All Forum Posts by: Mike Nuss

@Justin Green has some great insight. Interest rates are pretty comparable to cap rates right now. That means as interest rates go up, cash flow will go down, assuming rates go up higher than cap rates will (cap rates typically follow a similar trend as interest rates). RMLS published the "affordability index" in their last Market Action report. Based on that report Portland is still affordable, much more affordable than the bubble/peak times. Our market is much healthier now than it was before the crash. Also, values have come back or close to pre recession values. So, riding out the storm wasn't such a bad thing for the investors who did not sell during the recession. Adding locational context to the above statements.....close in N/NE/SE. 

My 2 cents. Spend a few thousand dollars direct marketing to 2-4 unit owners. Selling off market is very desirable to many 2-4 unit owners and is a great way to get a property you can create value add to. That marketing money could be the difference between cash flow and no cash flow once moving and can bring a huge ROI. 1-2K very well could lead to 100K in market value if you negotiate well.

Isaac, I've got some thoughts that I'm going to tally below. Hopefully they make sense and give you some good insight from another investor in Portland. Side note, what neighborhood? I love historic neighborhoods.

1) Some back ground on the numbers would help. My initial thought is what would hard or private $ have cost you for this project? How does that cost compare to the expected returns of your investor? Having other sources of $ gives you more leverage in negotiating these types of deals. 

2) Is the investor's 10% a simple interest per annum or flat rate ROI? Structuring this as "simple" interest versus a flat 10% ROI works better if the project is under 12 months. It is in your favor if the project is over 12 months. Just a point I would consider, similar to factoring hard $ points versus interest rate.

3) What's your "overhead" attributed to the project? Insurance, office space rent, phones, workers comp, etc. etc.? This is a very smart line item to build into the "cost" of the project, just as the investor's 10% return is a cost of the project. Good job here.

4) Historical design review is a serious process. Very serious process. I just bought a duplex in Irvington. The seller sold the neighboring 6plex to another investor before my company was ever part of the duplex sale (that investor backed out of the duplex purchase, he was going to purchase that as well). I met the other investor last week. He purchased the 6plex for just over $600K and plans to resell over 1.2mil. His comments. "You can have Irvington, I'm never working here again".I hear that a lot from investors working in historic neighborhoods. The returns are very appealing, but the design review is legitimate. In my experience we would build some sort of management cost into the profit share for the design review process. This is going to be a head against the wall session. Hopefully it will be your architect's head.

5) Project management should be a line item "cost" to the project. Every GC joint venture we have done has included this type of line item, albeit a small one (we want the GC invested, but we also want him to enjoy the project). 

6) Did you consult a CPA as to your projected income on the project? Would it be best to remove your company profit from the 40% and take that all as gains? Would it be better to remove your personal gains and take it all as income for the construction company. This may be a minimal consideration, but one thought that came to mind.

7) We have done this same exact profit split where the GC got 40% of profit and we got 60%, with our private $ being a cost to the project, so your split could be considered a "market rate" split.

8) How did you structure ownership? We always own the project and use joint venture agreements. Control is key!

9) Breakdown of some other "profit split" deals we have done locally:

We have done a hand full of investor/contractor projects where we were basically the glue. Our deal, our due diligence, our design, our ownership. But, not our $ and not our construction company. We've partnered with a GC having skin in the game. We paid out net profit equal to the amount of "skin in the game". The GC used private $ as well so our cost of funds were our own private expenses. We have done similar profit shares where the cost of funds was a cost of the project. 

Our latest profit share deal is a recent purchase in Wilshire. We approached the investor as a private $ loan. We had our investment packet with all due diligence completed. The packet always includes scope of work, purchase price, appraisal, rehab budget, break down of expenses and an LTV, showing our estimated resale. That out of area investor offered a profit split rather than a straight interest rate. He offered a 70/30 percent split. We get the 70, he gets the 30. In this scenario his simple interest return of 10% was changed to a projected annualized return in the low 20s. Our cost of funds increases and projected profit was reduced, but it was well worth it. The loan has 0 interest so our risk is very low. Also, we are not penalized if the timeline gets extended (something to consider in historical design review). The investor's return is actually a higher cost than hard $. We could have done this deal without him. However, the lower risk on the project and ability to do more in the future persuaded us to go the profit share route.

Hopefully this helps your thought process on your deal. Happy investing. 

You're thought process is correct in, yes you should be able to take the actual gross income and divide by twelve. But it's based on what the realtor inserts for rent. This value is really a variable. It could be current rent or their opinion of market rent because of vacant units and/or no recent market rent history to show/prove. There should be a monthly rent reported for each unit, although that's not always filled out. When it is filled out its subject to the same variables discussed above. So look for both annual gross as well as monthly rent per unit. Then read the comments for editorial regarding the reported numbers. 

