Buying a long-term rental property - Posted by Gregory

Posted by GL - ON on July 30, 2003 at 09:37:58:

I don’t think we disagree on a single thing. I know Donald Trump is a big blowhard. He makes it quite plain in his books, that when he started out his ambition was as much to be a famous big shot as it was to get rich. That’s why he chose Manhattan, and why he “networked” so vigorously in the 70’s, to the point where his friends found it embarrassing to watch him humiliate himself sucking up to all the celebrities.

I have a lot of respect for the Reichmanns, much more than for Trump. Also Harry Helmsley but not Leona.

I like to learn from these people and use the good things but not the bad things. You seem to be concentrating on the bad things and using them as an excuse to throw out the good with the bad.

Buying a long-term rental property - Posted by Gregory

Posted by Gregory on July 24, 2003 at 12:59:58:

Hi everyone. Thank you for reading this. I?d appreciate if those of you experienced with a long-term rentals share some of your experience.
I?m thinking to buy an investment property, that I?d keep as a rental for a long-term. Nothing creative, just 10% down, conventional loan. I was looking for newer (up to 10 years old) SHF, typical 3/2/2, good middle-class neighborhood, good to excellent school systems.
So far I was looking for properties in Texas, Florida, and Arizona (I live in San Francisco). After having done some research, it seems to me that those kind of properties would provide slightly negative or breakeven cash flow (which is fine with me, as I?m looking at this to be my retirement income and can handle a little cash outflow).
However, I?m a little concerned since so many people mention that they?re buying properties in the same states, within the same price range, and those properties cash-flow from the day one for up to 400-500$/month. So I think I?m either looking to the wrong kind of properties or overestimating expenses of owning/managing them. Or it may be that properties that cash-flow were bought under market because they?re distressed in some way or another.
With all this said, my main question is:
Is an absence of cash-flow a normal thing in this situation, considering types of properties that I described, states they?re in, and conventional financing strategy with 10% down? Or am I overlooking something, and there?s normally a cash flow from such kinds of properties? And if you did have a cash flow from day one in similar situations, can you please share some details (in terms of income vs. expenses, location, type & purchase price of those properties).
I really appreciate your time, and I think many people that are new to this can benefit from your answers.
Thank you,
Gregory

Re: Buying a long-term rental property - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on July 24, 2003 at 22:53:29:

Gregory–(CA)---------------------

I’d suggest you drop down to less expensive neighborhoods. “… good, middle-class neighborhood[s]… .” typically have poorer cash flow.

You might also consider buying in the central valley of CA or in what I call the “rim” of about 2500-4000 foot elevation in the foothills. You may be able to get a break even or close deal and you will then enjoy the appreciation. If you can use the tax benefits, you may even have a positive after-tax cash flow.

Good InvestingRon Starr*******

Re: Buying a long-term rental property - Posted by Dan-fl

Posted by Dan-fl on July 24, 2003 at 19:43:24:

Most of the SfH I buy need rehab,I buy them for 40Ltv,in good working class areas( no war zones) rehab them,refi them and cash out a small amount ( 5k ) and then rent them for $300 + cashflow per month.Here is the numbers on one of my recent rental deals.Paid 23k,comps out at 60k,small rehab cost 4k,refi and took 5k cash out.My piti is $333 per month and it rents out for $695 per month.I hope this helps.

Re: Buying a long-term rental property - Posted by GL - ON

Posted by GL - ON on July 24, 2003 at 15:35:14:

Single family homes usually don’t cash flow. But it varies around the country.

I understand that in San Francisco and other places in California a single house will have a negative cash flow of hundreds of dollars every month.

On the other hand in Oklahoma small towns you can buy houses for one tenth what they cost in San Francisco, and they cash flow.

Ron Starr is a Californian who has been buying in Oklahoma for several years, for just this reason.

Another thing you need to do is shop for bargains. If a house is listed at $200,000 but you manage to buy it for $160,000 then you have a better investment don’t you?

