All Forum Posts by: Stephan Kraus

Hey @Cara Kennedy, thanks for engaging, however i´m not quite sure why you would not read the full post / following comments, but give broad recommendations, that don't necessarily apply to this scenario? Don`t get me wrong, i appreciate anybody sharing their thoughts, but reading the post sure would help understanding first before commenting wouldn't it? 🙃 As for the follow up - I explained the monetary differences in the initial post, your general conclusion is correct, you would have to compare the same loan terms though to make a numbers based decision. What this decision doesn't factor in is the risk that the initial low / no cashflow brings, which can not be answered with yes or no, as it depends heavily on the individuals personal financial circumstances.

@Steve Vaughan, good points, yet I'm not sure they fully apply to this scenario - the cap gain is irrelevant since it would have been supposed to be a rental, if i ever sell a property then only to reinvest into something larger, the interest portion should technically still be deductible as cost of doing business.

@Nicole Parnell haha, if i was that smart i would not be this intrigued by this -in essence - simple math problem - but you are correct, the underlying question of the REAL cost of acquisition is one that rarely gets asked. Does it matter? Ideally you cashflow enough to let the loan pay down, expenses and your profit be covered, while being able to deduct the interest from your taxes, so who cares what the cost of the loan is, right? BUT to compare other scenarios, dissecting and going one or two levels deeper can show other sides of a deal that others by default give a "hard pass". Having an open mind certainly doesn't hurt in those cases, as long as the decision that follows is a factual and not an emotional one. People who dismissed the deal with generalisations like "i would never overpay" are in this case the ones making an emotional decision, based of what they feel. Thanks for your perspective! 

@ All - Thanks again, as mentioned above you can find my personal conclusions and decision on this a few comments above!

@Stephan Kraus

wow i really gotta proof read my posts before sending - my apologies for all the typo's and freestyle grammar.. (english ain't my first language 😅)

@Tyson Thompson

you are right - i would have personally wanted this property, as it checks a lot of boxes, but this alone doesn't justify the purchase, even though it would have been a convenient one.

i would have never made an emotional decision on this, hence the whole number game and upon running some scenarioa coming up with that fundamental question of the real cost of acquisitions.

while with the sellers final and beat counter still doesn't make it work for me as it stands, the whole discussion and analysis definitely help me understanding these metrics on a deeper level now - and will incorporate long term scenarios in my future deal analysis as well 🤔🤯

@Tyler Hubbs

we did talk about different terms, but his main goal (certain amount of income) doesnt allign with mine - cashflow, not as it currently stands. He gave his best and final, i walked for now - will follow up in 4 weeks again! how was the hike? if you're fully recovered i'd love to schedule a time to meet and discuss your acquisitions needs! 💪🏼

@Bob Daniels

thanks bob for your in depth analysis, i dont expect anyone to read completely through the whole post, i would have to agree on most takeaways from your answer! you make a few assumptions that have been explained along the way / misinterpret certain aspects, which i cant fault you since we dont know each other.

You are almost right with your cashflow assumptions, This property has been fully remodelled despite only beeing 10 years old and rents for about $2300/ month, at which after PITI and 30% for vacancy expenses and future maintenance (yes I and my crew self manage, i plan on eventually starting my own management company) so yes the initial cashflow on paprer would be negative despite rent covering the debt and expenses.

I would never recommend someone take on a deal like this as a first, second or even third rental property, however my other properties generate ca 10k+ in rental income, from propertie's with DCR's of 1.8-5.5 (!) and significant equity (30-60%) in adition to our job income, hence why i considered (and ultimately decided against) this property with the proposed financing - detailed explanation in the posts above 🤘🏻

Of course i have other options to obtain a mortgage, there are countless non QM lenders that would happily refinance my existing (and issue new) mortgages - but not at a sexy 3.X rate like a traditional, full doc mortgage from Wells of America & Co. 😅

Loan paydown at 0% would be off the hook and moving now vs in 6 months due to baby 2 on the way would have been 'nice to haves' - but ultimately more emotional factors than real arguments - unless you ask my currently VERY emotional wife 😂

lastly - i'd like to take you up on that 280k offer whrn the oh so looming recession finally hits us - until then i can offer you a stay at one of my short term rentals, fully deductable business expenses when we meet and discuss real estate in person 😜

thanks for your feedback, really appreciate you taking the time to answer!

