All Forum Posts by: Brad S.

First of all Congratulations on your current rental, those are great #'s, especially on just 1 property! I realize you bought it in 2013, but even so, we don't see anything close to those #'s in decent areas near me. And, I'm curious as to your potential deals (300-450k @ 4k/mth cf). Are those properties in good B or better areas or are they multi-families. ...just curious

Anyway, since you have converted your primary into a rental, do you own a new primary home? Is there equity in that? Or do you have only the $200k equity in your rental? 

Either way, I'd say that a HELOC sounds like the way to go. I would first get one on your primary (if you have one and have equity). For that route, I just heard that there are no-income HELOC's available for owner occupied homes, up to $250k (up to 90% ltv I think). But, I am not sure which banks/lenders do them in your area. You can also see if there are any no-income HELOC's available for non-owner occ. A little harder to find, but might be possible.

Otherwise (if you have no primary or HELOCs available), you would need to do a cashout refi (dscr) on your rental. I'm getting quoted a little over 5% on one of mine right now, which isn't too bad. Just work out the #'s based on both your current rental and your proposed rental, to average out the expenses and cashflow. It would probably be worth it with the #'s you presented.

 True, Sorry, I missed that ( I don't see the post when I respond from my ipad).

Anyway, to add to what I previously stated. She could try and sell a portion of her interest to someone else. Maybe a friend, family member, investor, etc. It could be something like, if they invest $400k, they can share in the rental amount, or they can have all of the rents. Example: If it is a 4 bedroom, she can rent the 3 individual bedrooms for $1k each per month, and offer an investor all $3k/month (9% annually). Then she would find someone to put up the money to build an ADU or 2 ADU's (ADU + jADU), and they could get some of the rent from that. These loans would be liens on the property, so the Lender is secured, and she can even offer them a portion of future equity or partial current ownership.

Yes, a hard money loan might help, but that would be more risky for her and also, most hard money lenders won't loan to owner occupants, especially in CA. But, WAIT, she may be able to get a hml or private loan and use SB9 (Senate Bill 9) to split the lot into 2 lots and build up to 2 dwellings on either lot. So, she could get a loan or investor, split the lot into 2 and build 1-2 dwellings on the new lot and then sell that separately to help pay off the ex. Basically, SB9 allows her to either have 2 primary dwellings + an ADU on her lot, or split her lot into 2 lots and build up to 2 primary dwellings on each lot. Depending on how her lot is configured, that might make sense and could actually be lucrative in a 2.4m area.

Anyway, none of this is straight forward and appealing, but they are "creative strategies [which] could work."

@Jonathan W.

Same reason they say…. “Google it”

@Kyle Jones

I am not aware of any or heard of any. Most private money lenders or hml, don’t want to loan on owner occupied houses. There are different laws with that,as compared to non owner occupied loans. It may vary state to state. Therefore, if things go south, the lender may have less recourse for owner occupied homes. That said, you may be able to find a friend, family friend, or family member that will loan a 2nd on your property. I’ve done that in the past.

@Renee Harris

How much can she afford to pay monthly?

Some options

* short term rent rooms in the house

* long term rent out rooms in the house

* Build or convert a structure into an ADU, she could offer an investor some of the monthly cashflow if they put up the money. She could either rent the adu or live in the adu and rent the house.

More Advantages

* You can invest where the trends are and not be limited to your own "backyard." I'm in CA and there has been a general out-migration trend recently, so I can choose to invest in areas that are experiencing high in-migration, or business in-flow, etc

* Being able to invest in more affordable areas. Median home prices in CA are currently over $800k - not very affordable by many standards.

* Being able to invest in areas with better potential returns. that $800k house in CA may get you around $3,000-$3,200/mth rent in a good area. Those are terrible returns from a rental perspective only.

Disadvantages

* Less direct control over your property and investment. You typically need to rely on others more.

* Buying in areas that may not appreciate or be good rental areas. You may get bad advice or management. My 2 first rentals did not appreciate at all over 17 years, when I finally sold them. Even today, they would only be minimally up compared to the price I purchased them at. I should've chose the area better, but the available data was not as good as it is today, and the CoC returns were great ....until repairs and maintenance!

