All Forum Posts by: Paul B.

I tend to think that there is simply a little more work involved in owning and managing a property where the rent is 2% of the asset's value compared to a property that might rent for, say, 1% of its asset value.

For example, you'll see people who buy an $80,000 property, and they're getting, say, $1,600 a month in rent. Across town the $80,000 properties are generating only $800 in rent. So the question is, why would anyone buy the lesser-producing property?

One thing could be lack of knowledge. The other investor may simply not know that there are other properties out there with a better ROI. Or maybe they know about them, but they're under the impression that they're in war zones or that they other present challenges. (And that could very well be partially true.) Or it could be that the superior quality and location of the lower-producing property simply merits the lower ROI or ROE -- which, if you analyze it, is not exactly horrible.

Let's say the 1% income property chews up half its rent in expenses as many here will tell you it will. That means that you're earning 6% net on your asset each year. Not really bad by today's standards.

Then, when you factor in that the rent is going to go up each year, it gets even better. And when you factor in that the asset should appreciate even just a little each year (remember those days?), it gets better still. Add in depreciation (temporary, yes, unless you never sell, but still putting more money in your pocket today), and it gets even better.

Then you can magnify your return even more (ROE vs. ROI) by using leverage, although that will be less of a factor if you're earning 6% on the asset and the debt is costing you about that.

So, while I know there are people out there who think it's plum stupid to buy anything that generates such a modest return on investment, it can work over time. And if you're taking the long-term view (15-30 years), even if the asset breaks even from a cash-flow perspective all those years, one day it will be debt-free -- coincidentally, right around the time you'll be retiring.

I can think of worse things than being 40 to 55 years old and sitting on $5 million worth of debt-free real estate that's netting "only" 6%...

Everyone's numbers are going to be different. I think that only you can decide what makes sense for you.

For example, my focus had previously been to buy houses right, fix them up, and sell them. My target profit per deal (on average) was $20,000. Generally speaking, I'd have been willing to spend 10% of my earnings on marketing, so that's $2,000 a deal.

Some might think that's too much, but to that I say, "I'm still netting $18,000." Plus, focusing on the cost per deal assumes that you could have an unlimited number of deals, which of course, you can't. It's only when you have so many deals that you can't handle them all that you need to start looking at the net cost for each one and trying to drive it down.

In other words, if my alternative is to sit on my hands and make no money, I'm more than happy to end up spending even $10,000 on a deal to make $20,000. I'm still making $10,000 compared to making nothing.

After all, what's better? To try to get deals that will cost you $300 each, but not get any? Or spend a grand or two on a deal, but actually get some?

That's why I suggest that these numbers are very investor-specific. What's right for me may not be right for you, and vice versa.

I am not using Google AdWords currently. I know you asked to hear from people who are, but I figured I'd chime in.

I have used AdWords in the past with success. I may have paid more (net) for a done deal than others would pay, but I met my target (I'm willing to allocate up to $2,000 in marketing costs to each done deal).

Keep in mind, though, that the only deals I was doing were straight purchases/rehabs/flips. There had to be equity in the deal (at closing), and the location had to be solid. So, I was very particular. Had I an interest in all of the other fancy stuff like lease-options and short sales, I would have had a lot more leads. In hindsight, I should have found someone who was interested in those and sold those leads for $10 to $20 each, because I probably would have recouped half of my AdWords spend.

I am sure the economics of AdWords are more favorable these days since there is presumably less competition.

AdWords might look confusing when you first get started, but you can be up and running fairly quickly. If you're completely new to AdWords, you might get yourself a book on the subject to get going.

Naturally you're going to target your ads to your geographic region, then you're going to write ads that catch their attention. Focus on the problem-solving aspect of what you're offering, and use keywords that people are typing in. (Google will help you find these best keywords.) The most logical ones are "sell house fast" and "we buy houses," but obviously the more popular a search term is, the more you're going to pay for a click.

Probably the biggest mistake I see people make with AdWords (or any paid search strategy) is not using a specific landing page (or a one-page micro-site). Instead, they take people to their general home page, which many times doesn't even have a form on it.

When people click that link, they need to be taken right to the page where they can contact you. You have to sell them on the idea of getting in touch with you quickly, then make it easy for them to do that. That means having a form, an email address, a phone number -- everything.

And with respect to the form, you don't need to make it a hundred questions long, with questions about bedrooms, baths, loan balance, etc. Just get the relevant contact information so you can get in touch. It's a fact that the more information you ask for, the lower your conversion rate. It's only when you have so many inquiries that you need to separate the wheat from the chaff that you need to get a little more detail from your prospects.

The bottom line is that Google AdWords absolutely can work, but you have to do it right, and you have to spend a little time tweaking.

