All Forum Posts by: Will Barnard

Jon, Thats too bad about Fisery. I never heard of them before but I will keep that in mind and warn my clients about that. Thanks for the info.

Also, I did not mean to get technical in regards to your wording, just wanted the original asker to be clear on how it works as it can be confusing when starting out, as I am sure you know.
I get a lot of clients question who has control of their $, so I usually spell it out for them.

By the way, if you have SDI funds that you use to make loans with, contact me. I always have deals in the works and use these types of funds for RE acquisitions, buildouts, and upgrades all backed by the RE of course. Rates and terms vary deal to deal but are always presented to you upfront and you have the option of choosing the one that is right for you.

Relax Amber, I was only expressing that the husband in question needs the support of his wife. I never said she had to be in the business. Teaching her the business as he went along was only another suggested option to have her feel more confident. Simply put, a married man will have much more success in anything he does with his wife's backing and encouragement. Strict? I do not think that is much to ask for. I get all the support I can possible get from my wife and it has made me a better investor.

Thank you Wheatie. That is exactly what I meant about the 50% rule. As vacanciy rates reduce, so do expnese percentages and vice versa.
As far as rents being higher if the owner pays the utilities, that is not always true in the commercial world. It is possible, however, in many cases, a particular complex may be master metered and the average rent in the area does not compensate for that expense. In other cases, it does. Therefore, using a flat 50% rule is not relevant for commercial circumstances. It can be used as a quick scan check before going into details of any particular deal.

Here are some better quick scan checkpoints as they relate to commercial apartment complexes:
Take the sq. footage of the rentable space and divide by the ask price which gives a price per sq. ft. If that figure is in the $40's or below, you know the numbers are close enough to take a more complete look as you can not build a complex for that price. Another quick check scan is the price per unit. You will know the average price per unit in a particular area (once you get experience) and when the number comes in under that, you look into it more.

Sounds like a quality pool of tenants for your landlording business you have there. No wonder your expense ratios are so high!

After checking out all the suggestions listed from the others, you can implement a RUBBS billback for utilities which would cut down on your expenses as well.

Heathen, to add another negative on not raising the rents: Having under market rents on an apartment complex (commercial property), you are decreasing the value of it. The value is based on the cap rate calculated from the NOI. Increasing the rents to market would increase the NOI, thus increasing the value.

Tim, get rid of the emotions in this business. It can and will produce mistakes and failures. As quoted from The God Father - "It's not personal, stricltly business"

These are the problems I have with Mike's 50% rule:
1. According to this valuation, a property with a 25% vacancy has the same expenses as a fully occupied property? No way. Taxes, insurance, and some other OE are fixed and they do not increase or reduce depending on the vacancy.
2. Residential properties are different than commercial properties and OE must be adjusted accordingly.

I take the current gross rents, subtract out the current vacancy, arrive at the AGI (Adjusted Gross Income) and then take out the OE to arrive at a more accurate NOI.

Also, residential and commercial properties are valued differently and have different expense ratios. Some apartment complexes have the tenants pay utilities and some the owners do. By Mike's 50% rule, he would say they have the same expenses and that just isn't the case. In a retail center, the tenants are usually on a double net or triple net lease, thus they are paying for some or all of the expenses which can include taxes, insurance, common area maintenance, etc. so that property would have a different expense ratio.
I still can not figure out why Mike talks about commercial properties when by his own statements, he is a residential landlord and has no experience or knowledge on that subject.
Commercial properties are valuated based on a cap rate and residential properties are based on comps. I can go to 1000 sfr owners in each of our 50 states and ask them how much their home is worth and none of them will arrive at their figures based on "cap rate" let alone know what that is. Just the same I can ask all the apartment owners how much their complex is worth and none will tell me because the apartment down the street which is the same size, etc sold for that.

So to be clear, when evaluating a residential deal, your calculations will be based one way, and on commercial, in another. If the 50% rule works for your SFR analysis, then go with it. I do not persaonlly recommend it for commercial properties including apartments.

