All Forum Posts by: Anthony Thompson

@Ian Slater I'm not sure how I missed your initial post but somewhat belatedly, welcome to BP.

I lived in NYC for a few years in the early 2000s and got a real estate finance & investment degree from NYU. It was great but I ultimately decided I'd rather be a bigger fish in a smaller pond (RI) than a tiny fish in a huge pond (NYC).

I am intimately familiar with all 93 exits on Rt 95 in Connecticut, however, having made that drive many times :)

My usual advice is to invest as close to home as possible but obviously that's not going to work for you. So I would say either choose a property management company carefully and/or be willing to pay more for properties in nicer areas.

There is a world of difference in tenant quality (and aggravation) between properties in B vs. C areas, and (to a little lesser extent) between A and B areas. The ones in C areas already start out with the mindset that you are the enemy, whereas the ones in A/B areas will give you some slack as long as you eventually address their issues. And the ones in A areas will let you know ahead of time and apologize (!) if their rent will be a little late. They actually have checking accounts and care about their credit rating, which are often foreign concepts in C areas.

(Though I will say on the flip side, some A/B area tenants are also "high maintenance" and expect more for their higher rents, but I've also encountered some of that in C areas so it's by no means an absolute.)

You will have to pay a little more for better area properties, but if you're managing from a distance I think it will be a lot easier.

Also make sure to pick your on-the-ground team, handymen and repair people, carefully as they'll be your "face" to the tenants if you're managing from afar.

Finally, you're not the first person I've encountered through BP who's from NYC; I know at least one more (@Jared Gettinger) in a similar situation, and he's actually come up to our local RI investor group (RIREIG) a few times. So maybe there's some opportunity to connect or mutually-assist there.

@James Lanier If you're asking about private lenders (individuals instead of banks), you'll find that it's relationship based and you'll really need to have your ducks in a row and show them that you have a plan for the property and some experience rehabbing.

The bigger the project, the more they're going to want to see that you have experience doing a project of that size. And just like with banks, the ideal time to approach them and build the relationship is when you don't need the money.

Also you mentioned starting your real estate ambitions. Do you have experience doing a major rehab? Every property I've seen in the last 5 years in the 40-60K range needs significant work. That's fine if you've done projects like that before, but I'd be very hesitant to say start off with one of those if you haven't.

You'll also find, if you haven't already, there there is a lot of competition in the under 100K price range so often those properties are getting bid up to almost unprofitable levels (unless you already have a crew and are trying to keep them busy). On the other hand, if you intend to buy and hold the #s may make more sense for you.

To your main question, there are lenders, but every one I know is going to insist on being in "first position" (i.e., being a first mortgage). So if you're buying in the 40-60K range you'd need to pay cash for that.

If you can do that, then yes, you can probably find some lenders who will give you a loan to do the rehab, but they will likely give it to you in construction draws, meaning you will have to pay for part of the rehab, then they will reimburse you for what you've spent and add to the loan balance.

Your best bet for financing a project like this, and you may even find some willing to give you a 2nd position mortgage (allowing you to fund part of the initial purchase with a loan), is family and friends who already know you and are willing to help you out. They may want to do so as loans out of self-directed retirement accounts or they may want to be equity partners (i.e., co-owners) instead; that's a negotiation based on your relationship with them.

A 203(k) loan (i.e., bank financing) is a good idea, you'll always get the best rates from institutional lenders, but there's a lot of paperwork and delay, and most of the offers in the sub-100K range are cash offers so there's virtually no way your 203(k) contingent offer is going to be accepted - unless it's a deal you find yourself that is not on MLS and you're dealing directly with the seller, which is by far the best way to find a "deal" in real estate.

(It's also, not coincidentally, the most work to find and create, though you can give up some margin by carefully buying such a deal from a wholesaler, after you vet that it really is a deal - many I get presented from "wholesalers" are not in fact deals at all.)

Somewhat ironically, you may find you have better luck with a 203(k) loan buying a fixer-upper from the MLS in the higher price ranges since fewer rehabbers look there and there's less of a chance you'll be competing with an all-cash offer.

Good luck, and let us know what happens of course!

Dan, if you're looking for a 4-plex make sure it's already fire-coded or you plan for the expense. 4-units have to have a panel and that panel also has to have regular inspections so that's a potentially big up front cost (if no panel is there already) and an ongoing extra expense. That's why many people opt for 3-units instead, where the fire alarms need to be interconnected but no panel is required.

As @Robert Wodogaza said, it's certainly getting tougher to find good deals. Your best deals will be those you make directly with the seller, i.e., off market and not MLS. Those require more work to find and create, but if you can do it, usually pay off much better. And as he recommended, networking.

There is no magic "area with the best CAP rate" that I know of and can tell you (or anyone). If there were such a thing, everyone would start focusing on that area and cap rates would lower commensurately.

