All Forum Posts by: David Beard

Hey, I think you're spot on as long as you're buying the property using the 50% rule, since you never know when circumstances might change, or your empire grows to the point where you NEED property management.

I've found that the following warrant a 55% rule:

* older pre-1950 houses
* mechanicals and deprciating structures more than 50% through their useful life
* low rents (less than $500/mth around here) since fixed costs will be higher as a % of rent
* multis where landlord pays water/sewer, common area costs
* turnover higher than nat'l avg of once every two years, driving up cleaning and make-ready expenses, and extra marketing/leasing time, even if it is your own time at this point.

Happy Thanksgiving.

Just go to the Homepath.com website (shows Fannie Mae REOs, which are always the most numerous REOs) and do a data extract on your county or target area. Tally the agents who have the most properties and call on them. These same agents will also handle REOs for large banks/trustees (Deutsche Bank, HSBC, BofA, Bank of New York, etc.). Go to the HUD site to get FHA foreclosures. HUD has changed its process recently, and are parceling out their REOs among more asset managers and more agents in each market.

Some agents think pocket listings (calling you prior to posting to the MLS) are unethical, many of course don't view it that way at all.

Buy the four-plexes:

* The extra 2% of spread on resi financing will overwhelm the higher upfront closing costs.
* Liquidity - you can sell just one if necessary to a larger buyer pool
* ROI - larger LTV will amplify cash flow/ROI
* Refinancing risks - eliminated with resi, 5 yr term likely on the comm
* More tenant separation, less dispute
* Diversification - if an area takes a turn for the worse, the 4's in different locales (mile or more apart we'll say) will lesse impact
* In my area, landlords don't have to provide a dumpster for 4s', but do for 5+.

If you go resi on 4's, might use a bank that also does comm, so that later you can leverage the relationship when you have larger projects or too many units to use resi(even if they're separate departments).

The vacancy argument has no merit, you have x% vacant of x units owned, doesn't matter how many properties.

Good investing

Talk to local banks, and as a benchmark, talk to BMC Capital, as they post 80% LTV on MFs, which I'm sure would apply to very strong borrowers and very stabilized properties.

http://www.bmccapital.com/tools/rate_sheet.php

Bryan A, I agree cash flow is #1 (live to fight another day and all that). I was just chiming in on the uncertainly expressed in some posts above around balance sheet tracking. Definitely hear you on potential unreliability of net worth computations if they're not based on actual comps (sales within one mile and three months). However, you're flying blind if you don't do this exercise regularly. Banks and potential investor partners want to see this as well. And I certainly stand by the motivational aspect of visibly monitoring your net worth growth.

I think the balance sheet is critical to keep track of your net worth. Watching your net worth grow is a critical and motivating aspect of your investment program.

It's also valuable to continually re-comp (re-value) your properties, not only to compute an accurate net worth, but to optimize decision making in determining which properties to sell for gains, which to dump if trends are moving the wrong way, which to keep for best rental return and cash flow maximization, etc.

You should compute your current returns (ROI, etc.) on a property using current market value, not historical cost, so that you recognize "opportunity cost" of continuing to hold an appreciated property, for instance. In other words, challenge yourself as to why you are holding each property. Another way to say it is, "would you go out and buy that property today at its current price".

Well, I'm looking at a 24-unit deal, and I'd like to get some feedback from BP'ers, as I've never bitten off anything even close to this and my anxiety is up there a bit.
* Pretty decent area, C++ to B- property, fully rented
* 24 units in two buildings, 18000 SF, all nice-sized 2BR; brick exterior; 4 units on each of three levels per building.
* Owned by busy small bank president, has been managed [poorly] by 82 year old father from 60 miles away. Dad is declining and they badly need to get him retired.
* Most tenants are paying $425/month and rents haven't been increased in years. Quite a few tenants have been there a good while, not surprising. There are two section 8 tenants, one paying $600 and another paying $500 (not sure why different, but that should give a better idea of market rent)
* Price is $27K/unit; will offer $25K and might settle at $26K
* Buildings are in nice shape; built in '72, seller has upgraded alot of mechanicals in past few years.
* If I can move average rents to $500-550 range, in my market I believe this will add at least $100K to value. I consider this a 9-10% cap rate property if run correctly. I'd be buying it at 11% cap on the current low rent. Would have potential profitable exit, or refi possibility, after 24 months.
* Seller is open to seller-financing with 20% down as an installment sale will spread out his tax pain. Broker: "He wants buyer to have skin in game. He does not want the buildings back". Two offers have come in, both wanting to put 10% down with seller financing; seller declined. He seems pretty focused on not getting the properties back.
* Seller actually offering 84 total units; 5 separate properties; asking $2.6mm. The property I've focused on appears to have the most potential. Pricing by property doesn't appear rational to me. One issue is that seller owes only $425K on the 84 units, but it's all attached to the property I want. So I'm not sure he'd go for seller financing on just the one property, as he'll need funds to pay off the mortgage. I don't think a "subject to" would work with someone like this. So I'm going to pursue bank financing at probably a better rate anyway.
* In any event, I can only afford the one property that looks the most promising.
* I'm going to comb through the units in the next couple of days, review utility bills, expenses, bank accounts, and tenant files. While some of the tenants have been there a good while, many have been poorly screened, and they have evicted a couple of tenants this year, with one more this week.
* Should cash flow quite well right away with 11% cap rate, but I'm really focused on increasing rental income and value, so that'll be a delicate walk with the tenants.
* Will put major dent in my investable funds at 20% down, though I have credit lines for contingencies. Can also borrow against 401-K.
* Sorry for the lengthy data dump. Bit anxious, as I said, want to anticipate possible surprises a best I can.

