All Forum Posts by: Michael Rossi

Parrotletlover,

Most rental calculator tools are very inaccurate because they don't include all of the expenses you will experience in the real world. Without getting too long winded, to calculate cash flow in the real world, subtract the mortgage payment (P & I) from 1/2 of the rent. Anything left over is your cash flow.

Mike

kygregor,

I had about 30 rentals at the 2 1/2 year point. Of course, I was not only getting the positive cash flow but also earning the managment and maintenance fee for these properties. In addition, I wholesaled a few properties during that period when I accidentally had too many deals come together at one time (too many to rehab at once).

Mike

NO

Mike

Maynard,

It took me about 2 1/2 years of VERY HARD WORK to build a large enough rental portfolio to make a nice living. Well worth the effort.

Mike

quadcam,

I think your analysis of the purchase price is pretty good if you are doing a flip to a retail buyer or simply living in the house. However, you have not done a proper analysis for a rental property. With a rental property, cash flow is king. You didn't even mention the rent or present a cash flow analysis. When you sell the property to someone on a lease-option, you are renting the property and all the rules that apply to rentals should be followed.

Finally, it is generally unwise to use a HML for a rental. The points and high interest rate will kill your cash flow.

Good Luck,

Mike

Ryan,

I agree with you that we're getting caught up in semantics. Here is how I would define these terms:

Mistake - an error or fault resulting from defective judgement or knowledge

Failure - committing a series of mistakes that leads to a major setback, such as losing money on a deal or being forced out of business (even temporarily)

Ryan, yes, I have certainly made mistakes. However, because I studied hard and learned from other successful landlords, I have not made any serious mistakes (like paying retail for property or failing to deal properly with tenants, which are the two main causes of failure by new landlords)

My argument is not that I am perfect - FAR FROM IT. I have not succeeded because I am a genius or a great entrepreneur. Quite the contrary, I have succeeded because I followed in the footsteps of those successful investors who have gone before. Real estate has been around forever, therefore there is nothing really "new" in this business. Every mistake has already been made and every path to success has already been paved. My job is simply to duplicate what they did right and avoid their mistakes.

The fact is that the majority of new real estate investors fail (are forced out of business) in a short period of time. That is also true of every other type of business. My point is that this is entirely preventable IF the newbies would simply do their homework and learn the business. It is totally unnecessary to make major mistakes (like paying retail for an investment property), yet this is one of the most common and most devastating mistakes and it leads to failure. We see these mistakes repeated over and over in posts on this forum, even though the information on doing it right is perfectly clear and absolutely free.

I have never lost money in any of my real estate companies. Why should I? This isn't brain surgery. It is a simple business. If you follow proper business principles and stay disciplined, there is not much excuse for losing money.

I have not gotten every deal that I looked at. It is certainly not a mistake to not get every deal. In fact, that is one of the secrets to success in this business - don't fall in love with any property. It's all about the numbers for me. If I can't buy a property at my price, I don't buy it.

I have been burned by contractors, sellers, and tenants. Again, not a mistake. I did the proper due dillegence on these people and NOTHING I could have done would have prevented these people from burning me or predicted that they would do so. However, none of these incidents has caused my rentals to be unprofitable because I use real world expense numbers and these incidents are a normal and completely routine part of the business.

I don't want to give the wrong impression that I don't think I've made mistakes. So, here's an example of one of the mistakes I made.

One of the first properties I bought was a SFH house in a blue collar neighborhood. The previous landlord knew nothing about the business and allowed it to become a crackhouse. It was almost completely destroyed. EVERY door and window were broken. There were holes in all the walls. It was a mess.

I bought the house CHEAP and rehabbed it. During the rehab, I developed pride in the property (STUPID) and over-rehabbed it (STUPID). We put hand stained crown molding; NEW appliances; and even a dishwasher in the house (EXTREMELY STUPID). This was a serious mistake, but fortunately I bought the property right and this didn't result in negative cash flow (although it certainly resulted in lower cash flow than I should get). This was a lesson that I didn't get from books or other investors, although I certainly should have. This incident was entirely preventable if I had only done a better job of studying or learning from others.

Mike

WELL SAID!

Mike

Parrotletlover,

This property is a negative cash flow loser. I would not buy it.

Throughout the United States, operating expenses run 45% to 50% of the gross rents. In this case, gross rents are $975. Therefore, your operating expenses are about $487, leaving $488 to pay the mortgage and for any profit (positive cash flow). Your mortgage payment is $568, meaning that you would have a negative cash flow of $80 per month. OUCH!

Operating expenses consist of FAR more than water and insurance. They also include management, maintenance, advertising, entity maintenance, vacancy allowance, captial expenses (not technically operating expenses), utilities paid by owner, office supplies, evictions, legal fees, court costs, damage done by tenants, lawsuits, etc, etc, etc. (I could go on and on).

Failing to understand the realities of the rental property business is the number one reason that new landlords fail (due to lack of cash flow). I would recommend doing some serious studying before you buy anything.

Also, that 1% rule does not work. If you want to make about $100 per month per unit, you will typically need to have monthly gross rents of about 2% of your cost of the property (purchase price + rehab).

Good Luck,

Mike

bs73,

Yes, I suggest picking a target investment area and learning that area. Start with one small area (part of a city, county, or town) and learn that first. You can expand the area later.

If you're wanting to do rentals, pick an area that already contains a lot of rentals. Then go look at a bunch or properties that are for sale (inside and out) in that area. Go to open houses and FSBOs. Once you've looked at enough houses, you will KNOW your market.

Mike

quadcam,

No, it's not wrong to look through the obituaries but it would be wrong and reprehensible to contact the family while they are grieving. Not to mention, that most families would not sell you the property during their grieving anyway.

Even if you were successful in buying the property at a big discount just after a death, doing so is an invitation to a lawsuit. The family may come to realize that they could have gotten more money if they had sold the property through a realtor and sue you for taking advantage of them (and they would probably win).

People despise these scumbag trial lawyers for a good reason and I would not do something as slimy as a lawyer just to get a deal.

Mike