All Forum Posts by: Justin Thompson

Yes... typically. They will take 75% of the income from the other side. 

Example:

Unit #1: your unit- no income

Unit #2: $1000 a month with a current lease in place. When they appraise it, if the appraiser states the fair market rent should be $975, they will take 75% of the $975 and count it towards your income. 

Hope that helps!

Going into fall and homes not selling is a common misconception. Spring, yes, is the best time to sell, but if your home is priced right from the start, it can sell anytime of year.  $8500 includes what exactly?  That's awful low for what you are saying with the A/C, kitchen update, clean-up (assuming paint, maybe flooring?) and general landscaping. 1500 sq.ft. home should be a 2.5 or 3 ton central air unit. If you know someone, you could get a new 2.5 ton unit, line set, a-coil, new disconnect box (if needed) installed for around $2000-$2500. If you don't have a friend in the business, it's going to fun you around $4k.  Are you just going to re-use the kitchen cabinets and put a new counter top on or what exactly does the kitchen update include?  I'd like to know more about what you are actually going to do. I can eat up $8500 in a kitchen with ease on a flip.  What sort of clean-up are you going to perform? 

You need to have someone pull comps back 1 year and look at the DOM (days on market) to determine what you should set aside for holding costs. If I were you, I'd set aside at least 6 months holding costs. I see a lot of new investors and experienced people think, 2-4 weeks rehab, 1-2 months marketing till sold... I'll have it gone in 3 months. They budget 3 months holding costs exactly to actually hold it for longer and they starts burning into your profit. Especially if you're running on a tight margin of error from the start. If they're asking $95k, ARV is $135k... factoring in 6% commission for the sale of the property, 6 months holding costs and your estimated $8500, I'd be very careful. The gross profit may look like $18k-$23k but that's not much of a margin if instead of $8500, you find out there's a structural issue and now it's $18,500. Your gross profit just dropped to $8k-$13k assuming the structural issue doesn't scare buyers and your holding costs is enough to cover the additional repairs. While that's a extreme case, it can happen. I've watched several people estimate, myself included, rehab costs to have $5k more actually be spent. It's very common for you to estimate $8500 and it take $12,500-$15,000. The little things when flipping a house that most new people miss, or don't factor in, really add up big time. If you're really wanting to pursue this house as a flip, I think you really need to study the homes currently for sale, especially the one that is pending. See what that interior looks like verse yours and the pending sale price. I'd have to say that if your $8500 rehab budget is solid, and I mean solid, I'd suggest not paying a dime over $86k. And that's if, and only if your budget for rehab is spot on. I'd try to get it for a good amount less but that's just me. If you could pay cash I'd say start out in the $70k's, financing the house is going to leave you a little less room to "low ball" the bank.

When asking about how difficult it will be to refi if not sold is a tough question to answer. People are going to tell you it won't be a problem do xyz but answering a financial question without knowing more about your financials is a hard question. If your DTI (debt-to-income) is already high now, getting a rental financed may prove to be difficult. For example you say there's enough money to clear $200-$300 net profit. That's after setting aside everything and includes PITI? Mortgage payment on lets say 75% of your stated $135k ARV with a 25 year amortization table, 4.75% interest is going to run around $577 a month. I don't have much experience with VA loans but have heard the "fees" involved are high. Lets say you rent it out for $1250-$1350 a month, after PITI, vacancy, reserves etc. you're spending give or take $1000-$1050 a month. When going through a residential loan, since this isn't on your taxes and is a hypothetical, worst case scenario, they're going to take 75% of the stated lease amount rent or appraisal rent analysis, whichever is lower. Let's say the appraiser says $1300 should be the fair market rent (picked the middle for an example), 75% is going to give you a $975 "credit" of what they'll count towards your income. So you'll only have a $25-$75 negative when calculating your DTI.

I hope my response helps answer your questions and wish you the best of luck in your adventure!  Hope I was able to shed some light on a few things.

