All Forum Posts by: Mike H.

Are either or both of these units that are property 1 (the main house or the adu) generating any rental income?   Do either of them have any equity? If so, how much?

I don't understand what you mean by equity position? Is that a heloc on the primary? Is the loan on the adu a standalone loan that only applies to the adu?  If so, then why don't you just get a new heloc on the primary assuming you could pull more money out. 

Your first mortgage at 3% doesn't change.  Your loan on the adu doesn't change (or at least I don't think it will but I don't really understand that loan).  And then you can use money from the new heloc to buy your next property.

But again, is this property being rented out?  Is the second property you want to buy going to be rented out or are you moving into that one? 

After seeing the pics, I definitely think the 1500 would be well worth spending.  What you have there is builder grade laminate and youre missing the end pieces on the existing countertops which really detracts from the place.  I would definitely change out the tops.

I think it would be extremely tough to actually invest in real estate with 10k.
Although you could possibly look to flip really cheap desert land with that.

If you spent 3k or 4k on a mailer and found a couple of deals to buy for 2k and sell for 5k or 6k, maybe you could do that.  But thats a tough road to hoe to build up any capital.

I'd say wholesaling but thats such a difficult gig right now that I don't know if someone knew could really pull that off.  I'd be worried they'd run out of cash before they found their first deal. Even if they could find one in what is one of the most difficult times since I can remember as an investor in terms of finding deals, would they know enough to be able to close it and cash in?   Again, that 10k might be gone in marketing before it generated anything.

I just don't know if 10k is enough these days.  You definitely aren't buying a house to fix and flip or fix and rent with that.  Need more down payment and more cash in the bank after you buy in order to qualify for a loan as a first time investor.

So maybe land. maybe wholesaling.  or maybe some creative mobile home deals.  Here in illinois we see really old mobile homes come up in tax deed auctions for 1k or less. Buy one, fix it up to make it livable and try to sell it?

I disagree completely.  I only do year leases in the beginning because lenders want to see that in case I have to refi or something.  But quite honestly, leases only restrict landlords.  They don't help us one bit.  

Once my leases are up, I let them all go month to month.  If I want to get them out, I can.

But tenants can break a lease any time they want.  Good luck trying to collect anything from them.  I even tell tenants that are having problems paying in the first year that I'll let them out of their lease if they simply move out.

Even if you could get a collection order for a tenant for breaking the lease, here in illinois the most you can get is the difference from their move out date til the date you had it re-rented.  So if they move out and you end up getting someone to move in there in say two months, the most you can get is two months of rent.

And while you'll get the judgement, good luck trying to collect it.  The collection system is an absolute nightmare and so heavily rigged in favor of the tenant its silly.  It costs more to go after collections than it does the amount you'd be collecting. And I just don't have the time. 

So I absolutely believe that a month to month lease is the way to go.  Having renters sign on for a year does nothing for the landord except prevents us from getting rid of tenant that we don't like.  They can break the lease whenever they want.  But we couldn't. So now we're stuck honoring a lease that they don't have to.

Just curious but how much money do you have in the first STR? If you're making 2500 a month or more - I'm assuming thats net - then I don't see why you wouldn't find a way to get a second one. That amount of profit seems like it would suggest your first property is in pretty good condition. So I just don't see that you'd get the return on investing 60k in your existing property.

I'd much rather get a second STR and work your magic on that one too.    Even if its a lesser home that you can't afford to make perfect right now.  Grab it and feed the profits back into it with your design strategies because you obviously know how to run these things.  

The goal should absolutely always be about growth as long as you're cash flowing that much money and you can self manage them or have property management built into the numbers and are still cash flowing.

Adding more units is like printing money - literally.  Again, as long as you're cash flowing like that or even half that, I would definitely use the 60k to add another one.  Not only are you increasing your cash flow with a second, but you're adding more property value which means your net worth is going up more with appreciation and your principal paydown as well.

