All Forum Posts by: Don Konipol

Quote from @Mustafa Mahmoodzada:

Hey everyone,

One of my cousins recently listed his property for sale, but unfortunately, he didn’t receive any offers, even after reducing the price three times—by a total of $50K. His house was in market for two months. He’s since pulled the house off the market. He’s now feeling distressed and is afraid of going into foreclosure.

He called me to see if I could help him out. I’m a buy-and-hold investor, and I’m considering whether I can make a deal that benefits both of us. The only option I can see that makes sense for me—while also providing positive cash flow—is to assume his mortgage, since he has a low interest rate unless you prefer another better strategy. 

I’ve never done a mortgage assumption before, so I’m not sure what the process entails. Here are the details of his current mortgage:

• Purchase date: October 2021
• Purchase price: $521K
• Current loan balance: $450K
• Interest rate: 2.75% (30-year conventional loan)
• Current market value: ~$620K
• Rent: $4,200/month (he already found a tenant)

I’d really appreciate your thoughts on the following:

1. Considering the family relationship, should I do a deal with him? I am afraid of hurting relationship while also feel responsible to do something for him.
   
2. Does this seem like a good strategy?
3. What kind of offer should I make? How much cash should I offer him for his equity to ensure I still get positive cash flow while also keeping him happy—especially given the current market? I need to pay him with a HELOC.
4. Who should I involve in my team to help close this transaction? Do I or the seller need to work with a real estate broker?

Thanks in advance 

Mustafa

He owes $450k.  You say it’s worth $620k.   Why is he afraid of going into foreclosure?  Just lower the price to where it will sell.  

Quote from @Benjamin B.:

Has anyone heard of marketing an ADU (1BR / 1BA) as small office for 1-2 people to telework vs live? The idea came up last night at dinner. Maybe someone teleworks but can't do so at home for whatever reason (i.e. noisy kids, space too small). You could always do a commercial lease but I was thinking this is for an individual ala "We Work". I'd love to hear the communities thoughts.

Why not?  As long as zoning allows, there’s probably a market. 
We built out an office as an addition to my business partners property above an existing game room.  We run over business out of it and lease space to two other people running their own businesses.  
‘My partner tells me that while the ROI is good, it’s not great. 

Ha ha.  Many interesting answers here - as always on BP.  Really these answers are PERSONAL - in other words it’s impossible to answer without knowing your risk/reward tradeoff, your personal financial situation, your anticipated income and expenditures for the future, etc, etc,.

Most quotes I’ve seen offer a lower interest rate for a 15 year mortgage.  So in terms of absolute cost the 15 year will be less costly.  Because the monthly payment will be larger the after mortgage payment cash flow will be less with a 15 year mortgage, despite the fact that the amount of interest paid will be less due to the lower rate and faster amortization. 

Another part of the equation is the ROI that you can invest the additional cash flow at.

Any advice anyone gives is based on THEIR risk/return criteria, not yours. 

Here’s mine.  I like 15 year because I can envision owning the property free and clear with significant asset value and significant cash flow in 15 years, while I have trouble envisioning 30 years.  Not very “scientific” but that’s just the way I think.  On the other side I’d want to accumulate an “emergency” fund asap to have the most important asset a real estate investor can have during a downturn - staying power. So these two are pulling me in opposite directions.  

Should you not be able to make a clear decision based on all the “information” we posters have postered, you can always do what I as a professional real estate investor, syndicator and fund manager has done - flip a coin. 

Quote from @Ned Carey:

@Don Konipol  you wrote  "Here’s why I DISAGREE."

You're not disagreeing with me. I am all for LLCs. No attorney I know owns property in their own name! that says something. 

However I get there are legitimate arguments for saying LLCs are overkill and proper insurance will cover 99% of issues.  It's a personal choice, I just wish more people made that choice based on an educated opinion not some YouTube video or guru advice. 

Ned, I wasn’t clear in the way I posted. I didn’t mean I was disagreeing with YOU, I meant I was disagreeing with my first paragraph “if you do not have significant personal assets to protect then there’s no reason to have investment property in an LLC, you might just as well have it in your own name.”

