patrick.net

how do you determine if rental is worth buying, and more how do you get more money for next rental? equity cash out as down payment?

There is a big difference if you have deep pockets to begin with, either your own, or trustworthy family and friends etc. With lots of money this is much easier, I would not recommend that for a single individual tight on cash who could get wiped out by a few mishaps or a sudden downturn / unexpected issues. IMO you need to have millions to start such a venture, otherwise stick with stocks. Likewise if you're just a participating investor, you can start with less but you will make less, and the people you invest with should be trustworthy. But if you can pull it off it's likely very rewarding as presented here. Same for starting a hedge fund, once you have enough critical mass you make out nicely just with management fees. Getting there is the hard part.

@Eman

I never understood why a bank would allow pulling equity out to use as a down-payment on more RE. 1. They lose equity collateral and 2. You're adding even more debt that you, personally, could not cover. You're reliant on other people covering the debt payments.

mell says

I would not recommend that for a single individual tight on cash who cold get wiped out by a few mishaps or a sudden downturn / unexpected issues.

Yes, everybody's a genius when markets are on the rise even the small investors.

Eman says

Just bad timing I guess, but it has worked out with real estate fortunately.

Key word: TIMING

GNL says

@Eman

I never understood why a bank would allow pulling equity out to use as a down-payment on more RE. 1. They lose equity collateral and 2. You're adding even more debt that you, personally, could not cover. You're reliant on other people covering the debt payments.

Banks are in the business of lending. The collateral is just there. They don’t want the asset.

Let’s say we buy an old rundown building that generates $7k/mo for $700k. After expenses, net cash flow is $3.5k. Bank would lend 80% of this amount for debt service. $2.8k/mo can cover about $560k worth of debt.

Once rehabbed and re-tenanted, it generates $10k/mo. After $3.5k in expenses, net cash flow is $6.5k. 80% of this can be applied to debt service aka (DSCR) debt service coverage ratio. $5.2k can service just over $1M of debt. Bank will lend $1M on the asset.

This approach requires patient. Most of our buildings are around SJSU. Kids will move out between 2-5 years so it’s easy to bring the units to fair market rent on natural turnovers.

From a math perspective, every $500/mo increase in net revenue makes the building worth $100k more. 10 units = $1M. 100 units = $10M.

Have to go to work now. I’ll respond to everyone later. It’s not a sexy way to make money, but it pays well and help to generate multigenerational wealth. If I kicked the can tomorrow, I know my wife and the next generation will be taken care of. With a W2, they’re screwed.

porkchopexpress says

Do you still stay in touch with Iwog? I'm curious how he's doing.

I don't know ducky personally, so I can't speak to specifics; however, this summer he sold his primary residence for half a million dollars over asking. I'd say he's doing all right. Bear in mind this is the residence that was used to seed his rental empire. The fact that he exited at this time is telling (though, who knows, it could have been dictated by personal circumstances). Last I checked, none of his rentals had been sold.

BayArea says

20% DP… 5x lever
3.75% DP… 27x lever

Must factor in the length of lever when comparing RE to SP500

Yup, there are a few parameters that don’t get factored into the equation when comparing real estate return with SPX. To me, it doesn’t matter which investment vehicle one chooses. Everyone’s knowledge and risk tolerance are different. Choose one that fits their personality.

My biz partner got $960k distributions from his stock portfolio and real estate investments last year. He’s happy with these 2 investment vehicles. Whenever he needed money for a new investment, he would borrow against his stock portfolio at 2.25% margin rate. Once the asset is stabilized, he would pay it back the cash out proceeds or annual cash flow. It’s pretty sweet.

EBGuy says

porkchopexpress says

Do you still stay in touch with Iwog? I'm curious how he's doing.

I don't know ducky personally, so I can't speak to specifics; however, this summer he sold his primary residence for half a million dollars over asking. I'd say he's doing all right. Bear in mind this is the residence that was used to seed his rental empire. The fact that he exited at this time is telling (though, who knows, it could have been dictated by personal circumstances). Last I checked, none of his rentals had been sold.

