Property Analysis & Scaling

[Marat Nigmatzyanov]

Hello everyone,

My business partner and I spent 10 years building an internet marketing firm that now, *knock on wood*, runs a bit like a well-oiled machine. We have roughly $5,000,000 in cash to show for it and decided to start investing some of that money in real estate. I already had a few properties that I bought for myself and family, but like an idiot, I paid for in cash. Now I understand the power of real estate and leverage and I want to ask experienced investors such as yourself for some advice.

After doing some basic research, we figured out that multi-family properties were the way to go. We just closed on a property ($322,000 with closing costs covered). The rent roll is $60,000/yr. Taxes, property management fees, insurance, heating (this old building uses oil heating), 10% of rent per year to maintenance, snow removal, pest control, etc add up to ~$29,000/yr. After accounting for 5% vacancy (our property management company is currently at 3%), and our $1650/month mortgage (20yrs, 4.65% APR), we are left with ~$8,000/yr in cash flows and an additional ~$10,000/yr in amortization that we can pull out whenever we refinance. So on a $64,000 investment, we are, with a conservative estimate, returning $18,000/yr, or 28%.

I've scheduled a sit down with every successful real estate investor I know, but I think BP is where I may find the best feedback of all. A lot of you have gone through this process and can hopefully answer some of these questions:

1) 28%/year sounds ridiculous. Am I missing something?

2) If 28% year is reasonable, why aren't huge hedge funds doing this? I recognize REITs exist, but if markets are truly efficient, why is there a 28% return left out there? This property wasn't a steal, it was priced in line with the area.

3) We want to scale and start doing this with our entire $5,000,000 portfolio, rather than $64,000. What are some of the scaling issues we may run into?

4) Will obtaining mortgages at similar rates (20% down, 4.65% APR in the current climate) be more of a challenge as our notional real estate portfolio climbs above $5,000,000?

5) Are there any tips you can recommend? Two we figured out ourselves: 1) Paying $10,000 more for the house in exchange for $10,000 in closing costs was a no-brainer. We can loan the $10,000 on the house; we can't for closing costs. 2) Refinancing after we improve NOIs may allow us to pull out a large chunk of our down-payment very quickly. This will effectively allow us to "loan even our down-payment" at current APRs of 5%, which we can then use to buy similar properties with greater returns.

I know this is a lot. If you can confidently answer any of these questions, I'd be very grateful. If you need some free guidance on internet advertising, feel free to PM me as well ;)