David Campbell & Hassle Free Cash Flow Investments – Dallas / Fort Worth, Texas Turn-Keys

[Stan T.]

Wondering if anybody has had the chance to work with David Campbell of Hassle-Free Cash-Flow Investments. His concise and informative ebook struck a chord with me, as it is exactly the investment philosophy I am looking to get into the business with, and I stumbled upon it here on BiggerPockets!

He offers a phone consultation explaining his construction/development business, investment strategy, and his current project in Texas. The basics of the deal are this: Newly constructed, fully-managed, $130,000 4 BR-2 Bath properties renting for $1300/month in DFW, TX. He offers to personally finance 15% of the purchase-price, leaving you with 5% down payment and a meager, modest ~$50 positive monthly cash-flow, on paper. If you stayed with conventional 20% down loan, and his same figures, it looks like you could cash flow around $100-150/month.

Right now I’m looking to get into ~$250k of solid turn-key cash-flow property. This deal seems attractive, and wanted to know if anyone has experience doing business with him.

[Gautam Venkatesan]

Have you taken into account property management, vacancies, repairs, etc. in that $50/month cash flow?

[Jon Klaus]

Stan, has Campbell provided you with any addresses so you can do due diligence on the properties?

[Mike D'Arrigo]

@Stan T. I'm not sure I'm understanding this right. Are you saying that you will only get $50/mth cash flow? If so, I don't see how this model is attractive especially in light of the fact that your criteria is $250/mth, which personally is where I think it should be on a buy and hold. You're fortunate to live in a great cash flow market and do far better with better ROI's right there in Kansas City. Feel free to reach out if you'd like like to explore some options.

Best wishes.

[Gautam Venkatesan]

@Mike D'Arrigo

I think he said $50/month CF if he only puts 5% as downpayment

[Mike D'Arrigo]

@Gautam Venkatesan I missed that. Thanks for clarifying. I do see where it's still only $100-$150/mth with 20% down. That's only a 7% cash on cash return. Pretty hard to get excited about that. Maybe I'm still missing something.

[David Campbell]

Full disclosure: My company is the seller of the property Stan is considering so in this post I will do my absolute best to speak in generalities as a form of sharing knowledge and I will do my absolute best to avoid sounding like a commercial.

Real estate brings different benefits to each investor. Each investor will receive a different set of benefits from a property based on their needs. If the only benefit you are seeking from an investment is pure and unadulterated cashflow, you'll probably do better owning private notes rather than real estate. If you are seeking tax shelter from depreciation, controlling the most real estate possible with the shortest depreciation schedules allowed should be your goal. If you are seeking the highest total return on your money, you're probably going to want to own real estate with aggressive leverage (smallest downpayment possible) so even small movements in the price of the real estate results in large gains (*or losses). If you are looking for a hedge against inflation, you want to control as much good debt as possible because the debt is what gets devalued. If you are seeking a blend of these benefits, then it is important not to evaluate your investment choices using just one metric such as cashflow.

A pet peeve of mine is when people take the annual cashflow (*cash throw off) divided by the cash invested (*equity) and call it cash on cash return. That formula tells you cash on CASHFLOW return. No one ever uses that term, but a lot of new investors think cash on cash return is the same as cash on cashflow return so I want to clarify for the benefit of no investor left behind. Cash on cash return is the total amount of profit divided by the total investment and then usually turned into an annualized number. You can make money in real estate from cashflow, amortization, appreciation, devaluation of debt, and tax benefits.... adding all of those profit centers together makes for a complicated formula to solve but when you are factoring cash on cash return that's the formula you're trying to solve.... it's not a good idea to focus solely on cash on cashflow return or you'll miss the big picture.

Let's look at a few of the examples presented here for the sake of learning concepts.

Assuming Stan's number of cashflow of $150/month ($1800/yr) with $26,000 invested = 7% cash on cashflow return and while that's not good it's not bad. Depending on where you live there are better cash on cashflow investment opportunities out there that produce better cashflow *such as notes. Assuming cashflow of $50/month ($600/yr) when you have $6500 invested is 9% cash on cashflow return. That's a lot better, but not jump out of your seat exciting.

Let's assume a property bought with 5% down stays the same value but your tenant pays off the mortgage over 30 years. Using Stan's loan numbers that is approximate $4300 equity per year from amortization (I know amortization is not level because the beginning of a loan is mostly interest, but for the sake of making a complicated subject as simple as possible $4100 is the average annual loan paydown). If you have 5% invested ($6500) and you get $600 in cashflow and $4100 in amortization equity that is $4700 per year / $6500 invested = 72% annualized ROI before you consider the possibility that the home price could increase from inflation or increased demand. Assuming the home increases in price at the rate of 2% inflation per year non compounding (that's an ultra conservative estimate) we're talking about $2600 per year of price increases (*equity). Add that to the $4700 above and you're at $7,300 per year total return divided by $6500 invested and you're 112% annualized cash on cash return. That's jump out of your seat exciting. Remember we didn't add in the tax benefit or the additional cashflow from rent increases or the possibility that inflation is higher than 2% non-compounded.

