All Forum Posts by: David Campbell

@Scott - I understand compounding return. I was clear that my illustration was based on annualized non-compounded return. It's not my intent to mislead. Thank you for showing your longhand math for compound return.

A market as strong and economically as diverse Dallas, TX should have rent growth and price growth but that is for each investor to decide how much to speculate on that future potential variable. I typically estimate a 3% increase in rents and 3% increase in all expenses except the mortgage payment which is a known constant. Again that is my philosophy and the reality is that in an economy based on fiat currency no one has any ability to accurately forecast what rents or prices will do in the future. It's one giant educated guess.

My properties and my investment philosophy are not for everyone, but I've been doing this a long time and I have a lot of happy repeat clients so there must be something to my madness. We also build a nice home. My company builds ~1% of all the new houses in Dallas, TX. That's a small market share of a huge market, but it's an accomplishment I'm proud of.

I usually don't post on BiggerPockets because the environment can be hostile because everyone seems to have an agenda to push. I'm here today because my name came up as the topic of a thread and I couldn't stay away (but probably should have).

Don't get your feathers ruffled people - I'm not trying to change your philosophy.

At the end of the day I'm offering a 6-6.5 CAP brand new rental property in one of the fastest growing metros in the US that can be purchased with 5% down and 95% CLTV 30 year fixed interest rate financing at 5%. If I were a newer or part time investor where the most important things to me were high leverage, semi-passivity and hassle-free management, I think I offer a compelling product that I haven't seen anywhere else. If you are a hands-on, do it yourself, make a ton of sweat equity kind of investor, my stuff will not be right for you. Back to my original point, everyone should form their own investment philosophy and buy stuff that fits inside that philosophy.

@JScott If accounting math and terminology was a principal and not a subjective part of an investor's philosophy there would be one universal accounting standard and it would have been codified hundreds of years ago; however, you'll see from this excerpt from Wikipedia explaining accounting standards that accounting best practices change all the time and accounting is done differently around the world and from company to company.

"Auditors took the leading role in developing GAAP for business enterprises.[3]

Accounting standards have historically been set by the American Institute of Certified Public Accountants (AICPA) subject to Securities and Exchange Commission regulations.[4] The AICPA first created the Committee on Accounting Procedure in 1939, and replaced that with the Accounting Principles Board in 1959. In 1973, the Accounting Principles Board was replaced by the Financial Accounting Standards Board (FASB) under the supervision of the Financial Accounting Foundation with the Financial Accounting Standards Advisory Council serving to advise and provide input on the accounting standards.[5] Other organizations involved in determining United States accounting standards include the Governmental Accounting Standards Board (GASB), formed in 1984, and the Public Company Accounting Oversight Board (PCAOB).

Circa 2008, the FASB issued the FASB Accounting Standards Codification, which reorganized the thousands of US GAAP pronouncements into roughly 90 accounting topics[6]

In 2008, the Securities and Exchange Commission issued a preliminary "roadmap" that may lead the U.S. to abandon Generally Accepted Accounting Principles in the future (to be determined in 2011), and to join more than 100 countries around the world instead in using the London-based International Financial Reporting Standards.[7] As of 2010, the convergence project was underway with the FASB meeting routinely with the IASB.[8] The SEC expressed their aim to fully adopt International Financial Reporting Standards in the U.S. by 2014.[9] With the convergence of the U.S. GAAP and the international IFRS accounting systems, as the highest authority over International Financial Reporting Standards, the International Accounting Standards Board is becoming more important in the U.S.

@David C. "Does divided by 30 really give an 'annualized return' ? that assumes no compounding? I don't think anyone uses that kind of math for any investment? I get that 8.3% for 30 years gets you 1093% of your original investment." You make an excellent point about the difference between annualized non-compounded ROI and annualized compounded. I was stating the former and your math is correct for the latter. There are so many variables in investing and so many benefits the math can get confusing especially with vocabulary that sounds the same but the math formula is very different. We make the best forecasts we can to help us compare apples to apples before we head into the battleground of the marketplace and then all forecasts are thrown out the window the moment we are in the heat of battle as an investor / owner / manager of a property. I don't really advocate buying exclusively for amortization; I was just isolating one benefit of ownership and putting an ROI number on it. I don't think that home prices or rents or operating expenses will stay the same over 30 years especially not in a growing market like Texas ... and especially not in an inflationary economy.