I remember. His wife inherited the house from her parents. They got to keep the low property tax basis. As much as ducky was advocating for progressives, he took advantage of the system whenever he could including buying the condo in Walnut Creek at the courthouse steps.

Ceffer says

There are successes and there are failures. I have encountered quite a few 'leverage' victims, including real estate agents, over the years using RE. I have known a lot of guys going bankrupt. There were a few real estate magnates with multiple homes in my hoods who bought with liar loans before 2008, and they collapsed with the downturn.

There is kind of a 'go for broke' gambling thing with lot of men, that results in a lot of investment casualties with just a few stochastic 'winners'. They say that AI now performs over 98 percent of all investment decisions and directions, and they collect huge data dumps and process them in tiny fractions of a second. Don't want to be on the down side of that kind of juggernaut, especially since even the residual 2 percent of the markets are rigged and only insiders can ride the investment tides. I still remember all of those real estate empire books from the 80's and 90's, smug authors , many went bankrupt due to tax changes...

This is where I think I have an advantage. A buddy of mine works for the Federal Reserve. He has seen a lot of wealthy people went under so he reminded me quite often to “stress test” my portfolio. I do this on an annual basis. Our break even is around 25% vacancy while our actual vacancy has been between 1.2–2.8% annually. Banks use 5% for underwriting. Our goal is not trying to get the highest rent, but to try to minimize vacancy. It’s been working out.

clambo says

It's not dumb luck to buy mutual funds; they are the essence of investing.
It's smart to understand that they are a great way to grow capital.
I have passed up real estate opportunities because I dislike renters and the details of maintenance etc.

Real estate is not for everyone. Some people get burned out being a landlord. The goal is to become an investors with a property management company handling the day to day operations.

richwicks says

Eman says

As some Patnet old timers know, I started my real estate investing journey in 2009, a year after iwog did. We accumulated about the same number of rentals by 2012-2013, about 10-11. Iwog seemed satisfied with that while I kept scaling up.

Now, my biz partner and I own just shy of 100 units here in San Jose. A couple buildings are co-owned with investors….mainly immediate friends and family. My share of ownership is 40% with about 45% LTV.

To put things in perspective on how wealth is built, Bay Area real estate tends to double in value every 15 years. If history is any guidance, a $40M real estate portfolio should appreciate $40M in the next 15 years, not including principal pay down, cash flow and rent growth over these years. If nothing more is done other than just maintain the assets, they should worth $160M, free and clear, in 30 years.

As a former engineer, when I analyzed Bay Area re...

You’re entitled to your opinion. I really don’t mind being called names. I’m very comfortable with myself.

If making money is easy, I’m sure you’re working for yourself and making a bunch of money. You’re not working for someone else.

With respect to building wealth, all I know is that if I kicked the can tomorrow, my wife and the next generation are taken care of financially. Could you say that about yourself, or would you say it’s effing none of my business once I’m dead? They’re on their own?

I see you’re speculating that this entire Bay Area is the next Detroit. I’m sure a lot of VC’s and tech companies would disagree with your speculation. Time will tell. I’m not smart enough to know.

Ceffer says

I'm thinking of buying another house just as a hedge against currency collapse, not necessarily for Caligulan profits I can lust over, just to preserve an asset class with real stuff rather than fiat. I'll be watching things as the market wheels into winter, and maybe a few more rate hikes.

I can already see some cooling in Santa Cruz with many cited price reductions. It looks like inventory is creeping up from zilch. I suppose there might be a flood when investors start cashing out before the fiat music really ends.

This 2011-2022 real estate run up looks like the 1995-2007 cycle. History suggests real estate corrections last 3-5 years. I don’t know how much real estate will drop this time. Your guess is as good as anyone else’s here.

FortwayeAsFuckJoeBiden says

how do you determine if rental is worth buying, and more how do you get more money for next rental? equity cash out as down payment?

