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Updated almost 10 years ago, 01/16/2015
David Campbell & Hassle Free Cash Flow Investments – Dallas / Fort Worth, Texas Turn-Keys
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.
Originally posted by @David Campbell :
David -
In my post above, I said I wouldn't delve into the math...but there's a lesson here for others reading this, for their sake -- not yours -- I'll consider this a teaching moment.
In the example above, your parameters are:
- $11K purchase
- No cash flow for 30 years
- $131K sale in year 30
You go on to say that the annualized rate of return for this deal is 36%. Any good investor would immediately think to themselves, "He's analyzing a 30 year investment without regard for the time value of money!"
In other words, given that the $11K has the ability to be compounded over the next 30 years in another investment (another property, stock market, commodities, businesses, etc) that actually throws off more cash either during or at the end of the investment term, the $131K in 30 years may or may not be a good return. And using an annualized ROI measure completely ignores those points (which is why it's the wrong measure to use in this situation).
But, luckily for us, there's a common return metric that does factor this in -- it's Internal Rate of Return (IRR). If you run an IRR analysis on the example parameters you provided above, you get the following:
Yup, your compounded annual rate of return needed to hit this investment target ($131K return off $11K investment over 30 years) is 8.60%.
While I'm not a huge fan of the stock market, the fact is that these returns are pretty commensurate with what you'd get in a diversified stock porfolio (based on historical averages), and there's no argument that you'll do a lot more work holding a portfolio of houses than you would putting your money in a mutual fund.
Regardless, whether you believe 8.6% is a reasonable long-term annualized return for being a landlord or not, there's no arguing that the returns you presented for this scenario (36%) are at-best misleading and at-worst deceptive.
In a later post, you claim that math can get confusing because different people use different terminology and formulas, etc. It's not that math has to be confusing -- it's just that some people don't understand how to apply the math and some people purposefully apply the math incorrectly in order to mislead.
@JScott If accounting math and terminology was a principal and not a subjective part of an investor's philosophy there would be one universal accounting standard and it would have been codified hundreds of years ago; however, you'll see from this excerpt from Wikipedia explaining accounting standards that accounting best practices change all the time and accounting is done differently around the world and from company to company.
"Auditors took the leading role in developing GAAP for business enterprises.[3]
Accounting standards have historically been set by the American Institute of Certified Public Accountants (AICPA) subject to Securities and Exchange Commission regulations.[4] The AICPA first created the Committee on Accounting Procedure in 1939, and replaced that with the Accounting Principles Board in 1959. In 1973, the Accounting Principles Board was replaced by the Financial Accounting Standards Board (FASB) under the supervision of the Financial Accounting Foundation with the Financial Accounting Standards Advisory Council serving to advise and provide input on the accounting standards.[5] Other organizations involved in determining United States accounting standards include the Governmental Accounting Standards Board (GASB), formed in 1984, and the Public Company Accounting Oversight Board (PCAOB).
Circa 2008, the FASB issued the FASB Accounting Standards Codification, which reorganized the thousands of US GAAP pronouncements into roughly 90 accounting topics[6]
In 2008, the Securities and Exchange Commission issued a preliminary "roadmap" that may lead the U.S. to abandon Generally Accepted Accounting Principles in the future (to be determined in 2011), and to join more than 100 countries around the world instead in using the London-based International Financial Reporting Standards.[7] As of 2010, the convergence project was underway with the FASB meeting routinely with the IASB.[8] The SEC expressed their aim to fully adopt International Financial Reporting Standards in the U.S. by 2014.[9] With the convergence of the U.S. GAAP and the international IFRS accounting systems, as the highest authority over International Financial Reporting Standards, the International Accounting Standards Board is becoming more important in the U.S.
Originally posted by @David Campbell:
I never mentioned anything about accounting and this thread has nothing whatsoever do with accounting or accounting practices. Did you mean finance? Or am I missing something?
I was referring to this comment of yours:
"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."
