I did it!! I did it!! - Posted by Senator

Real Estate Investing Triple Net Leases
1

Posted by HR on March 11, 2000 at 01:20:36:

Doug,

First, I agree that if he sells with lease option, owner financing, (or owner financing with paper discounted and sold) Senator can turn a “single” into maybe a double or triple. We agree.

You are also correct that Senator deserves praise for having done the deal to begin with. I agree that not all deals are “home runs”, and that even a consistent set of singles and doubles can fashion a nice, profitable income stream. Senator, as you noted, did find the deal, negotiate the deal, structure the deal, etc… Most importantly, though, he DID THE DEAL. For that he deserves praise; you are absolutely right.

My only disagreement with you appears to be a style issue. You don’t like to comment on deals unless you have all or most of the facts; I’m not afraid to comment on the information I am given. We have a style difference. The net effect is the same, though: information is shared, and we all may have learned something. Let’s just agree to disagree in our style differences; to each his own.

Since it is my “style” (lol) to make comments based on the information given, I will stick my neck out, Doug, (as is my style) and tell you this: I strongly suspect Senator has none of the back end strategies we discussed. Look at his posts.

His lead post is that he “finally has done a no money down deal.” No money down is a term not exclusively associated with CS, but it is heavily associated with him. This is also the CS newsgroup. It isn’t a wild assumption to begin assuming Senator has a buy and hold strategy on this deal. Next, when proded to give more info, he reveals more details about how he acquired the property. What sticks out in both posts is the negative cash flow, and then his desire later to refinance it.

I strongly suspect Senator wants to keep this deal as a short term (and probably longer term) rental. If these set of assumptions is correct, I submit to you that this “deal” ain’t much of a deal.

The negative cash flow is a problem. So, for me, is using the home eq to get into a deal that doesn’t free up my home eq within 6 months. We both know if Senator had the other back end strategies to begin with, he super-likely would have commented on them from the beginning; you don’t share the profit on a deal and forget to tell how you are going to get there. I’m reasonably sure (and comfortable in my assumption) that Senator intends to buy and hold.

So what’s the net effect from our discussion? If Senator looked at this deal as a buy and hold, he 1) may have learned how some others with more experience than he runs the numbers; 2) He has some excellent ideas in how to turn a single (or a strike) into a double or triple, given some other exit strategies; 3) this discussion proves the importance of continuing to educate oneself about other investment techniques so that you can take what you are dealt and naturally turn it into profit using one of a number of different strategies (instead of trying to cram all deals that come your way into one or two cookie cutters); and 4) this discussion, yet again, highlights what makes this website so valuable: real people can comment on real deals so we all profit more in our investments.

My only wish is that Senator would post and fill in some of the details. Then we both could have some hard data to run off of.

Cheers,

HR

2

I did it!! I did it!! - Posted by Senator

Posted by Senator on March 08, 2000 at 14:21:48:

I finally bought a house with no money down. It is my third house. I will have to operate at a negative cash flow for about a year, then I will be in the positive. Has anyone else ran into a situation like that??

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Here are the numbers - Posted by Senator

Posted by Senator on March 11, 2000 at 09:21:14:

I want to hear all criticism on this. The house is in a good, blue-coller neighborhood. It was built in 1981. It has been rented for 3 years for $550. My strategy, as HR assumed, is to hold. In fact my ultimate goal is to have at least 10 properties all working for me at once.

OK, I assumed his loan (33,000, 17 yrs left) payments are $370 a month. I did a home equity loan ($10,000, 5 years) 215 a month. This will put me at $580 a month. -30 cash flow per month.

I plan to refinance in a year at $40,000 (15 year). This will put my payments at roughly $405 before insurance. I will then be at a positive cash flow and in a position to have someone else pay off the mortgage.

I think thats all the info, so let me know what you think.

4

Be careful - Posted by Rob FL

Posted by Rob FL on March 10, 2000 at 15:52:54:

I don’t know all the details of your transaction, but generally speaking it is not a wise investment to hold anything long-term that has a negative cash flow. Vacancy and repair costs drive the negative even more. This is especially true considering you had to personally borrow 10K to make this thing work.

