All Forum Posts by: David Beard

No doubt these are springing up everywhere. There are quality companies with track records, at least some of which have members contributing to BP. They appear to offer houses that are fully rehabbed and even rented, as well as houses that are ready to rehab, in which case they'll present the rehab estimate and an estimate of the rental rate. They may offer to also do the ongoing prop mgmt, or at a minimum will recommend a good company. They invariably tout the "instant equity" at close as well as the ongoing cash flow and strong ROI. They sometimes offer to connect you with a local bank for financing, but I'm not sure how receptive these banks would be to an out-of-area investor.

I've seen these two in Memphis that look very repectable and offer very reasonable "turn key" properties, both of which have BP members running them or working for them:

www.memphisinvestmentproperties.net
www.memphisinvest.com

.. and Detroit Urban Wholesalers seems to have a sound system.

www.wholesalemi.com

Safe to say companies like this exist in every urban market.

I'd think these are a very reasonable way to remotely purchase into an area with a strong rental market, using local expertise, and allowing diversification of your holdings.

I'd likewise be interested in other's thoughts on the pros and cons.

Owner Occupied conventional (resellable into the secondary market), 30-yr fixed, look for 4.25%-4.375% and zero points.

Investment property conventional (resellable into the secondary market, LTV limited to 75%, possibly 80% with a yield premium with certain lenders), 30-yr fixed - there is another 1.75 pts required by investors. This can normally be paid up front to get OO rates or you can take a rate that is higher by .625% to .75% (average but varies by loan size).

Had a lengthy call with a local bank known as "investor friendly".

- They'll do cash out refis (on REO properties that are initially purchased for cash, for example) for 80% of (purchase price + documented rehab expense).
- 1 pt to the lender
- Other costs just $200-$300. They do their own inspection/comps, pay for lender's title and closing costs.
- Rate is 6.75%, 15-20 year amort term, rate resets after 5th year (based on prevailing rates at that time, not directly indexed), and resets annually thereafter. They won't lock rates for long terms on loans they're keeping (very prudent given their funding profile).
- No prepay penalties, so could be financed conventionally after one year seasoning if you wished.

The taxes sound high. Don't know what the prop tax rate is there, but the amount you quote must surely be based on a much higher assessment (as is typical these days). You should definitely petition the property tax authority for a lower assessment as soon as you purchase, or at the next annual review cycle.

Insurance seems high as well (3.5% of your purchase price), though I have only SFRs, so don't know if duplexes are outrageous for some reason. Call around, rates vary substantially; use an agent that represents numerous companies, not one dedicated to a single insurer; check quotes on-line to get a feel for which insurance companies are most competitive; sounds like you might be able to save money on insurance on your other properties as well.

Investors seem to leave a lot of money on the table by not aggressively searching for lower insurance rates and challenging tax assessments.

Also, I'm aware of several conventional lenders that do not have loan minimums, so you can get conforming rates on 30-year loans (just called a regional bank and was quoted 5.50% w/ zero points for 30-year 20% down, fixed as long as you have 4 or less financed properties, with no minimum; another lender is at 4.50% with 1.75 pts at 25% down, probablyi a better deal if you plan to rent and hold). We also have a local bank that does portfolio (they keep them) lending with no minimum loan amt: 6.75% 15 or 20yr amort term, .5 pt plus $150 to bank, all other costs absorbed by bank, in-house appraisals done, no prepay fees, loan 80% on purchase+rehab expense ; downside is rate resets to prevailing rate in 5 years and annually thereafter, but closes are fast and very helpful in cranking out pre-approval letters, work with alot of investors with large portfolios.

Might want to request that the seller absorb certain dollar amount (say $1,500) of closing costs in lieu of negotating the lowest possible dollar, so that you can finance a bit more, but prepare some support for the price to give to the appraiser that indicates value above what you're paying, using the most favorable comps and most favorable market rent data; I've found it helps).

Steve --

Similarly I was looking toward making all-cash offers on REOs using a HELOC on another investment property I have, then rolling into permanent financing after fix-up and tenant lease in place.

I haven't done this before and was looking for some guidance on the financing ins/outs of the cash-to-refi approach, seasoning periods to be concerned about, minimizing closing costs from transacting twice (title work comes to mind). Any advice would be appreciated.