Generally people like cities/towns in northern RI, like the ones Rob mentioned, because they're closer to Boston so we get more spillover from the Mass economy. I'd say look at demographics (change in population, employment, etc.) in those areas and, importantly, drive through them yourself, to see what you like and what's convenient for you.

Also as I've recommended recently in other threads, be sure to check out the finances of any city/town you're planning to buy in, including current and historical changes in municipal bond ratings (Moody's, Fitch, etc.). A municipality that is more financially challenged is more likely to raise taxes in the future so that's something to keep in mind.

@Michael Taberski Welcome to Bigger Pockets! It's great that you'll be at the RIREIG meeting this Thursday, I'll be there too so be sure to say hello.

Without a specific question it's hard to give any guidance, but if you're looking to buy a multi-family and live in one of the units, the standard advice is to visit the neighborhood during the day, during the night, during the week and on the weekend, so you get a good sense of the area at different times.

I'd also say, talk to the neighbors and try to get a sense of what kind of tenants the area & property will attract. Not only will they be your tenants, if you're living there, they'll also be your neighbors :)

And @KEVIN FLYNN had a good suggestion with looking into a VA loan as well.

Alex, it's by no means a steal but if you like the property and the area it seems like a perfectly acceptable place to start.

As @Brett Read said, you're not going to be able to do the Ocean State Grad Grant program since they suspended new applications.

One thing though, you mentioned PMI. That's not normally something I remember to include but since you mentioned it... I wouldn't normally consider that part of the "50% rule" of operating expenses (which Brett is right, is good to break out, at least a few times just to see what goes into it).

I would normally consider that "below the line" of NOI and include it as an extra financing expense beyond the yearly mortgage payments.

If I analyze this with 5% down and a yearly PMI cost of 1% of the loan balance (a rough # I came up with just by Googling - it varies depending on down payment and credit rating), it drops to a yearly cash flow of $352, a 4% cash on cash return and a dangerous 1.03 debt service coverage ratio.

I'm looking at it as:

   Yearly rent
-  operating expenses (50% or broken out)
= net operating income
- annual debt service (monthly P&I mortgage pmts x 12)
- annual mortgage insurance premium
= free cash flow

I think the most important thing which makes this a deal or no deal is the financing - how much you're going to have to put down, how much the mortgage insurance would be, what ratios the lender is going to require.

I'd recommend investigating your mortgage options before going further with this or another property. There's no point in falling in love with a property or deal if the mortgage #s aren't going to work yet. You may find that you just have to wait until you can put 20% down and avoid PMI altogether, which may make it better to wait until next year depending on your situation.

AJ, it really depends. In general, rehabs are better when the area is better. Besides not having to worry (as much) about tools and equipment being stolen, the values are higher on the back end (selling) so it makes the whole project easier or at least more enjoyable to work on.

You can certainly do rehabs in tough areas but the #s will be smaller (not to rehab, but on the ARV and rents) so you really need to make sure you don't pay too much when you buy because, if you're not used to the area, you may be unpleasantly surprised by smaller #s on the back end.

Another thing is that, somewhat counter-intuitively, sometimes the building inspectors in tough areas are actually pretty tough/demanding themselves. Maybe they figure they're the front line in an ongoing war to improve the area. Or something grandiose like that. In any case, Woonsocket is known to be very demanding regarding permits & approvals.

If you haven't done rehabs before or owned property in Woonsocket before, I don't know that I'd recommend it be the place you start out unless you're really comfortable (actually you'd have to be excited) with the price you're buying at.

If you're at all uncertain whether you're getting a good deal on a property that needs work, I'd recommend staying out of a tough area like Woonsocket. Finding out that your acquisition price wasn't as good as you thought it was, is still bearable in a good area, but will grind away at you in a bad area due to all the issues that go with it (tough tenants, tough neighbors, tough city officials, etc.).

If it's a ready-to-go (rent-ready) property though, I'd be less concerned with starting out in Woonsocket if the property is conveniently close for you (within 15-20 minutes drive). If it's farther away and you have no other connection to the area, I'd say even if it's rent-ready, you may want to consider something closer to home.

It looks like you already read the other thoughts on Woonsocket I posted recently so I won't repeat them here.

Preston, first off, I commend you for pursuing a market many others avoid. There probably is some opportunity in that, generally.

One thought that came to mind immediately was, if you're going to invest in Woonsocket, you better be OK with Section 8, period.

I can't find the exact reference right now, but at one point I'd read that Woonsocket absolutely dominates in terms of Section 8 housing units compared to the surrounding communities. Woonsocket is the land of Section 8, so if you're OK with that then wonderful, if you're not, then I recommend staying out of that market.

