All Forum Posts by: Michael Rossi

It is a little confusing. For LENDING purposes, 1-4 units is generally considered residential. However, for BUILDING CODE purposes it can be different and IS in fact different in Ohio. In Ohio, 1-3 units is residential for building code purposes and 4 or more is commercial.

Mike

That's the single most ridiculous statement I've ever seen written. The numbers don't matter - they'll always take care of themselves! Who are you kidding? I've got to tell you that I am always suspicious of anyone who claims to be rich but doesn't even understand the basics of the business.

How is anyone to evaluate a statement like that. Since your numbers are all over the place, it's tough to tell. Will your net worth really increase $100K per month or is it $10K per month or maybe only $1K per month? According to you, the numbers don't matter, they will always work themselves out.

For the record, I never said that anyone should only invest in SFHs. In fact, I said very clearly that I have both SFHs and apartment buildings. My point was that it is smart to START with SFHs and learn the business. Then, using sound business principles, expand at a controlled rate and in a sustainable manner.

You apparently are treating real estate investing like a spin of the roulette wheel. That is your choice. I am in the rental business and am running my operation as a business.

Mike

Yes, of course it is. I have a bunch of SFH rentals and every single one of them has a positive cash flow using the real world expense numbers (no guru voodoo).

Mike

Before you do anything else, run a cash flow analysis on the property, using real world expense numbers.

Only after you decide it's a deal should you spend money on an inspector. Also, depending on your state laws, you should be aware that a 4 unit may be considered commercial by the building code and you may not be allowed to do some of the work yourself. For example, here in Ohio, for 4 or more units, you need plans and a commercial electrician to do electrical work, even on your own 4-unit building. That's a LOT of extra expense. Just something else to think about.

Mike

Me too.

Mike

R2d246,

Just as I said, you're playing fast and loose with the numbers. In your original post, you said that you would have $5,000 per month cash flow with 10% down. Now, you are saying that it will cash flow $5,000 per month with 25% down. In a prior post, you admitted that operating expense are typically 45% to 50%, but now you're somehow running it at 40%. Some expenses are apparently vanishing into thin air. You're just changing the numbers with reckless disregard to the truth. There is no reality here, just fantasy and speculation.

You are also planning on increasing the rents 10% per year and counting on a lot of appreciation, both of which are very optimistic projections. You seem to be operating on the premise that the bubble environment of the past few years will continue into the future. That is very risky thinking.

FYI, I have both SFHs and apartment buildings. That's the reason that I know the reality of the business, while you are just making things up.

If you're going to be in the rental business, you need to at least understand the basics.

Mike

r2d246,

I'm not trying to be argumentative, but your numbers and assumptions are still way off. You say that your first mortgage is $4,186 per month, but how about that second mortgage? No matter how your slice it, your cash flow is NO WHERE NEAR the $5,000 you claimed in your first post. Not even close!

How about your assumptions? Factoring in a ($50) 10 percent rent increase each year for the next 5 years puts you in fantasy land. That might sound good at a seminar, but all it will do for you in the real world is empty out your apartment building! Also, your assmuption that interest rates will be the same or lower in 5 years is dangerous. The fact is that interest rates are near historically low rates and will not stay here. It's also easy to say that you're going to cut the operating expenses by 5 - 10%, but what are you going to cut to achieve that? It's easy to say, but can be difficult or impossible to do.

I'm not saying that you've done a terrible deal, but if you're counting on $5,000 per month positive cash flow, you are going to be VERY DISAPPOINTED.

SoBeRei and TallGray,

Is it even possible to find a SFH that will cash flow in the "bubble areas" - yes - it is POSSIBLE. The real question is can you find enough of these deals to make it a profitable business. I would say the answer to that question is NO. If I lived in Southern California, I'd probably move (for a variety of reasons). However, if you were wanting to stay in a bubble area and invest, real estate might might not be the vehicle of choice at this point in time. Don't get caught up in the hype about real estate. It is just like any other vehicle to make money. If it's not profitable in your area - DON'T DO IT!

