All Forum Posts by: Matthew Drouin

@Rich Cadena

Don’t feel bad about not knowing about the newest addition to the real estate alphabet soup!

Truth be told, I've been using "DSCR loans" since I bought my second property back in 2008. These have been the portfolio loans (on balance sheet) lending that is typically offered by community banks. The property usually needs to meet a DSCR covenant of 1.2 or 1.25.

Community banks kept investors growth alive during the financial crisis as all of the non confirming exotic loan products provided by institutional lenders (typically backed by hedge funds) were pulled off the shelf after the collapse.

Now as things have become more normal, non confirming (not fannie freddie) loan products have begun to trickle back into the market place as institutional capital has developed a thirst for yield backed by hard assets like real estate.

These DSCR loans you have heard buzzing about are not agency backed products so therefore there is not the hard and fast rules that you see with conventional. What that means is every DSCR lender is different in their criteria.

The first DSCR borrower of this type (2018) that I knew was an STR investor who over renovated a property using hard money and couldn't find a local bank to help them refi it because they couldn't get the property to appraise at a 80% ltv to give them loan proceeds to take their hard money lender out.

They found a lender that had a product that as long as they could show consistent revenue to meet at least a 1.3 DSCR for 12 months (the seasoning period) that the lender would do the deal regardless of appraisal (even though they required an appraisal to understand their exposure). The borrower needed to have a good credit score. They ended up getting the loan at a premium to appraised value because the revenue was sufficient to meet this particular DSCR requirements.

The fact of the manner is all of these lenders that offer DSCR loans may have different requirements so if you are going to go this route you may need to do research to see who would do your prospective deal.

Perhaps you might not even need to go this route and your deal could qualify for conventional or with a portfolio loan from a community bank or credit union.

Hope this helps!

@Shawn Williams

Growing in this business requires getting outside of your comfort zone. So why not start with this deal? Leverage does not equal risk. It’s just a business expense.

Besides by using some leverage and keeping more cash on your balance sheet, you can have some dry powder and weather a storm if one happens. If you spend the entire $150k and you have little reserves left, that doesn’t leave you much wiggle room.

Leverage is the biggest reason why real estate is attractive as an asset class. And you are throwing that out the window. To be honest, if leverage wasn’t a tool in real estate, I wouldn’t invest. If you aren’t comfortable with it now, then when will you be?

Plus, the median home price in Pitt is $259k according to Redfin. Your budget is almost half that. I always aim to invest in neighborhoods above the median because they usually signal desirable areas where I can get great tenants who take care of their place and pay me on time every time.

@Mels Kumisbekov I would say, be open to both. If you find a townhouse (with a well run HOA) and the numbers work, buy it!

Save your money in the meantime and if find a multi where the numbers work, do that!

Too many newbies get way too paralyzed about which way to go that they never do a deal and then lose interest and live with regret.

I would insert this caveat here. Only do this if you think there is a possibility of growth. If you know this is a “one and done”; your first and last investment property, then I would hesitate.

Every client I have ever sold an investment property to where it was their first and last, ended up calling me (like clockwork) five years later wanting to sell the place. To own just one, the juice isn’t really worth the squeeze. Gotta collect ‘em all lol

@Anthony Freeman

Ok this one is easy. Conventional is going to be a no go.

Community banks and credit unions should do on balance sheet lending or portfolio loans. These are loans that stay on their balance sheet so they don’t need to confirm to Fannie Freddie guidelines.

The only draw back is that the interest rates might be slightly higher and they typically aren’t long term, think 5-10 years as opposed to 30 year.

Ask real estate investors around your area which community bank is great to work with for investment properties. This will save you a lot of time because each community bank is different in terms of their appetite for loans!

Hope this helps!

@Patrick BlackRock

Do you still technically claim it as your primary residence?

If so you could qualify for an owner occupied HELOC with a local credit union.

@Shweta Mokashi

All of the properties, nearly all that are in great school districts are single family or condo/townhouses.

Although townhouses and condos are not great for long term appreciation, they make great rentals and you can find ones that are priced well within your budget and make some decent cashflow.

If you are looking for something relatively passive and family oriented, something with an HOA structure will cover exterior maintenance most of the time with most communities.

Otherwise, you will be competing with owner occupants on our crazy SFR market for properties in great school districts.

@Tiffany Roberts

I have totally been there.  Especially when you have competing priorities like job and kids.  This is the biggest reason most housing providers burn out.  They thought it was going to be easy and hassle free and then every issue comes out of left field at the most inconvenient time and feels like death by a thousand papercuts.

My suggestion is this.

1.)  Reevaluate your strategy going forward on future purchases.  Would you buy in the same type locations if you were to start all over?  Better locations = better tenants (assuming your PM company screens properly, I always want first right to green light applications until my PM understands with crystal clarity on what type of tenant I want.)  For the properties that I own in great locations, to be honest, sometimes I forget that I own them because the tenants are so great!  This is something that is very important to manage on the front end.  It's front loaded work, but if you have a great property, in a great location, with great tenants, it should not be very management intensive.

