Post-disaster investing - Posted by Bert Garwood


#1

Posted by Soapymac on December 15, 1998 at 17:32:07:

is go back to just fixing bicycles. Not the way you described the situation you have. You appear to have a very good handle on it…and it would be a crying shame to waste the amount of brain power that is evident in your post.

I will answer to only a small portion of it and leave the rest ot the others who read this board.

“All the properties I’ve looked at are listed by brokers. How much extra do you think they tack on to arrive at the list price? (You want 100, lets list it for 130, you might get 90).”

The key for a CORRECTLY PRICED property at RETAIL (which is the way most brokers are trained) goes something like this:

  1. Do a CMA (Comparable Market Analysis) or (“comps”) to find what the marketplace has determined to be the price of similar units. In a multi-unit property on the market that has nothing exactly like it, sometimes you need to find the cost PER LIVING UNIT, then multiply by the number of units in the building.

Another way is to find gross rents, figure and subtract expenses,(which is called your Net Operating Income…NOI for short), THEN subtract your mortgage payment. What you have left is your spendable cash flow.

A third way to figure the selling price is to take your NOI and divide that by the capitalization rate you want to earn. So, if your NOI was $24,000 annually and you wanted a 10% cap rate, the price of the property should be $240,000.

I mention all these because most retail brokers, especially those who only deal in SFR’s, do not know how to correctly price a multi-unit property such that it will attract investors.

You will hear it here time and time again…a property that is correctly priced will not stay on the market long…smart real estate agents/brokers/investors will recognize the value and purchase it.

So what about those units that stay on the market for a long time? Are they incorrectly priced? Could be. How about a stubborn owner who won’t negotiate? Could be that, too. Problems with a property? Possibly.

All this goes back to knowing your market.

And why shackle yourself with a 30% DP as part of your plan to buy a property? Could you not be looking to help the city out by offering to L/O some of their houses? Think about it.

Get your juices flowing. You could be in a position to make a TREMENDOUS cash flow and help the city out at the same time. Do it right…once…and your reputation will precede you when you do other things.

Cordially,

Soapymac


#2

Post-disaster investing - Posted by Bert Garwood

Posted by Bert Garwood on December 15, 1998 at 13:09:49:

What would you do if you were in my shoes? Here’s a little background.

In April of 1996 I bought a 4-plex for $98k with a garden variety mortgage. (30%down, 15 yr variable) April of '97 we had a “little water problem”. (You may have seen it on TV. Downtown on fire, floodwaters holding back firefighters, 70,000 evacuated and over 1000 homes destroyed.) I was able to get a low-interest SBA loan to repair my two flooded units by using my own home (was free and clear) as colateral. Did all the work myself. In effect I now owe $100,000 on the 4-plex.
(Hell no, I didn’t have flood insurance. There had never been water there in recorded history). I’m finally getting back to a break-even cash flow, as long as its 100% occupied. (Before the flood, about 20% of rents were gravy).

Now I’m starting to get the itch for more property, and have looked at a couple small multi-families. (example, 7 unit for $155k Its actually been listed for nearly 3 years, I looked at it in '96) I know a lot of people swear by single-family homes, but I really can’t afford to have a place thats completely vacant right now.

You’d think a town that was hit this hard would be begging for housing. However, the “CITY” built 185 new homes and only 8 of them have sold, and the city councel is debating whether to lower prices or throw in even more free appliances. Immediately after the flood, all the large landlords and most of the smaller ones raised their rents by some 30% and had waiting lists, but now the newspaper is full of stories about the high vacancy rates. (I’ve kept full by keeping the rent competitive)

3 years ago I was able to quit my job as a bicycle repairman, and have been living off cash rent from inherited farm land. Frankly, I was amazed I got the loan for the 4-plex. I’m single, 46, and am not worried about leaving a big estate since my heirs are all better off than I am anyway. I’ve been working with a buyer’s broker (yes, we have a contract, and she’s a REBAC member).

I’ve read a bunch of books on buying real estate creatively (Including Sheets and Whitney), but until you actually DO it, its all theory. I’ve been avoiding talking to a bank so far. They have trouble beleiving anyone can live on $15,000 a year, but I’ve been doing that since the Carter administration.

Sorry for the novella, but the answers to my questions probaly depend on the background. Now here’s some questions.

Are lenders “actually” interested in accepting property other than the subject property, and can such a thing reduce the down payment? (Ex. They’ll only loan 70% of the property’s value for a commercial loan. Say I want to buy a property for $100k, they’ll only loan 70. Might they be likely to take a mortgage on my farmland worth $150k, thereby raising the amount of the loan principle?)

What kind of positive cash flow do you like to have? As I mentioned, before the flood I had about $250 PCF from rents of $1340 or 18%.

All the properties I’ve looked at are listed by brokers. How much extra do you think they tack on to arrive at the list price? (You want 100, lets list it for 130, you might get 90)

I’ve used a formula based on the p&l provided with the listings and the cash flow I want to arrive at the size of loan a property would support. That and a 30% DP gives the higest price I’d offer. All of these have been at least 20% under the list price. Does this seem like a valid way to arrive at this?

Should I continue on my quest to become a wealthy land baron, or should I just go back to fixing bicycles?

Thanks for your time.
Bert G
Grand Forks, ND


#3

Re: Post-disaster investing - Posted by John Katitus

Posted by John Katitus on December 16, 1998 at 24:51:57:

With all those vacancies, there must be a lot of motivated sellers. Why do you think the houses aren’t selling? Purchase prices, lack of qualified buyers, etc? That’s probably the key to determining your best course of action.

Single family houses are great for appreciation but not cash flow. Plus, what would you do with a vacant house and a house payment? It would quickly eat into your $15,000. Multi-family are best for cash flow.

Bank money is expensive and you will jump through hoops, waste a lot of time, and end up apologizing for your lifestyle. If you can talk to the motivated sellers, they might be able to tell you how to finance a deal.

I think I would learn about sandwich lease/options for SFR’s and owner financing for multi’s. With sandwich L/O’s you can structure the agreement so you don’t make payments until after you find a buyer. You also have experience managing a 4-unit. Find an owner who is sick of the management and figure out a deal. Start with the guy that’s been listed for three years. Good Luck.