All Forum Posts by: Michael Rossi

The reason that you haven't heard of this happening frequently is that end buyers (your buyers) don't usually exercise their option and therefore the property is never purchased. These end "buyers" are really nothing more than renters. They have bad credit which does not improve and therefore they are never able to buy the property.

In addition, sandwich lease options are typically used by newbie investors who have no money and bad credit. The VAST majority of these new investors fail in a short period of time, so again, there is no exercise of the option.

I don't even do sandwich lease options and I know 2 people who had these go badly.

I am not against anyone using sandwich leases. I am just pointing out the difference between the hype and the reality. In reality, the risk is higher than just about any other type of REI deal.

My goals for 2007 are:

1. to add another 20 rental units (we're closing on 10 at the end of this month)

2. in addition, to find and purchase one larger project, ideally a 50 unit apartment complex, mobile home park, or RV Park (generating a minimum positive cash flow of $100/unit/month)

If you'd ever been in a lawsuit, you would know how big of a deal it can be. In a lawsuit, the only winners are the lawyers.

Mike

What you are describing is a "sandwich lease option". These are VERY RISKY and I never do them. One of the problems is that your "buyer" may exercise his option and when you try to exercise yours, your seller refuses to complete the sale. You tell your seller that he can't do that and he says "sue me". When you tell your buyer that you can't sell the property to him, he sues you. Within the period of one day, you are involved in 2 lawsuits!

If you take the property on a lease-option and then simply rent it until you actually buy it, that is a LOT safer.

Mike

Josh,

I think the new one is too "busy". It is so crowded that it might be intimidating to new visitors.

Mike

Minna,

I decided a long time ago that the world has fundamentally changed. Just one generation ago, it was possible to start and end your career with the same company. The company would take care of you and provide for a nice retirement. Those days are over.

In our rapidly changing world, I think the only relatively SAFE job is being self-employed. That way, at least you are in control of your own destiny. While you'll probably have to get another job in the short term, you might want to consider developing a business plan that will allow you to be a full time real estate investor. I did this a little over 3 years ago and have been quite happy with the result.

Of course, the road is bumpy and has a lot of curves. It will require a LOT of work and a LOT of sleepless nights, but it is worth it in the end. If you commit your time and energy to this goal, you should be able to accomplish it in a few short years. For me, it took 2 1/2 years of VERY HARD WORK.

Come up with a realistic plan and work like crazy. You can do it!

Good Luck,

Matrix,

This is NOT a good deal - not even close.

Throughout the United States, operating expenses run 45% to 50% of the gross rents (including paid maintenance, paid management, and capital expenses).

Therefore, in your case, here are the numbers:

Gross rents: $2,800
Operating expenses: $1,400
NOI: $1,400

Cash flow = NOI - mortgage payment
Therefore Cash flow = $1,400 - $2,600 = -$1,200 per month

This property would lose about $1,200 per month.

Since you are doing the management and maintenance, you would be able to add back in about 15% - 20% of the gross rents or $560 at best.

Therefore, your actual cash loss per month would be about $640 per month.

At tax time, you will get depreciation on the building only (not the land). You will also get to deduct interest expense, but not the principal.

I would NOT do this deal. All of my rentals MUST have a positive cash flow. After all, the purpose of having a business is to make money, not lose money.

Hope this helps.

All of the psychological mumbo-jumbo in the world will not help you succeed if you don't really understand your business. The number one reason that businesses fail is lack of cash flow. Chanting "I like myself" a million times isn't going to do one thing to improve your cash flow.

If you need to read motivational materials to become motivated enough to get moving, then you are not going to make it as a business owner. Almost all successful people are self-motivated.

Good Luck,

SoBeREI,

My previous post was about as clear as mud. Sorry. Let me try again.

Here are the formulas:

Gross rents - operating expenses = NOI

Operating expenses include property taxes (and other taxes other than income taxes), insurance, paid management, maintenance, office supplies, advertising, legal fees, court costs, fuel for your vehicle (or mileage), some vehicle expenses, some education expenses (possibly depending on your business situation), etc.

To answer your specific question, property taxes and insurance ARE part of the operating expenses.

Operating expenses do NOT include Principal and Interest, capital expenses, or depreciation, (although in reality you should consider an allowance for capital expenses in your cash flow analysis).

From a practical standpoint, you subtract the mortgage payment (P &I) from the NOI to get your monthly cash flow. That's cash flow. That's what you should actually get each month or year in actual cash.

For tax purposes, principal is not a deductible expense. Interest is deductible for tax purposes. For tax purposes, the depreciation will reduce your taxes.

Using a property analysis tool is a good idea, just be sure you include ALL the operating expenses. On the sample report, I didn't see eviction expenses, court costs, entity maintenance, excessive damage done by tenants (above and beyond the security deposit), etc.

That is why I use the statistical number for operating expenses when I evaluate a property. I use 45% to 50% of gross rents for operating expenses (including capital expense reserve) because it is impossible to calculate exactly what expenses a given property will have in a given year. For example, how many evictions will a given property have this year? You don't know. Hopefully none, but as your portfolio grows, you definitely do have evictions but you never know which unit will be involved. The same is true with extensive damage done by tenants. The same is true of lawsuits, etc, etc, etc. Failing to account for these many expenses is a recipe for failure.

Hope that is a little clearer.

If you want anyone to help, we need the numbers.

Gross Rents
Mortgage Payment
Market Value

if you don't know these numbers, you certainly are not ready to buy anything. Keep studying!

How do you plan to make money with this property?

Good Luck,