All Forum Posts by: Joshua Woolls

Absolutely. I'm not a "pro" investor, but I am fairly active and I know the areas very well. If you are looking for help or have questions, there is nothing I like more than to help get you started off in the right direction.

The problem with the investing that you are talking about is that the investors are gambling on appreciation. Appreciation can be an absolute benefit of real estate investing, but in my opinion it is not the reason to invest.

There are a lot of people on here who stop in for a week or two and we never see them again. The fact that you keep coming back is a good sign. Put your head down, keep working and you will get there for sure.

For me, real estate is my hobby. When I get done with work, I come home and instead of watching TV, I come to BP and get on the internet and look for houses. I have a passion for it. My wife too fortunately. Keep the passion and drive and the rest will come.

I think that risk goes up exponentially the closer we get to 100% leveraged. I also think that most people understand it. But, as we get closer to 100% leveraged, that risk starts getting shifted more onto the bank and away from the investor. Some people are OK with this.... I am not. Personally, believe other people's money should be protected before my money. 

As for debt ceilings, I think the reason that it doesn't get discussed much is because it falls right around that 75-80% mark, which just so happens to fall right in line with where the banks cut us off. Coincidence? I think not. Are there people that would over leverage if they could? Absolutely, because the closer and closer that we get to that 100%, the more the risk gets shifted away from the borrower and more to the bank.

When it comes to hard money loans, those should not be being used for buy and hold investments(in my opinion). Hard money is for different types of projects/situations. Sometimes hard money can be used like cash for acquisition. This can have distinct advantages. And I would not call a hard money lender a Loan Shark, there is a time and a place for what they do. 

As for commercial loans for real estate.... Good luck. It can be done, but it's not easy. I just spent several months and visited about 20 banks to get some loans on my rental property in the form of a portfolio loan. 5 properties with 100% equity. I wanted to borrow about 200k(50%) of the value for an upcoming tax auction. My personal debt is pretty low, and I still had a very difficult time finding a bank that would work with me. 

I am not trying to say you are wrong on your thoughts. I agree with a lot of what you are saying. I am just playing the devil's advocate.

I am not sure what your issue is. This discussion was about why it is better to buy a higher CAP rate than a lower one(it is) and you have turned it into "all properties in the same market have the same cap rate"(they don't).

As for using CAP rate, when I am evaluating properties, I have a spreadsheet. I plug in. Cost and expenses and it shoots out a CAP rate. It's not hard. If I see a high CAP rate, I start to look closer at the property and ask questions. It's not hard. Are these perfect? Nope, but I know the areas I buy in and they are pretty damn close. Are there other things I consider? Hell yeah.

There is no reason why you cannot use a CAP rate in SFR. Is it the ideal tool? No. I use many tools and that is just one, but it is quick and easy and starts pointing me in the wright direction.

Example:

26420 Kenneth Redford MI. 48239. 

I own it. Bought it a few months ago. I know the area and knew it would rent for $1150(it did). It was for sale for 60k. So I ran the numbers.

$54 Month Insurance, $150 Tax, $100 Property management (paid to my property management company), $50 Misc. This leave me with $800 month income. $9600 a year. $9600/$60000. This gives me a 16% CAP rate. I said to myself "Hmmm....Not too shabby, I think I will take a closer look". I did, I liked it, so I bought it.

And tonight...just like most other nights, I am doing the same thing. Find a property. Do a quick Assessment. Run the numbers. Cross it off the list for further review, or add it to my drive by list. If the drive by looks good, I call my realtor and we take a look.

The amount is not important. I was just using two arbitrary numbers for an example. If you are looking at a 5% and 5.5%, the higher CAP rate is better. And if we are looking at two different similar SFR in my market, I can absolutely find properties that have a 15% CAP rate vs. a 10% CAP rate. All... Day...Long.

Homes that rent for 1100 a month. 800 a month after expenses. Very, Very similar homes will range from 65k to 90k.

I understand CAP rates aren't really great for SFR, but I use them every day when I am evaluating a property.

Sure, maybe the cheaper property is in a location where people don't expect appreciation(appreciation has nothing to do with CAP rate) an in the area with higher appreciation, people are willing to make less, counting on appreciation to bail them out.

Maybe the lower priced property is purchased off market.

Maybe the lower priced property has an distressed owner that needs to move the property immediately.

Maybe, someone is just an idiot and their property is priced over market value.

Or maybe, just maybe we have the ability to invest in different markets! 

I live in Detroit and you live in Hawaii. I am willing to bet that CAP rates aren't the same.

And again, this is only for commercial properties. When we go back to SFR, there are even more reasons that the property could be priced inappropriately.

Real estate is not a perfect market. 

Are you telling me that every property in your area sells at the exact same CAP rate? If you are, you are wrong.

I find it hard to answer you without a smartass remark. Every purchase I make, I am attempting to purchase at a discount to market value(which by definition raises CAP rate). Spend a couple of weeks listening to the podcast and I am sure you will come away with several:

-Direct Market

-Netowrk

-Scour old listing

-Bargain

And if we move SFR, there are even more ways. I can literally go to the MLS in minutes and find two properties in the same neighborhood, that have the same rents that are 20% different in price.

If what you were implying were true, when we negotiated a lower price on a property the rents would go down proportionally.

Straight from Wikipedia:

Capitalization rate (or “Cap Rate”) is a real estate valuation measure used to compare different real estate investments. Although there are many variations, a cap rate is often calculated as the ratio between the net operating income produced by an asset and the original capital cost (the price paid to buy the asset) or alternatively its current market value.

When we are talking about CAP rate in this scenario, obviously we are talking about initial acquisition cost.

If I have two properties, identical in every way. One has a CAP rate of 5% and the other has a cap rate of 10%, I am going to, 100% of the time, without a doubt buy the one that has the higher CAP rate.

I know that CAP rates are also a measure of a properties NOI/Market Value, but for acquisition purposes we want to buy a property that has a high CAP rate. Once we have purchased the property we want the value of the property to increase, which(assuming NOI stays the same) will lower the CAP rate. In a perfect market, this would happen on it's own. Real estate is not a perfect market.

Back to my original statement(which was meant to be a simple overview, not a deep down analysis) if I am purchasing and I can finance with a low interest rate and purchase a property that has a high CAP rate, it is a good investment. Yes, there are other things that we need to look at, but this gets us on our way. On the other hand, if my interest rate is higher than my CAP rate, it is most likely not a good investment(unless I see that there is a large unrealized revenue source).

Please do not tell me to educate myself ;). I am educated(although I am always trying to learn more)

CAP rate is literally NOI/Cost. So, a high CAP rate should absolutely mean that the property is profitable. CAP rate is a measure of profitability.

On a 100k property, if I can get a CAP rate of 10% and borrow 80% money at 4%, I am sitting pretty. 10k earned - 3.2k paid in interest = 6.8k in profit on a cash investment of 20k. That's a 34% CoC return.

If the Cap rate goes down to 6%, I only make 6k. 6k earned - 3.2k interest = 2.8k profit. That's a 14% CoC return.

The greater the spread between the interest you pay and the CAP rate, the more you will profit.