All Forum Posts by: Neil Henderson

I could type a big long guide but I think Kathy Fettke has done a pretty thorough job here.

10 Ways To Protect Yourself from Dangerous Turn-key Property Companies

The main thing to keep in mind is track record, how long have they been in business.

Also, recognize that most property managers (even the good ones) eventually go a little bit crazy. It's a tough job to scale well, and many don't scale well.

I would recommend talking to a securities attorney who specializes in real estate like Jillian Sidoti over at Crowd Funding Lawyers. 

Don't structure it as a syndication. Syndications are for large, long-term hold projects. To legally set-up a syndication with a securities attorney will cost you a ballpark of $12,000 per deal, minimum. If your flips are large enough to handle that kind of set up cost, more power to you!

The safest way to structure these kinds of deals with partners and still stay legal with the SEC, is to structure it as debt or a true joint venture. The joint venture side of things is treacherous as that's what many people do to avoid falling under the purview of the SEC, but an SEC attorney will tell you not to. I'm not an SEC attorney and I'm not giving you legal advice.

Syndications typically pay an annual preferred return to the investors, 8% is typical, plus they include an equity split upon sale of the asset. Anywhere from 12-24%+ annual IRR.

Talk to a real estate lawyer in the state you plan to invest in. Make sure you have a detailed operating agreement in place that spells out exactly who is responsible for what jobs, what expenses, etc. Also, spell out what happens if one person wants to sell and they other doesn't. 

If it's more than 4 units you'll be looking for a commercial lender, not a residential lender. The price of the property, and what the bank will finance, will be based on the income the property produces, the Net Operating Income (Gross revenue minus expenses) divided my the Cap rate. Be advised, you're playing in a very competitive pool these days as that asset class is in high demand.

I would start be talking to the smallest banks in whatever community you plan to invest in. Look for the banks with the fewest branches. Call them up, ask to speak to their loan department and ask them what their appetite is for smaller commercial apartment buildings in the 6-8 unit range.

Good luck.

Bought a condo in Las Vegas in February of 2005 with 5% down (FIRST and SECOND BROKEN RULE) on a 5/1 Adjustable Rate Mortgage after it had doubled in value in one year. (FACE PALM)

Lived in it for 7 years as the price rose from $205k to $265k (YEAH!) and then plummeted to $60k. (BOO!)

Turned it into a terrible rental in 2012 as it was negative cash flowing of about $500 a month. (THIRD BROKEN RULE)

Short-sold it in 2014 for $100k.

Lessons learned:

1. Invest for cash flow. If a property doesn't cash flow, I don't want it. Cash flow is what keeps the lights on while the market does whatever the market is going to do. It sucks to be in a position to have to sell. 

2. Invest with low-leverage, long-term debt. Because my mortgage was less than 20% down it included PMI (which lowered the cash flow), it was also on an adjustable rate mortgage (which turned out to not be so bad, but it could've been).

3. Have sufficient cash reserves to weather the storm (I prefer six months of PITI per property). Cash reserves probably wouldn't have made much difference in this case as it was extreme, but when our tenant (who was in the military) was reassigned 6 months into a two year lease, the same month my wife, who was six months pregnant, lost her job, and after three months we were still without a new tenant, the choice was made for us.

If the property had been positive cash flow, we would probably still own it. It's value is just now back into break even territory. 

Personally, I'm not a huge fan of condos as the condo association tends to be a drain on your cash flow (with monthly fees and special assessments). Plus, the board (also sometimes called "the bored" as they are people with too much time on their hands) can often change the rules about what you can and can't do with your property.

Not saying don't do it, but proceed cautiously. 

The first question should be, what's legal where the property is located? If short term rentals aren't allowed where the property resides, proceed cautiously. Renting a room as a short-term rental is a great house hacking strategy if you are ok with having people in your space and you can navigate the regulatory landscape.

I prefer a HELOC to a Cash-out refi for a couple of reasons:

1. 1. Lower closing costs
2. 2. Repeatable. You can continue to use the HELOC, pay off the balance, and use it again.

We have a HELOC that is interest only payments on a 5 year-term, after which it transitions to a 30 year mortgage. I prefer to use it like a really inexpensive hard-money loan. Use it to acquire a property, fund the rehab, the refinance the HELOC funds all the way out with delayed finance (in a perfect world).

I know people who have used part of their HELOC as a down payment on a more traditionally financed purchase, but I prefer not to have that HELOC sitting out there like that.

My payments on an $85,000, interest only, HELOC balance were about $450 a month.

Whatever you do, I would recommend you start small. 

@Alex Brown Check to see if there is a Short Term Rental Owners Association in your area. The Short Term Rental Advocacy Center would also be a place to look.

A couple of thoughts. I agree with @Andrew Postell, when contemplating a BRRRR it's VERY important to talk to your refi lender about what you plan to do BEFORE you buy the property. Be up front with them about your plans, your source of funding, etc.

Most lenders will not allow you to refinance a rental property that is being used as a short-term rental. They like to see at least a 12-month lease tenant in there. Visio lending is one lender I have heard that might do refi's on short-term rentals. I have not actually used them.

Proceed cautiously on FHA loans and short-term rentals, even with a small multi-family. @Clint Harris has more experience with this so he could probably give you more insight into what's allowed and what's not. 

Again, talk to the lender! Even if every person on this forum tells you it's ok, you don't want to get crosswise with them.