All Forum Posts by: Matthew Drouin

@Haylee Moore

To echo what @Chris Seveney said. You will need to check with zoning.

And very important here, check with building code.

Zoning might allow it. They might not. If they don’t they you’d have to obtain a variance, which involves a public process.

Let’s assume that it is zoned as of right…

Now Let’s consider building code. When you change use or build new, it usually triggers you to bring the new building or what is being converted to be brought up to current building code. In some towns they change the code every year.

I’ve found in my experience that even if something is zoned for the proposed project, the building code requirements can make it cost prohibitive: think sprinklers, ADA requirements etc.

The one thing that would make it less cost prohibited if it was an extremely high demand, high barrier to entry, low supply market.

I own property in Rochester NY and I considered adding an additional unit to a 4 family I own. The cost of that additional unit was going to be $200k. Well I can buy a preexisting TWO family for $200k in my market so it was relatively cost prohibitive.

But, if you can build an 2 bd ADU for $200k and units in your area go for $350k and the cash flow from the additional unit gives you well above 20% above your debt service, it might be worth looking into further!

Hope this helps. I’m no Florida expert but I’m a developer so feel free to reach out if you have any other questions.

@Justin Li

By the way, congrats on your 5th property! Most people out there don’t even do their first!

Getting your credit pulled upon inquiry is going to hit your score regardless. And I don’t know any institutional lender who doesn’t pull your credit when you apply for a loan.

However, it's getting them financed under your personal name is what kills you. And regardless of your DTI, the credit bureaus don't give a hoot about you income, only about the nature of your debt. And subsequently, your score will drop as you start to look riskier and riskier. Remember, most people don't own rental property and the credit reporting companies has a one size fits all model for analyzing a borrowers risk!

Community and regional banks will lend to your LLC and keep the debt off your balance sheet.

What I’ve done in the past is I would accumulate 5 properties with a hard money lender and then refinance them with a community bank.

Hope this helps, feel free to reach out have any other questions!

@Russell Sherman

The good news is, you expectations and goals are VERY realistic. I think you might be able to exceed those goals without taking on risk to your capital preservation goals.

I had a client in exactly the same situation you are in a few years ago.  They needed long term predictable income post sale and did not want to lose their principal.

A couple of scenarios:

1.)  You could sell the property and hold the mortgage and customize the terms of that mortgage to whatever your goals were.  You could even negotiate no prepayment to lock in the terms for longer and defer your capital gains.  If you were to seller finance, it would be considered an installment sale and you would only pay gain taxes on the principal payments.  Of you course you would pay income tax on the interest payments.  I have no idea how the owner occupant gains exclusion would work in this scenario so check with a CPA.  The problem is you tie up 2/3 of your wealth into this mortgage.

2.) 1031 Exchange DST. Now, check with your CPA to see if this is even possible based upon what you have claimed as residency to see if a 1031 was possible on some place that you may have claimed as your primary residence. Assuming you can do a 1031, you do have the option of rolling your sale proceeds into a Delaware Statutory Trust. These are usually sold by RIAs (Registered Investment Advisors). They present a fractional ownership interest in a large investment property. They are usually designed for income. Usually fully stabilized, institutional class, in core markets, with very low leverage. You have the option of directing your sale proceeds through your Qualified Intermediary into several different DSTs so as to diversify. DSTs are a little thick with fees. Usually higher than typical real estate syndications so don't be surprised at that when you start reviewing prospectus'. Again, the problem with this scenario is you CAN diversify but 2/3 of your wealth is going to be tied up in real estate DSTs. They are designed to product income but are not very liquid. The standard DST terms are five years, so when the sponsors sell the property, you will have to either take the gain or roll it into another DST(s).

3.) The third and last scenario is to completely cash out, take the hit with your gain. This option will allow you to take your time to really architect your plan that is in line with your long term goals and short term needs. Hell, you could put your money into an FDIC insured money market account and get 5% on your money in this environment. This option gives you the greatest optionality in picking your asset allocation based upon your risk tolerances and goals not based upon what you need to do to beat back the tax man. Also if you have most of your wealth in securities that are liquid and considered cash and cash equivalents, you can convert them to cash very quickly and reallocate or even get a line of credit against those securities so that you can fund passive investments in other real estate deals or private lend or whatever.

@Casey Adams

I like a blend of cashflow and equity multiple, they don’t need to be mutually exclusive.

Negative cashflow is ok for a little bit of time like max 1 year while I stabilize a property. What are some reasons why it would negative cashflow first year?

Sometimes I’ve finished a rehab middle of winter and need to make concessions to find a great resident so I’ll drop the rent and put it on a six month lease.

What I don't like is negative cash flow for long periods. You might be able to increase your equity as the market appreciates but you'll never be able to meet a healthy DSCR.

I’ve been able to find this balance in markets like Rochester, NY. But only in great areas! There’s a lot of traps in our market.

For instance I just sold a double I had for 6 years.

Bought for $146k with hard money.

Leased it up.

Appraised 1 year later for $220k.

Refinanced and took my hard money lender out.

And cash flowed about $400 a month.

Then the market went crazy. I saw a comp trade for $452k so I listed mine for sale and sold it for $360k and walked away with a $198k check.

