All Forum Posts by: Will Barnard

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.

Flipping is a strategy best suited for un upward market, not a declining one. BUy and hold is the correct strategu right now. The market will continue to decline in 08-10. We will most likely not hit bottom until then and then recovery could start in 2011. Of course, new pres. and the fed stepping in with drastic measures may affect this.

Stick with the safe and smart play and buy as much as you can to hold for 5-7 years, then cash out when everyone is buying.

Step one: Get educated - sounds like you are and have been on that path.
Step 2: Act rather than be discouraged by fear.

Robert K. books are great for motivation and opening the mind to the income quadrant. I ahve read them all as well. The thing they lack is the step by step process or the "how to". Keep up with the education and wlecome to the forums.

Another good read to "open the eyes" is Lawyers are Liars by Mark J. Kohler. It explains the scams, half truths, and outright lies that you may encounter.

Good luck and happy investing!

Raiz, why would you purchase properties to hold if the cash flow is so small? Buy where you get cash flow in excess of $100 per door. That should be your base goal. If the numebrs can't produce that, move on.

Mike, I will have to disagree with you any several points.
Apartment complexes often have larger expense ratios as compared with a duplex or 4-plex. The reason investors buy them is because they can buy on the cap rate factor (commercial) and not the comp value (residential) which is often priced higher. Sure you have administartion, accounting, etc. but those expenses are spread out over all the residential investments which makes them less per, assuming you buy more than one or two investments. Apartments are usually operated as a seperate entity and all the admin./accounting/etc. expenses are for that single complex.

Of course I do not know all the operating expenses as the original question did not list them. It is not my property, nor did I have the benefit of looking at the P&L. Of course sellers always lie or mis represent OE and income so there is a need to estimate some items. The items I mentioned to get exact figures on are set things like insurance, taxes, etc.
There are of course averages nationwide, and sometimes, these figures are needed to get a valuation.

Any building with 4 or less units is residential, not commercial. When is the last time you got a commercial loan on a duplex?

As a full time landlord, you pay no taxes so depreciation is not an issue!?
What kind of BS is that. Perhaps the IRS would like to be introduced to you to examine your tax evasion scheme. If you make income, then you need deductions to offset that income inorder to reduce the taxes. For a full time "investor", I would hope you make enough money to be in the position to have to pay some tax.

Principle paydown is also relevant because you receive it when the property is sold or refinanced. It is not simple lost just because you cant "eat with it" today. It remains a return on the original investment.

You have promoted yourself as a full time investor and landlord here numerous times. From reading some of your blogs, you appear to be a painter, handyman, property manager, and book keeper just to name a few. As an investor, I find my time is more valuable networking, analizing deals, negotiating them, and managing my business. You also seem to have a niche in the older sfr properties valued under 100k and enjoy managing them yourself and dealing with all the headaches as well as having a high vacancy rate (according to your blog posts). If that is what you like, more power to you. It is just not for me and may not be for others. Investing in older sfr properties with lower income tenants, I can see why you would easily have the 50% OE. I prefer new multi-family units with lower maintenance and leave the headaches up to my property managers to deal with.

In closing, let me say that I did not intend to bash your business here, only to respond to your attacks on my statements previously. Perhaps we can agree to disagree on computing NOI and the differnce between res vs. commercial calculations. I do wish you success in your business as I would any investor. (by the way, the IRS comment was in jest)

Happy investing to all.

Jason hit the nail on the head. Just because it is a FSBO does not mean it does not require a rehab. There could be a number of reasons why the seller chose to sell by owner rather than list with an agent. Realtors are not all great and often times are worthless and know less than you do as an investor.
Being a newbie investor Christine, you need to plan an investment strategy first before searching out properties.

Good luck.

Advice to buy with all cash from a guy who's name is all cash! Give me a break. Even Donald Trump utilizes debt financing to acquire investment real estate. Eliminating the power and advantage of leverage greatly decreases your ROI.
I do agree with Mike and others in regards to getting yourself educated before diving in. As Mike said, newbies make huge mistakes due to a lack of knowledge, experience, and due diligence.

On the subject of utilizing a HELOC for down payment funds, that is a great strategy that I teach and encourage each and every day. First off, the HELOC rates right now for good credit and up to 70-75% LTV is as low as 4.25% right now. That is lower than a fixed first at 6.75-7%. The fact that it is variable is not an immediate concern as it can not jump more than x amount of points each year (usually caps at 2), so it would take 3 years to start getting scary if it were to max increase each year. The second and most important advantage to using a HELOC is that the loan is open-ended, meaning that $ can go in and out. If you pay extra towards principle on a fixed mortgage, you can't call the lender and have them send back the extra principle the next month!
This allows for you to contribute all of your cash flow towards the HELOC, thus cancelling interest, and when the cash flow is not there (a vacancy, large repair, etc) you can pull out to cover the loss rather than come out of your own living expenses.

Final note: I have yet to meet a single investor who bought there first property with all cash.