All Forum Posts by: Victor Menasce

Hi Debbie,

Tax sales in PA are a great source of properties. We've completed several. It's important to note that while most liens are wiped out from a tax sale, there are some liens that survive. 

1) IRS Liens

2) Water and Utility Liens

Most important is to understand any right of redemption period. In some cases, the original owner may have a right of redemption period that extends beyond the sale. If the owner was not served properly with legal notice of the sale, that right of redemption period can extend even further. Right of redemption means that anytime within the right of redemption period, the original owner can pay the taxes owing and get their property back. The key is to find a title company that is well versed in tax sales. You want to insure title to protect yourself. If the title company won't provide title insurance, then that's a good sign that there is some risk. 

In a few cases when we needed a particular property to complete a land assembly as part of a larger scale redevelopment, we took the extra step of quieting title in order to protect against the possibility of any right of redemption. Some counties (like Philadelphia) are notoriously poor at serving the owner with notice of the sale. In the case of Philly, the right of redemption can extend to 21 years. 

Shawn, let's connect. I may have some ideas. 

Joe, I don't know what the $21,000 in expenses includes. But there is always ongoing maintenance at a mobile home park. This one seems too small to be economically viable. The density is low at 2.5 homes per acre. At 8 acres, that's a lot of property to maintain. Someone will need to cut the grass, fill pot holes, make sure the roads are not collecting water or eroding, test the water supply monthly and send the samples into to the state. Someone needs to collect the rent and pay the bills. This is all active work that needs to be paid for. If you add debt service on the property on a 20 year amortization for $300,000, then you're looking at an additional $24,000 in funds going out leaving only $13,000 in cash flow. That number has risk on it. If there are repairs, or a tenant leaves, or you need to deal with a contamination issue in the drinking water, the profit will drop. In the short term, the cash flow will be negative. It's simply too small a project to dedicate resources. Once you dedicate management resources and pay for the true cost of that management, you'll find that the project is losing money. 

St. Thomas is a funny market. It's visitor demographics are completely different from the visitors to the British Virgin Islands only a few miles away. The entire group of islands are still recovering from the damage inflicted by hurricane Irma.  There are a lot of visitors to St. Thomas, but that number is dwarfed by the large number of cruise ships that dock there each day. Except right now, when the entire cruise ship industry is in hibernation. The entire hospitality industry is struggling to figure out what the new normal is going to be. We're in uncharted territory. You might find a bargain. On the other hand, you might be buying a problem. It all depends on the post-pandemic demand. The visitors to St. Thomas tend to be older. When the baby boomers are too old to travel, will the number of visitors decline? Too many questions for me to invest right now. The US Virgin Islands economic development authority may have some data to share with you that could help in your decision making. I've been speaking with them about a hotel they'd like to see redeveloped in St. Croix. Here too, the timing isn't right to make an investment. 

Plaster is easy to repair, but it requires practice to become skilled at it. Those who do it daily are amazing. I would hire a pro. It won't cost much because it won't take long. Pay close attention to what they're doing you'll maybe gain the confidence to do the next one yourself. 

Evan, this is a great question. But before I answer your specific questions, I want to set the context so that you look at the opportunity the right way.

You see the prices in Toronto are so high that it’s almost impossible to charge enough rent to recoup your investment in a reasonable timeframe. You end up tying up too much cash in the equity of a home in order for the numbers to make sense. House prices can increase by 10% in a year, but rents under rent control can only increase less than 2%. The value of a rental property is tied to its ability to generate income. 

The driver for housing in Toronto has been population growth. The city has added about 125,000 population a year and has only added about 35,000 units of new construction a year. The supply isn’t keeping pace with the demand which is why prices keep increasing, commute times keep getting longer, and the boundaries of the city keep expanding.

When you’re paying $700,000-$800,000 for a townhouse, it’s hard to charge enough in rent to cover the cost of financing this project. The ratios are too far out of whack.

What is working in the Toronto market is to renovate with a sale to an end-buyer as the exit strategy.

You can go to lower density more rural areas, but they’re a long commuting distance from the core of the city. Low density also means low demand. There is so little developable land within commuting distance that the land is worth a lot of money. Construction is cheap by comparison.

I personally don't think the BRRRR strategy works in Toronto.

Of course the market is in a strange state right now with the Covid-19 pandemic still affecting the market. We have less immigration which has been a traditional demand driver in Toronto. We also have a lot less foreign investment in the market.

The key to buying a suitable property in the Toronto area is to buy at a sufficient discount and to add enough value. You see in Toronto the municipal development charges, what are called impact fees in many cities are incredibly high. For a single family home you’re looking at a fee of $84,000 depending on the area in which you’re building a new home. So two identical houses side by side could differ in cost by $84,000. One is new construction and the other is replacing an existing house. So you have an $84,000 head start compared with a new home. You can do a lot of renovation for $84,000.

You could take a single story house, cut off the roof, add a second level and more than double the value of the house, without doubling the cost of the house.

You want to see what is working in an area and copy it. Don’t try to be a hero and blaze a new trail on your own. That’s a recipe for disaster.

The other main challenge in Toronto is finding high quality subcontractors and trades people that are reasonably priced. The guys that are good are already busy for the next two years with existing projects. Trades people are in high demand. Contractors are often looking for smaller projects as gap fillers in order to keep their people busy. They have to keep their people busy or they will lose them. Sometimes projects get delayed and contractors need to keep their people busy. But the flip side to that is that getting people to come to actually work on your project can sometimes be a problem.

