All Forum Posts by: Joshua Christensen

 Hey Ryan,

I do a lot of seller financing deals with the mortgage staying in place (ie. Subto).  In New Mexico we call them wraps.  Not a big deal.  

The risk involved is the Due on Sale Clause in the underlying mortgage.  Although it does present risk, the attorneys I work with explained it to me like this.  Essentially, it is not an automatic thing.  The due on Sale is there to allow the bank to call the note due should they feel it is necessary to do so.  The escrow company and attorney I work with have seen this exercised 1 time in 30 years.  The reason was due to non-payment.

To protect yourself as the seller, it is advised to make a payment and stay at least 1 payment ahead of your buyer at all times.  The escrow company will not see your underlying loan, so they won't know and it is up to you as the seller to keep your mortgage current.  

Second, ALWAYS utilize a third party escrow company to keep the transaction as arm's length for the purpose of records and refinance with the bank later to buy you out.  

Third, Get a good downpayment.  The higher the downpayment, you shift risk to the buyer and reduce your risk.  Give them something to lose if they don't make payments.  That's why banks ask for down payments.  Statistically, 20% down dramatically reduces the risk of foreclosure.

TERMS:

Interest rates: Some people like to raise their interest rates higher than what a person can get at the bank.  This attracts people who can't get bank loans increasing your risk as the seller.  I recommend charging more than you pay and less than the going market rate at a bank.  Make it attractive to buyers and you'll be more likely to get a better / performing buyer.

Down Payment:  I always ask for a minimum of 10% up to 20%.  Cover your costs and make sure you're getting some walking cash.

Term:  I like interest-only payments.  As a seller, 100% of their payment goes to your bottom line.  Cover your mortgage and then pocket the remaining interest.  When they refinance, they will still owe the original principal balance.  You maximize your earnings.

Need the cash:  In the event you need the cash, there are note buyers out there who will buy your contract.  Usually at some kind of discounted price.  The nice thing is that even with a little haircut, they are portable if push comes to shove.  

WHAT I LOVE AS A SELLER:

I hate that I am selling an asset with potential to pay me monthly.  With owner financing, I can actually convert my property asset into a note asset and still get paid.  I have no maintenance to worry about, no monthly rent collections, and my capital gains are pushed further down the road.  In the estimates I've run, an average $350k house will earn roughly 30% more than a traditional sale in additional interest over a 5 year period.  You will convert from normal income (rental) to interest income which is taxed differently.  Your real estate note becomes truly passive.

If you don't need the cash from the sale and can let it ride, then this is a great tool for additional growth in your portfolio.

 Good morning Casey,

I'm a broker and property manger in Albuquerque, NM.  I'm not familiar with the Houston market, and I do quite a bit with SECT 8.  I love the model and it does come with its own set of challenges (so does conventional leasing).  

Here in our market, we see the SECT 8 vouchers out pacing the number of available units which leads to shorter turn windows.  We see the average Sect 8 tenant occupies a unit for 7-8 years before making any moves reducing turnover costs.  

We also see that the SECT 8 typically pay higher than our market rents in many cases in the lower income areas of town.  In higher income areas, the market rents tend to be higher than the SECT 8, so we rarely see vouchers accepted in those areas.  

Monthly the checks come in.  During the pandemic, my voucher tenants kept our properties whole and we didn't have the massive non-payment issues that many experienced.  

Annual increases in keeping with HUD's fair market rents build in a stable increase in revenue.

Regular inspections from the local agency provides us with an excuse to get into the units to check for maintenance issues that often go unreported and cause more damage.

We love the model. It has worked well for us.  Just know what you're getting into and you'll do fine.  

Find out who the local agency is that handles them.  They often offer free classes for landlords to make sure you know the Facts of how to manage them as you partner with the agency.  They are a wealth of knowledge and very helpful.

