All Forum Posts by: Immanuel Sibero

@Bryan Mitchell

@Michael Noto

After reading the article, I think the statement - "If financing is planned, then Cap Rate cannot be used as an estimate of value." is incorrect or a  typo. It should read - "If financing is planned, then Cap Rate cannot be used as an estimate of return."

The author starts out with a premise that cap rate can generally be used as an indication of expected return (i.e. 10% cap rate generally means 10% return). What he is cautioning the reader is when financing is planned, then the above premise is no longer valid. In other words, he's saying that when financing is planned, a 10% cap rate would no longer mean 10% expected return.  As a matter of fact, financing is the very strategy commonly used to achieve a return that's different from the cap rate (i.e. in this case, higher). 

Besides, it does not make sense that the value of a property would change based on whether or not financing is planned.

Immanuel

@Andrew Postell

Thanks for your help. I have been going to real estate meetups and the next one is supposed to cover the tax aspects of real estate investing. I will have my question ready. Looks like the obvious solution is going to commercial or portfolio loans as you have suggested before.

@David Pascual

Great topic. Looks like your last question is what I am somewhat stuck on. After @Andrew Postell explanation earlier in the thread a conventional loan would not work with LLC because it's not allowed by Fannie/Freddie.

Thanks... Immanuel

@Andrew Postell

Thanks. It's good to know that banks won't normally question who pays for the mortgage. However, being a newbie, I'm still stuck with the bookkeeping on your customer's side (i.e. I'm in this exact position with my rental houses). For example, so I transfer the deed to my LLC, my LLC's balance sheet now shows the houses under Asset. Every month I show the LLC collecting rents, paying for expenses and paying the mortgage payments, but the balance sheet does not show the conventional loans under Liabilities. So effectively the LLC's balance sheet shows as if the LLC owns the houses free and clear (i.e. since the loans do not show up).

Now alternatively I could book the loans on the LLC's books and have them show up under Liabilities and everything would look good, EXCEPT the issue here (at least in my head, maybe this is not an issue...lol), the LLC would be showing the conventional loans belonging to ME. Isn't this co-mingling personal finances with the LLC finances? I'm thinking of a scenario where a lawyer is trying to prove that I have failed to separate business and personal finances.

Do your customers show the conventional loans on the LLC balance sheet?

Thanks... Immanuel

@Andrew Postell

Great info Andrew, thanks.  I do have a few of questions.

Once the deed is transferred to the LLC, legally the property is now owned by the LLC but the loan is still under your customer's name, correct?

Who then pays the mortgage payment? The LLC? or the customer?

Obviously, you do not record (book) the loan on the LLC's books, do you?

Thanks... Immanuel

Cap rate is a measure of risk and/or desirability of a property. A high cap rate is an indication that the properties in a particular area are less desirable (i.e. higher risks) compared to other properties in the surrounding areas with lower cap rate. If you are only screening cap rates greater than 8% (i.e. using "lowest cap rate of 8%" as a criterion) then you are only screening for higher risk, less desirable properties. If this is truly your screening criterion, you may be missing out on good deals.

This is why many investors do not put too much weight on cap rates much less use a "lowest cap rate" as a screening criterion. COC is a better metric anyway... better yet... IRR.

Immanuel

@Scott Mcquilkin

If it feels like you're overpaying then don't. Two ways to lose money:

- Overpay for a crappy property

- Overpay for an excellent property

Immanuel

@Jerry Ologh

I think you're doing quite well with the analysis (i.e. nothing jumps at me as being "incorrect"). Jeff has some great points to incorporate into your analysis.

The result of your analysis is typical in the mid cities and Dallas area, demand is high pushing up prices to levels where many prudent investors are priced out. If you keep looking, you will find diamonds in the rough... or think outside the box and go out of town.

This site gives you tons of info on how to make money, but the two quickest ways to lose money:

- overpay for a crappy property

- overpay for an excellent property

Good luck.... Immanuel

@Kenneth Noronha

Good question. I'm a newbie too and have done a lot of reading on BP about real estate. It's a great site. When it comes to cap rate and its derivatives (i.e. NOI and Sale/Value/Purchase price), as you have found, there's too much misconceptions, misuse and even abuse. I suggest doing a search right here on BP forums with search words "cap rate" and "noi". Pay particular attention to posts by Bob Bowling. His posts may not be easily identifiable now because his account had been closed. Read his posts for about 6 months and nothing else (which is what I did), you will have the confidence talking to even the most seasoned commercial brokers. You will actually be able to identify those how are clueless.

Once upon a time, in the world of "pure theory" the concepts of Cap Rate and NOI were clearly defined, however we now live in the world of "tainted reality". It's a hassle when someone tells me "my property's cap rate is 11%", I have to turn around and ask him "does that rate include Capex or exclude Capex?".

Good luck,

Immanuel

@Graham Nash

I think what Greg was saying is you have a 19 year amortization loan which builds equity faster but eats up cash flow. You can generate more cash flow by going conventional (i.e. 30 year amortization loan).

Also, I'd like to add to my previous post that you are calculating COC of 26% because you are using lower operating expenses (i.e. 36% of Rent). If you were to use the 50% of Rent for operating expenses (i.e. to be consistent with the way you calculate your cap rate), then your COC would be negative.

Immanuel

@Blair Boan

Looking at how cap rate is defined..... Cap Rate = NOI/Purchase Price.

So cap rate would increase when either:

- NOI increases

- Purchase Price decreases

- Or both

But don't worry too much about cap rates when you're dealing with 1-4 family properties. They're just not relevant.

Immanuel