And even if your second one is only making 1k a month out of the gate.  In ten years when rents have gone up and your mortgage has stayed the same, that profit will become 2 or 3k a month. That is one thing that people don't always see as part of the equation.

60k investment to make 1k a month may not seem that great.  But when you add in appreciation and principal paydown it looks pretty good.  But when you look at those returns in 10 years, its an absolute no brainer and nothing else comes close.

That does seem a bit tight for construction costs as we have priced out typical residential a few times. Even with beating up labor, the materials are the materials and thats what seems to push the build costs up.  

As far as margins, it looks like its 180k to 200k plus 22k for the land so 200k to 220k project.  Figure 20k for financing and loan costs. 6k or so for realtor fees.  You're looking at 225k to 245k all in.  If it sells for 310k and you make 60k to 80k, I know I'd be happy with that all day long.

As for the other mention that other lenders could do it for less cash into the deal, it doesn't look that bad.  You're getting 140k which leaves you needing 60k to 80k out of pocket.  Hard to scale.  But once you do a couple, then maybe they will give you a better LTC (closer to 90%).  If they don't, there are other lenders that will and it may be worth paying the higher interest rate that they'll charge so you don't have to tie up that much capital.

But that really only matters if you want to scale.  If you're just going to build one or even two at a time, why not stick with that? That rate is really good. And closing costs aren't terrible. 

Interestingly enough, we're a builder in eastern tn (gatlinburg, sevierville).  Up til now we've only been building rental cabins.  But I have been running the numbers on owner occupied residential out there and those are remotely some of the numbers I'm seeing. 

We've got a 3/2, 1,300 sq ft model that we priced everything out for at about 170k to 180 for the build.  Figure 30k to 40k for the lot. And then an estimated sales price of about 320k to 340k.  Its not the same margins we're getting on the cabins.  But I think they're easier to build so they'll go up quicker and even if we can make 50k or more, then why not do 5 or 6 of those a year? 

And if the market for buyers were to dry up, we could always eat those as rentals.  We'd refinance and pull all our money out. On a 210k loan, we'd be paying around 1400/mo. taxes would be 100/mo or less (taxes are so ridiculously cheap in tenn its silly).  Insurance 150/mo. And theyd rent for about 2200.  I don't like long term rentals any more. But it would always be an option if something really bad happened. 

Why would you need non-PG on your construction loans? The lenders I use for new construction all have PG requirements and their rates aren't cheap (i.e. 10 to 12% even).  Without a PG, I'm guessing your rates are going to be higher unless you find that unicorn of a lender.

But why would you not be willing to give a PG? 

I've been investing for 15 years and I've seen both sides of it. I agree with you 100% though that right now new construction is one of the few ways to consistently invest and be able to do it as a BRRR method so you can rinse and repeat and continue to grow without eating through your capital.

I was buying rehab to rent deals here in illinois for about 15 years (about a year or two after the 08 crash).  I was able to be all in at 70% or better on almost every one of my deals and had built up a portfolio of 83 sfh's worth between 160 to 200k before covid.  After covid hit i sold about half the houses and the rest are now worth between 160k to 300k. 

But since just before covid, the deals stopped.  Just completely dried up. I looked at new construction here but the numbers by me just didn't make sense.  A 3bed, 1,500 sq ft home was selling for about 260k to 280k but the build costs plus the lots (assuming I gc'd the thing myself) were running about 220k to 230k.    By the time you added financing/loan costs and realtor fees, the numbers just didn't make sense. 

However about 3 or so years ago I ran into eastern tennessee and tried a couple of builders that were building somewhat wholesale.  It was a bit of a struggle to manage but the numbers came out ok.  Two years ago, I was able to get my ex brother in law to move out there and now i can build for cost on my holds (some we build to hold and we hold separately and some we build to sell and we split the profits of the ones we sell).

But for the ones we build, I can be all in at 70% LTV or better and they'll cash flow as STRs (gatlinburg/sevierville are heavy str areas) right from the get go. So in some sense, its literally like printing money. Its still not easy. But I haven't been able to find anything else right now thats coming even remotely close to what I'm able to do right now.

