All Forum Posts by: KC Pake

Quote from @Ross Hayes:

Quote from @KC Pake:

Quote from @Ross Hayes:

Hello

First time poster...

We purchased our first investment property a year ago, and we are working to prepare to purchase our second.  I'm trying to educate myself better on the analysis to analyze deal, as well as key metrics to monitor performance of a property once you own it.  We feel like we made a good purchase on the property last year, but with rates higher and prices inflated, I want to make sure our analysis is very tight.

1) What key metrics do you recommend to analyze a potential deal, as well as after a deal is made?

2) For our existing property, how do you calculate return on investment?  How does mortgage payments (interest and/or principal) impact any analysis?

Our interest and focus in long term holds of residential rental properties.  Beyond ensuring that they cash flow, we are most interested in validating that the return on our cash put into a deal is yielding a good return, as well as overall return on the deal.

Thanks in advance!

Ross

Hello Ross,

Congratulations on your first investment property and on preparing for your second! Here are some insights to your questions:

Key Metrics for Analyzing Real Estate Deals:

Net Operating Income (NOI): This is your total income from the property minus operating expenses (excluding mortgage payments). It's a crucial metric for understanding the property's profitability.

Cash Flow: This is the net income after all expenses, including mortgage payments. Positive cash flow indicates that the property is generating more income than expenses.

Capitalization Rate (Cap Rate): This is used to estimate the investor's potential return on investment. It's calculated by dividing the NOI by the current market value of the property.

Cash on Cash Return: This measures the return on the actual cash invested. It's calculated by dividing the annual pre-tax cash flow by the total cash invested.

Internal Rate of Return (IRR): A more complex metric, IRR calculates the profitability of potential investments over time, taking into account the time value of money.
Calculating Return on Investment (ROI) and Impact of Mortgage Payments:

ROI Calculation: ROI is typically calculated by dividing the net profit of the investment by the total amount of money invested. For a rental property, your net profit would be your income from the property minus expenses, including mortgage payments.

Mortgage Payments: The principal portion of your mortgage payment is a reduction of liability (your loan balance), while the interest portion is an expense. The principal payment increases your equity in the property but does not affect your cash flow, whereas interest is an expense that reduces your net income and thus impacts your ROI.

For long-term residential rental properties, focusing on cash flow and ROI is a good approach. However, also consider the appreciation potential, local market conditions, and your property's location, as these can significantly impact your investment's long-term success.

Remember, each property and market is unique, so these metrics might need to be adjusted based on your specific situation and investment goals. Consulting with a financial advisor or a real estate investment expert can also provide tailored advice for your situation.

Hope this helps - Best of luck with your investment journey!

KC 

 Thanks, KC! Very helpful. A few follow up questions and clarifications:

On NOI, can you help me understand why mortgage payments would not be included? As I think about money going out each month, the mortgage is the biggest "expense".

For ROI, when you say "total amount of money invested", does this include cash down, cash put into updates/repairs, and also the mortgage amount? Or, does it only include actual cash out of pocket (i.e. money down at time of purchase plus any other expense for updates/repairs)?

So for calculating ROI on a rental property, the full mortgage payment (both interest and principal) is included in the expense?

Thanks again!

Ross,

I am glad the above information helped.  Here is a little more detail on NOI and ROI...

NOI and Mortgage Payments: NOI is designed to measure the profitability of a property before financing and capital costs. This is why mortgage payments are not included in the NOI calculation. It focuses on the property's ability to generate income from operations, not how it's financed. NOI is calculated by subtracting operating expenses (such as maintenance, property management fees, taxes, insurance, and utilities) from the gross rental income. Since mortgage payments are a financing expense and not an operating expense, they are not included in NOI.

ROI and Components of Investment: When calculating ROI for rental properties, the "total amount of money invested" typically includes all the cash you have put into the property. This encompasses the cash down payment at the time of purchase, any money spent on updates and repairs, and other direct out-of-pocket expenses. However, the total mortgage amount is not usually included in this calculation. ROI is intended to give you an idea of the returns on the actual cash you have invested, rather than the total value of the property including borrowed funds.

Calculating ROI on Rental Property: For ROI calculation, you generally consider the net income the property generates (which is after deducting all operating expenses but before mortgage payments) and then compare this to your total investment (down payment, repairs, updates). It's important to differentiate between ROI and Cash Flow. While ROI gives you an annual rate of return on your investment, Cash Flow is the actual cash you earn each month after all expenses, including mortgage payments.

