All Forum Posts by: Alex Fidelia

hey Jay,

Also, when it comes to Real Estate Agents, who are the heavy hitters in Indy?

best

Alex

 Thanks Jay!

I am not too familiar with the others, but I thought F S homes was more focused on C class?

best

Alex

hey Raju,

Great, thanks!

I'm curious how you got to that number though.  I am paying all cash for my properties and based on the PM I talked to, I should be able to get $300-$500/month.

Although it might be B's now

thanks

Alex

 Jay,

It sounds like your criteria has evolved a lot over the years, and you have thought things out carefully.

Right now, I see B class as lower risk in general (I'm sure there are always exceptions). Maybe I will want to get into the C class in the future when I am more experienced and willing to take more risk, but B class seems like a good idea for a new investor.

If I were to change course and get into the B class space, are there any PM's you would recommend?

thanks

Alex

hey Jay,

I guess I don't understand why IRR is the real metric. Wouldn't it depend on your goals?

My goal in real estate is $4,500/month in cash flow.  So shouldn't I just be looking at cash flow?

I also don't understand the point about needing to scale C classes quickly. Obviously if you buy your properties more quickly, you will make more money overall because you will start cash flowing earlier. But that's true regardless of class. So I guess I'm just not getting your point.

But let's forget about why for a second. To reach my $4,500 goal, all I need is 15 C-class properties cash flowing at $300/month.  How quickly would I need to purchase them for C-class to be worth it, in your opinion?  5 years? 10 years? 

thanks

Alex

hey James, 

I appreciate you being honest with me on this...

Your'e right. There's nothing wrong with PM companies making a profit, they are providing a service and saving me a lot of time and headache. Otherwise I would not hire one.

...And they need to be compensated fairly for that

I guess I just never thought of it that way!

Going forward, what is the best way to establish a good relationship with your PM? 

thanks

Alex

hey Jay and James,

So is the optimal strategy to simply buy in a great area that attracts quality tenants? As long as you buy right?

Attracting quality tenants and buying right seem to be the only large variables that are under my control.

Just want to clarify that I would be willing to buy C class...I am fine with the PM profiting from maintenance and turnover. If the maintenance costs are higher that is fine if the numbers work, but how the heck do I estimate the expenses? 

It seems to me like:

B class = attract quality tenants = less turnover = less variability = easier to estimate my turnover expenses

C class = attracting lower quality tenants = more turnover = more variability = harder to estimate my turnover expenses

I realize that everything is an estimate. But as an investor you want to select the option that is easiest to estimate.

...But here's an argument to buy C-class:  "The market is up, that means B class property values are inflated much more than C class. "

I guess that is the only main anti-B class argument I have left...

thanks

Alex

hey Jay,

Yeah I agree the proformas cannot be trusted. I am not going by proformas though, I am going by talking to other investors that own property.

....So are you saying that I may be better off buying a B class property because at has a higher likelihood of appreciation so that if I do sell it, I am less likely to lose money?

Are C properties sold by investors more often than B properties? With the higher maintenance, turnover and headache factor, I could imagine that being the case.  It certainly makes sense to buy something you are less likely to sell someday.

thanks

Alex

hey Jay,

Appreciate the lightning fast response!

That sure is a great model, I agree! That is definitely my eventual goal once I have more capital.

Sorry, let me clarify my position on PM's....

I don't think the PM controls the deal, I was just trying to figure out how to optimize my strategy by isolating the PM factor. 

The way I see it, it is the investor's job to buy right and pick the right team. If I don't do that right, I am the only one to blame for poor returns.

But If I buy right and buy in a nicer area, I minimize the effect the PM can have on my expenses. I realize that a flat-out bad PM can ruin your cash flow even in an A-class property. So you have to pick a pretty good one. But you don't have to find that 1% diamond-in-the-rough PM (which will be fleeting) if you buy in a good area.

Does that logic make sense?

But I still don't understand.  If the PM profits from turn over, wouldn't he/she be willing to spend the overhead costs and time?

I'm still confused on whether I should buy B-class or C-class...I feel like I'm in analysis paralysis here....lol....

Is it better to buy B or C, given the PM's here in Indy?  Are the B class PM's better than the C-class PM's or vice-versa? Maybe that would help me decide?

Am I still barking up the wrong tree?

thanks

Alex

@Jeff Schechter @Jay Hinrichs @James Wise @Tchaka Owen

hey All,

Thanks for you candid replies, that's very helpful! So here is what I am learning...A PM needs to make money from at least one of 3 Profit Centers (I'll call them Poisons, haha):

Poison A) a lot of turnover, but low maintenance mark-up

or

Poison B) high maintenance mark-up, but low turnover

or

Poison C) hidden fees

Let's compare 2 scenarios:

Scenario I) You buy a C class property 10% below market value

Scenario II) You buy a B class property 10% below market value

Here's my hypothesis: buying B-class (scenario II) gives you the greater likelihood of long term success because your cash flow is less dependent on your PM. 

Here is my logic:

1) PM's will almost always make money on maintenance, turnover, or hidden fees (the 3 poisons). Avoid the ones with hidden fees. This leaves maintenance and turnover.

2) In Scenario I (C-class), there is statistically MORE maintenance and turnover. Thus, the PM has more opportunities to make money and thus gets a BIGGER slice of the pie. As a result, your expenses (and thus your cash flow) is MORE dependent on your PM.

3) In Scenario II (B-class), there is statistically LESS maintenance and turnover. Thus, the PM has fewer opportunities to make money and thus gets a SMALLER slice of the pie. As a result, your expenses (and thus your cash flow) is LESS dependent on your PM.

4) You may find that a PM will cost you much less than the others on maintenance and turnover. But in general, this will not last (and constantly changing PM's has its own time/stress/money costs). The PM will eventually find ways to increase their profit through either maintenance or turnover. They are a business after all and will try to maximize profit.

5) Thus, to maximize your cash flow, you must be less dependent on your PM

6) Thus, scenario II (buying B-class) should lead to more cash flow over the long term.

* Yes these are general statements. But assuming all else is equal....in theory....B class should be better

** This is not to say you should get a crappy PM. You still need to screen them heavily. But realize that they WILL make money on the 3 poisons.

Does that sound accurate?

But wait a minute...I think there is one flaw in my reasoning: C class properties typically have higher cash flow after factoring in the higher maintenance

...So maybe the higher cash flow in C class properties offsets the higher management cost?

Now I'm confused again... :(

thanks

Alex