smart real estate investing
TRANSCRIPT
Rehabbing, Historic Restoration, and Creative Financing
TREIATiffany Elder, MBA8/30/2012www.tiffanyelder.comwww.coralbuilt.com
Disclaimer The information in these pages is for
informational purposes only. The Author makes no representations or warranties, either express or implied regarding this information. While every effort has been taken to ensure the accuracy of this information, the content is naturally subject to change. The reader agrees that in no event will The Author be held liable for any direct, indirect, or consequential damages arising out of action taken, or not taken, related to the information included herein.
About Tiffany
Former software engineer Realtor & Managing Broker of Paradigm
Properties NC Licensed General Contractor Full-time in real estate since 2003 Investing activities include rentals,
wholesaling, rehabbing, historic restoration, condo conversion, shortsales, new construction (residential and commercial) , tax credit projects, private lending
What we’ll cover today
Rehabbing How to Finance How to Pick ‘em How to Fix ‘em How To Sell ‘em
Bonus: Historic Restoration
No pics…just knowledge!
To start…
What’s your goal? Rehab and resell Rehab for rental
Level of repair you’re willing to take on Risk versus reward tradeoff
Financing source Determines the type/condition of the
property you will buy
How To Finance ‘Em
This comes first!!! Cash Conventional financing (“livability rule”)
Floor coverings, windows, etc.. Can limit the properties you can buy Advise your lender of your plans (short-term) Higher rate versus points
Hard money lenders/private lenders Self-directed retirement accounts Commercial lenders ???
Self-Directed IRA investing Removes the limitations of traditional
financing Leverage your retire accounts to fund deals
More stable returns Secured by real estate Faster retirement account growth Must follow SEC guidelines
No self-dealing allowed Must use a qualified self-directed account
custodian
Process
Roll funds over to a self-directed IRA custodian to fund your account
Determine the type of investment Send a Letter of direction to
custodian (Custodian will not advise you during
the transaction. They only manage the account)
Purchase/Fund the deal
Private Lenders Best candidates: Individuals/friends with funds in
retirement accounts or IRAs that are losing value They serve as your “bank” and you pay them
interest. Depending on the type of account used, the
interest they receive may be tax free Same process as for your personal self-directed
account, but… Always get proper insurance
(renter/vacancy/fire/GL/etc…)and record the deed of trust/promissory note
Example Your purchase price is 50k 15k in repairs 5k misc. costs (closing costs, utilities, etc…) ARV is 100k Structural repairs needed, therefore conventional financing won’t workSo… You borrow 70k from your private lender at 10% for 1 year Secured by the property at a safe LTV After completion and refi/sale, your “bank” make would not s 7k and
you are left with 23k equity in a deal that you would not have been able to do otherwise
WIN-WIN is important Higher risk deals require a higher return for the “bank” and vice-versa. Use funds for residential, commercial, land development, company
purchases, etc… Avoid prohibited transactions and self-dealing
How To Find ‘Em
Wholesalers FSBO County sales Realtors/MLS* Craigslist* Newspaper* Pre-foreclosures
*Look for key terms (handyman special, needs work, hidden gem…)
How To Pick ‘Em Ugly homes in pretty neighborhoods Homes in need of updating/cosmetic repair Desirable location (even if it is a lesser home) Close to shopping/amenities Strong school district Path of revitalizations Tax-friendly districts LOCATION, LOCATION, LOCATION You need to be where buyers/renters want to
live ???
What to Avoid Functionally obsolete
Walk through bedroom to get to kitchen 5 beds/1 bath Anything that sticks out like a sore thumb
Extensive structural work (unless you have the stomach for it) Undesirable location (harder to retail)
Near utilities/railroads Far from conveniences/amenities buyers want Weak school district (especially for larger homes) Very busy streets
“Weekend additions” Flat roofs (unless you are familiar with these) Steep driveways Environmental challenges (oil tanks, lead paint, asbestos, etc…) ???
Estimating Value
County property/tax sites Zillow/Cyberhomes/Trulia/Tota View Google maps Drive-bys (know your competition) Realtor CMA Proprietary tools (CRS, etc…) ???
SAFE formulas(for homes with an ARV up to 200k)
Formula #1(ARV*70%)- rehab costs – 5k = max purchase price
BUT don’t miss out on formidable opportunities just because they don’t fit this formula.
Formula #2ARV-rehab costs-profit-10% of ARV =max purchase
price
(10% covers brokerage fees, soft costs, buyer CC, etc…)
The Numbers
ARV = $150,000Home needs 20k in repair
Formula 1: Max purchase price = (150k*70%)-20k-5k =$ 80,000Formula 2:150k-20k rehab-20k profit-15k =
$95,000
Due DiligenceInvestigating these will help to ensure that your estimated
costs are on target:
Inspections (home, pest, etc…) Repair estimates Violations/lis pedens against the home PRIP violations Flood zone Zoning (especially in multifamily properties) Permitted use LOCAL Historic district (GIS) Unpermitted work Consider taking state home inspector’s class if you plan to
rehab often ???