Hope this helps

@Chris B. You're estimating a 50% expense ratio and that includes no management in your equation. This is on the high side for SFR to begin with. Being that you're planning on doing the maintenance yourself and hiring no management....your numbers seem to be legitimate. As you already suggested you'll probably see a higher return without having to make larger capital improvements.

The question in my mind.... Is there a better way for you to use that $155,000+ of equity right now? Your numbers are showing less than a 1% return on your equity as a rental (not including principal pay down, appreciation and tax benefits). 

Are you interested in growing your Real Estate experience and/or portfolio? Maybe renting it and getting a HELOC (for access to the equity) would be beneficial to you.

Welcome @JR Hinds 

You'll meet other like minded individuals at the events page linked below. It's a membership based group, but feel free to come check us out for free. Look forward to meeting you in person. 

http://myrarebird.com/events/

@Michele Fischer that's awesome "Longview has some challenges". 

@Bill Horton you know your OC....one huge reason to do some direct marketing there. I get asked all the time why we don't invest outside of Portland. Simple answer is I'll know a fraction about another market compared to the depth I have for Portland. I believe in investing where you have knowledge. 

I have mixed feelings about Clackamette Cove. Common paddle boarding spot for the fam and I. I think the water is too low in the Clackamas right there to make sense for a marina too. Although, mixed use makes a ton of sense right there with the land north of Fisherman's Marina. 

Wow, this is a pretty polarizing topic. As a moderator for a national REIA chapter and now an owner of a for profit (LOL, I almost choked writing that) REI club I get both sides. We started our own club because we didn't like how the local REIA pushed gurus. This seems to be the model for most REIAs from what I have heard across the nation.

 I get inquiries weekly from "gurus" and service providers asking to speak to our group. Their pitch always lets us know the way we can profit from whoring out our network. It's easy to see why certain REIAs will run their business in that manner. It can be profitable if done that way. 

Not all REI clubs are ran that way. I know free clubs and paid clubs. They all have their place. I can say that we charge a $30 monthly or $300 yearly membership subscription because we want our membership to be active doers that understand the value of a networking club. We do not let gurus come pedal their systems. We simply provide a meeting format for members to come learn and network. We insist on new members coming for free to make sure they want to be part of that type of environment. It's a giving atmosphere, unlike the "taking" atmosphere that many people have already griped about.

It all comes down to the leadership of the club. Either the leaders are going to be takers or the leaders are going to be givers. The membership will follow that lead and the leaders will attract the mindset that they lead with.  

@Dana Brown and @Bill Horton

@Bill Horton I think "goal" is a better word for what you're going to find in the Portland Metro area right now. Our rule, or "goal" is to make 20% return on the cash required for our projects after private $ is paid. Many times we go down closer to 15% for easy remodels on well located properties. I see a ton of "wholesale" deals out there or deals purchased off MLS where investors are working on 10% margins. It's super competitive. It's not often you'll find the 70%-repair rule here. It happens, we get them, others get them, but they're not often. Values are too high and there are too many investors out there willing to pay more.

Look at all the costs you have associated in a deal. You'll find that a 15-20% cash on cash return (after paying $ costs) is going to be a deal that brings in very solid profit and is lendable by private $ standards.....and that is most likely going to fall in the 75-80% rule, rather than 70%.

In my opinion there are 5 excellent ways to get cash flow in Portland

• be proactive
• do not buy off of MLS
• buy under rented properties
• do value add through rehab and rent increase
• self manage your units

Portland is an interesting market. The romantic areas of town start at 5 caps and go down from there. It's tough to provide cash flow when the return on NOI is the same as the interest rate you're borrowing. That in and of itself means you're only getting the 4-5% return on the downpayment you've made.......unless you add value through rehab and rent increase. $400 a month more in net rent = $96,000 in market value (assuming 5 cap). That type of value add is really easy to do in Portland (most rentals in the midwest won't ever reach 96K in value, where as that is a common value add in Portland). However, most of the MLS properties do not have that type of upside. If they do, they end up getting bid up beyond the value add you want to make.

The best part of the romantic properties and close in areas is the tenants these properties attract. We have multiple 800+ credit score tenants, all with $ in the bank. They sign their paperwork, move in, pay rent on time if not early and are rarely heard from again. Most of the work is in the lease out. Saving that 6-8% in monthly property management (don't forget the expensive lease up fees) is significant in this market as the property management typically makes just as much if not more cash flow than the owner does in NOI.

@Bill Horton  you're sitting in a potential gold mine there in OC. Just my opinion, but there are a ton of vacant homes in the historic areas of OC close to downtown. Urban Renewal has done a ton for the downtown area and the developer from Tacoma is going to make waves with his Blue Heron Paper Mill redevelopment. It's probably worth your while to send some letters out in your backyard.