Re: Strategies for buying over 10 homes - Posted by Luke Hoppel
Posted by Luke Hoppel on May 08, 2006 at 23:42:21:
I was joking about the married thing. That would be a horrible reason to get married. Even if you did put the properties in the LLC, that mortgage is still in your name.
Thanks,
Luke
Re: Strategies for buying over 10 homes - Posted by Mike-OH
Posted by Mike-OH on May 10, 2006 at 06:19:04:
Luke,
I don’t know why you are posting questions, if you don’t want to hear honest answers. Thanks for the “equity hunter” jab, but the truth is that I’m a big believer in REI. I’ve done nearly 40 deals in the past 2 years and have learned alot along the way. Since I’m a full time landlord, some of those things just might be something that you need to know (or you might just already know everything). Either way, it’s fine with me.
If you really want to be patronized, I’ll be happy to blindly congratulate you on future posts regardless of the merits of your “deal”.
Do you know that 80% of new businesses fail? That certainly includes new real estate investors. In fact, I’d be willing to bet that the numbers are even higher for REI since it’s often seen as a get rich quick scheme and is currently the fad of the day. The number one reason that newbies fail - they pay too much for their properties. I’ve seen it over and over. In fact, newbies that pay too much often become desperate sellers and I’ve bought many properties from them.
One of the many things that I learned over the past 2 years is that you can’t follow the silly guru formula for rentals. Almost every guru far underestimates the actual expenses involved with rentals. Unfortunately, you didn’t even include the basic expenses that the gurus talk about. For example, you didn’t include vacancy allowance, damage caused by tenants, evictions, exterminations, legal fees, court costs, office supplies, fuel (for going to and from the property), management, etc, etc, etc. I could go on and on.
The TRUTH is that operating expenses (including capital expenses) run between 45% and 50% of gross rents. This is true throughout the country and includes YOUR property. You can find this information by visiting the National Apartment Association website. They represent hundreds of thousands of rental units and survey their members every year. I have found this 45%-50% operating expense range to be VERY accurate in the real world.
So, using this simple formula, here are the real world numbers for your property:
Gross Rents $1,500
Expenses $675 - $750 (45% to 50% of gross rents)
Mortgage $590 (30 yr, 8%)
Your positive cash flow - $160 to $235 per month which is $80 to $117 per unit per month. You see that this is well below the $540 per month that you estimated by only including part of the actual expenses.
The good news is that you do have a small positive cash flow. The question is whether $80 to $117 per unit per month is enough income to make it worth the hassle of dealing with tenants. Everyone has to decide that for themselves.
There are at least five ways to make money with rentals. One of the main money making features of rentals is picking up equity at closing. This is made possible by buying at a BIG discount. Equity is wealth and picking up equity improves your financial statement which makes it easier to get loans, etc.
I have a duplex that is worth $85,000 (similar to yours). The big difference is that I paid $11,000 for mine and then put about $30,000 into the rehab. So, I picked up $44,000 of equity. If I needed to, I could sell my duplex this afternoon at a profit. Since you paid retail, you could not do that - you’ve given up your safety net.
Hopefully this helps,
Mike
Re: Strategies for buying over 10 homes - Posted by Luke Hoppel
Posted by Luke Hoppel on May 10, 2006 at 07:00:19:
Mike,
Congrats on your 40 deals. Very impressive. The reason I didn’t include, evictions and court costs is becuase I’m only holding the property for one year and I have 1 year leases. Sure, if I had to perform an eviction that I completely agree that my cash flow would go to crap.
I didn’t include management because I manage it myself.
Etc…Etc…
Thanks for the post though. Like I said, nooone would ever disagree that the best way to buy real esate was to do it for as cheap as possible.
Thanks for you time,
Luke
Re: Strategies for buying over 10 homes - Posted by Killer Joe
Posted by Killer Joe on May 10, 2006 at 15:50:08:
Luke,
How do your numbers look after you sell this place in one year? Commissions and closing costs will eat up a lot of that cash flow. Not trying to be negative, I’m just curious since you are so adament that your exit strategy justifies so much of your position.
KJ
PS. You don’t owe me an answer here, I’m not demanding anything 
Re: Strategies for buying over 10 homes - Posted by Luke Hoppel
Posted by Luke Hoppel on May 10, 2006 at 17:31:10:
KJ,
I liked your P.S. there! I understand where you are coming from.
I’m not justifying the deal by the exit strategy. That combined with the cashflow is what made me do the deal.
To answer your question though, I was told by a couple of realtors that right now it is worth around 95-100K. Clearly that’s only realtors words so that could be inaccurate. I did get two opinions and they both said about the same so I’m going to go with that.