I can tell you for a fact that there is nothing magical, wonderful, or romantic about REI. Don't get caught up in the hype. The fact is that I haven't spent a single day on my yacht since I started my rental business. Truth be told, I don't even have a yacht. Maybe I'm doing something wrong? I have spent many days fixing leaking toilets, repairing damage done by tenants, and evicting tenants - that's the reality of the rental property business.

If I thought it was more profitable and would provide a better lifestyle, I would start a hardware store, a janitorial business, a portable toilet business, etc. The business doesn't matter, the money and the lifestyle are what matters. Find out what works in your area and do that.

DRWeltman,

You are not an underachiever because you start out with SFHs. I have dozens of rentals with both SFHs and apartment buildings. I started with SFHs and I AM GLAD I DID. Dealing with tenants is a shock and starting with the really bad ones (in low income apartment buildings) is not a recipe for success. Likewise, learning the business is very important and cutting your teeth on a few SFHs in the beginning is an excellent low-risk way to do that.

So, I wouldn't say that you're an underachiever. I'd say that you are SMART!

Good Luck,

Mike

dal1,

That's exactly right. New investors often don't consider these expenses since they don't happen every day.

A friend of mine recently had a tenant do $10,000 of damage to a house. Of course, that doesn't happen every day or even every year, but how many years of positive cash flow does a $10,000 loss wipe out?

Mike

r2d246,

You are playing fast and loose with the numbers. Throughout the United States, operating expenses run 45% to 50% of gross rents. With your 29 units, to be conservative, that means that your operating expenses (including capital expenses) would be about $7,500 and your NOI would be about $7,500. The mortgage payment for $738,000 with a 20 year term and 8% interest is about $6,172 per month, meaning that your real world cash flow would be about $1,328 per month instead of the $5,000 you stated.

Vacancies do not affect this number because vacancy expense is already included in operating expenses.

Even in an EXCELLENT rental market, it is very difficult to get $100 per unit per month positive cash flow if you are including the real expenses and not using some silly guru formula. Check with any of the big apartment associations and you'll find that these numbers are right on the money.

What happens when you hear people claim inflated cash flows is that they are ignoring real world expenses, such as evictions, legal fees, lawsuits, captial expenses (not really an operating expense), advertising, office supplies, exterminations, etc. These expenses don't occur every day, so many newbies pretend that they don't exist. This is a BIG reason that new landlords fail.

In addition, it is my experience that sellers ALMOST ALWAYS over-estimate the income and underestimate the expenses. If you are not an experienced landlord, it is easy to believe these numbers and you don't find out the truth until it is too late.

That is exactly why I recommend starting slowly with SFHs. Bought right, SFHs will cash flow $100 per month just like a well-bought rental unit. Working with a single family house allows the new landlord to learn the operating expenses first hand and also develop the skills to be a landlord.

If you make a mistake with the operating expenses and landlording technique with a SFH, this is not a fatal error. Make the same mistake with a 29 unit complex and you will likely hear the fat lady sing!

I completely agree with you that one SFH with a cash flow of $1,200 per year ($100 per month) is not likely to greatly improve your standard of living. However, if you make a mistake, a loss of $100 per month is also not likely to break the bank.

A positive cash flow of $100 per month per unit on a larger apartment complex will almost certainly change your life for the better. However, a minor mistake that causes a $100 per month per unit negative cash flow on a larger apartment complex will almost always cause disaster for a new landlord.

Good Luck,

Mike

I would recommend keeping every penny of your $75,000. Buy every property without using your money. Buy every property at a huge discount. With rentals, you make your money when you buy. Remember, you'll be keeping them for many years, so it is absolutely critical that you do it right! It is also very important that you understand the real world expenses, not the guru nonsense.

I would strongly suggest that you start with a SFH. Single family houses are much more forgiving than multis; the tenants tend to be better; there are fewer evictions, etc. Go relatively slow and give yourself a chance to learn the business before you buy a big complex. Make a mistake or two with your first SFH and you can survive. Make a mistake with dozens of units and you're done!

Good Luck,

Mike