All Forum Posts by: J Scott

No, I don't think that's what Wheatie is saying. Without trying to put words in his mouth, I believe he was just demonstrating for you that if a deal is good, it doesn't matter how much you put as a down payment; and conversely, if a deal is bad, putting more a down payment isn't going to suddenly make it a good deal.

The key is that there are multiple different metrics that you should be looking at to determine if a particular deal is a good one. First and foremost (in my opinion), you want positive cash flow. This will be your lifeline to ensure that you don't get into trouble with the property; as long as you have positive monthly cash flow, you shouldn't have to worry about the bigger real estate picture.

But, that's not the only metric you need to look at. As Wheatie pointed out, cash-on-cash (COC) return is another one. This is the ratio of how much money you are making each year in comparison with how much you put into the deal. If you put $20,000 into a savings account, you'll make about 3% return (from interest); if you put that same $20,000 into a rental property, how much will you make in return? If it's not much more than 3%, it seems like just putting your money in a savings account would be easier. You want to be able to make significantly more than that for all the work to be worth it.

Once you know that you're cash flow positive and you know what your COC return is, then you can figure out other metrics, like total return (this is your COC return plus the extra value you get from building equity and tax advantages). For some types of properties, you might look at cap rate, or debt service to income ratios. You might want to find out your internal rate of return (IRR), etc.

Basically, there are lots of important measures of how well your investment will work for you on a deal, and you need to examine at least a couple of them to determine if it's a good deal or not. You can't just look at a single variable (like cash flow) and say a deal is good or bad.

Thanks Michael...

I have a house under contract that has some decent equity, and I'm looking to rehab and rent/sell it. During my walk-through, I noticed that there is mold in several places -- including the ceilings of two bathrooms and around the frames of most of the windows.

The house has been empty for a while, the windows are not well-insulated, and the bathrooms have little ventilation, so I'm not surprised that mold has started to grow. That said, I know very little about mold remediation.

My question is:

I have a 7-day inspection period on this house (it's an REO, and sold as-is), and I'm wondering what I should do in those 7 days to ensure the mold problem isn't a significant one (or one I can remediate myself)?

I'm planning to get a property inspection, but I don't know if the inspector will know enough about mold to tell me the extent of the problem.

If necessary, I'm happy to get a mold specialist out to take a look? But will he be able to tell me pretty easily how bad the problem is without opening up the walls? Or will he have to get into the walls to determine the extent of the problem?

Should I pass on the deal just-in-case the problem is bad?

Spending $500 to get $300?

It may be business, but it's not good business...

But, based on your comment about having no expenses other than taxes, I'm not quite sure I believe you have a business at all...

Another question (along the lines of this topic) for experienced property owners...

I used the 50% rule for SFH, and I do a much more detailed analysis for any buildings over 5 units, but I'm not really sure how to evaluate expenses for 2-4 unit properties (duplexes, triplexes, quad-plexes).

I imagine there are some economies of scale for multiple units in a single building, but certainly not to the degree of an apartment building.

Do you guys use the 50% rule for 2-4 units? Or some other rule? Or do you do a more detailed (i.e., NOI and cap rate) analysis when determining if a 2-4 unit property is a good deal?

Thanks!

Just to clarify what Mike is trying to point out...

A good rule of thumb for many residential properties is that expenses (including vacancy, maintenance, taxes, insurance, upkeep, administrative, etc) will generally run between 45-50% of gross income. This is more a rule for single family houses than apartments, but still a good rule of thumb for apartments as well.

You can argue whether an experienced landlord in specific locations can ever get expenses lower than 45% on-average, but I think 99.9% of experienced landlords would never honestly believe you could get expenses anywhere near where you have them (25%).

You can take Mike's advice and plan for 45-50% expenses (he has dozens of data points to support it), or you can stick with your own estimates, and consider it a learning opportunity a couple months down the road...

Good luck!

Have you successfully run any other mutli-unit properties with OE of 25% or less? If so, you're likely one of the best landlords in the country, and I would recommend buying much larger apartment buildings/complexes where you can make a LOT more money...

My biggest concern based on your answers is that if you're doing all the work yourself (leasing, maintenance, turn-over, landscaping, evictions, etc), you're probably spending at least a third of time time (if not a lot more) on this one property, and this one property is only earning you $20K per year.

So, you basically have created a job for yourself, that's earning you less than $60K/year. Wouldn't you rather be creating a business where you can be using your abilities to acquire and operate property to build a much bigger portfolio? You can't do that if you're busy mowing the lawn and spending time in court evicting tenants.

You should take your talents and go make millions...not thousands...of dollars...

Both LLC and LP can be good entities for holding real estate, but there are a lot more questions that you need to ask/answer before determining which is correct...

What kind of real estate will you hold? What is your hold time? What is your exit strategy? Will there be partners? Will you be an active member of the partnership? Etc...

If you create an LLC, you have multiple choices for how you want that company taxed, and the answer isn't always a simple one...

You should consult a CPA/attorney with experience in RE, and they should be able to help...