@Jerry W. - Thanks for your question. I outsource all of our residential property management and I do all of our commercial property management in house. There are lots of strong property management firms in DFW. I have my current favorite that I am happy to recommend. I like the ability to be aligned with my investor buyer / client in the event there is a conflict between the investor and their manager. Good residential property management is hard to do and even harder to do profitably.

@John Chapman I have been trying to talk in educational generalities to avoid pitching a deal in the forum, but since you and others have asked here is a post that includes the math and deal points as I market it (BIG DISCLOSURE - The following post may sound like a pitch book, but it's intended to be educational to the thread. If you think you'll be turned off by this, please just skip this post).

Rent range in our neighborhoods are $1250-$1350 so I typically proforma $1275 gross rents. The vast majority of our homes are leased for $1275-$1300. We have plenty of rent comps in our subdivisions and the surrounding areas to back up this rental income assumption. We build an energy efficient home that exceeds the minimum building requirement. This keeps the tenant's energy costs down which makes our homes even more affordable for the tenant than a comparable 4 bedroom that is 15 years old. We aren't expecting a premium rent for our homes because of this but we do use it as a feature when marketing to tenants which helps our occupancy rates.

Vacancy assumption 6%. This could a low vacancy rate for some markets, but Dallas is a hot rental market right now and we are seeing almost everything in our neighborhoods lease in 30 days or less (except for Nov - Feb which are sucky times to rent anything in Texas because of the holidays and cold weather). Our 3rd party property management company shows me the rent roll for our neighborhoods every month and they are averaging 94% occupancy. Looking at class B apartment rental data newer than year 2000 in our areas of Dallas and Fort Worth they are experiencing about a 94% occupancy rate as well.

Property management fee: 8% this is what our preferred 3rd party property management company charges to our clients. Market rate in Dallas is 6-10% of the gross rents collected.

Leasing fee: $300 per year. This could be an optimistic assumption. This assumes that a property turns over and a leasing fee is paid every 2.5 years. These are brand new four bedroom homes and our demographic is families. Our Dallas subdivision also has excellent schools (Duncanville ISD) which tend to attract less migrant tenants. In my personal experience I've had some rentals where the tenant stays forever and some where the house turns over every 12 months. This leasing fee estimate is highly subjective. The property manager typically writes 12-18 month leases.

Insurance: $721 per year. This is a middle of the road quote from Allstate with average credit and a $1000 deductible. You can get cheaper insurance with multiple policy discounts, better credit, and a higher deductible but I am trying to paint as realistic of a cashflow portrait as I can.

Maintenance: $459 per year. This would be a really low assumption for an older unit, but within the range of possibility for a brand new property with a 10 year builder warranty backed by a third party insurance company (Strucsure). There really should be zero maintenance expense in the first few years of ownership of a new property under warranty which allows you to build a maintenance contingency buffer when the property does need new carpet and paint. We also build the home with low maintenance expenses in mind. We use sheet vinyl that looks like wood in all of the common areas of the home. This vinyl product is very durable and is very cost effective to patch / repair if a tenant does damage. Only the bedrooms are carpeted and when you go to recarpet only a bedroom you can use remnant carpet to keep costs down. The home is a two tone interior paint and we use the same sherwin williams beige and white paint colors inside every home. The property manager and tenant are given touch up paint so the turnover touch up painting costs can be reduced.

Property taxes: It is easy to research the property tax rate and tax expense. In Texas there is a potential property tax holiday on new construction homes in that the assessed value of the home often lags behind construction. Basically, there are going to be a 2-10 months at the beginning of your ownership where the tax assessor will tax you as if you owned a vacant lot rather than an improved house. This is a bonus to our clients but it's not in our proforma. If you object to some of the assumptions I've made, here's a little fat to even the score a bit (albeit it's a one time bonus). I've made the assumption that the property tax rate will be applied to a value that is 90% of the purchase price. That is a reasonable assumption for our DFW market. You might even be able to petition the tax assessor for a lower tax value and therefore get a better cashflow than I've estimated.