I am intrigued by the prospect of investing in a mobile home park. However, I'm at a crossroads and would greatly appreciate your insights and experiences.

Option 1: Land Rents Only - In this scenario, I would own the land, and the tenants would own their mobile homes, paying rent for the lot. This option seems to have lower maintenance responsibilities since I wouldn't own the actual homes.

Option 2: Owning Mobile Homes and Land - Here, I would own both the land and the mobile homes, renting them as a complete package. This could potentially yield higher rental income, but I'm aware that it comes with increased responsibilities and costs for maintenance and management.

Here are my questions:

1. Profitability: Which option tends to be more profitable in the long run?
2. Maintenance and Management: How significant is the difference in maintenance and management responsibilities between the two options?
3. Tenant Stability: Does one option typically lead to more stable, long-term tenants?
4. Market Factors: Are there market factors that I should consider that might make one option more favorable than the other?

Any insights and experiences would be immensely valuable.  Thank you in advance for your time and wisdom!

KC

Quote from @Ross Hayes:

Hello

First time poster...

We purchased our first investment property a year ago, and we are working to prepare to purchase our second.  I'm trying to educate myself better on the analysis to analyze deal, as well as key metrics to monitor performance of a property once you own it.  We feel like we made a good purchase on the property last year, but with rates higher and prices inflated, I want to make sure our analysis is very tight.

1) What key metrics do you recommend to analyze a potential deal, as well as after a deal is made?

2) For our existing property, how do you calculate return on investment?  How does mortgage payments (interest and/or principal) impact any analysis?

Our interest and focus in long term holds of residential rental properties.  Beyond ensuring that they cash flow, we are most interested in validating that the return on our cash put into a deal is yielding a good return, as well as overall return on the deal.

Thanks in advance!

Ross

Hello Ross,

Congratulations on your first investment property and on preparing for your second! Here are some insights to your questions:

Key Metrics for Analyzing Real Estate Deals:

Net Operating Income (NOI): This is your total income from the property minus operating expenses (excluding mortgage payments). It's a crucial metric for understanding the property's profitability.

Cash Flow: This is the net income after all expenses, including mortgage payments. Positive cash flow indicates that the property is generating more income than expenses.

Capitalization Rate (Cap Rate): This is used to estimate the investor's potential return on investment. It's calculated by dividing the NOI by the current market value of the property.

Cash on Cash Return: This measures the return on the actual cash invested. It's calculated by dividing the annual pre-tax cash flow by the total cash invested.

Internal Rate of Return (IRR): A more complex metric, IRR calculates the profitability of potential investments over time, taking into account the time value of money.
Calculating Return on Investment (ROI) and Impact of Mortgage Payments:

ROI Calculation: ROI is typically calculated by dividing the net profit of the investment by the total amount of money invested. For a rental property, your net profit would be your income from the property minus expenses, including mortgage payments.

Mortgage Payments: The principal portion of your mortgage payment is a reduction of liability (your loan balance), while the interest portion is an expense. The principal payment increases your equity in the property but does not affect your cash flow, whereas interest is an expense that reduces your net income and thus impacts your ROI.

For long-term residential rental properties, focusing on cash flow and ROI is a good approach. However, also consider the appreciation potential, local market conditions, and your property's location, as these can significantly impact your investment's long-term success.

Remember, each property and market is unique, so these metrics might need to be adjusted based on your specific situation and investment goals. Consulting with a financial advisor or a real estate investment expert can also provide tailored advice for your situation.

Hope this helps - Best of luck with your investment journey!

KC 

Quote from @Chris Seveney:

Quote from @KC Pake:

Hello Everybody!

I've been dabbling in the world of real estate investments for a while now, and I'm keen to dive into something new and exciting. After reading up on the opportunities in fractional real estate investing, my curiosity is piqued! It seems like a fantastic way to build a real estate portfolio without the huge financial commitment of buying entire properties.

I'm reaching out to this knowledgeable community to gather some real-world insights. If you've ventured into fractional real estate investing, I’d love to hear about your journey.

• Experiences Please! What has your experience been like? Are we talking smooth sailing or choppy waters?
• Success Stories: Anyone willing to share their success stories? I'm sure we could all use some inspiration!
• Learning Curves: What were the biggest challenges or learning curves you faced?
• Company Recommendations: This is a big one! Which companies or platforms have you worked with? Are there any you'd recommend (or suggest steering clear of)?
• Tips for Beginners: Any golden tips for a newbie like me?