 Good morning Anthony,

A. Finding LPs - A great book on this Raising Capital for Real Estate by Hunter Thompson.  LP investors will be based on your syndication structure 506(b) or (c).  Under a (b) stucture, your LP investors must be known to you before you do the deal. You cannot advertise to "NEW" contacts after your deal is structured per SEC rules.  You cannot advertise publicly on (b) deals.  You start having conversations and building an investor list long before you need the money.  

(C) deals can advertise publicly and all investors must be accredited by the SEC rules.

B.  Payment structures. This is open on every deal.  80/20, 70/30, Pref, Promote, etc.  These can get somewhat complex.  Find your syndication partners and discuss these options with them.  It all comes down to the strength of each deal & importantly, aligning the interest of the LP investors before the GP team.  

C. Reputable Sources.  Rob Beasly has a couple of books out on underwriting.  Hunter Thompson is the Capital Raising expert.  Read anything on Private Equity structures as most syndications follow those models.  Study and understand the SEC rules for accredited investors and 506 (b) or (c) rules from their website.  

CAUTION:  Be careful of syndicators who use absolute terms like Always or Never or Inflation Protection, etc. as these are fluff.  The reality is that there is risk in syndications and you are taking on millions of dollars of investor capital.  You're essentially becoming a wealth manager for your investors and have a fiduciary responsibility to protect their capital.  No guarantees and that's why there are Syndication attorneys and SEC rules in place making sure that accredited investors understand the risk they are taking.  They bet on the Jockey more than the Horse.  You are the Jokey, the deal is the horse.  

Best wishes to you.

I'm of the mind to not over think this.  

1. Copies of leases & all amendments (anything verbal will not carry over - if a tenant fights it, then you negotiate a new agreement with them or they leave - Never make verbal agreements with your residents)

2. Utilities for most recent 12 months (this & the lease will indicate who is paying those bills)

3. Maintenance Report for last 12 months

4. CAPEX report since owned (roofs, flooring, appliances, windows, doors, etc.)

5. Obtain an independent crime report from the city

6. Copies of any 3rd party vendor contracts / agreements (landscaping, trash, laundry, etc)

7. Eviction / Deliquency Report

8. HVAC / Roof / Electrical / Pest / Termite / Sewer Line Inspections (at buyers cost)

9. Annual Operating Data - Income / Expenses

10. Insurance Claims Report - last 3 years

11. Deposit Trust report

12. Rent Roll

13. property survey

14. prelim title report (your broker can help with that)

I DO NOT Ask or recommend my clients ask for tax returns, credit reports, bank statements - These fall into financial privacy protections and if my buyer walks from the deal, there is too much liability & risk with having that information if were to be leaked.

If a third party management company has been managing it, you'll get basic information (income/expense, rent roll & leases, maintenance records, capex (maybe if they oversaw)).

Owner operated properties will have less of this information as most mom/pop operators don't keep good records, in my experience.

Don't worry about all this BEFORE the offer.  It is part of your due diligence period.  You can back out without losing your earnest if you negotiate that properly.  Most sellers won't release all of this without a contract in place, nor should they. 

I do a lot of Sellfer financing in New Mexico. The principles are the same.

1. Facebook REI groups in your area. Ask who has them.

2. MLS - filter into owner finance

3. Zillow - "Make Me Sell" or "For Sale By Owner" - Call and ask - Also, look at how long they've been on Zillow.  If they've been on there longer, you can inquire about a seller carry option to give them a bigger yield on their sale.  

4. Craigs List

5. Door Knocking FSBO's

6. County Records - Look for distressed sellers and mail out a "Will Buy" post card

7. Local REI Meetup groups - Ask

They are out there, but they are hiding under rocks a lot of times and you have to turn over a lot of rocks to find them. 
  

I genrally assume a 3% rule annually. The national average is closer to the 4-5% over time. I like to be conservative in my estimation. Also factor in if you will be refinancing and rolling any costs back into the loan if you're looking at ROI.

Good luck!