Mortgage - I'm using a 5.125 interest rate at one point for the first mortgage and 5% interest rate on the 30 year fixed second mortgage. Rates change daily but as of today you can probably get a little better rate than 5.125 with one point. The second mortgage interest rate is so cheap because I'm lending my own money. I make my money building the house so I don't have to make a high interest rate on the second mortgage. I have 15% of the capital invested in this home and my buyer has 5% of the capital invested in this home. My second mortgage will only get repaid if the investor is successful with the ownership of their property. As the junior lien holder that makes me HIGHLY motivated to (1) build a quality product (2) provide a reasonable cashflow forecast (3) maintain property values in the subdivisions I am building in (4) provide long term mentorship to our investor buyers to improve the likelihood of their investing success (5) assemble a powerful buying group of investors who can negotiate stronger pricing from property management and the maintenance vendors because there is economy of scales like you would get in managing an apartment building but these are separately owned houses in close proximity. My main motivation in providing the second mortgage is to develop a lifelong relationship with the investor which is created by being their flexible bank. If an investor gets over their head with their property or needs an emergency quick sale of their property, I am more motivated to earn a loyal investor than to make sure I get every dollar of my second mortgage repaid. My second mortgage helps the investor know we are invested in the property "together" without the complexities of a "partnership" in the legal definition of the word. Every other turn key provider I know takes their profit at close of escrow and the investor is on their own. Our company leaves 100% of our profit in the deal as a second mortgage and we usually contribute a little more equity capital besides. In short, if an investor ever needed to short sale their property they have a 15% cushion in my private second mortgage before a short sale became a problem for the investor. All of the first mortgages are done through conventional lenders who requires an unbiased appraisal. All of our purchase contracts are written to be contingent upon the property appraising at the contract price. Recently, our homes have been appraising slightly higher than the contract price. It's a brand NEW 1550-1700 sf four bed, two bath, two car house for $130-140k. The only reason we can build and sell at that price is that we have economy of scale for being one of the larger builders in DFW (we have ~1% market share of a huge market) and we were able to buy our land at an amazing price during the great recession. Can you find a cheaper home in our area? Probably, but it would be 10+ years old, it wouldn't have a warranty, and you wouldn't get the benefits I outlined above. If someone doesn't want the benefits we are offering and price is the most important thing, they might find a 10+ year old home in the same area for about 5-10% less than what we are selling a new home for. IMHO a home starts needing maintenance about year 10-15. That when you'll need to think about replacing fencing, hot water heaters, toilets, fixtures, appliances etc. You in theory pay a small premium for a new home, but I think you make up for it in reduced maintenance costs. Remember you can finance a new home, but you'll have to pay cash for the out of pocket maintenance on an older home. I'm digressing a little bit into philosophy and I totally get that some people will see this differently than me. This opportunity is not for everyone. Our most successful clients are long term, semi-passive investors who like the idea of high leverage, they just want the property to cashflow at least +$1 per month, and they see value in the intangible long term benefits we provide that go beyond the sticks and bricks of a home.

In short, we are forecasting an expense ratio of 42% (not 50% as others suggest) but this is new property with a 10 year builder warranty. In reality, you should have very low expenses for the first several years and then a higher expense ratio as the home ages. The biggest cost savings on a new home are lower insurance expenses, lower maintenance expenses and the potential for higher occupancy rates.

