All Forum Posts by: Ryan Rogers

@Matt R. I'm one of those BPers who likes to keep track of both my ROI and ROE (Return on Equity). Once you have made the purchase, looking at the ROI can make you feel good but I find it somewhat irrelevant. Looking at the ROE shows you how hard your money is working for you.

In an extreme example, let's say you purchased a SFR in Hawaii for $50K in 1970. You put $10K down and a $40K mortgage. Today the house is worth $1M and is renting for $4K. You have now paid off your loan so it's free and clear. If you are only looking at your initial investment, $10K, your ROI is now 480% ($48K rent/$10K down). Great! Looking at your ROE gives you a different number, 4.8%.

I know you've had significant appreciation on this house which should be included in the overall calculation, but I'm just trying to illustrate one use of an ROE calculation.

I would not be happy with a 4.8% return on my equity, so this ROE calculation would signal to me that it's time to put the equity to work.  You can either sell the house or refinance and re-deploy your equity.  For instance, you could refinance with an 80% loan, take out $800K and use it as downpayment on 4 additional $1M homes (not my recommendation, just an example).

Erik

As a California investor, I admit that for all practical purposes, my properties are break even. Especially by the standards most people on Bigger Pockets use.

After using the rent to cover the mortgage (which includes property taxes and insurance) and water/sewer, I only expect to have $200 left. That money will slowly get eaten up by miscellaneous maintenance and vacancy costs. Even if there is money left over, it's a very low return on a 200k property.

However, there are a lot of caveats as to why I believe this will work for me.

• Self managing = zero management costs
• Properties start in good condition, so I can minimize maintenance costs
• I plan on selling properties in less than 5 years after purchase to further decrease likelihood of large capital improvements becoming necessary.
• I have reserves in case large costs come up, as well as a 30k credit card if stuff were to really hit the fan
• I invest in a transitioning neighborhood, in a transitioning city, in a high appreciation state.
• I start with added value on day one.

@Ryan Rogers:- http://www.cleveland.com/business/index.ssf/2012/1...

Oh, and that's zip 44108 - an F Neighborhood according to @James Wise.

Wait until you get to the A Neighborhoods!

Hi Brent,

Yes, neither were purchased by investors as cash flow properties. Million dollar home purchased by an executive and needed to relocate. Instead of sell at a loss decided to allow the equity to build for a few years. Second owner purchased their second home and had built enough equity in the townhouse for the property to cash flow in an area with high appreciation. Many of our owners are in this category of "investor".

Hows the Ohio real estate market and how much do million dollar homes rent for in Ohio?

Sincerely,

Kawika 

@Ryan Rogers

if that is not enough please check out this article

https://www.biggerpockets.com/renewsblog/2016/02/0...

Good Luck Ryan !!!!

@Account Closedwho wouldn't want to have an excuse to go to Hawaii to check up on rental properties on a regular basis...

One thing I'm curious about is your rent to value ratios.  From my experience in San Diego, it seemed as if the rent to value ratio went down as the price went up.  I even went so far as to sell one property in Old Town San Diego because the value went up much faster than the rents, which made me feel as if my equity was not working as hard as it should have.  What are you finding in sunny Hawaii?  How much rent to you receive from a $500K or $1M property?

Erik

I've been faced with the same situation...............with no cash reserves in case something goes wrong, I would stay away. You don't want to get yourself out of the game before you get into it. If you want to do this for the long term, I wouldn't make a decision that could wipe you out before you seriously get started. Tempting, but don't do it.

Here's what I posted in another thread that addresses APPRECIATION, rent growth and cash flow for those of you that need a real life example.  "

The thing is that you don't hope and pray for appreciation. You put on your businessman pants and calculate your appreciation rate just like you would your rental rates, vacancy rate, expense rate. Oh, you don't calculate those? You just use whatever is posted on the internet. Bad move.

Anyway I just saw sales from two of my building in the paper last week. One is a smaller unit than mine that sold for $440,000. I bought for $204,000 in 2003. I figure I could sell for $460,000+. The other one I bought in 1978 for $35,000 and the $500,000 sale is identical to mine. The 2008 property I bought for a little over $500,000 had an identical unit sell last month for $900,000!. Paid retail for all three and all three were cash flow negative. So over $900,000 in the equity bank.

Now back in the 00's there was a local real estate company that was aggressively courting long time Honolulu owners to 1031 to the Mainland for CASH FAUX! His kids moved to the Mainland so I guess they needed the business. I warned anyone that I knew that was considering it. I have flyover experience from being a Realtor in KY and investing in Vegas. Well Honolulu stayed pretty stable and returned to the normal doubling in value every ten years. Everyone that I know that did the exchanges have regretted it as their tenants are 100% opposite of their experience in Honolulu. They have experienced vacancies and repairs and maintenance issues that they never had in Honolulu and their rents AND values DECREASED.

