What my very successful commercial investor client/mentor told me...

General Real Estate Investing
1

I had lunch the other day with a multi family and commercial investor who buys from me for his company. We talk a lot about real estate investing and he shares his experience with me.
His portfolio:

6 - 4 unit apartment building
5 - Commercial & Industrial warehouses that are leased and cash flowing well.

I asked him what he thought about purchase price and cash flow, he said “i dont really care about purchase price and cash flow”, " I mean I negotiate down what I can but I dont sweat it if i dont meet a certain price point"

He doesnt just randomly purchase properties but his business funds his purchases but he said it matter if it cash flows or not because once he pays it off then he has that passive cash flow for the rest of his life. He told me even if im cash flowing negative a couple of hundred use my personal income to cover it. He also said if I really want the cash flow to refi after a year or two and I might get something back each month. He doesnt really buy for cash flow now but for the cash flow when he has paid it off.

What do you guys think?

2

Wow…entirely not my way of doing business. So that negative $200/mo he’s telling you about is a used car payment. That’s if everything goes well. That probably doesn’t count when the A/C unit goes down, there’s an extended vacancy, refrigerator goes out (throw in any problem you can think of here), etc. The point is that’s really a dead end strategy. At some point, your ability to cover things with your income will come to an end. How many of those used cars could you afford to have out in your driveway if you had $200 payments on them each month and they weren’t making you any money? Maybe two. Maybe ten. At some point, you’ll run out of income for that.

If you keep buying alligators, eventually they’ll eat you alive.

I basically operate counter to what your friend does. I could give a crap about price appreciation now or in the future. I only care about cash flow. I care about it now and in the future. I only buy places that will cash flow…period. I’ve got cash flow now and I’ll have it in the future. My overall average is having rental income at a level about 2.5x the monthly mortgages. Plenty left over for rainy days. It will only get better as these properties get paid off.

3

If there is appreciation, then this is an option. If not, this is an enormously unsophisticated way to invest.

Your friend ignores the fundamentals that any half-way serious investor is going to consider.

That said, any investor will want either a bargain in terms, or a bargain in price. Most investors prefer a bargain in price, so that there are more exit strategies available in both the short and long terms.

Meantime, a bargain in terms usually means there’s a LONG gestation period to actually profit from the transaction.

Your friend sounds like a lot of retail buyers I sell to. They’ll buy because it’s a chance to own a nice home, not because it’s an investment. In fact, unless your residence is being paid for by a 3rd party (renter) your house remains a liability, not an asset, apart from paying off the mortgage in 30 years. It’s at best a forced savings account.

Sophisticated investors don’t buy wrong, just because they can afford to overcome negative cash flow. The negotiate prices and terms that at the very least produce some minimum return.

Returns can include a variety of elements, not just purely cash flow.

There’s…

  • appreciation
  • tax treatments
  • loan pay-downs
  • forced appreciation with better management, upgrades, or increased marketing
  • market repositioning
  • improved cash flow management
  • zoning changes
  • you name it

If none of these are considerations, then I would be suspicious about the overall quality of the deal, and question why it’s wise to buy it.

The axiom that we make a profit when we buy, and realize the profit when we sell, stands. Anything else reflects either a gamble, or lack of sophistication, or abject stupidity. :anon

4

So are you saying your maximum mortgage payment is around $600 and your mortgages are under $100,00? Are your gross rents around $900 pm (Im just ball parking my guess)

5

Let me rephrase what he told me, he does look at cash flow, but not against the debt service but the purchase price. His business provides him with lots of extra cash that he can aggressively pay off these properties and THEN collect the cash flow as income because he owns the property free and clear. That what he told me to do, with my personal income, to purchase a property and dont try to get cash back out but pay the balance off as soon as possible with my job. When its paid of then live off that income and go to the next property.

6

So effectively your friend uses the, “Bury Multiple Down Payments In One House Until It’s Paid Off” formula?

You know, to each his own.

I like the “Have My Renter Pay Off My House” formula. This way, I just have to buy right, and then let the renter slowly give me all my equity over time without having to “invest” hundreds of additional down payments in order to pay off my house.

My ROI is much higher.

With fear of sounding mean, your friend doesn’t know how to invest correctly, and is evidently too lazy to learn better how, so he makes up for his laziness and ignorance by personally paying off his houses with his own sweat and equity instead of letting the renters do it all for him.

It would be much more intelligent for your friend to buy properties that cash flowed, and instead of investing more cash in the houses he already owned, bought more cash flowing houses.

It just occurred to me, that if your friend has enough cash left over from his j.o.b. to pay off his rentals, he’ll probably not own enough rentals to replace his income at retirement in the first place. So not only is he sacrificing his current standard of living to pay off rentals, but he’s sacrificing the leverage necessary to maintain his standard of living during retirement.