I've attached a screen shot of our cashflow proforma which shows $63/month net spendable cashflow. As anyone who has been on the phone with me knows, I advise the client to call this break even cashflow and stick the extra cashflow into their contingency reserve fund. If you sell this property in 30 years and net $131,000 which is exactly what you paid for it (ultra conservative even for Texas) and you made no cashflow along the way, but your tenant paid off the mortgage for you here's the math: $131k proceeds of sale - $11k invested (assumes 5% down + closing costs) = $120k profit divided by $11k invested = 1090% total return divided by 30 years equals 36% annualized ROI. If you're happy with 36% annualized ROI using what I think are ultra conservative assumptions this deal could work out for you. If you think there is a possibility of rent increases or price increases over a 30 year period in a super strong market like Dallas, it's possible your return would be even better. If you see the opportunity to pull cash out this property in 15 years and re-leverage your money, your returns could possibly be MUCH better.

I've been offering this 5% down program since 2009 and I've had ZERO defaults on our second mortgages. The average client has purchased three homes from my company and usually one at a time after they have had proof of concept one the first rental. The majority of our sales come as referrals from existing clients. I focus on building investor relationships for life and the transactional business naturally happens.

Sorry for the long pitch book... I'm hoping there were at least a few educational nuggets that made it worth while reading to the end of this post.

David Campbell

@Jon Holdman makes some excellent points. I especially echo his investment philosphy: "Before jumping into any rental purchase, and especially turnkeys, make these assumptions: The house needs work. If it was rehabbed, assume its shoddy, cosmetic rehab that has covered up underlying problems. The house is overpriced. Rents are overstated. Demand for rentals in the area is overstated. Expenses are understated. Then work to invalidate these assumptions."

It sounds like Jon has a clear investment philosophy and having a clear investment philosophy sure makes investing a lot simpler. I'm using an important word not to skip over - "philosophy". There are absolutely no investment principles. There are only investment philosophies. A principle is correct 100% of the time without exception. Philosophies are subjective.

Very few people get into disagreements over principles like "water boils at 100 degrees centigrade at sea level". Philosophies are hotbeds of disagreement because they work sometimes but not 100% of the time. If you hear someone having an argument it's because they are looking at the world using differing philosophies. My advice to younger investors is to internalize that there is no "right way" or magic formula that is foolproof. Everyone has their own way of analyzing risk reward and it is a subjective philosophy NOT a scientific principle.

Jon's point above "IMHO, the phrase "cash on cash" is more accurately applied to the cash returned to the investor by the property than trying to apply it to these non cash items. " is a great philosophy that works for many people but it's not a principle (there are no absolute principles in investing). When one looks at cash returned to an investor you need to choose an arbitrary time period over which to measure the receipt of that cash. For example, I own net leased shopping centers whose tenants pay a substantial portion of their rent an annual reimbursement basis (common area maintenance for example). It would be missing the big picture to measure the cashflow on a monthly basis when the tenant pays much of their rent on an annual basis. The other thing to consider is whether you even want your property to have a large cashflow. Some of my properties have a large cashflow and some of my properties I use the cashflow to accelerate the amortization of my loans and therefore by my management style I've decided these properties won't cashflow for me because I don't want them to. A popular investment for wealthy investors is a "zero cashflow" CVS pharmacy. The property can be purchased with very little money down but 100% of the rent is assigned to amortize the mortgage so after 20-30 years the property is free and clear. Why would a wealthy investor buy a property they know will have zero cashflow for 30 years? There are a million reasons, but the reasons would all be personal to that investor and they might not be applicable to your investment needs and resources. To say that a zero cashflow net leased property has zero cash on cash return may or may not be a true statement depending on which PHILOSOPHY you are using to evaluate the investment. Using Jon's point of view it would have a zero cash on cash return. Using my philosophy (meaning IMHO) the total profit divided by the capital invested divided by the number of years is the cash on cash return. The majority of Americans are willing to wait 30+ years before their 401k starts to cashflow for them why are real estate investors so impatient to think that a property's monthly cashflow is the most important. Back to my shopping center analogy... on a monthly basis the cashflow on my shopping centers sucks. On an annual basis the cashflow on my shopping centers ROCKS! Choosing the time frame over which to measure cashflow is arbitrary.

