All Forum Posts by: Mike H.

This idea of diversification is a very tricky philosophy to me. I don't think its as easy as people make it out to be.  I think its rare you can take a model you're doing in this are or product and just move it somewhere else or on to some other product.

To me, If you have a niche that works and you're good at it and the numbers are strong,  I believe you should put everything you have into that business model and grow it and grow it fast while the getting is good.  Eventually the masses will catch on and then the model is tougher to continue to do. 

I've found that when I try finding other deal types or other business models or niches, I end up losing a ton of valuable time that goes nowhere.  But at some point I do find that next niche that works for me and I like and go into that full steam. 

To me the value in diversification is that it helps nudge you to look for other opportunities and revenue streams where you might otherwise just be content to stay in your lane and then you'd never find anything new.  And, again, eventually a strong business model/niche will show its numbers and then everyone will be doing it. So if you stick with the one thing and it ends, then you'll be done growing and you become a one hit wonder. 

I've gone from sfh rentals in my area to land flipping and now to building cabins to hold and to sell. The rental deals in my area are not even close to what I was doing before. The numbers are just ugly. The land deals have filtered down a ton too. But I was lucky to get into the cabin building and I'm doing the same with the cabins that I did building my rental portfolio. Margins are every bit as good. More work for sure. But I can BRRR my cabin deals every bit the same way I did my sfh rentals. If i hadn't tried several other things, I would have never found this one and I'd be sitting on the rental portfolio doing nothing right now.

Do you have an approval or is something even grandfathered in that would allow you to put up a billboard?  Does their contract have some sort of contingency that allows them to apply for a billboard and back out if its rejected?

One thing I would say is if you can put up a billboard on your land, then I would not sell the easement.  I would look to find someone that would rent the easement from you or give you a portion of the revenue.  That way you'll benefit as revenue goes up over time and your portion will go up too. 

But if you can put up a billboard on your land, you definitely should look into some of these other companies that will provide terms that allow you to grow your return as their revenue goes up. 

Definitely check with the local regulations and licensing first to make sure you can do it. But if you can, then look to see about the cost versus reward of making it more renter friendly.

If you just have a half bath, then adding a shower is critical unless you want to let these people use your shower upstairs.  But if its got at least a half bath (i.e. no tub or shower) which is what I'm guessing you mean, then adding a shower isn't too bad since it either has an ejection pit or something that toilet and sink are draining to.

But once you figure those two things out. Then how much more you do should be determined by what the cost to upgrade things would be versus how much rent you can get if you do them.

Separate entrance sounds really expensive depending on your homes' layout.
Egress window might cost you too.
As for a kitchen, its a small one bedroom in a basement so it isn't like you're going to be getting families renting the place.  Probably young couples or a couple of young friends to keep their cost down for their ski trip.  

To me, I would think a couple of cabinets with a sink, a fridge and a microwave would more than get the job done. And if you have to stay low on the budget, a fridge and a microwave might be enough.

But lets say you could add the shower and put a fridge and microwave down there and get 100 a night?  Or then you look and by adding the cabinets, sink, and a separate entrance, you could get 150 a night but the extra rehab costs 20k to do, I think you have to look at taking less rent for putting in less money.

To me, given where you seem to be new, I would go the cheap route to start.  Get the shower done. A fridge and microwave and then paint and put up some nice decorations.  Then use the rent you generate over time to upgrade if you think it makes sense.  One thing at a time - i.e separate entrance, etc. 



 

I've done several blanket loans over the years.  They stink - pure and simple.  Why not refi them individually with the same lender or a couple of lenders. Most blanket loan lenders will allow you to do partial releases so you could sell one at a time. Usually, they allocate a certain percentage of the loan to each house when you initially close your loan - based on values but then they also add a premium for the release so you're paying 110 or 120% of the allocation of the loan when you sell..

So lets say you have 4 houses and three of them are worth 100k and 1 house is worth 200k. Thats 500k in value and lets say they give you a loan for 400k.  They then allocate 80k to each of the three houses for the loan and 160k to the fourth one. That means 20% of the loan to the lesser valued houses (3) and 40% to the higher priced home (1) for a total of 100%.

When you sell one of the houses, you typically have to pay 110 to 120% of the allocation loan percentage based on current principal.  Lets say its 5 years later and you paid the 400k loan down to 350k and you sell one of the 100k houses for say 150k.

They calculate that its one of the homes that was allocated at 20%.  So 20% of the 350 is 70k plus the premium for release (premium goes towards paying down the loan so it isn't a fee) which means when you sold you'd have to pay down the loan 70k plus the 20% premium which would be another 14k.  And then they tack on some minor fees too. So you might have to pay 85k out of the proceeds towards paying down the loan.

But if you had them all in individual loans, you'd pay off the loan for that house and that would be it.  70k

Where its really difficult is if you have a 5 year or 7 year term on the blanket loan. You can try to renew if that lender is still in business or else you have to find someone else to do another blanket loan.

Blanket lender loans tend to have higher fees and poorer terms. Prepayment penalty is up there too. Usually 5-4-3-2-1. 

