenses, vacancy assumption, and replacement reserves for roof, mechanicals, appliances, etc.

The numbers above will serve as a filter when looking at many properties. When you're honing in on your best candidates, sharpen your pencil.

Look up the property taxes for the property on the county assessor web site, or call if necessary. Find out the assessed value, so that you then can back into the property tax rate. You're probably buying for way under the assessed value, so you'll be able to appeal the property taxes. Don't bank on being successful with this appeal, but it'll be gravy if/when it occurs.

For property insurance, I usually assume about .7% of cost (purchase+rehab).

Assume 10% for vacancy, 13% for property mgmt+leasing expenses, 10% for repairs/replacement reserves (maybe 15% if the bldg is very old but this is subjective and depends on degree of prior renovation)

Call the gas/electric company in the area to get the average paid by the landlord (the master meter) durding the prior 12 mths. Ask the utility company to confirm the # of meters and separate billing accounts for the property.

Call the water company to do the same. Water/sewer are almost always paid by the landlord, and around here runs $40/unit/mth or thereabouts on average, depending on # of occupants.

Since the tenants are already in place, make sure they are current, find out if they're Section 8, and how long their leases run. I always view the units with the tenants home so that I can ask them questions. They love to talk about any issues they have, and if they plan on staying. Ask them to confirm their rent, their security deposits, and what utilities they pay. Ask them how much their utility bills normally run.

You can also evaluate them at that time, even though you're stuck with them through the duration of their leases. I ask to see their rental applications and tenant file to make sure it appears that they were properly screened and not just passed in so that the seller can say "fully rented!!" in their ad.

At a minimum, proper screening means: gross income three times rent, no evictions in last four years, copy of recent pay stub, continuous work record in prior six mths, and ideally some evidence that prior landlord was called.

David

Financexaminer -- I know you've run most of the companies in the Fortune 500 at one time or another and the breadth of your experience is beyond comprehension to most of us, and we're undoubtedly a source of never-ending chuckles, but really...

your commentary adds nothing to the discussion other than permitting you to preen before us.

By sales comps, the "ancient" past of 2007 is completely irrelevant. The rule of thumb is to find closed sales (not listings) in the last 6 mths and within one-half mile of your property -- preferably condos. Your agent can pull these numbers very quickly using the MLS.

Condo associations create a lot of unknowns and extra risks of special assessments and mismanagement, particularly when numerous units are vacant, as people have pointed out. If you can make $5-10K from flipping that would be my course of action, then find a better property.

Your cap rate (net yield on your 73K investment) will be a paltry 5% if you hold this:

1600 rent per mth
- 750 HOA
- 225 taxes/insurance (est).
- 20% of 1600 for vacancy, repairs, prop mgmt
=305/mth NOI

That's poor in any context. Please consider moving on.

Good luck, David

Ryan, my man, the picture... the picture....

hard to be serious with you, bro'....