All Forum Posts by: Samuel DeMass

Bought a house in 2012 for 230,000 put down 20% and owe around 177,000.
The area has appreciated greatly and the house is currently worth 350,000.

 Gerry,

Another idea struck me that might be worth considering in your situation.  If market rent did not increase with the increase in the property's appreciation then a refinance may reduce your cash flow and, by association, your cash on cash return.

In this scenario, it may be prudent to sell the property to extract the tied up 173K in equity and accept that you've made 273% profit on your original 46K down payment.  Nice job!

Now, you can invest your newly liberated 173K into a monster 865K multiplex property that should provide you with a higher cash flow.  Alternatively you could split the down payment into 4 similar sized properties to stay within your niche at, on average, 216K  with a familiar 43K down payment a pop.

This move would help you redistribute your equity to help you maintain a solidly leveraged position while ensuring a positive cash flow.

Either way, great pick on the initial property!  Great problem to have.

Gerry,

What is your cash flow on the rental property you're proposing to refinance?  Will the refinancing of the appreciated value of your rental cause your debt service costs to increase and put you in the red?

Just food for thought.  I had similar questions on my first round of refinancing.  I needed to tap into some of the equity created from the appreciation for improvements.  Luckily I was also able to get a better interest rate to lower my mortgage payments and increase my overall cash flow.  It was a win-win for me, but it was a limited amount of cash out.

Elizabeth,

Thanks!  I thought they might be hiding in plain site, just need a new lens.  

Are these properties that you picked because of their situation or was it more market availability?

In my limited experience, I've never had the fortune of stumbling onto a foreclosure or short sale.

I'm getting ready to enter the market again and I would like to be more aware of all the options available.

Where should I look to find foreclosures, short sales, and other properties in duress?

Thanks, Ned.

I was missing the forest for the trees! 

This is one of the advantages of this site.  Constantly learning and refreshing.

I've got 3 properties mortgaged together on one loan. At the time, it was the only feasible way to get the financing done, as it was a portfolio lender from a banker I knew well. Now, a few years down the road, I'm ready to start improving my overall cash flow and maybe 1031 to a more profitable property by selling the lower performers and keeping one. Here's my question: What happens to mortgage when I sell one or two properties? I plan on giving the bank a call and discussing. Any additional suggestions on things I should consider would also be appreciated. Thank you for your time!

I've done all the above with different rental units. I would recommend tile over hardwood, for durability and cleaning efficiencies. However I have had success with old wood floors. My current home and future rental has beautiful engineered hardwood. I like it a lot, and I agree that it will attract the next level of tenant if that's what you're objective requires.

Thanks for the insight, Joe. I think having an exit strategy is solid planning. Albeit that I'm always setting up for a hold strategy, I'd like to learn more about wholesaling. Let me know if you have any suggestions on where to start learning.

Joe,

Great point.  There are a plethora of variables I omitted when coming to the value from the buyer's prospective, because you NAILED most of them with your first post!

I couldn't agree more with doing the 'simple math', as I like to call it for the buy and hold strategy to find your break even point.  

Additionally I think Richard C. made a valid point about not having to hit a home run every time.  As long as you can work out the net cash-flow to be a positive, using prudent and conservative estimations, it's a green light.

What method do you use to for your exit criteria?

I'm of the opinion that a property is worth the price at which a buyer is willing to pay, and a seller willing to sell.  This is of course a very broad brush perspective, but I like to remind myself of this simple truth when approaching a deal.  Sometimes inflated hype or other past life experience will influence both buyers and sellers in their value of the same property.

Appraisals however use 3 common techniques, and I stress "techniques" as it follows our simple truth.  I only feel sure footed on speaking about residential real estate, but it may well transfer to commercial:

1. Cost Approach - How much it costs to build/rebuild the property.  This includes the price of materials and labor to build an identical house on an identical plot of land, given current market forces for material and labor.

I find this method the least helpful of the methods in my personal ventures.  I think of this as more of an insurance reference number.

2. Sales Comparison Approach - Usually a minimum of 3 recently sold houses of similar build and geography are used in the scope of the analysis.  The attributes that differ from the subject house are added to or subtracted from the comps to arrive at a corrected value of the subject house.  

In example, Lets assume the subject house has an attached garage.  Comp #1 was sold recently at $100,000 and is similar in all other aspects, except it doesn't have a garage.  The appraiser would then subtract the value of the garage out to arrive at a value for the subject.  Again, lets assume the appraiser assigns an attached garage a value of $5,000 (I'm not sure of the method they arrive at the garage value).  The Comp#1 adjusted value would be adjusted $100,000-$5,000 = $95,000.  Then the appraiser would continue with the calculations of the other (at least 2) comps to get 3 values.  At his point an average can be made to produce an appraisal value using this method.

This approach gives you a good idea what the local market forces are doing to property value.  I find this helpful as a reference, but only to ensure I'm not overpaying for a property.  The next method is the most valued opinion to me.

3. Income Approach - This method takes the income producing potential of the property into account and uses a multiplier to arrive at a value. There are a few ways to do this, and you can read more about them by the link I attached below:

http://en.wikipedia.org/wiki/Real_estate_appraisal...

How can you as a potential real estate investor (not an appraiser) value a property?  In my opinion the most common is looking at the capitalization rate, or 'cap rate'. This is probably the most efficient and meaningful way to analyze a real estate deal.