All Forum Posts by: Mark Sullivan

No - I couldn't make the numbers work.  

I have SFU's & Duplex rentals in the Midwest and looking at selling a few and reinvesting into the St. Pete market.  My basic assumption is I would be trading a certain level of cash flow for increased appreciation over a period of 10 years. For example, I looked at one tri-plex that had recently been remodeled with two units being 2/2 @1000 sq feet renting for $2,000 per unit and the third being a 2/1 renting for $1750 asking price of $850K.  Why would someone do that?  

Anyone familiar with the St. Pete market? Assume heavy STR and this is what is driving the market? Also, I assume a 10% property management fee in my calculations and based on initial conversations.

Quote from @Zach Oehlman:

This is a great question @Mark Weins and something alot of people struggle with understanding.

First off...

I am not a financial advisor and I am not giving financial advise :) 

But here are somethings to consider and run by your financial team.

1). You can't buy stock at a discount. If Microsoft is selling at $100 you need to pay $100. You can however buy real estate at a discount. For example, you can buy a property that is valued at $100K for $80K which instantly creates $20K in return.

2). You need to understanding returns and how they are calculated. Historically we can say the stock market has performed at "x". This is usually on the portfolio value and is only realized when sold so you can't really gain access to that "return" unless you sell it. This would force you to buy dividend paying stocks that might not perform at the same "x" you mentioned in the question. If they did return "x" you will need to make sure that the companies can perform in the future as it is my opinion that investing in the stock market is an active strategy if you want to protect your wealth. What I mean by this is that you constantly need to be evaluating your portfolio manager and / or the index you are investing in to make sure it still has the underlying fundementals that had you invest in the first place. 

3). Real estate produces 4 types of returns. This includes cash flow, appreciation, depreciation, and ammortization (your tenant is paying down your mortgage). If you add all of these up it is really hard to find a stock that can outperform real estate on a risk adjusted basis. You can also gain access to the increase in equity in real estate and might not be able to do that in equities depending on the volatility of the underlying stock. Most people don't understand risk adjusted return and only look at the "return" aspect when investing in stocks. Understand what could happen on the downside of investing in stocks / indexes / etc and the ask yourself if you can handle that.

4). It is my experience that if real estate goes down in value so will equities. However, if equities go down in value that doesn't mean real estate will. This is an important factor to understand when analyzing risk.

I have bought and sold businesses and invested in a lot of different asset classes and I can tell you that I haven't seen anything that can outperform real estate on a risk adjusted basis.

And if I had $5M I would invest the vast majority of it in real estate and then use a small portion of it to buy a business or businesses to make active income as this is what we currently do.

We make our money in business and store our money in real estate which creates wealth while we are making money. Few people understand that you need a source of active income and passive income as they grow at different rates. It is much easier to scale a business to $1M a year than it is to make $1M a year in rentals

I hope I have you asking yourself some great questions and am here if you need anything. 

Have a wonderful day!

Zach,

This is one of the best post I have read over the last several years of following BiggerPockets!  I have owned Real Estate for many years but it wasn't until the last ten that I really understood the value of owning a business and taking the cash flow and investing in Real Estate.  Personally I have found what WORKS FOR ME that might be worth considering for someone just starting out...

Find an existing Business that has a successful track record whose owner is within 3 years of retirement.  Don't get caught up in "I love to do this" focus on the health of the business.  You may have to work for the business and earn respect, trust and get qualified for many of the various loan options available for new business owners (plenty). 

The key is to find a current business owner that loves their business and want to PASS IT ON and see it succeed (think legacy) and they see you as a viable trusted option that can make that happen. Now you simply have to WORK YOUR *** off with total dedication to learning the business and being successful.  Sound easy.... remember everyone dreams of freedom but freedom is never free.

Now take the income and invest into Real Estate and at about the 10 year mark things start to snowball in your favor.  Sound easy - no of course not.... but it can be done.  Here is what I did... after life situations that were perfect for a country music song (Heart Attack, Loss of work & Divorce all in 48 hours resulting in a bankruptcy) I was able to start from $2 and no credit and build $2,000,000 dollar net worth in 10 years. 

I now have 4 income streams that feed into Real Estate and in two years plan on selling off businesses and lowering my Debt-To-Equity ratio allowing me to focus on leaving a legacy.  Hope this encourages someone that is starting out.

