All Forum Posts by: Tom Arena

Don't think of HML as a 'cash buy' from your perspective. From the seller's side, you using financing that's not appraisal dependent and having the your own cash to buy is the same thing. From YOUR side though those are two very different things. The HML will come with points and payments while buying a property with cash you just had laying around would not generate any extra cost.

Did that make it clearer? I'm not sure I wrote it well.

1. Hard money requires point + interest and it's financed. Unless you have a strange deal with no payments for X months. That's why the calculator doesn't seem like it's working for what you're trying to do. All cash is for buyers that have the purchase price in their own cash at hand.

2. Income like fees that are one time only are generally not in the overall return calculation. For those pocket cases it's probably better to understand and build a model that reflects what you're trying to do.

In my experience, conversation with local lenders have been more successful. Their underwriters are training in evaluating local markets and they tend to be more flexible.

Talk to another loan officer. My local credit union says that they recognize rental income after 1 year of land lording experience if I can produce full P&L for the property and documentation to support continued operations. Effectively it's a business loan with recourse at this level. 

Look around your area for more financing options and talk to them. Not all underwriter and loan officers are alike.

The benefits of house-hacking are largely that you can take advantage of advantageous loan options while your tenants pay your living expenses. Anyone could, given the resources, get a conventional loan to purchase a property then rent it out on a per-room basis. House hacking allows people to start this journey in their own home and increase leverage through FHA and other low-down-payment loan options.

There is nothing stopping you from just buying a rental property. Without living in it it's not house hacking, just regular REI. Your friend would be a tenant that would pay you rent like any other tenant. Good luck.

If you're interested in multi-units in the SLO area, have you talked to the owners of the triplex for sales in Paso? 

It's listed for $575,000 last I checked and market rent for the units was around $1,350-$1,500 each. I talked to them a couple months ago, but they weren't flexible at the time. The couple have owned real estate in the area for a couple decades, self-manage, and want to sell and retire. At the time they were not interested in self-financing, but the delay in sale may have changed that.

I would set out a contract defining the terms of your payout. 10-15% is not a debt interest rate, it sounds like it's an equity return and has equity risk. You should be looking for more than that. If you are strictly a debt investor then read about creating notes, look for 12-15% interest locked in with a lien on the property and a personal guarantee from the borrower. Contact some hard money lenders here if you just want to do a property-backed loan only.

The terms should probably be something like: He guarantees you 8% annualized return on your money and you split 50/50 any profit in the deal after that. For example:

Purchase Price: $200,000 ($55,000 down)

Renovation: $40,000

Total Acquisition $240,000

Cash Out of Pocket $100,000 (your money)

Holding Cost: $5,000 for 6 months

Selling Price: $300,000

Cash Distribution: Selling Price - Loan - Renovation - Down Payment - Holding Cost = $55,000

Your 4% (8% for 6 months on $100k): $4,000

Remaining: $51,000

50% = $25,500

6 Month Return = $29,500/$100,000=29.5%

If the rental application does not include spaces for the birthdays of all inhabitants than I would use a different form. Ideally you should be doing background checks on all the occupants 18 and older. At those ages criminal records are public and will save you from a nightmare tenant. The cost of those checks should be in your application fee.

@Michael A. Davise, did you end up going forward with this? Your cashflow looked pretty slim with financing eating over 60% of your revenue.

Doug, please keep this thread updated. Even if the deal doesn't work out, the steps and the lessons you learn in the process of trying to put this deal together will be invaluable.