Of course this all assumes he’s attempting to prepare for retirement. Maybe he just wants a source of spending money when he’s old. I don’t know.

7

hmm, im not sure, but that is a good point.

8

Let me answer your question about our cash flow. Our business model and standard deal is as follows:
Find a house that we’ll have about 25k or less in by the time it’s rent ready.
Payments will be about $250/mo for around 10 yrs.
Rent amount will be about $550-625.
We have done tons of deals like that or better.

I do agree with trying not to pull the money back out but rather pay the property off faster, but I try to do that with cash flow from all of the properties collectively. I try not to supplement the business with personal money…not saying it hasn’t happened a few times when we’ve had lots of things going on but I try to let the business take care of itself. We leave the money in there so the business can grow. I’ll pull money from it later. For now, I want it to grow. We live off the money I make from my day job. In a few years, the rental money will be my only source of income. If you buy right, you won’t have to supplement the rent to pay down the balance.

9

so you buy houses that are under $70,000, put $25,000 down and finance the rest? @ Justin

10

No. I have yet to pay over 30k for a SFH rental. I’ve paid as little as 2k, but most of them are about 15-20k each. I put little down and finance most of the amount. If you can find lots of deals like that which will rent for $500 or more, you’ll make money.

11

You can find run down shacks in 5th, 6th, 9th ward in Louisiana for around $1500 to $2500 per SFR.

12

I’m sure there’s also deals like that in Detroit too. New Orleans is number one on my list of places to never live though…

13

Detroit is a lot worst then new Orleans but who cares as long as you renting them out. We rent out our SFR in the hood in Watts California never a problem. We just rented our last one to a guy wearing a pink hat with a feather in it and driving a pink Cadillac and all our renters pay $500 per month more then market rate.

14

Cash flow!!! That’s what it’s all about. Quick money is great but cash flow pays the monthly bills. I been in this game for almost 20 years and up until recently didn’t have that figured out. I loved fast money, wholesale, rehab, new construction SFR. Done it all, but when the check is spent, what pays the bills next month. CASH FLOW is all I want from now on. Looking for apartments now. I flipped a 16 units last year. Wished I could have kept it but needed the equity. Now I’m looking for a buy and hold complex. May have found one. Only thing with apartments is that financing isn’t as available as with SFR.

15

Apartment financing is available if you have 30% cash down, and 6 months reserve.

16

“DUH?” :shocked

17

I know most investors looking for 100%.

18

The investor is not investing for income, he is soaking up surplus cash his primary business is throwing off. He could park the cash in a bank and it would earn next to nothing and inflation would likely win. If the same person buys real estate, he gets to earn a return on his cash that is higher, it is largely inflation hedged and not likely to be mismanaged by a more passive investment (stocks and bonds). Control and an inflation hedge.

It is a good strategy for someone who has surplus cash flow. What might be also going on (a guess) is the primary business keeps him busy so he does not want to work the property side any harder.

19

i know this is a rather old thread, but i’m finding i am doing something similar.

i don’t have time to find 2% deals and whatnot. i can, in my market, buy a place for $60k, put $5k - $10k in it, and rent it for $1200/mo, and it’s pretty automatic.

i only have 2 properties, as i have a day job for my day life, but i’m planning on buying at 5 to 10 more in the next couple of years. if i had to live off the SFH rents today (ie, run a business), I’d do things differently. However, as an investment vehicle, I’m fine with making less cash flow. The most important thing for me now is to break even while someone else pays the mortgage (and taxes and expenses.)

One day there won’t be a mortgage, rents will be higher, and I’ll still have the passive income.
In 20 years, if i have 10 units paid for (either these or others), my kids will be out of college, my needs will be significantly less, and unless rents go DOWN, I’ll have $10k - $15k a month in rents…

The one thing I can’t make is more time.

People invest in different ways. Donald Trump wouldn’t waste his time with SFHs… but people make money with them.

20

Why not try to purchase a small commercial multifamily type building like a quad or up to 8 units you could probably get one wholesale at about $250-$275K depending on the area and condition of the property etc. which is the price of the average home in Atlanta according to statistics. You could force appreciation on the property (something you cant do with residential property) and once you get the property satbilized with occupancy up to 80-85% you can pull cash out of it and do it again. All with no personal guarantee the weight is placed on the performance of the property and 1-2 rents would cover the mortgage depending on the interest rate and operating expenses. I find the property for the investors I work with and secure the funding which makes the process fast and efficient…

Not only does someone else pay the mortgage but you will have extra to the good. Cheers!!!

:beer