All Forum Posts by: David Chan

How much of a floor is there for the 150-200k range products I wonder now that construction costs are up? The 400k+ segment probably was the surprise outperformer this year but seems like there's just a major supply issue at the sub-200k level. I'd love to see a correction in the market just so I can buy more, but I do question how big of one are we going to see, if there would even be a meaningful enough of a correction in the market any time soon.

A lot of smaller 1 bed unit buildings in that area of Midtown Crossing. Kinda odd to see a 4 bed 2 bath in that area so maybe people just aren't looking there.  Pricing seems about right on it.

The finishes are kind of average, and the area is also kinda so-so, which are your main headwinds, but you priced it right and it's a decent value for the number of bedroom. Tho it is a "value" proposition.

When you say you aren't finding qualified renters, are you getting poor tenant quality? Or not finding leads? That part of town historically had those kind of.... quality issues and I am not sure if Blackstone is moving much quality that far eastward. It's a class B type deal and if the main pitch is value you may be getting exactly that.... maybe it is just one of those deals that takes longer than you expect before the right person stumbles thru, I don't know if you can do much radically different here.

@Tony Gazetti As I mentioned, I am a class B+ / A type for a reason. I hate dealing with class C. Tenant issues, maintenance, vacancy, all are potentially time bombs. Now you can argue class A's might have some basket cases too and that's absolutely true, but it certainly is a lot less frequent and a lot easier than class C.

You are hopping a bit all over the place on strategy as well. You should have a very clear mindset what you are trying to achieve before your first purchase. For us, its cashflow and asset quality. We structure our company accordingly with that in mind. That's not really a question any one of us can answer for you. You need to have a chat with your banker and see what they are willing to do with you and what assets would take you there. Different people, different answers.

I am also not saying there's no potential to make money in class C, there's a need for the class of housing for sure, but it takes a certain set of skills and mindset to deal with it. Quite frankly, I enjoy quartz countertops and soft close drawers a lil too much for me to do anything else.... it's just who I am. It takes a certain type of investor to deal with class C. 

You are focused only on the numbers and not at the big picture. Your business has to be scalable if you have ambitions to do it full time. You don't want to be talking about $30k properties all day... I would hope. If you can manage 1? Good job. But can you manage 3? 5? 10? 20 of these? We can dissect your 1 house all day long but that isn't exactly sound advice.

Your focus is to find the banks who would be willing to work with you on this should be at the top of your mind right now, and as @Andrew Johnson already said, you need to start talking to bankers before you look at any more properties. Now unless lending in Michigan is at the point where bankers are full on embracing the 2008, I can't see any main line bank willing to work with you and offer you the the numbers and ratios you proposed in your initial scenario. As I said, I work in class B+ and A, and it is sometimes difficult for me to convince my banker to give me sub-5% interest with a 20 year amt on my properties. I don't see how you can do it for class C. If they are doing it...... there's problems in the lending market again.

TL:DR? If you have a banker who is willing to fund these deals, and if you want to get down and dirty? Your deal right now is tight at best. You need to negotiate better terms if you want to make money. If you want to build a business, I don't think you are looking at the right things.... at all, by far. Start with your banker. That person will be the one you need to please at the end of the day.

@Tom Rockwell What you are asking relates to BRRRR.

Mainline banks usually have a lending requirement that if you purchase a property for X and the appraisal comes in at Y, they will pick the lower value between X and Y and apply the more commonly used 80% LTV rule to that number for investment properties. Some banks may be more aggressive with the LTV number but the lower appraisal or purchase price rule usually applies. Banks don't care what the you say your appraisal of the property is worth, they are evaluating the risk of your deal and lend accordingly.

If you purchased a house for 40k that's worth 125k and did nothing else to improve it, chances are, you can borrow 32k, simple. If you did renovations, you can probably justify adding on that additional capex. But no one will be using 125k to give you ~100k. The only way to do so is if you purchase your property in question, warehouse it for a year and generate a lease with viable income (seasoning the property) then refinance. This is the BRRRR model that may generate a greater than 100% of your invested capital out of the whole transaction, granted you have to have enough capital to acquire and stablize, or "season" the property, and your lease has to support the valuations that allows them to use the appraised value instead of your invested dollar amount.

@Andrew Johnson makes a good point on lending that I missed: Forget about no money down deals. I did not realize you are budgeting for your loan to cover for 100% of your purchase price.

No bank is going to do this. Forget about it. Main line banks have underwriting standards that they expect you to have skin in the game when it comes to each investment deal. Low LTV deals are reserved for a primary residence and is often government assisted (think FHA) that still expect you to come up with 3.5% or so of equity to purchase a house for yourself.

A private lender or investor might do 100% LTV but I haven't seen anyone that would do it for less than 7%. Other hard money lenders might give you 60/70% LTV at atrocious interest rates IMO (10-14%, you might as well as lend off your credit card, at least they can't come after you personally). These sources are a dangerous way to get started if this is your first deal. The terms are often onerous, and it isn't news there are scams with startup lenders especially seeing how hot the market is across the US, it takes a certain level of sophistication to deal with these types. No one is going to give you a sweetheart deal to buy a class C locale: think from a lenders perspective, why should I throw money to a newbie investor buying a horrible asset class unless if I am paid to do so?