In my opinion if you can’t net at least $100 a month after all costs it ain’t a good deal for a long-term hold. If you are already into the deal, maybe instead of renting it out you can sell on a lease option and get enough cash flow to break even with a decent back-end price.

5

Re: I did it!! I did it!! - Posted by chris

Posted by chris on March 09, 2000 at 12:12:26:

Congratulations!!! It sounds good to me, of course I’m nobody, YET !! I’ll get my first soon, Thank you for the advice earlier.

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Tell us how you did it - Posted by Frank

Posted by Frank on March 08, 2000 at 16:33:20:

Details please - what kind of offer did you make?

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OK, Let’s have some fun! - Posted by HR

Posted by HR on March 11, 2000 at 20:19:11:

Senator,

As Doug correctly highlighted, you are first to be commended for having done this and other deals. That should not go without saying. Now, let’s see how one might sqeeze even more profit from your deal.

First, here’s what I like about your deal: I like your strategy. Buy and hold is a good strategy. It just has its risks, and one should be aware of them. Next, I like that your assumable loan was assumable and only has 17 years left (it’s starting to pay down some decent principal each month from here on out). I like that you bought a property with below market rents (or at least stagnant rents). I like that you used your home equity to do a no money down deal. I also like that you have an end game strategy: to refinance and not bleed to death from the negative cash flow. I am assuming you have another job besides re, so losing $30/month I suspect will hardly kill you.

What won’t kill you, but may hit your pocketbook deeper, though, is a failure to calculate vacancy and repairs into your deal. A conservative number many use is 30% (Other folks run their numbers as high as 40-50% depending on the condition of the property.) Thus, factoring in vacancy and repairs, your real numbers might look more like this:

Monthly income: $550
X .30

= $385.

Your debt service is $585 (you didn’t say anything about insurance; im going to assume it’s in the 585 figure. If it’s not, this run of the numbers will get even uglier when you add your insurance costs.) So, 385 (average monthly income) -585 = -$200 cash flow.

Why 30%? Because stuff will break. Most will be minor; a major one will take you by surprise at some point (depreciation, after all, isn’t just an accounting concept). Plus, the one month when it sits vacant while you try to rent it will offset all the other months when you beat the $385 average. Over the legnth of the year, though, this is a safe figure to bet on (How would you like to be one of those real conservative types that runs their vacancy and repair percentage at 40% and higher?)

So, now we’re not looking at a minor cash flow of $30/month–$360/year; we are looking at a realistic possibility of $200/month–$2400/year. That’s a horse of a different color, and it’s why I suggested to you in the beginning this may not be such a great deal the way you have it structured.

Or is it?

First, I agree with Chris 100%: jack up those rents. One way to offset negative cash flow is to boost the income. Plant some flowers, do some minor sprucing, and make the tenants feel like they are getting their rent increase worth. And if they don’t feel that way, Next! Also, try to do some of the repairs yourself, to keep costs down.

Next, if you are going to refinance in a year, keep close tabs of what your negative cash flow were, so you can borrow that amount too at year’s end so it will be a no money down deal.

Honestly, Senator, if I were you, I might not refinance. I might eat the negative cash flow (even if my numbers are right) because your second mortgage will be gone in 5 years, and then you are in great shape after that. I don’t like refinancing when your first is already paying down so much principal at this point. So, you eat it for five years, but come out big on the back end. Lesson learned (for me): negotiate a better deal up front and run more realistic numbers so that you can craft an even more profitable deal next time

There are other strategies that you could do, though, that would turn this possible single into a definate double or triple. Doug gave you two good examples Lease option or owner finance. Do you know how to do that?

With lease options, you lease the property just like you would one of your rentals, but the tenant has an option to buy the property at a preagreed price. You can get a higher price for your property than it’s current fair market value (because of your owner financing and assumed property appreciation), the tenant buyer gives you a non-refundable option consideration to obtain the option, and you collect a monthly spread on the difference. Let’s look at what your deal could do.