This is an ordinary property turned into a super charged investment because of deal structure. You can use this deal structure on any property where you can get 95% investor financing. That deal structure is a concept you can use on any investment property. If you can find 95% financing, and you like the property, and you can at least break even on the cashflow, and you are investing for wealth creation and highest ROI more than cash on cashflow return this strategy could work for you. You don't have to buy properties from me to use this strategy. I've made the 5% down opportunity available to our clients because it's a great strategy and I couldn't find any other turnkey provider offering it. If ya'll can find investment properties with 5% down that you like better than the new houses I am building in Dallas and Fort Worth, go buy them!!! The world is a big place and there are lots of good deals out there. Make sure you analyze the property AND the deal structure to get to a set of benefits and then see if those benefits are the ones you are looking for. Also, if you find high quality positive cashflow properties with 5% down (other than mine) let me know, because I would love to market them to my investors as well.

In short, the investment strategy Stan is talking about (high leverage with modest cashflow) isn't for everyone. There are a lot of cashflow risks when you take on that much leverage. However, for someone trying to create wealth and tax shelter starting with a modest amount of cash this strategy has a lot of merit.

CASHFLOW PARADIGM SHIFT - here's why cashflow investors might also like this 5% down strategy. Assuming you could turn $26k of cash into one property with 20% down / 80% financing and it produced $300 a month cashflow. I would say that is a strong deal worth considering *assuming you've also budgeted for management, vacancy, maintenance and replacement reserves. Alternately you could buy three properties with 5% down (*only three and not four because you'd have closing extra costs) that cashflow $50 per month each *($50x 3 properties = $150). $300 is better than $150 until you look at what happens when the rent on all these properties goes up by $100. Your $300 cashflow property will cashflow $400 and your three $50 properties will now cashflow $150 x 3 = $450. When the rent goes up $100 *which it inevitably will if you believe in inflation* you have better cashflow by owning three "mediocre cashflow properties" rather than one "stellar cashflow property". Again, over time the leveraged deal structure trumps property performance. One huge thing to consider is that leverage works in your favor when the CAP rate is higher than the interest rate. Get this formula reversed (interest > CAP) and the financing will be working against you. I'll say it again because it's that important.... If you borrow at 6% and invest at 5%, you'll lose money the more you borrow. If you borrow at 5% and invest at 6% you'll make more money the more you borrow.

Beginning investors focus on the sticks and bricks of real estate, while professional investors focus on creative deal structures that create impressive returns. As the saying goes... "You name the price and I'll name the terms."

*I'll buy your crappy duplex for $10 million dollars... Here's the terms... One dollar down and a dollar a year for the next 10 million years." The person who names the terms always comes out ahead in the long run.

The other concept I focus on is that there is no such thing as a good investment or a bad investment. There are only investments that are suitable or unsuitable for a particular investor's objectives. If you know what you want a property to do for you, you'll know how to evaluate it for your circumstances and according to your own personal investment philosophy. Circling back to the beginning, everyone's circumstance is different. There are no properties or investment strategies that are a one size fits all program.

Best of success to everyone!

-David Campbell

[Greg Meech]

WOW - Great post.

[Jay Hinrichs]

@David Campbell

David Nicely done... the markets shift morph move etc. 2003 to 2008 it was all about leverage no money down least money down.. Then the crash then it was all about CASHFLOW and NET returns because there is no appreciation ,appreciation is a bonus blah blah blah..

and of course no one has the benefit from these post to see your actual proforma which includes tax's insurance vacancy reserve maintenance etc. New construction mitigates maint. for the first few years unless you get a bad tenant. New houses should stay rented better than old ones.. Tax's in Texas I hear are high.. And prices don't move a lot.. that's why you can buy a brand new home from you right now for 130k.. Heck we cant build them for that here in Oregon.. And if your selling to investors then the home owner market must not be that strong.. The only reason investors stepped into newco here in Oregon is they paid cash and would commit to 5 or 10.. I sold few to them but at the end of the day I wish I had not.. no matter what, a rental just does not look as good as a owner occ. Unless of course you sell them all as rentals then in my opinion the hood will deteriorate over time. as Home owners will migratge to were there are other homeowners so it makes selling to homeowners harder if you have a bunch of rentals in the Hood. I guess unless you put them into one section. I find Texas fascinating.. ONe of the hot markets but also one of the cheapest places to buy newco in a great state and great economy.. But competition drives your prices.

[Gautam Venkatesan]

Thanks for the insights David that was an different perspective I had not heard before.

