Deal 2 - What?

Question

Someone asked about whether or not they should hire a coach or mentor from a different thread in the "Starting Out" forum. @henryclark was nice enough to offer free assistance. I jumped on the offer immediately because I am just getting started. He laid out the instructions in my post titled "Deal 1 - Why?" I am going to be open, follow his advice on putting together this plan and share my goals. So here goes!

Action:

1. Discuss what your Goals are for your First Deal and long term. Obviously, I am geared towards certain types of investments, but that is due to our Risk/reward, REI experience, stage in life. We want ones that fit your family. Don't pick one yet.

Little about myself. I am 44 years old. I am married to my wife of 18 years and we have two daughters. I am an entrepreneur. Sold my first business in 2013 and now a partner in the second small business. We have a dog named Duke and he is glued to my side! My wife is a stay at home and works part time for FCA. Together we love to visit wineries, go on road trips and date night. My oldest daughter does track and cross country. She is in 9th grade. My youngest daughter is into dance and she is in 6th grade. I am close with both of them. I love to hunt, fish, mountain bike, grill and work in the yard.

My goal is to invest in our first real estate deal within the next 4-6 months. Short term, I am literally just getting started. I planned to start 2.5 years ago. However Covid happened. I am in retail and the supply chain went absolutely crazy. My partner and I had to focus 100% of our time on the business. So now I am ready get back to my original plan of real estate investing. Since I am just getting started I am trying to wrap my head around what I want to invest in within the next 6 months. I truly have not thought about long enough to know. I just know I want to get started as quickly as possible. Being 44, I know I am late to the game. For some reason, I am drawn to short term rentals and commercial. Long term, I know my goal is to have more freedom. I am very chained down in my business and it requires a lot of time away from my family. It is very demanding / stressful. My dream would be to sell my share of the business within 5 years and replace my income with my real estate portfolio.

2.  Determine your cash/asset collateralization at 65% and your finance type.  This will determine your deal size.  Even if you can do a deal of say $100,000; we might still only do a $10,000 deal for your first deal.  We have to take other non financial attributes into consideration,  Knowledge, risk, time available, etc.

This is where I wish I could go back and do things a little different. I have never really leveraged debt. We did the Dave Ramsey plan for a long time. I worked in my businesses and just planned to take the normal route of working hard every day and retiring when I was 65. We have pumped a lot of our money into our house. We do not owe very much and we have a lot of equity. Other than that I have invested a lot of money into 401k. We have $10k in an emergency fund (although I would be comfortable with holding $5k in the emergency fund) and we have $15k in savings. Also I have a $100k HELOC that has no balance. I got it a couple of years ago before Covid started so it would be available for my real estate investments.

Henry Clark · Answer

Thanks Waylon.  Your story, resources, goals and timelines are different from other people, yet the same.  All of you still have to follow a Path, just different timing and results needed for your goal.

A.  Let's step back for a second.  Summary:  Financial Freedom is a big part of your decision process.  You followed the Dave Ramsey plan, and he is far smarter and more experienced than me.   You don't do leverage, but to me that is the strength of REI.  Example:  With $5,000 and a 10% SBA loan, I could control a $50,000 investment; versus needing $50,000 to do a $50,000 investment.  You would never hit your 5 year time frame.

B.  When talking financial Freedom.  Let's focus on REI as the solution.  Let's disregard your Business's value.  Enough to replace your Salary.  Let's use $100,000 after taxes for this public forum.  You change the figure privately.

C.  401k even paying the early payout penalties you would make far more investing it into REI.  Let's put that to the side.  You can look up the post I just answered on that subject.  But you're not ready to do that.  If you had several successful deals under your belt and ran through the numbers on withdrawing your 401k, you would say why did I wait so long.  For now, disregard that.

D.  Your existing payroll or profits from your business, lets disregard that.  5 years is a good timeframe, because it will take that long to build up your Snowball of investments.

E.  Resources available:  $5k of emergency fund; $15k Savings; $100k Heloc.  Again, does not mean we would use all of this.

F.  Next, we need your Finance mechanism to decide the size of deal you might do.  Example:  VA loan X%; SBA 10%; Conventional 25%; Conventional 40%.

G.  Deal size is a combination of your Resources say $50,000 and your Financing Collateral % say 25%; Then you can do a deal of $200,000; plus need to consider any extra startup expenses.