$2,000 per door?  Might want to clarify but I assume that is what you meant.  

I forgot to mention that one of my key learnings is how you can buy a business and used the cash flow to support buying real estate.  In this case my cash flow from the Subway is about $65,000 a year with a management team in place.  I can use that money for real estate.  An aggressive approach would be to own 3 - 4 Subway (fill in the blank with the business) units which would allow you to have a General Manager AND the Real Estate (say $425,000 per unit).  It would take about 5 - 7 years to get this done but at that point you would have 4 business units worth about 1.2 million along with the commercial real estate for each unit that values around $1.8 million.  In addition you would have around $150,000 a year income to invest in real estate... can you say SNOWBALL?

Investment Info:

Retail buy & hold investment.

Purchase price: $415,000
Cash invested: $55,000

This is a commercial property off an interstate exit with a Subway for a tenant. Subway has been in operation for 17 years.

What made you interested in investing in this type of deal?

I own the Subway, a new Speedway gas station just opened next to me and the interstate is being upgraded to the new Interstate 69 which will increase traffic counts.

How did you find this deal and how did you negotiate it?

The owner of the building was retiring and moving out of state. I kept in contact until she was ready to sell and after several months of negotiation we came to an agreement.

How did you finance this deal?

Local bank - 25 year commercial loan with 5 years fixed.

How did you add value to the deal?

I knew that a Speedway Gas Station was going to be build next to me. I improved the management of the Subway which generated more cash flow and did minor improvement to the property (asphalt refinished, painting the exterior of the building, new lighting).

What was the outcome?

I was paying $3,400 a month as a lease that had 5% bumps every 5 years. I now pay approximately $1,000 a month less and enjoy the benefits of ownership. The increased traffic with the Speedway has increased business and my property value went up about 15% per our recent appraisal allowing me the option of pulling out my initial investment to use for other opportunities.

Lessons learned? Challenges?

Owning the subway is not nearly as important as owning the real estate.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

No

* I do plan on owning the Subway for the long term. My plan is to own the Subway long enough to let it pay off the real estate in about 7 years and sell it. I would then have the commerical real estate cash flow (I am 54 years old) and additional funds to invest. The lease is NNN

* main focus is REI

* All of the profits would be invested 

* Residential rent is $975 a month per unit

* I get your comment on Cap X.  Property management fees are typically 10% in my area.

* Water, Sewer, trash paid by tenants with no shared utilities.  Snow removal (we average 3 inches per year) is a possible need but very limited.  

* Lawn care - I have a "handy man" that does small maintenance and lawn care for $15 per hour using my equipment.  The property has approximately 1/3 of an acre to mow.  

Do you mind giving me your thoughts?  Last year I bought a Single Family Unit for $96,000 and after spending approximately $14,000 in rehab cost.  I then rented the property for one year and sold it for $162,500.  I am now wanting to do a 1031 exchange and have two options...which would you suggest? 

Option #1 Commercial Real Estate

I currently own a Subway and have the opportunity to buy the existing commercial real estate. The purchase price would be $415,000 and I think I can get an SBA 504 loan which gives a very low fixed rate (perhaps around 4%) for up to 25 years with 10% down.  Here are the numbers....

1. Current annual rent (including cams) - $40,800 (10% bump every 5 years)

2. Taxes - $6,000 (annual)

3. Building is in reasonable condition and is 10 years old.

Option #2 4 plex

4 plex (3 bed/2 bath with approximately 2,00 square feet per unit that has been completely renovated in the last year.  Purchase price would be $350,000. with the following numbers......

1. Rent per unit - $46,800

2. Mortgage (annual) - $297,500 @ 5%/ 25 years - $20,870

2. Insurance (annual) - $3,900

3. Taxes - $3,650

4.  Maint (5%) - $2,340 (recently renovated - is this a reasonable number?).

5. Vacancy (8%) - $3,744 (It is in a desirable location and in good shape so this might be high?)

6. Cap X (5%) - $2,340 (reasonable number?)

Which would you do?

Doesn't sound like a place I would want to live.  My advise would be to move.

Please let me know when your next one is scheduled.  I have a good friend looking to invest in the St. Louis market.