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Author Topic: Location vs cashflow  (Read 21344 times)

Offline oldmandate

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Re: Location vs cashflow
« Reply #15 on: September 07, 2007, 11:48:31 am »
Mike,

I think it goes back to what I started this topic with.  It is supply and demand.  If you have a nice property, in a nice location then the demand for people wanting to pay top dollar for it is there.  If not, then you have to make it attractive.  All I can say is this...there is absolutely no way anyone would sell you this property for $60K (that would be the cost of the land) and (at least where I am) no way will you be able to rent a $60K property for $1400/mo.   None of these scenarios will fit my market.


Offline Rich_in_CT

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Re: Location vs cashflow
« Reply #16 on: September 07, 2007, 12:11:06 pm »
Mike,

I think it goes back to what I started this topic with.  It is supply and demand.  If you have a nice property, in a nice location then the demand for people wanting to pay top dollar for it is there.  If not, then you have to make it attractive.  All I can say is this...there is absolutely no way anyone would sell you this property for $60K (that would be the cost of the land) and (at least where I am) no way will you be able to rent a $60K property for $1400/mo.   None of these scenarios will fit my market.


None of these scenarios fit ANY market in most cases, only the truly desperate will let a property go cheap and most of the time this means there will also be at least some rehab to be done.  That's why you hear Mike say he is buying at 50-70% ARV, in most cases the properties are worth far more but he is getting them cheap due to certain factors.  Factors include:  light to extensive rehab needed, burned out landlords, nightmare tenants, divorce, inherited property that the beneficiaries want rid of to get a quick payday, owner retiring by choice or due to illness, etc.  99 times out of 100 the property would be sold for FMV, Mike is only buying that 1% and passing on everything else as it does not make good business sense to him.

For the record I wouldn't touch $135k property with $1200/month gross rents with a 15' pole and rubber gloves on.  I see a lot of people going after properties with 1% of the purchase price in gross rents per month and I think that's nuts.....this property was 0.89% a month.  No thanks, I pass on a million "deals" like this to get just ONE good deal with 2% per month.

Offline jparkx1

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Re: Location vs cashflow
« Reply #17 on: September 07, 2007, 12:26:32 pm »
It's hard work to find those deals even as experienced investors.  As a beginner, how would you being to search those?

Offline Rich_in_CT

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Re: Location vs cashflow
« Reply #18 on: September 07, 2007, 12:29:19 pm »
It's hard work to find those deals even as experienced investors.  As a beginner, how would you being to search those?
Go to your local REI meeting and search out landlords that want out and are willing to do anything to stop the pain.

Offline Frank Chin

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Re: Location vs cashflow
« Reply #19 on: September 07, 2007, 01:25:21 pm »
It's hard work to find those deals even as experienced investors.  As a beginner, how would you being to search those?

Not evey investor is the "no down", "must make that cash flow" type investor. As others have said, it's supply and demand, and often, too many dollars chasing too few properties, in CERTAIN areas..

Give you a good example. A relative of ours is a doctor, with a banker wife making 250K/year. Had a 3-family, bought at 200K, and paid off in less than 10 years, at which point it was worth 400K. The property is in SanFrancisco.

I recall he nets around 25K to 30Kyear after the property was paid off. His BIG problem. The incremental taxes on the Federal, state and local levels are killing him. He's not going to quit his job as a doctor, nor his wife as a banker.

Solution??

Sold the place and did a 1031 into 2 SFH, TOTALLING $400K taKing on a $200K mortgage each. Object - take on enough debt to have no cash flow.

Why??

He's killed with income taxes on the rent. He has these  SFH's for seven years now, and as of two years ago, reached the lofty price of $1MM each. If he sell's, and pays the taxes, it'll be at the low capital gains rate.

Taking the cash flow, if he made $20K/year, it's $10K gone in taxes, netting $10K. Is he ahead taking NO CASH FLOW??

taking a look at the numbers, he'll pocket $10K after taxes in cash flow from keeping the $400K free and clear house, and pocket $70K in the last seven years.. Having two SFH with no cash flow, he made $600K each for a total of $1.2MM appreciation before taxes, and pay a realtively low capital gains rate if he sells.