[Andy Luick]

There are so many angles and perspectives to real estate investing. Leverage can create some amazing returns...especially on paper. I saw a KC property advertised recently that also produced 120% cash on cash. It looks great until a tenant doesn't pay. I don't know David's market and I do hear good things about texas but what I do know applies nationally - good credit people aren't tenant....they are owners and buying with rates this low. Now, skipping the financing for a minute, and making sure there are no restrictive covenants preventing it.....I would turn it into shared housing which boosts the returns, keeps the property rented maximizing income and minimizing risk. It's a different niche but it works and it works very well.

I have a 3bedroom/2bath in metro atlanta that was investor owned for 4 years...it barely produced a 2% return over that time and was purchased for cash. It brought in a net $500 a month rent...when it was rented and the owner has not accounted for the 3 evictions and all of the ensuing repairs in his 2% number...nor vacancy costs. We took it over, made it a 4 bedroom by finishing space in the terrace level and it now nets $1500 a month after all expenses. More importantly, even if someone leaves, we still have income on the property.

We are not creating rooming houses - we attract professional class tenants - many who may have had past job issues and credit issues....or got divorced and down-sized. Shared housing produces huge returns...at least for us it does. You may want to consider it for this property.

Beyond that, call some local rental agents in David's market and see what kind of rents and times on market they quote you. Get a feel for the local market before you sign into anything. I appreciate David's response....I just don't like that much debt on a property. Our backend buyers are either all cash or go with 50% down and are guaranteed a 10% net return (ignoring financing which boosts the return). If the property doesn't hit the mark, we reach back in our pockets for the first 18 months. We haven't had to hand over any money so far and most properties are producing 10% to 14% returns. Happy Investing!

[Jon Holdman]

I've never heard the term "cash on cashflow return" either. Further, using it as you've described makes no sense. You could use the term "cashflow on cash return" because the word "on" in such phrases refers to division.

IMHO, the phrase "cash on cash" is more accurately applied to the cash returned to the investor by the property than trying to apply it to these non cash items. Lets take them one by one:

cash flow - actual money put into your pocket by the property. The good stuff.

amortization - paydown of the loan and an increase in the value of your equity. Good stuff too. But not cash. You can't easily spend this. You either have to take out a loan (costing you interest) or sell.

devaluation of debt - not sure what this means. I think you mean that if inflation kicks in, its easier to repay the debt because rents and expenses go up (hopefully in synch, but certainly no guarantee) while the debt payment remains the same. Maybe that happens. Maybe not.

tax benefits - hoo boy. Here's my big bugaboo with many sellers. Often the lipstick that gets slapped on a pig of an investment. Sellers claim "this produces a passive loss you can use to offset other income". Boloney. Good rentals produce taxable income. These supposed tax benefits come from depreciation. All other deductions you make against the gross income to get to your taxable income are actual cash out the door. The ability to get any benefit from the depreciation is 1) limited by your income, and 2) has to be paid back.

On point 1, you can only take a passive loss against ordinary income if you have an AGI under $100K or are a real estate professional. AGI's below $100K can take up to $25K a year in passive losses as a "special allowance". Above $100K it phases out and at $150K its gone. You can take it if you're a RE professional which means spending at least 750 hours a year And more hours doing real estate than anything elses. Full time job? The threshold is 2081 hours. Unless you're doing real estate as your only job, you're not a professional by this IRS definition.

Point 2, as you take depreciation (or, even it you could, but for some crazy reason don't) the "basis" of your property decreases. When you sell, the "gain" is the net selling price (selling price less all costs) less the basis. On the amount of gain up to the total amount of depreciation taken or allowed (whichever is more) is subject to a tax on the unrecaptured depreciation. That's your ordinary, marginal income tax rate, though it is currently capped at 25%. So, those benefits you got if you were able to use these passive losses have to, in most part, be repaid when you sell. If you can't take the passive losses, they can be used to offset the gains when you do sell.

Complicated math can be used to make a crummy deal look good. IMHO, all you need to do is this:

NOI = rent/2 (and convince yourself its even this good)

Cash flow = NOI - P&I

Cash on cash return = Cash flow / total cash invested.

That's the money you can put in your pocket.

A very strong deal. Folks, don't forget to apply the 50% rule to turnkeys just like any other rental. 50% of gross schedule rents are going to vacancy, expenses and capital. I've never seen a turnkey ad that claims anything close to 50% as the number here. Your actuals will vary, but the best case is taxes, insurance, and property management. Worst case can be much, much worse. And then you take out your debt service (P&I payment). Truly netting $300 would be a very excellent rental.

Speculation pure and simple. "Buy my crummy rental using too much leverage and you'll be OK in the end because rents will go up". There are ZERO guarantees that will happen. Your rents may go down. It does happen. All too often on these turnkey deals I've examined the rent promised by the turnkey sellers is above market rent to start with. You may find that after the one year rent guarantee expires you're stuck re-renting the property at the lower market rent.