Since you are not buying the house for love but as an investment you can afford to shop for bargains. If someone turns down your offer, who cares? There are lots more houses where that one came from.

As you have a down payment and can get a mortgage for the rest, your offer will be “all cash” to the seller.

An all cash offer with a quick closing is so desirable, you should get a 20% discount for that alone unless you are buying in a “hot” market. And you shouldn’t be buying in a “hot” market.

There are other ways of shopping for bargains. In some cases a certain neighborhood will be trendy, and very high priced. While you can buy the same house in the next block for a lot less because it isn’t fashionable. Guess what, in a few years the other neighborhood becomes fashionable and the prices go up to match.

Another thing to look for is a town or neighborhood with a problem. They aren’t hard to find, they will be on the front page of the newspaper, with big pictures. Tornado, flood, tire fire, etc etc. Who wants to buy in that town? Nobody. So go in and scoop up a few houses for 25% off, wait until the problem blows over, and in a year or 2 prices will be right back up again.

This is how Donald Trump made his first fortune in New York City, buying bargains in the 70’s when New York real estate was stinko. It sure came back didn’t it? LOL

Re: Buying a long-term rental property - Posted by jorge

Posted by jorge on July 24, 2003 at 22:26:52:

ok. So I have to ask How is it that you get a house that has comps at 60kwith 4k worth of repairs. (paint and carpet??) for 23k? HOw do you negotiate that deal? Besides… just saying… "Well Mr. seller, I know you can sell this home in about a month for 50k easy… I am willing to give you 23k cash right now."
Is that the extent of it. Can you give us the play by play…? and your location would help too.

Thanks,

Jorge

Re: Buying a long-term rental property - Posted by Eric C

Posted by Eric C on July 28, 2003 at 21:18:44:

Hi -

Points well taken. But “the Donald” made his first forune (and the basis for the remainder) by choosing his parents very wisely.

Not everyone has that luxury.

Take care,

Eric C

Re: Buying a long-term rental property - Posted by Dan-Fl

Posted by Dan-Fl on July 25, 2003 at 06:55:05:

If you want to make money doing rehabs,then 40% LTV is all you should be willing to pay.You can do better then that,I bought a 3 bedroom house for 5k and 6k rehab and it comps out at 46k and rents for $600 a month.I bought a two bedroom for $200, no kidding,no mortgage,it needed work and I flip it to another investor for 20k.These houses are all in good areas.Once you find a real motivated seller,then the deals are easy to close.Both of these sellers lived thousands of miles away from these properties for some reason or another.The county was getting on there backs to fix and clean them up.If not they were going to be fined everyday.Hows that for motivation.

Re: Buying a long-term rental property - Posted by Heather_Tx

Posted by Heather_Tx on July 24, 2003 at 23:27:44:

Here in Texas the Cashflow Rentals are to be had also, I wish I had the reserves to be able to buy and hold… and in the future I defintely WILL!

We passed on a deal last night to another investor we know quite well, since it was a cash deal, and well I don’t have the cash =)

Rents for 700/month with tenents that have been there for a few years and would like to stay. Rents haven’t been raised in several years… (Only Paint/Carpet cleaning needed per selller and if current tenet stays not even that)
Asking price was 48K the first time the seller called me a few months ago, we tried to put him into contact with a couple different investors we had talked to that were new but looking for rentals, but nothing happened and I don’t even think they called him. SO he called back last night dropped his price to 43K and we now had an experienced investor interested… and passed on the info.

After a few more rehabs, and some cash reserves, I would have took that in a heartbeat. $300 or so postitive cashflow is nice :slight_smile: and at 70% or below market with only paint and carpet cleaning… AND renters wanting to stay ain’t that bad.

Heather_Tx

This seller had several rentals but was getting rid of this one, and I Think some others. Tired LandLords are a VERY good source of leads. Some just don’t want the hassels anymore.

Re: Buying a long-term rental property - Posted by GL - ON

Posted by GL - ON on July 29, 2003 at 01:33:22:

OK sorry. Didn’t realise that a millionaire builder father was a prerequisite for real estate success. My father was an electrician and my mother was a housewife so you can see I’m one of the lucky ones.

