All Forum Posts by: Mike H.

I think when you can start seeing rates in the low 5's, people will start to jump back in again. But I still believe we have a huge supply and demand issue and the government needs to do something to spur new construction. As it is, there are more households forming than there are new construction starts coming online.  Way more.

And there are also more people locked in with rates in the 3's or low 4's, that may never sell their house because they can't part with that financing. 

I saw a mention of providing first time homebuyers more down payment assistance.  That doesn't do anything but help people buy homes that probably can't afford to do so. 

What I'd like to see is the government pay down a mortgage rate for X number of years if a buyer buys a new construction home.  We have to create real demand for growth in new construction if we're going to fix the problem - and its a big problem.

If rates were to come down to 5.5%, then the govt could offer to buy down the rate to 4% for say 7 years. I think that would cost 225/mo? or 2700 a year?  Do that for 5 years of the 30? It would cost the govt 15k but think of all the jobs it would generate in new construction and taxes it would add to the states.  Maybe the states could kick in some of that 15k too. 

Plus they'd get money back from the taxes on the builder's profits.  If the builder makes 30k on a house, the govt is getting 4k to 6k in income taxes. Not to mention the taxes they get on salaries of the construction workers. 

I started with a portfolio of about 83 houses (SFH) in some smaller towns here in Illinois. It took me about 15 years to build that up and I had never sold a thing until covid hit. And that period kind of soured me on self managing and rentals. Plus I wanted the cash to start building rental cabins in eastern tennessee.

But looking bad I made a poor decision in selling (I sold about 40) and should have refi'd several of those houses instead.

Here would be my criteria if I could have it do over again:
If its a nice house in a nice area that will appreciate well and rent well, then keep it and refi.  If its not all three of those, I'd sell it.

Unfortunately, I didn't figure that out until it was too late.
Had I done that from the beginning, I probably would have kept another 20.  And on those 20, given that rents have gone up a ton and equity has gone up, I'd be making just as much money as I was before I refi'd and had just as much equity again. 

So I'm selling a few more in areas that are further away. But everything else thats decent and close, I'm keeping and pulling money out via refi's.  Tax free money is great. I can gain even more equity by putting the money into rental cabins in tennessee. And now I still get the benefit of some rental income and more importantly, principal paydown, appreciation, etc.

I would allow my rentals to be rented out by short term rental arbiter - but only if they had some money behind them.  And I would require the contract to state the the furnishings would all belong to me if they ended up being short on rent and I had to go after them.

To me, many of the people that do this tend to do it because they don't have the money to buy the units themselves.  And thats a red flag.  They might easily have some issues with a slow period and then where do they get the money to pay the actual rent to you.

the one question I have is if you could write the contract in such a way that an eviction would not be required.  If you set them up as a "property manager" who was required to produce X amount of income to you (i.e. your rent amount) and then they'd get the rest.  And that they'd be required to furnish the home and they'd be responsible for all repairs as well.

Then technically they would not be a renter so you wouldn't have to evict them and then you might be ok. To me thats the risk. If you "rent" to them and let them STR the home, then if they don't pay, I think you'd have to evict them.

Again, I think if you were to bring them on as property manager with no renter rights and require them to furnish the home and manage it and guarantee you your rent amount and allow them to keep everything else, you can at least mitigate your risks. 

Quote from @Chris Seveney:

@Justin Brin

1. I would not rent my house short term. I live in dc area and could do it especially at inauguration etc but for us it’s not worth it in the sense of our house is our house - not someone else’s. Sometimes not about the $.

Now this is my opinion and for others it’s very different depending on the situation - I just wanted to share an alternative point of view

Regarding what has more wear and tear, I would say short term rentals have more wear and tear to them than long term tenants but also depends on the tenants.

I would disagree that short term rentals have more wear and tear.  Give a house two years of a long term rental and its going to have much needed maintenance.  An STR will look every bit as good as it did when it started - because it has to.