I'm sure there are other areas and product types doing as well if not better.  But I can't find them. And i've tried a bunch - was flipping land nationally until a year ago when that model really dried up; and even did some mobile home rehabs in florida where I did ok but then desantis got stupid with immigration and literally ALL the contractors left the state - the ones there illegally had to move but they were living with other family members so all of them moved together and there was noone left to do any work down there. 

In terms of demo and build new, that can be a slippery slope. But I don't see why you can't get a construction loan on that.  The lender surely won't lend to you based on the value of the house you're going to get rid of.  But they will give you a loan based on the value of the land itself and the construction costs.  

What kind of price points are you talking about? 250k for the house and lot? 500k for the build? And an LTV of 1million? I think you could get better answers on that if you gave a little more details. Lets say that lot was worth 100k. You could get a loan for 90% LTC so 100 plus 500k for the build (600k x 90%) which would be 540k. that would require you to put up about 210k total to buy the property and do the demo and build.

If you don't want to bring utilities, why not look for infill lots? There are typically a couple one off lots in existing subdivisions that simply never got developed.  The utilities are there.  Just be careful. Sometimes there's a reason the lots never got developed and they aren't actually buildable.  But sometimes they are. 

As for developing land by subdividing it, that has its own issues.  The infrastructure costs can absolutely kill you.  Time, money, etc. As someone that just got into new construction, I looked at that really hard but I can't make the numbers work.  We just buy infill lots and build there.  Much easier. And far fewer moving parts......

I would suggest that the best way to invest out of state is simply to get a partner.  Find the best niche and area in the country and then find a partner to hammer it.  Then you'll eliminate the nuisance fee that invariably gets added to OOS investing.

OOS investing can be absolutely ripe with issues.  Agree 100%. But there are unique niches that you can only find in certain areas of the country. And you can't replicate them just anywhere.   And when the margins are really good, that nuisance fee that you have to account for is peanuts compared to what you can do anywhere else.

I did invest locally (about 6 towns near me) when I started about 15 years ago.  And built a sizable portfolio.  But self managing 83 houses really took a toll. And quite honestly, the ability to find homes where you could be all in at 75% or better really and truly dried up around here.    The investor meetings even stopped because noone was really doing much of anything consistently any more.

I was doing land flipping nationally and hit on an area there in eastern tennessee where the actual build cost and retail cost had an amazing margin.  I tried having a partner out there and he just didn't want to stay put. We found a builder or two that would build for basically wholesale costs but managing them was hit or miss and the margins weren't as good. 

I was able to partner with my ex brother in law who was a small builder here in illinois and did a bunch of my rehabs as well.  He moved out there.  We got our gc license.  And away we went.  We build to sell and build to hold some (the ones we hold we hold individually so we don't split those).

But now I can build new construction cabins that I'm all in at 70% LTV or better so I can BRRR the heck out of these deals. And even with property management built in, I can cash flow positive with essentially no money out of pocket when its all said and done.

I simply could not do the same thing here in illinois.  I tried every which way to even come close.  Just doesn't work. 

So yes, when we build to sell, I'm splitting half the profits. But when we build to hold, I am holding them as 100% owner (he is doing some holds for himself as well).  To me, thats an example of where partnering OOS is one of the best ways to take advantage of the margins and specific niche areas in the country and continue to grow.

Going on two years since we got our license, I have three cabins completed with an equity of about 700k and three more in some stage of building right now. My goal is to build 3 to 4 a year for myself as holds to where I can end up with 20 in the next 4 years. If I can pull that off, that will give me about the same equity that I was able to build in 15 years in sfh's. And probably about 4x the cash flow - and someone else is managing these things.

To me, thats why you should never close the door on OOS.  There are simply certain markets and niches that you can't replicate where you live. But I do think one of the ways to mitigate the risks and costs is to have a partner - or at the very least keep trying to find that one special contractor or boots on the ground person that is truly dependable.  Those people are out there.