All Forum Posts by: Nathan Grabau

I do not think this is likely at all, but if the scarcity problem was somehow resolved in a major way, I would reconsider my long term bullishness on real estate. 

David Greene talks about this mortgage and realtor "perch" and from my commercial/ MF construction perch, I do not see any way that the inventory problem can be solved in a cost efficient way. We are seeing our roofing costs skyrocket like never before. When I am preparing bids, we are putting in 50% escalations for projects that will start a year from now. Our leads times are also terrible, going from 2-3 weeks to get the material we need for a few hundred unit apartment complex to 11+ months. 

Are you opposed to considering long distance investing? I am invested in the Ames, Iowa area. It has reasonable cash flow like many mid west markets, but unlike many midwest markets is not experiencing value depreciation/ population decline. The local economy is supported by a university and agriculture, two recession proof industries. I now have 3 properties in the surrounding area, and went to see the first one when I was under contract but I have not seen the second or third in person. My realtor there has made the process super easy. He owns property himself and has a property management company which I have been very happy with. At the 250k price point, it is possible to get a nice duplex in Ames or a tri to five plex in the surrounding area. Please send me a DM if you would like me to get you in touch with him. 

As I am writing this response, I would be curious about more details of what you are trying to accomplish. That being said, I think it is important to note that LLC's on their own do not create any value. When you create an LLC, even if you pay a lawyer $500 to set it up for you, but there is nothing in the LLC, the LLC is worth $0. I would try to think of an LLC as a legally created person, which is a pretty broad definition, but instead of thinking of it as a fancy business entity, I would think of it as another person. Let's say Billy(made up person) comes up to me and says hey I want to buy your property and you can have some of what I own for it, and you say "what do you own" and he says "nothing" you are not going to trade half of what you have(if you have anything) for even 100% of his nothing.

You can sell an interest in any property you own to more or less anyone or entity. Owning part of an LLC though that you are also partnered with, generally would make the debt ratio's on the property super messy. Most likely if the LLC and you lets say were to get a loan "together" on the debt, you and the LLC have 100% of the debt costs count against you in the same way that if someone and their friend buy a house together, they cannot say that each is only "half" responsible for the mortgage payment. Instead both friends will have the whole mortgage payment count against their DTI's.

If you are trying to figure out what percent of the LLC you should get for the percent of the property you are giving the LLC. If the LLC has nothing in it, then you should probably get 100% of the LLC for putting equity into it. If the LLC has 250k worth of net value in it and they are given you 250k in cash for the property worth 500k, you are essentially "giving" the LLC 250k worth of equity. In this situation I would ask for half the equity of the LLC.

This feels like someone who owns an LLC is trying to turn there empty/ valueless LLC into something using your property. You do not want to let someone offer you some of nothing, and then give them some of something back.

So there are two main types of ways that banks look for loans to be paid, one is with your personal income, the other is with what is call a DSCR which stands for debt service coverage ratio. An example of a personal income based loan is an FHA loan, you can have up to 55% of your income going to debt payments. Banks will also let you count 75% of the revenue from a rental towards your income. Loans with lower down payments(3.5% to 10%) tend to be ones based off of your personal income plus 75% of rental income.

DSCR loans allow you to borrow money based off the net operating income (income minus expenses before mortgage) of the property. To put numbers to this, lets say I have a property that rents for $2000, my management is $200 a month, vacancy loss is $100, mainantence is $100, insurance is $200 a month, and property taxes are $150 per month, my net operating income is $1250 (2000-200-100-100-200-150). If my bank requires a DSCR of 1.25(all 3 of the DSCR loans I have require this ratio), then the maximum mortgage payment I can have is $1000 per month. On top of this, most DSCR lenders require that you put 20% down, so I could have a max LTV of 80% and mortgage of $1000. This is nice because private bank will essentially allow me to keep doing this over and over again, as long as I continue to meet their criteria.

This is where it gets fun, essentially I need to find deals that can generate a DSCR of 1.25. While that seems simple, it means that the property must cash flow 25% more money than the cost of the mortgage. This used to be easy to find, but now as interest rates are going up, but property values are not, this is becoming more difficult and we have to start getting creative with our deals. This is why people have become recently interested in subdividing properties or creating short term rentals, it increases the work we put in, but it also increase the return on our capital when we do not consider the cost of our time.