Not only that but it is much easier for property managers to get repairs reimbursed when a guest damages something as an STR as opposed to when a long term renter moves out and outside of the security deposit, good luck.

Its a tough one to really help someone with.  Ultimately in looking at it, I'm not sure commercial would be that great as it doesn't have any highway frontage. 

It does have some road running through a portion of it and it does have the railroad running along the border. It looks to be heavily treed.

Have you thought about having a timber consultant tell you if theres any value in having someone come in and cut down the timber?  Might be a way to get some cash quicker or maybe get a buyer for the land quicker if you can show them they could pull 1k an acre by having someone come clear cut the parcel after they buy it.

The local population seems very limiting too. Its just a really small town and very few towns nearby.  Its not near any major cities where someone might look at it as a long play for path of progress.

Another option might be to see if a solar farm or wind farm company might be interested once its clear cut.  If you could get some interest by someone that does that, it might help you drive the price up and/or get a quicker sale too.

Those are some suggestions for getting value or maybe a quicker sale.  But in terms of a new home builder wanting to buy 109 acres in that location - I just don't see that being very likely (IMHO).  Same with commercial.  Just too small of a population.  Not enough people to generate the demand to sell enough houses for that size property and not enough people for a factory or something to come to because they wouldn't be able to get enough employees from the surrounding areas.

Is that a good hunting area? Maybe you could have a timber guy strategically come in and cut some of the timber down so you could get some cash and then sell to someone looking for some hunting land.  

I just don't see you being able to do a whole lot to allow you to sell it quickly outside of lowering your price to something extremely compelling.  

@Devin James

I'm curious. But is there a scenario where you strictly entitle lots or maybe take reasonable size parcels that you split and turn into 8 to 10 lot subdivisions to where the profit makes sense? 

Is the risk for a developer that they're paying for the engineering work for something the village/govt won't approve? 

I'm sure we'd all be interested in the numbers just because thats why we're all here.  i.e. How much did you pay for the land? Do you own the land free and clear? How much is the estimated build cost? How much is the estimated value upon completion.   

In terms of a new construction loan, there are a lot of national lenders that will do the loan.  But there are a lot of variables they will consider in figuring out your loan will be structured.
1) Is your land owned free and clear and if so how much of it will they allow you to be credited towards the project down payment.
2) Have you done any loans with them before? Likely not so this pushes the terms down meaning a higher down payment and a higher rate.
3) Have you done any construction projects at all yourself or rehab flips even?  If this is your first investment project, you may have trouble finding lenders.  There are a few out there that will do first time investors but being your first, you will be limited.
4) What are your actual margins.  The better the ltv they're lending on, the better their terms.

In order to do it yourself and assuming its your first new construction deal, your most difficult obstacle might be finding a lender that will do first time investor/construction.  If you do find one, you'll likely need to put down 20% of the project and they may or may not give you down payment credit for the amount you paid for the lot.  And then they'll likely charge you 3 points and 10 to 12% interest on the construction loan for a 9 or 12 months period - with 3 month extensions.

That is what you'd be looking at with the national lenders.  A local lender would definitely be able to give you better terms. But many times they're going to need a lot more paperwork and have a lot more guidelines.  And be much much slower to approve anything.

In a perfect world, you might look to partner with a real estate investor. Someone that has done a couple of rehab flips at least.  And then get them to put up half the money with you for the down payment (less what you paid for the lot). And then split the profits.

After you do two of these, the lender will likely increase your terms so that you can do them on your own and will get you closer to that 85 to 90% of the project close AND give you credit towards that down payment based on what you paid for the lot.

A recently construction loan I did where I owned the lot free and clear, I was able to get a 300k construction loan and only came out of pocket at closing like 8k or something. 

@Matthew Paul   Or his gc put together bad contracts so heavily in their favor that they never intended to finish to begin with.