What effect does investors like these have on folks looking to make some cash flow. They create a huge demand, pushing prices up, and they don't care about cash flow.

Another problem is foreign investors coming in invests in the same way, but many shun getting mortgages.

So to do cash flow investing, you'll have to do it in areas where these types of investors avoid, or don't know about. An investor I met, who lived in Manhattan years back oriiginally invests in Manhattan, NYC, but moved on to White Plains NY some 15 years ago.

His theory?? As he's also a broker, he said "folks from Japan and Hong Kong all heard of Manhattan, no one has yet heard of White Plains yet".

Afer I make some investments up there, I'll then tell them about it.
« Last Edit: September 07, 2007, 01:39:43 pm by Frank Chin »

Offline aak5454

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Re: Location vs cashflow
« Reply #20 on: September 07, 2007, 02:30:11 pm »
great post by Frank.

it nicely illustrates the fact that it comes back to objectives and constraints.  Different objectives (e.g.cash for income or not worrying about current cash flow but long term appreciation) and different constraints (i.e. high tax situation, limited amount of time due other occupation(s), etc) will ultimately mean different styles of rental property investing.

interesting topic....

Offline redefining

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Re: Location vs cashflow
« Reply #21 on: September 07, 2007, 04:00:09 pm »
Go to your local REI meeting and search out landlords that want out and are willing to do anything to stop the pain.

Or simply go to your local courthouse and get records of all evictions filed in the last month.  Contact each landlord who has had a bad time with tenants and make them an offer to 'take the problem off their hands'.

You'd be surprised just how many bites you'll get.

V

Offline Rich_in_CT

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Re: Location vs cashflow
« Reply #22 on: September 07, 2007, 05:01:38 pm »
Go to your local REI meeting and search out landlords that want out and are willing to do anything to stop the pain.

Or simply go to your local courthouse and get records of all evictions filed in the last month.  Contact each landlord who has had a bad time with tenants and make them an offer to 'take the problem off their hands'.

You'd be surprised just how many bites you'll get.

V

That's a good trick too, I forgot to mention that one.  Far more effective than doing direct mail to ALL landlords, much better results targeting ones having problems at this time.

Offline oldmandate

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Re: Location vs cashflow
« Reply #23 on: September 08, 2007, 12:29:23 pm »
I think there has been very good analysis by Frank and others on this topic and I don't want to beat a dead horse here but some of the recommendations that keeps coming up that I have a hard time believing are:

1) Go to your local REI clubs and seek out desperate sellers.
2) Find people that have inherited property and are anxious to sell.

Pardon me for being blunt about this but do you guys thing people are stupid?  If I was a landlord and I was sick of it do you really think I give my property away?  If I inherited a property do you really think I'm going to be stupid enough to sell it at %60 to %70 discount when I know Iíll have people lining up at %5 below market value?  Desperation sets in when thereís not much demand for what you are trying to sell.

We novice investors have provided some examples of our novice buying.  May be some of seasoned guys on this board can provide us with examples of some of their purchases...  Please include any rehab costs after the purchase as well.

Thanks!

Offline redefining

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Re: Location vs cashflow
« Reply #24 on: September 08, 2007, 03:19:56 pm »
the return on rentla property is composed of two pieces: cash flow and appreciation. 

No, actually 3.  Depreciation can also be considered a value income on properties for those needing a tax break.

V

Offline propertymanager

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Re: Location vs cashflow
« Reply #25 on: September 08, 2007, 05:52:48 pm »
Quote
Pardon me for being blunt about this but do you guys thing people are stupid?  If I was a landlord and I was sick of it do you really think I give my property away?  If I inherited a property do you really think I'm going to be stupid enough to sell it at %60 to %70 discount when I know Iíll have people lining up at %5 below market value?  Desperation sets in when thereís not much demand for what you are trying to sell.

Oldmandate,

No, I don't think people are stupid.  Well, in all honesty, some people are stupid but that's another story.  However, in this context the issue isn't being stupid, it's being desperate.  What makes a seller desperate?  STRESS!  A person buys a rental or maybe several rentals without understanding the business.  Before long, it is evident that they are losing money every month.  This puts pressure on them which builds month by month.  Then, they encounter the tenant from hell.  On landlord that I bought several properties from had a convicted felon that wouldn't pay the rent and another tenant that not only wouldn't pay the rent, but he just about disassembled the other half of the duplex and sold it for scrap.  The furnace was gone, the copper piping was gone, the kitchen cabinets were stolen, etc, etc, etc.  She was not only desperate, she was literally sick.  She told me that she couldn't sleep.  She would do ANYTHING to get rid of the nightmare.

