All Forum Posts by: Kenneth Garrett

Dennis,

I only use commercial loans for my SFR investments. These loans are typically 5% @ 25 years amortized. I like the fact that they are not limited to the number of loans like residential loans. I'm ok with the 5 year balloons. First the tenant is paying my principal down (at 5.75 on 100K at 5 years my principle is 89,605). I receive the advantage of deducting the interest, property taxes, repairs and depreciation. When I refinance it's at a lower principle. At 5 years at 5.75% my balance is 89,605. if I refinance at 6% payment is 577 versus at 5.75 at 100 was 629.

I would love the 30 year fixed commercial loan, but I can live with the 5 year balloons.  My strategy is to pay them off as soon as possible with the cash flow from other properties.  The sooner you payoff the mortgage the better we will all be and not let the banks become richer.

I was at a seminar about interest rates.  On a 30 year fixed rate at 6% they said double the rate and add a zero that is the actual interest rate you are paying (120%).  The goal is to pay them off as soon as possible.  Its called the sweep strategy, they are out of Hawaii, but there are other systems similar take a look and let me know what you think.  The website is sweepstrategies.com    I am not recommending them, but it is an interesting concept about mortgage financing in the United States.      

Great comments everyone.  I agree with @James Masotti you have to start networking.  It took a couple of years for me.  Talk to people about what you are doing.  Get to know them, build a relationship.  Don't meet someone the first time and ask for funding.  It takes relationship building.   You didn't ask your spouse to marry you the first time you met, although maybe I should not presume you didn't.

Attend local REIA clubs, meetups, anywhere people of the same mindset are at. I have gone to IRA events where they are speaking about Self Directing Retirement Funds. I even go to guru events (free ones) to network. It's work. I am an introvert by nature, but I love teaching and investing.

Make it fun.  Keep up the good work.

I am in the northwest suburbs outside of Chicago. I have been able to find properties that cash flow on the MLS. You have to analyze them very carefully and pick them out. These are not turn key. Put in 25-30K of rehab. I have selected a few markets where I have become an expert. I also have been fortunate to find some estate sales where the family is ready to move on.

The market is very tight and the banks are very inflexible.  Your not going to offer the banks 30K less then the list price.  A couple of months ago I was able to get the bank down 10K, It was a miracle.  Sometimes you just happen to hit the bank when they have to unload the property.  It does take a lot of offers.

Hang In there.  Maybe you are being to conservative.  I know I have that problem from time to time.  I look at cash flow first and I agree with @Jeff B. work the numbers back words to see if you can get an offer that cash flows and works within your criteria.  I need cash flow 250 and up.  I use to look for 400 - 500 but those are more difficult to find.        

Good Luck.

@Terry Owens, @John Thedford

Terry, it works the same.  You could do a combination of debt and equity to lower the Interest rate.  For example you could ask for 7% for a debt arrangement and 20% equity in the deal when you reposition in 7 years.  Remember the combination of creativity is unlimited provided it is legal.  I have heard of many different arrangements over the years. 

Good Luck. 

It appears your funding is an equity arrangement and then an out clause which would then turn into a debt partner.  I did a joint venture last year where we had a debt partner relationship that had the option to covert to equity.  We ended up converting to equity.

I actually think the 12% is reasonable.  Your partner will have to replace your funds  if you opt out of the agreement. 

I think this lends itself to ask a few questions and I do understand about protecting yourself.  How well do you know this person and do they have a track record of finishing projects in a timely manner. What is the construction schedule and what is the average DOM (Days on Market) in the area.  If those numbers do not equate to a 6 month schedule then that approach seems somewhat flawed. Make sure you have full transparency on both sides with the expectations.  As an investor you have to perform your own due diligence not just on the project but on your partner as well.  I use my Self Directed Retirement Fund for projects and I have to make sure I have a comfort level with the partner(s) and the project. 

I think you should be a debt investor in this scenario to make sure you are comfortable and leave yourself an exit strategy.  It seems you have reservations and maybe on your first partnering with this individual you should take a more conservative approach.  After a track record has been established you will be more comfortable.

Good Luck.

NOI is the rent amount - expenses other than P&I.

Example is rent 1200 - taxes 300 - Insurance 50 = 850

Calculate Debt Service Coverage Ratio = NOI/P&I Example P&I = 600

DSCR = 850/600 = 1.42 Most banks want to see 1.25 we are good here.

I don't like capitalization Rates, but here you go

Annual NOI/Sale Price or estimated sale price

850 x 12 = 10,200/100,000 = 10.2%

Cap Rate is based on the area. Need a commercial broker to tell you what the area cap rate is.  Commercial and multifamily properties use this Instead of using comps.   Not a fan of this.

Hope this helps.

I keep 6 months minimum in reserves.  This covers possible evictions, repairs, etc.  I also bank all my cash flow so I can pay down the mortgage or buy additional properties.   

Sorry I must be tired.  Just check all of your numbers to make sure and narrow down the comps.

Michael,

Are there other liens attached to the property.  129 + 80 = 209.  Comps are 210-370.  That's a big spread.  How much is the rehab, cost of money to use to hold or rehab.  Property taxes.  Cost of broker fees, utilities, permits, etc.  You need to narrow down the comp so you don't assume its a great deal.  What is the average DOM (Days on Market).  I know someone who bought in Ohio and the average DOM was 360 days.  So much for a great deal.

Good Luck.

A couple of thoughts.  I am a building Inspector.  Most vents today use charcoal filters where you do not need to direct the exhaust to the outside.  If you are choosing to run the exhaust to the outside as a preference its a very small job and you probably are going to have a hard time finding some one unless you find a small rehabber or handyman.  I think you are on the right path since the job is so small.  The third story is a little bit of a challenge.