And my point was that when the math and the vocabulary is truly understood, it doesn't get confusing. Understanding the math doesn't just mean knowing how to plug numbers into formulas, it also means knowing which formulas to use when (and why) and which formulas not to use (and why not).
There's nothing wrong with not having a firm grasp on the math behind investing metrics (I know I don't always grasp every concept!), but to claim that the math can get confusing because of vocabulary that sounds similar just says that the math (and/or the vocabulary) isn't truly understood by the person using it.
And btw, I often don't know how to apply and analyze metrics in certain situations; but I never blame the math...it's MY lack knowledge that's the issue.
Originally posted by @David Campbell:
You are all over the place, aren't you?
Accounting has nothing to do with calculating or understanding investment metrics. Accounting is focused solely on accurately recording and reporting financial transactions.
While a CPA knows how to calculate an IRR and help you understand what it is trying to tell you it has nothing to do with accounting for the transactions involved.
Oh and by the way, ask any high school or college student what happens when they cite Wikipedia as a reference in a paper.
@Scott - I understand compounding return. I was clear that my illustration was based on annualized non-compounded return. It's not my intent to mislead. Thank you for showing your longhand math for compound return.
A market as strong and economically as diverse Dallas, TX should have rent growth and price growth but that is for each investor to decide how much to speculate on that future potential variable. I typically estimate a 3% increase in rents and 3% increase in all expenses except the mortgage payment which is a known constant. Again that is my philosophy and the reality is that in an economy based on fiat currency no one has any ability to accurately forecast what rents or prices will do in the future. It's one giant educated guess.
My properties and my investment philosophy are not for everyone, but I've been doing this a long time and I have a lot of happy repeat clients so there must be something to my madness. We also build a nice home. My company builds ~1% of all the new houses in Dallas, TX. That's a small market share of a huge market, but it's an accomplishment I'm proud of.
I usually don't post on BiggerPockets because the environment can be hostile because everyone seems to have an agenda to push. I'm here today because my name came up as the topic of a thread and I couldn't stay away (but probably should have).
Don't get your feathers ruffled people - I'm not trying to change your philosophy.
At the end of the day I'm offering a 6-6.5 CAP brand new rental property in one of the fastest growing metros in the US that can be purchased with 5% down and 95% CLTV 30 year fixed interest rate financing at 5%. If I were a newer or part time investor where the most important things to me were high leverage, semi-passivity and hassle-free management, I think I offer a compelling product that I haven't seen anywhere else. If you are a hands-on, do it yourself, make a ton of sweat equity kind of investor, my stuff will not be right for you. Back to my original point, everyone should form their own investment philosophy and buy stuff that fits inside that philosophy.
Originally posted by @David Campbell:
So, your target market is new investors who don't know any better. That must be one helluvan elevator pitch.
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Holly molly maybe I am missing something here but buying a single family rental is just not this complicated. the citations to gaap account the SEC extra extra.. seems over the top... Am I missing something. When I used to buy timber land ( I just sold my last tree farm in Oregon this year) we used to do all sorts of tax plays with depletion growth rates etc etc. Its all greek to me at the end of the day.. But SFR rentals REALLY
- Jay Hinrichs
- Podcast Guest on Show #222
Originally posted by @Jay Hinrichs:
@J Scott
Holly molly maybe I am missing something here but buying a single family rental is just not this complicated. the citations to gaap account the SEC extra extra.. seems over the top... Am I missing something. When I used to buy timber land ( I just sold my last tree farm in Oregon this year) we used to do all sorts of tax plays with depletion growth rates etc etc. Its all greek to me at the end of the day.. But SFR rentals REALLY
All you are missing is @David Campbell trying to obfuscate.
David, if you build 1% of the homes in Dallas, and build a good product, that is something to be proud of.
As for this:"At the end of the day I'm offering a 6-6.5 CAP brand new rental property in one of the fastest growing metros in the US that can be purchased with 5% down and 95% CLTV 30 year fixed interest rate financing at 5%. If I were a newer or part time investor where the most important things to me were high leverage, semi-passivity and hassle-free management, I think I offer a compelling product that I haven't seen anywhere else."