So if you can focus on markets that have neighborhoods which are in the path of progress and desirable, you can cash flow short term and build equity on the back end.

Hope this helps!

Reach out if you need any more help!

@Elizabeth Chan

I hate to be the heretic here but 9% cash on cash for a short term rental is not great.

STRs are much more management intensive than long term rentals. And more risks too.

9% on a LTR, assuming if it was in a good location and not a ton of deferred maintenance would be fantastic.

But that being said, if it’s your first deal and you really like it, it will be an invaluable learning experience, even if it doesn’t make the best financial sense.

You’re going to make mistakes any way you play it. But no mistakes are going to prove fatal especially if you are taking on no debt with the purchase.

Happy to talk more if you like. Take care!

@Jeff Smith

Jeff I am going to be the heretic here and suggest you do both.

If you don't already have a HELOC, open one! It doesn't cost you anything to have it. Plus it's a floating rate, so if you are using it to brrrr a deal, once you complete the plan on that acquisition, refi it, and use the proceeds to pay it back down, the interest rate on that cost of capital effectively becomes zero.

If you refinanced the existing property, your cost of capital on any subsequent new deal would be baked in at the new rate on your new debt.

In regard to refinancing your current current property, I would look at your current return on equity to make that decision. How to calculate that?

1. What’s it worth?

2. What do you owe on it?

3. What’s the annual cash flow?

Do this formula to calculate return on equity:

3/(1-2) If you come up with a number much less than 11% we make the decision to either refinance and strap it with new higher debt or sell it. But that’s us as a company and you can use your own metrics of course.

Feel free to reach out if I can offer any further guidance!

@Robert Salazar

Appraisals on refinances are very tricky and oftentimes disappointing. Generally when appraising for a purchase, all the appraiser is trying to do is find a comp that will support the purchase price.

On refis most of the time they don’t know what value you are trying to go for so sometimes they can come in low.

It certainly doesn’t hurt to be there. It gives me the chance to build some report with them as well.

This is a chance to explain any nuances associated with the property that aren’t immediately apparent.

And also, sometimes I’ve actually had them ask me “what value are you trying to go for?” Which I’m not sure that’s even legal/ethical of them to ask but they wouldn’t never ask me that via phone or email!

Also I’ll take the opportunity to find sale pending comps and see if the listing agents of those comps will disclose to me the contract price so I can give that info to the appraiser as well.

That being said, always be conservative with where you project the refi appraisal to land and make sure you have a backup plan in the event of a low appraisal!

I had one come in way low and I had to take $100k out of my pocket just to close the refi and take my hard money lender out!

Sam, no problem.  Glad to help!  Let me know if you are planning a visit and I'll plug you in!

@Sam Chicquen

You wouldn’t be the first Canadian to invest in the US and certainly not the last.

I’ve heard cash flow is virtually a myth in Canadian real estate.

One BP member recommended reaching out to brokers. Agreed. However…

I would try to identify one or two markets in the US that are going to meet your criteria first. And then decide to really commit and start drilling deep into that market.

Now, this is not a life sentence to that market but you are going to have to make a concerted effort to turning over some stones and building relationships in that market.

The reason why is the best, most knowledgeable brokers on investment properties are going to be very busy. I used to be a RE broker for 16 years before I retired from that business.

I would get calls all the time from out of town and even international buyers. I learned very quickly that 99% of the time, they were going to be a colossal waste of time.

So I decided that I was going to have three major tests before I decided to spend more than 30 min with them:

1.) Do they have the financial means with which to buy something that meets their criteria?

2.) Does their online presence make them look like they have their proverbial 💩 together?

3.) Have they physically visited our market? Like actually taken a trip here?

Number 3 is important for several different reasons. I only want to work with smart investors. Those who are educated decisive and committed. Would I really invest a significant chunk of my wealth without actually being familiar with how the market feels? Also it shows to me, serious commitment which means that even if this person is just starting out, they are willing to waste some valuable time if this doesn’t work out.

Either way if Rochester NY is a market you are considering, come visit our REIA. We meet several times a month so there are several opportunities to walk the market and meet some local pros!

@Carrie Brauninger

Three different thoughts;

1. When you say “looking for a place to park your money”, what do you mean? Like temporarily?

If that’s the case, you can invest passively into a syndication partnered with a proven operator which can cash flow and appreciate.

They typically have terms of 5 years and investment minimums as low as $25k. It’s also not uncommon to see equity multiples of 2x or close to 2x over that holding period.

The process of looking at multiple opportunities and vetting them and then tracking those deals will give you great experience to passively learn the business until you figure out what you want to do.

Or maybe opportunities become more abundant in your market.

2. In regard to owning something directly. Out of state is tricky. I just have always felt uneasy about investing a substantial portion of my wealth and signing on a personal guarantee for a bank loan for something that is outside my direct reach. It’s very difficult to find a good property management company that does smaller deals.

3. Third train of thought. You own a house. What about the possibility of building an ADU. You could probably finance the build with a HELOC. It would be an awesome experience to go through the zoning process, architecting, building etc.

Just some thoughts. Hope it helps!