Re: Buying a long-term rental property - Posted by jorge

Posted by jorge on July 25, 2003 at 09:12:42:

Can you tell me what you say to people that sell you a house for 5k? I understand people do some foolish things when they are motivated… but… 5k for a house that only needs 6k in fix up? HOw do you find people like that? I would think that you would have to be on the look out full time… 50 hours a week looking for these people… and where do YOU look. If you can tell me your personal experience of where YOU found these deals, that would be great… thanks,

still learning,

Jorge

Not a requirement - Posted by Eric C

Posted by Eric C on July 29, 2003 at 08:23:56:

Hi -

Don’t mean to belabor the issue, but having wealthy parents certainly isn’t a prerequisite to real estate success. Of course, in the Donald’s case – some might argue that Donald’s father Fred was the real brains behind the Trump fortune. Fred built a real estate empire (little e rather than Donald’s large e) long before the world (or NYC) ever heard of the younger Trump.

Think about it – rather than having to learn any of this RE stuff on his own, Donald had a live-in teacher who even paid him to learn! What a deal.

Not to take anything away from Donald’s accomplishments, but without Fred’s influence I doubt that Donald would have made such a mark on NYC RE.

And I also have to say that although Donald has been successful, he wouldn’t be on my list of role models.

Take care,

Eric C

Re: I say - Posted by Dan-Fl

Posted by Dan-Fl on July 25, 2003 at 11:45:08:

That sounds good,lets sign a contract.You need to look for people in trouble,F/C,divorces,tired landlords,out of state owners,condemn properties.You need to find them before they even know themselfs that they want to sell.Find people in trouble and you will get some deals.Its all public info.

Re: Not a requirement - Posted by GL - ON

Posted by GL - ON on July 29, 2003 at 09:10:23:

Well, obviously.

It doesn’t matter where he learned about real estate investing and business. I use him as an example because he is someone everyone has heard of and is known outside real estate circles.

How many times have you heard the question “does this stuff really work? Can you really make money investing in real estate?” I have seen it at least a million times on this board alone.

The quick answer is “Donald Trump”.

And if you bother to read The Art Of The Deal, you will see that he uses the same techniques of nothing down deals, hunting for motivated sellers,overfinancing etc, that the gurus recommend.

Agree to disagree, more or less… - Posted by Eric C

Posted by Eric C on July 30, 2003 at 08:41:16:

Hi -

I guess we’ll just have to disagree about some things. You’re certainly correct about Donald Trump being well known – both inside RE circles and out.

And I have to admit that the question about whether or not creative real estate techniques work or not does come up a lot.

I even will agree that “the Donald” can be of use as an example to newbies and others, but I have to say that he’s probably not someone most people will be able to emulate (nor will they wish to do so).

But then again, who am I to say?

Yes, I’ve read the Art of the Deal. Quite a self-serving little book, wouldn’t you agree?

But don’t stop there – why not check the last twenty years worth of business press, licensing and permitting records, credit reports, court transcripts, and SEC information (to name just a few sources)?

You’ll find that they’re not so flattering to Mr. Trump.

He has this disturbing tendency not to pay his debts. He doesn’t always plan too well (read that to mean he sucks at operations). And he prefers that everyone believe the fable that he’s done it all by himself.

Not.

You say that it doesn’t matter where or how he learned his methods. I disagree. Yep, it’s more important that he actually uses them than where he got his education, but most people would agree that:

  1. Having a father in the biz makes a big difference;
  2. If your father is extremely wealthy (say, 300 mil or so) even better,
  3. The ability to bounce questions, ideas, and dreams off a person like the elder Trump would certainly be useful; and
  4. The association with the father brought all sorts of wonderful bonuses, such as banking relationships, knowledge of city codes and officials, a skilled contractor base, trusted employees, and a nice fat paycheck – just to name a few.

