All Forum Posts by: Paul B.

I don't know if you've confused yourself; I thought confusing you was MY job. You've certainly confused ME, though...

Here's what I hear you saying: Inflation is not good for real estate investors because when inflation is high, the cost of money goes up, and when the cost of money goes up, the price of certain economic assets (for example, real estate) goes down, ergo, inflation is bad for real estate investors.

I don't think you can have it both ways. Either you have inflation, with its obvious increases in prices, or you don't. Generally speaking, you can't really have inflation without a related increase in real estate values, too -- and yes, I know how utterly stupid that sentence sounds today.

I still think my two-$100K house example demonstrates how using debt during an inflationary period can pay off. You're buying today's lower-priced assets and paying the debt back with inflated, less valuable dollars.

Alex, when you are back in Maryland, please look up John Peterson in Rockville. He runs the Washington REIA and is an honorable, stand-up guy. He's also got something like 600+ deals under his belt.

Bryan, I'm sorry to say I don't follow. If the price of something doubles, it doubles. It doesn't matter whether interest rates are higher or anything else. If I buy something for $1 and it becomes worth $2, it's worth $2.

Are you saying that in real terms I've gained nothing if it now takes twice as much money to buy everything else? In other words, my wealth has doubled, but so has the cost of everything else around me? That's different, that's the difference between a regular return and a "real" return which is net of inflation (as I know you full well know).

That's why I predicated my answer on that you have to be a borrower to make inflation really work for you. You buy pre-inflated assets today with borrowed money, then you repay that money with lower-value dollars in the future.

Again, look at my example. I buy two $100,000 buildings and I finance them both 100%. In a year they increase in value 100% and are worth $200,000 each. I sell one of my $200,000 buildings and pay off both loans (2 x $100,000). I am now left with one $200,000 building, free and clear. Can you argue that inflation has not helped me?

I think I understand what you're saying to some extent, though. It's a question I asked myself back in the days of doing DCF valuations on businesses. I thought, "Great, so when rates are low, businesses are worth more. And in the future, businesses should be worth even more still, since they should go up in value. But, if times are good, won't rates at some point go up, which would then reduce the value of a business, all other things being equal?"

Is that sort of what you're getting at? That inflation leads to higher rates, which in turn lead to lower present values on future cash flows?

Perhaps I'm not thinking about this all the way through, but it seems to me that inflation helps any investor who borrows money at fixed rates to buy those inflating assets.

I buy two $100,000 properties and I mortgage them both 100%. In a year they double in value. I sell one and pay off both loans, leaving me with one free and clear.

"Thank you, inflation!"

Also, and I know this goes back 6-7 months now, but I don't follow why the Fed doesn't have a hand in rates going up. I think it most certainly does. It raises the discount rate just as easily as it lowers it. Also, it can decide that it's time to reverse quantitative easing by selling bonds. I'd appreciate insight as to why some think the Fed doesn't have a say as to when rates go up. Maybe I'm missing something.

I think this filtering (or lead-scoring) approach is good only if you have so many leads coming in that you can't handle them all personally.

Also, I would be apprehensive about using customer-derived data to make offers sight unseen. As has been stated, people tend to overvalue their houses and underestimate the repair costs.

Plus, there's a big difference between a number on a screen and a live person with a contract and a checkbook in his hand. A $60,000 offer on a computer monitor doesn't really carry the same problem-solving weight as a person who is prepared to sign on the dotted line right now.

The other thing I think a lot of buyers forget is that this really is a relationship business. I've seen a number of buyers talk and look down on their sellers. I don't ever do that because those sellers are my customers.

When I walk a property and talk to the seller, I'm asking questions about them personally, and I'm telling them about myself and my family. I make it plain that I'm a working man who does this to pay bills -- to feed my son. By the time I'm done writing the contract, the seller is often the one who thinks he's helping ME out, especially if it's an older person or couple. They know they're leaving money on the table, and they simply don't care.

I don't see how you could ever hope to replicate that sort of experience on a Web site.