You may also find that if you decide to sell the property you have to bring cash to the table. With only 5% down if you sell after a year that you have to bring cash to the table. Despite this gross oversimplification "but for the sake of making a complicated subject as simple as possible $4100 is the average annual loan paydown", you pay almost nothing in principal for the first 10 years of a 30 year loan. After paying closing costs you will be in the hole even if you can sell for the price you paid. Its entirely possible you discover the price you paid was above retail and to get a buyer you have to sell it for less than you paid. So, you're even further in the hole.

Before jumping into any rental purchase, and especially turnkeys, make these assumptions:

1. The house needs work. If it was rehabbed, assume its shoddy, cosmetic rehab that has covered up underlying problems.
2. The house is overpriced.
3. Rents are overstated.
4. Demand for rentals in the area is overstated.
5. Expenses are understated.

Then work to invalidate these assumptions. Get on a plane and go visit the property. Drive the neighborhood. Late at night. Look at other houses. Research rents. DO YOUR OWN DUE DILIGENCE. Then buy only if it makes sense based on your own research. Sellers, turnkey or otherwise, are always going to oversell their deal.

Don't look at a far-away deal with your local eyes. This seems to me to be the number one area where turnkey sellers look. The market in Detroit, Memphis or other popular turnkey areas IS NOT the same as your market in NYC, LA or SF. If you use your local eyes and think "this is a great deal" you are probably fooling yourself. Just because it would be a great deal if that property was in your area doesn't make it a great deal where the property actually is.

[David Campbell]

@Jon Holdman makes some excellent points. I especially echo his investment philosphy: "Before jumping into any rental purchase, and especially turnkeys, make these assumptions: The house needs work. If it was rehabbed, assume its shoddy, cosmetic rehab that has covered up underlying problems. The house is overpriced. Rents are overstated. Demand for rentals in the area is overstated. Expenses are understated. Then work to invalidate these assumptions."

It sounds like Jon has a clear investment philosophy and having a clear investment philosophy sure makes investing a lot simpler. I'm using an important word not to skip over - "philosophy". There are absolutely no investment principles. There are only investment philosophies. A principle is correct 100% of the time without exception. Philosophies are subjective.

Very few people get into disagreements over principles like "water boils at 100 degrees centigrade at sea level". Philosophies are hotbeds of disagreement because they work sometimes but not 100% of the time. If you hear someone having an argument it's because they are looking at the world using differing philosophies. My advice to younger investors is to internalize that there is no "right way" or magic formula that is foolproof. Everyone has their own way of analyzing risk reward and it is a subjective philosophy NOT a scientific principle.

Jon's point above "IMHO, the phrase "cash on cash" is more accurately applied to the cash returned to the investor by the property than trying to apply it to these non cash items. " is a great philosophy that works for many people but it's not a principle (there are no absolute principles in investing). When one looks at cash returned to an investor you need to choose an arbitrary time period over which to measure the receipt of that cash. For example, I own net leased shopping centers whose tenants pay a substantial portion of their rent an annual reimbursement basis (common area maintenance for example). It would be missing the big picture to measure the cashflow on a monthly basis when the tenant pays much of their rent on an annual basis. The other thing to consider is whether you even want your property to have a large cashflow. Some of my properties have a large cashflow and some of my properties I use the cashflow to accelerate the amortization of my loans and therefore by my management style I've decided these properties won't cashflow for me because I don't want them to. A popular investment for wealthy investors is a "zero cashflow" CVS pharmacy. The property can be purchased with very little money down but 100% of the rent is assigned to amortize the mortgage so after 20-30 years the property is free and clear. Why would a wealthy investor buy a property they know will have zero cashflow for 30 years? There are a million reasons, but the reasons would all be personal to that investor and they might not be applicable to your investment needs and resources. To say that a zero cashflow net leased property has zero cash on cash return may or may not be a true statement depending on which PHILOSOPHY you are using to evaluate the investment. Using Jon's point of view it would have a zero cash on cash return. Using my philosophy (meaning IMHO) the total profit divided by the capital invested divided by the number of years is the cash on cash return. The majority of Americans are willing to wait 30+ years before their 401k starts to cashflow for them why are real estate investors so impatient to think that a property's monthly cashflow is the most important. Back to my shopping center analogy... on a monthly basis the cashflow on my shopping centers sucks. On an annual basis the cashflow on my shopping centers ROCKS! Choosing the time frame over which to measure cashflow is arbitrary.

