All Forum Posts by: Anthony Klemm

@Anthony Klemm

my 3rd and 4th rentals were BRRRRs. the first one did not go as planned, i overestimated the boost in ARV that i would get, and didn't get enough back out on the refi. the second went well, still 'left a little money in' as they say, but it's a great property and one of my strongest rentals.

BRRRR is tough, more difficult than advertised, definitely still a viable strategy, just not a 'cash flow' strategy.

@Anthony Klemm here's copy & paste info that hopefully answers your question(s):

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The Real Estate Crash of 2008-2010 caused real estate prices to crash across the country - but didn't affect rent amounts. This caused a historically unique opportunity for investors - they could buy Class A properties and immediately cashflow when renting them out.

This couldn't last forever, and it didn't, as excited new investors drove up prices.

Eventually, Class A property values increased to the point that even increasing rents didn't allow them to cashflow upon purchase.

So, the flood of new investors switched to buying Class B properties.

COVID created a chaotic spike in both the sale & rental markets, attracting even more new real estate investors. According to CoreLogic, in December of 2023, almost 30% of home sales were to investors!

Investment also spiked in Class A Short-Term Rentals (STR) and investors started paying higher and higher prices based upon anticipated STR rental rates, that exceeded sustainability based upon Long-Term Rental rates (LTR).

Now we're seeing investors pouring money into buying Class C rentals - but, many are getting burned.

In our experience & opinion, the main determinant of property Class is not location or even property condition, those are #2 and #3. The #1 determinant is the Tenant Pool.

If you don't believe us, try putting several Class D tenants in Class A apartment buildings and watch what happens. Or try the reverse - rehab a property to Class A standards in a Class D neighborhood and try to get a Class A or B tenant to rent it.

Unfortunately, many newbie real estate investors are jumping into buying affordable Class C rentals - expecting Class A results. In our opinion, Class C tenants have FICO scores from 560 to 620 - where their chance of default/nonpayment is 15-22%. See the chart from Fair Isaac Company (FICO) below:

Source: Fair Isaac Company

According to this chart, investors should use corresponding vacancy+tenant-nonperformance factors of approximately 5% for Class A rentals, 10% for Class B and 20% for Class C.

To address Class C payment challenges, many industry "experts" are now selling programs to newbie investors about how Section 8 tenants are the cure. If only it was that easy. Yes, the government pays the Section 8 rent timely, but more and more tenants are having to pay a portion of their rent. Then there are the challenges with Section 8 tenants paying utilities and taking care of their rental property.

Investors should fully understand that Section 8 is not a cure-all for Class C & D tenant challenges, it's just trading one set of problems for another.

We see too many investors not doing enough research to fully understand all this and making naïve investing decisions.

@Anthony Klemm

i know this sounds counterintuitive but i am always happy when new investors find what you found.  if they think every property on Zillow is a 'deal' then something is wrong.

you got great advice and a ton of time invested in responses from

as he pointed out - there's basically no cash flow in long term rentals now. anywhere. not even in those supposed ATM mid-west markets.  cash flow is going to be found in tougher, niche strategies that are more like a business and less like a passive investment... and LTRs aren't all that passive sometimes either.

the benefits to LTR real estate are...  all of them together.  mortgage paydown, maybe some tax savings - consult your CPA - and hopefully long term appreciation.

i'm looking for my next BRRRR - which isn't a cash flow strategy either - and i keep getting outbid. it's a tough market. i'm trying to stay patient.

i know this reply wasn't specific to LV but hopefully it helped.  i am happy to dialogue further.  i have nothing to sell, am not an agent, am not an anything.

@Anthony Klemm

Can’t find a rental property to cashflow?

You’re probably thinking you have to offer asking price – not true!

To determine what to offer on a rental property:

• Determine reasonable market rent, NOT the highest!
• Deduct NEW property taxes after you buy
• Deduct home insurance costs
• Deduct maintenance percentage, typically 10%
• Deduct vacancy+tenant nonperformance percentage
  (we recommend 5% for Class A, 10% Class B, 20% Class C, good luck with Class D)
• Deduct whatever dollar/percentage of cashflow you want

Now, what you have left over is the amount for debt service.

