All Forum Posts by: P.J. Bremner

@Jacob Carlson

A couple things to be aware of when doing BRRRR:

- Non-owner occupied (investment) loans are much more strict with guidelines. You will get a higher interest rate than owner occupied, the banks will require significantly higher reserve funds (typically 6 months of expenses per property, all reserves MUST BE SEASONED - meaning they will look at 2 months of statements to make sure the funds are yours), your DTI must be low, etc.

- To pull equity out of a rental, you must have owned the property for 6 months by the time the loan CLOSES (some loan officers don't know this, it's 6 months from purchase to close, not from time of purchase until you can start the loan!). In order to get a HELOC on a rental, they may require an even longer period. Fanny/Freddy determine the 6-month guideline, but HELOCs are always portfolio loans, which means whoever is doing the HELOC will be keeping that debt in their portfolio (or selling it privately to another bank, but it will not be sold on secondary mortgage market like the regular fanny/freddy loans). When a loan is not Fanny/Freddy, the bank can make up whatever guidelines they want. For example, I recently started 3 HELOC for out of state BRRRR properties through Wells Fargo. They actually have VERY good programs for HELOCs, but their guidelines are tough. They usually want to see 12 months, but I'm asking for exceptions since I do so much business with them.

-  The cost of originating a loan is VERY high when you take a percentage of cost/appraised value at the lower property values.  For example - I was going to get 3 cash out refi on my Ohio duplexes, got quotes for 5+ lenders and everyone was about $4,500 - $7,000 in total loan fees (this is not including prorate amounts for property taxes, insurance, etc. which can bump your cash required to close up to $10k - $15k.  So that $100k I was expecting had dwindled down to $85k - $90k lol ouch!).  When you are dealing with mortgages, it's generally MUCH cheaper to originate a large loan.  The reason for this is the lender can raise the rate a tiny amount (1/8th or 1/4 point) and get lender credit to cover ALL of your closing costs and sometimes even get some cash back to you.  You'll have a slightly higher rate, but get all the money upfront which is a huge beneficial trade off imo.  If you were to bump the rate on a $100k loan by 1/4 point, the lender credit would be enough to cover your lunch at McDonald's, so generally you just bite the bullet and pay the costs.

In my personal experience, I found the HELOC product to be much more beneficial for my situation, but for very specific reasons that might not make sense for others. Wells HELOC have $0 cost associated with them and they lend 60% LTV. When I did the math, a regular cash out gave me 70% of LTV with a cost of $5k on a $100k loan. So even though I was getting 70% of my cash back, $5k (or 5%) was eaten up by loan costs so my effective LTV for cash out was only 65%, and that 5% in costs is GONE forever. I have 0% chance of recouping that cost in the future. The rate is slightly higher in the current market, if I recall the cash out was 5.675% and the HELOC will start at 5.75%. Here is the trade off though... the cash out has a 30 year fixed rate, the HELOC will adjust when the fed adjusts the rates. The HELOC is not a good vehicle to hold debt over the long haul, but is perfect for having the flexibility to pull the cash when the right deal comes up. I still own the 3 properties free and clear, but have the HELOC on them to be able to get 60% out at a moment's notice, good as cash. In the meantime, if I don't find any deals, I don't have a mortgage to pay and the cashflow is quite nice.

In the end, you have to look at what options are available to you and then determine what would work best given your future plans.  I know this was long winded, but I was able to distill 6 months of my research into a couple paragraphs.  Hopefully some of that helps!

@Michael Norris

Thank you for that info, I spoke with my insurance company and they do not offer anything for sewer & drain backup.  My broker stated that they specialize in CA rentals so I may need to switch companies if I want to pick that up.  Not too many basements here in CA (I think I've seen one in my life and I've looked at hundreds of properties lol) so it makes sense.

I will definitely keep you posted.  I just reviewed the disclosure statement from the purchase just to make sure, there was nothing on there regarding flood damages so I will spend this week talking with a lawyer or two.

@Don Petrasek

Great advice, they certainly talk up as if they will not be responsible for anything.  The damages came out to roughly $8k in total - full gut, replace lots of framing, all drywall, replace a 2 month-old water heater (circuits were sizzled and warranty doesn't cover flood damage), etc.  I'm not quite sure what the city would think upon receipt of an $8k repair bill, but it would certainly help me out a bit.  I didn't have the rider on my insurance for sewer backup so most of this will be out of my own pocket.  My deductible is at $5k so I'll have to pencil it out.

From what my contractor says, the damage was quite extensive and there is evidence of multiple cover-ups so not just a single flood incident.  That should be pretty hard to dispute in court.