So because I invest for profit, NOT cash faux and know my appreciation rate I am up in rents and over a million in appreciation."

We started buying apartments in mid Michigan in 2003.  We stared with a four plex and are now up to 81 units.  I assume no appreciation whenever I invest and focus solely on cashflow.  I have all my buildings bank financed and my equity position is quite strong after 13 years on one loan, 10 on another, 6 on another and 5 on another.  We are still only around 25% equity on the two we purchased last year.  

Cashflow allows me to maintain, upgrade, improve, handle risk, etc., etc., It allows me to run my business.  Cashflow also means all the other bills are being paid i.e, mortgages, taxes, utilities, insurance, etc., etc. 

If you follow this recipe, one day you will wake up to discover, in a relatively short period of time (10 years), that your balance sheet is good and that the funds you used to achieve such a thing were provided by a tenant...or 81 tenants.  

Oh, and I should mention - ALL my properties have appreciated in value since I purchased them.  My point is, I never buy banking on appreciation.    

For me, cashflow is everything and the only thing.

@Ryan Rogers There's no such thing as zero vacancy!  If you are using a zero vacancy as the basis for your calculations, you are setting yourself up for failure in this business.  Keep in mind that there are two kinds of vacancies, physical and economic.  You are NEVER going to be able to avoid either or both of these over a long period of time.   

As I pointed out, at some point you will rent your house to a professional tenant.  He's well dressed, speaks well and has good references.  After you receive the first months rent and deposit, the second month's check will bounce, followed by many excuses, deaths in the family etc.   You buy the first couple of excuses because they are credible sob stories (and you haven't heard them before...).  Once you start the eviction process, you find out that the tenant knows all of the inns and outs of the local eviction laws, postpones the hearing (perhaps over another death in the family...), claims habitability issues in the house (that he caused), requiring another hearing in a months time etc.  By the time you actually get the deadbeat out, you're out 90+ days of rent.  If you're lucky, there's not too much damage to the house, but you will end up painting and replacing the carpet.    This is known as economic vacancy, there's someone in the unit, but you are not receiving rent.  There's a small percentage of tenants that fit into this category, but if you rent units for long enough, you will step on one of these landmines eventually.  If you have been in the business for 30 years and have 100 units when you do, it's not that big of a deal.  However, if it happens to be your first tenant after you bought your first property, a $500K house with no money down, it can be an absolute disaster.

As to your next question about not counting on appreciation.  I have owned multifamily properties in San Diego since 1999, enough time to see some ups and downs in the market.  I count on cash flow and forced appreciation, never on market appreciation.  I can control cash flow and forced appreciation but I have no control at all over the market in general.   What is the point in speculating that in 20 years, my portfolio might be worth twice of what I paid for it?  A "feel good" exercise?   It's so far out and with so many variables that the number becomes irrelevant. 

I like to focus on the here and now.  What is this building worth today?  Can I buy it for less than what I think it's worth?  If I have to pay full value, can I negotiate favorable terms on the financing?  Once I own the property, the focus is on what can I do to improve the cash flow from the property?  What can I do to keep it from deteriorating?  What can I do to make it look better?  Can I raise the rents?  All improvements can be checked against the potential increased cash flow by dividing the cash flow with the prevailing cap rate in the area.  For example: It will cost me $10K to rehab an apartment; I can raise the rent by $200/month after the rehab; increased cash flow is $2,400/month; cap rate in the area is 10%; $2,400/.10 is $24,000.  So, if I put in $10K, my building will increase in value by $24K; that's a good return and I would probably do it.

If you are projecting long term increases in value in order to compare your investment with the stock market, you are missing a crucial differentiation, real estate is not a passive investment.  You need to manage the property, or manage your manager.  You need to stay on top of maintenance, drive by the property on a regular basis and make sure it's still standing and that the curb appeal is preserved.  If you buy the house today, expecting not to touch it and have it be worth $1M in 20 years, you're in for a surprise...

Market appreciation happens, but don't count on it.   Use it to your advantage when possible, sell properties when the market hits a high, buy properties when the market crashes.  Looking at long term value charts can be helpful, but don't forget that there are many external factors that can affect the appreciation trends, such as inflation, quantitative easing and demographic trends.

Let me finish by making an analogy between learning to invest in real estate and learning to swim. You can start by jumping in at the deep end and hoping you figure everything out before you drown. Some people have actually done it, survived and done very well for themselves. Another alternative is to start in the shallow end and gradually increasing your depth as your skills and comfort level improves. Your chances of survival and success will dramatically improve, even if it's not as exciting as the first option. Buying a $500K SFR, with no money down and no cash flow, hoping for appreciation is the equivalent of trying to learn to swim by going to the pool in the middle of the night, with no life guard, not knowing if there's even water in the pool, jumping in at the deep end and hoping you figure it out before something bad happens.

Start at the shallow end my friend, it won't be as exciting, but chances are that you will still be here in 20 years.

Erik