All Forum Posts by: Kevin McGuire

I have no insights, only bewilderment :) What confuses me about any projection is the fact that the market forces on rent and those on property value are only loosely correlated. For example, I’m guessing that today we’re seeing cap rate compression since renters have less cash for rent, but low interest rates are driving up prices. At least that’s what I’m seeing for my properties. Seems the only thing you might predict is operating expenses which on a stabilized property might be kept in check for a 5 year period. I understand though for commercial, the value *is* a function of cap rate, so maybe I’m thinking about this wrong.

@Paul Henning If the decision is purely financial, search Ben Felix “5% rule” on how to analyze https://www.youtube.com/watch?v=LyMnIwcMDBM&feature=share

@Travis Hargreaves those are big, sweet, gentle giants. I’d rent to them. Yeah a 90 lb dog will be hard on the hardwood. I had a tenant with a Great Dane. I installed a manufactured flooring material and it’s fine. My experience is that dog owners make very appreciative tenants with very low turnover.

@Caylon Haggard can’t speak to them but for another data point check out Wellings Capital and @Paul Moore

@Michael Nolan congratulations on your accomplishments so far: all that it took to be here, and all that it took to have cash to invest. These are exceptional.

Your question is quite broad which makes it difficult to know how to answer, but I guess that’s the challenge when starting out: you don’t know what you don’t know. Here’s my shot at some random advice:

1: You said “as quick as possible”. An expression I like about real estate investing is, “get rich slowly”. It’s where time is on your side, plant the seeds and watch them grow. Another expression that I think applies, “Go fast, but don’t rush”. If you rush you may take a deal that’s not great. But, don’t sit back and wait for the deals to arrive either. Sense of urgency with patience, a powerful combination.

2: Educate: listen to BP podcasts and any others you can find on real estate investing. Read a book or three. That at least is what I did and am in constant learn mode.

3: Invest locally to start. Yes you can invest out of state, and it may be more profitable, but that adds a whole new level of complexity. Imagine you’re taking “ Real Estate Investing 101”. Out of state is covered in the 300 level course. Being local allows you to view the property and be on hand to resolve issues. Once conquered you’ll graduate and get to 300 level.

4: You asked about multi family and I know lots have had success with “house hacking” where you live in one unit and rent the rest. I personally don’t have experience with it but it may be apply to you.

5: Learn how to analyze deals. Do it as often as you can, it’ll hone your sense of good and bad deals.

Hope that’s of some help, best of luck!

Fantastic, such a great start, this has lots of potential!

@Delbert Standifer yes, no reason why not. Cap rate and CoC are measuring slightly different things.

What problem are you trying to solve?

@Delbert Standifer , your post has an automatic link to the formal definition,

“The capitalization rate is the rate of return an investor can expect from an investment in real estate, assuming they pay all cash. “

I'm not sure if you're asking how it applies specifically to a SFH so let me know if I didn't get your question and apologies if I'm explaining something you already understand.

Normally cap rate is used for commercial properties but I use it to analyze my SFH rental purchases too. Think of cap rate as a dividend yield. To analyze a purchase, you take the annual rental income, subtract all the expected operating expenses (taxes, HOA fees, maintenance, utilities, etc.) and divide by the purchase price. If you're going to net $4,000 on a $100,000 property it'll have a cap rate of 4%. It's helpful for comparing properties you're considering buying since it tells you how effective each property will be at generating net income. It doesn't take into account financing charges though since that's not an operating expense but is really a cost of money for being leveraged.

For residential, folks tend to use Cash on Cash (CoC). Wikipedia defines it as, "the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage." It does take into account the mortgage which would reduce the cash flow. I think people tend to prefer CoC for SFH because it says, "Given I have X dollars to invest, how much cash will it generate?".

As a way to compare deals, I prefer Cap Rate, because I consider leverage as an independent decision which exchanges risk for growth. It's also helpful for deciding whether to purchase locally or Out of State, since cap rate vary by region (e.g. Seattle cap rates are much lower on average than Kansas City). But I think for people starting out with limited capital and who want to ensure that they have money in their pocket every month, CoC is a good measure on how much you're left with every month.

I’ve gone through a related decision process myself (56 and retired, I think, we’ll see if it sticks). However, I bought mine for the expressed purpose of passive income in retirement, so your situation is a bit different. My pricing model was that they’d produce a 4% cap rate, including management, to match the 4% SWR. Intrinsic in my model was that I’d have a property manager. This is the only thing that makes sense for me in retirement, I want to be sitting on a beach sipping drinks with umbrellas in them while money arrives every month.

I like REI for retirement because of the passive income without reducing the capital, which removes the risk of running out of money, and the steady heartbeat of income reduces the sequence of returns risk. I didn't build my wealth this way, I'm using REI to manage risk in retirement and I've invested in training and processes to make it as passive as possible.

Perhaps you should take a fresh look at it. Pretend you don’t own any of your properties, they’re all converted to cash, but you have options on all of them. Now design your retirement and see if any or all of the properties contribute to that goal.

Oops I meant to type 2008, not 2018, in my previous post