All Forum Posts by: David Beard

I agree as well. I think that the typicaly 1%-1.5% property probably has long term avg expenses of 40%, and 2%+ properties are more like 60%, due to higher vacancy and greater tenant turn costs, tenant damage, eviction/set-out expenses, more economically cyclical blue-collar tenant base, greater fixed costs as a % of rent, and the YOUR PERSONAL TIME to manage these types of properties versus engaging in greater value added activities. And the nicer properties will retain their value better in tough times and be easier to resell to qualified O/O's. (Potential buyers of the lower-end units will be disproportionately unable to qualify for mortgages and secure down payments).

That said, some of these lower end units are beaten down in price to such an extent that they still make a lot of sense in this market, but the expense ratio should be thought of as more dynamic.

If you borrow with the LLC on the loan, the bank will generally want personal guarantees from the LLC members, so you should expect it to show up on your credit that way.

Conventional loans (FNMA/FHLMC) will only be available to personal borrowers, not entities such as LLC's that are desired for the asset protection benefits. This is a significant problem with using these loans to obtain the coveted 30-year fixed term. There have been threads on "techniques" to get your LLC on the loan docs when financing conventionally, though it seems tricky at best.

Your GC is going to do $18K of labor personally?? There will presumably be several subs. Is he going to pay the labor costs of these additional folks out of his own pocket? If he's going to trade $18K of labor contribution for an unknown potential $16.5K (could be less), then that makes no sense from his perspective. Typically, he would recoup the value of his labor contribution of $18K (that's equivalent to a financial contribution), and you'll recoup your financial contribution, THEN you'll split the remaining profit. That's how it would be expected to work.

Jack,

Have you called For Rent signs and researched rent rates on Craigs List to verify the rental amount? Are you familiar enough with the area to determine how easily it will be to rent at your stated $800?

Aren't townhomes connected in such a way that HOA fees are necessary to pay for new roof, etc. How can there be none?

Have you pulled sales comps through your tax assessor site or the MLS to ensure that you're not overpaying?

Also, would you mind sharing where you're getting 4.375% fixed for 15 years on investment property? Sounds amazingly low.

Choose the ethical path, in this case or any other. This case is not even a gray area, it's black and white fraud. The ethical path avoids problems down the road, enables you to sleep better at night, and will pay dividends in your business dealings with others, etc., etc. It's not just a matter of "will I get caught", and "what can they do to me".

Thanks Scott, good to have another lender to help answer quesions.

The remaining questions I still had:

* How long of a fixed rate term will your "portfolio lender" go?
* Can you count the income on a new subject property you're purchasing (by definition it never will have showed up on your past Sch. E's, since you didn't own it)?I'm not referring to my primary residence.
* Can you count the income on other properties you already own if they've been purchased in the prior year and you have no tax return data on them?

Thanks.

OK, I'll confess I didn't make it through all of the discussion, but I get the show stopper to be forward expectations of rising rates built into the instruments.

Someone back earlier in the thread mentioned interest rate swaps (or possibly a forward starting interest rate swap in the case of a 3/1 or 5/1 ARM) as the perfect instrument to accomplish this, but they're only available in the institutional space. Eric, Bryan, do you agree that an interest rate swap accomplishes this objective. I work for a large insurance company which utilizes many billions of notional of these to lenghten duration, convert fixed assets to floaters, etc. I'm not an expert on their usage, but I do know that we can use swaps to go out and lock in current fixed rates. We would recieve/pay a floating Libor-indexed rate which moves in tandem with our underlying floating asset/liability and receive/pay a fixed swap rate over the life of the term. If this is the case, I would have thought (maybe naively) that a futures contract would accomplish the same end.

I'll try to follow up with some of the deriv "experts" at my company on the topic. I also wondered, if you could in fact figure out a way to do the hedge, would it be cleaner and better fitting to get a loan that floats from the outset (rather than the 5/1 that commercial/portfolio lenders offer) to better match your derivative.

Bank operations and sales are very different. You might consider taking tests from a couple of the better online aptitude testing services, if you haven't already done this, to determine what you're good at, and suited to. We tend to be content, and excel, when we're doing things that align with our innate ability. "Stretching" and seeking new challenges is great and commendable, but make sure you don't make a decision based largely on the apparent monetary gain. That said, if the deal making really gets your blook pumping (which it does for most on BP), then it sounds like a tremendous opportunity.

To distill this advice -- use your inspection contingency to exit this deal. Educate yourself. Sorry, but I'm questioning your judgment at rushing into this without any notion of what the cash flow and other risks might be. You need to take a step back, consult with investors at an REI club, on BP, or elsewhere who have been successful, do a lot of reading, then get going...

I agree, for buy-and-hold your numbers make it a no brainer. For a flip, it's a greater point of concern, as the OO buyer is simply more demanding. For down the road, might be worth at least evaluating up-front the feasibility of adding a bathroom to enhance resell.

Others have said they love the 2/1's, as they're cheap relative to rents, typically are small needing less maint., and don't attract families with destructive munchkins. :)