All Forum Posts by: John Lowe

If a RE investor is butting up against usury laws, there's something wrong with their business model. There is no reason to charge a high interest rate. The yield can be increased by adjusting the other loan terms: pv, pmt, n.

I just noticed this thread. I'm new to BP so please forgive me if I've breached protocol by posting my slightly off topic comments.

I'm not familiar with PFR, so I'm not qualified to criticize or endorse them. I'm just sharing my thoughts based on my experience. I've lived on the south side of Chicago and southern suburbs for most of my life. I've been a full time investor for a decade, with properties in Chatham, S.Chicago, Dolton, Riverdale, and Robbins.

There are literally thousands of cheap houses ( < $50k) and rents are high (the lower end of the market is $1100-1500/mo). For landlords that know what they're doing, its a very profitable business. One of the challenges for out of state investors is the dearth of property managers that know how to work this niche. Its high touch, high turnover, high tear up management.

The biggest issue I see with PFR is that they have priced their properties at what I would call, the highest justifiable price. From what others have posted it sounds like their houses are the nicest house on the block. So in order for it to appreciate, the surrounding houses have to catch up. The question is what's the likelihood of that happening? Most of their properties are in C areas. Many of these areas will not gentrify anytime soon (or ever). So these top dollar properties may never appreciate. To see how big the gap is, look up the prices of homes sold in the immediate vacinity.

With PFR houses, the analogy that comes to mind is, prettiest pig in the pen. In my opinion, the critical question turnkey buyers should ask themselves is: will I be happy with the ROI on this investment if I can't sell it for more than what I paid for it? For me, as a pig farmer, I don't need appreciation because the NOI is sufficient to recoup my investment within 5-6 years.

One more FYI: PFR sells mostly 2 flats that are > $170k. In Chicago, SFHs tend to be better investments. There are SFHs that don't need rehab, in B areas, that can be bought for $85k and would rent for $1500/mo. 

So you want to be a snowbird... 

I agree with what you've already heard, you probably won't break-even. Here are some factors to consider:

1. You're keeping the best months for yourself. Nov - Mar is high season. Demand is lowest Jun - Sep.

2. Seasonal and vacation rental's desirability is very location dependent. Specialized knowledge of the area is needed. Not only neighborhoods, but also building complexes- some are more popular than others.

3. Home prices are high relative to the rents they command. Expenses are high- especially property taxes, windstorm insurance, and property management (ie. maintaining furnishings, maid service).

4. Competition can be stiff, there are a lot of vacant homes. I can't speak about Tampa, but in my county (Monroe, admittedly atypical) on average only 50% of the housing stock is occupied at any given time (of course not all of it is in the rental pool).

5. Consider a condo complex that specializes in this. They have onsite management to handle all the details (ie. marketing, scheduling, checkin/out, cleaning, maintenance) plus they have an established reputation and customer base. They can give you an accurate pro forma of typical income and expenses. Even if you're not interested, they're worth contacting for informational purposes to get a better understanding of the market.

SFHs and condos are obvious choices, but there are other less expensive options:

• mobile homes- not the working class MHPs found throughout the country, there are parks that cater to snowbirds
• RV/campers- there are folks who drive down yearly and others that leave it permanently parked down here
• liveaboards- this can be very cheap, the vessel doesn't even need to be seaworthy (so long as it floats :)

Florida can have an almost irresistible appeal this time of year. Whatever you buy, make sure that supporting it won't cause financial hardship even if there is no rental income. Otherwise owning a winter retreat may cause more stress than it relieves. 

That jives with what I see too. Although it may not be politically/legally correct, banks don't want to lend to "those" people or invest in "those" neighborhoods*. So the cheap houses are being bought by landlords, turning once thriving neighborhoods into rental communities. Without doubt, investing in this niche can be extremely profitable. Without doubt, if you're an upper middle  class neophyte investor in California, it will require hundreds of hours and thousands of dollars to ascend the learning curve needed to achieve those profits. Depending on your talent, access to capital, highest and best use of your time, opportunity cost, etc. it may or may not be worth the effort/expense.

A couple of folks have mentioned that the requisite skill set doesn't vary by geography. I've also found that to be the case based on my experience dealing with tenants in FL, GA, and IL. For those that are interested in pursuing this niche, I suggest not picking an area 1200 miles from home. Find a working class area within a few hours drive of where you live and hone your skills there.

