All Forum Posts by: Michael Randle

Thank you everyone for the good advise. Like I said this was just an exercise in understanding cap rates using a real world example and NOT a property I was going to bid on or do anything more then just look into the numbers publicly available.

Special call out to @Andrew Johnson for the great reminder to do due diligence.

@Daniel Akerman for confirming my math.

@Immanuel Sibero for the syndication info and a little more on how that process goes.

@Alina Trigub for reminding cash flow is almost always king.

and @David Miller for confirming that 4.11% is probably way over priced for the asset.

Well I think generally the first question would be, what are the cap rates for the area? Class A,B, or C property? What is the NOI? Did you run those rents through a third party system to see if they are at market? Above or below?

Hello everybody,

The following is all theory and I am putting it out there for the community to correct my process not exactly the numbers.

I am doing my homework and trying to analyze 5 deals a day. Working on getting up to speed on multifamily. So obviously this involves CAP rates and unfortunately not a lot of deals that can be found on public search engines.

I did manage to track down a property in my old town of Phoenix AZ and figured it would be good to try and see what a good offer on it would be.

NOI = ~$45k (pro forma)

CAP = 4.11% (C class property)

Asking = $1,100,000

10-Unit.

I managed to see a few places to increase NOI, get it up to ~$55k.

Now I want to make an offer on this property but I do not know if the CAP rate is accurate.

I google and call brokers and it seems like class C properties are going for 5.5% cap in reality!

So in order to make a actual offer I would make an offer of NOI=$45k with a 5.5% cap rate. Therefore the counter offer is ~$818K.

I understand that in reality I would probably be closer to CAP rate of 6.2% and instead of using PRO FORMA rates I would use actual rates, and I would look at actual NOI. But besides that does my theory hold up on to how to evaluate and make a counter offer on a property?

This is really subjective. Your strategy should go with what your goal is. You mentioned empire building. That leads me to believe you want 'more', but why? Have you ever sat down and done a budget of, 'I need X amount a month to be set'? How close to that amount are you?

Does buy and hold forever work in real estate? Sometimes. Buy and hold in Detroit, Pittsburgh, Baltimore from the 1970's forward probably was a bad idea. Buy and hold in Pasadena Beach, or Miami Beach from the 1970's has paid off huge. If you can guess right you can clean house, if you guess wrong you have to hustle to unload bad assets.

Has Warren Buffet been accurate all the time? No. Has he made mistakes and missed opportunities? Yes. Does Warren Buffet have the best ROI in the last 5 years? No. Yet we still (rightfully) associate Warren Buffet with successful investing. It is because he practices a very structured, disciplined, long term, low/no debt investing. What is generally equated in the real estate terms as 'old man real estate'.

If you want to take the risk you are still young and using leverage will boost you up to that next level with all the equity you have. And mathematically that is best. But before you do, ask yourself why you are doing it. And see if maybe another strategy will get you to your goals.

/2c

@Vivian O.

I have read through most of the comments you have gotten and it sounds like you are getting calculus advise when you are in the basic arithmetic stages.

I have to say personally, buying in a hot market, 6 offers isn't that many. In Aurora CO in 2015 when I purchased my first home I had to submit 16 offers before one was accepted. Buying homes is a numbers games, what numbers you need to hit to make it work, what numbers you are going to pay for the home, what numbers you are going to submit before you get a deal under contract. It doesn't cost you anything (besides time and emotional stress) to make an offer. So make those offers, throw as much mud against the wall and see what sticks. If you can go look at homes during the week go do that. Check out a home on Monday and put in the contract you want to have an answer by Tuesday Night. And then on Tuesday look at another and have a contract ready to go when the one on Tuesday night gets rejected. If you are going to be full time (which I assume you are) then just treat it like a numbers game an go from there.

It sounds like you have all your ducks in a row for your offers, pre-approval letter etc. And it sounds like you cannot make your offer any stronger with a higher down-payment or higher purchase price. So you need to play the numbers game. And since this is your first house it is going to be the most emotionally draining purchase, you need a place to live, but stick to your numbers and your goal and eventually something will come along.

When you move on to house 2 or 3, then you can start with the calc lessons. But this is your first house, crawl before you walk.

Do not get discouraged, in a hot market 6 offers isn't anything, and it sounds like you got close once already!

Hello all,

Since the amount we rent our properties out for is so important as to our overall financial goals and business models I am surprised I do not see the question asked more often.

What software/website do you use to determine your current rents? Or better yet if you are analyzing a deal where do you go to get accurate data to see if you really are getting a good deal?

I kind of assume not everyone just crunches raw data on every property you are looking at, and the 'gut instinct' and knowing the area doesn't seem to work for out of state investors. If you are trying to do the anaylize 5 properties a day practice you need to have at least accurate numbers.

I do understand that there are a lot of variables, like square footage, finishing, etc. But I am looking for just general sites or software in which people use that have been fairly accurate in guestamating rents.

Thank!

@Libby Baugher, Personally I think the question shouldn't be 15 vs 30 years. The question should be what is your GOAL with real estate investing?

Are you looking to supplement your 401k/Pension? Or are you looking at it being your only retirement vehicle? How much stress/work do you want upon retirement? What is your retirement $ goal?

If you are looking at building up your portfolio to the largest, fastest with the most risk/leverage then a 30 year mortgage is the route to go. You can cash flow which allows you buy more etc etc. This has been mathematically proven to give you the 'best' return on money.

The down side to a 30 year is you will always be in debt. You will always have to keep your real estate machine running in close to top performance, this will add stress in later years. When you get larger to reach your goal eventually you are going to have to either take over full time (so much for retirement), or hire someone (PM). If that happens you then add another point of failure in your business model. Plus you are giving the bank even more money for longer periods of time.

So we circle back around to the original question. What is your GOAL with real estate? When you clearly define your goal (not 'be financially independent') you can start to tailor your strategy to meet that goal. And a 15 vs 30 should be one aspect of that strategy. 15 v 30 should not define your strategy or goal.

@Matthew Paul, You ruined the punch line! He was going to ask how they could find him in less then 10 minutes when he uses a google phone number.

The U.S. Government found Osama Bin Laden, they can find you. Given enough time and money almost anything is possible. The real question is are they going to waste said time and money to find you. And the answer is, eh...depends on the police. 

Seeing as it probably takes about 10 minutes of effort to catch you, you should probably just budget for the fine and keep going if your strategy is to use bandit signs.

@Elvis Vasquez, awesome! Thank you sir.