All Forum Posts by: J. Martin

I was reading your blog as I said before, and I like it.

You're very aware of humans' reactions, motivations, expectations, etc.. Something I need to be more conscious of..

@Joe Fairless ,

Worse comes to worse, you can always send them a message, and just say, "I enjoyed your *whatever* so much, I would like to give you a reference. But I'll need you to send me the request first by clicking on my profile and requesting one."

Maybe not the answer we were looking for, but it is an answer..

@Jay Hinrichs ,

Do you live in Oregon or near Santa Rosa now? I'm just curious because I was going to set up a BP meetup in Santa Rosa while I'm up there working the next few weeks (I live in the Bay), and I'd be interested in chatting with you if you're around.. I'll probably stop by Graton or whatever the casino is called too.. So I'll wave hi to your awesome payoff..

Anyway, development is a whole different game in CA. I've seen several developers who ONLY take raw land through best-use entitlement - and that's because they know everyone in the cities they work in. And it still takes years.. So yes, you really have to know your game. But my buddy was building SFH in TX and he said it was a free-for-all. No zoning pushback, size, parking, nothing. Pay the fee. Get your permit. "Git 'er dun" as they say lol Not a huge development though..

Well this happens to be impeccable timing @Tim Farrell , because not only do I own and invest in Contra Costa County (Richmond now, looking at other areas in the Bay), but I organize a monthly meetup of local investors in Oakland every month. We have a great group of people (25+ typically) from all different types of strategies, skill sets, etc. It's a great place to meet other local investors, and the next one is on Wed, Feb 19th. You can see more about me on my website in my signature or in my BP profile. Hopefully I'll see you at the meetup!

http://www.biggerpockets.com/forums/521/topics/114766-east-bay-meetup---wed-2-19-14-in-oakland

Also, @Jessica Yau owns a property in Oakland. And @Melvin Yuen owns a property in Solano County, among others.. From what I've been hearing at the meetups, there is definitely demand for off-market deals if you can bring some good ones through wholesaling..

Welcome to BP! And nice to meet you!

The BP forums of course!! (not only literally, but some of the best resources out there!!) I like financial disaster books, and I think they're a great learning tool..

When Genius Failed: The Rise and Fall of Long-Term Capital Management - By Roger Lowenstein

I think there's a good lesson for all of us in being humble, understanding the limitations of own brilliance and prowess, understanding the limitations of "overly-calculating" prices and risks that all the data and math in the world cannot account for (no offense "big data" folk and economic statisticians)!, and perhaps the most important lesson that stands the test of time: the risk of leverage.

I think one of my favorite investing quotes comes from this book, regarding the squeeze that can take place when markets change and you're leveraged (think lack of refinancing, equity extraction, etc).. "The market can stay irrational longer than most people can stay liquid."

I wrote a blog post on BP about the risks/benefit trade-off on how leveraged you are over economic cycles, with some thoughts, considerations, and questions..

http://www.biggerpockets.com/blogs/4579/blog_posts/32645-if-ca-h-is-king-then-leverage-is-god---loans-cash-roe-roi-and-risk

I think it depends on how quick you think you can find a deal, and how fast the market is moving where you're at.

When the market is increasing quickly, I don't like to be waiting on the sidelines for cash when there are good deals available, and then kicking myself in the a** later.. You can probably just get a little HELOC on the future value then, even if you tap the equity that you have now.. I don't think it's an "either/or".

Thanks @Rob K. . You're right I would not have any asset price exposure. But I also would only have about a $5K deposit tied up. It's just a "side deal" that would give me some extra income. Although it would not necessarily be perpetual.. Most of the risk is in my credit risk - could be more than the $5k. But for $17K in estimated cash flow.. I shoot for about a 15% ROI. So on a property, I would have to invest about $113K in this case w/ a loan for about $225K on a $340K purchase, to get the same $17K cash flow (approximately.) But instead of putting down $113K on a property, I'd put down a $5k deposit.

If there were an eviction, I would absorb that cost by paying for a lawyer out of my gross spread (or paying thousands for the person to walk - I estimated $1k in legal fees and $5k to the tenant to leave plus $2k in damage in a bad year in the scenario in my original post. I think the $17K in annual projected CF allows me to absorb that cost, if/when it arises...

I am an owner and landlord of several units, and have a unique proposal for the landlord of another building. I'm looking for feedback for anyone who has done this before, or from others that want to weigh in on the pros and cons of the situation. I'll start with a quick summary, then much more detail down below.