Hey, you have to hand it to Donald – he’s aggressive. He’s not afraid to take risks (most of the time). And he dreams big.

All of those are admirable qualities.

But again, there’s that little thing about not doing what you promise. You know, treating partners fairly and repaying loans.

One of Trump’s favorite techniques is to borrow so much money that banks have to treat him differently. Better than other folks. In fact, he prefers that they fear his possible default.

But even this is not really original. People, corporations, and central bankers have been doing this for years. It?s called bluffing ? you know, like in poker.

So far, it?s worked pretty well for Mr. Trump. But that could always change ? after all, it has in the past (for others).

Years ago, I personally knew a man who employed the same technique. And, like Trump ? it worked well for him for about 20 years or so. He would borrow so much at small local banks (and regional ones) that they didn?t dare call his loans. He called it his ?evergreen revolver? ? a gun to the head of the bankers making them do as he wished. Year after year, loans would be rolled over once again, payment schedules recalculated, and terms made more forgiving.

As I said, it worked for a while. In fact, he was able to pyramid his debt-built empire up to about 400 million (give or take 10 mil). And, at that level he definitely had a nice lifestyle ? wonderful homes around the world, fantastic vacations anytime he liked, and lots of toys (cars, boats, and a personal jet ? a nice one too ? not as nice as mine, but definitely OK.)

Eventually the banks called his position. The local and regional banks were bought out by a multi-national which decided that even a debt of $400 mil (plus interest) could (and should) be declared in default.

No more homes. No more vacations. No more toys. And a new lifestyle ? one not nearly so enviable.

His take?

He thinks he didn?t borrow enough. That?s right ? he still doesn?t think there was anything wrong about not paying back the money, just that he didn?t borrow big enough to put fear into the heart of the multinational bank.

You know what? He?s probably right.

Ah, well I digress. Anyway, the point is that these techniques you mention do work ? along with many more that most folks don?t even know about. But techniques are merely tools and nothing more. They can be used wisely and well or they can be used poorly in which case they may actually cause harm both to yourself and others.

But as for the Donald, he can be a good example in two ways: positively and negatively. He illustrates what someone can achieve and accomplish (with a little help and knowledge). He also shows us what can happen when one doesn?t honor their commitments.

Maybe we?re all a little like that. I can certainly point to deals that I wish I hadn?t done and to people who were hurt ? either by my action or inaction. In almost every case, it wasn?t my intention to cause them any pain (or myself, for that matter).

But it happened. And nothing I do now or in the future will ever change that fact. But it did change me.

I?ve come to the sad conclusion that most of us only learn through our mistakes (and hopefully through the mistakes of others). These failures teach us far more about ourselves, our strategies, and our world than success ever will.

In that spirit, I offer at least two more examples of people who were once regarded as RE wizards and business geniuses only to discover that there are some mistakes from which you just don?t recover: Bill Zeckendorf (who was slicing and dicing NYC and other metros long before the world ever heard about Trump) and Paul Reichmann (who once believed he was too big to fail ? sound familiar?)

Thanks for the post (and for making me think).

Take care,

Eric C

PS ? as to how bad it actually got for Trump at one point is illustrated by the fact when his casinos were in trouble ? nobody would loan him money. All his renegotiation with the banks hung on his commitment to make the interest payment on time (a token one to be sure). Who finally stepped up to the plate? Daddy. But even he wasn?t completely sure that Donald would be able to repay him so he worked it to ensure that the State of New Jersey would guarantee the loan.

How? By bringing cash into Trump?s casino (3 mil or so) and buying chips. The casino ended the day about 3 mil long and Daddy had 3 mil of chips. At the time, should the casino (Trump) go BK for any reason, the State guaranteed all chips. Slick.

Gives you an idea that Donald may not be the only smart guy in the family.

PPS - there are always techniques that you can learn from people inside the RE biz and from those who deal in other fields. Here?s a link to a post that illustrates that fact nicely:

http://www.creonline.com/commercial-real-estate/wwwboard5/messages/3699.html