2.)  Have you developed trust with your current property manager?  The reason why I ask is if you get really annoyed at having to make decisions about maintenance calls or repairs or whatever, then maybe they don't need to run EVERYTHING by you.  I only hear from my PM if there's going to be an expense over $1000.  If it's under that, it just gets done and I'll see the expense on my monthly income statement.  If I have questions, I'll ask for details.  You should be able to customize this with your manager and adjust over time.  For one of my managers, I maybe get one call a year when there's something more major.

3.)  Schedule a detailed walkthrough of your properties with you and your manager and a home inspector.  Identify any issues that need to be fixed preemptively.  And also make clear that you want it done the RIGHT way.  This will ensure that most of what COULD go wrong gets addressed on the front end so that you don't have to get bogged down with ongoing maintenance judgement calls.

If none of these suggestions seem tenable in reducing the brain damage associated with owning property, then owning rental property directly might not be for you.  And that's ok.  That's the reason why so many people like myself utilize OPM (Other Peoples Money).  You can invest passively in deals and the most work you have to do is running your distribution checks to the bank and giving a K-1 or 1099-INT to your accountant each year.

Hope this helps.  Stay in there!

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John,

Before I would even call the zoning department, I would find out about demand first and also supply or the barrier of entry to new supply.  Check rent comps in the area and check what new product is trading for in terms of monthly rents so that you can build a financial model to see what this thing would be worth conservatively on the back end.  That being said, if you can't fit 5 units or more on this site I wouldn't pursue it.  4 units would be considered residential and subject to residential appraisal standards and weight sales comparables very heavily.  5 unit or more would use an income capitalization approach and the value would be driven by Net Operating Income.

So here's your homework.

1.)  Call a commercial appraisal company and ask them what newer vintage 5+ unit trade Cap Rate wise for the subject area.  Also ask them what type of expense ratio is you can plug in for you proforma so you can start to build your financial model.

2.) Based upon that, let's assume they tell you 5% cap rate and a 50% expense ratio. Based upon market demand, you find that a 1000 sqft, 2 bedroom 2 bath unit mix will work best for you market. You find rent comps on newer product that rent for $1800 a month. So you do $1800 x 5 units x 12 months = $108,000 in gross rents. And then based upon an operating expense ratio of 50%, you have a pro forma NOI of $54,000. Divide that by 0.05 (5% market rate cap rate) and you get $1,080,000.

3.)  Now you have to find out if you can build it.  Contact a general contractor that builds this type of stuff.  If you don't have one, contact your local building department and ask them who's built one of these projects recently and find out who was the General Contractor on record as well as who the lead developer was (you'll want to have this contact later on if you decide to move this along further.)  Ask the GC on what if cost them to build the project, they might give you price per sqft so lets say they say conservatively $225 a foot.

4.)  Now time to do the math.  If its going to cost you $1,125,000  to build this thing in hard costs and it might only be worth $1,080,000, this project might not pencil.  However, if you you have rent comps that support $2200 a month, then you might have a project that could appraise at or above your project costs.  We did not even talk about soft costs that need to be factored into this as well as land acquisition costs.  To set aside a line item for soft costs, talk to an architect.  Hopefully an architect of record on a locally done project.

If the project pencils from a back of the envelope approach then contact the local zoning department and see what the site is zoned for.  Whether single family, multifamily, business, industrial, etc.  If it allows for multifamily, you need to know that the building and zoning requirements are in terms of set back requirements, max impermeable surface, etc.

If what you want to build doesn't fit zoning wise, you might have to pursue a variance or multiple variances in order to get a project entitled and approved.

Once you've done this homework, repost on the forums here and tag me in and we will take the next steps from there.

The bottom line is this.  If all these things start making your head spin, you will quickly realize why we have a housing shortage in this country.  If this project costs $225k a unit to build even before considering land acquisition and soft costs you might want to give serious consideration in buying something existing. Even if you have to pay $150k per unit, you are still buying at a significant discount to replacement cost and this gives you a unique competitive advantage in pricing.  AAAAND you don't have nearly the amount of risks as developing new.  That's why most developers choose only to do massive projects because the juice is worth the squeeze.

P.S.  Check in with your local government so see if there is a economic development agency that administers PILOTs (Payment In Lieu Of Taxes).  These are typically 10 year tax abatements which can really help these types of development or redevelopment of vacant or functionally obsolescent structures economically viable.  These PILOTs can also help your back end valuation because appraisers will take a discounted cash flow on the tax savings and help your valuation.

Cheers!

@Chadwick Cotner

I think you have to start with the end in mind. Do you and your partner even have alignment THERE?

Most couples don’t talk about this. So set aside some time while both of you can be present and ask them what’s the vision for their life and what they want for your life together and ask why? They may tell you things you’ve never heard before.

So then so the math together, can you feasibly get to end goal by doing exactly what you are doing right now?

If the answer is no then something has to change.

Ask if they are open to the idea of real estate investing. Explain you too are a path to discovery and if they are interested in discovering together? Hopefully they are at least curious.

Start listening to podcasts together. Audio books together. Maybe you could go to a meet up together once a month as the bidding real estate power couple.

Ultimately my wife had no interest, but at least she understood after getting some education and seeing there was an entire community of successful people doing this thing. And it wasn’t just me feeling jazzed about real estate investing after watching some late night infomercial.

You have some other questions here but are going to be irrelevant until you get your partner on board and that’s going to take time; you can’t just give them a sheet of paper with the bullet points and expect them to change their mind.