H.  Time Commitment- chained down to your business.  Plus, two active teenage Daughters.

I.  Your drawn to Short Term Rentals and Commercial.

J. We are going to use $100,000 after taxes to replace your salary. Again, I just picked this number for discussion purposes and it's not your real number. You adjust. And we want to earn that every year starting 5 years from now.

K.  We are going to do about 5 different financial models.  Just so we get in the habit of doing modeling.  Although they might be your model, we won't worry about that for now.  Then we will adjust to hit your Salary replacement and 5 year targets.  We won't worry about that up front.  We are learning how to do modeling.

Noted before, we make money three different ways in REI:

1.  Monthly Cash Flow

2.  Appreciation through market or Value Add.

3.  Expense reduction.

Financial Models: To view your interest in STR and Commercial.

1.  STR- Buy a 3/2 and rent out.  High input solution.

2.  STR- Buy a Cargo Container and rent out. Just to expand your thinking, plus I did a plan for someone on the other side of the Smokey mountains from you.  Low input solution.

3.  Comml- Your business, does it lease a facility?  Easy thought process. Commercial can be anything, even a bowling alley or restaurant, so you might help narrow down the discussion.  We can change examples.  But again, we are working on the process and path.  Not the final solution.

4.  Comml- Self Storage, because that's what I do.  Plus, I already can tell the results for your location.  Big dollars, big reward, detailed thought process.

5.  Comml- Subdivision lots, Again, that's what we do, and I already know the potential for your location.  Bid dollars, big reward, simple thought process.

Action:

1.  On a new Excel spreadsheet make up 10 tabs and name them based on the above 5 items.  1A- Cost template; 1B- Profit template; 2A, 2B, so forth.  Now there already exists templates in BP.  I don't know where they are and haven't used them.  Why not go directly to them.  Because I want you to build the templates and understand the logic.  Learn the hard way.

2.  Just on the first two tabs, build the following template below.

Take the prior checklist template and drop it in 1A and we will build a cost model from it.

Go out on the web and find a STR property for sale similar to what you are thinking.  Don't worry about is it a good price or not.  Capture the detail and post here.  Let's see the Cost and if they show rental rates and occupancy.  If not, you look up and establish a Rental rate.  Then we will address occupancy %.

Template 1B use the following:

Revenue:

Annual Revenue. -  Let's have a more detailed discussion on a pricing model by individual days of the year.  Example: Full week for July 4th, Labor Day, Memorial Day pricing; Weekend Fri/Sat/Sunday rate; Weekday rate M/T/W/Th; Off season rate- traveling nurses, Holiday off seasons, etc.

Occupancy %  Or based on the above, we will do a daily rental chart, versus a flat Occupancy %.

Addl revenue items

Net Revenue:

Expenses:

Property taxes- find rate for the location

Insurance- We will get a quote

Utilities

-  Water- estimate, show basis

- Sewer- estimate, show basis

- Water- estimate, show basis

Repairs and Maintenance - Let's look at the actual property and make estimates.

Capex funding- make estimates and treat as expense.  We will do 5 years.  By year we will lay in plans. Example year 1- flooring replacement; 2- Water heater; 3- Bathroom replacement.

Landscaping

Management fee

Advertising

Payroll

Sales Tax?

Other fees

Total Operating Expenses

Net Operating Income

Depreciation

Interest expense

Pretax income

Income Taxes

Net income

Principal Payments

Cash Flow= Net income plus Depreciation expense less principal payments.

We will do a separate Loan payment schedule.

Improve on the above.  Make a separate post.  Ask for people to analyze your Cost worksheet and Your Income statement and cash flow work sheet.   Tell them you are intentionally building from scratch versus using the BP calculators; to understand the logic better.  Once you have done the above 5 examples then re do them using the BP calculator.

Please do 1A and 1B.  Do not get perfect.  You want to blast through both of them together in about 2 hours.  We will perfect later.  Want to get through the process first.  If you get stuck on anything, just place ?????? marks and keep moving.  Again, it's about getting through the process versus getting it right for now.

Henry Clark · Answer

Will check with you later.  Need to go check on our Teak fields.   Have to figure out how to pull together $10,000,000 to buy our neighbors 1,000 acres.

Henry Clark · Answer

Missed my flight.  So I will knock some more out.

Start Deal 4”Who?”