The formula is simple, but not easy to achieve. If you don’t have money, you need to put in sweat equity aka value-add. As long as you’re all in at 75% LTV, or can achieve this within 2-3 years, then you have some scale. If not, it’s a buy-and-pray with your own equity/savings. This is why most can’t scale up their portfolio.

I made it my full time job when I started out in 2009. In less than 4 years, I was able to amass 11 units (my share). I owned 6 with pkennedy, who I met on this site (3 was my share). He was like “this is effing amazing”. I told him to stick around for a bit longer so we could acquire more, but he couldn’t wait to retire at the age of 40.

Then I met my current partner, who sold his company in 2000 for $115M at the age of 29. One thing I learned from him is “the business must be scalable”. This was why we got into buying apartment buildings since.

My flip profits are to put food on the table. All the profits from the apartment buildings have been reinvested back in growing the biz.

mell says

There is a big difference if you have deep pockets to begin with, either your own, or trustworthy family and friends etc. With lots of money this is much easier, I would not recommend that for a single individual tight on cash who could get wiped out by a few mishaps or a sudden downturn / unexpected issues. IMO you need to have millions to start such a venture, otherwise stick with stocks. Likewise if you're just a participating investor, you can start with less but you will make less, and the people you invest with should be trustworthy. But if you can pull it off it's likely very rewarding as presented here. Same for starting a hedge fund, once you have enough critical mass you make out nicely just with management fees. Getting there is the hard part.

Mell is absolutely correct. I didn’t have much money other than a pocket full of dreams when I started out. I didn’t mind putting in the works. Pkennedy helped with the financing aspect of the 6 rentals. We borrowed money from my aunts on a couple occasions for acquisitions. Then refinanced and paid her back with 10% interest. All these small deals had allowed me to sell and roll into the apartment buildings with my rich partner. It’s like monopoly in real life. Sell 1 unit to buy 3-4 units.

My rich partner made it easy with financing due to the size of his balance sheet. Everyone around us said I’m the strategist while he’s the executor. My Federal Reserve buddy gave me all the details of how to negotiate with the lenders to get the best terms and financing.

I remember a couple times when we sat down and negotiated “flexible” loan terms with the lenders, they asked me how did I know these? I smiled and said someone from the Federal Reserve. Once the terms have been negotiated, my biz partner would be like “where do I sign?” 🤣🤣🤣

Once the relationship has been established with a lender, and we showed we could execute our plans, it gets easier going forward. Every lender has their own niche so we know which lender to take our loan to when we need to. One lender can close a commercial loan in 2 weeks. Yes, it’s possible.

GNL says

mell says

I would not recommend that for a single individual tight on cash who cold get wiped out by a few mishaps or a sudden downturn / unexpected issues.

Yes, everybody's a genius when markets are on the rise even the small investors.

Actually, it’s a little different with commercial real estate. The bank will only lend maximum at 80% of the net cash flow after all expenses, and they use 5% vacancy for underwriting. They don’t factor in future rent growth even though the units are 50% below fair market rent.

When you buy a rundown building at a discounted price with low in-place rent, the only way to go is up. Time will do all most of the heavy lifting. All you need is patient.

Say a 10-unit building with $1k/mo/unit. FMV should be $1M, but you have to pay $1.2-$1.25M to get it.

FMR should be $2k/mo/unit. At $2k/mo/unit, it’s worth at least $2M. While you’re waiting, FMR could grow to be $2.2-$2.4K/mo. That’s another $200-$400k equity right there. Just trying to keep the numbers simple for illustration purposes.

It’s rewarding once you’re in the game. When all said and done, you own a nice all done up building with fair market rent, or close to it for decades to come with 100%+ financing. You’re essentially growing rich with the house money.

Dig a hole, put fertilizer down, plant the tree, and water it regularly. Once it starts to bloom, you’ll enjoy the fruits of your labor for decades to come. It’s a one time upfront effort. Yes, it’s a lot of work, but it’s so worth it.

