All Forum Posts by: Mike H.

Quote from @Don Konipol:

Most Common Incorrect “Facts” by the Inexperienced

1. It’s “illegal” to purchase a property without the approval of the existing note holder (subject to)

2. If a property owner stops paying on a note the lender just “takes” the property

3. That there’s ONE foreclosure law in the U.S., not 51

4. That real property ownership is indivisible rather than a “bundle” of rights

5. That real as well as personal property rights isn’t under attach by political forces in the U.S.

6. Real estate prices always go up

7. Mortgage rates of 3 -4% are the norm

8. That real estate gurus / mentors have been successful in their real estate investing careers - if they ever actually had one

9. With no experience, knowledge or capital they can be successful by attending a weekend workshop 

10. Lenders are lining up to provide down payment, “gap” financing, and earnest money deposit financing so that they, with no experience, no capital, and no knowledge can purchase a property they incorrectly analyzed as a good purchase, for “nothing” down.

 Real estate prices always do go up - just a matter of how long it takes.  People who bought during the boom of 05-07 had to wait almost 20 years but their houses eventually were valued at more than what they paid for them. :-)

One other thing to consider though might be looking for areas that you can STR and LTR. LTR is a bit more consistent and predictable in terms of rents. But it also comes with more risk in terms of evictions and damages - which you can never collect for.

But STRs don't have any issues with evictions and damages are typically covered by the STR insurance or sometimes the Property Management company has its own insurance too.

The other thing is that, on average, STRs tend to generate more income than LTRs. 

Your age and goals also matter. Being young, you may be able to find a nice area that will allow you to BRRR your way to a sizable portfolio as LTRs and create a ton of equity and long term wealth and then use that to do even more fun stuff in your second phase of investing.

But in terms of returns, I still think STRs are the way to go - even in areas that are not big vacation spots. 

I would definitely get a loan on your existing home before you buy your next one. Get a Heloc on your current home because some lenders will go up to 90% on helocs and then you can maximize the amount of money you have available to you for future investment properties. And the nice thing about the heloc is you won't be paying interest on the money if you're not using it. 

If you turn around and refi and pull money out of your existing home, then you're going to have pay interest on that money whether you're using it or not. Although if thats what you're going to do then do it now.  Your terms are going to be better right now because its owner occupied. Once you move out and its investment property, then hte ltv you can get the loan for is less and the rate is higher than if it was your primary.

Once you move out, then you won't be able to get a heloc on the investment property unless you're lucky and find some local lender still doing it.  Even then you won't be able to get the heloc amount to 90% ltv.

You mentioned that when you rent your property out it will rent for 400 more than the mortgage. Is that 400 more than the current mortgage or then the new mortgage if you were to refi and pull cash out?

i.e. What would the new mortgage payment be if you refi your existing home? And then how much more would the rent be? 

It seems like it might be a bit tight on profit.  In this case, I'm wondering if you'd be better off selling your house instead.  Buying your new primary.  And then looking for rental properties that you can buy for a discount and that cash flow too. 

Normally, I'm always opposed to selling anything ever.  But in this case, I'm wondering if that would be the way to go.  I'm just looking at the fact that you may be pulling most of your equity out of the existing home and then breaking even on the cash flow or worse.  If you had 4 or 5 rentals generating money, then maybe that is ok.  But if you only have one rental and its tight on cash and low on equity, I don't know that I like that as much. Would you be ok if you had to pay two mortgages for 3 or 4 months if the renter stopped paying and you had do an eviction?   

I'm a huge believer in the numbers and I don't care whats going on with the market.  But you do have to play the numbers of what the market is dictating. 

I had dipped my toe in a couple of fix and flips before the market crashed in 08.  And I was looking at the numbers as house prices just started plummeting.  It just didn't make sense to me how you couldn't make money buying at those prices.  Now the issue was you couldn't sell houses for anything then either so it only made sense if you wanted to rent them out. And thats what I did.  Never sold a thing until covid. 

Now I'm seeing the same thing in tennessee. I'm building cabins to sell and to hold.  And what I'm seeing is the bigger cabins are struggling for rents and also for prices in terms of sales.  But the smaller cabins are doing surprisingly well on rents and, given sales are based on rents, not surprisingly they are selling for good prices too.

But new construction out here has come to a standstill.  There is next to nothing going on the market in terms of new builds which is a complete 180 from what its been like the last few years.  

But we're still building and actually we're ramping up even more right now. In another year as interest rates come down, and the boom of cabins that came online over the last two years starts to get sucked in, I think there's going to be a return to solid and steady growth in demand for new cabins.