Quote from @Ned Carey:

@Don Konipol great story.  I wonder how many caught that she used an 'Option". 

You clearly know this, but for those reading along the word "option"  is what changed this from an illegal act "acting as a broker without a license"  to a perfectly legal transaction. 

This is exactly the kind of detail the newbies miss and don't seem to care about or want to learn. 

“She started by attending someREIA meetings, went on to read a number of real estate text books studying real estate principles and real estate law. Further she took the course curriculum for the brokers license, and an introductory course in commercial real estate.”

Here’s my take on syndication.  Please remember that this is coming from someone who has been in the syndication business for over 25 years, and a real estate investor 50 years.

The vast majority of syndications have fees “off the top” averaging 15% +.  So investing $100k you’ve already lost $15k.  You’re down to $85k BEFORE you start!

The majority of syndications utilize leverage of 60% +.  So, you as investor now have have 25% equity with 75% debt after accounting for upfront “fees” by syndicator and third parties. 

If the value of the underlying property drops 25%, your equity is WIPED OUT.  If values drop a more modest 12.5% HALF your equity is wiped out.  And, since commercial property is valued 2/3 by Cap rate (actually, by the present value of future returns, but Cap rate is a good short cut), a rise in interest rates of say 2% from a base of 4% to 6% can result in a 100% wipe out of your equity.

So here’s my take - the fees upfront are a non starter.  I’d only invest in syndicated offerings with NO of VERY LOW upfront fees and MOST of my capital going to property purchase or rehab.  

That being said 60% leverage is exactly the WORST amount of leverage you can use.  50% or less and you have STAYING power. 80% or more and you have “walk away” power.  In a declining market 60 - 75% leverage is a “slow death”. 

Quote from @Ned Carey:

@Kelvin Cheung you don't need to have an LLC. There are advantages and disadvantages. You should study this and understand the risks and benefits. I recommend books by NOLO Press to learn about the law from a business person perspective.

Yes you should also probably work with an attorney. But I advise getting some basic knowledge beforehand so you are not overwhelmed. 

If you want to buy in your own name to save money and then transfer to an LLC, I highly recommend against that.

Do  search her and follow people like @Stuart Udis, @Don Konipol

I’m BIG on having all investment assets in a separate series of a series LLC.  Many, if not most disagree with me. The most common reason I hear is that if you do not have significant personal assets to protect then there’s no reason to have investment property in an LLC, you might just as well have it in your own name.

Here’s why I DISAGREE.  A lawsuit in which an entity you own is the named defendant is A LOT different from a lawsuit in which YOU ARE PERSONALLY named as a defendant.  And the consequences can differ considerably, too.  If an investment property is owned by an LLC you control, even if the plaintiff names you personally as an additional defendant, in all likelihood your attorney can get the court to order you be excluded from the lawsuit. The exception would be if you PERSONALLY perform an act that is the basis of the suit, such as fraud or malice. 

Owning the property personally means that you’ll be the defendant, and even if you have no other assets the plaintiff can obtain a judgement against you. You may have to file BK, the judgement may force you to operate in ways and utilize entities that make day to day transactions difficult, it may/will affect your credit standing, increase the cost of loans, subject you to credit rejection, and about 2 dozen other negative consequences.   

Investors paying "too much" for "too little". The risk is too high for the anticipated ROI. Meanwhile I'll originate my own notes, invest in some selected REITS at 30% + discount from NAV, buy a few notes that are priced at what I believe to be a ‘proper" risk adjustedROI, and wait out a market that (I believe) has mis priced risk/return.

Quote from @Account Closed:

We've been in the business for over 15 years now, and the most common reason for a deal falling apart is a borrower omitting critical information — or, in some cases, trying to pass off borderline fraud as fact.

not only borrowers but intermediaries (brokers) as well.  And then it goes one of two ways - either the borrower (or broker) slinks away with no further comment or they become indigent that it all your fault because you didn’t uncover their fraud “fast” enough; or you he previously produced a term sheet (based on the false information or non disclosure of pertinent facts by them), or you didn’t ask them specifically for the information they with held, or that shouldn’t be a criteria, or you’re discriminating against them, or a million other reasons meaning a affirmative action their “victim” status. 

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