My reasons for buying stock mutual funds were: 1. low cost to start investing 2. no credit required (my job didn't pay well) 3. the objective was to appreciate capital (to create income later) 4. I'm indecisive and although I lived a long time in Santa Cruz, I thought I would leave someday.

If you already have income, you can forget worrying about things.

I like the idea of moving a mouse and putting cash into a bank account. However, I never seem to take out much cash for some reason.

@Eman congrats on having the chutzpah to see an opportunity and take it. As you may recall I bought my house (NOT an investment, just a place to live) as a foreclosure for what I thought was a fair price. Looking back it was a steal.

But I've never gotten beyond that. As much as I've looked at investment properties off and on over the years, the initial cost to get in has always been too rich for my blood. Mantanice cost, managing tenants, etc. are also a headache. I suppose once you have ammased enough properties that you can out source that to a management company and simply write it off as the cost of doing buisness, but as a one-off to get started, nothing in my market was cash flow neutral (let alone positive) out of the starting gate - even if I did most of the grunt work myself. Anything that was was a teardown.

I'm glad you did well but here in the East coast there remains a lot of overpriced crap. It's housing bubble 2.0, but things have finally peaked. If we get another crash perhaps I'll try and get in near the low end, but for now I'm on the sidelines keeping my powder dry.

Timing is everything. As of yet, the timing has not been right for me and my local maket. Last go round I want about to risk what little capital I had access to as I was not yet established. But I'm happy you were able to take full advantage.

GreaterNYCDude says

@Eman congrats on having the chutzpah to see an opportunity and take it. As you may recall I bought my house (NOT an investment, just a place to live) as a foreclosure for what I thought was a fair price. Looking back it was a steal.

But I've never gotten beyond that. As much as I've looked at investment properties off and on over the years, the initial cost to get in has always been too rich for my blood. Mantanice cost, managing tenants, etc. are also a headache. I suppose once you have ammased enough properties that you can out source that to a management company and simply write it off as the cost of doing buisness, but as a one-off to get started, nothing in my market was cash flow neutral (let alone positive) out of the starting gate - even if I did most of the grunt work myself. Anything that was was a teardown.

I'm glad you did well but here in the East coast there remains a lot of overpriced crap. It's housing bubble 2.0, but things have finally...

Hi ECBB,

I remember you bought your house for $300k…ish. You’re a patient and reasonable guy. I’m glad it’s worked out for you and your family.

Oops, lunch is here. I’ll share my 2 cents when I get home in a bit.

Cheers!

@GreaterNYCDude,

A few things I’ve learned and observed this last decade.

1) Don’t invest in areas with no appreciation. The capital expenditures will consume all your cash flow.

2) Appreciation is the best passive income. If you have appreciation, you’ll have rent growth. If you have rent growth, your bottom line will swell YoY as the cost to maintain the assets doesn’t go up at the same rate.

3) you can start small but at some point, you’ll have to learn to let go and be an investor. Landlords get burned out while investors look at the top and bottom lines and evaluate it from a business POV.

4) There’s no right way or wrong way to invest. It depends on your objective. Locally, some landlords bought one rental at a time with savings from their W2. They started out losing small money each month with negative cash flow and breaking even in a few years. Over the years, they’ve accumulated 3-5 SFH rentals. These have appreciated tremendously and are worth millions now. Some folks in my circle own rentals in Los Altos, Mountain View, Cupertino, Palo Alto, etc… They’re worth $2.5-$5M each. Not my preferred way to invest, but it works for them.

5) Look at equity, not cash flow alone. Let’s say you can buy an asset at $500k discount, but it’ll lose $1k/mo for 5 years before it breaks even. Then it’ll start to make money in year 6. $1k/mo = $60k loss in 5 years. This means you still got it for $440k discount. The fact is you’ll likely lose $800/mo in year 2, $600/mo in year 3, etc…. Also, the tenant pays down at least $500-$600/mo in principal. This is how we acquire our apartment buildings. Sometimes, you break even with 1 tenant turnover shortly after you acquire it. A lot of variables. Don’t just look at the initial cash flow.