*those- refers to socioeconomic status, not explicitly racial 

According to the FDIC (see the link in my earlier post) there is no legal definition of predatory lending. In terms of DF XIV, here's a link to the summary: http://www.aba.com/aba/documents/RegReform/TitleXI...

I have a more than casual interest in using captive financing, probably going to get a license. So I have been reading up on this stuff. Lonnie Deals do not employ any of the lending practices or loan terms that have been defined as predatory. In fact, with the appropriate documentation, it would be considered a Qualified Mortgage.   

I'd like to pivot the topic a bit. Although I've shifted my attention to SFHs, I'll throw this idea out for comment. With the new regulations in place, I would think most MHP owners would cease selling their homes on terms. So an external source offering financing should be welcome. Here's the business model: homeowner is responsible for finding a buyer for their home, you define the loan terms and provide the loan paperwork, seller and buyer sign, you buy the note for 50%. Its a modified and more scalable version of a Lonnie Dealer. No rehab, no sales/marketing activities, no tenants. No IRS dealer status, and potentially no SAFE/DF (homeowner is exempt but loan buying/servicing activity may not be). In theory its being the bank, in reality its being in the collections business.

Yep, from a tax perspective, I will have to pay interest. The loan terms are not designed to evade income taxes. It just boils down to the math- of the 4 loan variables: pv, n, i, and pmt, I'm most flexible on the i.

Note holders don't have many of the tax benefits that deed holders have, so I'll have a higher tax burden on those properties. But I estimate my ROI will still be higher than landlording. Even if its not, I'm committed to the strategy because of the social impact it has.

 https://www.21stmortgage.com/web/21stSite.nsf/locating?OpenForm

I'm not saying there haven't been abuses in lending. In my opinion, the SAFE Act and Dodd Frank brought much needed regulation to the industry. Predatory loans do exist but they aren't structured like a Lonnie Deal. Lonnie didn't originate liar loans or negative amortization loans. His loans didn't have balloon payments, adjustable rates or prepayment penalties. He didn't charge points or fees. He didn't even do rent to own. Lonnie made short term, fixed rate, fully amortizing loans with low monthly payments that his customers could afford. Making Lonnie the poster child for predatory lending is like making Ellen DeGeneres the spokesperson for Weight Watchers.

I am new to Bigger Pockets, but I'm not new to RE investing. Have you read Deals on Wheels? Your assessment shows a lack of understanding of its principles. One of the fundamental concepts is what constitutes value. Some investors add value by physical improvements (rehabbers), others add value by negotiating good deals (wholesalers), others add value by improving management (turnaround teams). Lonnie added value by providing financing.

Comps and blue book value for MHs are almost meaningless. This is especially the case with MHs in parks, the quintessential Lonnie Deal. Most of the value that a MH has is a function of its specific location. There could be two MHPs next to each other and moving a home from one park into the other park could instantly double or halve its value due to the characteristics of the park (ie. lot rent, amenities, occupancy). This is readily seen in Florida in age restricted vs all age communities.

Lonnie's pricing formula was simplistic: 2-3x cost. Fellow BPer John Fedro has said that approach leaves too much money on the table. Most RE investors charge the highest price the market will bear, regardless of their cost basis. Lonnie frequently used a nominal interest rate of 12.75% (this was back in the 1990s) but for these type of transactions its irrelevant since the purchase price can be adjusted accordingly. Lonnie Deals by design are short term debts, with payment schedules of less than 4 years. They are designed to be paid off quickly, leaving the homeowner the financial security afforded by having a free and clear residence. Lonnie Deals don't rely on refinancing or loan churning. The turnover that occurs is the result of seminal changes in the borrower's life. The fact that the Lonnie Dealer frequently fairs well when this happens is a byproduct of the weak cash market that exists for MHs. Before Lonnie purchased or repurchased (repossession was rarely necessary) a home, he encouraged the homeowner to seek out other buyers. He was always the buyer's last option, literally their savior. This is the way all Lonnie Dealers that I know operate.

