All Forum Posts by: Will Barnard

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.

I have to leave but will get back to you on that by tomorrow.

I think it is the feeling of everyone else here, including myself, that collecting a full month's rent upfront shows to us, the landlords, that the tenant had the ability to pay the initial full rent with security deposit. Often times, I get a potential tenant ask to split up the deposit or something else creative to lower the amount they have to come up with initially. This is a red flag to me and tells me that one: they lack funds, and 2: if a financial problem occurs, they do not have the means to pay me my rent.

This is simple a good policy and helps/not eliminates the problem of a poor tenant. If you have not ever had a problem with the tenants paying the full rent on the 1st of the next month, consider yourself lucky and consider that you are due to have a problem occur. (law of averages)

I would not go as far to say that. I think the statement is general in nature and just not true. I do agree that there are many poor (quality) agents out there, but it is ultimateley up to the investor to pick the right ones. They can be very beneficial to your business. They add more eyes and ears out there to locate and bring good deals to you. You as the investor are responsible for calculating which are really good deals and which are not. Either way, having agents on your team is a good thing, not a bad thing.

There will always over time, be cases where a seller's agent hinders or even ruins a deal. As an investor, that is part of the territory and you simply move on to the next. There is always a great deal around the corner!

Mike puts the return on the cash invested inside the cash flow projections. His thought is, if you put up cash, you want a return on that cash and thus figures in the cost as if it was part of the mortgage. You could also figure that return outside the investment, in other words, not include it as cost in your cash flow projection and have it as a seperate investment. either way, it is relative and ultimately, you want a return on it. Mike's version is a simple and easu way to figure that in by including it in the cash flow projection. Now you may want better than a 7% return on that $ and tehrefore must calculate that figure accordingly.