Who is going to pay 5% below retail for a property like that?  NO-ONE!  I bought it (a duplex) for $45,000.  Market value for similar duplexes in our area are $90K to $110K (one side is 3 bdrm, the other side is 4 bdrm).   What did it cost me to fix the place?  Very little!  I put in electric baseboard heat, which is what everybody wants now in our area.  The heaters and wiring cost a few hundred dollars.  I replaced the stolen water lines with PEX (less than $100).  I painted the interior and put new Berber Carpet in 2 rooms (about $400).  I got some used cabinets (in excellent condition) for free from someone that was remodeling.  To fix both sides, it might cost me $5,000.   That means that I got this property for 50 cents on the dollar!

I have people say all the time that they can't find properties at a big discount.  However, when I ask them what they've done to find them, the answer is almost always the same  -  ALMOST NOTHING.  Good deals don't fall out of the sky and land in your lap.  In the beginning, you've got to put in the work to get them. 

WHAT HAVE YOU BEEN DOING TO FIND GREAT DEALS?

Mike
« Last Edit: September 08, 2007, 05:56:03 pm by propertymanager »
www.1MinuteToRentalPropertyRichs.com 
This No-Hype, No-Nonsense Book is a step by step course in making money and building wealth with rental properties!  Everything from buying properties at a discount to dealing with terrible tenants.  Now In Paperback!

Offline jparkx1

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Re: Location vs cashflow
« Reply #26 on: September 08, 2007, 06:18:19 pm »
Mike,

How did you come across this landlord and learn of her property?  If possible, could you tell me about the first deal you did and the methods you went through to locate it?

Thanks,
James

Offline propertymanager

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Re: Location vs cashflow
« Reply #27 on: September 08, 2007, 07:22:52 pm »
I met this particular one at my REIA.  She was there desperately trying to unload her rentals and I was happy to oblige.  My first traditional rental was also a desperate landlord and my realtor found that one for me.  It was owned by another landlord who didn't screen the tenants and a drug dealer really trashed the place.  Every door was broken; every window was broken; and every wall had a hole in it.  There had been a drug bust and the owner was at his witts end.

There are a BUNCH of ways to find great deals and they all require getting out of the house and meeting people.

Mike
www.1MinuteToRentalPropertyRichs.com 
This No-Hype, No-Nonsense Book is a step by step course in making money and building wealth with rental properties!  Everything from buying properties at a discount to dealing with terrible tenants.  Now In Paperback!

Offline Funder

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Re: Location vs cashflow
« Reply #28 on: September 08, 2007, 11:05:01 pm »
Itís good to see this kind of exportation by the investors on this site.  Kudos to the original post.  I screen my tenants very carefully and Iím pretty uncompromising.  Iíve found that 3/2s and 4/2s do a lot better from a maintenance standpoint because the tenants for these properties tend to be families who move out in the name of buying a house, and they want their cleaning and security deposit back.  Iíve also found that nice properties in nice neighborhoods have almost no vacancies.  I've also found that operating expenses go up as buildings age.  Iíve never worked with apartment buildings, but Iíve been told that overhead costs on apartment buildings are higher than single family homes and duplexes.
I believe that we make choices based upon our options.  Mikeís deals have always left me with a question.  Here is how the scenario plays out for a rent=2% of property value:
Cost                   $50,000
Rental income:    $1,000
Letís assume that the deal was found for 50% of FMV.
Do tenants have a choice between buying a $100,000 home for $725 PITI, or renting the place for $1000 and choose to rent?  WTF?  WHY????  Are they stupid?  Are they desperate?  Do they want to move?  Do they fear losing their jobs?
Now, I have to confess, when I bought a Kiyosaki video and sat down to watch it, I almost ripped my TV out of the wall and threw it out the window while screaming explicatives.  How could they take me for such a fool?  Then I looked at the price of real estate in Arizona, and realized that they werenít BSing me.
It must just be the economic environment or something.
Go ahead rip the cabinets out, rip out the furnace, throw appliances all over the front lawn, break every window and every door.  In my neighborhood, if you put the place on the MLS for 75% of ARV minus the expense to repair it, It would go in a month.  There would probably be people lined up just to get it because real estate is so expensive, a lot of people want places that need a lot of repair.
Iíve been to my REI club, and property management classes and asked agents for pocket deals.  I have never seen a property for 50 cents on the dollar.  The closest I have seen are homes that are practically tear downs that, after an ambitious person did all of the work themselves, they could come in about 75 cents on the dollar.  The lowest GRM that Iíve seen in my area (now Iím excluding 3 million dollar apartment buildings) went as follows: 595 sq/ft 2/1 for $120,000.  Materials to turn this thing around would be $50,000.  Rents would be $1100 to be kind.  I havenít  looked at hundreds of properties Iíve looked at thousands.  I really wish someone would come on this site and tell me that Iím wrong, that I didnít consider this or that.  I will also mention that I know California real estate investors who are buying property in the rust belt as fast as they can.  They run the numbers in that area, and laugh until their faces turn red.
« Last Edit: September 09, 2007, 12:25:03 am by Funder »