If it’s worth 48k, you could lease option it for $55,000 all day long. You might even be able to get $60,000. Collect $2000 non-refundable option consideration, and have the tenant buyer give you $750/month (I figure your piti… principal, interst, taxes, and insurance… are probably around $685/month). This will give you $100 +cf/month. Hopefully, you screened your tenant buyer well and they will exercise their option and buy the house from you for 60k in 12-14 months. If they dont? Do it again! Sure beats negative cash flow, doesn’t it? Hopefully, you could get two tenant buyers in their over five years, both would not exercise their option, your 10k loan meanwhile would disappear, and then you could revert back to your original strategy.

Now, I know you want to buy and hold. But, if you made an extra $15,000, do you think that would help you get off on your next rental keeper on a better footing? I do. Whatever you do, don’t suffer from paranoia. Remember what the great Bob Allen said: “your deal of a lifetime comes around about every 7 days.” How true! You can let this deal go; there are plenty more out there (and Senator, forgive me, but they are even better than this one!)

So, consider doing a lease option or owner financing on this deal. It will boost your profits considerably.

If you don’t know how to do these, Bill Bronchick has an excellent course on lease options, and the book 5 magic paths to making a fortune in real estate by Lumley ($15) talks about them (but it doesn’t give you great forms and handholding steps like Bronchick does).

Thanks for having the courage to share your deal. It is a deal, and depending on how you massage it, it could be mediocre or a nice hit. You decide. Just let us know what happens in the meantime.

Cheers,

HR

8

I tell you I just don’t get IT! - Posted by David

Posted by David on March 11, 2000 at 19:28:27:

negative cash flow not the way to go, especially on a keeper. if the rent can’t support the property now it probably won’t next year or the following years if the value is appreciating. Go for the GOLD, go for the positive cash flow, leave the negative cash flows for the others.
David

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Re: Here are the numbers - Posted by chris

Posted by chris on March 11, 2000 at 14:08:36:

Senator-

Lets get rid of the Gator.

How about a rent increase. If it has been at the same level for three years, even the cheapest tenant knows that it is time for an increase. Considering an increase of a puny 1% each year to keep up with the almost non-existent inflation the rent should be at $566.67 by now (if the %550 rate was realistic to begin with). Look in your area for ads. in the newspaper for rentals as well as with the local RE Investors’ group for an idea of the market rent. I really like Jim Piper’s post at the main newsgroup from the archives. To read it go to-

http://www.creonline.com/wwwboard/messages/jan00/55089.html

Are you paying for any of the utilities that the tenants are utilizing? I recommend a line-by-line review of income/expenses to see what you can do to give you some positive cash flow.

-Chris

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Re: Tell us how you did it - Posted by Senator

Posted by Senator on March 08, 2000 at 23:08:44:

Well, he had an assumable loan (1987) with $33,000 left on it. He was asking $48,900, and was willing to finance his equity. Instead, I offered him $10,000 in cash and assumption of his loan. I then got a home equity loan for $10,000 and bought the property no money down.

For beginners, it is not easy, but it is a helluva lot of fun.

Senator…Alabama

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Constructive criticism: is this really a deal? - Posted by HR

Posted by HR on March 09, 2000 at 02:33:04:

Senator,

Part of what I like most about these boards (and this cyber community) is the ability to post our deals and get feedback from others regarding them. It’s in that spirit that I offer my thoughts. They are only my 2 cents, and they are probably not even worth that. Also, commenting on someone else’s deal is like commenting on their momma: VERY dangerous. It’s with some trepidation, therefore, that I ask these questions.

Is this really a deal?

This isn’t a deal in my book. You only got the seller to come off their price by 10%, and it caused you to go into a negative cash flow. Yuck. I assume 49k is the fair market value of the property. What are you also projecting as vacancy and repair expenses? At least 30% of rent, right? I suspect that after your maintenance costs and vacancy, your negative cash flow may be even greater.

