All Forum Posts by: James W.

@Jonathan R McLaughlin I think it is likely to fail for new investors as well, which is the reason I created this post in the first place.  

In all reality, I probably should have use examples of 5-10 units for the new investor, but things would look much worse from that scenario.

The 100 unit example is to assume there is some scale and see how it looks from that standpoint.  It does not look that attractive to me as a simple buy and hold which is what most new investors look at.  I understand most experienced people want to find a value add opportunity so it does not apply to them as much, but it does possibly apply more to someone looking at a property that was a recently completed value add that is renovated correctly and rents at market rates.

@JD Martin Even at 100 doors, it does not seem like there is too much room for error, which is why it is somewhat concerning to me that so many people on this site have a goal of $100 a door, talk about it as a reasonable goal, and recommend it to new investors as a reasonable metric.  

$100/door is scary for me to think about, especially at a low scale!

@Jay Hinrichs My brother and I are somewhat interested in the development side of things, but more from the standpoint of developing more affordable rentals in a few areas where there is a shortage.  

We do not have any experience in it which is somewhat limiting though.  Even if we could get the capital, there would be a learning curve involved with vetting out various contractors and figuring out other things we do not know.

@Jonathan R McLaughlin

Thanks for the response.  

Not that I have the problem, but I understand it can be difficult to get large sums of money placed into investments.  A 12% return might look good for some, but for a 12% return, I see a bit of risk in this scenario if we were to enter a recession.

I would think a building renting at $1,000/mo would be in a safer area but not a high class area from an investment standpoint.  This differs greatly given the area, but $1,000/mo is still a little bit low in my area.  We usually hear that there is less risk in investing in higher classes of assets, but from the standpoint of an asset that throws of a low amount of cash flow, the risk appears to be greater in a higher class of asset than it would be in a lower class with a lower monthly rent.  

In a recession, I see it feasible that vacancy could increase 10% which would put the above property at break even.  I don't think 86% vacancy (or somewhere around there) is something that could not be expected in a stressed environment.  At the same time, I see it possible that rents could decline as well.  One if not both of these items could turn this into an investment that has a poor return or could cost the investor money each month.

I know there are many on here that are not as concerned with cash flow, but a property with high cash flow appears that it will weather a recession better than a property providing a low return back to the investor.

Personally, If I had the money, I would not invest in the scenario above at $80k/unit even if I have solid numbers for the other variables such as maintenance, cap ex, expenses, and my vacancy is in line with market as I would want better cash flow to protect me in the event that the property has to withstand a recession or two in my ownership.  I do better than 12% with my 401k at this time and it sure is easier to pull it back into something safe if things take a turn in the economy.  It would be harder to unload a property in a stressed environment.  The only reason I look to invest in real estate is to try and beat the market and to have a better control over my assets.  

I'm curious to see if anyone will jump on to post about how their properties performed during the last recession or in the late 80s.  I would be curious to see if an additional 10% in vacancy or a 10% decrease in rents is outside the norm.  I think one if not both would be reasonable, but I did not live through them as an investor either.  

@Bill F. I understand my example is not perfect, but there have to be some constants in the review of a hypothetical situation.  I could use variables to make everything look good or variables to make everything look really bad so I am trying to take some of the variables out of it with what I posted.

What I have in the example does not take into consideration the time value of money, but it does not make the deal look any better. Wouldn't the IRR/MIRR/DCR calcs make this scenario look even worse since it essentially says the $100/door is worth less each year?

Also, from a tax perspective, any cap ex expenses not actually spent in the current year will be taxable in the given year and looked as as income.  Of course depreciation helps offset some of this, but there are many variables with taxes depending on the timing of things and the individual investor, which is one of the reasons I did not include it.

@Mark S. My assumption is that all of the reserves are solid and the $100/door is solid based on today's market.

@Eric James I understand the ease of deploying assets and diversifying with a larger property.  That is not what I am trying to look at here.  I am looking at the feasibility of investing at $100/door of cash flow after all expenses to better understand why many people on this site say they are using it as a measuring stick. 

My examples look at 100 units to assume there will be efficiencies with scale.  I do not have the means of investing at this scale but my thought is that this scenario would be more favorable to an investor than looking at $100/door for a handful of units.  I could do the same with a SRF or duplex, but the reality is that there is less room for error in estimates with the lower number of units someone would have as $100/unit is not much money to be putting in your pocket on smaller deals.

@Bill F.  Absent the assumption that there is a value add play or that rents will continue to go up year over year in a 5 year timeframe, how would you look at the example above to show the true return over a short term horizon?  

If we look at this as a place that was already renovated and rented at market rents, what am I missing?

I am only looking at the cashflow side as it is the only thing we can look at as something constant over a short term period without speculating on the market or how the supply will be in a given area.  It is also what will cover the debt service and help in weathering changes in the economic cycle. 

I know there are tax benefits, but I am too young to let tax benefits drive my investment decisions so I usually don't take that into consideration with my investments at this time.  

@Jeremy Z. The biggest concern for me is protection from a recession at that cash flow level.  There is not much room for error even with moderate scale to it.   That assumes the numbers are solid from the start.

I agree that most new investors underestimate expenses so this is another reason the $100/door estimate should be larger for people with less experience.  It scares me even more to see that some of them are looking to invest on behalf of others in a larger deal!

Some people have the mentality that the first deal does not need to make money and just needs to be a learning experience.  I completely disagree as a bad deal can make it so a new investor might not have enough capital or capacity to get into the next deal.  

My biggest concern is really for new investors that hear about these different metrics and think of them as safe numbers.  If there was a metric that would work for every scenario, it likely would not be an achievable metric for everyone.  I don't think some people understand there is no safe rule of thumb number for every situation.

The same can be said about the 50% rule, 1%, and 2% rules.

@Isaac Braun Make sure you compare the policies.

My policies are through State Farm and they are not looked at as the cheapest, but I have everything through them and have had good experience with them in the past.  My cheapest property is around the same as your quote and is a single family rental.