6) There are different vehicles to get to our destination. It doesn’t have to be an IRA, or 401k, or real estate. Each of us has our own strength. Use it to pave our own path. As Steve Jobs said “Love what we do. Do what we love.” If we love what we do, life is really enjoyable.

Best of luck. Feel free to ping me if you need a second opinion. I’ll help where I can. This is not hard, but it’s not easy. Anyone can do it, but not everyone will. Paycheck is the most addictive drug out there. It’s so clear once we’re on the other side of the bridge looking back. Seriously.

Eman says

Paycheck is the most addictive drug out there.

I believe this with every fiber in my body. You could also add debt to that.

@Eman,

I know you're not asking for any advice but, I'll give you some anyway.

If you have or expect to acquire generational wealth, give an enormous amount of thought to who and how you want to disperse that wealth. I have a son inlaw who's grandfather built quite a real estate portfolio. I would give you their website but I don't think that would be wise of me. The family owned REIT has about 7,000 rental units, hotels and 1,000,000 square feet of commercial space. My son inlaw has a trust fund. He is a self absorbed idiot.

Eman says

Hi ECBB,

I remember you bought your house for $300k…ish. You’re a patient and reasonable guy. I’m glad it’s worked out for you and your family.

Your memory is spot on. I'm Reasonable.. mostly. Patient.. not really. Persistent is more like it.

I appreciate all your advice. As an engineer, I know that math doesn't lie. That said emotions and investing go hand in hand, rightly or wrongly. For example I KNOW that on paper I'm better off paying the miminum on my mortgage and investing any extra cash flow but the peice of mind of having it paid off as quick as possible is appealing, so I choose to pay extra.

FWIW the strategy helped, because when I suddenly found myself out of work (thanks covid), I was able to refinance and lower the monthly payment such that we can now get by one income if needed.

At current rate of payment the note will be paid off in 7 years. Then I'm free and clear and a considerable amount of cash frees up to take advantage of the next opportunity, whatever that may be. Perhaps even early retirement, although I enjoy what I do far too much to stop working.

Residential real estate market around here has been strange. Flat for a long time then shot up once remote work became a thing. It just peaked (again) and is on the way back down to reality. Over the past decade, appreciation has averaged about 5% per year; rents have doubled. I don't know enough about commercial to know enough, but several strip malls have sprung up over the last year or so. Many are just starting to be rented out.

GNL says

If you have or expect to acquire generational wealth, give an enormous amount of thought to who and how you want to disperse that wealth

Distant relatives in Poland.

Booger says

GNL says

If you have or expect to acquire generational wealth, give an enormous amount of thought to who and how you want to disperse that wealth

Distant relatives in Poland.

Aren't they all Nazis?

RWSGFY says

Booger says

GNL says

If you have or expect to acquire generational wealth, give an enormous amount of thought to who and how you want to disperse that wealth

Distant relatives in Poland.

Aren't they all Nazis?

That's what Israel says when they try to grift money off from them. Poland was the only Nazi occupied nation where instead of the government giving up, went entirely underground for the duration of the war. The government never surrendered, they just got beaten.

GNL makes a good point.
About a day after my father died my older brother reminded me not to forget to name his son and daughter as beneficiaries of my accounts (I have no children).
I didn’t like his comment.
My girlfriend is the beneficiary of a few of my accounts.
I’m going to have several, maybe make multiple people 10% beneficiaries.
I’m curious who will prepare my tax return after I die; I prepared my father’s final tax return.
Presently I am annoyed by the sloth, greed, and envy I have noticed among some females.
They won’t be rewarded.

clambo says

GNL makes a good point.
About a day after my father died my older brother reminded me not to forget to name his son and daughter as beneficiaries of my accounts (I have no children).
I didn’t like his comment.
My girlfriend is the beneficiary of a few of my accounts.
I’m going to have several, maybe make multiple people 10% beneficiaries.
I’m curious who will prepare my tax return after I die; I prepared my father’s final tax return.
Presently I am annoyed by the sloth, greed, and envy I have noticed among some females.
They won’t be rewarded.