Jon made good points about the tax benefits of depreciation, but depreciation is only one of the potential tax benefits of real estate. Here are few points I would add from my perspective. If a rental property is profitable you will want all of the depreciation you can to shelter the rental profits generated by the property. You don't necessarily need the passive loss from the property to carry over against your active income to realize a tax benefit because as Jon said high wage earners won't be able to use that passive loss benefit against their w-2 income. If your rental produces $2000 a year in profit and $2000 a year in depreciation shelter, the income from your rental comes to you tax deferred or maybe even tax free. If you 1031 exchange or hold the property with your depreciated basis until you die then your heirs can inherit the property with a stepped up basis and you can avoid depreciation recapture (consult your tax advisor). Some other huge tax advantages of real estate - the increase in the price of the asset is not taxed until you liquidate the asset. You can potentially borrow your profit out of the property without selling it and that cash deposit in your bank account is tax free. You can potentially 1031 exchange your rental profits into a beautiful home that you rent out for a reasonable time (1+ years), move into this low depreciated basis home as a primary residence and if you live in it for 2 out of the last 5 years you may be able to sell the home and use your primary residence capital gain exclusion to erase some of your depreciation recapture. This is getting complex, but the point I want to underscore is that every person is seeking a different set of benefits from a property. Some investors will be able to use all of the benefits and some don't even want all of the benefits.

Jon's point about buying a property with 5% leverage and selling a year later is a crucial one!!! If you buy a property with that much leverage your transaction costs might equal your entire investment. Any time you are investing with leverage (e.g. stocks bought on margin) there is a higher degree of risk and a higher potential for reward. In my teaching "philosophy" I believe that higher leverage investing can potentially result in LOWER risk. That sounds counter intuitive so hear me out on this one. If I bought a property with 5% down and put 15% in the bank as cash reserves I will be much better able to weather any future market or cashflow fluctuations than the investor who puts 20% down and has minimal cash reserves. Another perspective is that if I bought eight properties with 5% down I would have eight sources of income to create statistical diversity in my portfolio. Chances are I would only have 1/8 of my portfolio vacant at any one time. Andy's philosophy is to use this same amount of capital to put 50% down on a single property rather than 5% down on 8 properties (it's 8 not 10 properties because of added closing costs). Andy would have potentially better cashflow because he has lower leverage, but he also has reduced diversity of his capital. Another powerful concept is the idea of stop loss. People use stop loss in their paper trading all the time. The idea of stop loss in real estate rubs people the wrong way from an ethical standpoint so if you are one of those people please just read through this section without judging and tell yourself "oh that philosophy works for some people but not for me". Here's the idea of stop loss in real estate. Let's say Andy bought a house with 50% down ($100k house with $50k down) and I bought the identical house next door with 5% down ($5k down with $45k left as cash in the bank). The market declines in value from $100k to $40k such as happened to me as an investor in Vallejo, CA after the city declared bankruptcy. Andy and I both decide enough is enough and we are going to short sell our properties at $40k. Andy started with $50k and because he put it all into his property as a downpayment he now has a total loss. I put $5k as a downpayment and left $45k in the bank. I would have a total loss on my capital invested but I still have $5k in the bank so my loss would be 10% and Andy's loss would be 100%. The higher leverage can help you and hurt you, but higher leverage used properly REDUCES your risk of loss. If that is a paradigm shift for you, then your investment philosophy just changed. If you think my idea is full of crap, then I congratulate you on having developed your own investment philosophy. There is no right way to invest in real estate. Investing is real estate is a highly subjective world and discussions like this one will help you figure out how to get the benefits of real estate you are seeking using the resources you are starting with.

To your success!

David Campbell

Full disclosure: My company is the seller of the property Stan is considering so in this post I will do my absolute best to speak in generalities as a form of sharing knowledge and I will do my absolute best to avoid sounding like a commercial.

