All Forum Posts by: Mike H.

Believe it or not, that coffee thing works.  Back when I was buying/rehabbing houses to hold, I had a couple people from bp contact me and do just that.   A couple of them are big time investors these days with over 40 houses each and have moved up to STRs and commercial properties.

Find someone that will share their opinions and suggestions and it'll help keep you motivated to get through the starting period.  Stick with it and take action with their input and you'll end up having a really nice portfolio in 10 years.  That coffee thing works. 

It may not be an easy drive for an RV but it can't hurt to put it up for rent for them anyway. On the river is on the river.  I think there are some sites that let you post land to camp on (i.e. tents).

I'm not sure what the weather is like there as the only thing I know about new mexico is what I saw from breaking bad. :-)   But you might want to even consider putting up a yurt (glorified commercial tents that are relatively cheap) and furnishing it and then renting the place out on airbnb.

Is there good fishing on that river? Kayaking? People will pay to stay in a yurt.  And when you go to sell, you could use the rental income as a big selling feature to potential buyers.

I think the rates are a bit higher for DSCR loans. And while they seem to work much better in areas with lower property taxes. Really hard to hit ratios in places like Illinois where the property taxes are silly.

I'm using them for all my holds in eastern tennessee when I finish construction of a rental cabin i'm going to hold.  Only done a couple but they were pretty good. Much easier than typical loans and the rates weren't that bad.  Better ltv helps keep the rate down. 

But they almost always qualify with dscr ratio out there because the STR rents are high and the taxes are nothing.

Quote from @Jay Hinrichs:

where I have seen this work and can be done at state county and city level is property tax abatements. Portland did this in their pearl district it was a defunct area with a bunch of old buildings that were functionally and economically obsolete ( probably like many city cores) but prime locations and all the infrastructure is already there.. They gave developers tax breaks and then the buyers of these new units got a 10 year tax abatement no prop taxs for 10 years. That changed the whole area its now all condo's of course not starter housing but it worked to transform an area.  Starter housing on the west coast is pretty tough unless the govmit buys the land and donates it.. land cost are huge part of it.. but in cities were you have lots that are basically worthless  as existing homes cost less than it cost to build.. those could be targets.

 In illinois that would work wonders because our taxes are so high. a new construction 1,500 sq ft home here is going for around 300k to 330k in my area.  But the tax rate is 3.1 to 3.3 percent depending on the town.  There is a homeowner exemption but the taxes are still 7k to 8k a year for that house.  That would save a homeowner 70k to 80k over the 10 years. HUGE incentive.

But where that wouldn't work would be in states like tennessee where they pay $800 a year for homes valued at 600k to 700k. I"m guessing areas like florida and such would be the same thing.  Wouldnt' move the needle. 

Not sure how best to do it, but a larger first time homebuyer credit makes no sense to me.  Thats just going to create a larger buyer pool for existing homes which will drive up those prices (and inflation) but not really address the lack of new construction going on.

Thats the million dollar question.  To me there are a couple of ways you can do it, although one is no longer really a workable option - at least not like it was a couple of years ago.

1) Direct marketing.  Mail letters to home owners.  Maybe filter by people with no or low mortgages and/or people with 90 day notices, or people whose taxes were sold.  Sometimes those people are in unique situations to where they need to sell their homes and for whatever reason, don't want to put it on mls and have people come through their house for showings. Keep in mind, these houses typically need quite a bit of rehab work. 

2) Find wholesalers doign direct marketing. Some are better than others - way better.  But if you find a good one, you have a shot at them doing the marketing and finding a good deal that they can pass on to you at a lesser discoun.  i.e. maybe they get a 200k house under contract for 100k and it needs 40k in rehab.  And then they sell the contract to you for 115k and it needs 40k in rehab so you'll be all in at 155k.  Not a 70% deal, but at least you're getting a discount with some work on your end.

3) Make a bunch of low ball offers.  This is the one that doesn't work really any more.  It was somewhat successful up until four or five years ago.  But these days not so much.  I still do it to buy land.  Not getting 30% to 35% discounts but I can get 20 to 25% on buildable lots in eastern tennessee so this definitely works a little for land.

But again, it can't hurt to ask.  If you see a listing that might have some selling clues in the description (i.e. needs work, owner moving, divorce, etc) or one thats had a recent price drop or a deal thats fallen through, don't be afraid to put in an offer of say 150k on a 200k house. If you can do it without any contingencies and fast, you might have a shot.  And maybe 75% is a bit of optimism.  But it might be close enough to where they counter at say 165k or 170k even to where you're at least not paying retail.

Those would be three ways I'd be looking at to try to get a discount. The last one is not going to get you to that 70 or 75% LTV like you should want to get deals for when investing. But maybe you get lucky and hit on one at 80%. Thats not terrible these days. The other two ways likely require you to do some rehab. Otherwise, you probably won't see those discounts on those either.

As a rule, most areas will not cash flow if you're paying retail for the property. Thats been like that for almost any time since I started even looking at investing 20 years ago.  I spent the first three or four years shaking my head because the numbers didn't make sense. Put down 20 to 25% and lose money every month? 