Take the tab you’re making in deal three for deal analysis.  Add some columns to the right 4 or 5 columns over.   One column is for a persons name, next column company, next column phone number.

Throughout this entire process want you to keep adding to these people.  You might have two plumbers.   Maybe two insurance people.

This is your team?  If you don’t know someone ask.   If your food with your plumber, ask him for an electrician recommendation.

Get the names at the zoning and planning department and put them down.  Etc etc.

Don’t go looking for them. Just as you need them or will start adding them.

Timing-  We will do the five deal analysis before ever getting serious about an actual investment or management approach.

Henry Clark · Answer

Add a third tab for each of the 5 analyses.  Call it Cost of Failure.  We will calculate the cost of failure, might be one number or a range.  Want to know our Risk factor along with the Reward.

Henry Clark · Answer

Great.

Change Total Expense to Operating Expense.  Want to take revenue less Operating Expense to get Net Operating expense.  Then you can look at Cap rate and bankers can easily see Operating income.  Without Interest Expense and Depreciation.

If you could split the Principal and Interest out separately on the work sheets.  Want to be able to do Income Tax, less the principal.  Then bring the Principal, back in for Cash flow.  Move the interest expense below the Operating Expenses.  Realize Principal and Interest expense mix will change.  Just put in for now.  Note next to it above, the loan terms.  Example:  30 year, 7% down, Interest rate 7%.  Don't try to get hard loan figures.

On the property you're using for an example.  Get an estimate of just the land value.  Back that out for the depreciable amount.  Just divide by 30 years for now.  Will get more accurate later and discuss Cost Segregation and things like that later.  Add Depreciation expense as a separate line item below Operating Expenses.

Add a line for Income Taxes.  Use 28% for now.  Bottom line will be Net Income.

Keep Cash flow at the bottom.  This will be Net Income and add back Depreciation expense.

Keep going, but we need to have a side discussion on Buying versus Developing.  The Property you listed is a log cabin for $350,000;  869 sqft; 1.41 acres.  It is my understanding Log Cabins cost more per sqft than traditional Stick built.  But for discussion let's use $200 per sqft.  869 sqft times $200=  $174,000 for the building, say $200,000.  Property is listed for $350,000.  Leaves $150,000 for land value.  Later lets see if we can estimate land value, water, sewer, electric hookup, site prep.  Let's keep this for a later discussion.

Also please make a separate Revenue rental page.  Uncomfortable using a flat 70% occupancy rate.  Do by day for a year.  List out your Rental terms. Holiday rates.  Full Week.  Weekend.  Minimum Stay.  Winter rates.  Etc.  Let's get into the logic.  To the right of the above numbers put the logic.  Example:  Cleaning Service is $0.  Put you plan to do it.  Realize you have ??? marks and still need to fill in info.

When you get done.  We will spend minimal time on the individual expense items.  Want to pull back and have a macro discussion on your end target wage replacement, collateral needed, time commitment, using this as an example, the amount of scaling to get to your goals.

Action items:

A.  Finish loose ends.  Don't go for 100% accuracy.  If you need to plug in a number.  Just plug in and put a note to that effect.

B.  Let's go through your Revenue pricing scheme.

C.  Step back and look at your Scaling needed to hit your financial targets.

D.  Then let's calculate Failure on this specific unit.  Do several templates always starting with your original.  Occupancy is only 60%.  Purchase price is $20,000 higher.  Downpayment is 10%.  Interest rate is 8%.  Etc.  Each of these will be separate templates using your original one as a base.  Most people will never do a REI, not because of Success, but because of all the "Imagined" Failures.  We want to see what failure looks like.

Make sure you're bringing your Wife along with you.  Don't show her the final product.

Waylon Smith · Answer

Here is a link to the property.

https://www.realtor.com/reales...

PS - I am working on a spread sheet with the 1a / 1b tab, every day, etc like you recommended but not finished. Just wanted you to see what I have been working on.

Waylon Smith · Answer

@Henry Clark awesome!

Henry Clark · Answer

For your revenue make a separate worksheet tab.  Put every day of the year.  Instead of using a flat percentage want you to develop a pricing model.   Read my previous notes above.  Fill in day by day.  Put zeroes where needed.  This is forcing you to think about pricing models.

Henry Clark · Answer

Please drop the above into an excel spreadsheet.  Whatever you don’t know put question marks.   If you don’t use put 0’s.

Deal 2 - What?

Most Popular Reply