The low-down:
The owner of a multifamily (I have a connection with) is willing to take below-market rent from someone he can trust (me) to pay rent and treat a unit kindly (for personal residence - just signed the lease). I'm considering offering the owner of the building the same below-market rent on other vacant units that come up, paying the monthly below-market rent every month to him so he doesn't have to worry about it, then subleasing it out, and absorbing the vacancy and turnover expenses myself. Essentially, I would be taking all the monthly payment risk, vacancy, turnover, and deposit/damage responsibility from him, in exchange for a deal on rents to compensate me for that risk. Has anyone done this before?

Here were the owner's motivations when he rented me a unit for personal use, at significantly below market, as stated by him:

1) He wanted to be able to collect rent every month from someone he could trust (I came on a fantastic referral from a friend and former "pupil" in our college economics classes who is the landlord's cousin). And have strong financials.
2) He didn't want to have to worry about the unit being treated poorly, as they were remodeled - and there are some sketchy people who still live/move in to the neighborhood.
3) I think he also wanted to give a little "gift" to a friend of a family member. It's unclear how much, if any, this might play into it..

So my proposal seems to fit into what he is looking for.
1) He gets one monthly check for all his units (he seemed relieved to be able to do it on this unit, so maybe he's happy to do more.. maybe he just doesn't like the landlord risks).
2) He doesn't have to worry about vacancy or evictions, because I'm responsible for it (I would also propose giving him a big deposit for good faith, and my personal credit and cash flow, which is substantial..).
3) The rents would also be at a much higher level - which will help so he's not bound by low rents under rent control in Oakland. That's good for value when he's refinancing, which I know is also on his mind.

Risks & Rewards
I've thought of a few of the pro's and con's. But I would like to hear from others about their perspective, or other considerations I haven't thought about yet. Many I have not put down here because it would just be too extensive, but I appreciate any input. The building is in a highly desirable area with rising rents and low vacancies. Should be able to get good tenants that want to stay.

Now let's talk numbers..
Monthly

Owner rents units to me at: $1,000

I rent them out at market: $1,600

Gross Spread $600

Vacancy Allowance from owner $42

Total Monthly Gross $642

Actual Vacancy $133

Other turn costs $42

Net Profit per Unit/mo $467

# of units 3

Total Cash Flow $1,400.00 /mo

That pencils out to just under $17K net annually to me if there are just regular turnover costs, without any "blow-ups" like drawn-out evictions, significant damage, etc., which I would expect to be rare, given the tenant I believe I can pull due to the desirability of the area. Maybe even an extra $100 or $200/mo rent/unit. So this seems to give lots of cushion. I would ask for a small vacancy allowance from the owner (included), although my vacancy costs would probably be slightly higher than his would have been at lower rents.. I may also ask for a "turnover" allowance, but that is not included yet.

So let's say I have an issue beyond normal, tenant does $2K in damage, $1K in legal fees, and I end up paying them $5K to leave the unit by end of month. That's an $8k haircut, netting me just over $8k for the year. Not a homerun exactly. But I don't expect those kind of blow-ups on an annual basis by any means (I have more than double the units in a less-desirable, lower-income area nearby and haven't had any of these problems over a similar time frame.)

Thoughts?
Opinions?
What am I missing here?
Sound good?
Am I crazy?

I have never heard of any such thing as negotiations after the sale.. I would tell them to pound sand at that point.. But in our area, which is very competitive, I have got a price reduction after the original contract. We get in contract, typically 10-17 day inspection period to cancel contract w/ no penalty and get deposit back. Found items deserving $20K reduction on original $265K offer price. I thought $245K would also be about as good as they would get with a very firm offer (probably others higher, but suspect financing situation and newer buyers who might get scared off..). This was during the inspection period. It is not common to lower the price though in this market at the time. But that's why there's an inspection period..

The best leverage in negotiations is being ready and willing to walk away. I was ready to walk if they weren't willing to accept $245K for the 2 houses on 1 lot I was buying, and I told them so. They accepted it, and I closed on it. I also pointed out all the problems, of course..

I hear lots of "jargon," but I think I'd really have to more fully understand this before opining whether or not it would be valuable for me as an investor. Predicting vacancy rates and lengths? Already market reports on vacancy rates and turnover out there. And it's so locally and QUALITY/area specific.. Sometimes, I think more information is not necessarily more useful information.. unless you're talking about big multiple big multifamily projects and have a big law of averages on your side..

Process:
Step 1: Input massive amounts of data
Step 2: Algorithms
Step 3: Awesome money-making output, appropriate to your specific area, condition of your unit/property/street, how well managed/marketed the unit is..
Step 4: Make money!

I just don't fully understand what's coming out of #2 and #3..

@Account Closed seems to like quantitative analysis and "data" in general.. any thoughts Minh? Do you understand the value of this better than I do?