I see it all the time in eastern tennessee.  These gc's create these ridiculous contracts where they front load the money for the build.  Then once the gc gets far enough along that he's taken the lion share of the money, he suddenly has no time to finish the build. He's wanting the buyer/investor to fire him.  Once he's fired, he doesn't have to finish the remaining part of the build which he's got half the draws allocated of the actual costs.

And there's nothing the buyer/investor can do.  The builder was paid X which was agreed to in the contract for 50% of the work even though he really got 70% of the cost.  And now the buyer/investor has to hire another gc and come out of pocket to finish the remaining 50% because there's not enough left after what was spent. 

That and some of these guys do these cost plus contracts without any limits and just rip people off.  They put in the contract some really low number and then they buddy up to them telling them how they'll easily hit their number or come in lower even.  Yet the contract explicitly states the number is an estimate the buyer will be charged actual costs plus markups. 

And that is an absolute license to steal.  I've had people tell me their numbers on some of these deals and the gc's are going 100k to 250k over their estimate.  They're doing driveways for 8 cars when the contract and the plans showed 4 spot. 

I've seen subs quit before due to a GC not paying.  But I can't say I've ever seen a GC quitting over not getting paid.  Not in new construction where the draws are coming from the lender and the buyer/investor has to get lien releases back over to the lender - sometimes they need to pay the gc first out of their own pocket and then get the lien waiver to give to the lender in order to get the draw. 

No way of knowing on this one obviously.  But everything in new construction is so significantly wanted towards the gc, I don't know how the buyer/investor could stiff them. 

I say that and I'm a licensed GC in eastern tennessee...... But our subs tell us all their stories. And I've seen actual stuff from buyers too that had become acquaintances.  Its a license to steal with the way they're doings things.

I don't know how bad the landlord laws are in california (they're not exactly great here in illinois) but evictions in any are are going to be costly regardless.  One way to avoid that though is to invest in areas that allow str's - even if they're modest small town usa towns.

You never have to worry about evictions as long as your management doesn't allow them to book stays 30 days or more (which you can put in your management agreement).  And most of the damages a guest will do can be covered by these str booking sites insurance.

Your budget will prevent you from buying homes in some of these big cities or vacatation areas with tons of str's.  But you'd be surprised at some of these average smaller towns can do STRs very successfully.  Going to those places will help you stay in your budget and cash flow better too - with property management built in.

The hard part with the smaller towns is that they don't always have the big property management setups so thats where you'd have to do some leg work to find ones that do.

And you might be able to do bigger str towns or even cities in that price range. I'm thinking of something like Branson, MO. They have houses in that price range. They have STR management.

To me, if you're going to buy cash and don't want the risk of evictions or tenant damage, then STRs are absolutely the way to go.  No matter how you cut it, you will get a higher return by doing STR than you would by doing regular rent.  And property management is built in. And the risk of an eviction or a tenant trashing the place is virtually zero. (note: a guest might trash the place but that would be covered by the hosting sites' insurance as part of your listing services).

Maybe california has cheaper towns that are close to you that also allow STRs. Don't be afraid to consider turning a home into an STR even if its not a vacation town.  You'd be surprised how much demand there is in smaller nondescript towns like that.  And again, if you were to airbnb a home in california, I don't think the guests would have the same eviction rights they have if they were to be a regular renter.  I believe you just need to keep the stays under 30 days.

Just a suggestion that might be worth looking at.  Maybe california could still be an option in some way and you can reduce the risk of evictions/damage by investing in homes in small towns there that allow strs. 

This is an absolute no brainer.  The house is paid in full but, by renting it out, you're not cash flowing anything or maybe just a little if you bumped the rent? SELL. SELL. SELL. 

Now I would question your rent amount to see if thats really a bigger part of the equation.  I don't know of any area in the state north of kankakee even that you can rent a house - even a 1 one bedroom house for less than 1200 these days.  I know park forest is a bit of difficult area but still.  Are you sure you aren't WAY under market and not just a little? 

