All Forum Posts by: John Brodeur

@Ekaterina S., I think you should pay the money to consult with an attorney to understand your legal liability, responsibility to the tenant, and avenues of pursuit against the now bankrupt Property Management firm. In the eyes of the law ignorance of your legal responsibilities to the tenant is typically no defense in court. I don't know how much something like this would cost in your locality, but I have received baseline attorney consults before, and sometimes they range from free to a standard hourly rate (maybe $250 to $300) without a retainer. Now if you are hiring the attorney to formally represent you in the matter (file forms, show up in bankruptcy court, gather and review documents, review case law, etc.) that will typically be more expensive.

This may sound harsh, but if you don't have the funds available to pay for a legal consult and/or make your tenant whole while you are pursuing the PM this might not be the business for you. Weird situations come up all the time where it's important to know the actions you legally need to take and/or work with an attorney to find out. You shouldn't just be guessing what your responsibilities are to the tenant or hoping that they just don't take action. 

@Janelle Eagle-Robles, 401k loans are all required to charge interest per IRS and Erisa regulations. The unique thing about 401k loans is the interest charges goes directly into the individuals 401k and not to the plan provider.

Each employer has their own individual rules about what interest rate to charge, how many loans can be taken out at one time, duration etc. as long as the loans follow the overall irs guidelines.

OP, go to your HR or the company who administers the 401k plan and ask for their summary plan document. This is normally a 40 to 50 page document that has all the details about how your individual plan works.

https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-participant-loans-dont-conform-to-the-requirements-of-the-plan-document-and-irc-section-72p

@Emmanuel N Okafor

Not saying you are being too careful, I think based on the fact that you don't have a team together, and a more detailed plan on how to execute a value add project for the property with a high confidence you are appropriately going in on what the current as is value. I think if you already had the teams in place, and had a high confidence plan in place you might be able to push the dollar amount up. 

@Emmanuel N Okafor, First I want to say congratulations on building a tremendous portfolio and significant cash flow in single family rentals! You are clearly doing a ton of great things already and I aspire to grow my portfolio and cash flow to be in a position that you are some day.

I don't have the level of experience that other's on the forum have in multi-families, so take what I say with a grain of salt, and of course due your own due diligence. I am however under contract with a partner on a 11 unit value-add opportunity myself so I am sharing how we have approached some of the analysis. 

Are you purchasing this property based on the T12 as a stabilized property or based on the value add opportunity? If you looking to buy the property for the value add opportunity I think the best way to analyze the deal is to look not at what cap rate you are buying it for now, but what the value should be post rehab/ or repositioning.

As I have read and gleamed from others the reason why cap rates for value add opportunities are lower than stabilized opportunities is because investors are willing to pay more up front, because based on the value add they are actually getting a better return post the value add being completed. 

The price that you are willing to pay should be commensurate with how much value add there is, and what the risks are pertaining to the execution of that value add. You mention being able to cut expenses to 50%, sub-meter units, potentially raise rents. I think understanding the feasibility, cost, timeline, and business plan, as well as exit strategy will help lead you to what price you are willing to pay for the value add. 

An example: Let's say you've analyzed the T12 and you are highly confident that reducing expenses is able to be done (let's say because you already have quotes from your vendors (PM, landscaping, cleaning crews etc) that will get you where you need to be easily and quickly. As you would be able to add $1M to the value of the property with little work you might be willing to pay up on the purchase price for the ability to gain some of that higher valuation. The more you pay up for the property of course the less of that higher valuation you get to keep. Maybe one investor is willing to pay $500K more for the ability to easily add $1M, but another is only willing to pay $200k, and still another is willing to pay $800k. It will come down to what is your strategy, and how confident are you in being able to execute against that strategy to hit the value add.

All this being said, you of course want to also look at your exit CAP rate, and in a rising interest rate environment it's entirely possible that CAP rates will expand again so if you are paying up for the ability to execute value add I would also stress test the post value-add valuation with an expansion of CAP rates to ensure that your value-add opportunity isn't eaten up by a decrease in overall valuations.

@James Hamling, I think the vast majority of posters agree that a property at 100% leverage with 0 reserves is not a good idea and I don't think private money, hard money, or a bank would lend on that $245K. 

That being said if the property cash flows 2k a month at 100% leverage, it should pencil out to much higher cash flow per month at a normal 75% LTV. So if the OP found an equity partner for the deal (IE someone else who has the balance sheet to put the right down payment, closing costs and the reserves down), it could be a good deal.

All that is with the caveat that we know very little on the actual details of the property (deferred maintenance, specific location, realistic projections for rent, vacancy, operating expenses, taxes, property management, CapEX, actual financing terms etc.). Without all the details to know if the UW on the property is sound, we can't be sure if the deal is good or not. 

But, I do agree that being leveraged at 100% on any investment property with little to no reserves is a recipe for any little thing going wrong and the whole house crumbling down. Also the OP presenting this as an opportunity that works at 100% leverage and without maintaining larger reserves is indicative of an investor/manager who is playing fast and loose with debt and might not be the most fiscally responsible person to manage the deal. 