I guess I'm going to ask the others here: a 130,000 property that rents at 1300/month - is that a 6 - 6.5 cap rate? With 50% expenses - that leaves 7,800/130,000 = 6% Is that how we come up with a cap rate?
But can we use 50% of rent when the rent is only 1% of the purchase price? or do we need to say: investment properties should be priced at rent = 2% of the purchase price, so a 130,000 property should rent for 2,600, leaving 1,300 in expenses and in his case: $0/130,000 or a 0.00 cap rate?
Originally posted by @David C.
All you are missing is @David Campbell ell trying to obfuscate. David, if you build 1% of the homes in Dallas, and build a good product, that is something to be proud of.
As for this:"At the end of the day I'm offering a 6-6.5 CAP brand new rental property in one of the fastest growing metros in the US that can be purchased with 5% down and 95% CLTV 30 year fixed interest rate financing at 5%. If I were a newer or part time investor where the most important things to me were high leverage, semi-passivity and hassle-free management, I think I offer a compelling product that I haven't seen anywhere else."
I guess I'm going to ask the others here: a 130,000 property that rents at 1300/month - is that a 6 - 6.5 cap rate? With 50% expenses - that leaves 7,800/130,000 = 6% Is that how we come up with a cap rate?
David C - You did the math right, and the investment described above is about a 6% cap rate investment.
In fact, if David Campbell had simply stuck with that paragraph above (that you quoted), and hadn't used misleading math to describe his investment, I would be the first to say, "That makes perfect sense and sounds like it might be the right investment for certain types of investors."
Not every investment is a home run and not every investment is right for every investor. Put out there what you have, describe it accurately and if it's good for someone, hopefully that someone finds you.
Remember, if you tell the truth 1000 times in a row, there will still be people who wonder if you're an honest person; but you lie/mislead just 1 time and there's no doubt you're not.
David Campbell - I'm sure you don't know/care who I am, but here's some feedback I'd give you -- from reading your posts above, you seem like a smart guy and I don't get the vibe that you're trying to rip anyone off. Just the opposite -- it seems you're dedicated to offering a good, but niche, product that would work well for a certain type of buyer. Nothing wrong with that, and I actually highly respect that business model. But personally, I think you could position your investments just as well by being completely honest and removing the hyperbole when you talk about returns. I don't believe the backlash you're getting here is about your product, but instead, it's about your claims.
Again, just my opinion...
A few years ago I purchased a property in Vero Beach Florida from @David Campbell. I live in Sacramento, CA and because of hedge funds I could not get good cash flow properties in my local area so David's company was perfect for me. I would have NEVER felt comfortable making the leap of buying a property out of state, let alone the other side of the country, if it were not for his company.
The property has not been a home run but it has been solid investment. I bought the property for about $80,000 and have made between $200 and $300 a month since. I talked a buddy of mine into buying a property there also and his property has been a good experience for him as well.
Again this has not been a home run, but it has led me to feel much more comfortable with buying out of state and David Campbell was very fair and informative. I feel like this thread has been unfair to him and his company. I would recommend it to anyone who is interested in a turn-key property (not for everyone).
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Raymond
Originally posted by @David Campbell:
There are absolutely no investment principles. There are only investment philosophies. A principle is correct 100% of the time without exception. Philosophies are subjective.
...
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.
David:
Cash on Cash return {or yield} is not a philosophy, it is a financial principle with a standard definition - at least in the five accounting and business finance texts I have immediately at-hand. It is the measure of yield on an investment. Computed as the ratio of the annual income from an investment to the amount invested.
Or, as Jon stated: {annual} cash-flow / total {dollar} amount invested.
[After I had originally responded, I noted this was a revived thread from early in the year and J. Scott had already called to task Mr. Campbell over his redefinition of convenience for Cash-on-Cash return.]
Thank you @Raymond B. for the pointer:)
This is why @Jon Holdman is a moderator with 10k+ votes. Well done, sir.