So I’ll have 72K + 8K into the house. A total of 80K.
It’s currently worth 95K, we’ll go with the lower number. So right now there is only 15K equity, not that much. The demand for housing has gone up significantly in that town due to the size increase of the military base. They are adding an additional 10K soldiers in a town that only has about a 40K population. So 25% increase. I’m expecting high appreciation but let’s say it only goes up 6%, which I believe to be conservative for this situation.
It’s now worth roughly 101K. The mortgage won’t be paid down that much in one year so I’m not taking that into effect.
So at the selling point I have 20K of equity. I plan to sell the house myself. I was licensed in another state so I’m pretty up to date on the process. It is another state so I’ll have to read up a little but it’s not a problem. I will pay someone $150 to list in the MLS as a entry only an co-op with a buyer agent for 3% which is 3K. I don’t assume closing costs will be over 5% so there’s another 5K. So now I have 12K of equity. I’m sure some other things will need to be paid for so maybe I’ll end up with 10K before taxes.
So I have $550 for 12 months, = $6,600 + 10K = a grand total of about 16K. I was conservative in appreciation and what is currently worth so I’m going to have that offset the other small expenses.
Like I said, it’s not ready to be a guru example but for one of my first deals, I’m happy with it.
They will get better as I go along as a current deal I’m working on will hopefully show. Nothing guaranteed yet but hopefully I can write a better success story here in a couple months that will make you all happier!
Thanks KJ,
Luke
Re: Strategies (long) - Posted by KJ
Posted by KJ on May 10, 2006 at 19:07:47:
Luke,
Thank you for the well thought-out response. I sincerely hope all goes as planned, and the lessons learned give you a good foundation for the future.
If I can deviate from the discussion for a moment, I think you shouldn’t be so harse with Mike-OH. Mike, like so many of us here, read a great deal of posts from folks who have no battle scars, yet are quick to jump on the enthusiasm bandwagon and are hell bent for financial suicide (present company excepted). They of course don’t see it through experienced eyes, so they are quick to attack anyone who pricks their bubble (not saying you did this). One of my favorite authors, Robert Ringer, has a saying “You either recognize reality and use it to your advantage, or it automatically works against you.” This is so true when it comes to investing, and a good deal of the experienced posters here are only trying to help folks see the true reality behind the smoke and mirrors of all the hype that they’ve been exposed to.
Here is a little food for thought…investing can take on many forms, but are usually active or passive in nature. They all, however, must compete with opportunity. The kind of REI that you have just entered into is active investing and so that takes time, minutes-hours-days, that all add up to time that needs to be compensated for. Not only does it need to be compensated for, on the downside it can prevent you from entering into other opportunities that can give you a better return for the time invested. It is one of the great lessons experience teaches.
Numbers are great, at least when they add up on the plus side, but they don’t tell the whole story. Being overly optomisic with the numbers sure seems fun at the outset. It is only when reality sets in and the books are posted, reconciled, and closed that the final figures tell the true story. Let’s call that experience, at that point you’ve been there, done that, and now can see the whole picture in the correct light.
One of foundations for success in this business is the true understanding of what positive cash flow projections should look like. As an example, if we take a second look at your situation, only this time we include the negative possibilities instead of the positive possibilities, we have a completely different picture for the outcome. Now here is the point I’m trying to make…
When we do our pro forma on a piece of property we need to do BOTH the positive and the negative numbers to see the SCOPE of the investment, not just the upside. We need a clear picture of the potential downside, and included it when we are assessing the true risks involved with a particular property.
It is ONLY when we can still profit AFTER all the negatives are taken into account that you have a real deal. Otherwise, you are just betting on good old luck, and we call that speculation.
Now I am not saying you are speculating here, I think your chances for success on this one look good considering the population increase. What I want you to take away from this post is the knowledge that a GOOD deal is one where you win going into the deal, even using all pertinant negative numbers. At that point you will be protected, and the possibility of wasting your ‘opportunity resourses’ will be very small, and the chance for failure all but eliminated. HTH
All the best for your future,
KJ
Re: Strategies (long) - Posted by Luke Hoppel
Posted by Luke Hoppel on May 10, 2006 at 20:49:23:
KJ,
Thanks for the advice! You’re right, I probably did jump over Mike to hard even though he was probably just trying to help. That’s one of the things I dislike about “talking” via posts; When I read Mike’s it came across as synical and negative but for all I know he wrote it caringly with only the best intentions in mind.
I can tell your a good writer because yours came across like you were just trying to help.
Thanks again, I actually copied and pasted into a word document and saved it on my desktop for future reference. That was probably the most useful post I have ever read on this board.
Thanks and best wishes to you as well!
Luke