I love my numbers eithe way though.  I'm building 1,000 sq ft cabins that I'm all in at about 350k including the lot and they're worth about 500k to 550k (comps on the smaller ones keep going up actually).  The rents are still growing on the smaller ones too as I think the rents compare favorably for people coming in when they look at a nice hotel room for 150k to 200 a night or a one bedroom cabin for 200 a night. 

But again, the new construction starts are next to nothing right now and have been for the past 8 or 9 months.  What was taking 6 to 8 weeks for septic permit approvals is now less than a week. Its great. 

As long as your numbers work, now is absolutely the best time to invest.  There are so many other investors who are sitting this time out because they don't see the boom articles in anything and they're scared. 

I started back in 08/09 with a heloc of 43k and that was about right. I pulled every penny out of the heloc and stuck it in my bank to show I had the reserves most lenders wanted.

But I think there is a different sense of what investing is these days.  When I started, my goal was always to be able to find a deal where I was all in at 70% or better on the ltv so I could pull all my money back out and keep going.  

I used a hard money lender that would finance 100% of the purchase and rehab so as to not eat up bit a couple grand of that 43k.  And then I'd refi into a long term loan when I was done.

To me, you need to find deals.  If you really want to get ahead, its about finding properties well below market.  It helps you preseve your capital and gives you multiple exit strategies. 

These people buying str's today make me shake my head a bit.  The numbers are still ok sometimes when you look at all the ways real estate makes you money.  But, my gosh, they're paying retail. That seems crazy to me. 

I think if you had 40k and could find deals, and then you used a hard money lender for your acquisition loans to cover purchase and rehab, you can make that capital last a long time. But the hard money lender isn't going to give you 100% financing unless you really are finding deals below market (typically 70 or sometimes 75% ltv).

Have you given the rent increase notice in writing? Or was it just verbally? 
Did you give him the rent increase in writing in person? Some areas thats required too.
If it was just verbally, you can't evict off that. If it wasn't in person that may or may not fly either.

What you can do, however, is give him 30 notice to be out assuming he's currently not under any lease and is just a month to month tenant. Here in illinois when the lease expires, the tenant is considered month to month which means either party can give 30 day notice to leave or to be told to leave. 

But once they get the 30 day notice, then they might sing a different tune real quick.  Then you need to get them to sign a new lease - even if its a month to month lease - for the new rent amount. 

If they still don't budge, then you have to follow through the eviction.

For the life of me, I don't understand why so many areas in the country make evictions so onerous on the landlord and the collections of unpaid rent so impossible for landlords. Its truly the most illogical and inequitable thing on the planet.  If I go into best buy and walk out with something without paying, I'm getting arrested for theft.  But if a tenant doesnt' want to pay me rent and they are essentially stealing rent from me, I have to go through hoops and then even when I get to court and a judge agrees they've been stealing rent, the judge gives them another two weeks to stay there (i.e. steal even more rent).

Quote from @Matthew Paul:

Quote from @Mike H.:

Quote from @Matthew Paul:

The federal government cant solve the problem . The problem lies with local jurisdictions . You have areas where property taxes are going up too fast based on the over valuation of properties  ( tax on unrealized gain ) . Fees for new construction , between capitol connections , impact fees , environmental fees , engineering fees , etc  you CANT build AFFORDABLE housing .   I didnt even mention land costs , and the cost of the construction itself , and commissions . 

All that both sides are saying about housing is a ploy for votes .  

There is plenty of affordable housing available right now , the problem is that no one wants to live in the cities where its located . Due to crime and poor schools .  Fix the crime and education problem and the free market will solve the rest .

" I am with the government and we are here to help "        Not 

 I disagree completely. The govt has to be the one to fix this problem.  We have a supply issue because banks stopped lending to builders other than one or two at a time for spec builds after the bust in 08 so they were limited in being able to grow the supply.  And now the margins are too tight for people to do it. 

The govt absolutely has to help nudge new construction or this problem is never going to be corrected.  We simply don't have enough homes for the number of people who want them.  And the pace of homes being built is too far below what we need to keep pace let alone catch up to where its only going to get worse.

And that is going to drive up inflation big time. Which then leads to the fed keeping rates artificially higher than they should be.

 I have been waiting for a permit from the " government " for a sewer connection since June . Its an existing house with septic , and the sewer stack is already there . Its digging in a straight line 85 ft .  Its a $7000 job , with $21,000 of fees , permits and engineering . The job will take a day and a half .    

Sure we need more government help 

 I think you're missing my point. We need the govt to help incentivize new construction because the margins aren't there to where we're getting enough new homes compared to the number we need.  We're several million homes short as it is and we're not even keeping up with the new household formations so that number is getting worse and not better.

Now when you talk permitting and government, you're talking something completely different.  And I'm on board with that completely.  Some of the stuff they do is absolute garbage.  But thats not a federal issue - thats entirely a local problem.  Every area I know has gotten worse and worse and worse on it.

