All Forum Posts by: Matt Schelberg

@Ij O.

First off, I recommend consulting an attorney to determine your potential liabilities, the status of any existing liability coverage from the home insurance policies, and whether you have enough assets to warrant the cost of an umbrella policy. But based solely on my experience, you'll want to look at a couple of factors.

1) If the properties are financed, will the bank allow you to transfer title to your LLC? (If not, they could potentially call the loan.)

2) Title transfer fees are pretty high in Maryland. In my county it is 1.5%. It may be cost prohibitive to transfer title to your LLC, and this would push you in the direction of an umbrella policy.

-Matt

I would. It's not as important for your own buy/sell evaluations...as long as you use the same formula consistently. I would argue that the benefit of using a universal metric like cap rates is that it lets two investors talk without first having to walk though all the math and assumptions. It becomes a common language.

Matt

Hi Brianna,

Gonna throw it out there, but there are probably already others in the thread...property management, even if self-managed...it just keeps the numbers conservative in case you ever have to transition to totally passive investment. But as you have it now works. [Edit: After thinking about it some more, it defeats the purpose of the metric to skew the cap rate numbers. Presumably you are using it to gauge other properties. Might as well compare apples to apples.]

(other small ones: rental license and other regulations & fees; travel to property)

Hope it helps!

Matt

Drew,

1) 6% really is outrageous, bordering on prohibitive. I live near a city with 2.5% rates and it is often hard to make the numbers work. Compare it to a mutual fund with a 6% management fee...I don't care how well it performs, that is tough to overcome. But I guess I'd have to know what the rents are. There is also the "Chavez" factor of putting yourself in an environment where the local government feels it is free to confiscate assets. You never know what they're gonna do.

2) LLC. One thing I did not consider when buying rental properties under an LLC is the extra obstacle of financing compared to properties held under my own name. Many banks have difficulty selling loans they originate if held by an LLC, even if backed with a personal guarantor. Others charge higher interest rates (200 basis points in my neck of the woods). Just my experience, hopefully the guest of podcast 55 can chime in with a more authoritative answer.

Matt

I like the wreath idea. It's a very "vanilla" house so any color will help. How about one of those tin barn-stars above the garage door?

The shorter term of the personal loan is also skewing your numbers. The amortization period has a greater impact than the interest rate in terms of monthly cash flow. Plug the numbers into a mortgage calculator to see the difference. A 5 year loan can make even a great deal seem like a loser.

You also mentioned that the rent was determined by rentometer. Be sure to comp out individual properties to ensure you are comparing apples to apples. Craigslist is a good place for this.

To answer the other part of your question: the bank will want to know the purchase price and the scope of the rehab as separate items. For the 203k project there were two hurdles. (1) the house had to appraise at or above the original purchase price and (2) the bank did an ARV appraisal. The bank needs to know that it is financing a project that will actually increase market value.

But unless you were just planning on adding a gold-plated swimming pool, it will probably work out.

Hi Darren,

This is called a renovation loan. FHA has a program called 203k for renovation loans. For a rehab as small as 10k, they have what is called a "streamlined 203k" loan, which features less red tape. Check out the HUD website for more info.

Some banks also offer renovation loans, though they are generally harder to qualify for than FHA. But well worth the effort of asking, as you will have no mortgage insurance premium.

Some local banks offer renovation loans for investors -- I believe you might find something at a higher rate like 7-8%.

I am just finished up a 203k project for my personal residence, so feel free to contact me if you have more questions.

Matt

Adrian,

I just completed a 203k rehab loan on my primary residence. Not sure what loan product you're considering, but I'd be happy to share my experiences with the 203k. (Some banks offer their own rehab loans and these are definitely worth looking at -- much less red tape.)

The 203k includes the purchase price + renovation cost + 10% contingent allowance that is used for unexpected issues (e.g. unidentified foundation problems). These are all rolled into a single loan. Any unused rehab dollars are backed out of the loan at the conclusion of the rehab. (You cannot keep unused dollars as cash.) The bank will often force you to make certain repairs (e.g. lead paint, uneven steps, etc.)

HUD has some good info on its website.

It is a great loan product, but be prepared for frustrating delays. As was mentioned on BP Podcast 25, use a loan officer who has experience with this type of loan. When you encounter obstacles they will guide you in the right direction.

Best of luck,
Matt

Hi Blake,

Welcome to BP! You are wise to start early. You're also right that the demand for rentals in college towns is awesome. But you often pay dearly for those locations. I was in the Penn State area when I first became interested in investing, and I saw the same type of market. I visited lots of properties and ran lots of numbers. When I found one I liked I was very close to pulling the trigger...but I am glad I didn't. Because while the deal was good relative to the local area, it was didn't come close to the value I later found in other markets.

Definitely check out your area...it may be good for whatever type of investing you are looking at (sounds like buy and hold). But be sure to get a sense of its attractiveness compared to other markets.

Good luck!