Jon made good points about the tax benefits of depreciation, but depreciation is only one of the potential tax benefits of real estate. Here are few points I would add from my perspective. If a rental property is profitable you will want all of the depreciation you can to shelter the rental profits generated by the property. You don't necessarily need the passive loss from the property to carry over against your active income to realize a tax benefit because as Jon said high wage earners won't be able to use that passive loss benefit against their w-2 income. If your rental produces $2000 a year in profit and $2000 a year in depreciation shelter, the income from your rental comes to you tax deferred or maybe even tax free. If you 1031 exchange or hold the property with your depreciated basis until you die then your heirs can inherit the property with a stepped up basis and you can avoid depreciation recapture (consult your tax advisor). Some other huge tax advantages of real estate - the increase in the price of the asset is not taxed until you liquidate the asset. You can potentially borrow your profit out of the property without selling it and that cash deposit in your bank account is tax free. You can potentially 1031 exchange your rental profits into a beautiful home that you rent out for a reasonable time (1+ years), move into this low depreciated basis home as a primary residence and if you live in it for 2 out of the last 5 years you may be able to sell the home and use your primary residence capital gain exclusion to erase some of your depreciation recapture. This is getting complex, but the point I want to underscore is that every person is seeking a different set of benefits from a property. Some investors will be able to use all of the benefits and some don't even want all of the benefits.

Jon's point about buying a property with 5% leverage and selling a year later is a crucial one!!! If you buy a property with that much leverage your transaction costs might equal your entire investment. Any time you are investing with leverage (e.g. stocks bought on margin) there is a higher degree of risk and a higher potential for reward. In my teaching "philosophy" I believe that higher leverage investing can potentially result in LOWER risk. That sounds counter intuitive so hear me out on this one. If I bought a property with 5% down and put 15% in the bank as cash reserves I will be much better able to weather any future market or cashflow fluctuations than the investor who puts 20% down and has minimal cash reserves. Another perspective is that if I bought eight properties with 5% down I would have eight sources of income to create statistical diversity in my portfolio. Chances are I would only have 1/8 of my portfolio vacant at any one time. Andy's philosophy is to use this same amount of capital to put 50% down on a single property rather than 5% down on 8 properties (it's 8 not 10 properties because of added closing costs). Andy would have potentially better cashflow because he has lower leverage, but he also has reduced diversity of his capital. Another powerful concept is the idea of stop loss. People use stop loss in their paper trading all the time. The idea of stop loss in real estate rubs people the wrong way from an ethical standpoint so if you are one of those people please just read through this section without judging and tell yourself "oh that philosophy works for some people but not for me". Here's the idea of stop loss in real estate. Let's say Andy bought a house with 50% down ($100k house with $50k down) and I bought the identical house next door with 5% down ($5k down with $45k left as cash in the bank). The market declines in value from $100k to $40k such as happened to me as an investor in Vallejo, CA after the city declared bankruptcy. Andy and I both decide enough is enough and we are going to short sell our properties at $40k. Andy started with $50k and because he put it all into his property as a downpayment he now has a total loss. I put $5k as a downpayment and left $45k in the bank. I would have a total loss on my capital invested but I still have $5k in the bank so my loss would be 10% and Andy's loss would be 100%. The higher leverage can help you and hurt you, but higher leverage used properly REDUCES your risk of loss. If that is a paradigm shift for you, then your investment philosophy just changed. If you think my idea is full of crap, then I congratulate you on having developed your own investment philosophy. There is no right way to invest in real estate. Investing is real estate is a highly subjective world and discussions like this one will help you figure out how to get the benefits of real estate you are seeking using the resources you are starting with.

To your success!

David Campbell

[John Chapman]

@David Campbell , here's the problem I'm having. You are taking pages and pages to try to explain what I consider a very simple investment type, single family turn key investing. (I'm a lawyer, and I'm having trouble following you.)

As @Jon Holdman alluded, this stuff is not rocket science. There's the 50% rule (which I think is probably not conservative enough in Texas given our taxes), there's the actual market value of the properties, and there's the rents. Without even getting into the issue of whether the market value is really what you say it is, or whether rents are your what you say they are (which I think every investor would need to verify), how is there is any cashflow from a $130K property that is leased at $1300 and 95% leveraged? Even if I assumed I could finance the 95% at 5% for 30 years (unrealistic), my mortgage payment is $662, which means I'm losing $10/month in cash flow if I apply the 50% rule. (Frankly, I think it would probably be much more using realistic assumptions for taxes, insurance and property management in the DFW metroplex) I'm not saying this is a deal-killer, but can you give us an explanation as to the type of return an investor can expect in real numbers?

[David Campbell]

@John Chapman I have been trying to talk in educational generalities to avoid pitching a deal in the forum, but since you and others have asked here is a post that includes the math and deal points as I market it (BIG DISCLOSURE - The following post may sound like a pitch book, but it's intended to be educational to the thread. If you think you'll be turned off by this, please just skip this post).

Rent range in our neighborhoods are $1250-$1350 so I typically proforma $1275 gross rents. The vast majority of our homes are leased for $1275-$1300. We have plenty of rent comps in our subdivisions and the surrounding areas to back up this rental income assumption. We build an energy efficient home that exceeds the minimum building requirement. This keeps the tenant's energy costs down which makes our homes even more affordable for the tenant than a comparable 4 bedroom that is 15 years old. We aren't expecting a premium rent for our homes because of this but we do use it as a feature when marketing to tenants which helps our occupancy rates.