Market value, or current market value to be more specific, would be estimated on the comps in the area speaking from a residential standpoint and defined by the cap rate as well as other calculations from a commercial aspect.

During times of falling prices, all you can do is account for the expected loss during your holding period and buy based on those numbers. Each month or year as it may, that goes, the current market value will change so you simple must allow for that.

Looking at the figures you provided, the taxes seem very low. What is the tax rate there? The tax figure you quoted would be much less than 1%. Remember to calculate taxes on your acquisition price (some states taxes based on assessed value & others on actual purchase price). The taxes currently being paid are lower than your acquired tax bill when purchased (via re-assessment or purchase price as the case may be).

Also, you left out administration costs, accounting, state business taxes, legal fees, and the cost of an entity (assuming you will use one for this property).

Assuming the new tax basis will be at least $3250, and adding in the other expenses, you are looking at an NOI of $23,542. Thus, your purchase price cap rate is 7.24% (too low in my opinion). Also, the amount you put down has no bearing on the cap rate, only on the debt financing and ROI.

If your maximum cap rate you are willing to pay is 8.5%, then the max offer price should be $277,000. The owner carry is a big advantage as you can get into the deal with very little down, but you should (in my opinion) look for a better price.

Good Luck.

You can break down all my statements, ridicule them, state they are silly, call them inacurrate, state I am a guru, and type condesending statements unntil your heart's content. I am not a guru nor would I ever want to be one. Furthermore, I do not have to prove myself to you and your landlord business. I have plenty of residential sfr and mult-family rentals all earning me cash flow, and I do much larger commercial deals on a daily basis, but that does not matter here. Your statements are your opinions only and that does not mean they are correct. You like to spout off here as the all knowing and everyone else who does not adopt your ideas is wrong or silly. Wake Up

Find me a newbie investor who has an entity with credit history that can guarantee a loan - I didn't think so.
Loans are acquired and guaranteed personally and then title can be simply transfered into the entity. Entitlys need at least 3 years in business and a alrge income/asset base in order to acquire loans on their own. What newbie has an entity with that kind of history? Entity formation is also over sold by the gurus. Do not be a slum lord or negligent landlord and there will be no lawsuites. A simply umbrella policy of 1-2 million would also suffice for a small time investor and give the same protection for less money.

Not all investors have the ability to self manage or do their own handyman work nor do they live near their investments, nor do they all want that type of work load. Many investors have to go to other states to invest which requires building a team of professionals to do the majority of the tasks. Many do not have the time to put in 12-18 hours a week doing repairs and management because they have full time jobs. That is the beauty of RE investing. You can have your money work for you while you continue to earn your W-2 income. Many newbie investors are not capable of jumping into the business full time. By your preached methods, they have to leave work to go paint their rental house.

You keep spoting off that everyone needs to buy properties with a 2% rent to purchase price ratio. Show me 1 new construction property over 200k anywhere in the country that you can get 4k per month in rental income. All you can show is some dump you got for 20k or 30k and rent it out for 500 per month. That is the only 2% rule example you have and those properties have very very low potential of great appreciation for the future. Even if they were to double in 10 years, thats only 50K or 5k a year, big deal.

My duplex for $155k comes with well screened, paying tenants with large security deposits, lease contracts to protect the owners for at least one year terms, and have $0 maintenance because they are new with builder warranties. This is simply a different strategy than your low income rehab rentals for 30k. They are also in areas which are growing and have great upside potential. Your low income sf rentals will not have the same future appreciation. Oh, excuse me, your family can't eat appreciation, right! So you keep doing your landlord business and I will do mine. In 10 years time, you will still be painting houses and trying to find the next low income tenant who will trash your house, just to sustain your "cash flow" I will have cashed out on many investments with large chunks of equity due to the appreciation and principle paydowns. And that will be in addition to the 10 years of cash flow.

As I said before, lets agree to disagree. You have your methods that work for you, fine. That does not make my methods poor, silly, or wrong.
I am very successful in my business and so are my investors.