I did a quick check and the absolute cheapest home for rent in park forest right now is 1800/mo.  And thats a 3/1 , 900 sq ft home.  Is this a condo or something? If its an actual single family home and its in decent condition, you should be at least 1600/mo - and that changes the scenario quite a bit!

That being said. If it were me. I would still sell.  You've got a free and clear home. But its in a less than desirable area so the bump in prices isn't going to continue - partially due to the high taxes those areas are seeing.  Sell the house. Take your money and find two houses in a better area at a bit of a discount (say you can get them for 90% of what theyre worth) and split your money from the  sale of the home to use as the down payment on the two new investment homes.

You should be able to get 100k to 120k for a house in park forest if its fixed up.  That means 50 or 60k down on each home so you'd be looking for homes in the 200k range. 

Move up to a better area and leverage your cash to go from one home to two.  If you could turn one home worth 120k into two homes worth 200k apiece (albeit with loans on them), you'll be setting yourself for more rental profits and more net worth via appreciation by being in a better area.

Maybe jump down to crete where you can get some smaller homes in move condition around that 200k mark and the rents are really strong there and the better area will give you more appreciation over time.   

To me this is what I would be looking at:
Sell the park forest house and get 110k net. Then buy houses at about a 10% discount.
Buy house 1 for 180k and put down 45k and use 10k for some minor refresh (paint, new appliances go a long way).
Buy house 2 for 180k and put down your 45k (25%) and use another 10k for some minor refresh.

Now you owe 360k in loans. YOur houses are worth 400k
You owe 270k. (135k each).  So now you have 130k in equity still.
Your payment on each loan is 850/mo.  Taxes and insurance on 200k is another 450/mo or so. Thats 1300/mo.  Rent for each house is probably 1800/mo or so (3/1, 1,200 sq ft home maybe).   

So you're grossing 500/mo each.  After avg repairs and vacancy, maybe you're netting 200/mo each? So you're making 400/mo total or 5k a year and it would all be tax free.

But here's the value in growing to two.  
Right now you have a 110k house (i'm guessing completely on its value obviously). You're renting for 850 and making very little profit at all.  You're only getting appreciation on one house in a bad area so typically that isn't much.  At 5% you're making 5k a year in appreciation.  But you have no loan so you're getting no principal paydown.

Your net worth on this house is only going up with appreciation and its only going up 5k a year if that.  Thats NOT how you build wealth in real estate.  

Now if you sell and get into a better area and use leverage, here would be what your numbers would look like.

1) More rental profits.

2) You would be paying down your loans every year. About 150/mo or 1800/year x 2 loans = 3,600 in principal paydown in the early years. That adds directly to your net worth.

3) Your appreciation would now be on 2 houses worth 200k apiece and they'd be in a nicer area that could appreciate more.  But lets say 5% for this area too.  Thats 5% of 400k which would mean 20k a year in appreciation. That adds directly to your net worth.

And lets look at what that would mean in 20 years assuming the value of both scenarios were to double in 20 years.
If you kept the one house you have and it double in 20 years - you'd have a house worth 220k. And lets say your rents doubled from 1k to 2k.  But now you're paying 800/mo in taxes instead of 500.  Your gross profit would be 1,200/mo?   That blows for owning a house 20 years.

If you sold and bought the two other houses instead and they doubled in 20 years, you'd have two houses close to being paid (you'd still owe about 65k each) off that would be worth 800k total.   And your rental income, assuming it doubled as well, would be 3,600 per house or 7,200 per month.  And lets bump the taxes up for these too from 400/mo to say 700/mo or 1400/mo for both.  That means your gross rental profits would be 5,800/mo.  Thats a nice chuck of revenue even after repairs and vacancies.  


Thats a HUGE difference.  To me this isn't even a question. Sell the house.  Use the money to buy two houses in a better area. And buy them with leverage to grow your net worth so that in 10 or 20 years, you're looking at a bigger and better portfolio so that you can do the things in life you enjoy.  

You won't get there owning one house free and clear in a somewhat bad area with those kinds of taxes.