* Paying higher prices for construction/repair work, since you have a harder time vetting and shopping for venders.

that's all I can think of for now...

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I'm not sure if you know for sure that ADU conversion (into 2 adu's) is unpermitted, but, shared utilities do not necessarily mean it was not permitted. I'm guessing zoning doesn't permit 3 units on the property, so it is probably unpermitted as it is. And similarly, just because it is on county records, doesn't mean it is permitted. I imagine it's different in some areas, but in my experience (as an Appraiser and past Deputy Assessor for a local county) the county may reflect what is actually on the site, even if it is not all permitted. We were trained to add what we inspected when we went to a property. We typically didn't cross-check with the specific cities building and safety departments the property was located in. So, many times the county records don't reflect exactly what the legal property is. You should always confirm permit status directly with the local building and safety dept, when purchasing a property.

Regarding the rent issue: I can't be sure if I have ever done an appraisal for a dscr loan specifically (we wouldn't necessarily know), but I have done a ton of rental surveys for lenders. And, I would not typically count rent from an illegal unit. So, I would either require the owner to show me proof that it is legal, or just not provide a rental value for that unit and comment appropriately. But, that may also be up to the underwriter and how they want to deal with that situation. They can decide to include that rent in their calculation, that's up to them. The lenders on this thread would have insight into the underwriting requirements. 

But, if the ADU was permitted as a whole (not divided into 2 adu's), then it would still seem to have some value, even as split up. With regard to value, we would most likely deal with this by estimating a "cost to cure," in order to theoretically bring it into compliance with zoning. example- we may estimate what it may cost to remove the kitchen in the studio unit and connect it to the 1 bedroom unit again, probably by installing an interior door between them. Then, it would be valued as 1 larger ADU.

So, similarly, the rental value of the larger (theoretical) ADU may have more rental value than just one of the as-is units. So, the appraiser can provide a rental estimate for the larger ADU (maybe as a 2 bedroom, if they were theoretically put together), and then discount it for a "cost to cure" for putting them together. But, I have never been asked to do that and don't know how a lender would handle that. But, you can use the argument that the ADU would have a higher rental value utilizing both ADU's as one larger one, assuming the entire structure is legal.

So, to use your example, you can argue that if the units were combined, you could rent it as a 2 bed/2 bath unit (using the studio as a 1/1), for more than $1,200/mth. Maybe they can find a way to underwrite it that way. Remember, the appraiser is just reporting what is there,  the lender is the one that makes the decisions of what to accept.

I think you have the right idea, with lowering your expenses first. I would do some value added deals locally (flips, wholesale, etc), since you have all the resources available here. Then you can direct the profits into more cashflowing properties in good areas of potential appreciation, without worrying about squeezing the most cashflow, highest % return and highest leverage, out of your new purchases. Since you would be investing the new money created from the short term deals. I like the ADU and SB9 laws in CA for cashflow plays and potential appreciation. I, personally, don't like the high leverage, maximize the # of rentals plan. I have done that also and have made a lot more money on appreciation than properties with high cashflow returns only. The more leveraged properties I had, meant the more liability I had also, and less resources available for more profitable deals.

And, I would sell the condo, to have the $200k available for the short term deals. Example, if you do a flip using your $200k and make $50k or $100k from it, you can then buy an OOS rental in a potential appreciating area, putting a higher % down payment, so you can still get decent cashflow. Since you created that money form a flip, I wouldn't worry about the % return so much.

First thing to do is get a signed Purchase Agreement, PERIOD! Once you find a deal you want, the first thing to do, is to control  the deal. Typically, this would be by getting it under contract right away, then you can worry about the next steps. Because, if you don't have it under contract, you DON"T have a deal!

If you don't have a contract, or know where to get one, then you can talk to a local agent, title company, attorney, escrow, title co, or whomever normally handles transactions in your state. It is different from state to state. I would imagine you can find real estate documents for your state online somewhere. But, first and foremost, now that you have a price agreed on, get it under contract, NOW!

