All Forum Posts by: William Morgan

I place a high value on them.  While I agree that it may not tell the whole story and a "good tenant" may have fallen through the cracks, my experience is that people who care about their credit rating tend to be responsible as tenants (and in other areas).  They worked hard to get it there and they have more than just a deposit to lose if things go south.

It's scalable. Relying on a good credit score saves me time.  I can simply state a policy, such as filtering by credit score, that anyone can follow without wasting time digging into individual credit reports hoping to find a diamond in the rough.

It's a single data point with IMO significant implications. Banks also place a high value on it - and they'd know more than anyone.

Here's a problem with waiting until they leave:  Let's say you wait till say, 1 week after the new tenants left to clean, touch-up, advertise, schedule and show to prospective tenants.  Your new responsible tenants will want to give 30 days notice (likely a little longer) to their current landlord and move.  That means 5-7 weeks of vacancy for you!

As an alternative you could show the new prospects just the outside of the house (preferably when the tenants are not home).  Bring along pictures of the interior and explain they can do another walk-through inside when it's vacant. Being physically at the property will help them decide if they want it and hopefully get them to make their decision and give notice to their current landlord. This could reduce your vacant time to potentially only 1-3 days (best case) . While I appreciate comments advising you to wait, realize that this could cost you 1.5 months of rent!

BTW,  I had similar type of tenant screaming I will sue, sue, sue for all sorts of heinous crimes!  Her strategy was to scare me into letting her skip the last 1.5 months of rent due on her tenancy. Following her threats I had my cell phone out taking pics and video during our interactions (and let her know it).  I recommended she see a lawyer so she didn't do anything illegal to land herself in trouble. I even looked up some Lawyer names and contact info for her.

I emphasized 3 things every time we thereafter spoke:

• If She refused to pay the rent we will proceed with an eviction and request the judgement be recorded.
• We will report non payment to the credit bureau. 
• We will seek criminal charges for any vandalism done to the property. 

He is an example of language I included in our subsequent correspondence.  Feel free to borrow:

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Regarding contractors and other professionals who have frequented the Duplex, please understand that California law requires a 24 hr written notice to enter the unit. No one has ever entered your unit without your permission. You recall 8 occasions where people appeared on the property without prior notice..... (I cite examples) ....... Appearing on the doorstep informing you of work on the exterior does not require prior notice. As a courtesy we gave you notice anyway 30 days in advance (see 3/21/14 letter).  Please understand there will continue to be people working on the exterior of the property as you have been notified by myself and my construction contractor. As we have discussed earlier we will endeavor minimize their impact to the best extent possible, but will be working on both unit exteriors. This is lawful activity in full compliance with California Laws.

(redacted), the bottom line is the rent is due on the 1st. If you don’t pay your rent when it is due I will seek legal remedies in court and I will prevail which will result in a judgment issued against you. I have been fair, upfront and courteous to you throughout your tenancy.  

Don’t be short sighted, a judgment can have all sorts of ramifications that will show up on your record and affect your prospects for future employment, benefits, a place to rent or getting a home loan. If I can make the rest of your stay more enjoyable I will but the rent must be paid. 

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A paragraph on her final move-out instructions:

Vandalism and Damage

I do not anticipate this will be a problem however I am compelled to inform you that any willful acts of destruction or sabotage to the property will be criminally prosecuted to the full extent of the law. We will also seek full monetary restitution through Civil Courts for any damage to the property caused by you or guests of yours. 

A business partner of mine has participated in few flips with me. He wants to unlock the equity he has in a duplex that he owns free and clear. A problem he is encountering is his income will not support a loan he is seeking (an ELOC on a NOO). He is retired with a few rentals but the income they generate isn't enough for him to get the credit line he is seeking.

He has ~800 FICO

He also has a willing cosigner with w2 income/good credit but he doesn't want him to necessarily go on title.

Any lenders or those familiar know of how he can best access his equity, preferably with a line of credit secured by RE? He likes a ELOC for it's low cost and cash like flexibility.

Elan: "would like to move forward with another deal without having to wait 6-12 months to season the loan and refinance traditionally."

I would start by verifying your assumption first (6-12 months refi). While the national banks often impose a seasoning limit on refinances, you are likely to find regionals and credit unions who do NOT. I just did one on one of my properties in 5 months post purchase.  The credit union I used had no seasoning requirement and they were one of many who did not.

