All Forum Posts by: Eric Lee

I have recently realized how much I enjoy real estate investing likely even more than my day job. I want to see if I can gain more experience by helping a fellow investor succeed. I would love to see what I could do to help deals go through and help with day to day operations. My biggest strengths right now are through analysis. If you are looking for help and to help an eager investor, please let me know.

If the risk free rate is the return of a hypothetical investment to determine the worth of the cash flows how do you use a rate higher than a passive investment? Are you using other real estate investments to qualify the discount rate?

I understand the DCF model isn't necessarily the best for levered investments, but I am just curious how others determine the rate they use.

Something that has always made me curious is the discount rate real estate investors use in their DCF analysis. If you are a buy and hold investor, due you use the stock market average (e.g. S&P500, index fund, etc.) or do you use the risk free rate from a bond/treasury. If there has never been a 20 year period where the bond market has out performed the stock market, then the stock market would have higher short term volatility, but be truly the better long term risk free rate.

Conversely, if you plan to possibly sell the property in less than 10 years do you assume a discount rate more similar to the bond/treasury market.

Knowing in either scenario, said investor should be doing an analysis to determine which path/option is best and that discount rate is a simplified margin of safety in an investment.

Generally speaking, I see the majority of real estate analysis done using the deterministic approach we're people essentially use assumed averages to evaluate a property. In other investment realms such as corporate finance or stocks, people often use a probabilistic approach where each variable has a range of outcomes that vary along some distribution (i.e. normal/bell curve, triangular, etc). Considering returns are often non-linear and affect of compounding money, I think this approach would be more widely used.

I have been exploring writing a program to do a program to do such an analysis. The tool would be able to do myriad analysis to evaluate the deterministic analysis such as margin of safety, probability of a return, maximum buy price given a certain probability of a return, and calculate the opportunity cost comparing this investment to an equal investment in an index fund.

Does anyone think a tool like this would be useful and beneficial or do you think it's more of a waste of time? Would anyone be interested in a tool that could do this? 

@Andy Mirza thank you for the prompt response. It is a duplex and therefore a residential loan. We got quotes from 6 lenders, but in this circumstance the lender is fine with carrying the note so we do not necessarily have to find a non-QM loan. 

Based on your responses, I am gathering this local ordinance may limit some lenders during the sale and/or refinance, but shouldn't limit most lenders. Am I correct in that assumption?

@Andy Mirza thank you for the response. The underwriter at the lender stated since this property would be defined as a non-compliant structure in the event of damage to the property in excess of 50%, they would not be able to sell the note on the secondary market. 

The thought process I was going through was as follows:

- if the most lenders sell notes on the secondary market

- and if the note in question cannot be sold on the secondary market

- will this limitation affect the ability to sell/refi the house in the future assuming lenders will continue the preference to sell notes on the secondary market

Our analysis for the property showed we should sell the property before the term on the note is up. I want to make sure my partners and I are properly understanding the 'out strategy' to plan for realistic returns. 

My partners and I recently got a multi-family house under contract. During the due diligence phase we discovered  a local ordinance on the parcel which states a multi-family property could not be rebuilt if destroyed. This prevents the mortgage from being sold on the secondary market. 

Our lender is willing to carry the primary note , but I am concerned about the long term viability of the property and the ability to sell, refinance, or how this affects the appreciation. I am a relatively new investor, but  I believe the government invests in nearly 90% of residential mortgages (unsure what percentage of that is on the secondary market) and I do not know how common it is for lenders to carry the primary note on a mortgage or a refinanced property. 

Has anyone else ran into situations like this and am I making too big of deal out of this?

I found a deal recently that I believe is a good cash flow deal, but with limited to added value potential. I'm currently house hacking as my first property that I bought this summer and want assistance on what is a better option for a new investor.

Property: $100k
Taxes: 1.2k/yr
Rent: $2.05k/mo (on par with neighborhood with potential value add on rental income). 
Estimated operating cost: $600/mo

Even with the limited value add potential, I think the cash flow works out to be about $400/unit which is great for a nearly move in ready. However, my concern is that a refi to remove myself from being leveraged may not be logical
if I buy it at or near asking price. Thoughts?

Charles - thank you for that advice. Depending on how the call back system is set up (e.g. go through a service that has an automated message, email or website sign up list, etc.) I can see myself being available. if it was direct access to me that'd be tough because I am a structural engineer that is regularly on conference calls.

Ryan- I'd love to connect further. I work in the holland area and live in SE GR. If it's easier to connect via BP, email, phone, or in person, just let me know.

I'm relatively new to the real estate investing world, but I'm eager to learn what ever I can. My wife and I are currently house hacking. We are very interested in financial freedom. After listening to the Podcasts I'd like to see if anyone in the area is looking for help in a direct making campaign, looking for deals, running the numbers etc. We live in Grand Rapids, MI and are pretty familiar with the Kalamazoo market as well. Please let me know if anyone needs assistance and could teach a young motivated coupe along the way.