All Forum Posts by: Keith Kellermeyer

Hey Andy!

What makes this "worth it" to you really depends on your goal/plan. Do you want to minimize your expenses by living in this converted unit? Sure, it could be worth it. Do you want to just convert it to livable square footage to then sell the house? It may not be worth it then.

Calculate the amount of work and permit costs it will take to convert this unit. Then, look at A) how much you will save in rent by living there, B) how much it could rent for per month to someone C) how much livable square footage it could add to the house value.

For me, I just recently converted a 400sqft shed in my backyard into an ADU. Since cash flow and long term holding is my strategy, it made sense for me to invest the $2.5k now and recoup that cost in 1 year of renting the ADU. Since I never plan to really sell, this conversion is worth it since it will always bring cash flow.

Hope this helps!

Hey Joseph!

As Blake said, you're paying for the convenience of time with hard money vs 203k. Since you're able to complete your rehab in a quicker time frame with hard money, you don't have to pay as high of holding costs - most of the time by several months!

Hope this helps!

Hey Fady!

This property certainly meets the 1% rule (rent is 1% or more of the purchase price), so that's a good sign right off the bat. The taxes seem like they need to be reduced for sure. A few things you should include:

Do you plan to pay all cash? 3.5% down loan? conventional 20% down loan? Basically, this will help you evaluate what your monthly payments on the property will be, thus giving you the data to know if the deal is worth buying or not. Also, do you plan to flip this property? But & Hold? BRRRR? Your strategy will determine your success with this.

Hope this helps!

Hey there Stan!

Well, if you're looking to hold it long term, but this flipper is your mentor and would be managing the project, your only real option would be to buy him out of his share of the profit on the deal.

If you want to use this as a learning experience, you are definitely able to get a good learning experience about the rehab part of this deal from your flipping mentor, but not as much on the refinance part, nor the rental part.

If you'll be 200k all in, and the appraisal is 260k, you could most likely get a loan on the property for 208k, leaving you with 8k cash as profit. You could negotiate with your flipping mentor and hand him all of that 8k, plus offer to pay him a monthly amount for a few years until his share of the profit is paid off. So, if his share of the profit is 30k, you could pay off the remaining 22k at $400/mo for 4 years 7 months.

Either way, if you end up negotiating a buy&hold, OR flipping it with your mentor, you WILL gain some sort of knowledge. GO FOR IT. JUMP IN!!!

Hope this helps!

Hey Nathaniel!

When doing a cash-out refinance for a conventional type loan through a bank, they will review your credit, tax returns, income, etc. to ensure you are able to pay the mortgage. Different banks/credit unions will have different standards though to qualify your income from said rental property. Some require what is called a seasoning period, where the loan institution requires you to hold the property for a certain amount of time before considering a refinance. These loan institutions may also require you to have 1-2 years of documented rental income from this property as well for them to count it toward your income (when qualifying you for the refinance).

The property value is the biggest part of doing a refinance, because this will have the highest impact on the loan amount the institution gives you. A typical conventional loan will be 75% LTV (loan-to-value), meaning the bank will give you 75% of the value of the home as a loan. Forcing the property value as high as possible will allow you to pull teh most amount of money out.

Hope this helps!

Hey Brendan!

When using the BRRRR method, you use the ARV in your calculations for projected cash flow before buying the deal. You'll know at what loan amount your monthly payments will not meet your cash flow requirements. This is easily solved though!

Sometimes, BRRRR deals don't allow you to pull ALL your cash back out; you will end up leaving equity in a property. Let's say you bought a duplex, and to cash flow $200 a month, you have to leave $5k in equity during your refinance. That's perfectly okay! At $200/month cash flow, you have a CoC return of nearly 50% in year 1! At the 25 month mark, you've made that entire $5k back. This is the benefit of the BRRRR method - it works long-term, even in the unfavorable outcome of having to leave money in the deal!

Another scenario could be that, that $5k belonged to a hard-money lender. They require 12% ROI from that $5k. Year 1, they expect $5,600. Year 2, they expect $6,200. (This is a very basic breakdown, as hard/private money terms will most likely require a repayment monthly, but you understand the concept). By Year 3, the cash flow you have collected from the property over the course of the past 3 years has now paid back that hard money loan.

Higher Appraisal =/ the same level of increase in monthly payments. Here's an example:

You buy a property and the property is valued at $300k. When you go to refi, your loan amount will be $240k., leaving 20% in the deal. At 240k, 4% interest, taxes and insurance the same, your payment is $1429.13. Now, let's say the value is actually $320k. Your payment (interest, taxes, insurance all the same) is now $1505.52. You had a reduction in cash flow, but you were able to refinance to a loan of $256k, and pull out 16k cash for $76.39 less cash flow per month. $76 usually won't break a deal, if you need to pull more money out to payback investors :)

Let me know if this makes sense for you, or if you have additional questions about BRRRR, I can certainly explain this different ways, if you like :)

Hope this helps!

Hey Ralph!

A 203k loan is usually used when doing the purchase of a property, allowing a low downpayment and the financing of the project to be built in. I assume you're trying to re-finance though?

The big con of a 203k loan is that the closing can take upward of 6 months, since the documentation requirements for the whole project are huge. Several quotes, detailed plan of improvement, proving such to the loan institution, etc.

If you already own the property though, and have equity built in already, you may want to consider doing a HELOC. You can negotiate a line of credit that you only pay interest on for the first year or so. The interest rate can be fair, around 4-5%, and your monthly payments while renovating will be low. At the end of the project, you can refinance into a conventional loan and pay off said HELOC.

Hope this helps!

Hey Brianna!

Welcome to the forums! You've come to the right place for advice on investing.

For investing from afar, I'd recommend picking up David Greene's book "Long Distance Real Estate Investing" and this blog post. There are a ton of blog posts that would be really useful for you!

Hope this helps!

Hey Dereka!

A few things to check additionally:

• Check the loan details for sure. This makes or breaks the property. Purchasing for 474k with 3.5% FHA looks like 2k/mo Principal and Interest payment, and ~$300/mo for the insurance and taxes.
• Don't forget to account for vacancy, capital expenditures (water heaters, washer/dryers, roof, etc.), repairs/maintenance.
• I would also advise to put Property Management and Landscaping cost into your number when evaluating. You wouldn't want to be stuck trying to always manage this property just to make the numbers work.
• What are the ACTUAL market rents? Using rentometer.com, I looked up Whittier, NC and saw that the median was roughly $850 for a 2bedroom. Collecting $3,400/mo would make this MUCH better of a deal!

Hope this helps!

Hey Todd!

I am by no means an accountant or a tax advisor in any way, so this is not professional guidance. That being said, I don't think that the insurance check is taxable. I believe it would be taxable if the insurance check designated that it was for "replacing income". If it does designate that a portion is to replace income, you will most likely need to claim that as income and pay taxes on that income. Other than that, usually insurance checks are used for asset replacement, medical expenses, "pain and suffering", etc.

I'll also add that, if the proceeds are not reinvested quick enough, then the insurance payout may be viewed as capital gains, in which case you would need to pay taxes.

Hope this helps!