Unfortunately, you are likely going to have to take the hit on this no matter how you cut it. Settlling is probably better off because if you argue you are operating this illegally then you're in for my problems.

But here is the thing in terms of prevention and hindisght.  Knowing that you couldn't accept section 8 because you didn't have a permit and knowing that new york and many other areas now require landlords to accept section 8 - well moreso that you cannot block section 8 - why didn't you let them apply and just deny them with no reason? 

If I get someone that submits an application, I rarely give a reason why I am not accepting.  Usually what I do is tell them the house is now gone if I've selected someone else.  If it isn't rented yet, then I tell them I'm still taking applications and haven't made a decision.

They will move on regardless. And I've given them nothing to use in terms of whether there is some unfair practice going on.  And if someone were to look at my rental portfolio and history, the ratios actually would probably look as if I rent to more minorities than the population average.   So they'd have no where to go.

As for section 8, I always tell them that I will accept it as long as section 8 will pay my advertised rent price - which typically they won't.  I also tell them that I'm not doing any repairs that section 8 may require in order to move in.

There is a clear difference in whether they can make you accept section 8 - versus whether the govt can make you take less money and do more to take section 8.  Quite honestly if they want to pay me the market rate and I don't have to deal with inspections, I will take them.  Even though oddly enough, one of the counties i'm in requires landlords to take a 2 hours training class in order to qualify to accept their section 8 tenants.  So if you don't take the class, then its not you who is refusing to accept section 8, its section 8 refusing to allow you to rent to their tenants.  

Quote from @Pete Galyon:

PREVIOUS AIR BNB PROPERTY   <--------- link to previous Air BnB we flipped

Some say that numbers are down for Air BNB and I'm here to tell you it is all in how you look at ( and structure it ). 

This, our third rental, we plan to do the BRRR method with as we have the other two that are now owned by fortunate new owners over in my other market of Blue Ridge GA. This place was bought at a sweet price of $595K and $15k in seller concessions. The comparables for the resale on this home are in the 825k - 850k range which of course, makes this guy happy :)  ITS an UGLY DUCKLING and I love ugly ones that need improvements THUS adding value when we improve the home AND increase the ROI from the monthly income standpoint as well.

AIr BNB just put out a report that in the past 2 quarters the occupancy over the top 10 major markets has been steadily going back up by 7- 9% per quarter and may be back to pre 2021 numbers by 1st quarter next year. That's promising and has me buying properties once again. 

BLACK SWAN. 

quick question.  Where did you see that airbnb report.  I'm seeing their quarterly earnings were released where they stated 3rd quarter revenue is projected to grow about that much from the previous year.  But thats revenue. I'm trying to find something from them or anyone showing occupancy rates historically as I love seeing some of that data - as both a builder of str cabins in eastern tennessee and someone holding str cabins in eastern tennessee. :-) 

Any chance you have a link or two to the report? 

@Matt T.

I am a full time real estate investor so I could use all the depreciation I want by doing cost segregation on the cabins I'm holding. The numbers are so good, I'm not sure I need to though. But now that you say that, Its not a bad idea really.

I did it on a couple early on in sfh buying but was limited because i was working full time in IT.  So almost all of the ones I have left get the standard depreciation amount of 27.5 years. But because of how little I paid for them, we're talking 3 to 4k per year.  And my rental income was netting way more per property up until I did the cash out refi's.  Now thats about where some of them are at again. 

I've got another 10 years or so for those.  I don't worry as much about recapture.  I'll keep these cabins indefinitely given their numbers have property management built in. And if the numbers are ever that great to where I want to sell a few to raise some cash, I'll either refi and pull cash out or I'll just eat the recapture and take the hit.  I don't mind paying taxes when I'm pulling down a profit of a few hundred grand or more.

But good suggestion on doing cost segregation on the cabins. I think I'm going to look at that real close given the numbers of these builds. Those sfh's we were talking 100k with purchase and rehab.  But the cabins we're talking 300k to 500k builds in some cases. Every penny i keep in my pocket today is worth way more by delaying having it to pay it out in taxes sometime down the road - if at all. 

@Mike H. Great job on the new construction cabins. I am guessing you are a Real estate professional and can do cost seg to take a bunch of losses for the new construction cabins that you intend to keep long term as rentals? I know that conventional wisdom says that you should never invest for depreciation but that has to factor in I would imagine? If you have 80 some rentals already that you bought years ago, I am guessing that the depreciation deductions are running a lot lower now for those units and you're probably paying higher taxes. . . Now all of a sudden you have these new cabin units and you can significantly reduce your tax bill at least in the near term by splitting out the components. I know you have to eventually pay recapture, yadda, yadda but it still seems like a huge win given the time value of money. Am I wrong?

 @Jay Hinrichs    I wouldn't want to say they're incredible.  I think they're extremely good though. And yes, I feel the same way about this model that I did about SFRs right after the bust.  I want to get as many in as I can while these margins are what they are because it won't last forever. But yes, volume is a very tricky issue here.  The permitting process and the availability of reasonably buildable lots is a concern.    I've currently got about 18 solid lots in some form of permitting and have another 6 under contract now.  But at least half of those are for the business which will then sell them.