Real estate brings different benefits to each investor. Each investor will receive a different set of benefits from a property based on their needs. If the only benefit you are seeking from an investment is pure and unadulterated cashflow, you'll probably do better owning private notes rather than real estate. If you are seeking tax shelter from depreciation, controlling the most real estate possible with the shortest depreciation schedules allowed should be your goal. If you are seeking the highest total return on your money, you're probably going to want to own real estate with aggressive leverage (smallest downpayment possible) so even small movements in the price of the real estate results in large gains (*or losses). If you are looking for a hedge against inflation, you want to control as much good debt as possible because the debt is what gets devalued. If you are seeking a blend of these benefits, then it is important not to evaluate your investment choices using just one metric such as cashflow.

A pet peeve of mine is when people take the annual cashflow (*cash throw off) divided by the cash invested (*equity) and call it cash on cash return. That formula tells you cash on CASHFLOW return. No one ever uses that term, but a lot of new investors think cash on cash return is the same as cash on cashflow return so I want to clarify for the benefit of no investor left behind. Cash on cash return is the total amount of profit divided by the total investment and then usually turned into an annualized number. You can make money in real estate from cashflow, amortization, appreciation, devaluation of debt, and tax benefits.... adding all of those profit centers together makes for a complicated formula to solve but when you are factoring cash on cash return that's the formula you're trying to solve.... it's not a good idea to focus solely on cash on cashflow return or you'll miss the big picture.

Let's look at a few of the examples presented here for the sake of learning concepts.

Assuming Stan's number of cashflow of $150/month ($1800/yr) with $26,000 invested = 7% cash on cashflow return and while that's not good it's not bad. Depending on where you live there are better cash on cashflow investment opportunities out there that produce better cashflow *such as notes. Assuming cashflow of $50/month ($600/yr) when you have $6500 invested is 9% cash on cashflow return. That's a lot better, but not jump out of your seat exciting.

Let's assume a property bought with 5% down stays the same value but your tenant pays off the mortgage over 30 years. Using Stan's loan numbers that is approximate $4300 equity per year from amortization (I know amortization is not level because the beginning of a loan is mostly interest, but for the sake of making a complicated subject as simple as possible $4100 is the average annual loan paydown). If you have 5% invested ($6500) and you get $600 in cashflow and $4100 in amortization equity that is $4700 per year / $6500 invested = 72% annualized ROI before you consider the possibility that the home price could increase from inflation or increased demand. Assuming the home increases in price at the rate of 2% inflation per year non compounding (that's an ultra conservative estimate) we're talking about $2600 per year of price increases (*equity). Add that to the $4700 above and you're at $7,300 per year total return divided by $6500 invested and you're 112% annualized cash on cash return. That's jump out of your seat exciting. Remember we didn't add in the tax benefit or the additional cashflow from rent increases or the possibility that inflation is higher than 2% non-compounded.

This is an ordinary property turned into a super charged investment because of deal structure. You can use this deal structure on any property where you can get 95% investor financing. That deal structure is a concept you can use on any investment property. If you can find 95% financing, and you like the property, and you can at least break even on the cashflow, and you are investing for wealth creation and highest ROI more than cash on cashflow return this strategy could work for you. You don't have to buy properties from me to use this strategy. I've made the 5% down opportunity available to our clients because it's a great strategy and I couldn't find any other turnkey provider offering it. If ya'll can find investment properties with 5% down that you like better than the new houses I am building in Dallas and Fort Worth, go buy them!!! The world is a big place and there are lots of good deals out there. Make sure you analyze the property AND the deal structure to get to a set of benefits and then see if those benefits are the ones you are looking for. Also, if you find high quality positive cashflow properties with 5% down (other than mine) let me know, because I would love to market them to my investors as well.

In short, the investment strategy Stan is talking about (high leverage with modest cashflow) isn't for everyone. There are a lot of cashflow risks when you take on that much leverage. However, for someone trying to create wealth and tax shelter starting with a modest amount of cash this strategy has a lot of merit.