@Kim Meredith Hampton

I'm really hoping the "I never lived there" excuse has no legs in this case lol I've heard that it can be used as a catch-all phrase.  My question for that is - Who did the repairs for you?  At some point, they would have had to pay someone to fix the issues, which means they would have been aware of a flooding incident at their property.  I'm not sure what the legal precedent is for that, but I guess we will find out!

@Brian R.  It's crazy to think that their line was at fault, but they have no liability in damages caused by it.  I'm definitely hoping Ohio doesn't have the same legal precedence.  Good to know about the extra insurance coverage, thanks for that!

@Christopher Smith  I emailed my insurance broker already, I'll definitely be listening to her, but I was curious how others have handled this type of situation in the past.  I've been a real estate investor in CA for 6 years or so and we have no basements here and very little rain, so this was a new one for me and your advice is much appreciated.  What were the resolutions for each of your three issues?  Did you have to struggle much with the city/insurance company to get to your end outcome?

I totally agree with you regarding the mold issues - I immediately had my contractor go in and clear out the water, rip out everything, drylock the entire basement and replace everything.  My 1st priority will always be making the tenants happy and safe.

@Miguel Nava

I am actually working with the same law firm that @Nicole Heasley Beitenman had suggested and so far they are really on top of things.  We are filing shortly and should have taxes reduced significantly on 2 out of 3 of my recent purchased.  One property was purchased for $27,500 with a county tax assessed value of $140k and taxes of $9,500 (OUCH lol) and the other property purchased at $84k with the county tax assessed value of $135k and taxes of $4,500.  I am expecting more than half reduction on the first and less than half on the second, which is night/day difference in my cash flow.  The plan is to ride out the reduction in taxes and 1031 exchange when the city raises the taxes high enough to where my ROE would be better elsewhere.

As for the cost of using this law firm - it's only 1/3 of the first year's savings.  It's true that I could file for them myself, but at what cost?  The city will be looking for every reason to not reduce and issue a refund, so any mistake will cost me thousands of dollars.  By letting people with experience handle it, I'm nearly guaranteeing myself a return for not only the first year, but several years to come.

@Bradley Coleman

It always helps to look at ads for what is available near your rental before you list your property. My suggestion is to look at a few of the most popular places to advertise apartments for rent: craigslist, padmapper, zillow, etc. You can get an idea for what appliances most people include as well as the quality. If everyone is going for all-white used appliances, then you might be better off doing the same. If they all have top-of-the-line stainless steel, then best of luck getting an ROI from that lol.

I can tell you from personal experience that if the local norm is to include appliances and people walk through your unit without anything, they will either ask if appliances will be included (but have a bad impression) or not ask and also not fill out a rental application.  Most people want to see what they are going to get before they commit.  I had ordered appliances for one of my duplexes, but they didn't arrive on time and the units were shown without appliances.  Everyone was told that they would be installed before move-in, but nobody filled out applications.  Once they were delivered, both units were filled the same weekend.  It could have been coincidence, but most likely not!

I also agree with @Thomas S., get used appliances as they will be used the moment they touch your kitchen floor.  Just be careful when you search for used, you definitely get what you pay for... you can find a fridge and stove set for $300 - $400, but if those appliances break on you soon after, you'll be paying for repairs and more importantly causing your tenant stress and giving them reasons to move out.  Get quality used appliances.

Hello BP,

It's always fun posting stuff on here and hearing what everyone has say, but i'm afraid this post isn't quite as pleasant.  Nonetheless i'm sure there are lessons to be had here and I would greatly appreciate experiences responses:

I recently purchased several duplexes in the Cleveland, OH area and was planning on BRRRRR each one. All were purchased for cash, rehabbed with cash, tenants have been placed and things were moving fairly smoothly. I received a call regarding my property in Lakewood that the basement has been flooded with about 4" - 5" of water. The property was fully rehabbed a month or so before, nearly $80k went into fixing this place up so everything should have been taken care of.

My contractor went to the property expecting to find a crack in the foundation or some gap where water could come in from the outside since it had rained significantly that day.  No cracks were found, the water was actually coming from one of the sewer drains.  Cleveland has 2 sewer lines - one for waste water from the toilette and showers etc. and the second for run-off water from the gutters.  The city was called, they came to snake the line and found no damage in the pipes going from my property to the streets, which means the damage was done AT THE STREET, which would be city owned pipes.

The next day, the city sent out a construction crew to dig up the front sidewalk and sure enough, a giant hole in the city pipe for the runoff line was found and replaced.  The backup had occurred at the street sending gutter water back up my drain pipes and into the basement.  The initial conversation with the city has not gone so well as they claim they are only responsible for repairing the pipes at the street and not responsible for any damages caused by their pipes.  Immediately red flags were going off in my head as this seems pretty clear they should be paying for the damages done, but I wanted to get some advice from others who have dealt with this before.