Didn't read everyone's response but I say don't give up just yet. Call the zoning office, give them the address and ask if the current 2-family use is permitted or grandfathered in. Just because a property is zoned "Single Family Residential" doesn't mean duplexes are not allowed and or they could have been grandfathered in. For example: I own a duplex in a R-2 residential zoning that most appraisers say Single family residential. However, in R-2 zoning, 1-4 families are permitted for use if: then lists a case by case basis for a grandfathered variance. I've had no issues with the city nor did I have a problem obtaining a loan.

Originally posted by @Chris Campbell:

What kind of deals are you buying right now? What part of town? We like the Eastside of town(Oakley, Anderson, Fairfax, East End/Columbia Tusculum) for flips and the good parts of Northern Kentucky(Villa Hills, Ft Mitchell, Hebron, Florence) as well- nothing on the river. I'm currently trying to find partners on an off-market 10 unit in downtown Covington--we're always looking for partners on deals.... LOL. We get a lot of deals each month, and we wholesale 90-95% them right now because it's quick and easy. We'd like to be able to do more flips and acquire some more rentals, but that will require more equity partners. 

 I'm actively pursuing 4 duplexes in the Cincinnati area. I haven't focused my investing in the Cincinnati market areas like I'd like to but I'm planning to expand in the near future. I've found a property in Anderson market that I intend to flip, so we'll see how that goes! 

I do! Haha. Cincinnati (Norwood), OH to Vandalia, OH is where I stay for now. Will expand on larger adventures. 

Jessica,

Welcome and my advice is for you is to soak up as much knowledge on BP as possible. Also, out source different investment & real estate books. Take heed of the knowledge in everything you read and apply it to your goals in life. Starting your own business in real estate or something else? If you're going to take profits from another business and invest in real estate you can have a great tax efficiency if done right. 

Depending on your goals for a rental portfolio, I'd start small and make sure being a landlord, if that's your goal, is right for you. A lot of people want to become landlords but it is not for everyone. It takes a special type of person to be a successful landlord. If you're wanting to flip properties, I'd suggest getting in with a local real estate agent or appraiser and gain as much local knowledge as you can in order to assess your market area well. Slow and steady wins the race and you came to the right place for learning! 

Originally posted by @Michael Worley:

Originally posted by @Justin Thompson:

If they underwrite through Fannie Mae, they can/will count 75% of the income stated on the lease or appraisal whichever is lower.

If they underwrite through Freddie Mac, the income has to be on your tax returns for 2 years before its counted as income.

Most loan officers will tell you they can't count it and will count it against you. Loan officers are sometimes "check box monkeys". (No offense!) So find yourself an educated loan officer and you won't have an issues.

 To the OP be very wary if responses like this one. The person who responded to this either doesn't understand lender's loan policies or is being deliberately misleading. Every lender has their own loan policy, which can always be more strict but not less strict than the aggregator. Put another way, even if you sell directly to a GSE like Fannie Mae you can (and most likely will) have stricter underwriting standards. Those loan standards are based on the risk weighted pricing your bank is trying to achieve, the current performance of your banks portfolio with the aggregator, the individual underwriter's portfolio performance, etc. The bottom line is that the Checkbox Monkeys don't just go by some alleged Fannie Mae standard.

 I take offense and I'm sorry you feel that way. I've dealt with several loan officers. Very few of which actually knew the true underwriting guildelines. If you'd like to question my knowledge please by all means go ahead. I can tell the OP the truth not some experience I never had. So please by all means question my advice or knowledge anytime and I'm sure I can put to rest any questions you may have. 

Originally posted by @Tatiana K.:

Originally posted by @Justin Thompson:

Interesting, that's something I never thought of. Can you please elaborate?

Sure!  Like I said in my other post you have to remove emotion for you to stay in control as the landlord. When you go to renovate their unit and let them use yours, you are accommodating them to much.  You need to pitch the rent increase and remodel as you want to remodel their unit so that they can be "proud" to call their place home.  They are going to have to understand and endure the temporary inconvenience of the remodel. This will give them a sense of you are trying to make their home better and they should be receptive to the remodel without any issues. If you accommodate them by letting them use your unit, they will, in my opinion, lose the sense of who actually is in control.  This could lead to issues down the road when things need fixed or they don't have the money on time for rent. If you show to much kindness (emotion), not all, but a majority of tenants will see this as a sign of weakness and try to take advantage of it at some point or another.  You will lose your upper hand of control and then you start having a tenant that thinks they call the shots. My tenants know I am a kind, considerate guy but they also know I am in control.  