CASHFLOW PARADIGM SHIFT - here's why cashflow investors might also like this 5% down strategy. Assuming you could turn $26k of cash into one property with 20% down / 80% financing and it produced $300 a month cashflow. I would say that is a strong deal worth considering *assuming you've also budgeted for management, vacancy, maintenance and replacement reserves. Alternately you could buy three properties with 5% down (*only three and not four because you'd have closing extra costs) that cashflow $50 per month each *($50x 3 properties = $150). $300 is better than $150 until you look at what happens when the rent on all these properties goes up by $100. Your $300 cashflow property will cashflow $400 and your three $50 properties will now cashflow $150 x 3 = $450. When the rent goes up $100 *which it inevitably will if you believe in inflation* you have better cashflow by owning three "mediocre cashflow properties" rather than one "stellar cashflow property". Again, over time the leveraged deal structure trumps property performance. One huge thing to consider is that leverage works in your favor when the CAP rate is higher than the interest rate. Get this formula reversed (interest > CAP) and the financing will be working against you. I'll say it again because it's that important.... If you borrow at 6% and invest at 5%, you'll lose money the more you borrow. If you borrow at 5% and invest at 6% you'll make more money the more you borrow.

Beginning investors focus on the sticks and bricks of real estate, while professional investors focus on creative deal structures that create impressive returns. As the saying goes... "You name the price and I'll name the terms."

*I'll buy your crappy duplex for $10 million dollars... Here's the terms... One dollar down and a dollar a year for the next 10 million years." The person who names the terms always comes out ahead in the long run.

The other concept I focus on is that there is no such thing as a good investment or a bad investment. There are only investments that are suitable or unsuitable for a particular investor's objectives. If you know what you want a property to do for you, you'll know how to evaluate it for your circumstances and according to your own personal investment philosophy. Circling back to the beginning, everyone's circumstance is different. There are no properties or investment strategies that are a one size fits all program.

Best of success to everyone!

-David Campbell

Assuming that you're talking about managing a single-family house, what's normal in the property management industry is between 7 and 10 percent of the gross monthly rents collected. Also, property managers will charge a leasing fee when they place a brand new tenant in the property. That fee is above and beyond the management fee. It is usually between fifty and one hundred percent of the gross first month's rent and often times your property manager will split that fee with the cooperating broker. So they'll use that fee to incentivize other brokers to bring them new tenants. Property managers also can make fees from repairs on the property. Sometimes the manager has their own in-house construction team and this way they can make some profit by doing repairs. Other times the property manager will hire third-party vendors to do repairs on your property but in that case they may or may not charge you an additional fee for coordinating the vendors. When you are shopping for property managers, cost is not the most important thing. When you are looking at the cashflow performa for your property, one to three percent difference in your property management fee should not really make or break your deal. If it does, you've got the wrong deal. When you are looking for property managers, you want to make sure they are providing an excellent service. If they are a member of NARPM (national association of residential property managers) that's a great sign. If they are responsive on the telephone, or if they've got great internet marketing and you like the way their ads look on Realtor.com and Craigslist, that's a great sign as well. If they are using property management software to help you manage your income and expenses, that's good as well. All of these things can be more important than the cost.

This is David Campbell. I use Google Alerts to find places where people are blogging about me on the internet. I then email a link to the blog thread to my list of clients asking them to participate in the educational thread. Whatever my clients post is up to them.

While it shouldn't be assumed that positive comments are spam, it does seem strange that so many new bloggers would be aware of me in this thread. People in my existing client database are more likely to have a positive opinion of me than average.

FYI - I believe the concept Ryan is referring to is... buy a property for $100 using an $80 bank loan @ 5% and $20 equity. Immediately resell the property for $110 where the buyer puts $10 down and the investor carries a $100 wrap note at 9%. The investor makes 9% on $100 = $9 and pays his bank 5% of $80 = $4. The result is a $5 profit on a $10 investment (remember $20 down less $10 from the buyer) or 50% ROI.

The strategy works best when you start with an occupant with good income and bad credit who is willing to pay 9% and top dollar to get into a property. I would not try to implement this strategy by starting with a property and trying to find a buyer.

This strategy works well in Texas, but is prohibited in some states.

If you are trying to remove equity from a property using conventional financing, it is a very slow and expensive process.

This blog post doesn't contain enough info for you to actually implement this strategy. Consult your legal adviser about the potential risks and merits of this strategy.