All Forum Posts by: Mike Klarman

I've been saying it on here for years, Private Money is expensive and what enamors people to it is the "Private" moniker.

There's institutional lenders that will work with new investors with standard fees and points, nothing outrageous.  Rates are 11.5% - 12.5% to start which is fine.  

I think Hard Money gets a bad name from those who didn't do well using it or had a bad experience. You can't globally judge Hard Money outfits. Some are good, some are not. Some are good at Bridge loans, some DSCR, some specialize is 5+, some won't touch 5+.

You have to know where to go, who to use, you have to understand the process so you can get ahead of any issues, you have to stay on top of your title and insurance contacts.  Those are two areas that can really slow you down if you do not stay on top of them.

The worst thing an investor can do is to start checking key investment tools off their list.

Jacob, good for you to putting the homework in before you put any money to work.

I think Sac is a 500k or so median sale price market. The distressed houses ripe for a BRRRR sound like they may be 250K+. A price bucket of that number can have a total project cost that exceeds 75k when you add it all together: Down payment, Closing costs, holding costs, insurance, title, utilities, any miscellaneous costs that incur.

If you are just starting out, I would not recommend you being the one doing the picking of the houses.  There's people that know Sac like the back of their hand.  I'm sure Sac like every other city has nicknames for the neighborhoods.  Get yourself a big map of Sac and shade in each neighborhood and when properties trade on market, put a pin on the map with the sales price.  You'll quickly see what is trading and for how much and where things move fast and where they don't and now when a distressed property does arise, you'll know what it is worth fixed up better than anyone.  All you have to do is look at the wall.

And I'm not sure what capital means to you, but if you can buy for cash that's what you should be doing.  Find a funnel into the cash discount opportunities of Sacramento. Most markets have them and Sac is not an LA or a SF, it's a secondary city so it should have this.  You find it at auction, foreclosure, short-sale, or direct from seller.

You buy for cash, let's say for 230k you get a steal on a distressed property in a desirable section of Sac.  What do you do?

1) Develop connections into the investment/wholesaling/RE Agent world and they all know people who can possibly buy a property like this 230k property for about 275k because after walking it it does not need much and you can buy for 230k and in about three months have 275k. That's 19% return on capital in 3 months. 76% APR. So sometimes your cash buy can be a vehicle to someone else's investment. You do not have to pick up the hammer and nails all the time and hold the note and risk the exit. Sometimes taking 50k in three months is just fine.

2) You walk this 230k and you see that you can do a bare min rehab for like 40k and then put it on the market for 375k and let a turnkey investor gobble it up as an investment.  You gross 100k.  Why do you do this, because you are holding better....

3) You walk it and really see a vision, love the location, the market is right....you're gonna do a flip finish.  Now you go to a lender and they will give you a 12 month bridge loan that will cash you out 80%/85% of the 230k and also provide that 100k you want for the flip finish.  You get 195k of the 230k back, but now you are holding the note, working with a GC, needing to get the project done, but if you are in at 230k and spend 100k in rehab and you get out at 500k, then that is a huge win

4) You want to hold it and you do the same steps as #3 with the lender but you do it with a rental finish for like 70K and then when work is done, get a renter and then apply for the refinance and you will cash out 75% of the 450k BUT DO NOT DO THAT. First the DSCR would not survive that. Could rent for a SFH in Sac carry a 337,000 note? That's a 3300/month payment. You would need to collect 4000 per month for it to be worth it and I doubt Sac is fetching that. But you only want to refinance for your money back. Nothing extra. Keep the debt low and the cash flow high. So you'd refi at like 50% of the 450k and carry a 230k note and your equity is in an appreciating asset while you receive a monthly dividend that has a higher than avg DSCR.

I never thought I would see a post where the lead was 100+ BRRRR at 20 yrs old and then the question would be how do I scale?

you are scaling!

I am deeply connected in the Pitt market.  Those same deals exist there as well.  You just have to have the right Point Man to tell you which ones, cause the cheapies are always in a less than desirable zip code BUT the sub par sections sometimes do not stretch the entire zip code or sometimes the zip code can go block by block in terms of values.  So, you have to have the right "point and buy" guy.

Hi Mike, there are plenty of strategies that I have seen work. Buying up turnkeys is one of them, but it is very cash intensive b/c you are getting in very late in the game and you are paying that end value and living off of the cashflow that's generated from an 80% DSCR purchase loan. This strategy either takes 100s of thousands or it takes very long b/c you are doing one, saving up, and then doing another when you can.

If cash flow is your thing, look into STR. There's secondary and tertiary vacation markets in this country where STR is a very solid investment. I have a client whose whole portfolio are STR assets in the Pocono Mountains in PA. He's full 80% of the year on each. The portfolio is worth 4 million. He has loans for 2.8 Mill b/c these are considered rural. His total debt payment is like 25k - 30k per month. His STR income is 97k per month. I refi'd two houses for him myself and one had a trailing 12 months of 400k and the other had a trailing 12 months of 275k, and he has a few others. How would you like to be him? Get in line...

The lender for the property that generated 400k, they didn't believe it.  They thought he was falsifying the spreadsheet printouts.  It is a 800k house.  Big.  6 beds/3 baths/indoor swimming pool.  It's sold out almost all year long.  Someone rented it between Christmas and New Years two years ago for 30k.

There's 50k min bridge loan lenders out there, I use them when I need to.  Big Box lenders really don't like under 100k cause there's no money in it for them and they have pretty big companies and if the same man hours could produce 1k in commission or 5k in commission, what are they supposed to do?

I like to work backwards when it comes to this stuff. Let's start what you think the house is worth. Post Rehab, let's say 280k. That's what you can get if you sell in todays market. So, where should you be for max project cost? Most say 70% - 75% of the ARV. 70% of 280k is 196k. 196k is the max you wanna be in for to make sure there's a decent profit for you. Next you need to get the line item budget together and be accurate and be in depth and have a contingency. Let's say that number is 90k. 196k - 90k = 106k. 106k is what you can pay for the house.

So you go with a purchase contract to any one of dozens that offer bridge loans and then they run your credit and then will offer you initial terms based of what you say on ARV. You say 280k ARV, and at that number they can offer you 85%/100%. That means they offer 85% leverage for the purchase and 100% of the rehab, probably at 2 points and around 11% - 12.5% depending on credit, experience, market conditions.

If you have 100k, you really don't wanna go deeper than 40k - 50k on a project.  If you buy at 400k with the downpayment, closing costs, carrying costs.....say goodbye to the 100k and then if you get stuck and have to reduce, your profit will shrink up quick.

Rural usually means the population of the town is under a certain amount.  Some lenders do rural, some do not.

For 1 - 4 units, 720+ credit: 7.5%ish.  I've seen lower at a few outfits and some have a buy down option that lets you get as low as 6.5%.

I can tell you, if you go into this with 10k and even if someone does give you 100% financing up to 70% btw, they forget to mention that and properties on market when the rehab is added in, they rarely have a 70% project cost to ARV ratio. Cause if they did, would they be on market for 98 days?

10k is 10 cents in this world.  I've seen deals where the investor was making 50k on paper and they wound up losing 50k.  You're telling me you have 10K?  If you came to me, I wouldn't even put you in a loan or offer you one.  Why would I ask you to jump into a pool and then ask you to also hold these weights?

You have to be careful.  Agents are trying to sell.  Lenders are trying to lend.  Brokers are trying to broker.  None usually have your intentions ahead of their commissions.

With 10k, do not, I repeat, do not even think about a project.