Vacancy assumption 6%. This could a low vacancy rate for some markets, but Dallas is a hot rental market right now and we are seeing almost everything in our neighborhoods lease in 30 days or less (except for Nov - Feb which are sucky times to rent anything in Texas because of the holidays and cold weather). Our 3rd party property management company shows me the rent roll for our neighborhoods every month and they are averaging 94% occupancy. Looking at class B apartment rental data newer than year 2000 in our areas of Dallas and Fort Worth they are experiencing about a 94% occupancy rate as well.

Property management fee: 8% this is what our preferred 3rd party property management company charges to our clients. Market rate in Dallas is 6-10% of the gross rents collected.

Leasing fee: $300 per year. This could be an optimistic assumption. This assumes that a property turns over and a leasing fee is paid every 2.5 years. These are brand new four bedroom homes and our demographic is families. Our Dallas subdivision also has excellent schools (Duncanville ISD) which tend to attract less migrant tenants. In my personal experience I've had some rentals where the tenant stays forever and some where the house turns over every 12 months. This leasing fee estimate is highly subjective. The property manager typically writes 12-18 month leases.

Insurance: $721 per year. This is a middle of the road quote from Allstate with average credit and a $1000 deductible. You can get cheaper insurance with multiple policy discounts, better credit, and a higher deductible but I am trying to paint as realistic of a cashflow portrait as I can.

Maintenance: $459 per year. This would be a really low assumption for an older unit, but within the range of possibility for a brand new property with a 10 year builder warranty backed by a third party insurance company (Strucsure). There really should be zero maintenance expense in the first few years of ownership of a new property under warranty which allows you to build a maintenance contingency buffer when the property does need new carpet and paint. We also build the home with low maintenance expenses in mind. We use sheet vinyl that looks like wood in all of the common areas of the home. This vinyl product is very durable and is very cost effective to patch / repair if a tenant does damage. Only the bedrooms are carpeted and when you go to recarpet only a bedroom you can use remnant carpet to keep costs down. The home is a two tone interior paint and we use the same sherwin williams beige and white paint colors inside every home. The property manager and tenant are given touch up paint so the turnover touch up painting costs can be reduced.

Property taxes: It is easy to research the property tax rate and tax expense. In Texas there is a potential property tax holiday on new construction homes in that the assessed value of the home often lags behind construction. Basically, there are going to be a 2-10 months at the beginning of your ownership where the tax assessor will tax you as if you owned a vacant lot rather than an improved house. This is a bonus to our clients but it's not in our proforma. If you object to some of the assumptions I've made, here's a little fat to even the score a bit (albeit it's a one time bonus). I've made the assumption that the property tax rate will be applied to a value that is 90% of the purchase price. That is a reasonable assumption for our DFW market. You might even be able to petition the tax assessor for a lower tax value and therefore get a better cashflow than I've estimated.

Mortgage - I'm using a 5.125 interest rate at one point for the first mortgage and 5% interest rate on the 30 year fixed second mortgage. Rates change daily but as of today you can probably get a little better rate than 5.125 with one point. The second mortgage interest rate is so cheap because I'm lending my own money. I make my money building the house so I don't have to make a high interest rate on the second mortgage. I have 15% of the capital invested in this home and my buyer has 5% of the capital invested in this home. My second mortgage will only get repaid if the investor is successful with the ownership of their property. As the junior lien holder that makes me HIGHLY motivated to (1) build a quality product (2) provide a reasonable cashflow forecast (3) maintain property values in the subdivisions I am building in (4) provide long term mentorship to our investor buyers to improve the likelihood of their investing success (5) assemble a powerful buying group of investors who can negotiate stronger pricing from property management and the maintenance vendors because there is economy of scales like you would get in managing an apartment building but these are separately owned houses in close proximity. My main motivation in providing the second mortgage is to develop a lifelong relationship with the investor which is created by being their flexible bank. If an investor gets over their head with their property or needs an emergency quick sale of their property, I am more motivated to earn a loyal investor than to make sure I get every dollar of my second mortgage repaid. My second mortgage helps the investor know we are invested in the property "together" without the complexities of a "partnership" in the legal definition of the word. Every other turn key provider I know takes their profit at close of escrow and the investor is on their own. Our company leaves 100% of our profit in the deal as a second mortgage and we usually contribute a little more equity capital besides. In short, if an investor ever needed to short sale their property they have a 15% cushion in my private second mortgage before a short sale became a problem for the investor. All of the first mortgages are done through conventional lenders who requires an unbiased appraisal. All of our purchase contracts are written to be contingent upon the property appraising at the contract price. Recently, our homes have been appraising slightly higher than the contract price. It's a brand NEW 1550-1700 sf four bed, two bath, two car house for $130-140k. The only reason we can build and sell at that price is that we have economy of scale for being one of the larger builders in DFW (we have ~1% market share of a huge market) and we were able to buy our land at an amazing price during the great recession. Can you find a cheaper home in our area? Probably, but it would be 10+ years old, it wouldn't have a warranty, and you wouldn't get the benefits I outlined above. If someone doesn't want the benefits we are offering and price is the most important thing, they might find a 10+ year old home in the same area for about 5-10% less than what we are selling a new home for. IMHO a home starts needing maintenance about year 10-15. That when you'll need to think about replacing fencing, hot water heaters, toilets, fixtures, appliances etc. You in theory pay a small premium for a new home, but I think you make up for it in reduced maintenance costs. Remember you can finance a new home, but you'll have to pay cash for the out of pocket maintenance on an older home. I'm digressing a little bit into philosophy and I totally get that some people will see this differently than me. This opportunity is not for everyone. Our most successful clients are long term, semi-passive investors who like the idea of high leverage, they just want the property to cashflow at least +$1 per month, and they see value in the intangible long term benefits we provide that go beyond the sticks and bricks of a home.

