All Forum Posts by: James W.

@Mike Dymski

For an investor purchasing at FMV in 2006-2007, how do you suppose that investor made money on their property? It surely was not in appreciation. Twelve years later, many markets have shown appreciation from those values, but it is nothing to write home about-especially if appreciation was majority of the return over the last 10-12 years.

@Scott R.

Yeah, but many people bought in right before it happened too...   Real estate was at an all time high then and we are also at a new all time high now.  Investors who bought before the crash have earned nothing over the last 10-12 years and are finally showing a slight gain after dumping all kinds of cash into a property that has not given them any return for over 10 years.   You are fooling yourself if you think it is not possible to happen again.

While the credit terms are not the same, poor investment strategy has not changed and there is a new crop of investors willing to get into any deal they can with the hopes they will make a killing on appreciation-especially since they have seen a lot of appreciation over the last 5 years in their own homes.

The investors who weathered the last recession needed a lot of liquidity and/or strong cash flow for their deals to avoid losing their properties.  

I'm not sure what your area is like, but people are buying tons of poor deals in MN just to get in and that is not helping things.  

@Kraig Kujawa

How do your numbers look if gets to 40% and rents decline 30% as well?  From what I gathered talking with others, rents went way down and vacancy increased quite a bit in the last crisis.  It has happened before and it is possible it can happen again-especially with all of the new investors flocking to RE as a way to invest, purchasing properties that barely cash flow and assuming they will make a ton as they continue to appreciate...

@Scott R.

How well did properties appreciate from 2007-2010?  In some areas, we are finally hitting the 2007 prices and it has been 12 years.  There are people still underwater in parts of the country as well.  If we hit the next crash sooner than later, I have a feeling just about everyone on here will see some real stress on their investments.  Those with strong cash flow (better ability to whether changes in rents and vacancy) will do much better than others.  Even if someone has equity in a crash, they will not be able to access it if the property does not cashflow.

Chris Gordon I’d recommend a percentage of rents as a metric instead of a standard $$$ per door. It factors in differences in the economic area as $100/door is completely different for a unit renting at $500 as compared to a unit renting at $1,500. I don’t have experience to know what level of cash flow would be conservative enough to last a recession, but I look for deals to be around 30% of rent assuming good front end numbers. This can be hard to achieve at this time too though.

As Joe Villeneuve hit on, low cash flow will kill an investor in a downturn as it does not provide protection in a change in the economic cycle where rents decline and vacancy increases. Equity won’t save the investor either as they won’t be able to get access to their equity if the property won’t cash flow. Another thing to consider is that $100/door is completely different on a $1,400/mo rental than a $500/mo rental. There is more cushion in lower cash flow for cheaper properties. All of us invest in different markets so the level of cushion $100/mo equates to can be completely different. I’d recommend looking at it as a percentage of rents than a specific $$$ per door as it is never an apples to apples comparison when discussing topics like this on here.

Deals are tight in our market and you need to look at the numbers closely on all deals. Don’t take stated info without verifying. Personally, I’m not buying deals with the reliance on appreciation so it needs a decent return without it.

@Ayne C.  

Yes-everything including debt service and management.  Good luck weathering a change in the economic cycle making $1,200/yr on a property!  When vacancy increases or rent decreases, it will not look very good. 

Looked into one towards the last crisis (someone looking to sell) and didn't do the deal.  Haven't looked since, but I'm not really sure what you would get out of the deal.  Many people folded at the last crisis and homevestors was essentially non-existent for several years after the last crash.  They have only really been advertising in MN the last year or so from what I saw since the market is hot again. 

I'm not sure what you are looking to get out of it, but it seems like a waste of time/money for me.  With all of the junk mail going to homeowners now, I'm not sure how many leads they really get 

The cash on cash return is only 4.48%.  I want much stronger cash flow in our market.

The cap rate is low.  If cap rates go up, the value will go down. 

The DSCR is only 1.23 which does not meet commercial lending minimum guidelines.

If not using conventional financing (assumed conventional) you won't get a 30yr fixed rate.  Even with conventional, I think you will pay a little more now.

The 5% management figure is about half of what you will pay

Cap Ex and repairs totaling 5% is way too low.  I'd estimate 10% of so but it really is property specific.  Either way, the figure provided is low especially if renting to students.

I'm not too familiar with the calcs on here, but you will have vacancy and I do not see that factored in.

If the utilities are not actual, you will want to verify those but they seem a little low to me based on my experience

Based on what I see, I would not do the deal-even with your added info.  I guess it is up to you with what your goals are though.  

Originally posted by @Chris Gordon:

Please define cashflow.

If after PITI, strong savings for capex and repairs, vacancy, and paying management, you have 100 bucks left over, I think that can be good - especially for someone starting out or in a tough market.

People use the term cashflow to mean everything from what I just said, to the money leftover after they just pay the mortgage.

$100/mo ($1,200/yr) is not even worth the hassle of dealing with a property even if you assume it is managed and accounted for.  It is horrible advice for someone starting out as new investors likely have errors in their estimates and need additional cash flow if they ever want to be able to reinvest and grow their business.