All Forum Posts by: Nathan Grabau

Following the Fed raising rates yesterday, I am send out a note to my investor clients with my quick thoughts on what happened and where I see things going:

On a very basic level, the Fed controls how much money is in our system, and can increase the money supply, causing interest rates to decrease and economic activity to increase, like they did during Covid. They can also do the opposite, decreasing the money supply, causing rates to increase and economic activity to decrease, like they are doing now.

At the end of last year, the Fed predicted that inflation would go away largely on its own and they would not have to do much economic tightening. Fast forward to today and we know that is not true, they have had to take rates almost 3 times as high as they expected they would. Over the last 6 months, the Fed has slammed the breaks on the economy as hard as they ever had in an effort to get inflation under control. The way they slam the breaks, it can take a while for it to show up in the economy. Fed activity generally first affects asset prices, then inflation moves, and then the job market moves.

We have seen asset prices go down, from houses to stocks, we also now have 2 month in a row of core CPI at the Fed's target, and have seen minor softening in the job market. There is a growing feeling among Fed watchers that the Fed is over tightening. Jeremy Siegel is a professor at Wharton, who was right about inflation on the front end, who is now vocally saying that he believes the Fed will have to start cutting rates into the middle of 2023.

If the Fed cuts rates next year, people who have been waiting to "see what happens" or "rates to come down" will likely rush into the market, potentially bringing back the aggressive sellers market. I believe that we have this window where it is possible to buy investment property while sellers are getting desperate and there is little competition. I am not sure when this window will close, but this is an incredible opportunity to buy when everything is on sale, and likely refinance and crank cash on cash returns up as rates fall.

I think any investment strategy has to be sustainable in current conditions, but we could be very close to a bottom, and that is the best time to buy.

If you would like to discuss this more, please let me know.

I would see what the city/ county records are for the finished sqft are in the home. 2 thoughts off the top of my head, the why I am offer a lower price seems clear here that this is partially finished, and it being acceptable for them doesn't mean it is acceptable for you/ other buyers. The second would be you do not want to tie yourself to the appraisal, if it comes in high you leave yourself exposed on them wanting more money/ backing out, but if it comes in low you can negotiate down. I personally think you have more to lose talking about the appraisal in your purchase price negotiations.

My PM uses Buildium and I have been happy with it. They run about 500 door with it. 

The extra liability is minimal. An inspector could pass a framing inspection for a home, that collapses the next day and it is still the building owner/ general contractor/ framer that would be liable in that case. 

The refi impact should be minimal as well. I would not worry about this. 

Resale or in a renovation is where I would worry about this. The problem is now yours if you buy the property and other buyers might walk away from a deal over this. With regards to a renovation, the city could force you to remove or update the addition to close out a future permit. Calling the city will help with this, but the city can always change their policy surrounding unpermitted additions, so they could say not to worry about it today, but force you to remove it 3 years from now. I own properties that have had work done that should have been permitted, including additions, but I cannot find a permit for, so I am okay with holding that risk, but that is something you need to work through on your own. 

It being in Texas (vs CA who's building inspectors are known for being terrible) make me feel better about it. Your agent not being worried about it helps too. I would take their input less seriously depending on how much "commission breath" they have. 

I would google banks near you, and go to the main branch of any banks with less that 5 branches and ask to talk to someone about lending. I think it is going to be hard to check the low down payment, low interest rate, and long am period boxes, but small banks are largely free to create products the way they want. I would start the conversation with questions like "what are you looking to lend on?" and similar general questions, then ask about your property specifically. It is likely that for most of these, your loan will be designed and approved by a few people sitting around a table in a weekly meeting, one of which will be the person you are talking to. How agreeable you are absolutely will impact the type of product you will get offered, so if you are not getting the responses you want you can ask things like "is there a way we can make xyz work?". There also are going to be some banks that refuse to be creative and have a very small box and other banks that are up for being more creative, massaging their LTV, changing their rates if you will shorten your arm, etc. I would look for the later type.

When I did this, I had a list of about 10 near me, and it took me 2 stops to find a good one, so it is okay to move on to the next one if you do not think you guys are going to mesh. 

 Broadly, and everyone has their own definition, driving for dollars is when you physically search for homes that are in your target range, find the owners of them, and try to negotiate off market deals. So for example, a flipper could be looking for distressed single family homes, unkept landscaping, broken down cars in the driveway, peeling paint, off color roof repairs, and then start to either mail, or contact the homes owners in different ways. For you, I would start doing this with MF properties, where you create a list, find the owners, and start contacting them and see if they are looking to sell the property you saw or any other properties they own.

If the LOC is in your name or if the lender catches wind of it, they will count it against your DTI until it is paid off. I would make sure you give yourself a reasonable amount of time to pay it off before closing so it can be confirmed as paid off. I would confirm this with your lender, but the best way to do this might be to include paying off the LOC in escrow when you close the loan. You would bring the cash for the LOC to be paid off to the closing table, and then the title company would pay off the LOC on your behalf with that money.

Lending broadly tends to be driven by risk reward where lenders with higher LTV will tend to have higher rates or lenders with pre payment penalties can have lower rates. I am not sure if you need to speak with 5 or more specifically, its more important that you find one that you feel comfortable with. For me, that took walking into 2 offices. The things I would want to know are:

When and how the arms adjust, what pre payment penalties exist, if it is a balloon when does it come due, longest amortization rates they feel comfortable with, highest DTI's they feel comfortable with, etc.

What you are trying to find is a bank that expresses flexibility and a strong desire to close to loan. I look for banks that are small enough that each loan is reviewed by a few people in a meeting once or twice a week, where my primary contact is one of the people at the table. 

I would strongly encourage you to get your real estate license, and work more as a RE agent than any other job to get RE professional status. While there are inherit benefits to getting plugged into the market as an agent, with RE professional status, you can take real estate losses through depreciation and use your real estate professional status to write them off against your wife's earned income. Over the next couple years, or maybe even in 2023, get your income tax liability to 0.  

Every lender is going to handle REO's on their balance sheet differently. We have a substantial inventory crunch still, so banks do not need to sell under market value to get them off their balance sheets. That being said, of the bankers that I interact with, they don't really want to be rehabbers or RE investors, they want to move paper. It would surprise me if they were broadly doing their own rehabs, but I could see individual banks doing this.

If buying under market value is important to you, I would start contacting investors directly by driving for dollars. In my market, as flippers have reduced their activity, distressed inventory is also going for a discount relative to the rest of the market.