All Forum Posts by: George Pauley

I tell potential investors to accept that they WILL make mistake$.  (Spelled with a $ on purpose...)  So many people are afraid to make the first deal because the investment amounts are usually significant (at least to new investors) and they know that they are still novices.  I tell them to get the best deal they can with the knowledge they currently have, and to accept that they will end up regretting some aspects of the deal.  Treat each mistake or regret as a le$$on learned.  Really not a lot different than paying tuition at college.  But making that first deal, and paying for those lessons is how they move from novice to seasoned investor status.  The next investment will better, and the one after that better still.  

(Within reason, if you, as a novice, know the best deal you can currently get is a bad deal, then it almost certainly is a bad deal, and you shouldn't take it.) 

As @Kenneth Garrett mentioned previously, the "standard" advice is to hold back 6 months worth of operating expenses in reserve.

I would add that most of us, as we acquire more doors, feel that 6 months is too much.  It's the "acquire more doors" part that is key here.  As you get more doors you begin to notice that "problem$$$" usually only occur on one or two properties at a time.  And that very often the income from the other properties covers the cost of the issues on the few problematic ones.

I deal with a a fair number of property managers, and they will generally estimate 3-5% of rent as being needed for maintenance.  This number is WAY to low (for most of us).  The way these PMs come up with that number is by cost averaging maintenance costs over the hundreds (sometimes thousands) of properties they manage.  I've tried to explain why standard deviation is an important consideration in this calculation but, as you might imagine, it ends up being too mathy for most PMs and they tune out.  :D  The problem is that of their hundreds of homes they manage, the average cost is 3-5%, but some poor owner is stuck buying a new AC each month. 

But the cost averaging principal still applies.  As you get more homes, you will find that you don't need to hold back quite as much.

So how much do you hold back?  Ultimately it's a personal decision.  It does seem to me that there is an upper limit.  Questions like:  What is my insurance deductable?  What is the longest period my PM has needed to rent a unit?  What is the largest repair expense my PM has seen?  Those types of questions would likely help you find a reasonable upper limit on how much you should reserve.

I would love to a large PM share their data with a mathematician, and probably a professional poker player :), and see if they could come up with some guidelines.

Jumping and (semi) hijacking this thread :)  How do you all feel about (with respect to safety) the crowd source investments such as Patch of Land, Fundrise, etc?  Returns are nice, and the programs seem to have solid safety mechanisms in place.  Most actually protect the crowd investors before they protect themselves.

@Daniel McNulty I'm not currently in Fundrise as I thought they were not the best choice.  But I'd love to hear some of your suggestions for better places to invest.  :)

A piece of advice I usually give new investors is to simply accept that you're going to make mistakes.  And those mistakes will cost you money.  But this is actually a good thing.  (Not the costing you money part... :) )  You may have heard entrepreneurs like Elon Musk, Richard Bransen, etc say "Fail early, fail often".  Most folks end the quote there, but the full quote is "Fail early, fail often, but always fail forward."  The point is that you learn with each failure you make, and you will quickly become pretty savvy, and likely profitable.

I'm not saying be reckless.  Be careful, and make the best decisions you can.  But recognize that you simply will make mistakes and don't let that keep you from starting the journey.

First, do the financial numbers make sense.  If not, don't bother digging deeper.  This seems silly, but it's important as it weeds out most potential markets and saves research time.

Next, can I find a good property manager.  Finding a good PM is hard, even locally, but doubly so remotely.  Look for good BBB ratings, good reviews, years in business and number of units managed  Also, Bigger Pockets is a huge community.  Likely if you ask the community about a particular PM they'll be able to give you the straight information.

The PM is important not just for managing the properties.  PMs know what properties, in which local areas, are actually going to rent, and for how much.  I typically run all potential properties by my PM before pulling the trigger.

Next I try to understand the local economy.  Very often you can find fairly recent reports on the local economy online.  In particular I want to know if the area is seeing emigration or immigration, and why.  Next I want to know how people make money there.  I like to see a diverse economy.  A one company town is risky as that company could go under.  A bit harder to find is what percentage of the population rents.  Some areas are very rental heavy, others almost no one rents.  I will also usually ask the PM for average time tenants stay in place.

If people are moving out of NY headed for NJ, and causing price inflation in NJ, doesn't this imply the opposite should be happening in NY?  Point here is that different markets behave differently.  I feel confident that there is indeed opportunity in some markets.