Isn’t it funny how we get more picky the more experience we get? I am hardly a battle-worn, seasoned pro. Nonetheless, I like at least 30% equity in my deals, and a healthy positive cash flow to boot. I will eat negative cash flow for a time, but it better be in the service of upgrading the property, creating more equity or cash flow in the property, etc.

Imho, just because one can create a no money down transaction doesn’t make it a deal. This sounds like a no money down transaction; it doesn’t sound like a deal.

HR

12

Re: Constructive criticism: really you think so? - Posted by doug, ky

Posted by doug, ky on March 09, 2000 at 09:42:08:

Really, I would not knock this deal until I knew all the particulars. You’ve made some assumptions. With the right back end stadegy, this deal could be good. I see the Senator possibly making ten grand in six to twelve months with a positive cash flow on a fifty thousand dollars home and nothing down. What’s the ROI? Even if it only makes five grand in six months its five grand he didn’t have. I say congrats. The senator found a seller, found a solution, and went for it. Sounds creative to me. I do hope the Senator will tell us how he comes out of the deal. Keep going and good luck.

I do understand what you were telling the Senator. Quiet possibly you or I could have made the deal more profitable and its okay for us to set our standards as to what we will do and accept. However, every deal is not going to be a homerun; it might just be a hit. Investing creatively in real estate, is finding sellers, solutions, and making a profit. Give him credit for finding a seller with an assumable loan. Give him credit for buying below market using the assumable loan. Give him credit for solving the equity payoff, even if we could have maybe done better. With the right stadegy on this deal, I think the Senator will do alright. Question is making 10 grand on a fifty thousand dollar home in a year worth it? That’s what I see. I know my answer

Doug, KY

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Constructive criticism always welcome!! - Posted by Senator

Posted by Senator on March 09, 2000 at 08:47:11:

I will never discourage constructive criticism, because I need it if I’m gonna get rich doing this, which is my goal.

One thing that helps in my deal is that the current owner will replace the linoleum(sp?), clean carpet, replace the stove,and paint the inside. We estimated that to be about $2500 worth of repairs, so I didn’t mind going in the negative for a short time.

I do have a question though. Can’t you refinance the entire deal within a year? Thats my plan.

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Doug, run the numbers please. Where do you see 5 or 10 grand? nt - Posted by HR

Posted by HR on March 09, 2000 at 22:55:29:

ntt

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Re: Constructive criticism always welcome!! - Posted by HR

Posted by HR on March 09, 2000 at 23:06:12:

Senator,

Yes, you can refinance the property, sometimes sooner than a year. The refi will depend on the equity you have in the property, the cash flow projections, your credit, etc. Talk with a good mortgage broker in your area; they can help you run these potential numbers.

What are your current numbers? What is your piti, your rental income, your vacancy and repair allowance, and your expected refi rate? What is your exit strategy on this property?

I absolutely agree with Doug: not every deal needs to be a home run. Heck, Michael Jordan is the greatest baskeball player ever, and he missed 70% of the shots he took (the 30% he hit, though, made a BIG difference). Please share the details of your deal, if you feel comfortable.

HR

16

Re: ok - try this - Posted by doug,ky

Posted by doug,ky on March 10, 2000 at 08:51:40:

$33,000 1st
$10,000 home equity loan
$ 2,500 misc. costs

$45,500

Two schools of thought

  1. lease option for $55,000 or more
  2. sell using owner financing -

Doesn’t matter if the property is worth $55,000 or not because you have control of the financing.

I don’t know what the particulars are on the terms of the $33,000 1 st note are or the home equity loan. But I would think under these conditions above you should make money on the front, middle and end. I have. Unfortunately, I don’t know what the Senator’s stadegy is for sure nor do you, but if he wants any advise - just ask.

Now, if the Senator is buying and holding. Different story, But I still need to know more particulars before I would knock this deal. like location, how old the property is, the exact terms of the existing financing and new home equity loan. One home positioned favorably could provide the college tution for a year. Four pay for college!

Doug, KY