Offline propertymanager

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Re: Location vs cashflow
« Reply #29 on: September 09, 2007, 06:30:56 am »
Quote
Do tenants have a choice between buying a $100,000 home for $725 PITI, or renting the place for $1000 and choose to rent?  WTF?  WHY????  Are they stupid?  Are they desperate?  Do they want to move?  Do they fear losing their jobs?

No, the tenants generally do not have a choice between buying a house and renting.  Their only option is to rent.  Why?  Because they consistently use poor judgement and make poor choices.  They can't manage their money and they throw away their money on alcohol, cigarettes, child support, alimony, big screen TVs, etc, etc, etc.  When you do stupid stuff like that, you can't get a loan for a house.  In addition, many of these people who did buy a house with the relaxed lending standards of the past few years have already lost them for the same reason.  That is good for landlords because these people make good renters.

Also, the true cost of homeownership is higher than just PITI.  The property must be maintained; the grass must be mowed; there are still capital expenses, etc.   Many of these people have serious character issues and won't take care of their property.  If you live like a pig and have pigs for friends, it doesn't take long for their house to self-destruct (the same thing they do to rentals).  That is the reason they are tenants and deserve to be tenants.   

I'm currently reading "The Millionaire Next Door", which is a book about the reality of being a millionaire in the United States.   The book is written by a couple of researchers who have conducted exhaustive studies on this issue.  What do real millionaires look like?  Boring.  The typical millionaire is:

1. in his 50s (or older)
2. self-employed
3. owns a boring business (like rentals)
4. has a total annualized income that is less that 7% of their net worth
5. are married and have only been married once
6. have at least a bachelor's degree
7. rarely sells his equity investments

This is a very interesting book and provides a good explanation of how people become millionaires.  In my experience, that description is right on, although some of my friends became millionaires in their forties.

At any rate, contrast that description to the typical renter who has no net worth; is not married (and typically chooses to simply shack up); does not have a college education; works are a relatively low income job (if he works at all); wastes his discretionary income on alcohol, cigarettes, and big screen TVs, etc. 

Quote
Go ahead rip the cabinets out, rip out the furnace, throw appliances all over the front lawn, break every window and every door.  In my neighborhood, if you put the place on the MLS for 75% of ARV minus the expense to repair it, It would go in a month.  There would probably be people lined up just to get it because real estate is so expensive, a lot of people want places that need a lot of repair.

If you live in one of the bubble areas and prices have not yet come back to reality, then I would not get into the rental business.  If the deals aren't there, do something else.  Real estate is NOT the be and end all of the world.  It is simply one of a million ways to make money.  If it doesn't work in your area, then the choices are to 1) invest elsewhere (difficult), 2) move, or 3) do something else. 

Mike

www.1MinuteToRentalPropertyRichs.com 
This No-Hype, No-Nonsense Book is a step by step course in making money and building wealth with rental properties!  Everything from buying properties at a discount to dealing with terrible tenants.  Now In Paperback!

 




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