I think the issue here is your expectation for getting started in real estate. The market is hot. Things move fast. Properties are snapped up by all cash investors. Unless you have skin in the game and a cash reserve to make conventional deals happen, you are asking to pay dearly for either A) costly financing, B) costly property investment mistakes by buying the wrong property, or C) end up being washed out if the market stops performing and has a wash out while leveraging your financial profile to the hilt, especially if you are expecting the 100% LTV idea to fly. (it won't)

Stop what you are doing, make a realistic analysis of your financial position and estimate the amount of cash you can pony up front. Go into your bank and ask private lenders who would be willing to work with you and what they expect. Different lenders have different asset class targets and focus and that may also steer what you are able to do. Without the backing of lenders unless you got a trust fund somewhere to take over not many people can get -started- in real estate let alone grow.

Personal experience: My portfolio is currently at 41.5% LTV. Cash on cash returns is around 4.5%. I have 16 houses under my belt and it is my company's strategy to take on class B+/A rentals in a destination part of my town. Even with that it took me 2-3 years to build a solid reputation with my lender before I felt like I have a good handle on things. If I didn't have that wide a margin of safety with my overly conservative LTV, some of the mistakes I've made in the first few years starting out would have destroyed any chance my firm can survive for the last 7 years. I can only wish you have this well planned enough before getting into it at a rather pricy price point in the industry cycle.

$41k for a house? Class C / Section 8?

The capex estimates are good, but your maintenance and repair budget isn't realistic. 75-100 a month maybe, 25 isnt going to get you anywhere. (our portfolio has a budget of 150/mo per house, and we are all class B+ and A's with very little deferred maintenance and an aggressive capex spend.)

30 year mortgage on an investment property is also not going to be that easy if you are working with older housing stock. If you are able to find a commercial lender to do 30 year my experience is that they are wanting 5+% rates at the moment or 30-40% down. Mortgage numbers seems too sunny with flowers, but maybe you have better bankers than I do.

Throw these variables in..... the deal is barely break even cashflow and a low dollar value deal. Not something that I would ever do, and doesn't seem that exciting. Unless you know something that I don't know (area gentrification, redevelopment, buyout potential) then I see no reason to get into it.

@David Faulkner To David's point, if you want to treat the 50k as a lottery ticket where you can either win big or lose it all, then this deal is it.

This your first time dealing with class C and section 8? The numbers can be 20% ROI a year and I still wouldn't touch it with a 10 foot pole. In fact, if you came to me with this deal, I really wouldn't have much interest to take on this type of portfolio even if you gave it to me for free.

I don't think we need to flesh out the difficulties of class C assets. There's plenty of articles about the type of investor and manager that's required to run class C assets. Are you wanting to hire a manager and pay him maybe $40 bucks a month to help you run each house? Maybe it's time to wonder who would say yes to that kinda offer.

100% occupied? You need to ask why is the seller selling when this portfolio on paper is running full steam ahead. (because it probably is not.)

It's been sitting on the MLS for the last 3 years. It's a public deal. There's no informational advantage you are proposing here and that means the majority of active investors in this local market agrees with the risk profile.

Move along. No point to waste time with a subpar asset in a foreign market when the masterclass of class C investors have passed it by for the last 3 years. Anyone pitching 50% cash on cash isn't doing you any favors, especially in today's markets.

Just out of curiosity: why not do it yourself?

There's a variety of managers out there in town who can do property management but it's never one size fits all. It is always a question of what you are looking for. I have 1 class C building that my personality cannot deal with so I have a manager that specializes in this product class that does it for me, while the majority of my 16 properties are class A and B properties and those I personally self manage.

Knowing the reason why may be a better way of pointing you to the right person or answering the question.

@Jim Blackburn

Are you suggesting him to buy a 4-plex, live in 1 unit to qualify for FHA on an investment property? Probably need to clarify FHA is only going to work for owner-occupied properties of 1 - 4 units properties.

Owning 1 property isn't going to turn into a business however. What product are you recommending to clients beyond that first property?

I'd like to see what people are doing and whether the advice they are getting are any different to mine. I am holding 16 properties with a $3 million book at a 41% LTV. Never in my 7 years doing this could I qualify for FHA so that's an interesting take for a recommendation.

1250 is a bit high for a 2 bed being in Papillion, but I'd be fairly firm at 1100. The 825/mo duplex nearby just looks dumpy compared to your unit, but it does have more sq footage. It might hurt your comp values until that unit gets rented.

Just remember at 1250 you have plenty of alternatives in the city to look at, especially in Midtown like Dundee/Arksarben/Blackstone where you get the location + the finishes. You've done well with the renovation, but kinda a hard pitch at 1250 for a 2 bed unless someone really wants to be in Papillion.