All Forum Posts by: Axel Meierhoefer

@Robert Brown I agree with Andrew. The one thing you should keep in mind to make this work well and keep growing in the future is the reserve-aspect. I ran into this recently and, though I was aware of it, I had not really calculated it. When you start having several properties, even if it is under 5, the lenders will also look at the reserves you have put aside in case something more than a minor repair happens to your property. I have created dedicated reserve accounts with American Express high yield Savings for each of my properties to make sure I always have a sufficient level of reserves. If I were you I would also combine that with a good plan, following Andrews general point, to pay back the LOC's. I recommend a percentage of the income from the short term rental activities. If you see that income purely as disposable you will potentially run out of options.

@Wayne Yahnke Your are welcome and if you like to chat about it, let me know. It's easier to talk than type it all

@Wayne Yahnke It appears to me that you might not be including the increase in value you would be creating if you rehab. As Wayne B. said, it is almost impossible to make the math work in California unless you find a total dump in foreclosure or go really out into the most rural areas. In case you had a really good deal (hypothetical) you would want to estimate what the after repair value is. Theoretically, you could then buy the place, renovate it as you have been calculating and get it appraised afterward for a cash-out refi.

In reality, you might find that the ratio you can get out of the costs to buy, reno, etc. versus what you can rent for when everything is done will not leave you any positive cash flow, even if you were able to get your original investment out of the deal. Naturally, if you were able to put in a lot of your own money in, you could "fake cash flow" but I would advise against it. I believe we are approaching or have already reached a peak in valuations along the coasts. Prices have gone up a lot while interest is going up as well and the folks you would want to attract as buyers often have no or not enough funds for a down payment or don't qualify. In the past, there were people who would "move up", either in size or from a less nice to a nicer property. That is not going to happen when you sit on a 3.5% mortgage interest and have to pay more than 6% in a newer place. On top of that there is an aspect that nobody seems to talk much about:

In the past, you could make an argument that people/buyers could deduct their mortgage interest and property taxes from their income taxes as part of the reduction of overall cost. With the new tax rules that amount is capped and many people in California will wake up to a very rude awakening in April/May when they expect a tax return payment and instead will be asked to pay additional money to Franchise Tax Board and IRS.

With all that I think you would be better off to consider turnkey investments that cash flow from the start in locations with continuing economic and diverse development in more affordable cities and states. I live in CA myself and can't make the math work either. I am actually working on a 1031 for one of my properties in CA  into 5 properties in turnkey markets.

@Jesse E. You are right. One other thing to consider. You can establish the HELOC right now while the equity in your property is high. As long as you don't use the money you basically have no payments on it.

I suspect there will be a significant correction in prices in 2019. That would allow you to be more flexible to jump on a good deal and you would not have to ask for a HELOC at a lower valuation of your current property.

There are a few things to consider about possible lender adjustments, but normally they worry about all other issues and you would get the cake and eat it too following that approach.

I am doing that with one of my properties right now.

@Jesse E. One more thing to Dan's description. I highly recommend using the Bigger POckets investment property calculators. You can run all kinds of scenarios to see what your cash flow and stuff will be and when you have the one you want to use you will have a super detailed report (PDF) to take to the lender

@Jesse E. Dan and Brandon gave you some very good insights into the mechanics. There is another aspect to consider. As Dan said, you will have to decide if you move into the next property you buy or not. If you, for example, buy a triplex and move in one unit yourself, you would get the low down-payment advantage as it will become your primary residence. If you purchase an investment property in most cases you will have to put 20% down as long as you don't have 4 properties/units on the books or 25% for 5th or more. That's something to keep in mind.

The aspect of qualification you asked about is what I call "The Dance". It's a very long story with many facets but for your scenario what you will potentially run into when it comes to qualifying is the issue of 'proof of income'.

When you decide that you keep your current property as a rental (even if it is cash flow positive) and buy a new property, the underwriter will/might say: "Prove to me that you actually had the $1100/month for at least 1 year or show me where it is listed in your tax return". There are some ways around it but when you are still relatively new to real estate investing it is often hard. I lived through it the first three times until I got my portfolio to a point that it is no longer an issue (now I have now ones to deal with :) )

I am not saying it will for sure happen, but be prepared that when trying to qualify for your next purchase, you might be asked how you afford to pay for both mortgages. (current property + new one). You might say: " I get the rent from my current property as soon as I am out and I pay the new property from my income - but they potentially will not accept that.

If you like to discuss further I am happy to be available. Just wanted you to be aware of that possibility regarding your ability to qualify for loans, regardless if it is HELOC or FHA, conventional, etc.

@Account Closed It depends on what you mean by ... make money on the buy. Most people look for steady positive cash flow when working with a TK company. If you mean appreciation I agree that that should be seen as icing on the cake if it happens but not be the motivation to buy. 

@Wei Jie Yang Yes, there are turnkey providers (even though that term is interpreted differently by different people). I have checked a few myself and am working with some. My suggestion is to set your criteria of investment category, cash flow, finance or all cash, market condition of your location. (I recommend reading Chris Closier's book "Turnkey Revolution". Yes, he is biased to his company, but they are the gold standard and if one does everything Chris recommends I am pretty sure you will not end up with a bad provider - could still end up with a bad deal though ;) )

I am also not an extreme bear or doom and gloom person but I look at the markets and market behavior over time. That's why I am contemplating how smart it will be to have cash positions to jump on new opportunities. Inverse yield curves saying something, 10 year bull-markets, etc. are not going to be around forever. Having some powder in your back pocket when the next crisis comes is not a bad idea.

That does not mean to stop investing. I am in the closing steps of a new construction investment and also bought a piece fo cacao farms this year for my retirement plan.

For next year I am working on a 1031 with Memphis Invest (very early stages right now)

I would not agree to look for a company first and then see if what they offer fits your investment goals. IMHO, you want to set your goals, your financial and cash flow frame and then see in which markets that can be met. You might also take a really close look at financial market movements and economic conditions. You have some good companies in your list but to me, the biggest problem we all face right now is that pretty much anybody was successful in the market in the last 4 years. You would have to come up with criteria that serve you well going forward. This is not the place the go into details about economic developments but I strongly believe strong changes are coming that will influence your outcomes substantially and are not very dependant on the past performance of the turnkey provider.

This is a scenario that is complex and hard to help via message board. I typically prefer to discuss on the phone as that allows for a better flow of questions back and forth. I am not a lender but be happy to talk to you.

It sounds like you are more emotional than rational/financially.

I agree with most of what Kathy said. You stated that you are self-employed. You mentioned that last year tax return was low and this year will be better. One thing I would suggest to substantially increase your chances would be to employee yourself in your business. I am sure you paid your cost of living from what you made from your work. It's a little more involved than I can explain in text but that is the main thing I would do.

With your good credit, your reserves and the fact that we are almost in December of this tax year, I would aim to create a true image of your financial situation that is appealing to lenders. Again, happy to chat about it. This is more a matter of how you position your business and yourself. I have been dealing with this "dance" for the last 13 years and got pretty good at it, I believe.

Last point. Your data is pretty incomplete. It looks like you are not a Pros-member, so you only have limited use/access to the Bigger Pocket calculators. If you already exhausted and want to do a  screen-share with me I would be happy to help you run it for your two deals. Based on what you are stating I am not sure that you really have a full picture of the financials yet, which a lender will want to see, and you should know to make an informed decision.