All Forum Posts by: Sam Domach

@Alana Reynolds In my experience there are really three ways to go about this, which one you choose will depend on how much effort and time you want to put into the process versus how much of the money owed you want to collect.

1. You can go after them yourself. There is nothing wrong with that, however, there is also nothing 'legally' pushing them to have to pay you. So you can write letters and knock on doors, but that doesn't mean that you will get paid.

2. You can get a judgement against them. I believe there is a way to do this yourself, but I would absolutely recommend NOT doing that is it is extremely complex. Thus, you would need to hire a lawyer to file the judgement and potentially go to court if it gets that far. The workload there for you will be smaller than doing it yourself. They will handle all of the paperwork, etc. which turns out to be a ton. If you go this route, you can expect to pay the hourly rate that it will take for the lawyers to do the paper work and then a pretty hefty price tag on their time if they have to go to court to represent you. Last time I went this route, it was in the $1500-2000 range for everything, but consult with a lawyer in your area. 

3. The last one would be to go to a collection agency. This is the easiest on you, but also the most costly and potentially long drawn out. You will set up an account with them and they will go after the person for the money owed. In my experience a collecction agency will take 25-30% to handle it and that will increase to 40-50% if they have to go to court.

Those are the three ways that I know that you can approach the decision. I think the biggest variable is how much they owe you. If it is only a few hundred dollars, you are best off just going at them yourself for as long as you can handle it with the knowledge there is a high likelihood you will never get that. Once you have an established relationship with a collection agency, they can go after things for you, but it also has to be worth their while.

Thanks,

Sam

Investment Info:

Small multi-family (2-4 units) buy & hold investment in Milwaukee.

Purchase price: $330,000
Cash invested: $84,000

Recently updated 4 unit. New furnaces and water heaters and a new roof. This was an interesting one as the appraisal came back lower than the purchase price which was a shock with how updated and cash flowing the property was. Needed to bring a little more to the closing table, but the CoC return is still at 9%.

What made you interested in investing in this type of deal?

I love small multifamily. It provides fantastic debt to use especially today where rates are as low as they are.

How did you find this deal and how did you negotiate it?

Found this deal on Realtor.com and got the MLS as well. The list price started at 384K in the hot market. Waited until this sat on the market for a month and a half and the price reduced 5K. Offered 350K. Previous owner just wanted the property off their books, so wanted a waive of appraisal and inspection. Had an inspection report on file from an inspector I have worked with a lot in the past so got good information there. With taking more risk removing contingencies, offered 330Kto compensate

How did you finance this deal?

I financed through a traditional mortgage lender. I put down 25% with a rate of 3.375% on an investment property loan.

How did you add value to the deal?

Will be updating the exterior/landscaping a bit. Large mechanicals are all solid.

What was the outcome?

Current cash flow is $620/mo with below market rents for the area. Current rent around $850/unit. Market rent near $1000/unit. As renters leave, will be renting out higher and cashflowing around $1200 per month.

Lessons learned? Challenges?

Be flexible with sellers to get great deals. That's not to say you should do anything dumb, but there are a lot of ways to move prices based on how the seller is feeling and what they want/need to do. Always trust the numbers. This also taught me that you can buy property site unseen. That comes with many other obstacles and risks, but there are ways in which you can do it without putting too much risk on your plate with a agent or property manager that you can trust.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Austin Maly - ReMAX Realtors out of Madison, WI - realtor
Wes Kane - Thompson & Kane out of Madison, WI - lending

@John Sherron - There are differences that you need to be aware of when looking at commercial versus residential properties. First and foremost is lending. The terms are much different and that typically comes with a little more risk for the buyer in terms of financing. You will want to reach out to quite a few banks, I have seen the best rates out of local credit unions, but that is very location dependent. You will typically only be able to get a 5 or 10 year fixed rate and it will change after that point. The average commercial rate is going to be higher than a residential rate. If the seller is looking to do seller financing, that is a different story and you should be able to negotiate with them, however, the rate will still most likely be higher than normal residential rates currently.

Make sure you have a very firm grasp on what current rents are and where they are potentially going in the future. Does the purchase price justify the cost of ownership? Insurance, taxes, etc. will all be a little higher than what you will see in residential so will need to take that into account as well. I would reach out to understand what your insurance, new tax total will be, any financing needed before moving further into the deal as it may not make sense.

As far as managing the property once you have purchased it, that comes down to your overall preference. If your father currently rents one, would he be willing to look after it for a fee? How often are you back in the area to take care of the property? Is there someone else in the property you can negotiate a better rent with to help take care of it? I think there are more options than simply going property management so would be worth investigating.