You can't time markets.  So don't try.  I bought my first investment house in 2008.  It took me almost a decade to get rid of that turkey.  But I learned and moved forward and, today, consider myself pretty successful.  You gotta pull the trigger some time.

I'm pretty sure there will be lawsuits, that will eventually make it to the highest courts.  But this is going to take years to wind it's way through the courts.  This is how it should be.  The system is designed to be slow so we don't make mistakes due to the passions of the moment.  So, unfortunately, there is no immediate relief. 

One thing that might be useful is to present a case to local lawmakers.  I completely understand that governments don't want a huge uptick in homelessness to deal with right now.  But I think there are some considerations that most lawmakers haven't considered yet.  Non-paying tenants WILL eventually be evicted.  (Unless we go full property seizure by the government.)  And then those tenants will not be able to move into new rentals because of the evictions.  And no, the laws being proposed to make it illegal to deny renting due to prior evictions aren't going to work.  So, this moratorium, meant to help renters, is likely ultimately hurting them. 

A better argument is that landlords, if they aren't receiving rents, will eventually default on their mortgages.  This will drive property values down.  Probably significantly down if this happens to a lot of landlords.  This in turn will drive property taxes down.  And I think this little unintended consequence might get a few lawmakers attention.  :D

But seriously, lawmakers are just people too.  And they are working in a difficult situation with little information.  Most Senators, Congressmen, state Legislators, etc (I think) are willing to at least hear a well reasoned, concise, arguments.

Not saying they'll stop the moratorium, but they might change it somehow.  Maybe offer aid to landlords.  Maybe cap how many months a renter can go without paying.  Who knows?

I'm sure others will have lots of good advice.  But one thing that surprised, even shocked, me was how effective "For Rent" signs are.  I'm not sure, but I think it works because people in the neighborhood see the sign, and know a friend or family member looking to rent, and they want that friend or family member to move into their neighborhood.

Sure gentrification can be tackled by one person.  But, it's a lot easier if that person is financially well off.  

When you ride on an airplane, the stewardess always tells you to put your own oxygen mask on before putting it on others.  The reason is simple, you have to secure your own position before you can help others.  This is true whether we are discussing oxygen masks or financial stability.

Real Estate Investing is full of stories of successful investors who, at some point in their career, realize they have "enough" and switch to the philanthropist phase of their investing career.  My advice, worth what it is costing you, is to invest with the intent of securing your financial position first, then move to philanthropy. 

Good Luck!

Do the math and the math will tell you what to do.

Let's assume you buy a $200k house (to keep math simple).  You have 2 scenarios:  First, you put the entire $100k down, second, you put 20%, $40k down.  Let's assume the property rents for $2k, mortgage at 5%, and you have $500 in fixed costs (tax, insurance, etc.).  In scenario #1, your mortgage is $540.  In scenario #2 your mortgage is $860.

In scenario 1 (the full $100k down) you will cash flow $2000 - $500 - $540 = $960. Your CoC ROI will be (12 * 960) / 100,000 = 11.5%. In scenario 2 ($40 down) you will cash flow $2000 - $500 - $860 = $640. The ROI in case 2 is (12 * 640) / 40,000 = 19.2%. The 20% down scenario has a much higher ROI.

I chose the numbers above to keep the math simple.  However, you will find that ROI is always higher with less down.

Now some folks will go crazy and start talking about 0% down and infinite ROI's!  This is where you have to apply some common sense.  You should put enough down that you will cash flow.  And cash flow enough that you can handle repairs, maintenance and vacancies.  (I like to assume 20% of rent price for these expenses.)

The cool thing is that you can run the numbers in the other direction.  You can figure out what amount down you need to make the property cash flow.  Then calculate the ROI based on this amount.  Then you compare that calculated ROI against other investments.  For example, lets say that the ROI on the property your looking at ends up being 8%.  Well Patch of Land is offering 10% pretty regularly right now.  It would probably be better to put the money in patch of land.  (Make sense?)

Finally, going back to the original example, I want to point out that if you can find 2 houses for $200k each, and put 20% down on both of them, you will cash flow (2 * $640) = $1280 which is more than the $960 you would have made had you put the entire $100k down on just one of the houses.  And you'll still have $20k of your original $100k left in your pocket.  Which I think really illustrates why leveraging and using other peoples money is always the superior investment strategy.