The key to investing is you have to buy the property at a discount. Typically you want to be all in around 70 to 75% of the value of the home.  Then you can usually eke out a small profit on the rental income if you self manage and pull your money back out so you can scale with that. 

But its very rare to be able to pay retail today and expect it to cash flow positive - even though you're sinking your 20 or 25% down.  Keep in mind though. You are still getting principal paydown and appreciation on your investment so coc is not your true return.  And if you're losing money, you'd get that writeoff against your regular income plus the depreciation writeoff.

Still, I'd find better areas where even if you paid retail or say 10% under retail, you can do a little better than lose 1k a month. Thats not sustainable and not scalable. 

Here in the towns I'm in (smallish illinois suburbs), you can buy a 3/1.5, 1400 sq ft house for say 190k (retail and rental ready) and rent it out for 1750 to 1850 all day long.  If you put down 20%, thats 38k so you'd owe 152k.  Your payment at 5.75 would be about 900/mo.  Taxes 350/mo, insurance 75/mo.  thats 1325. If you self manage, you might net about 100 to 150 /mo after repairs and vacancy. 

Lets say 2k a year net rental income. Not great coc for 38k down. Right around 5%. But the depreciation would be about 6k a year so your 2k would be tax free plus you could write off another 4k in depreciation.  Your principal paydown would about 2k a year. And if your appreciation is 4% a year, that would be a gain of another 7,600 a year. 

Now whats your return on your investment? 38k - 2k, 1500 dep, 2k pripayd, 7600 appreciation - 13/38 = 34%.

Its a great return but it also requires you to self manage. 
To me, I don't believe its investing unless you're buying the property at a discount of at least 25%.

I would add though. The numbers don't work as well on LTR as they do on STRs. So if you don't think you can find properties discounted to that level, then maybe look into STR markets too. STRs can help you bring in more money and they have management built in too.

 

While its true that mortgage rates don't correspond directly to the fed rate, I think its still somewhat related.  And if the fed rate continues to drop, so will the mortgage rate. 

I think it was a double whammy when the fed rate was boosted from nothing to 5-5.25 and the fed was also selling a bunch of the bonds they had bought before to drive mortgage rates down.  The key is the fed knows they need to help mortgage rates right now so if they lower the fed rate AND stop selling the treas bonds in their porfolio, that will help create more demand for bond sales to keep prices up and get rates down a bit.

I can see mortgage rates hitting 5 to 5.25 by spring of next year.  The covid money is all gone and the economy is so so right now which should keep inflation down and keep the fed pushing rates lower which will help get mortgage rates lower eventually.

Question.  Are you looking to buy these new construction deals right off mls and pay retail? Or are you looking to GC or quasi GC your own builds?  Typically a GC tries to get 15 to 20 percent margin on the build. So if you could gc them yourself, you could force some equity on the new construction deals and the new construction ones might be a no brainer.

The other question I'd have is whether you're getting deals on the pre-existing homes.

Ultimately, its going to be real tough to scale either one if you're paying retail because if you're buying 250k homes and putting down 20 to 25%, you'll run out of cash real quick.  Now if you're able to do new construction and pull out all your money except 5%, you can scale much faster.

I'm building in eastern tennessee and recently got a GC license.  I'm only building rental cabins which is a higher price point due to their ability to produce income.  But we can build stuff at 70% to 75% or so including the lot and the financing.

That allows me to grow a portfolio without putting hardly any of my cash into the deal.  And because I have a lower loan amount than people paying retail, i'm able to do ok for cash flow too. 

I'm sure there are other areas that people are doing the same exact thing. But thought I'd throw that out there too.

Sometimes its not as much about which one is better in terms of cash flow. It could very well be which one is better in terms of equity so you can scale by not having to dump 25% of your cash into each deal and instead only having to put 5% into each one. I'd rather take my 100k capital and end up with 5 400k houses at 75% LTV making 400/mo cash flow each than to have 1 400k house at 75% LTV making 1000/mo cash flow.

So I would suggest invest in both as long as you can get them at the right discount to where you can scale. 

I think investors should very much be watching the fed is doing and trying to gauge how that may affect their business or business plans.

That being said, lower rates will bring back more buyers for sure. If the rates go low enough, it might bring back more sellers too. People with rates in the high 4's or low 5's may finally be willing to move on from their house if they can find a new rate in the mid 5's. 

But ultimately, there's one thing that rates can't fix - supply and demand.
There simply aren't enough houses for the number of buyers that want them.  And lower rates won't fix that.

Prices going up help that a bit because then the premium to buy a new construction home and pre-existing home isn't as great.  If a new construction house costs 300k but a preexisting home costs 275k, that premium might be worth doing. But when you're looking at 340k for new construction and 250 for preexisting it makes it tough.

Its going to be interesting to see how they spur new construction more. Demand is there.  But not at the price gap that currently exists. 

Isn't the real problem with florida the lack of affordable insurance? And secondly, the risk of these hurricanes getting worse and worse and constantly beating down on people's houses? At some point, people just say enough is enough.

You have a lot of people on fixed income down there and the insurance increases are out of control. They're starting to throw their houses up for sale because of all the equity they've gained and many are moving to other states so they can actually get insurance on the new homes.