According to the FDIC (http://www.fdicoig.gov/reports06/06-011.pdf): "predatory lending typically involves imposing unfair and abusive loan terms on borrowers, often through aggressive sales tactics; taking advantage of borrowers' lack of understanding of complicated transactions; and outright deception." There is nothing in Lonnie's books that fits that description. His contracts were exceedingly simple: 1 page application, 1 page sales agreement, and a 1 page promissory note. The homebuyer got title immediately. Its the total opposite of a predatory loan, I'd say its unfair to the investor, offering little protection/recourse.

My definition of predatory lending is simple: is the borrower better off or worse off as a result of the loan? If you query MHP residents, you will find the answer is overwhelmingly a positive affirmation. MH home sellers and MH homebuyers will say that Lonnie Dealers provide a valuable service. There is zero institutional investing in this space (older SWs in MHPs). That's the reason the homes can be bought so cheaply and sold for several multiples higher.

I'll share how I'm going to apply the Lonnie Deal model to SFHs. I'm buying REOs and will be selling them at retail prices (Zillow/Eppraisal value) by carrying the financing. Typically this is 2-3x my basis in the property. Loan is 0% interest, term is ~10 years, monthly payment is derived based on market rent. In a couple of weeks I'll be finished rehabbing a house and will have $35-40k in it. It would normally rent for 1300/mo. I'll sell it for 125k, with 5,000 down and mortgage payments of $1000/mo + TI. My yield will be > 30%, so is it a predatory loan? Aggressive sales tactics and deception are not needed, they'll be beating down my door. Similar to what every good landlord does, ability to pay (ATR) will be assessed. With 0% interest rate its not a high cost mortgage (as defined by Dodd Frank). These Lonnie Deals will be Qualified Mortgages (as defined by Dodd Frank). Is there anything unfair or abusive about the loan? Banks won't lend to these customers and they won't lend in these neighborhoods. The only alternative available to my customer is renting. So will they be better or worse off as a result of the transaction? I'll give you their phone number so you can ask them.

When doing a pro forma, use actual numbers whenever possible, only use percentages as a last resort. Look up last years taxes, and adjust them upward if there was a homeowners, senior, or other exemption applied that you won't qualify for. Adjust downward if taxes are likely to be reduced based on a lower assessed value after the sale. Obtain a couple of property insurance quotes. Call the utility companies and verify the previous year's bill. On multi family properties, don't underestimate common area maintenance (ie. mowing grass, shoveling snow). Make sure you're not buying in a war zone, check the crime map on Trulia. Talk to a property management company or local investors to make sure your assumptions are realistic and that you haven't overlooked anything. This is all part of the due diligence process.

Maintenance expenses consists of two categories, actual repair expenses, and capital expenditures. On a practical basis, both should be escrowed monthly until you have significant reserves on hand (say 6x gross rents sitting in a savings account). For a property like this I'd suggest at least $100/mo for each. Make sure your rehab budget includes any capital expenditures that have less than 25% of the useful life left (ie. the water heater is 10 years old, the roof looks like it will need replacing in a few years). Don't forget to include appliances in the rehab budget (unless they are typically not provided by landlords in your area).

Lastly, keep in mind, lower end rentals are management intensive. Working class tenants do not have the financial wherewithal to withstand life's disruptive events to the same degree that middle class folks can. As a result, turnover is higher, repairs are more frequent, and collections more labor intensive. Most property management companies do not have the expertise or desire to cater to this niche. Lack of competence will be reflected in higher operating expenses. I believe this is the primary reason why many out of state investors don't achieve the high returns they expected.

 I totally disagree with that sentiment. First, he was a salt of the earth kind of guy: plain spoken, humble, and generous with his time. Second, the philosophy on managing your personal finances he set forth in his book is not only sound, its accessible and practical for the average person. Third, while recent regulatory changes may effect some of the details of implementation, the Lonnie Deal strategy- buy at wholesale prices and sell at retail prices by carrying the financing, remains 100% viable. Furthermore, the strategy can be applied to many other areas, IIRC he mentioned cars. I have a friend who does it using boats.

"Rent to own" is ambiguous, I'd call it "rent then own". Specifically, I'd structure it as a 1 year regular lease (ie. no option, no rent credit) which upon successful completion, entitles the tenant to sign a contract for deed. The SAFE Act and Dodd Frank are not the death knell of seller financing.