Comments are appreciated.

Maybe a separate thread would be helpful on hedging the interest rate risk of an ARM (i.e. converting the ARM to a FRM using financial instruments), in cases where you're stuck using an ARM because you're funding with a local bank, or one of the other reasons cited.

Options that come to mind for a retail investor:
1) Short intereste rate futures
2) Short a short-duration (1-2 year) bond ETF

Problems: hedges don't line up perfectly, might need cash on hand if rates actually move down, cash flow mismatch, etc.

Anyone had luck with these approaches.

Sure, always start with the net return generated by the property if it were owned free-and-clear, in this case 22.5% (also called the cap rate). Typically you'll just take the gross rent yield and cut it in half to account for all expenses including property mgmt (multiply gross yield by 60% if you'll manage it yourself).

Now layer on the benefits of the 75% leverage (loan). You'll now be earning in two components:

(a) You'll earn 22.5% on the 25% down payment you put in, plus
(b) You'll earn the "spread" from borrowing from the bank at 7% and earning 22.5%. This spread is 15.5%. Since you're leveraging at 75%, which is three times your down payment, multiply the 15.5% by three, arriving at 46.5%.

Add (a) and (b) together and you have 69% as your ROI in the first year on the amount you invested. This is just a quick mental calc whenever you're scanning through properties. If the leverage were 80%, then you can deduce that (b) would rise to 62% (15.5% multiplied by four) and your ROI would be 84.5%. Of course, as you use more leverage, you have to purchase more dollars of properties to get your money put to work, and you increase risk.

Just memorize the multipliers for other common LTVs like 70%(multiplier 2.33x) or 65% (multiplier 1.85x). An LTV of 75% is pretty standard when buying SFRs, though you may hit a 65-70% limit for 2-4 unit properties.

The principal amortization causes the cash flow yield to be lower (Cash on Cash return), in this case a 15yr term cuts 11% points off the ROI. Rules of thumb for loans in the 7% range are:

15yr = 11% reduction
20yr = 7%
25yr = 5%
30yr = 3%

Obviously the longer amort term gives you more of a cash flow buffer to weather storms.

So in this case you'd put about $23,200 in your pocket annually on your $40,000 investment (40K * 58%) in $160,000 worth of property. The fewer the units you can accomplish this with the better, but the reality is that the cheaper the unit the higher the yield and the greater the management headaches, so you'll have to find your "sweet spot" depending on how involved you want to be and how much risk you want to take on. The posters indicated they could do this with eight $20K units to get this return, so this would get you to about $240 per unit per month in cash flow, which would be excellent.

Another thing about the leverage is that it allows you to attain more property, so you get much larger depreciation deductions for tax purposes.

Hey Josh, I admire your determination. The fire in the belly will serve you well. You do not have to have a 50K minimum loan. Citibank is a lender with no minimum, for example. I would almost think that any lender that signs up to do Homepath loans would have to agree to do the smaller loan amounts as well. But others will do the smaller loans, no question.

Clearly you need a temporary solution while you do everything possible to repair your credit to enable a permanent and low-rate loan down the road.

I assume you've already looked at options of a private family/friend lender, credit cards, or borrowing against your 401-K (this is free, you pay the interest back to yourself).

Given your large down payment, you might be able to find a local bank (possibly where you bank now) that will do the loan. Call them, and call other local banks in your area. They don't have to follow Fannie guidelines, though bank regulator do impose limits and extra capital requirements for loans to "sub-prime" borrowers such as yourself, so many local banks have tightened up as well.

And someone on BP may make a private or hard money loan to you.