Finally, you have to consider the sales tax. There is sales tax on new home sales, but not on the resale of existing homes. That adds another 13% to the cost of a new home in addition to the already exorbitant development charges. So you want to make sure you don’t renovate the house too much so that it is considered a new house. You want to be treated as if you are re-selling an existing house that has already paid the sales tax.

Ok. So onto your questions:

What’s the best way to structure private lending? You want to work with a mortgage broker who specializes in this kind of lending. It's governed by FSCO in the province and you want to work with someone experienced with the rules. 

What can go wrong? Lots. You want to hire a consultant who is experienced in construction who is financially incented to reduce the cost of the project. The contractor has a financial interest in increasing the total cost of the project. Quotes vary widely. I recently had a quote for tile work that was 4x higher than it should have been.

Finding comps is relatively easy. You want to hire a broker who can give you access to the data.

I’m a developer based in Ottawa and am happy to answer any questions you might have.

A tenants in common structure means that every signature is required for any transaction, including financing. That means that every signature is potentially a veto if you don't have complete agreement. With a tenants in common structure, you are personally exposed to liability if the landlord gets sued for whatever reason. An entity structure that limits liability may offer some protection. It may also make it easier to handle disagreements by determining the ground rules in the operating agreement. 

But another consideration is what happens if one or more of you leave the US and are no longer US residents. You would still be required to pay US taxes on the income earned, or non-resident withholding tax. Depending on the tax treaty with your home country, you might be able to deduct the withholding tax from your home country's taxes. If structured incorrectly, you might be subject to double taxation. It's worth researching which entity structure is favored under the tax treaty with your home country. It might be a limited partnership instead of an LLC. But if you use a limited partnership, then you will want an LLC to act as the general partner, because the general partner has unlimited liability, and only the limited partners have limited liability.

Some lenders will want to see significant income history and longevity in the US before approving you for a loan.

A Payroll Protection Plan Loan is an SBA Loan for existing businesses. It was designed to keep people employed. The loan amount was based on 2.5 months of existing payroll. If 75% of the loan was spent on payroll, then the entire loan would be forgiven. The program applied from March through May and has been fully spent. I can't see a way to use if for real estate investing. That wasn't its intended purpose.

Kerry,

This is a great question. I’m a believer in the laws of supply and demand. But it’s more than just demand that matters. I’m talking about demand and ability to pay. The current job market turmoil puts a big question mark around ability to pay. For now, millions of people are collecting unemployment benefits. But it’s unclear how long those benefits will be in place. At some point, the weakness in the job market will cascade into the financial markets, which may precipitate a shortage of lending. The last time we saw this was 2008. The cause was different, but the effect is likely to be the same.

There are several considerations you want to examine.

• The partnership and the team.
• The city. Is it attracting jobs.
• The micro-market. Real Estate is always hyper local. Some neighborhoods maintain value while others don’t.
• The asset class
• The deal structure. How much debt is on the property.

Personally, I like Huntsville because it has a strong jobs story with the auto sector having selected Huntsville for manufacturing. There is a history of technical expertise in both radio and military R&D centers. The drawback, is that the rent per square foot in the market is low, averaging at about $1.10. While there is a shortage of rental housing, there doesn’t seem to be much upward pressure on rental rates, which is keeping new supply from coming into the market.

I personally would stay away from Memphis. It’s a tough market and you need expert property management to make money in Memphis. I know several investors who own property in Memphis, and it’s got more risk than I’m comfortable with.

Charlotte NC is a growing city and has attracted a several financial institutions. It’s emerging as a banking center in the South. It’s not very high priced, but overall it has good fundamentals. It’s hard to say what the impact of the current economic downturn will be on Charlotte. I simply haven’t researched it. Charlotte is definitely worth a closer look.

I don’t have an opinion on Omaha. I simply haven’t researched that market.

Columbus Ohio is likely to suffer from its higher than average exposure to retail in the current economic conditions. Columbus is also a financial and insurance center in the middle of the country. Overall, Columbus has been one of the fastest growing cities in the country for a number of years now. It’s definitely worth a closer look.

Atlanta is also a growing city. But like any city it has a lot of areas. Some that I would not consider investing in, and others that are growing.

But before choosing a city, I would focus on finding a team to work with. Having the right people on your team, is more important than choosing the city.

I would also be patient about investing right now. There will be opportunities to buy properties at a deep discount to the market. This will take some time. We currently have a moratorium on foreclosures. That will eventually be lifted. Much like the period following the 2008 recession, the opportunities took years to materialize. The best years for finding deals were 2010 and 2011. It took a while for the deals to show up, and I believe that will be the case this time around too.

Given the choice between investing in single family homes or small multi-family, there is a tradeoff. These products attract different tenants. The small multi-family buildings tend to rent at a discount to the market averages, whereas single family homes tend to rent for a bit more. In my experience, single family homes offer a more stable investment. But the problem is that they’re more difficult to manage. You end up requiring a strong management team in both cases. Income stability is key to making any investment today. If your tenant loses their income, and there is a moratorium on evictions, you can go from 100% occupancy to 100% economic vacancy in a heartbeat. If you own a portfolio of single family homes in the same neighborhood, then you can effectively manage them much like you would a multi-family complex. ‘

I would make sure that your purchase is not over-leveraged in today’s environment. Once economic stability returns, it could be an opportunity to refinance and pull some equity out.

This will be a great session.