All Forum Posts by: Oren K.

Sean,

If you are using a personal line of credit to fund the rehab then some of your questions don't apply. Presumably the bank received some other colateral that they were satisfied with when you set it up.

- there is no explicit term on a LOC. The interest is just added to the balance outstanding up to the maximum amount of the LOC. You may get a call as you approach the limit but that's about it.

- the interest rate is the one you agreed to. Usually this tied to either prime or fed rate or someother benchmark and WILL fluctuate as that benchmark changes. Depending on how long the funds will be outstanding, this should not be an issue. Rates are rising but not quickly. Call the bank and ask them what the current rate is and what it is based on.

- with the above being case - I would assume that the bankrate calculator is accurate (its not a difficult calculation) but note that one of the inputs is the number of months. With a LOC, you can pay back as much (or as little) as you want at any time so if you flip, you can pay it all back once the sale closes and if you hold, you can use the cash flow to pay back and if you have other income, you can pay back from there or any other funds you happen to have.

Good luck

Oren

Jessica,

As it does NOT explicitly say seller financing I would not presume that it is (but you can always ask). Rather they are showing a 'proposed financing'.

They are NOT guaranteeing that you will find this (LTV, Rate, Term) or any other aspect of a loan (fees, commissions, etc).

Leaving the loan aside, I can't help but make a couple of comments regarding the numbers;

- Vacancy of just 5% means that if you have 1 move out in a year and it takes you more then 1 month to turn the unit and re-lease it, you have exceeded your vacancy budget. It is not clear how stable the tenants are but this is something I would question.

- I love that they are including CAPEX above the line to NOI. Not only is this not correct but I certainly also don't believe that $1200 per year is sufficient.

- With ~18K for expenses and ~63K of income, that works out to ~29%; extremely unlikely (to the point that I would buy a lottery ticket first - at least I would know what I am going to loose ;). Specifically I note that there is no allocation to management, landscaping, snow removal, unit turns, etc.

As always, verify everything!

Oren

@Matthew Jure - Not the information that I have received in the past.

The school district actively looks for sales over the current assessed value and will automatically appeal it (higher) between the tri-annual assessments. The property tax rate (all in) works out to ~ 5% so a 40K increase on what was a 60K home (now 100K) is a 66% increase (or 3K to 5K). 

They have a firmc(s) on retainer that (I think) do it for a flat fee / success fee. It's mostly paperwork that a para-legal or admin can do and over the number of transactions that occur, adds up.

The school district is always looking for funds so eventually they will catch up to you. Depending on when your sale date is, you possibly get a 1 year deferral on the increase in a rising market.

Oren

Hi PJ,

Never done this myself but I believe that @Marc Ramsay did this for a project in Cleveland. Marc - how did it work out and were they good enough to warrant a referral?

Oren

Hi Bob,

Very familiar with the property from when Robert L,. owned it - Nice turnaround in just over year.

Good luck.

Oren

Doing renovations while tenants say in place is challanging at best unless they are trivial (e.g. light fixture -> ceiling fan fixture). Some stuff like flooring is possible as they just move everything to one side, install on the other and then reverse but its a pain for the crew.

Larger renovations (e.g. new floor tiles or new bathroom) means the tenant has to stay out of that space for at least a day, usually more. What are they going to do for a bathroom / shower during the work?

Your 'gut' is usually the best advisor so if its upset and you can't get a good enough explanation to it settle down, move on.

@Bryan Devitt - In many jurisdictions there is a status called 'Legal non-conforming' (or something equivalent). Basically it means that the city (or whatever is the permitting authority) has taken notice of the structure and deemed it OK even though current permits / standards / zoning would NOT allow it.

Historically it covers stuff that was built before there was an authority or when the standards changed dramatically (e.g. knob & tube vs. copper for electrical). There would be revolt if they tried to force everyone to upgrade / retrofit every time the standards changed.

SO.. @Aria Drexler check with the local authority if there is such a status, what it applies to and if the sun room falls under it. If it does, an inspector has to ability to demand it be removed and you can market it with peace of mind.

Matthew,

Don't really have an answer for you but I have been on this soap box several times. Yes, many (most?) people don't properly account for capex and are basically rolling the dice to see if they get caught during their hold period; NOI looks great but actual return over a longer period of time - not so much.

This is especially true of lower cost investments since many items cost the same regardless (e.g. Roof)

Also, it depends on your 'strategy'; fix and flip investor doesn't care as they will generally be out of the property within 6 - 9 months and it's ALL capex to them.

As well, for some, capex is only about the basics (e.g. structure, roofing, heating and cooling). For others it is also appliances and carpeting. For yet others it is also includes plumbing & electrical or more (e.g. drainage connection). You can drive this down to a micro level (e.g. ceiling fans and light bulbs). 

All things have a 'normal' operational life expectancy; some will last longer and some shorter then 'normal'. The longer your expected hold period is, the more you should be thinking about this.

All the rules / methods you list are as 'rules of thumb', 'short cuts', etc. just as you can guesstimate a roof re-shingle just by the sq footage without selecting material, taking in account specific damage or getting quotes.

Using any one of these methods is just a time saver to see if you should invest the most precious thing you have - Time. It takes time to figure out what the actual capex number should be.

The answer is maybe - It depends on what the landlord puts in the lease and how they enforce it. The lease could say that you can only conduct the business you tell them about (e.g. lawyer, accountant, consultant, sales, etc.). 

By renting out space you are not using, you are running side business of a subleasing space / virtual office which they may not be to happy about. Would you be OK if they declared you in breach of the lease and kicked you out. 

IF you move forward with this, you are in effect becoming a landlord and have to deal with tenant issues (e.g. showings, collections, evictions, advertising, etc.). Will that not distract you from your real business / work?

Also to consider - what if you can not find people to take / pay for the other desks / space. Are you OK paying for everything long term? Once you sign the lease, there is an expectation that all the rent will be paid each month regardless of if you find other people.

Good luck.

Bob - I'll take door #2 (Price Is Right reference)

You can not put away money that you never receive otherwise if totally vacant you would be getting $8000 (in your case) by magic from someone and not have to do anything (how I wish this was possible ;).

The vacancy is not a 'reserve' but 'unrealized' income.

Oren