**BONUS** This story comes with a bonus by the way lol... it doesn't end with the city neglect!  We had to tear apart the basement and replace all of the drywall and some structure, but it turns out that the previous owner had been dealing with basement flooding for some time.  The wood behind the drywall was severely damaged and rotting, new drywall was thrown up quickly before they listed the property to cover up the damage.  I'm aware that any material facts about a property need to be disclosed upon the sale.  Having extensive damage in the basement would definitely be considered a material fact and covering up damages with a bandaid and not disclosing it should be considered fraud.  I would love to hear from other real estate investors, professionals, lawyers, etc. to see if I am way off-base with this or should I proceed with legal action?

Thank you everyone for reading and thank you in advance for your responses!

@Ricardo Lunk

I was in a very similar situation as you when I started out in 2011.  I graduated college and landed a $100k+ per year position right out of the gate and had been planning my real estate empire for a couple years at that point.  What you are looking to do seems quite reasonable and I have no doubt if you continue on this path, you will be fine.  You make enough money to where mistakes will not bankrupt you.  You're young enough to make huge mistakes and still have time to recover.

I went a different route in the beginning, house hacked my way up to 4 properties (SFR) and quit my job. If you do room rentals with a big house, you can easily clear $2,500++ and keep to your local market. I'm in SoCal, which is one of the worst buy and hold markets for cash flow. I imagine Washington is just as expensive.

Now I am focusing on out of state rentals simply because my business model can't scale and I don't want to be landlord for 100+ college kids sharing rooms lol. If you do the math on out of state turnkey rentals, it pretty much sucks. It's better than stocks and bonds, etc. but let's be real here - You're a 23 year old making six figures, do you want what everyone else can get easily..? Take a look at the BRRRR strategy, it might make sense for you.

Think of it this way - the cash flow will be the same.  The asset quality for end product will be the same (fully rehabbed).  The tenants paying you rent will be the same.  The property management company can be the same if you want.  What's the difference?  You take the risk in the beginning, buy a dump, fix it up with your team and then keep 30%+ equity AND get all of your operating cash back.  As I stated before in this post, you are young with good income and can absorb this kind of risk.

In my experience since I started buying out of state this year, the hardest part is probably finding the right deal.  That being said, I've managed to build a full team that can source, acquire, rehab, rent and manage the properties.  I'm in negotiations for my 3rd property as we speak, so it certainly is possible.  Next year I plan to add investor capital to the mix (I have some friends and family that want in) and will probably go the direct marketing route.  

There are tons of ways to make your way in this business, I have little doubt you will do well. I would just caution you to think about the opportunity cost of your decisions: What is the most effective use of your TIME and MONEY. Rooms rentals were the most effective use of my time and money in the beginning, but as I become more and more successful I can see the absolute benefits to hands-off BRRRR rentals. I can take on a nearly infinite number of units and my workload (and working capital) stay relatively level throughout.

@Jack B.

This reminds me of a great interview i once read about, I believe it was with Henry Ford at the peak of his empire.  The person doing the interview asked Ford, "If you were to lose everything today; take away the money, the business, the assets, what would you do?"

Ford replied, "It  wouldn't change much, I would have it all back in a few years.  You can take away everything I earned, but you will never take away the experiences and knowledge I have gained over the years.  I would simply start another business and be right back where I left off." (I'm paraphrasing of course, I couldn't find the exact verbiage).

The whole point is that money doesn't make someone wealthy.  Assets do not make people wealthy.  Resourcefulness, originality, grit, determination, perseverance, etc. are what make someone successful.  You boot-strapped your real estate business with hard work and smarts.  Someone who inherits their wealth without any interest in learning the business or cannot find the right person to manage it for them, will quickly part with it.

Think of it this way... You got there from scratch once.  If a major depression hits and you both lose your shirts, who do you think will be back in the game shortly after?  I wouldn't put too much weight on dollar values as they are more of a scorecard and by themselves aren't useful at all.  It's when that dollar value is paired with skill and hard work that makes wealth worth something.  You have something worth much more (both tangible and intangible) than money.

@Shannon McKenna

The $40k was for one property as I already have solar on the other ones that needed it.  I don't know construction costs out your way, but $11k seems decent if they are handling the permits, drawings and installation.

As for the financing side, I would check with local banks to see if they will lend on the project.  It's a pretty safe loan to make because the cost of the system is nearly always covered by the energy savings, if not more (assuming the proper math was done during the design phase).

I was initially going to use this company for the bulk purchase of the systems: https://www.wholesalesolar.com/solar-panels