In fact, my very first deal came within days of putting up my campaign. I bought a duplex for $115,000, put $15,000 into it, and sold it within 45 days for $171,000. (Best of all, this was back in the go-go days when Regions Bank would loan you 75% of ARV and give you a $10,000 advance at close without a draw request. I didn't put one red cent into this deal -- not one penny -- as the rent was paying my interest and then some.)

When the dust settled, I think I cleared $28,000. So, yeah...you could say I am a fan. "Thank you, AdWords!"

I am not in favor of this kind of discount unless you think there's a concern that you're not going to get paid in the future.

Look at the math:

Let's say the rent is $500 and you offer a 5% discount for paying in advance. And let's say, for the sake of discussion, that you're willing to give someone a 10 day grace period before you charge them a late charge (overly generous in my opinion, but run with it).

That means you're willing to give up 5% of your income for basically "borrowing" the money (the rent that you haven't collected) for only 10 days. That's a half-percent per day, or a 180%-plus cost of funds.

In dollar terms, you're giving up $300 a year on a $500/month property. Why are you giving away 18 days worth of rent each year when you plan to collect that rent only days thereafter anyway?

And if you're like me with a zero-tolerance on late payments -- even one day late -- then you really have no incentive to give a discount for prepayment because that money is getting there on or before the 1st of the month anyway.

Again, all of this assumes that you view the rent as 100% collectible in a reasonable amount of time.

Without knowing all of the details, I'd say replace the roof. I still remember this one house I renovated where I had the same decision to make as you: fix or replace. I went for the "money-saving" route and fixed it. Sure, it didn't leak, but it sure was ugly. Those new shingles just stood out like a sore thumb against the remainder of the roof.

To this day, I still think about how much nicer that house would have been -- how its curb appeal would have been enhanced 100% -- had I done it right the first time.

People pull up, they notice that new roof, and they know it's one less (expensive) thing that they're going to have to worry about. It reflects well on the entire house and the job you've done renovating it. If you do the roof half-baked, buyers will wonder where else did you cut corners -- and today, buyers have options, lots and lots of options.

I know you know all this...just relaying my personal experience with this exact question.

Interesting question, because not only do I live in a neighborhood with an HOA, I've also been the president for the last two years (and the treasurer for two years before that). It's sort of a "keep your enemies closer" thing...

I have always worked to ensure that the HOA does not become one of those HOAs you read about in the paper...telling people that their house is the wrong shade of white or that their grass is a sixteenth of an inch too high.

But, I do think HOAs serve some purpose with respect to maintaining aesthetics. I know some will say, "I can be trusted to keep my own house nice, thanks," and I certainly get that, but I can assure you that not everyone runs their lives the same way. And moreover, if someone doesn't want to live with an HOA, they shouldn't buy a house in an HOA neighborhood. Pretty simple...

But that wasn't the question...the question was how desirable is it to have an HOA over your rental property. From my perspective, not very. First of all, as the owner, YOU are going to be liable for any violations that your tenant might make. I don't like being on the hook like that. Second, some places (like ours) don't even let you put a for rent sign in the front yard or anywhere on the common area. That presents a challenge. Third, as has been pointed out, some HOAs are looking to limit or prevent rentals altogether.

So, as much as I don't mind an HOA where I live, I probably don't want one in my business concerning rental properties.

How about escrowing the bulk of the proceeds until he moves out, then if he stays beyond the original term of the lease, the lease rate doubles or triples and can be offset against the escrowed funds if not paid. Having the money in escrow will make it much more real to him that he's losing actual cash, should he stay beyond the original term.

I'm not a lawyer, but you might be able to stay for the duration of the lease, at least until the property is sold to someone who intends to live in it. From the Act:

(2) the rights of any bona fide tenant, as of the date of such notice of foreclosure—

(A) under any bona fide lease entered into before the notice of foreclosure to occupy the premises until the end of the remaining term of the lease, except that a successor in interest may terminate a lease effective on the date of sale of the unit to a purchaser who will occupy the unit as a primary residence, subject to the receipt by the tenant of the 90 day notice under paragraph (1);

See if you can find someone to counsel you on this at no or low cost. It's worth investigating.

I think it depends on what you're using the financial statements for. I can certainly appreciate the logic behind wanting to use FMV for all assets. The trick, as you've said, is in calculating FMV. You probably don't want to appraise your assets each year (whether a one-man operation or a F500) because that's expensive. Moreover, how would you book the gain or loss when the value is higher or lower than what you paid for it?

You probably can't bypass the P&L and just adjust the equity account, and you probably don't want to book a non-cash gain as income (nor a non-cash loss as an expense).

Like someone said, it really has to do more with the audience and the goal.

I think you took that more literally than I intended... :)

However, considering that most assets are leveraged only "X%" of their value, this appears to be taken somewhat into account when a loan is underwritten.