In short, we are forecasting an expense ratio of 42% (not 50% as others suggest) but this is new property with a 10 year builder warranty. In reality, you should have very low expenses for the first several years and then a higher expense ratio as the home ages. The biggest cost savings on a new home are lower insurance expenses, lower maintenance expenses and the potential for higher occupancy rates.

I've attached a screen shot of our cashflow proforma which shows $63/month net spendable cashflow. As anyone who has been on the phone with me knows, I advise the client to call this break even cashflow and stick the extra cashflow into their contingency reserve fund. If you sell this property in 30 years and net $131,000 which is exactly what you paid for it (ultra conservative even for Texas) and you made no cashflow along the way, but your tenant paid off the mortgage for you here's the math: $131k proceeds of sale - $11k invested (assumes 5% down + closing costs) = $120k profit divided by $11k invested = 1090% total return divided by 30 years equals 36% annualized ROI. If you're happy with 36% annualized ROI using what I think are ultra conservative assumptions this deal could work out for you. If you think there is a possibility of rent increases or price increases over a 30 year period in a super strong market like Dallas, it's possible your return would be even better. If you see the opportunity to pull cash out this property in 15 years and re-leverage your money, your returns could possibly be MUCH better.

I've been offering this 5% down program since 2009 and I've had ZERO defaults on our second mortgages. The average client has purchased three homes from my company and usually one at a time after they have had proof of concept one the first rental. The majority of our sales come as referrals from existing clients. I focus on building investor relationships for life and the transactional business naturally happens.

Sorry for the long pitch book... I'm hoping there were at least a few educational nuggets that made it worth while reading to the end of this post.

David Campbell

[Eric M.]

I haven't bothered to read the full text of David's blathering. What I don't like is when people like David Campbell post under fake accounts like Stan's and then hijack the thread as "themselves".

Stan is obviously bogus and he asked if anyone had experience with David Campbell, so in my mind David Campbell's spewing of information about his own product is OFF TOPIC.

[Account Closed]

@Eric Michaels,

Do you have any proof you can share with everyone whom David Campbell post under fake accounts?

Joe Gore

[Bryce Y.]

So the basic idea is to buy at retail prices, leverage 95%, and make the bulk of your return on principal paydown? I'm not bashing you or your company as I have never heard of it before this thread, but this does not sound like a good business strategy. Being so highly leveraged makes you extremely exposed to market fluctuations and with virtually no cash flow to lean on, it seems more like gambling than investing.

Also your expense assumptions are flawed. Being new construction, I can buy the 3% expenses for the first few years, but according to you, "This would be a really low assumption for an older unit, but within the range of possibility for a brand new property with a 10 year builder warranty backed by a third party insurance company (Strucsure)." So what happens after year 10? Surely expenses will go up dramatically (on average). Are you accounting for this in your model?

[Jerry W.]

@David Campbell , I do not know that I have bought your philosophy completely, but I must admit I like the way you post. No attacks on folks who disagree, you address each point individually. pretty good. Do you do the property management? Or do you just refer a different company. Thanks for the posts.

[John Chapman]

@David Campbell Thanks for taking the time to write that out. I have to say that point by point I probably agree with you more than I disagree. First, I should qualify, that I haven't looked at Duncanville in years, so I really don't know the market values or tenant pools, particularly if it's a $1300/month pool or closer to the $1000/month crowd. I also don't know about the whole model of having a bunch of rentals in one subdivision. I'm going to assume, then, for purposes of this post that you are correct about those issues.

That being said, I agree that if the market value of a new build is $130,000, you should be able to get $1300 in rent easily. I agree your taxes are insurance are correct. I think your vacancy rate is correct, particularly for a new build. I also like the idea of selling the place as energy efficient to prospective tenants as a perk to minimize vacancy as opposed to using it to justify higher rents (which I think would just in turn lead to higher vacancy.) I would be more conservative with the pm fee (using the market 10%, plus half a month's month re-letting fee every two years), but that's me quibbling with you at the edges.