Again, though, if you've got a way to get a couple hundred leads a day and you need to get to the soft, chewy center of the handful who are OK with your wholesale pricing, that's what lead-scoring is all about.

As with all marketing, there's only one way to know for sure. Test, test, test...

Richard, I am curious if you've ever read "The Section 8 Bible," and if so, what your thoughts are on that harsh a management style.

The book's basic concept is, "Provide ONLY what is required, and not one thing extra, because it's going to be the source of constant repair or replacement."

For example, the author says that if the unit has a garbage disposal, take it OUT right away, before you rent it. A disposal is not required, and it's just something that can go wrong.

Also, the author discusses "carpet in a can," which is basically painting the floors since carpet is not "required."

These are but a couple examples, but I think you get the idea.

I'd love some insight on exactly how tough you have to be with tenants in these rougher neighborhoods, in relation to repairs and maintenance.

Lastly, do you venture into these neighborhoods yourself, or do you use a property manager? Also, if I may (and you're under no obligation to answer, of course), if you do go into these places, do you carry a weapon with you?

Who is this business plan for? What kind of funding or investment are you hoping to attract with it?

In my mind, real estate is very market- (geographic) and deal-specific. And I don't think your plan needs to spend much time on the whys and hows of real estate, in general. Either they already get it, or they don't.

From my perspective, your plan can be very short, and it should probably be property-specific, unless you're trying to raise a fund.

I'd keep it short and sweet:

The Deal: What is is, why it makes sense, including the exit strategy

The YOU: Why you have what it takes to make "the deal" work; experience in real estate would be good.

The numbers: What you need, what you hope to do with it, and what you're offering in return. Having some skin in the game will go a long way here.

To me, that's about it. If you're looking for a loan, then you'll need all that fun paperwork: tax returns, financial statements, and a credit score. If you're looking for an equity partner, you might be able to sidestep some of that, but they are still likely going to want to know who they're dealing with and that you're not down to your last penny.

For what it's worth, I never needed a business plan for my previous deals. It was all about the numbers. A really well written plan is never going to compensate for a bad deal or an inexperienced operator, and if you are an experienced operator with cash and credit, your business plan can probably be written on a napkin.

Having said all of that, I'd love to hear stories about how and why people have needed full-tilt business plans in the past, setting aside those people who are raising funds, where clearly a more comprehensive document is required since you're asking for carte blanche to do deals going forward.

I'm curious as to why you think SFHs are the way to go. Do you think it's more desirable to buy 75 SFH doors for $70K each as opposed to, say, buying a 150-unit apartment building for the same $5 million? Do you think there's more upside/appreciation to be had with SFHs compared to larger MF properties? I presume that you're buying your SFHs "right" and walking into equity post-renovation, but I would hope that would be the same strategy with a MF property.

And would these SFHs be in neighborhoods where you'd hope an owner-occupant might have an interest, or do you think the buyers here are investors, too?

I would advise against getting a loan in your name then transferring the property to a business entity. Sure, the lender may not know, but if they specifically told you, "We will make the loan only to you, not a business entity," and then you thumb your nose at them and transfer the title to the property (and they find out about it), I predict a bumpy, unhappy, and short-lived relationship.

You should be able to put the collateral into a business entity and then either do a personal guaranty for the business borrower, or, for an even more "belt-and-suspenders" approach, be a co-borrower alongside the business.

As for your personal liability risks (non-debt related), you can cover most of those with insurance. I think far too many investors place far too much confidence in the thinking that an "entity" absolves them of personal liability. The deepest pocket in the room always gets sued; on this, you can count. Pay an insurance company to be that "deepest pocket."

Ah, sorry -- I edited my headline/subject for brevity and lost the most important part. This is not for yourself; it's for a "rich uncle" or other investor. You'll be thrown a bone for your good efforts, but you can't keep all the profits for yourself.

So, Bryan, sorry -- kickin' it in the Caribbean and watching interest just roll into your account are not options here!

D.P., I appreciate the response, and I'd like to hear how *you* would handle the $5 million using your goals, comfort zone, etc., but keeping in mind that you can't use debt.