All Forum Posts by: Reginald Ross

@Reginald Ross

Ok, insomnia has apparently gotten the best of me as I completely left out the effects of mortgage payments but you get the picture.

The less money you have tied up in an asset, the greater your return, generally speaking. You can experience an inflection point where your return starts to decrease as you increase leverage but that’s what due diligence is for.

The more equity you leave in an asset, the lower the risk. However, when your returns drop below an amount below the sum of the current market risk premium and risk free rate, you’d do better off investing elsewhere.

Right now the risk free rate is ~0.6% and the market risk premium is ~6.5% so if your total return on equity is < 0.6% + 6.5% or 7.1%, you would be limiting your potential returns.

@Dennis Byrne

I have a slightly different take on this. If you have a property that won't cash flow after a 75% LTV refi, it should be a flip, not a BRRRR. Here's my reasoning:

You're in REI for the money so if a property isn't cash flowing, it doesn't make sense.

Conversely, if you don’t take maximum equity from the property to reinvest, that money is “tied up” and your return on equity suffers.

Example:

Let's say you have $100k house and cash out at 75%LTV. That means you have have $25k equity. If you rent out for $1000/month and assume that cash flow after expenses is $500, your return on equity is 24%. Not bad, eh?

Now, take the same house but only cash out refi at 50% LTV. Your return on equity has now plummeted to 12%.

The flip side to this is when you add leverage, you incur additional risk. This is where you have to balance your risk tolerance with the returns you want.

@George W.

Notice I never said “fast” or “quick”. I used words like “reliable” and “quality”. I *always* want the job done right even if it runs over schedule.

When I run a rehab myself, the budget is met and schedule is beat...and I’m not even close to being a professional.

The point is, if I can do it, I KNOW there are those that can do it and better.

I’m not looking for a unicorn, just 2 out of 3.

@Jordan Lucas

I would suggest focusing on cash flow, return on equity and net worth.

Asset value is arbitrary (kind of) and not a measure of anything other than what’s in the definition.

Cash flow is how much money ends up in your bank account after paying all the bills. Isn’t that more important?

I mean, you could have $100 million in assets but if your net worth, cash flow and returns are negative, who cares?

Now, if you decide to adjust your goals to hit $100MM of net worth, THAT is a different story and you could take one hundred million different paths to get there.

Investor in the Mobile, AL area here. 23 doors and rapidly expanding BUT...

I'm having significant issues finding reliable contractors that do quality work in my area for my BRRRR's.

I have used friends (big mistake), referrals which are either overpriced or flakey and even tried Homeadvisor to no avail.

I have great property management, an abundance of deals and plenty of motivation but contractor relations is my weak spot.

What’s everyone’s best advice for building a strong, reliable contracting team?

@Matthew Ladner

I live in Mobile and have rental properties in the Mobile Area. Some are close to the university and I haven’t had a problem keeping houses full.

In my experience, some college student don’t want to live in apartments.

A typical duplex in the area can easily rent out for $600-700.

@Jay Hinrichs

I’m taking a contrarian stance on this as I believe rents will actually increase.

According to the quantity theory of money, if you increase the supply of money in an economy, the price level of all goods and services increase (i.e. inflation).

As we began to print more money, interests rate decrease and more liquidity is introduced through legislated stimulus packages, people will have more money and rents as well as property values will increase.

I think the market will need to stabilize before this plays out in reality but directionally, I believe inflationary forces will push prices and asset values higher.

@James De Stefano

I lumped Houston in there because of the oil and gas exposure

I also exited my last REI position there back in January.

I’m in the O&G industry and it’s getting double decimated by the coronavirus fallout AND the OPEC+/oversupply situation.

I hope I’m wrong but I see Houston experiencing some pain.

@Adiel Gorel

Thank you for your analysis.

Short response: Broadly speaking, I think you’re on the right track.

Long response: it’s going to depend. Coronavirus isn’t hitting every geography the same:

https://apple.news/AxoJ28rO8R_m8Hh-F34P-AQ

I’m located in Alabama which has a diversified work force, is not significantly exposed to the tourism industry and has a lower population density which means less sickness and thus business closures and diminished economic impact.

We’re going to be fine, relatively speaking.

California, New York, Las Vegas, Houston, Seattle, etc. I would NOT want to have a property in any of those cities right now.

@Peter Korty

I will vary based on property specifics but as a starting point, I’ll use 1% of asset value per year or 10% of gross rent, whichever is greater.

If it’s an older asset, I may adjust upward. A brand new house will be lower.

Example: I have a house worth $100k that rents for $1200/month.

1% of $100k would be $1000/yr in opex.

10% of gross rent would be $120/month or $1440/yr in opex.

If the house was built in 1928 and has deferred maintenance, I might double the highest number.

If the house is brand new I might cut the lowest number in half.

The more experience you get, the more intuitive it will become.