Thanks,

Sam

@Jaclyn Spinelli - Rates are up a ton in COVID due to raw materials prices and the cost to rebuild a home at virtually all time highs. If you are comfortable with more risk, you could take a policy out that would only cover the purchase price of the property and not the rebuild costs. 
The risk here is that if there is a fire or anything to your property, they will only give you back the amount of money you paid for it, which will be a lot lower than the cost to rebuild. I would consult a few insurance agents in your area to see what the differences are in rates and what your risk tolerance would be to that.

Thanks,

Sam

@Kenneth Biason - I recently went through this same exact thing. I would see what they are looking to sell the property for and at the same time make sure to run your numbers. If they tell you a number that is around what you would be willing to pay, that is when I would move closer to the deal.

If you are comfortable moving forward without an agent, that saves the seller 6% on the overall deal, which typically means that you can ask for at least some of that money off of the purchase price. For instance, if they wanted to sell for $500K on the market and you proceeded with the deal without an agent, instead of them paying $30K in agent fees, you could ask to purchase the property for $475K and everyone wins because they would have netted less than that anyways.

Word of caution, if you do not use an agent, you will most likely have to do all of the work. Paperwork, set up with the title/closing company, etc. It's not unbearable and can save a lot of money, but you will need to do it so know that.

I would also make sure that they are comfortable with you having a home inspection and eventual appraisal so that you can get the bank financing and renegotiate if there are any other bigger items. With the property I purchased, it turned out after inspection that I needed a new $19K roof. I worked with the seller to pay $17K of it and I covered the rest to not let the deal fall through, but I don't imagine that would have happened had I had an agent involved.

You can find documentation online of real estate transactions that you can use, it's all pretty boiler plate.

Thanks, 
Sam

@Richard A Lozano - The insurance will typically be correlated to the price of the property in one of two ways. Your policy can cover the purchase price that you purchased the building for (typically cheaper) or for a rebuild price (ie. property burns down and you have to rebuild the entire thing, typically more expensive because it's more money)

I would encourage you to call an agent and have a conversation about the different categories. Depending on the size of the investment property you will need to utilize different companies. For small multi, the larger corps (Allstate, etc.) will insure them. For anything larger, there are different companies (Acuity, etc.) that will insure it for you.

If you have an idea of what you are going after call a few companies and ask them to put together a quote for a given price point. It may not work with everyone, but they can ballpark it for you and you can use that as a baseline when you analyze a property that is higher/lower.

Sam

@Kameron Kline - Congrats on the property! If you don't mind me asking, what sort of rates/PMI did you get with your FHA loan? How did that work into your numbers?

@Diandra Duncan - I think this is pretty common in single family homes right now across the United States. With the amount of demand, there are a lot of people waiving their inspections which helps the seller tremendously, but puts all of the risk of the purchase onto the buyer.

For instance, if you were not to get an inspection for the deal and got one after only to find out that you needed a new $20K roof, would this property still work for you? I would imagine that would blow up your numbers quite a bit. You would not have the ability to renegotiate the price with the seller and would need to pay basically an additional $20K for the house out of pocket.

In the SFH game, emotions play a pivotal role in the deal, more so sometimes than the numbers. With so many unknowns without an inspection, I would not feel comfortable walking into that property without one. There are a lot of properties out there....

Sam

@Rene Owczarski - Those are very good questions.

I am a big fan of the buy and hold game which is why I am interested in this discussion. The fix and flip is easy enough because once you sell, you can obviously pay everything back with.

With the buy and hold, if you do major improvements, I understand the refi philosophy as well. What if you purchase a buy and hold for a little under market, but no major improvements are necessary? You would then not be able to pull out too much money in a year or two when the private loan needs to be paid back.

I am looking for any creative ways to do that without bringing someone in as an equity partner and simply giving them a portion of the cash flow, but it is seemingly hard to do without a building with bigger repairs.

Sam

Hey BP! Happy Friday!

I am curious on ways investors have chosen to structure deals with private money in order to pay them back. I am currently looking at private investors that are looking to make a return on their money without equity in the deal. In my small number of experiences, they are typically looking for their money back plus the interest in just a few years.

For simple math, if you take $50,000 in private money and give them 7% on their money, on a property that cash flows $400 a month to be paid back in 2 years, you are in the hole monthly obviously.

What techniques have you all used to be able to still pay that money back? Dip into your own pockets? Use cashflow from other properties? Something different?

Looking forward to having a great conversation!

Thanks,
Sam