All Forum Posts by: George Pauley

I think the way to approach these types of questions is to look at return-on-equity (ROE).  Everyone is familiar with return-on-investment (ROI), it's just cash-returned divided by cash-invested.  ROE is similar, just divide by the equity in the property instead of the cash-invested.

Calculate ROE on your current property.  Then calculate (estimated) ROI on the new property.  If ROI > ROE then you should refinance.  One way of looking at this situation is that if ROI(new) > ROE(old) then the equity sitting in the old property is making you less return than it would if it were invested in the new property.  Make sense?

I'm seeing markets tighten up everywhere.  Memphis has always been a go-to location for me, but it's getting hard to find good deals there.  Damn investors are flooding all the good (easy) markets.  Still, I'd definitely check out the Memphis Market.

Also, in terms of when to buy on the dip, it occurred to me that historical data might offer some clues.  Look at market prices plotted against time for various markets to see how much they have dipped in previous bubble busts to get an idea of how far prices might drop.  Also look at non bubble bust dips to get an idea of what random fluctuations look like in a given market.

Of course... Past performance is not indicative of future results.  ;)

@Dave Foster, I value BP Forums recommendations very highly.  When I saw 2 quick responses with the same name, I almost didn't post about Starker.  But then reconsidered.  Starker had performed well for me and deserved a reference.

That said, I also realized that I used Starker because my CPA, who's a bit of an REI expert, recommended them. He had used them, and had clients that had used them, in the past and was used to working with them. This was a pretty big plus for me.

@Jordan Sitzler, do you have a tax person?  If so, maybe ask them who they recommend.  At a minimum, it's another recommendation.

I can't help but agree with the OP... but something about what's being said bugs me.

I remember the first time I played the Cashflow game.  I made the (common) mistake of attempting to get out of debt before I started investing.  Needless to say I didn't make it out of the rat race before someone else won the game.  The lessons learned were:  1.  Using debt to invest can be a (very) good thing.  2.  One doesn't get out of the rat race by saving.

There is no denying that at some point you will need cash for major repairs, vacancies, evictions etc.  You need to have enough reserve to get you through these setbacks to get the property back to a money making status.  I consider these reserves as part of the price of investment.  If you can't afford the price of the investment then you can't/shouldn't make the investment.

But those reserves don't have to actually be cash.  Other wealth that can be tapped, such as equity, credit, etc.  They should be relatively liquid of course. 

In fact, I would argue against leaving the reserves as cash laying around in a savings account.  A conservative figure that gets tossed around is maintain 6 months of operating costs to get you over these types of obstacles.  I'm going to guess whether you are 1 door or 1000 doors, 6 months operating cost represents a significant amount of money to you.  (It's all relative right?)  Find someplace to put that money that makes some sort of return, but that you can get your hands on if you need it.

Otherwise, you need to take your reserve cash and add it your up front cash cost when calculating your ROI.  And I suspect doing this would make many many deals unattractive.

Your question seems to me like you are looking at the issue a bit backwards?  I buy properties based on whether the math (and fundamentals) indicates they are a good investment or not.

Pondering this a bit...  I buy primarily for cash-flow.  As such I don't really care that much about price, but rather ROI.  But if I were investing for equity increases, I could see where I might be much more interested in timing the market.  But, I'm pretty sure I can't time the market, so I try to invest in ways that don't require me to have to time it.

I used Starker Services (http://www.starker.com/) for 3 exchanges so far.  They made it easy and were reasonably priced.

I just had a TK provider I've worked with before inform me that they are no longer offering an out to buyers if the property doesn't appraise.  Is this the start of a new trend?

Just because your house is a liability (not an asset) doesn't mean it isn't very useful or necessary.  No doubt, you need a place to live.  You also need food, water, electricty, etc.  but you likely don't consider them assets right?  

I suspect folks get confused because the home builders, realtors, and mortgage vendors have done a good job of convincing us that our houses are an asset/investment over the years.  But this is more advertising than reality.

I also think people get confused because owning a home dramatically reduces the amount that you end up spending on the place that you live.  (Especially once the mortgage is paid off!)  A penny saved is a penny earned after all, so this makes home ownership look suspiciously like an income increase.

You mentioned turning your home into a cash-flowing asset.  I'm not 100% sure how you do this.  I'm guessing you move out and rent the home out to someone else?  In that case, you still have to have (and pay for) a place to live.  All you've done is move the expense entry for that place to live to another address.

Over the long term, house prices tend to follow inflation.  So we can imagine buying a home for $300k in our 20's, living until we're 80, and having our heirs inherit and sell the home for $600k.  Viola we have a $300k gain on our "investment" right?  Not really, our heirs will discover that $600k buys them a home comparable to the one they are selling.  The same inflation that increased the value of our home, also decreased the buying power of the dollars our heirs get when we sell the home.  So, not an investment right?  (Or at least a pretty crummy one.)

You mentioned that you wanted to get your equity out as it appears you are at the top of the market.  I'd like to suggest a different way of thinking about this.

Most folks know how to calculate cash-on-cash ROI. How much are you in for divided by how much you make each year. But a better metric is equity ROI: equity divided by how much you make each year. Typically equity ROI declines year over year, mainly due to equity increasing faster than cash flow. There will come a point where your equity ROI is lower than what you could make if invested that equity elsewhere. At that point it's time to get that equity out and reinvest it. Make sense?

Secondly, no one can time the real-estate market perfectly.  (Or the stock market either.)  A lesson I learned a long time ago in stocks is that if someone buys my stock and makes a bunch of profit off of it because I sold too early, well that's OK, as long as I got my profit when I sold.  In other words don't worry about timing the market, no one can anyway.  Instead rely on equity ROI to let you know when to sell/refinance.  

Oh, and great deal, I'm jealous!  ;)

I'm currently purchasing turnkey properties 12-15, and have dealt with 5 different providers.  I've had a number of properties fail to appraise for the asking price.  Usually it's less than $1k and I just write a check.  Three times the appraisal has fallen significantly short.  One of those times the provider successfully contested the appraisal.  The other two times the providers gracefully allowed me to back out of the deal and returned my earnest money.  I still remember what one provider said as I was backing out:  "I want to make sure you are going to continue to buy properties from me!"

Point is, I don't think Memphis Invest's position is the prevalent one in the turnkey market.  You don't have to accept this from Memphis Invest as there are plenty of other options.  In Memphis, both Memphis Investment Properties, and MidSouth Home Buyers, are excellent turnkey providers.