I'll give you an example of what happened to me when I bought my first duplex with tenants in place in one of the units.  Unit 1 was vacant and needed a complete rehab.  Unit 2 was rented but to someone that had no lease in place and they were paying $100 less per month than I expected to generate. Well I started the rehab on the vacant unit and I notified the tenant in the other unit that I would be remodeling theirs next. Or if they did not want me to remodel I was still increasing the rent by $50 per month. Well long story short, I tried to be to accommodating to them during my remodel and I did not maintain my control. They brought a dog into their unit, when I strictly said no pets.  They did a few other things that I let slide as I was the "new" landlord trying to play nice to the existing tenants.  Well I will never do that again. They started acting like they called the shots. Well rent was due and they didn't pay. I went to collect it, they stated "they'd call me when they had my money. Until they call, don't show back up."  Now I know this is an extreme case, but if I had stayed in control when I first bought the property and stood my ground when they pushed the limits of the new landlord, I wouldn't have had an issue.  They probably would have last a little longer than they did.  I evicted them after owning the property less than 2 months.

That's what happened on my first duplex I bought.  Now I am a kind, respectful landlord, but my tenants know I am in control and since that property, I have not had another tenant try to push the limits with me. Sure someone will down the road, but I maintain a control aspect that I see most landlords struggle with that leads to issues. I look at is as, I may be causing them a few weeks of mess when remodeling but they need to understand they are "renting" from me. I own the property, they are privileged enough to live in my property, that I pay for, that I maintain.  All my tenants show me a great amount of respect and I show them the same respect and it has been a pleasure renting to them. I know it may come across as I am a jerk or something to some, but I am by far one of the least stressed landlords I know because of it!  Landlords that try to play friends with their tenants will lose every time. You're running the business, you're the CEO, you're the head person.  Treat it that way and I promise you that being a landlord will be a completely different experience. It will be a much more pleasurable adventure!!

FHA will typically not guarantee more than 1 loan for a borrower for their primary residence. They do have a few situations that they will allow an additional FHA loan to be held:

You relocate a distance of xx miles from current FHA insured home and commuting is not considered to be reasonable. I believe you have to move either 75 or 100 miles away.

Your number of dependents (family size) increases to where your current FHA home does not support the number of family members. Then FHA may allow another FHA to accommodate the new size of the family.

Originally posted by @Tatiana K.:

@Justin Thompson thank you for the input! Luckily we're not planning to move into our unit right away so we could ostensibly update ours first, then let them use the bathroom/kitchen while theirs is under construction. 

I'm also willing to cut them a deal on the rent and raise it gradually, or even keep it as is for a period of time to keep them happy. A month of vacancy would cost much more than a few months of lower rent and I want to do right by them.

You're very welcome! That's a good idea but I personally wouldn't advise letting them use the other unit while you do theirs. I believe that would cause a tenant/landlord issue later down the road but that's just my thoughts.  I know you want to do right by them and that's a great quality to have as a landlord.  However, money is money to me and my wife has a hard time withdrawing emotion when we buy a property with tenants already in place and I plan to increase their rent.  She puts emotion into every deal we do, but that's what balances her and I out. I remove emotion and let the numbers be my reasoning. The only way to increase cash flow is to either lower expenses and or generate more income.  I'd offer to do a semi-remodel of their unit and raise the rent at least 50% of what you wanted/needed.  That will give your unit a better appeal, you increase the rent and they don't get sticker shock of the rent increase.  I've raised rent before $150 the day after I bought a property, people had no problems and they are still there. I raised rent by $25 once, people left the next weekend.  So it all depends on the tenants and what they can handle.  If I can live with a little lower rent and keep good tenants I will. If they are already having a hard time affording to pay the rent now and you keep it the same for 6 months and then increase it then, they still won't be able to afford it.  I'd see what their income is and see if they can even handle a increase in rent.