Wealth that is not labored for is squandered. It also makes most people useless slugs and worse. I have a strong distaste for most wealthy people that I have ever met that did not earn their wealth. All I'm saying is, there is more than 1 way to ruin your children. Giving them too much money is one of them.

GNL says

clambo says

GNL makes a good point.
About a day after my father died my older brother reminded me not to forget to name his son and daughter as beneficiaries of my accounts (I have no children).
I didn’t like his comment.
My girlfriend is the beneficiary of a few of my accounts.
I’m going to have several, maybe make multiple people 10% beneficiaries.
I’m curious who will prepare my tax return after I die; I prepared my father’s final tax return.
Presently I am annoyed by the sloth, greed, and envy I have noticed among some females.
They won’t be rewarded.

Wealth that is not labored for is squandered. It also makes most people useless slugs and worse. I have a strong distaste for most wealthy people that I have ever met that did not earn their wealth. All I'm saying is, there is more than 1 way to ruin your children. Giving them too much money is one of them.

this young guy i know, sad story. inherited dads wealth, a lot of it. gets 300k a year distribution. doesn’t do a damn thing, just squanders it away, no work, all play. nice guy, but has no goals in life.

FortwayeAsFuckJoeBiden says

Wealth that is not labored for is squandered. It also makes most people useless slugs and worse. I have a strong distaste for most wealthy people that I have ever met that did not earn their wealth. All I'm saying is, there is more than 1 way to ruin your children. Giving them too much money is one of them.

this young guy i know, sad story. inherited dads wealth, a lot of it. gets 300k a year distribution. doesn’t do a damn thing, just squanders it away, no work, all play. nice guy, but has no goals in life.

I've known a few trustfunders and most of them are the same...anchorless. One I know even couch surfed for years until his mom died and left him her nursing home empire. He knew he was going to get the money and was willing to simply smoke weed and couch surf until it happened. My son inlaw is unique in that he and his twin brother were adopted. He hit the lottery three times...1. was adopted (many are not adopted) 2. adopted by a wealthy family and 3. was given a trust fund. He works at a doggy day care. At least he works. The biggest problem is he is rudderless while acting as if he himself is worthy of some kind of admiration. He is rude, doesn't care about others and is controlling. I'm not sure the marriage will last. Hmm, that makes me think of a good question to ask the group.

I had a girlfriend whose father was very rich, but he made a point of making her work for a living - until she got married and had a few kids. Then he gave her a nice house.

GNL says

@Eman,

I know you're not asking for any advice but, I'll give you some anyway.

If you have or expect to acquire generational wealth, give an enormous amount of thought to who and how you want to disperse that wealth. I have a son inlaw who's grandfather built quite a real estate portfolio. I would give you their website but I don't think that would be wise of me. The family owned REIT has about 7,000 rental units, hotels and 1,000,000 square feet of commercial space. My son inlaw has a trust fund. He is a self absorbed idiot.

All constructive advice are welcome. I haven’t put much thought into it although we have a trust and will in-place in case anything happens to us.

I’ve been very happy with my life. I would die a happy man at the age of 50 rather than live and work a W2 till the age of 70. That’s how much I appreciate the life I have now.

I told my wife if I happen to grow our net worth to $100M or even $1B, I’d like at least half of it go to the nieces and nephews on both sides of the family (15 of them) and half goes to our daughter.

I want to build a real estate portfolio that’s big enough to support a few W2 employees so that if some nieces and nephews who want to continue my footsteps can run it and continue to grow the portfolio and build wealth for the entire nuclear family. All the kids will get equal share of the annual distribution after expenses.