I agree with @Bryce Y. that your maintenance and capex expenses are just too low. I think you can achieve them in the first couple of years, but they will be higher in subsequent years. Just changing carpet in the bedrooms when tenants leave, even with remnants, is expensive.

I agree that if you can truly put 95% fixed, 30 year financing on the property, at 5.25% (no balloons or anything) for standard closing costs, that is something of incredible value. (Not saying I would necessarily do it, but I had assumed that the second would be a much higher rate.) Also, I agree it does motivate you to see the investor succeed.

At the very least, it's an interesting business model.

[David C.]

@David Campbell says:

If you sell this property in 30 years and net $131,000 which is exactly what you paid for it (ultra conservative even for Texas) and you made no cashflow along the way, but your tenant paid off the mortgage for you here's the math: $131k proceeds of sale - $11k invested (assumes 5% down + closing costs) = $120k profit divided by $11k invested = 1090% total return divided by 30 years equals 36% annualized ROI.

Does divided by 30 really give an 'annualized return' ? that assumes no compounding? I don't think anyone uses that kind of math for any investment?

I get that 8.3% for 30 years gets you 1093% of your original investment.

@Jon Holdman don't forget the step-up in basis on death, the killer app for depreciation is that your heirs get to avoid recapture with the stepped up basis at the time of your death! We all die, so this is a sure thing! I'm going to pull all my money into these zero cash-flow deals and then off myself in year 29, I'll get the last laugh!

[David Campbell]

@Jerry W. - Thanks for your question. I outsource all of our residential property management and I do all of our commercial property management in house. There are lots of strong property management firms in DFW. I have my current favorite that I am happy to recommend. I like the ability to be aligned with my investor buyer / client in the event there is a conflict between the investor and their manager. Good residential property management is hard to do and even harder to do profitably.

[David Campbell]

@David C. "Does divided by 30 really give an 'annualized return' ? that assumes no compounding? I don't think anyone uses that kind of math for any investment? I get that 8.3% for 30 years gets you 1093% of your original investment." You make an excellent point about the difference between annualized non-compounded ROI and annualized compounded. I was stating the former and your math is correct for the latter. There are so many variables in investing and so many benefits the math can get confusing especially with vocabulary that sounds the same but the math formula is very different. We make the best forecasts we can to help us compare apples to apples before we head into the battleground of the marketplace and then all forecasts are thrown out the window the moment we are in the heat of battle as an investor / owner / manager of a property. I don't really advocate buying exclusively for amortization; I was just isolating one benefit of ownership and putting an ROI number on it. I don't think that home prices or rents or operating expenses will stay the same over 30 years especially not in a growing market like Texas ... and especially not in an inflationary economy.

[Duncan Taylor]

@David Campbell

If any of my buyers, who are my employees, brought me a deal based on the numbers, data and hype you have presented here and recommended we buy it... I'd fire them on the spot and personally kick their butts all the way to the parking lot.

[J Scott]

Originally posted by @David Campbell:

Let's assume a property bought with 5% down stays the same value but your tenant pays off the mortgage over 30 years. Using Stan's loan numbers that is approximate $4300 equity per year from amortization (I know amortization is not level because the beginning of a loan is mostly interest, but for the sake of making a complicated subject as simple as possible $4100 is the average annual loan paydown). If you have 5% invested ($6500) and you get $600 in cashflow and $4100 in amortization equity that is $4700 per year / $6500 invested = 72% annualized ROI before you consider the possibility that the home price could increase from inflation or increased demand.

Ugh. Seriously? This is the second post today where someone who is trying to sell properties on a large scale is taking well-defined finance and accounting terms and redefining them to justify their business model...

Okay, let's just ignore the "cash on cashflow" discussion for the time being -- the definition of cash on cash return is well defined (ask your CPA or do a Google search) as a pre-tax return measure and "cash on cashflow" is a term that I assume this poster has made up himself. I'm happy to debate whether it's a useful metric or not, but that's a separate post.

But, on to my most important point...

Much of your post is mathematically sound, but then you make a couple ridiculous leaps that make me question how well you understand this stuff. Let's use the quote I pasted above as my case in point.

EDIT: I had posted a long criticism of the math you posted above, but in retrospect, criticizing what you wrote above insinuates that I think you just made an honest mistake. I don't believe that. As I recommended to another poster earlier today, you really should add someone to your team who understands finance. I'll leave it at that.

[David C.]

Ugh. Seriously? This is the second post today where someone who is trying to sell properties on a large scale is taking well-defined finance and accounting terms and redefining them to justify their business model...

@J Scott in his defense, his bad terminology was not posted today... Duncan commented today reviving this slightly old thread. I had mentioned this thread to him and in the other conversation.