All Forum Posts by: Peter K.

I state in my lease that tenants are responsible for the "municipal services bill."  Milwaukee has shifted a bunch of stuff from the tax bill, where it probably belongs, over to what is commonly called the water bill, but includes snow removal, garbage and recycling, and all of the water related fees.  

@William S. The reason you don't have much competition for renters is that this is not a good market for investors who want cash flow. You've asked this same question in a few different ways over the last few months and the answer will continue to be the same. I know you don't want to look at cheaper SFR's, but they are where the cash flow is!

I have three toolboxes and a bucket toolbag:

-Plumbing toolbox

-Electric toolbox

-Cordless drill, bits, many different types of screws

-Bucket toolbag with general purpose stuff--pliers, screw drivers, duct and electrical tape, etc.

Depending on what I need to do I'll grab the appropriate tool box, and the bucket always goes with me.

Hi @Bobert M..  An understanding of what makes a loan commercial vs. residential will help clarify how to get your next property financed.

When most people think of a mortgage, they are thinking of a loan they take out to buy their own home.  Most of these loans are underwritten to meet Fannie and Freddie criteria, and the debt is sold to Fannie or Freddie with servicing rights (cashing your check and being the company who answers the phone when you call, in exchange for a portion of the interest collected) retained by the bank.  That means that the bank puts their own money on the table at the purchase closing to get you the property.  They then transfer the loan to Fannie or Freddie where it is bundled up with a bunch of other loans with similar credit/debt to income/loan to value characteristics and sold to institutional investors as a bond (mortgage backed securities).  We call these conventional or conforming loans.  They "conform" to the standard underwriting guidelines.  The bonds can be sold and resold on the secondary market without any change to the terms of the underlying mortgages, so there is always going to be a market for this debt, though the value to those institutional investors will be determined by future market conditions, just like any other asset.

Typically when we think about commercial loans, it is a loan that the bank or credit union is making out of their own funds--deposits received from customers of the bank--and they do not sell the debt.  This is why underwriting and product offerings can vary so much from bank to bank, they all develop their own loan products to serve their market and make money while limiting risk.  This is also why commercial loans will have a balloon or adjustable rate--a bank doesn't want to commit to anything for 30 years.

Fannie and Freddie were created to enable affordable home ownership.  As such, they only buy loans which were made to people, not companies.  For reasons I don't know, they also buy loans for second homes and rental properties, while still requiring that the borrower is a person and not a legal entity.  Any one borrower can have up to ten properties with mortgages and still qualify for a conventional loan--but not all lenders allow this, many limiting that number to four financed properties.  This includes the borrowers primary residence.

To cash out of your current rental, you are going to have to find a bank which lends to an investor like you.  The issue I see for that is you don't have a proven record making money on rental properties.  Typically two years of tax returns showing the profitability of your investment is required.  There are certainly lenders which will lend to someone in your situation, but you will probably need to call around for a local or regional bank in your area for one with an appetite for that type of loan.  

One option would be to title the house in your name and then take out a conventional loan, and you could do a cash out loan for up to 75% of the value of the property.  There may be some additional restrictions on loan amount since it sounds like  you haven't owned the property very long, but if it has been a year you could do 75%.  There is also something called delayed financing, where if you paid cash for the purchase and improvements (which technically you have) you can then finance up to the LESSER of  the original purchase price of the property or 75% of the current appraised value.

For your next property, you could buy it in your own name, with a conventional mortgage (30 year fixed etc.) qualifying with income from your day job, without any issue.  You would need 20% down payment.

Your mileage may vary, lenders may have additional restrictions, all that jazz.  I didn't even sleep at a Holiday Inn last night.

That turned out longer than I intended...  Let me know if any clarification would be helpful.  I lend (conventional, not commercial) in Wisconsin and would be happy to be resource for you whether you are a client or not.  I love this stuff!

Hi Chris--just to clarify. "Conventional" (aka conforming) financing means a loan that is underwritten to Fannie/Freddie guidelines.  Fannie and Freddie do not lend on properties unless they are owned by a person--not an entity.  The best 30 year rates are available on loans which conform to Fannie or Freddie guidelines, as they can be bundled with other mortgages and sold as a commodity.  

The bank you are talking to may offer a 30 year fixed loan on a property held by an LLC, but the rates will be higher than on a conventional deal as the bank has to hold on to that debt--it can't be sold. Banks don't like the idea of being locked into anything for 30 years.

If you did find a lender which will actually offer a 30 year fixed rate on a property which is held in an LLC, and the rate/costs are reasonable, that's a great find!

As an investor, I'm not at all afraid to buy a property that needs a roof.  You could list it for sale by owner or with a realtor, and if it's a good property at a good price, it will sell.

@William S. you have found a property class that you are comfortable dealing with. You've also learned first hand what kind of cash flow that type of property provides (or doesn't provide!). Cheaper houses in Milwaukee provide better ROI, but you are pretty much giving up on appreciation, at least with current prices. I started with a couple duplexes in Shorewood, young and optimistic about appreciation. What a mistake... I'm glad to no longer own them, and I like the cash flow my small SFR's produce. They aren't in great neighborhoods, but they make money every month. I'd like to own some SFR's in Tosa too--but they just don't make money. I could see doing a 1031 exchange to get out of the cheapies and into fewer units while putting off a tax hit, but that move is many years down the road for me.

Our market is expensive now compared to a couple years ago.  Finding something that makes sense is more difficult no matter what neighborhood you are looking in, but where you are, I just don't see any reason to add any more properties to the portfolio unless you work your way into a screaming deal.

You are looking at nice properties. That's not where the cash flow is... I used to own a couple duplexes in Shorewood. Same story--high taxes, high property values, no cash flow. You can gamble on appreciation, but you aren't going to pay your bills or earn a good ROI on Milwaukee properties at that price point.

Now I have my cheapie SFR's on the north side, and I'm enjoying the cash flow. Yes, there is work to be done to ensure the income continues, but I treat my investment as a business I run--NOT a passive investment.

Nice work!  Would you mind sharing the credit union who did the cash out financing for you?  

For the most part, they will look up contact info online and not just use a number you provide, but it depends on the employer.  Many larger employers use a service called The Work Number which is consistently updated and provides an automated response confirming employment status. 

Have to ask--are you trying to get around something?  Best approach is to find a really good loan officer and establish a relationship with them.  You can then ask them about the scenario you are concerned about to see what will or will not work.