In the absence of good comps in a neighborhood, you should first ask, why?

* Are there (or have there been ) any recent listings in the neighborhood, or are properties sitting on the market for a long time and not selling (or cancelled/expired listings)?
This should give you a clue as to the desirability (demand) for the neighborhood or area.
....you may find there are ample sales in adjacent neighborhoods, but lingering active listings (or cancelled/expired listings), in the Subject neighborhood. This may point to the Subject being in a less desirable neighborhood, or may simply be due to owners holding on to their houses in the neighborhood and little are offered for sale.
or
Are the recent sales in the neighborhood , only 1,400sf ?
...and if so, is that because an 1,800sf house is overbuilt for the neighborhood?
or .....is it just that 1,800sf houses are more desirable and less offered for sale?
....maybe an 1,800sf house is highly desirable in the area, but their have not been any available for sale recently.

In reality, an 1,800sf house does not sound overbuilt for most neighborhoods, but this can be the case in larger gla's (example. 3,000sf house, in a neighborhood with mainly 1,400sf houses).

Over the years, I have had properties offered to me that were significantly larger than what is typical for an area, with the Seller/s trying to push how much better those properties were, due to the superior gla. But, for me, that just contributed to more risk, since there are typically less buyers for the "atypical" house in a neighborhood. I typically want to have the typical house (in primary characteristics) in a neighborhood, for a relatively low price and then make it superior in condition and quality.

And, contrary to some opinions, an appraiser, or should I say, a Good appraiser, will not look at it on a $/sf basis, especially not prior to adjusting for other factors. Example - A run-down, unmaintained 1,000sf house, with no pool and located on a high traffic street, should not be worth the same as a fully remodeled 1,000sf house with twice the lot size and a pool, etc.

I suppose you can look at $/sf on a more general basis for an area (assuming you have many datapoints), but then you still want to take into account the Subject size vs the typical size for the area. Because, if you are overbuilt for the neighborhood, then the surplus gla will have less value/sf than the typical gla. So, if you are an 1,800sf house in an area of 1,400sf houses, the 400sf additional sf, may be worth less than the first 1,400sf. And you would be overvaluing the 1,800sf by just doing a basic $/sf calculation, without taking that into account.    ..... Makes sense?

Ok, this might be more info than you wanted ...but it is important. 

Here are some other techniques to follow to help evaluate a property with little local data.

You should look at it from multiple sides:

* Look at historical sales (go back years if you need to) and see if properties in the neighborhood typically sell fast, and note their gla's (1,400 or 1,800sf, etc), and get a feel for the Subject's value at that time. Then you can "trend" the appreciation of the market from that time, to estimate what the appreciation rate may have been from then till now. So, if you think 3 years ago the value should $100k and you estimate 10% appreciation, you may decide the current value may be around $110k.

* Also, look at adjacent neighborhoods. Find recent sales of similar properties in similar neighborhoods. That should give you a fair indication of value for the Subject. If you can't find any, then use relatively similar neighborhoods to find sales and adjust for their sizes, year built, etc. 

Basically, you should be taking multiple factors into account in the areas you are finding recent sales
* Is that neighborhood similar to the Subject, similar demand and appeal?
* Are homes of similar characteristics to the Subject neighborhood (i.e. size, year built, bed/bath count, quality, condition, lot size, etc).

In general, you are looking for recent data of similar properties, and if you can't find similar properties, you find the best data you can and try and take any differences into account (location, size, etc). For example, if you only have recent sales in a superior neighborhood, where homes sell for 10% higher than the Subject's neighborhood, then you estimate the value of your house and adjust it down by 10% for being in an inferior neighborhood. and you can do the same for any characteristic (superior or inferior). That's actually how a good appraiser should be doing it. And yes, you may use $/sf, but just keep in mind the potential pitfalls of that and price that in to your estimate.

Also, to be clear, I am a 25 year certified Appraiser, Investor and Broker