I use eRentpayment.

Pro's:

• No paperwork or depositing checks.  Rent lands in my account - done.
• Tenants like the ability auto-pay.
• I don't have to be the bad guy with late payments. If they're late, they have to pay it all or it won't accept it (optional).  They receive a automatic reminder of what happens if they're even later.
• The one time I had a customer service issue they were Johnny on the spot.

Cons:

• It takes 3-5 days for the funds to clear.  (not really a big deal)
• $3/month/unit. I looked at cheaper but I like the variety of options they offered when I was researching. I'd change though if I can get the same service elsewhere.

All in all it's the only way I'll accept rent now.  Easy Peasy.

An unencumbered property can be a risk.  When an attorney is considering litigation they will often determine how much their 'victim' has in assets.  If they see you $500k rental wholly owned free and clear they'd be more inclined to proceed even without up-front fees.  However if they see your property encumbered with a $450k note the situation is completely different.

A HELOC on your rental could be one way discourage a lawsuit. Even if the line is unused it will still show the full line amount encumbering the property.

Trusts can be useful to as well to keep ownership private and separate during an asset search to determine your net worth.

Umbrella insurance is another tool.

It's a pretty common concern and there are effective ways to address it.

Chris: Could you just buy a $100k property, fix it up, rent it out and then get a home equity loan for $70k and repeat as long as you have cash?

You could, yes and it's not a bad strategy providing you understand the numbers in the deal. You could buy and fix with your combination of HELOC and cash. When finished, you appraise and refinance the now improved property with, ideally, only a 1st that covers your all-in costs and pays off the HELOC plus, depending on the deal. The benefit is you access equity in your property without having to sell it or over-encumber it.

HELOCs can be advantageous for short term transactional financing. It's a cheap and fast source without all the strings other sources of financing have. Not sure how many you can have out at once but not all banks do Non-owner Occupied HELOCS - usually high rate and lower LTV. There are definitely better solutions for long terms financing.

Chris: I heard that after 1 year you could get a home equity loan on the value of the house, but before 1 year, you have to get it on the purchase price..

Mostly true with National Banks, NOT true for credit unions or regional banks.  I just secured one after only 6 months of ownership and there were numerous CU's and regionals to choose from.

I had a Contract-for-Deed buyer turn my 4 bedroom 2 bath house into a grow house.  I stopped in on him 2 months after closing to find the large open front yard walled by a 7' fence with a greenhouse peaking through.  It had 8 wine barrel halfs  supporting the 2 1/2" trunk of his plants. It was so full of 'greenery' that you could only walk in if you crawled along the bottom between the barrel halves.  In the garage there were 2, 10' diameter, floor to ceiling plastic clam-shell growing units.  Upon opening each clam-shell you saw an huge 8' center light that provided light for the 999 planters that ringed the periphery of the clamshell unit.  Each unit produced $30-40k in sproutlings every 3 months. He had a grafting workshop in the back yard and an off duty Deputy-Sheriff that provided security after hours.

He assured me it was all legal according to California Law.  

@Bill Gulley

I'm curious, why was everyone trying to get L to leave? Was she not paying the rent?

Derek

It sounds like your seller is most concerned with acheiving a stable monthly income.

I agree, defer initial payments if you can but I'd make it for a fixed Rehab period instead of "until rented". Maximize that rehab period to allow enough time to allow for any unforseen issues that may arise. If you anticipate a 2 month rehab negotiate defered payments for 4-6 months. Agressively market the rental during the rehab period as the property begins to take shape and it's availablity date becomes known. Should you finish ahead of the defered period you can apply the first few months rent income toward your reserves or any overages you experienced (if any) on your rehab.

I'd also negotiate a 40 yr fixed period as Zach mentioned. Rents will rise with inflation whereas your note will be fixed. The payoff becomes less significant with inflation and time.

Lastly I'd specify a payment schedule with fixed (rather than sliding)amount of principle applied with each payment as opposed to having the interest front loaded as is the norm with institutional lenders. In the case of a 40yr your monthly priciple would be 1/480th plus 5% annualized interest. Not sure if there are regulations that apply here so check.

Good Luck

PS It would help if you had defined all of your abbreviations in your intial post.