And yes, the permitting process out there is absolutely awful. It has to do with almost all of the lots being very steep and also needing septic which require surveyors and health dept reviews and surveyors being backed up for months.  I would say from lot purchase to build permit, you're looking at 9 months. So I definitely need to do a better job of getting the lots entitled (permitted) by starting the process well before they're needed.

That being said, that permitting process and the area itself create a very unique situation that I believe helps deter anyone from coming in and doing large scale building. And I like that about this area.  

I also like that the subdivisions/areas we're building are specifically licensed for STRs.  So the govt entities can't come in and change the laws to restrict or prohibit STRs from operating like they are in many other areas. 

Being the GC is the key though. I can find efficiencies in a lot of the processes.  We got our own excavator which saves about 10k on lot clearing and foundation prep.  We also save another 2k or so to dig the trench for the wells to the cabins for our well guy.  And we are just getting ready to pass the septic licensing test which will help us save 6k to 7k per cabin by doing our own septic.  We're doing our own plumbing now - another 6k or 7k in savings.  And we found a great pre-finished lumber supplier for the siding and the tongue and groove that is saving us 10 to 15k a cabin depending on the size (and producing far better quality results in the finishes).

It doesn't sound like much when you're looking at 300k to 500k builds.  But when I'm using cash instead of financing and, on a smaller build (2/1, 1300 sq ft), I can save 25k to 30k in financing and another 30k or so in the other stuff, that adds up quick when you stack it on to the fact that the actual build costs are coming in well under retail. Gains me more equity and my end loan is less which gives me more cash flow. 

I just have to execute and thats always the key.  But I still would like to find another method or strategy in real estate somewhere to grow my income and/or equity.  

At one time I was looking at mobile homes in certain areas. It looked like I could pull off some very compelling numbers by buying new mobile homes and having them brought into lots in certain areas.   But the red tape and the inability to scale due to the way mobiles are purchased and then not having boots on the ground where I was targeting were just too many obstacles to overcome in terms of risk.

But the numbers were there.  I really didn't like having to put down all cash for mobiles (or some I think it was half to start and half when they were close to finished). If the manufacturer went belly up, I was going to be out all my money? I don't like that kind of risk at all.  Just a terrible purchase process for the buyer who is assuming all the risk. 

@Nicholas L.   Thanks.  But I view that portfolio as what I DID and I'm trying to find the next strategy to move to so I can create an additional stream of income on what I'm DOING.

I feel like the building thing is solid. I'm able to build these rental cabins at 65 to 70% LTV and sell some for income and hold some to create another portfolio at basically a BRRR method.

And with the numbers being higher (1,000 sq ft cabins are going for 500k that I'm all in around 340k, 2,000 sq ft cabins are going for 800k that I'm all in around 575k), I can create the same equity and cash flow that I did with my rentals in a shorter period of time with less units and with property management built in.

But I'm also sitting on a nice chunk of cash that I am really hoping I can hit on one more strategy so I can have two of these things generating equity and cash flow on every deal without having to park much cash into them.  I don't mind using my cash to build something (i'm doing it with some of the cabin builds - as a 300k build, I can save 25k to 30k in financing by using cash), but once they're done I'd like to be all in at very little cash and have equity and have cash flow.

I was able to do it with the ltr's when I was creating that portfolio - albeit the cash flow was small and I was self managing.  But I was all in on almost every deal for 70% LTV or better (purchase plus rehab at 70% or better).  And the land flipping was doing well there too but that has slowed quite a bit recently.

I'm just a believer that no matter how the market goes there has always been some new strategy to follow to where the numbers just make sense.  Even before the crash, it was flipping and then using the flip profits to buy down the deals so you could hold them. But right now seems to be the absolute exception to where there simply isn't any obvious play to run with. 

So my thought is I'm going to jump back in here too to get connected again so I can hear all the ideas that people are pursuing and see if anything resonates to me.  And then keep doing my building and maybe still continue to do land flipping albeit with a bit of a twist - i.e. I think I'm going to get my realtor license in some of these states I do the most buying/selling in so that I can turn some of the leads I get into revenue from the people who want to sell but just not at my low offer numbers. 

@Marcus Auerbach   Yea.  I think not being in sites like this has caused me to lose my edge.  I used to have a much better pulse as to where investing was going.  But things were going so well in everything that I didn't have time to add any more investing strategies so I just stopped coming on here.  Now I think I need to get back to seeing what people are doing and seeing if I can pick up any gems.

As for the areas, I would agree.  I sold a bunch of homes and now I'm kicking myself a little.  Here lately, I started refinancing some of the homes whose loans were coming due and taking money out.  I'm also a big believer that prices are going up here.  Just a supply and demand thing really.

I like pulling the money out with no taxes and then still owning the property so I can take advantage of the principal paydown and appreciation and a little rental income.  I do like having come down from 83 to being in the 40's though as I was self managing.  And I was able to cherry pick the ones I kept a little so the ones further away and/or with issues are much fewer.