Thanks in advance for sharing your wisdom and experiences!

 I would be careful with fractional real estate. What I mean by this is investing in a single property and having a small equity/ shares involved in that asset. Why do I say this? Historically real estate provides around an 8% return. In these instances you also have the property manager but the fund manager collecting fees. If you look atthe returns on these fractional assets they are currently I believe at the 4-5% range. That is a low return for high risk. It also appears from the ones I looked at they have a management fee, acquisition fee etc. which may add to the price of the home. 

lastly most invest in these with a few hundred or thousand dollars. I was on a call this past week with an investor considering a $5,000 investment in our fund. They wanted $100/mo was their expectation. That is of course $1200/yr =  24% return. Never happening with a $5000 investment. 

One benefit of investing though could be you could see how fund managers manage their fund. 

Hi Chris,

Firstly, I want to extend my thanks for your insightful comments on fractional real estate investing. Your analysis provides a clear perspective on the potential risks and returns of such investments, particularly in terms of the associated fees and realistic expectations of returns.

I'm particularly intrigued by your point about the educational value of observing how fund managers operate. 

On a related note, I've spent some time exploring your website and learning about your fund. The information I found there was quite enlightening. I would love the opportunity to discuss the contrasts between your fund and fractional ownership investing/funds.

Thanks again for sharing your knowledge. I'm looking forward to potentially connecting with you and delving deeper into these topics.

KC

Hello Everybody!

I've been dabbling in the world of real estate investments for a while now, and I'm keen to dive into something new and exciting. After reading up on the opportunities in fractional real estate investing, my curiosity is piqued! It seems like a fantastic way to build a real estate portfolio without the huge financial commitment of buying entire properties.

I'm reaching out to this knowledgeable community to gather some real-world insights. If you've ventured into fractional real estate investing, I’d love to hear about your journey.

• Experiences Please! What has your experience been like? Are we talking smooth sailing or choppy waters?
• Success Stories: Anyone willing to share their success stories? I'm sure we could all use some inspiration!
• Learning Curves: What were the biggest challenges or learning curves you faced?
• Company Recommendations: This is a big one! Which companies or platforms have you worked with? Are there any you'd recommend (or suggest steering clear of)?
• Tips for Beginners: Any golden tips for a newbie like me?

Thanks in advance for sharing your wisdom and experiences!

Quote from @Dani Sounthone:

Can a VA LOAN be moved under an LLC or how would you go about getting your assets protected another way?

Hi Dani,

When it comes to using a VA loan (Veterans Affairs loan) for real estate and the possibility of transferring it to a Limited Liability Company (LLC), there are several important considerations:

Loan Transfer Restrictions: VA loans are personal loans guaranteed by the U.S. Department of Veterans Affairs and are intended for the personal use of veterans, service members, and their families. These loans typically have restrictions that prevent them from being transferred to an LLC or other business entity. The primary purpose is to assist eligible veterans in purchasing, building, repairing, retaining, or adapting a home for personal occupancy.

Asset Protection Strategies: If your goal is to protect your assets, there are other strategies you might consider:

Insurance: Obtaining adequate insurance coverage, like homeowner's insurance and umbrella policies (as @Greg Scott mentioned), can provide a layer of protection against liabilities.

Homestead Exemption: Some states offer a homestead exemption that can protect a portion of your home's value from creditors.

Trusts: In some cases, placing the property in a trust can provide asset protection, although this can be complex and requires legal expertise.

Legal and Financial Advice: It's crucial to seek advice from legal and financial experts. Real estate laws, tax implications, and asset protection strategies can be complex and vary significantly based on your situation and jurisdiction.

Alternatives to Transferring to an LLC: If you're interested in investing in real estate through an LLC, you might consider purchasing additional properties directly through the LLC instead of transferring a property acquired with a VA loan. This approach can keep your personal and business assets separate.

Review of VA Loan Terms: Before making any decisions, review the terms of your VA loan. Any attempt to transfer the property without understanding these terms could result in complications, including the acceleration of your loan repayment.

In conclusion, while transferring a VA loan to an LLC for asset protection is generally not feasible, there are several strategies you can explore.

All the best,
KC

As we navigate the ever-evolving landscape of real estate, understanding and mitigating risks is crucial. But what are the biggest risks we face in today's market? And more importantly, how do seasoned pros deal with these challenges?