@Chris Meadors

haha, yeah its quite the ride - i posted my personal conclusions a bit further up, i did not buy it, but not because i would be overpaying - i still think this would make a great long term play, but the short term risk of not having an exit strategy for the first few years is still above my current personal risk tolerance - the key takeaways of the underlying questions were a great learning for me though, and even though its easy to lose track following this trainwreck of a thought, i hope it maybe opens a few mind horizons of how to look at numbers below of whats on the surface 🤯🤙🏼

@Alan Grobmeier

i also follow the mantra of never losing money, its not the worst philosophy 😂🤘🏻

By SDIRA - do you by any chance mean the property is in San Diego? i might be interested in that case - Seller or regular financing 😬

@Alan Grobmeier, i agree on the reserves etc. i guess it all boils down to the personal risk tolerance (and financial means to justify said tolerance). I think 15 or 30yrs in retrospect, this could actually be a great deal- initial low cashflow assumptions aside, especially in this market. I disagree on the argument some made, to "never pay above market value" - this is certainly not smart if paying above means paying less over the course of the loan, all other things being equal. But one needs to be able to compensate the first few years, in order to "safely" take the risk associated. I enjoyed exploring the "What if" part of it, but have decided to not move forward with the deal as is, and countered with market value and low monthly interest, which would lead to the same monthly payment (which is what the sellers goal is) but less risk IF i would need a earlier exit and lower overall acquisition cost, than if i bought 20% below market at 5% rental loan). Thanks for your insight though!

@Dustin Mathenia

@Dustin Mathenia

Seller originally wanted to rent it out. since he lives in CA, a sale and receipt of a lump sump would result in a extremely high tax burden, thats why he would consider seller financing, but of course wants to get as many eggs as he can in his basket, and wants to charge interest upfront. Im not sure he understands that the IRS might assume a base interest, it was his proposal and that would ultimately be his issue to deal with, he is an investor himself and him and i agree that this could be a win-win for the right parties. It is not going to be me though, see comment above :) thanks for pitching in, love the angle that you are looking at this deal from!

@Nick Barlow In Nevada its 27 days from notice to pay until locks changed with tenant out - but i agree, those things can and will happen, and usually cost more than just the lost income for the month. I do budget and account for vacancies and other expenses with all properties, which i recommend to anyone.

@Prashant Dave Thanks for the present value calculation! that actually undermines my argument, that you can't just dismiss "paying more than market value" without looking at it from all angles. Negotiation would have opened the door for further price decrease, longer term, less down (less cash invested, so higher ROI) etc, which could have tipped the scale in favor of "overpaying"!

@Lynnette E. You are absolutely right - Neighbourhoods do change over time. In this particular case i think its fairly safe to say, that even 30 years from now, this particular area won't degrade to a C-Class neighbourhood. Summerlin, Henderson, the SouthWest and new North developments are the best possible neighbourhoods to be in and there's a lot of people with a lot of money who will make sure this stays that way. (40% of new residents in Henderson for example are Californians buying into those neighbourhoods for example) And new development will run out of dirt to build on soon.. Nothing is certain though, couldn't agree more. 

Thank you guys all so much for sharing your thoughts, analysing this deal and being forced to think about your arguments and opinions (except for the unfunny, "are you a woman" guy, WTF dude?) did help me digging deeper and clarifying my thoughts, and opened my eyes a bit more, hopefully the one or the other feels the same way!  

My conclusion in short (more detailed in the comments above) is- I dont dismiss the deal per say, even if i knowingly would initially overpay - in certain situations this might very well be a win-win for the seller AND the buyer. It won't be me in this case, but not because i think its a bad deal, it just doesn't line up with my risk tolerance (that might change further down the road). 

As a side-note - i asked @brandon turner about his opinion on this deal and if he'd do it a few days ago when i thought about the initial offer - and he basically agreed with my long-strung thought process, his short answer was this: "..if it at least broke even on a 15 at 0% - sure!" ;) 

Thanks to pitching in, and BP for the platform that enables such an exchange! 

best, Stephan!
 

@Michael Ealy

thank you for your insight! i absolutely agree with you on everything - especially the cyclical market, we may very well be at or close to another turning point, however i think its fair to say that 15, 20, 30 years from now propertie's in general will be likely worth more than they are today, would you agree? Especially in a land locked city like Las Vegas, that is experiencing strong population and rent growth (even during the 2008 recession) - a good healthy cashflow from day one is absolutely my number one goal on any property i buy - i have substantial equity (30-60%) in all my properties and could cut my rents in half and still break even if needed, so my rationelle on this one is: my overall purchase cost are ~ the same as if i bought the same property 24% BELOW market with a 3yr 5% rental loan instead. it would likely cashflow 250 a month, compared to +/- 0 at the initial scenario.

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In both cases, i own a good condition property in an a class neighborhood, however it is fully paid off in one scenario, and i still owe more than 50% in the other after 17yrs. - from where it will cashflow WAY more than the one that still has a loan.

I understand that there are other deals out there, im not trying to justify this one - im trying to find an answer to: if it doesn't cashflow negative, and im in a position where i dont need $250 of cashflow to cover my bases - WHY NOT? 🤔

This is more a fundamental question, then a "should i do THIS" Dea r not - but it for sure got me thinking about the cost of acquisition of properties in general

@Diego Aguillon

by no means, we just bought an auction property and are in the middle of rehab, im not fixated on this one but find the math on this one fascinating - did you read the calculation of the deal if it was 24% BELOW market instead? its a few answers above, let me know what you think 🤙🏼