All Forum Posts by: Nathan Grabau

I would consider yourself lucky if $2500 was the cost of the "don't pay the contractor until they are done" lesson. Most investors pay much more to learn this lesson. I am not a lawyer and this is not legal advice, but... You can take them to small claims court, but the burden of serving them along with your legal fees will likely fall on you. If you have a loser pays provision in your contract, the story is different, but most construction contracts lack this. If you do have loser pays, I would kindly remind the contractor of this in a demand letter, with the demand being to either execute their contractual obligations or to refund x dollars for incomplete work. Some states say that if you threaten to sue someone you are blackmailing them, so I would be careful not to say something like "or I will sue you". Once again this risk adds to the "cons" side of the pros/ cons of suing. 

In future deals, I would say that it is okay to hold a retainage. This is where you only pay 90% of the invoice amount and hold that last 10% of every invoice until the end to keep them motivated to get across he finish line. I would be upfront about this and if you have a contractor that cannot accept this, consider it a red flag. 

Typically, to get a loan that is advantageous you will need something like a property that you have equity in to loan against. For example, I have a heloc on my primary residence that allows me to take up to 90% of my homes value. Do you have a property to use as collateral or does this property you are talking about have equity you could use as collateral? 

I can't see any really major issues with the budget you have laid out here. In my experience with home projects I end up much higher than I thought I would be. The timing seems great too that you should not lose that much rent in down time on the unit because you will be able to focus on it and finish quickly during the summer. 

If you are considered a real estate professional the real estate paper losses deduction caps go away. This was one of my motivations in getting my real estate license. While I intend now to be an active broker, at the time my CPA said I only needed to devout 750 hours per year to real estate, not including investment time, to get this classification. It might be advantageous for you or your wife to pursue this for tax purposes. 

Also, you never lose the liability that you were not able to take, you just have to take it in a future year or you get it back in capital gains when you go to sell the property. Sadly a lower rate, but not a terrible deal. 

I would try to get a house hack in place as soon as you can. This is where you buy a property, single family or up to 4 units, single family will probably be easier as a student and then rent out space to help cover the cost of your mortgage. For most people this is the best first investment to make as it helps you reduce your living expense while giving you real estate and landlord experience. If you want you can reach out to the David Greene team to get working with someone. I am also happy to help you find and then refer you to a great agent in the area you are looking to help you with this if you send me a private message. You are starting at the right time! I bought my first property during undergrad and now have 12 doors! 

I think you are on the right track here with what you are thinking. A little cosmetic work can really improve the appeal of a unit and tenant quality. For the list you have said, 2-4k seems like it might be on the low side. For material for example, with the cheapest rental durability laminate floors, you will probably be close to $3($2.5 for floor, .5 for underlayment) a foot in material after waste. I cheaped out on redoing the floors in my house and really wish I would have spent the extra 75c a foot to get better laminate because that is nothing compared to my effort and even after a professional install, my 99c a foot flooring squeaks all over the place. But that alone for an 800 sqft unit is $2400 before labor. 

Cheap things I have done: paint, repaint cabinets, door hardware(crazy what grandma bronze to a brushed nickel can do), cabinet hardware if you have it, and updated outlets(cheap an very easy to rewire).  I also have replaced some fans with flush mount ceiling lights. It is wiring, but very easy wiring and if you have a low ceiling, can make it feel multiple feet higher. I wouldn't do it in a bedroom but great in a dining room or kitchen. 

I would also encourage you to put a value in place for you time as you work. Even if it is what is McDonalds hiring at, you want to make sure that if you value your time, suddenly an investment no longer makes sense. In the same way that we want to make our money go the furthest, if there is a way to make your time go further, it is worth investigating. 

Cleveland does have a declining population, which means that scarcity is going to disappear. According the St Louis Fed's home value tracker, the average house price in the US retook its pre financial crisis peak in mid 2013, in Cleveland, this did not happen until late 2018. Cleveland also peaked in 2005, vs 2007 for the national average. This means that had you bought in 2005 at the peak in Cleveland, you would have had to wait 13 years just to break even on the value of the house. The same investor who bought in an average US market, only had to wait 6 years for this, less than half the time. 

https://fred.stlouisfed.org/se...

https://fred.stlouisfed.org/se...

On my first pass this seems like a really good deal. The next two things I would be curious about would be how they look/ how recently they have been updated, including HVAC/ water heater age, and the last time the properties were renovated. I would also want to know where these were. With my quick calcs, 90k down, 270k loan at 6% for 30 years, leads to a cash on cash return of 15% a year without doing anything fancy makes me think that you are in a market like Cleveland or Flint that the population is declining. I personally will not invest in an area with negative population growth. My whole thesis for owning real estate has to do with scarcity, and if the population is declining (half as many people live in Cleveland as they did in 1970) scarcity is not an issue in that area. If this is in a location with a growing or even stable population and the units are in good shape, this is a great deal! 

An immediate opening I see to make your lift easier is to find a lender that does 20% down DSCR loans. In my experience these have also been much easier to close than conventional products that need 25% down plus a high level of cash reserves.

If you are an agent, I would recommend leveraging low down payment products as your primary residence. With a 3% down and a buyers agents commission of 3%, you should be able to buy a property every year with virtually no money down. 

Does your current primary have a HELOC on it? Quorum Federal Credit Union will do a .99% plus prime interest only HELOC, which at todays rates is about $375 per 100k you can borrow.

These are all things I have done to be able to purchase more properties. I am now working on a BRRRR, which I will be financing with a commercial refi on one of my properties, and I am hoping to be able to get out almost all of the cash I put into the deal.

I think that this is a point that a lot of investors hit though, where they burn through their dry powder and the next time they get more, they are much more cash strategic about it. 

Do you have a loan contingency in your purchase contract? Did you elect to lock the loan on the loan disclosure? 

If you have a loan contingency, you could likely back out of the deal if it has not passed. If you locked the rate, you should be able to demand the rate until the window they gave you it was locked for. Sadly lenders are in the driver's seat if you only have a week to close.

You could also attempt to get an extension to close to find an alternate product. 6% is not crazy, but it does not feel that competitive.