A few links worth checking out:

• Woonsocket Comprehensive Plan which includes good statistics such as, "Woonsocket’s ratio of homeowner to renter is 35:65... the total number of assisted units has continued to grow during a period of continued overall population decline."
• Washington Post article Food Stamps Put RI Town on Monthly Boom and Bust Cycle
• Despite Concessions, Woonsocket's Pension is Forecast to Run Dry (Valley Breeze, the local newspaper to read for Woonsocket stuff)
• Appeal Period Expires on Supplemental Tax Suit (Valley Breeze)

The last one is particularly relevant because the "supplemental tax" is a special extra tax bill Woonsocket sent out to property owners a few years ago, basically because they couldn't meet their expenses with property taxes alone.

I like the general concept of investing where few others are, however I also give huge consideration to the fiscal stability of a city or town and how responsible its leadership appears to be.

The latter is mainly because, if spending outweighs income a municipality can do one of two things: 1) reduce spending, 2) increase income (i.e., raise taxes). Historically, municipalities have often opted for #2, often because their hands are mostly tied on #1 due to various contractual obligations.

One quick way to check that, which should be followed up with more extensive research of course, is to check Moody's/Fitch/S&P reports on the municipality's bond ratings.

Surprisingly, in Woonsocket's case, while it's still a "junk" bond it was recently raised a notch which is good (another, similar report).

The big question is, what is the trend? What's coming/changing in the future? A proposed 12% tax decrease (not sure if it has been approved yet) is a good sign along with that raised credit rating. 

Another thing that has some people excited is a proposed set of new train connections linking Woonsocket to Providence and Worcester. However you should be careful about such things because they can get derailed (pun mostly unintended) by political and financial issues, or they could take much longer to materialize than planned (see After Almost a Century, the 2nd Avenue Subway Is Close to Arriving).

On the other hand, major retailers like Lowes pulling out of Woonsocket and going to nearby North Smithfield aren't great either.

As you can see, you should really get to know the particulars (and, unfortunately, politics) of a new market before committing to it too strongly.

(I own one property in Woonsocket so I have some familiarity with it, but by no means consider myself an expert.)

I think it's worth asking them. It may be the kind of thing they don't usually do, but if they're on site with all the materials anyway they may be willing to do it at the same reduced rate they do the other work.

Usually their proposals are about half the cost if you hired someone to do it separately, because they get state money. Basically, we're all paying for it anyway with our taxes, so it's seriously worth considering doing, especially on your primary residence if you own it and are going to be there for at least a few years.

The energy audit is free, then they send you a proposal and you decide whether to go forward.

The only thing I will say is, they do have a long waiting list so it could be a couple months before you can get an appointment. On the other hand, that's always the case, so the sooner you call, the sooner they'll come out.

Sadly I don't have personal experience with soundproofing to answer the original question, but I did want to post the "other ways to placate the tenant" perspective.

Managing tenants is like dealing with children. Sometimes you don't know who's at fault so you punish both of them, sometimes you give them what they ask for, sometimes you substitute what they ask for with something you'd rather give them, etc. :)

I'm glad @JD Martin added the "what did they expect" comment - I was thinking the exact same thing. It might be cheaper to let them move out and get less sensitive tenants on the first floor. Or if the 2nd floor tenants are actually unreasonably noisy, send them a warning letter and then if no change, ask them to leave.

That said, if you want to placate the first floor tenants you could have an "energy audit" by RISE Engineering where they look at the house especially in terms of heat loss and come up with a proposal to add insulation and other energy-saving features (and give you free LED light bulbs :).

I'm not saying that insulation is the same as sound proofing at all. But it might be something you consider doing  for your property anyway, especially if you are paying for heat/utilities, and either way it may be "something" that you do in response to the complaint which buys you some time with the tenant.

My first reaction though was, "Welcome to apartment living" :D

Adam, one piece of advice would be to leave your check book and credit cards at home.

Every free seminar I've even been to has been an upsell to a seminar that does cost money, and/or a book/tape course and/or (the trend seems to be toward) a coaching program that has either a big up-front cost or a monthly ongoing fee.

If you would like to go study how a salesman pitches a room of people however, it will probably be a great case study in sales techniques, especially the last 15-30 minutes where they really ratchet up the sales techniques.

You'll get to see all the techniques like getting the audience to agree with simple statements to build rapport, presenting the "total cost" and then "slashing" it for a "today only discount", the old classic "limited time only, while supplies last" and its variant "for the first ___ people at the back of the room", etc.

I've gotten good value out of seminars over the years. But I've also been a sucker and spent a lot more than I had to. Money-preserving rule: No matter how good the sales pitch is, never buy anything that day - always sleep on it and, if possible/applicable, research & discuss with spouse/partner/etc.

Pro tip: Many times you can get books & tape courses deeply discounted on Ebay, Craigslist, your local real estate group, etc. from people who bought them and never used them.