All Forum Posts by: David Beard

The banks would have an incentive to retire a low-yielding asset at par, replacing with a maket (higher) yielding asset. Thus they might mine their systems and external sources to detect due-on-sale violations.

What about shorting a short-duration bond market ETF.

Mike--

Yes, for 1 and 2-unit properties only. Flagstar would also do them, also 1 and 2-unit only. You may want to call them up to verify, as some lenders have tightened further in December from what I understand.

I've since had discussions with a seasoned mortgage lender with US Bank who says that they'll go to 6 financed properties.

You probably know that FNMA permits up to 10, though the underwriting is rigid. However, virtually all wholesale lenders have imposed a 4-loan limit, perhaps due to the onerous documentation requirements. They're much more labor-intensive to underwrite, and they don't get paid any more for them when reselling.

I take it you are after low-rate, long-term conventional financing and not commercial/portfolio financing.

Can you take the loan in your personal name, then quit claim to your LLC? Are there concerns with triggering due-on-sale (very unlikely) or insurance policy issues, or what?

Citimortgage will loan on your 5th through 10th property (spoke to them on 10/26/10 of this year, I assume nothing has changed):
* 30 year fixed
* Must have 6 mths cash reserves on all properties (Fannie standard), not just subject property
* LTV to 75%
* Only 1 and 2-unit properties, no 3's or 4's on the 5th thru 10th loan
* Lender fees $665 (this is very competitive)
* He stated up front will be lengthy underwriting, having to verify operating results on 5+ properties
* Will loan down to $10K, believe it or not.

Flagstar -> also goes to 10 loans including home (also no 3 or 4-unit after 4th property)

Be aware that if you're unable to find good comps, this will also haunt your end buyer in their loan approval process. The asking prices worthless, as the selling agents are just guessing in the absence of sold comps. Expand your zone to find as comparable group of sales as possible (you need to know your area well to judge this), but you will need to build in an extra layer of conservatism (perhaps 10%).

Well, there are 7 million houses at least 30 days past due, in process of foreclosure, or currently already as bank REO.

That's a LOT of inventory to move through the system. Realtors I talk to think prices will likely move down 10-15% in 2011, flatten in 2012, then begin to gradually recover. How else can that volume of distressed inventory be cleared out? The banks/services are mouthing that they'll gradually release their REO to the market, but is it practical to have millions of vacant houses sitting around? I think not. They'll need to be liquidated and re-occupied ASAP, which should begin in earnest in January as the majors begin turning their foreclosure machines back on full.

Your NOI has Maint Supplies, but likely does not have an appropriate capital reserve to replace depreciating components: roof, HVAC, etc.

Also, the utilities at 30% of gross potential rent are off-the-charts ridiculous. We all know that landlord-paid utilities are patently a bad idea, as tenants have zero incentive to conserve anything. Water at $67/mth/unit sounds extremely high, but may be normal in your market. Is electric not separated? Can a RUBS utilities chargeback process be implemented in your market?

Big question: how much of an investment to bring the C property to B area standard and achieve commensurate increase in rents? Will you have capital to make these improvements?

Don't pay the owner for a 95% occupancy rate. He has run it at 87-88% economic occupancy for the last two years, and failed to achieve 95% occupancy. To juice occupancy for selling purposes, were concessions made in tenant screening criteria, or "1st month free" or "free cable and internet" or "$200 deposit" ? Quite common in this market.

However, the C building in B market looks good, if the B assessment is truly accurate.

I agree that the 1.1mm contract means squat. If that party failed to close, they were probably thinly capitalized or unsophisticated, and the offer doesn't mean a thing. Look at recent sales of similar-sized complexes in your market. Do you have this data?

Curtis -- since you're plugging your company in your tag line, l took a look and the first property I reviewed had the breakdown shown below. How do you justify the lack of repairs/maint., or a vacancy factor? Is the thinking that this is fully rehabbed, so there couldn't possibly be any issues?

Gross Operating Income -
Rent: $585.00
Expenses -
Property Management: ($58.50)
Insurance: ($37.94)
Property Tax: ($67.52)

Net Operating Income -
Cash Flow: $421.04

John -- your analysis looks solid. Other considerations that come to mind:

Net Property Return:
Prop A = 9000/72500 = 12.4%
Prop B = 6600/44900 = 14.7%

Return on investment (ROI) in Year 1 with a 3/1 ratio of bank funds at 6% rate:
Prop A = 12.4+(12.4-6.0)*3 = 31.6%
Prop B = 14.7+(14.7-6.0)*3 = 40.8%

Leveraged ROI above 30% is excellent and generally where you want to be.

Though Prop B has a better apparent ROI, factors favoring Prop A are:
* should attractive higher-caliber tenant, thus reducing turnover, maint, vacancy time, and landlord time, all things being equal -- this will lower the expense ratio versus Prop B
* gets more of your capital working for you right now
* better economies of scale on loan closing costs
* Easier resale, as more lenders would finance at this size (you apparently have a "conventional" lender that will do the smaller loan on Prop B at the same terms, is that so?)

Sharpen your pencil on expenses, especially any differencese around who is paying utilities and takes care of the yard, or if age of buildings is considerably different.

Adjust purchase price in analysis for deferred maint. or large repairs/replacements that need to be done in the first year or two.

Good luck. Can you purchase both?