Is the goal to house hack? If it is, the fifth bedroom will help you, but it also depends on how big the bedrooms are/ the layout/ the bathroom count. When house hacking, I would not want 5 people to be sharing 2 bathrooms. The 2 car garage could also be converted to additional bedrooms or maybe even a studio in the future. I would personally lean towards the first one for those reasons. 

In this market, it is hard to go wrong, especially when house hacking. Without knowing all the details, I think both of these could be great deals for you. 

I have been house hacking in a SFH for the last 5 years, so if you have any questions about that please feel free to reach out to me directly!

The lowest I have heard from a second residence is 10% down. If the second home can be classified as your primary you could qualify for an FHA 3.5% down loan, once your refi your current FHA loan. If your existing loan is an FHA, you can still get a primary residence 5% down conventional loan. The easiest way to have that second property qualify as a primary residence is to actually move into it after buying it and rent your current property. That being said, people have been known to change their mind on which house they want to live in after closing.

I think it would be pretty easy for us to get a couple point higher. That being said, I think the important story that people are not talking about is what this will do to inventory. As rates increase, people will be less likely to sell property that they have low fixed rate debt on, keeping inventory low and competition high. This will likely drive rents up as well, because it will reduce the number of renters who can afford to buy. 

I'm actually starting to think that there will be some form of a rent, first time home buyer and/or new construction subsidy. The affordability problem is getting worse and worse, and society's shift to the right in the last 24 months makes it seem like that policy change is more likely to come in the form of supply side subsidies than rent control style policies.  

If I am reading your post correctly, it seems like the primary goal behind building a new house is that you want to be able to set it up to have additional rooms to rent, driving up your ROI. The time it is going to take to purchase land, design the house, then build the house seems like a risk that I would discourage you from taking. If rates continue to go up the refi is going to cost you more money at the end and if property values fall (I think this is unlikely) you could be left unable to get it refinanced into a VA loan. You are also very likely to blow your budget on a new build right now. I am a roofing contractor and I am putting in 5% a month escalations in to hold today's pricing for people.

I would recommend trying to find a house that is a good house hacking candidate. What I mean when I say this is look for an existing house with space that could be converted to extra bedrooms. Because it sounds like people really just need a place to sleep, this could be a rec room, dining room, a large bedroom that could be divided into 2 bedrooms, etc. The other consideration I would recommend is making sure that there are sufficient bathrooms for the bedroom count you will add. It sounds like because it will only be used part time by most people, that this shouldn't though. 

Congratulations on doing so well on the sale of your NY property. I am very aggressively leveraged(about 78%), and would encourage other people to leverage because it is better to pay off debt with dollars that will be worth less than they are today with inflation. If you are trying to minimize the future cost of your mortgage, I would recommend getting a 30 year fixed mortgage, but making extra payments on it to have it paid off faster, specifically by the time you want to retire. This gives you a lower monthly minimum payment, but makes it so your mortgage is not a cost you need to carry through retirement. 

If you think about the value you are getting out of investing the 324k in real estate, and you take any 10 year period in US history, your yield would have exceeded what you will pay in interest, even at today's rates. 

I have been happy with the appreciation/ cashflow blend in the greater Ames, Iowa area. If you are looking for a market that has been a little less volatile this is a great one. I am happy to give you my relators contact if you DM me. He also owns property in the area and has a management company, which has been very helpful for me as a long distance investor. 

You could potentially get the bank to carry the whole 400k. The will typically only lend up to 80% of the value of the property, which is up to 440k in this situation. The issue you are going to run into is the owner of the property might not want to owner finance as a second lien up to 100% of the property's value. If the owner wants to be the first lien, most likely you will only be able to get a bank to loan you another 290k. (440k-150k). 

So the way the bank would want it is if you default: Bank gets all their money back, the owner gets the rest

The way the owner might want it: Owner gets their money back first, bank gets the rest

If the bank gets to be first in line, they will most likely give you up to 440k. If the owner gets to be first in line, the bank will loan you 440k, minus whatever the owner has loaned you.