Enter it into a mortgage calculator, with current interest rate for an investment property, to determine your maximum mortgage amount.

Divide the mortgage amount by either 75% or 80%, depending on the required down payment percentage - this is your tentative price to offer.

If the property needs repairs, you'll want to deduct 110%-120% of the estimated repairs from this amount.

Be sure to also research the ARV and make sure it's 10-20% higher than your tentative purchase price.

As long as the ARV checks out, this is the purchase price to offer.

It is probably significantly below the asking price. Who cares? If you pay more, you won't meet your metrics and will probably have negative cashflow and/or equity.

You may have to make 10, 20 or even 100 offers to get one accepted at the price that meets your numbers.

This is what all investors did BEFORE the Great Real Estate Crash of 2008-2010.

Anthony, again assuming you can’t or won’t rent out rooms in your home, better known as easy money. What I am trying to say is so little of the return is based on cashflow, it shouldn’t be the deciding factor. 

Imagine you buy an average $400k property and hold it for 30 years. With ZERO cashflow, the rent exactly covers repairs, taxes, PITI etc, even 20 years from now when you've doubled the rents because you were behind at the beginning.

If you refused to buy it as a new primary, so you had to put down 20%, were unable to find a good deal and just bought at market price, didn’t hit a home run, etc…

Imagine you only average 4.7% appreciation. In 30 years your $80k downpayment has turned in to a $1.6M paid off property. A 2,000% return or 10.8% annually. After depreciation you probably got that return almost 100% tax free. Now you have 3 choices. It cashflows like crazy as is, you take out a tax free loan of $1.2M give or take, you leave it to your heirs when you die and they pay zero taxes. 

The way I think of my real estate investments when I started was the same way most people think of their 401ks or IRAs. I didn’t expect them to cashflow when I got started. In fact I got 15 year loans to pay a lot interest rate and just sent all their income in to paying them off. 

By accident the above example is close to what I experience. Between 10 & 15 years ago I purchase 5 primary homes and 5 rentals over 5 years. I could have put less down on the primaries but I put down 20% to avoid PMI. So the average home was $100-$110k, I put down $20-22k, and 10-15 years later they are worth $420-$600k and they are paid off. The throw off about $200k year in cashflow and I pay almost zero taxes. (Being in NV helps.). They worked exactly how your retirement accounts are supposed to work but 3 x faster.

You can say houses are much more expensive today! And my reply would be: That means you need less houses to get the exact same results I got in raw dollars. But I’d suggest with inflation eating at your returns I’d still try to get 10, even if it takes longer. It’s not a race. 

When I was young I feared the day I would start pulling funds out of my IRA and/or Roth. Was I supposed to hope I died before I ran out of money? The Alabama song "I'm in a hurry" would play in my head.

Unless you truly believe interest rates and prices will be lower in the next 2-3 years there’s no way to catch up with the investor that starts today. I was going to type “don't take uncomfortable risks.” But you will be taking them. Don’t take extreme risks. This was being done by amateurs without mentors, BP, a decent Internet forum, anyone to ask for advice, or heck, without knowing anyone that owned more than one house. You can always regret not starting 5 years ago, until you start. I truly meant it when I said good luck. Your success is a compliment to those who succeeded before you. Not a detraction. 

Why else would so meany people be trying to help you for free? We’re not trying to sell you anything and we don’t make $1 more than if you never get started. We’re simply cheerleaders, fellow players, and coaches trying to get the new players to live up to their potential. 

Ps. After I posted this. I randomly got an email from @Eric Fernwood that showed how a negative cashflow rental could provide a 19-20% annual IRR return even after selling costs because of the increased rents and appreciation. He is MUCH better at math than me. You could reach out to him to ask for a copy of his results.

Hi Anthony! 

Congrats on starting your REI career! I live in the Las Vegas market and have investments and a real estate brokerage in Henderson. Las Vegas attracts investors from all over the world for good reason so I think you are on the right track starting here before expanding. If you have questions I am happy to help. A great thing about my team is we handle the sale and property management side for investors!

No problem at all. Another thing to note is that syndication doesn't really make sense for smaller deals since the compliance costs would be too much of a burden.