While I’m still alive, I want to do a ton of donations to orphans and disabled elder organizations in our country. We have a few that we’ve been sending money back home to help, but I want to be able to send a lot more. Of course, the portfolio needs to be bigger to send more donations, or I need to make a lot more money, which I’ve been learning. 😅

clambo says

GNL makes a good point.
About a day after my father died my older brother reminded me not to forget to name his son and daughter as beneficiaries of my accounts (I have no children).
I didn’t like his comment.
My girlfriend is the beneficiary of a few of my accounts.
I’m going to have several, maybe make multiple people 10% beneficiaries.
I’m curious who will prepare my tax return after I die; I prepared my father’s final tax return.
Presently I am annoyed by the sloth, greed, and envy I have noticed among some females.
They won’t be rewarded.

There are winners and losers among us. Not all trust fund babies are lazy and couch surfers. Some are smart and self-driven while others just want to coast through life. That’s what makes us a society. Money will transfer from the lazy to the productive. Time will be sure it happens.

Eman says

There are winners and losers among us. Not all trust fund babies are lazy and couch surfers. Some are smart and self-driven while others just want to coast through life. That’s what makes us a society. Money will transfer from the lazy to the productive. Time will be sure it happens.

Yes, good points. If you want great kids who contribute positively to society (I sure hope that's what we all want), money without work is nearly an abomination imo. Money doesn't create a good society or person. Reading, learning, loving etc...those are the tickets.

Eman you mentioned some stuff about loan advice from federal reserve friend. Can you share any of that advice please? Like loan terms, types? Im looking at commercial land and properties lately too, just not in CA.

FortwayeAsFuckJoeBiden says

Eman you mentioned some stuff about loan advice from federal reserve friend. Can you share any of that advice please? Like loan terms, types? Im looking at commercial land and properties lately too, just not in CA.

@FortwayeAsFuckJoeBiden,

This mainly relates to commercial loans. When you buy a non- or underperforming asset/building that doesn’t generate adequate income for a 75% LTV, you ask the bank for a bridge IO (interest only) to perm (permanent) loan.

Let’s say you need 1 year to stabilize the asset, you ask for 18-24 months IO with a 3-5 year ballon payment to give yourself some buffer. Once the asset is stabilized, you can convert it to a perm loan, which is typically a 5/1, 7/1 or 10/1 ARM loan with 30-year amortization.

Example: Buy a $1M building with only $5k/mo of income. After $3.5k of monthly expenses, net cash flow is $1.5k. 80% allowed for debt service is $1.2k. Max loan amount is $240k. You need to bring in $760k to close the deal.

You propose/request for a 75% LTV (Loan to value) IO bridge to perm loan with reserve, which will be released once the DSCR (debt service coverage ratio) has been achieved.

Debt service on the $750k IO loan is $30k/year at 4% interest. 18-month terms = $45k to be set aside in the bank’s reserve account not to be touched. At 24 month = $60k. Your total cash outlay is $295k to $310k vs. $760k

Once your net cash flow is greater than $3,125/mo, you ask your property manager to send the monthly statement to the bank, they will release the reserve immediately. $3,125 is 1.25 x $2,500/mo of debt service.

If you can achieve $4.5k/mo net cash flow within 24 months, you can ask the bank to convert it to a perm loan. If you can achieve $6,250/mo in cash flow within 24 months, you can ask the bank for a cash out refinance loan of $1M.

Note: the interest rate is fixed for a 5-, 7- or 10-year perm loan. Interest rate is float/adjustable on a bridge loan. It’s normally prime + 0.75%. Today’s prime rate is 5.5% so that’s 6.25% interest.

There are other terms that you can ask the lender to carve-out or modify like pre-payment penalties. You can also ask for an earn-out like for each milestone of cash flow that you achieve, the lender would give you $50k or $100k of equity so you can achieve higher cash flow, etc….

Basically, whenever I have a scenario, I would run it by him. He’ll share how he would structure it and pitch it to the lender. Hope this helps. I’ve learned so much this past decade thanks to generous people who are willing to share their knowledge….all for free.