Fifteen years ago,  when I was buying, rehabbing houses and holding, I oculd hire a licensed contractor and they were able to change toilets, faucets, even water heaters. As long as I wasn't running new water or drain lines, they were fine. But Now, in my area, not only does a plumber have to be the one that touches that, but I am "supposed" to hire a plumber just to demo (i.e. remove a toilet or vanity) the house.  If I want to change the countertops, I am supposed to have a plumber pull a permit because only a plumber is allowed to change a faucet. 

Its a scam.  

And some might say thats what you get with illinois and the democrats running the state (which is a bit of a problem).  But the fact is I'm building in tennessee and their govt rules are just as bad if not worse.  I've got a 5 acre piece zoned commercial (parts of it) and agricultural.  I wanted to put a steel building up and they said I had to have a bathroom there and needed to have a fire hydrant within 2 miles.  Then I asked if I could just store some materials on the land.  Nope. I have to get a permit to do that even though its rural area with nothing but farms around it.

And the septic rules keep tightening up there worse and worse where its rendering some lots that were previously approved for a one or two bedroom septic to where they are literally unbuildable and useless because they won't allow any septic at all.   The building department now wants driveways to come in at 25% slope but they're talking about changing that to 15% slope which will make even more lots virtually unbuildable.

Thats tennessee who goes on and on about they're all about a govt keeping out of business' stuff.   These local governments are all absolutely terrible. 
 

Quote from @Alan Asriants:

Quote from @Nicholas L.:

@Ted Barrett

your analysis is roughly correct.  higher rates have crushed cash flow.

i never really used the rule to begin with. i just looked at lots of individual properties. i will also do a BRRRR if i can break even when i'm done and get 90+% of my cash back out.

 Seeing a lot of this. People doing BRRRRs getting back a good portion of their investment and breaking even. 

Doing one of these myself. Thats considered a good deal in a nice area...

I think if you're looking to build a sizable portfolio, then these break even deals can be ok if they're in good areas with good rents.  And I did a few of these when I was building my portfolio.  But I think the key is that you have to a balance of higher cash flow properties so that you don't end up with 40 of these deals that break even and nothing else.  Then you'pre going to get yourself into trouble.

But every once in a while there was just a really nice house that I knew would be a great long term investment and I would break my normal numbers requirements and take it down. And those deals turned out to be huge equity gains 10 years later for sure. 

The other trick I would do is I would fudge my numbers on the rehab to make the numbers work so I could stay under the 70% ltv and not put in too much money on deal.  And what I mean by that is that I would take a house that needed 30k in rehab and cut the rehab budget down to 20k and leave the old windows.  Leave the ugly cabinets (or just paint them), leave a roof thats on its last leg and maybe has 4 or 5 years tops with repairs if that.

My goal was to take down houses and by doing that, I was able to grow faster and offer more so I could get more.  And then I was able to do the deferred maintenance later on after tenants had paid the rent for a few years. 

The appreciation and principal paydown gained over the years was well worth the shell game I played by under rehabbing the houses for rent to keep under that 70% ltv mark and still offering enough to take them down. 

I think another factor here in determining whether its a good investment is your age and your goals.  If you're younger then it might make a ton of sense to take down anything you can as long as it cash flows.  In 20 years, those same houses that you own today will be paid off and worth double what they are now.  So if you had 20 of them, you're talking about a huge retirement kicker that you can build.

If you're up there higher in age (i.e. 40's or 50's), then the long play doesn't make as much sense.  If it only has 100/mo cash flow, there will be times when you have to dip into your pocket.  Not worth it if you have to feed the thing.

But again, what are your personal goals to investing. Growing your portfolio? If so, then sometimes you take some of the lesser deals just to grow.   Just like you can't hit homeruns on every deal, sometimes your better off taking some lesser deals in there too just to grow. 

The 1% rule doesn't work everywhere anyway.  Perfect example is Illinois where our taxes are 2 or 3 times most other areas.  In my area, a 200k house would have property taxes of roughly 6400/yr.  Whereas the same 200k house in tennessee would have property taxes of than 1k a year.  Thats a huge swing in expenses.

I think you have to run the numbers and work backwards and then find a gross profit that you're comfortable with.  I.e 3bed, 1500 sq ft house rents for 2k/mo.  You can buy it for 200.  Your down payment would be 50k, and loan 150k.  Your payment at 6.5% would be 950/mo or so.  Taxes another 400/mo. Insurance 100/mo. That leaves 550/mo gross profit.  

If you're ok with that number, then you do it. If not, then you pass.  Just need to find a gross profit number that you're ok with and go from there.