Andrew, you bring up some very real and raw issues regarding REI that many don't talk about. Unfortunately, there are too many courses out there teaching Real Estate for passive income and cash flow - Quit your job...blah blah blah. They don't always teach the business side of real estate which is what you're experiencing.

It sounds like you set your REI business up as a Solopreneur where you not only have another full time job and family, but you're the maintenance, leasing agent, manager, project manager and etc. You have too many full time jobs going on. Of course you're stressed. Then to add insult to injury, you get hit with multiple large CAPEX items at the same time.

Let's look at some solutions.  Your business is at capacity.  1. You can hire someone full time to work at $20+ per hour - $800 per week or $3200 per month (simple calc. not accurate).  or 2. hire a Property management company who provides multiple employees to cover your asset for 10% or less per month which probably works out to less than $2500 per month.  They report directly to you.  You have to manage them, but they are now your "Staff" to take the stress off your shoulders.

Is $30k a lot per year?  Sure it is.  What's the cost of never being present with your kids or wife?  Priceless?  Did you get into real estate to create margin and freedom in your life?  How's that working out?  

Look, smaller properties typically don't create massive amounts of cash flow in the early years.  They grow in value, the tenants pay down mortgages increasing equity, you get tax benefits, and there's the appreciation.  Depending on leverage, you'll start to experience cash flow years 3+.  

As far as CapEx. Most people don't set enough aside for this. They get hit, like you did, when big expenses come along. So, when we buy, we always set aside an account for operating and CAPEX for each property. Monthly, money goes into those accounts. When they are "fully" funded, I may stop adding to them and put that money back into reinvestment accounts to buy additional assets. Always be prepared for worst case scenarios.

A place that could help is on turn overs.  Damages can eat up your profits quickly.  Rather than doing damage deposits, look into deposit insurance programs like Rhino (only one I can think of off top of my head).  The tenant pays a small amount monthly in lieu of a deposit for $5-10k of damage insurance + lost rent insurance in the event of eviction.  It can save your budget where as one month of rent doesn't come close.  

You have to start thinking about your assets as a business or the stress will eat you alive.  It is a hard business that is sexy from the outside and really messy on the inside.  Welcome to the game! 

I'm guessing the owner won't provide financing for you?

For rehab, credit cards and home depot/lowes credit can help.

Does the Rehab have to be done upfront?  Can it be spread out over the life of ownership?  Can rents be set aside for a few months and do a little at a time?  Combined with Credit Cards.

I've seen DSCR reno deals out there that will give you up to 75 or 80% of the ARV vs. LTV on purchase price. Have you looked into any of those options?

Robert, this is a great question.  It's is incomplete as we don't know what type of appreciation you are looking for.  Every market has opportunity in the right places with the right deals.

1-4 units follow the market appreciation through sales comps. 

5+ units you start getting into forced appreciation through NOI approach.

In either case, I'd be looking at markets with a growing population (demand), a shortage of inventory (supply), and a market that has a net positive importing of jobs with wage growth.

As the Fed's a poised to make some moves with interest rates later this year, the question still remains to be seen what they will do with their QE/QT policy on their balance sheet as that will affect long term 1-4 unit rates.  Commercial rates will follow as they lower their overnight rates as SOFR usually tends to follow.  We're already starting see more of the sideline private equity entering the market again which will help rates.

To pick the right market, you need clarity on your strategy. Value Add, Yield, BRRRR, STR, LTR...Every market has something to offer if you look. This question is a bit broad in scope. IMO.

That line "the money will follow the deal" is a great line used in classes to sell.  

In my experience, you have to be "raising" awareness of offers and build a nice investor list that will have opportunity to see the deals you bring.  They are not giving you any money only joining your portal.  If you've done a good job nurturing your list, when you have a deal to present, the raise will be easier, but not perfect.

You have do both.  Find investors & deals simultaneously.  

We made that mistake on our first one.  We didn't have a big enough list and fell short of our raise which killed the deal.  Licked our wounds and kept going.  Lesson learned.