As is everything it depends on your rental market, but I would also be extremely surprised if a lack of canned lighting is holding back a rental in all but the top of the luxury end of the rental market. If the higher end of the market is $2,800, and you think you can get $1,800 right now there is a world of difference in $1,000 a month in rent. No way that recessed lighting is worth a $1,000 bump in rent let alone $300 between $1,800 and $2,100. 

Which means there is probably much more between your unit and the units that are renting at $2,800 a month. Full houses, sq footage, proximity to shopping/desirable locations, walkability, other amenities (higher end apartment complexes often have things like dog parks, grooming, on-site fitness, hotel style front desk concierge services etc.). You are probably not renting to the same person who is spending $2,800 a month to live in a luxury apartment above Wholefoods, which is why shouldn't try to compete for the same renter (you most likely can't compete with the style, and suite of amenities in that type of apartment). 

From a marketing perspective you should identify your target customer (renter), and identify what makes your property unique or best aligned for that renter. Maybe it's the person/couple who could afford $2,800 a month, but wants to save money for a down payment on a purchase. Maybe your unit offers more privacy/fenced in back yard which is perfect for a family with young kids who can play outside without worry. You should focus on doing the things to your unit that would make those individuals most likely to rent. 

If you don't know what those features and amenities are in your market you could put it for rent and then solicit feedback as others have said, or you could also call a few local property managers, investors, real estate leasing agents, and ask what they are seeing for rents, and features that your target renter is looking for.

The posters who are outlining getting the unit up and rented as soon as possible are correct. You are losing out on $1800 a month in revenue for each month that you don't rent the unit. 

I would agree that the OP should probably not borrow to leverage up to 100% LTV on this purchase. I personally would never want to be at 100% LTV. This is definitely where folks got into trouble in the lead up to 08 and 09, where 0 money down, and loose lending standards lead to people being in a really tough position.

That being said I don't think the OP should give up. It sounds like this potential opportunity cash flows really well with a standard down payment. Assuming the OP's numbers are correct, then this could be a great deal for someone else to fund and the OP to take a portion of the equity for finding it, negotiating, getting it under contract, getting great financing, and then managing it.

I tend to agree with both sides of the discussion on this forum. Both that a deal that cash flows at 100% financing could be indicative of getting the property at a great price. I say could, because without actually underwriting the deal, the assumptions being used etc. no one can tell you for sure. 

The other side of the discussion is that it seems you might be over-leveraging yourself on this property purchase. I don't know your risk tolerance, total amount of assets, income outside of real estate etc., but it does seem pretty tight on scraping together the funds to close the deal. 

I echo Jay's comments on looking for an equity partner (or two) who has the capital to bring to the table for the down payment.

@Abdul Lateef, yes my point was that any strategy is scalable. 

An example for SFH BRRRR's might be that you start off buying and managing a few a year (up to your capacity). You find the deals, get them under contract, vet an hire the contractors, work with the lender, find the tenants and then self manage.

The above is clearly not scalable because you only have so much time in the day and you are doing all the work yourself. 

But let's say in the above example you start sourcing some of the activities to others (hire a property manager to manage the properties, and find tenants). Then you spend more of your time trying to find deals and instead of finding 2 or 3 in the year, you are now able to get 5 or 6 under contract. But now you are hitting another road block of not enough time to make all the follow ups you want for potential properties so you hire a virtual assistant to offload some of those tasks. 

Now after a couple of years doing the above you've started to max out the capital you have to deploy (there's only so much cash you have in the bank), so you start networking with other investors, hard money lenders, private money, well off individuals to expand your capital and then suddenly you have enough money to purchase more deals. Now you start to run into the problem of maybe you have expanded to the point of saturation in your local market (too many other investors doing the same, not enough inventory, financial don't work out on as many deals as you have money). So what do you do, you start building out a similar approach and team in another market. 

This is just meant to be an example, but it's how many investors like Brandon Turner and David Greene started out with a few properties, and expanded out. Eventually though most of these investors start moving to larger properties because the amount of effort to buy a 4 unit building, is only marginally more than a single family, and a 20 unit building doesn't take 20 times the effort as a SFH. It's just easier to scale into larger buildings when you have the capital and teams in place.

@Greg R., I am not an economist and I can't predict the future, but I would look at the anticipated federal funds rate increases in 2022 as a starting point. The below article indicates the federal reserve planning on raises the federal reserve rates from near 0 at the beginning of 2022 to 2.75% to 3% by the end of the year. Mortgage rates are not typically directly tied to the federal funds rates, but they are indirectly related. As banks are charged more to borrow from the federal reserve they tend to charge more on lending products they issue. Also typically banks will move their rates up in anticipation of higher rates in the future. Which is exactly what we saw with the most recent March 2022 increase. Mortgage rates increased much more than 0.25% over the past month even though the fed only raised rates by 0.25%.

Also as you talk to lenders some (local banks and credit unions typically) will be able to let you know what stress test scenarios their UW team is leveraging when underwriting and approving loans. This can give you a good sense of where the lenders themselves are projecting their rates to be at the end of the year. 

All this being said, you need to do your own due diligence, research, and get comfortable with some level of uncertainty and risk as no one will be able to predict exactly where the market will be in a year. I think a well laid out plan, different potential exit strategies (refinance, flip), as well as buying a deal under market can help mitigate some of the risk.

https://www.reuters.com/busine...