All Forum Posts by: Will Barnard

Realtor.com and Dataquick are helpful. I have a membership to dataquick which allows me to search for comps, property profiles, as well as outstanding mortgages. Some states have disclosure laws, so I can not get all the info necessary at times.
A title company on your team is very important as well as an agent to run comps.

the vacancy comment was no joke

25 percent is a good number to use.
New Construction units for investors did well in the mania. Not so well now. I am now going to due some DD into this. Are you assigning a interest in these propertys?

25%?? Be real. I have never had a 25% vacancy rate on any residential property nor has any of my investors. In fact, I do not know of a RE investor who has had an average 25% vacancy factor. Perhaps you need to evaluate your investments better if you operate with that type of vacancy.

No I am not assigning an interest in the 4-plex unit in question. I am simply offering the last two, which is now the last one to an interested investor. The mania has nothing to do with the rental demand of today. In fact, the rental demand is higher now than it was during the boom. Remeber that FL as well as CA, Las Vegas, AZ, etc. had huge booms and TX did not. It has shown steady growth for the last 40 years+. You are in an entirely different market than TX. I suggest you do your due diligence before jumping to invalid conclusions about an investment you obviously know nothing about.

I have attended a NR meeting at a hotel near me as well as had contact with some of their reps. Most of the reps selling the NR program do not know squat about RE investing nor do they own any investments. This is not to say that all of them fit this category.
I do think that the materials and education at their college is well put together, particularly the written stuff, but the potential re investor at the end of the day is still unsure what to do to make their 1st deal. That is the same problem with most of the guru education. Too much generalities, too much "making it harder than it really is", and not enough assistance/mentoring once the education is complete.

They also have what they call their "investor concierge" which is "click a mouse & buy a house" Not only are the deals not good, most of them are very poor. I scame across an article in regards to their investments they offer which was written by CNN Money back in August 8, 2007 by Patricia B. Gray. Do a search for the article as I do not have the link anymore.

Originally posted by "Wheatie":

I believe you are correct that it is impossible to buy new construction, rent it, pay out 50% of the rent for expenses and turn a profit. That's why I can't see buying new construction for a rental.

Profits will be seen from the longer term hold (5-10 years), as they appreciate as well as offer the tax advantages for passive investors.

Originally posted by "Wheatie":

Capital expenses may be different from an IRS point of view but they're still money out of your pocket as an investor. They're worse than expenses because you pay them all at once but can only deduct them based on their depreciation schedule. If you do your projections and neglect these expenses, you'll have a very unpleasant surprise when they do eventually come due.

Yes, cap expenses are depreciated over time, but the funds do not have to come from cash, simply having a reserve is all that is needed and recommended.

Originally posted by "Wheatie":

Most expenses, like property management, vacancy, legal expenses, evictions, tenant damage, taxes, and insurance have little or nothing to do with new construction vs. existing houses.

New units have very little and often no repairs the first year or two, while older units will often have immediate and ongoing repairs/deferred maintenance. Vacancies will be lower on new units as renters prefer a new unit over an old one. As far as the rest of the fixed expenses you mentioned, I agree it makes no difference between new or old.

Originally posted by "Wheatie":

I'm new to the rental game, and don't have enough data to really know. I've spoken to a number of experienced landlords, including one who has about 30 rentals and has had them for a number of years. Consistently, they say expenses are not as high as 50% of rent. I've never actually gotten a specific number. But, I do get more of a "yeah, maybe" for 40%.

I agree that 40% for an AVERAGE is fair for a screening tool, but again, each individual property will have it's own numbers. They may be 36%, they may be 44%, etc. The other factor often left out is that the higher the rental rates get, the lower the expense ratio (percentage) becomes. Fixed expenses do not increase just because one unit has much higher rent than another, so using percentages should be a screening tool only.

Originally posted by "Wheatie":

I've also been led to believe that southern climates have a lower expense ratio than northern climates.

Although I do not have units in the cold climates, I have heard this as well. I believe that the colder climates have additional expenses like snow removal, higher utilities or special utilities, etc. that the warmer climtes do not have. Perhaps repairs of heating systems, water pipes, etc. are also more expensive.

Jeff,
Florida is an entirely different market than Texas, Fort Worth in particular. These units will not be REO's, as they will only be sold to qualified buyers who have the financial backing/reserves to avoid such an occurance. If that comment was your attempt to be funny, it was not and has no place here. Perhaps we can start a comic thread if you are so inclined.