The Core Question: What are the most significant risks associated with real estate investing today, and what strategies do seasoned investors recommend for mitigating these risks?

Here are a few points to ponder:

1. Market Volatility: How do market fluctuations affect our investments, and what are the best practices to safeguard against sudden changes?
2. Economic Uncertainties: With economic landscapes shifting globally, how can we adapt our strategies to remain resilient?
3. Regulatory Changes: The impact of government policies can be significant. What are the best ways to stay informed and compliant?
4. Tenant and Property Management Challenges: From finding the right tenants to maintaining properties, what are the proven strategies to manage these effectively?
5. Technological Advancements: How is technology changing the game, and how can we leverage it to our advantage?

I'd love to hear your experiences, insights, and strategies. Whether you're a seasoned investor or just starting, your perspective is valuable. Let’s share our knowledge, learn from each other, and together, become more savvy, risk-aware real estate investors.

Looking forward to insightful feedback!

Best,
KC

Quote from @Aristone Louxz:

Hello BP Community, 

Currently I have been buying and flipping properties in and around the Philadelphia area. I have been offered an alternative investment opportunity to flipping. First, here's some background on our current model.

 As of this year we have locked in 5 projects and completed 3 of the 5 (East falls and queen village one to be completed this month other to be completed by Jan-Feb). My financing structure now is 90% of Acquisition and rehab financed with Hard money. The remainder closing cost, down payment etc  is financed by a partner who I offer a 20% return on their money. That partner also offers a line of credit for construction draws and that line of credit is paid off with each reimbursement I get from the construction draws of the hard money lender.  Essentially I am 100% financed for the flip.

I like this flip model but I have been offered 100% financing for buy and hold projects instead of flips. Here's the structure, the project must have 25%-30% value added Example : we are all in  (acquisition, plus rehab, closing cost, holding costs etc = 200K the Value created must be $50k or greater). I will be finding the off market properties, once we acquire the property I own 10% from the get go, once property is remodeled and appraised I own 25% of the Value created. I also get the whole remodel project which can be another opportunity to make money with my team Lets say $10k at the very Least. So using the previous example, All in $200k but the property is worth $250k I own $10k equity once we purchased the project (assuming we bought it for $100k for easy numbers sake), I then do the remodel and create $50k in Value. Now I own 25% of that $50K which is $12,500. Total ownership  $22,500 in equity and $10k on the construction end. 

Now After this He offered to either cash me out or roll it into the next project....

Is this a good deal? Has anyone done something similar? Should I negotiate any terms? Would anyone cash out or roll it into the next project?

Thanks BP Fam! Looking forward to the responses!

Hello Aristone,

It sounds like you've been quite successful with your flipping projects in the Philadelphia area, and it's great to hear that you're exploring new investment opportunities. The buy-and-hold strategy you've been offered certainly has its merits, especially with the 100% financing structure. Here are a few considerations and potential questions to help you evaluate this opportunity:

1. Risk vs. Reward: Compare the risk profile of flipping vs. buy-and-hold. Flipping generally offers quicker returns but can be riskier, especially in fluctuating markets. Buy-and-hold can provide stable, long-term gains and potential rental income, but it usually requires a longer investment horizon.
2. 
   Equity Accumulation: Your proposed buy-and-hold deal allows you to build equity over time. However, consider the rate at which you're accumulating equity and the potential appreciation of the properties. The 25% ownership in the value-added seems attractive, but ensure it aligns with your long-term financial goals.
3. 
   Cash Flow Analysis: For buy-and-hold investments, it's crucial to consider the cash flow. Will these properties generate rental income? If so, how does this income compare to your current returns from flipping?
4. 
   Market Dynamics: Research the local real estate market trends. Is the area appreciating? Are rental demands high? This can significantly impact the success of a buy-and-hold strategy.
5. 
   Exit Strategy Flexibility: The option to cash out or roll into the next project offers flexibility. If you choose to roll over, it might compound your gains over time. Cashing out provides immediate liquidity. Your decision here might depend on your immediate financial needs versus long-term investment plans.
6. 
   Negotiating Terms: Always consider if there's room for negotiation, especially regarding your ownership percentage or the terms of financing.
7. 
   Consulting with Professionals: It might be beneficial to consult with a real estate attorney or a financial advisor to review the terms of this deal and ensure it aligns with your investment strategy.
8. 
   Diversification of Investment Portfolio: Consider how this buy-and-hold strategy fits into your overall investment portfolio. Diversification can help mitigate risk.
9. 
   Management Responsibilities: Buy-and-hold investments typically come with property management responsibilities. Are you prepared to handle or delegate these tasks?
10. 
    Tax Implications: Different investment strategies have different tax implications. It's worth consulting with a tax professional to understand how this will affect your overall tax situation.

