All Forum Posts by: Ben Leybovich

Mary Joe,

I am not sure who is giving you this info. But, in Ohio I can buy homes for 20k and rent them out for $450 in every city, which would easily leave me with CF of about $300/mo. I don’t do it because these types of investments are high management, but it can be done very profitably. In fact, if CF is the primary objective with disregard to equity retention or appreciation, this style of investing may be the most lucrative.

As to why several houses are safer than one – Multiple Revenue Streams. When going into battle, would you rather have 1 soldier on your side or 20? I prefer 20. If something happens to one or even several, I’ve still got many more to take care of me. I feel, and most investors on BP will agree, that it is much safer to make $2,000/mo spread among 10 investments, that to make all of it in on place. If something goes wrong with that one house, you’ll be in trouble in a big way.

Incidentally, this reasoning is why I prefer to buy multi-family apartments. I can pick up nice buildings in desirable areas at $30,000 - $40,000 per door, with each unit generating $100/mo of CF or more. Hope this helps.

Agree with Joel and the rest. Too much too soon Emma!

That should work...:)! Good job

Welcome to BP Julie. You WILL get the answers you need. Be active, and Good Luck!

They will crash the market with this crap! Thanks for the link Gene

Colby,

Before I get into some specifics, let me address what you currently have. First of all, I am not sure that you are aware of this, but you can NOT get a 30-year mortgage on a 6-unit. Fannie/Freedie regulation with respect to salable residential mortgages is that nothing over 4 units is even applicable. This means that you will be automatically kicked over to the commercial side, where your amortization will most likely be 20 years tops, and the interest rate of around 5% or mopre, thus this deal would likely be in the negative. So, it’s even worse than you thought…

Also, you mentioned a partner. Be careful! Think of money as a great amplifier of what is already there. Great and honorable people are even more so when money is involved, while the reverse is also true!!! As well, having two people in the boat who don’t know how to swim doesn’t make the trip any safer. Two people losing money is not better than one. By taking on a partner, each one of you will assume the responsibility for the other. I believe that a person must have much knowledge and a track record of success before assuming this responsibility…

Now. Not every RE market is created equal, and your market may be less conducive to CF than some others. There are many socio-political and economic reasons for this – but it is what it is. However, your impulse to invest for passive CF is right on – that’s how we achieve financial freedom. Unfortunately, you may need to look into a different market.

Appraisers use what is called a GRM analysis to arrive at a value of income-producing building, which establishes a relationship between the Gross Revenue and Value by way of multiplying the gross revenue by an appropriate factor (GRM). Thus:

Value = Gross Revenue x GRM

This is only used for buildings with 4 units or less, and it is very inaccurate since it doesn’t take into account the expense structure of the building. However, my experience has been that a factor of around 70 tends to result in 9 – 11CAP rate, and a strong CF.

Thus, as a quick rule of thumb, if the 6-plex generates $6,000 of monthly income, than I would expect to pay for it in the neighborhood of $420,000. If rents are only $3,000/mo. ($500/unit), then the price should be in the neighborhood of $210,000. This is not definitive, of course, but it’s enough to tell me at a glance whether there is a possible deal to be had.

Notice also that I am talking about the purchase price and not the financed portion of the price. You should not have to “buy” cash flow by putting more money down. The deal should be good enough when financed 100%. Does this help?

Norm,

Go look at them and let us know your thoughts. Be detailed...

Colby,

Judging by the questions you ask, it feels that you may be jumping the gun a bit. Your questions are all intelligent questions, but it takes time to find your footing with the analysis and strategy stages of the acquisition process. BP is an excellent place to get a lot of the answers. Keep asking questions. The analysis stage is the most critical part of what we do – gain a very clear understanding of how to do it the right way.

Some of the terminology that you need to have very good understanding is:

CAP Rate (what it is, when it's used, and how)
GRM (what it is, when it's used, and how)
DSCR (what it is, when it's used, and for what purpose)
Cash on Cash
NOI
Cash flow

Knowing all these and more is mandatory to be able to put a healthy transaction together. Google these, and if you need help myself and others on BP will certainly help you.

Using short term money can a viable plan, if done the right way. However, you need to know before you pull the trigger how you are going to get the cash out done. And you should have 2 or 3 ways of doing it. Relative to this, you need to know how the banks work better than the bankers themselves. This requires a lot of research.

Be careful my friend. Long term property investing has 2 speeds. Forward is slow, but reverse is usually very quick and it can hurt…

Norm,

Yes, ultimately the chief factor in my decision-making process is cash flow – money in the pocket at the end of the day. Now, there are a number of metrics aside for CF that we use when analyzing property. Here are a few:

Cash on Cash is basically going to tell you how fast you are recovering your cash investment. Thus, COC = CF / Out of Pocket Investment. If you want to be very sophisticated, then you could add to the CF your realized tax savings. So, if you put $50,000 down, while your CF is $500/mo ($6,000), the COC would be 12%. I specialize in 100% (or as close to it as possible), so my COC is typically outrageous. But in general, a minimum of 25% is what we like to see, meaning that it takes 4 years to get the invested capital back.

CAP Rate (capitalization rate) is a juxtaposition of the Annual NOI (net operating income, which is income less all expenses excluding cost of money) to the total investment. Thus: CAP Rate = NOI / (Purchase Price + Closing Costs + Up-front repair costs). I do not do any deals in today's market under a 10 CAP. I am in Ohio. In NY, Seattle, or Chicago you likely could not touch a 10 CAP even today. I would think that 5 or 6 would be good there. I want you to talk to a commercial lender or appraiser. Ask them what the going CAP rate for a building such as the one you are looking at in that particular location is.

DSCR (debt service coverage ration) is juxtaposition of NOI to cost of money. Thus, DSCR = NOI / sum of all mortgages. Banks typically want to see 1.2 ratio at a minimum. I like 1.3 – 1.4 minimum, which results in healthier CF.

There are others, but you’ll be fine to start with these. All of these are a bit screwy in your case since you are going to loose 1 of the rents due to moving-in. However, if you plug-in a market rate rent, these will tell the story about the health of your investment.

The cost of roof and siding are measured as price per square (10ft. by 10ft.) Talk to 5 or 10 contractors to get a sense of cost. Since a 4-plex is typically a two-story, the surface area is a bit less than a 3-plex, which is often an L-shaped sprauled out structure.

I have some ideas for you in terms of how I’d structure this your deal to gain the most out of it – too long for this post. Feel free to grab hold of me either by phone or email. Hope this helps.

Mary Joe,

You are right! It doesn’t do any good just to put more money down to create more CF. The point is, even fully leveraged (100% financing) you should be able to see cash flow.

For example, I have a 10-unit in escrow as we speak, which at 95% leverage will be throwing off $1,000/mo of CF ($100/unit). This is after I hold back roughly $1,000 for vacancy and repairs, which is rather conservative. Granted, this is difficult in some places around the country to accomplish, but in Ohio I will not even consider anything under a 10 - 11 CAP in today's market. Which is why this was the only deal that I've been able to do since last summer – they are not easy to find.

Do not give up. The good ones are out there. As to the land lording side of things, I tend to agree with Chris. The stories are scarier than the reality once you get efficient at qualifying and presuming that you've bought the right kind of building in the first place.

Good luck,