Are there any notable differences in approach that should be taken with Fannie or HUD (FHA)? There are FAR more listings from these agencies in our area than through Freddie.

Thanks for any assistance.

Great dialogue -- I'm very impressed with the wealth of experience on BP, and I'm learning a great deal.

One thing that I've noticed in this community (and most, I'd wager) is that SFR foreclosures are flooding the market (I'd guess 40% of all new MLS listings currently here),and banks/housing agencies are discounting aggressively. Picking up the SFRs at 50-60% of what similar good-condition houses are selling for in the area is a tremendous risk mitigant and offers an attractive alternative re-sale exit strategy, to generate cash (if desired) for your investing machine down the road a bit. You're probably not going to find this volume of distressed sellers with MF's -- certainly not around here, anyway.

Banks/housing agencies have 600K of SFRs on the market, with perhaps 3-4 million in the foreclosure pipeline, so they have to discount hugely to get this inventory cleared. Of course, funny article in the paper about Fannie possibly renting out their REOs THEMSELVES! Let's see how that works out for them.

Using lease-purchase contracts as an alternative to straight lease, if desired, would also be an advantage of SFRs. More diversification, more options.

Of course, I only have two SFRs at present, but plan to low-ball on up to 6 REOs next week to take the banks' temperature.

Also, you can bolster your offer with the bank's asset manager by including comps indicating that other similar foreclosed MF's and SFR's are in fact selling at 50x mthly rents or less, and point out all flaws, time to get leased, etc.... I certainly see REOs selling 10-20% below what the bank purchased at auction. As you know, the bank has likely already set up a very conservative impairment reserve on the asset and may well take 125K and move on.

Watch the water bills on the MFs if not separately metered. Lots of extra items compared to SFRs for lawn, common electric, water/trash, higher turnover, offset by economies of scale to some extent, so 50-60% for expenses is reasonable.

The 12% net yield (cap rate) on 50x rents (135K puchase price) and 50% expenses, combined with 25% down and 6.5% 15-yr commercial financing gives you:
Pre-tax ROI = 29%
After-Tax ROI = 24% (30% marginal bracket)
Yr 1 Cash Flow ROI =12% (net of principal reduction)

... so you put in $34K and have CF of $4,050 in yr 1. Looks good. At $125K purchase, looks very good, but check rental market rates and vacancies thoroughly in that area, as I'm sure you know.

Good luck, I'm looking at a similar property with similar numbers, but leased up and only a quad, so it complies with conventional financing and gets better rates. Since FNMA has restrictions on # of rental properties that can be owned (no more than 10), it makes some sense to buy quads that only count as one property and use conventional financing, then later as your property count moves higher use a local bank that will lend for their own portfolio.

Best of luck, -- David

Hi -- If I understand you intend to rent both units, I don't believe FHA does investment property loans; don't represent that your intention is to occupy the property if that is not the case. Investment property loans will require min. 20% down with conventional lender financing and proof of extra liquid reserves on hand. If the owner has equity, they may take back a 2nd for a period of time.
Questions:
Why is property being sold? Assess owners motivation.
Why is the property not currently rented?
Are there alot of vacancies in this area, and research actual market rental rates, as they're probably down trending.
Are all the major system/mechanicals in house at 50% or greater of their remaining useful life? Any other rehab?
Get the owners tax Sch. E from prior year to verify income.
What utilities and yard upkeep paid by owner?
Have you looked at where comparable multi-family and SFR rentals are selling for in this area? Get from a realtor, or through assessor records or other public database.
I would not do any deal for less than 9% net return (cap rate), and preferably 10%. There are simply too many opportunities available to use up your cash and borrowing capacity on 7-8% deals. If the annual net operating income (NOI) is $9,600, then you should pay no more than $105k, and I'd work hard to get to $96k. Be willing to walk away, there are lots of deals. Have your pre-approved financing letter in place to prove you can complete the deal -- will help. I know this amount seems low, but you have to leave cushion to absorb downside such as high vacancy, depressed rental rates, major repairs, tenant eviction. Many rental owners are bankrupt or walking away from portfolios who paid too dearly for houses in early to mid 2000's, and can't cash flow their loans with elevated vacancies and depressed rental rates. Detroit vacancies are generally very high.

Good luck.