Whether to cash out or roll into the next project depends on your financial goals, risk tolerance, and investment strategy. Cashing out offers immediate returns, which can be reinvested elsewhere. Rolling the investment over could potentially lead to greater long-term growth.

I hope these points give you some food for thought. It's great to see you're considering all angles and seeking advice from the BP community. Best of luck with your decision!

KC

Quote from @Tim Marcinko:

Seeking advice!

I'm a recent college grad and looking to do my first BRRRR. I'm targeting the near west side of Cleveland. I know the area and market well and I'm confident in my numbers. Any advice? Not much income history for lending due to school and internships. Also, if there are any local Cleveland investors around, I'd love to meet and grab coffee sometime! I'm ready to learn and get started.

-Tim Marcinko

Hi Tim,

Congratulations on embarking on your first BRRRR journey! It's great to hear that you're familiar with the Cleveland market; local knowledge is a huge advantage.

Here are a few tips:

Networking: Connect with local real estate investor groups in Cleveland. These communities are invaluable for sharing insights, finding mentors, and even discovering potential partnership opportunities. Attending local meetups or real estate investment seminars can be a great start.

Financing: Since you're a recent grad with a limited income history, consider creative financing options. Seller financing, partnering with other investors, or finding a hard money lender who focuses on the property's potential rather than your income history could be viable paths.

Due Diligence: Ensure you've done thorough due diligence on the property. This includes not only the building itself but also understanding the neighborhood dynamics, rental market trends, and upcoming developments that might affect property values.

Building a Team: Assemble a reliable team including a real estate agent experienced in investments, a trustworthy contractor for renovations, and a good property manager if you plan to be hands-off after renting the property.

Education: Continue educating yourself. Read books, listen to podcasts, and attend webinars on real estate investing and specifically on the BRRRR strategy. Knowledge is power in real estate investing.

Risk Management: Always have a plan B. Market conditions can change, renovations can uncover unexpected issues, and tenants can be unpredictable. Ensure you have contingency plans and sufficient reserves to handle these situations.

Best of luck on your investment journey,
KC

Quote from @Brandy Luna:

I have 30k to invest in a fix and flip project.  I am quickly seeing that this is a very small amount.  What type of lender and terms should I be looking for?  Lenders will require down payment, closing costs, reserves, etc.  I have great credit.  I have a small amount of cash.  I am also open to partnering with another person who may find themselves in the same situation.  Any guidance or advice would be much appreciated.  

Hi Brandy,

Here's a brief overview of different funding options and their benefits:

Traditional Bank Loan: Since you have great credit, a traditional bank loan could be an option. Banks typically offer lower interest rates and longer repayment terms. However, they often require a significant down payment and have strict eligibility criteria for investment loans.

Hard Money Lenders: These lenders are more flexible than banks and usually focus on the property's potential value after renovation. They offer short-term loans with higher interest rates. This option is great for quick access to funds, but be mindful of the higher costs.

Private Lenders: Private individuals or groups willing to invest in your project might offer more flexible terms than institutional lenders. Rates and terms vary greatly, so it's essential to negotiate well.

Home Equity Loan or Line of Credit: If you own another property, you could use its equity to finance your project. This option often provides lower interest rates but puts your property at risk if you default.

Crowdfunding or Peer-to-Peer Lending: Online platforms allow you to raise funds from multiple investors. This option can provide access to capital without traditional lending criteria but usually involves paying a percentage of the funds raised as fees.

Partnerships: As you mentioned, teaming up with another investor can double your available capital and share the risk. Ensure that roles, responsibilities, and profit-sharing are clearly outlined in a legal agreement.

When considering lenders, focus on those who understand and regularly finance fix and flip projects. Look for terms that balance affordability with flexibility. Since lenders will require a down payment, closing costs, and reserves, you'll need to account for these in your budget.

Given your great credit and willingness to partner, explore options that leverage these strengths. A combination of funding sources might also be a viable approach. Always consult with a financial advisor or real estate expert before making any decisions, as they can provide tailored advice based on your specific situation and goals.

Best of luck to you,
KC