All Forum Posts by: Stephen Chittenden

Our third project was another single-family home in Havre de Grace, MD. This home was originally listed at $115,000, but we were able to negotiate the price down to $81,900 (about $85,500 after taxes, fees, and realtor costs). The house is a 3/2 with about 1700 square feet of living space.

Our rehab budget was about $50,000, including $12,000 for two bathroom remodels, $5,000 for a kitchen remodel, $9,000 for a new roof, $10,000 for HVAC and plumbing, with the remainder for carpeting, flooring, painting, and appliances.  So, all told, we expected to be in for about $138k. The ARV was expected to be $185-200k. Monthly rent was expected to be $1400-1600.

Here are some before pictures:

How did we do?

Well, the rehab went over budget. However, given our last single-family rehab went 90% over budget, this was easy. A gas leak, hidden plumbing leaks, and a failed sump pump put us over budget. The biggest extra expense though was having to replace the flooring throughout the first floor. The laminate that we hoped could be saved, could not. We also made the decision to replace the flooring in the downstairs bathroom because we weren't happy with how it looked after we cleaned it. We made some sacrifices, forgoing a planned jack-and-jill bathroom upstairs, some leveling of the concrete basement floor, and ceramic tile floors and surrounds in the two bathrooms. The changes worried us and made us concerned that we would not be able to achieve the ARV we hoped for and might end up with more trapped cash in the property.

Between the extra costs and our compromised design, we ended up over budget by a little more than $2,000.  That's unfortunate, but only about a 4% overrun.  We lost a couple of months between the gas leak delaying getting the HVAC operational (which pushed back paint and flooring) and the flu coming in and taking out the entire crew.  Fortunately, having paid cash for the property, our holding costs were pretty minimal, so the delay didn't cost us much cash out-of-pocket and had the benefit of pushing us out into prime rental territory.  The place was rented after being on the market for two weeks and the tenant began occupancy on June 1.

Some after pictures:

The Cash-In Numbers

Purchase Price: $81,900

Closing Costs on Purchase: $3,600

Rehab: $51,700

Holding Costs (Utilities): $500

Total Costs: $137,700

Financing

We are closing a loan with a local credit union. Because the property is owned by our LLC, it is a commercial real estate loan. It is a 5/5-ARM with 30-year amortization at 5.5% interest. Total closing costs and taxes on the loan are expected to be about $5,000 (still waiting for the final numbers). The lender was only willing to finance $130,000 or 75% of the appraised value, whichever is less. In the future, I think they will be willing to go up to our actual cash outlays, but because this is our first loan with them, they did not want to go above $130,000. There initial over was for $125,000, but we were able to negotiate the higher loan amount due to the strong credit and income of the LLC's members. Assuming a $130,000 loan amount, the payment will be $738 per month for the first five years.

Appraisal

We got the results of the appraisal this week.  We had hoped for $185,000-200,000.  It wasn't what we hoped for though... it was better! The appraisal came in at $204,000.  That will allow us to finance the full $130,000.  That leaves us with about $12,700 invested to control an asset worth over $200,000.

Rental Numbers

We signed a two-year lease at $1,475 per month.  The tenants are a nice couple, and the wife is a school teacher at the nearby elementary school who can walk to work.  We expect they will stay the two full years, avoiding the need to find a new tenant right away.  We pay our property manager 8% per month plus the first month's rent.

Rent: $1,475

Management Fee: $118

Mortgage: $738

Insurance: $95

Taxes: $150

Vacancy: $120

Maintenance/CapEx: $150

Net Cash Flow: $104 per month

Cash-on-Cash Return: 10%

All-and-all, I call this a rousing success.  What say you?

The reserve requirements, which is what you are discussing, are based on the monthly mortgage payment. These requirements vary from lender-to-lender, although for small multi family resident (4-units or less) and single-family, many lenders will use the Fannie Mae and Freddie Mac requirements as they plan to resell the mortgage. Other lenders who will hold and service the note in-house may be more flexible. The requirements have historically been measured in terms of months of reserves and varied from 0-6 months depending upon credit, down payment, and other factors. They are moving now to a percentage of the mortgage value as opposed to months, but the amounts are low--only a few percent at most. You can search the Internet for Fannie Mae reserve requirements to find more specific information. FYI, they generally will include 60% of an IRA balance for purposes of the reserve calculation. Also, you cannot contribute more than your earnings to an IRA, so I'm not sure why you would want to borrow money to fund an IRA. This is especially true given the relatively low IRA contribution limits.

And congrats on your deal.

Laurel is a weird place. Hyper local, it seems. Houses for $500k a block from homes for $80k.

Have you found a lender that will give you the second on an investment property? I think they are harder to get than they are for your primary residence. At least HELOCs are.

We use a two-class equity structure for our deals. Every member of the LLC contributed an equal amount of money to the LLC as Class A voting member interests. We then fund our deals with Class B nonvoting interests. Our LLC operating agreement requires Class B interests to be repurchased by the LLC at face value before any profit distributions are made. We do not use loans to fund the LLC. I'm not sure it really makes a difference from a tax perspective though. An accountant could tell you how the IRS would view loans from the members to the LLC and whether any interest on those loans is income to you.

You should talk to a CPA, but assuming that you are the only owner of the LLC, I don't think so. The IRS won't believe that your LLC exists and will ignore it. Accordingly, I don't think you would have any interest income form the loan to the LLC (it's like your left hand loaning your right hand money). This does seem more complicated than it needs to be. You can just contribute money to the LLC. I don't know why you would want to use a loan for this purpose. Unless you actually record a mortgage against the property, the bank isn't going to "pay off" that loan directly anyway. (Doing that would result in more taxes and fees, so I don't know why you'd do that either.) The answer would obviously differ if you had partners.

We use TD Bank for our banking relationship, but we do not use them for lending.

Originally posted by @Sky Mikesell:

hello @Jassem A., @Chuck Wiggins, @Nathan Miller, @Stephen Chittenden   there is a product now that is out protecting landlords from tenants that default on their rent... rentsuremembership.com

It covers up to 11 months of lost rent, pays for the cost of eviction, and pays up to $10k in malicious damage caused by tenant.

the product is a little more robust then the AON product of old. Screening criteria for tenants is same as what most property managers are screening for already and cost is minimal or same as most investors are (or should be) allocating for their vacancy cost.

Feel free to reach out if you have more questions.

*as a disclaimer i am the CEO of RentSureMembership in the U.S. 

 When I looked into it, for one property that we had Aon Rent Protect insurance on, it was about 5x the price.  The agreement on your website listed pricing at $199 up front and then $69 per month.  That works out to about $960 for a year.  The Aon product was $209 per year.  There's no denying that your product is more robust, but it's also difficult to foresee having more than six months of vacancy to recover lost rent.  The malicious damage coverage is nice, and would be good, but I don't think it's frequent enough to make it worth it for us.  Given that we know have 6 units, it's hard to imagine getting $6,000 per year of value out of it on average.  It made more sense for us to self-insure by maintaining adequate vacancy reserves.  Certainly for others, it might be different.

Aon used to offer this product in the US but pulled out of the market a few years ago.