How To Fix ‘EMPoints to focus on in your rehabs:
Structural and Systems Kitchens and baths are key Curb appeal and first impressions count (15 second
rule) Give it character WOW items (focus in a few…buyers won’t remember
all of them) Learn the norms in the area and make it slightly
better BUT …Don’t overbuild
How To Fix ‘Em (continued) Build your team GC versus Handyman
Size of the project (NC $30,000 threshold) Permits Multiple “parts” to the project Your experience Hands-on vs. hands-off Don’t let cost be the decision-maker ▪ Contractor cost▪ Contractor experience and supplier discounts
REMEMBER… Your time is valuable You get what you pay for
Working with contractorsIF you choose to work with a
contractor: Get references Check license status Check insurance (call yourself) Work agreement in writing Lien waivers (you’ll need this when
you sell) EPA RRP Certification
Saving on material costs
Habitat stores Large discount suppliers
Surplus Warehouse IKEA Historic salvage warehouse
WindowWorld Local investor references (TREIA,
etc…)s ???
To permit or not to permit? Beware of tradesmen that tell you your project
doesn’t require a permit. Check with the city/county/municipality if you
aren’t sure. Certain items require permitting
Plumbing, electrical, HVAC, decks, structural $ amount of project may require a permit
Not pulling a permit can cost you later When the county inspector drives by and notices work
being done onsite. When your buyer’s Realtor/ home inspector does their
research.
EPA Lead Paint (RRP) Laws Pre 1978 housing requires additional attention when renovating If you are disturbing an area greater than 6 sqft of the
interior of the house or 20 sqft of the exterior of the house You must give a copy of test results to homeowner or tenant
with in 30 days of test. You must give the homeowner or tenant a pamphlet advising of
the hazards of lead base paint. They must sign in recognition of pamphlet.
You must keep documentation of test in file for 3 years. You must be a certified RRP Renovator to oversee the removal.
(Make sure your repairman/contractor is certified). Follow the rules (these apply to landlord/maintenance work too) Up to $30k fines PER DAY IF YOU WILL REHAB OLDER HOMES REGULARLY, GET
CERTIFIED
How To Sell ‘Em
FSBO Pros
Costs less Works well in high-demand areas State disclosures still required
Realtor Pros
More visibility (Realtors, buyers, and several online venues through MLS)
Assistance with the negotiations and closing process Good cop/bad cop filter
Selling ConsiderationsBe aware of changes in financing
90 day FHA rule Verifying your repairs for your buyer’s lender
Be aware of limitations at time of purchase Deed restrictions
Make it appealing to buyers Quality work Incentives
Make it appealing to Realtors Good condition Incentives
DO
Buy right (make your money when you buy)
Price to sell Keep landscaping in order while on
the market Use safe numbers
Conservative estimates for resale Exaggerated estimates for rehab costs
DON’T
Renovate the home to your personal tastes
Overbuild for the area Stray from your budget (make tradeoffs) Overlook the small stuff (switch plates,
knobs, etc…) Forget about curb appeal Forget to consider soft costs (utilities,
insurance, buyer CC, prorated expenses, etc…)
Historic Restoration Tax credits
30% 20%/20%
To qualify (for income-producing property) Contributing home must be in a NATIONAL historic
district Minimum rehab = adjusted basis of the property MUST follow the Secretary of the Interior’s Historic
Restoration Guidelines Must follow hold-time requirements
Visit NC State historic preservation website for more info
Process
Qualify the property Application
“Before” photos Project description
Fees Rehab Finalize application
“After” photos
Restoration no-no’s Vinyl siding Non-conforming replacement windows Removing plaster Changing floorplan in main rooms Changing exterior on street-side elevation
Note that not all project costs are eligible for tax credits New construction Landscaping Etc…
Sample Project (small)
$30k purchase price (assume purchase price = adjusted basis) , $30k renovation, $5k misc. costs
$100k ARV…. $65k total project cost 40%*30k renovation costs – $12k tax
credits Realized project cost after tax credits=
$53k
Another way to look at it… You have a… 100k home with only 65k invested 35k equity $750/month rent $500 PITI
=$3000 annual cashflow $12,000 tax credits(Historic tax credits can minimize or eliminate
your tax bill! Chat w/ your CPA for restrictions)
Sample Project (large) $50k purchase price, $125k renovation $325k ARV…. $175k total project cost 40%*125k renovation costs = $50k tax credits Property rented for $2100/month PITI = $1200 per month
Cashflow = $900/month ($10,800 annually) Equity = $150k $50k in tax credits
Questions?