If new construction units are not profitable over time, how can anyone explain why they sell at all? The bottome line is that these are for the passive investor, (the same investors who buy stocks and hold them) who hold full time jobs, may not be full time investors, and are looking for the tax advantages, cash flow, and the future upside of appreciation which is not guaranteed, but history has proven over time has gone up each and every decade.

I do agree with Jon, that an expense ratio of 40% on AVERAGE, is a suitable screening tool. Remember that capital expenses and other operating expenses that occur over time can come from reserves or saved up cash flow. There are many successful and famous RE investors who say that cash flow is in commercial properties and residential is purchased for appreciation. That said, I like to combine the two whenever possible, both for my portfolio, and those of my investors.

Misconception: Fed lowers rate, mortgages should drop. Wrong.

When the Fed lowers the prime rate, it only affects the rate in which banks lend $ to each other, the rate of return on your savings, money market, & CD accounts, and HELOC's. (I appologize if I missed any).

Fixed rate mortgage loans are not based on the prime rate, but the 10 year treasury, bond market, or Libor. (Again, my appologies if I missed any). So when the Fed says that they dropped the rate, do not count on your next mortgage loan to be lower. On the contrary, they are going up and until there is a positive change/correction, they will continue to do so. Lenders are tight on who and what they lend on, becasue they are limited on the funds they can lend (lack of abundance). Supply low / demad high = higher rates.

I think the word "speculation" has been broken down too far in this thread. From a RE investment standpoint, speculation usually refers to a short term buy and hold, short term buy and flip strategy and takes into consideration, not the cash flow, but the difference between the purchase price and the sales price as the profit. Landlording, as we know, is based more on cash flow principles and the appreciation is gravy.

History has shown that over a period of ten years, RE has increased in value. In fact, the last 60 years+, RE has increased over every 10 year period. I would not call buying RE in 1995 and selling in 2005, regarless of positive or negative cash flow, specualtion, as we know that we would profit on the appreciation. Just as McDonalds knows people will continue to buy hamburgers over a 10 year period of time.

There is also a viable strategy to buy RE with cash flow and have upside potential such as appreciation for added profit on the exit. That does not make the investor a speculator, simply a smart and well rounded RE investor. :wink:

Jon,
To answer your questions, if a tenant was to knock a hole in the wall, that expense would come out of their $900 security deposit. An amount that most are not willing to part with. Our tenants are middle class hard working people who take pride in where they live. This is not a low income area where you have crack dealers, drug attics, and other low life types. We have not had one occurance of tenant vandalism and no tenant has left with damage in excess of their security deposit.
There are no HOA fees in this development and all utilities are paid by the tenants.
Capital expenses, are just that, cap expenses, not operating expenses and since the units are new, a new roof, new water heater, etc. is more than 10 years out.
Now over time, minor repair/maintenance costs will occur and the investor should factor that in. That expense will hardly get us to the 50% mark.

It is obvious that most here consider the 50% rule, but by it's definition/explanation, it is an average. Some expenses on properties which are older will be higher than 50% and new ones such as this will be lower. I figure a 40% rule on your investments and that is fine. Are those investments new construction? What are the numbers on them?

Either way, if you have a new construction investment anywhere in the US that can be purchased with the 50% rule, and delivers better cash flow, please let me know where they are so I can buy them.

James,
Here is the current listed proforma:
$3,600 - $3,700 Rental Income
80% P&I Mortgage @ 7% = 1810
10% Credit Line @ 6% = 170 (To avoid PMI of 90% financing)
Taxes = $535
Insurance = $160
Management 8% = $288
Cash Flow = $637-$737
Vacancy factor is less than 5% but using that would be more than safe on this investment. Repairs are $0 first year & very small years 2-4 (makereadies, etc.) By no means will the 50% rule be applicable on this investment. By the definaition/explanation, it is an average and some are higher and some are lower.
Each investor should plug in their own numbers as the porforma does not list All expenses.

If you are not familiar with RE purchase contracts and teh contingencies you should have to protect YOUR interests, I highly recommend having a RE attorney look it over, or help you with it. It is worth the cost. Remeber that any item in the contract, promulgated or not, is negotiable.