All Forum Posts by: Steve Funder

I have an offer in on a property and I want to know if I am taking on too much risk.

The building will cost 70K with a down payment of 15K. Seller carry IO 55K for 5 years at 9%.

The building is 70 years old, with an original square footage of 500sqft. Additions have been made to increase the size of the building, with one 40 foot length of foundation being earth to wood contact, with the sill plate right on the ground. There is no evidence of termite infestation, but I will inspect and treat as necessary, then build a stem wall for that part of the foundation.

All utilities are at the site.

This is a large lot, the back of the lot is 30 yards away from a railroad. There seems to be an old, buried sidetrack that goes right up to the back of the lot.

ARV is 135K. I believe that I can rehab this place for 30K.

If I’m right, I can flip it for 35K profit, or buy and hold for an ultimate cash on cash between 10 and 15 cap.

What are the environmental risks involved with railroad sidetracks (I’m thinking repair and refueling, possibly herbicides or cargo)?

Does anyone have experience with this kind of termite code violation?

Consider Germany in the 1920s. The Treaty of Versailles required Germany to pay reparations to its enemies from World War 1. So, this is different from the circumstance that we find ourselves in today, but the effect is the same. The Germans were too far in debt to other nations. They tried to get out of debt by simply printing money. The resulting hyperinflation has several anecdotes:
A woman goes to the store to buy a loaf of bread. Due to the extreme inflation, she must bring the money to buy the bread in a wheelbarrow. When she comes out of the store, she finds that she is the victim of theft. The thieves took her wheelbarrow. They left the money, because it was worthless.
People could drink a bottle of wine with dinner, then the next day, recycle the bottle for more than they had paid for the wine. That was the rate that German currency was devaluing.
I believe that the more gimmicks we try to unfold in the name of dodging inflation or maintaining the value of our currency. Eventually, we will have to exchange value for value and pay our debtors back.
We need to have low unemployment, we need to have manufacturing and intellectual property and goods that the rest of the world wants, we need to maintain priorities which address the needs of the rest of the world, and productively and effectively execute said priorities. If we fail to do this, you bet your life (and your children’s wallets) that our currency will be worthless.

I suppose it’s best to hope for the best and plan for the worst.
Recall the British economy in 1980. Civil unrest occurred, but it was mostly confined to peaceful protest. The violence during that time was mostly confined to matters concerning the IRA.
Japan’s GDP peaked in 1995, and Japan fell into a decade long recession. I don’t recall any violent civil unrest from this crisis.
The German economy suffered hyperinflation in the early 1920’s, which was primarily triggered by excessive financial obligations to other countries (sound familiar?). The civil unrest which ensued was mostly peaceful. I suppose you could point to the rise of Hitler, but this seems to me to be a coup and a rise to power, typical of power shifts, and not really widespread civil violence due to deteriorating economic conditions. I might add that Germany’s answer to hyperinflation was to introduce a new currency secured by real estate.
Even the Chinese, who have seen quite a bit of social unrest in the last 15 years, have primarily contained this behavior to protests and demonstrations. But is this tension due to grievances concerning economics or government corruption?
If we really have “Change we can believe inâ€, then widespread rioting and violent civil unrest seems unlikely. I’m not being partisan here, I don’t care which party is in power, I simply believe that we must remain vigilant regarding tyrannical fascist agendas in the American government. We are very vulnerable right now. I also think that times of turmoil provide the perfect opportunity to take freedom away from the people.
I absolutely agree with William; the blame or condition is far less relevant than the plan of action. This economy is opening new doors of opportunity by the day for people who are looking.
Here are some of my personal favorites:
'I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.'
Thomas Jefferson
The strongest reason for the people to retain the right to keep and bear arms is, as a last resort, to protect themselves against tyranny in government.
Thomas Jefferson
America is great because she is good. If America ceases to be good, America will cease to be great.
Alexis de Tocqueville

I made this post while in a state of rage. I have edited the original post for etiquette, but not spirit. I feel compelled to make a few clarifications.
First, I love my country.
I applied for my commission as a naval officer when I graduated from college, but I did not serve for reasons that I will not go into. To this day, I stand by my original intent, which was to serve and defend this country.
This accounts for a large part of my anger. I cannot control the behavior of the citizens of this country, and acting in bad faith in business contracts in front of the rest of the world not only constitutes a shameful disgrace, it gives this country a bad name.
There is a new trend in my area. Homeowners are qualifying for a second home, buying at the new discounted rate, then moving into the second home and defaulting on their original home. What do you suppose that a retiree, in another country, whose income is derived from American debt instruments thinks of this? Who do you think is paying for this?
All of the banks are pushed either internally or otherwise to produce the highest profit achievable. So, a common homeowner goes to the bank and says “I can’t payâ€, the bank says “but your 28/2 puts you at an 11% APR…†but the overnight lending APR is 2%. Will the bank negotiate? Nope. They’ll foreclose. Then they’ll ask the American taxpayer for a bailout. Please TELL ME I’M WRONG!!!
I can defend the war in Iraq as fighting genocide or tyranny or totalitarian supremacy. I can defend George W. as a well meaning person without public speaking skills.
But I can’t defend the mortgage fraud perpetrated by these citizens.
I can’t defend the greed or lack of ability displayed by these banks.
Do you think that they will be held accountable?
Or will the rest of the world perceive American citizens as fraudulent, greedy liars?
I typically work at least 70 hours per week, and my financial well being is not as jeopardized as I may have insinuated, but I do live modestly.
Yes, my revenues are “nice and large†but most of them go to the government and the banks. This is one of the main points. My tenants drive nicer cars than I do. Hell, my tenants live in nicer properties than I do. My move into real estate investment was a bid for freedom, not a bid for luxury.
I do not hate every living person who allowed this to happen.
If you lived in a crime ridden neighborhood, and your children went to bad schools, and you signed up for a mortgage in a good neighborhood, I understand. If you came from a poverty stricken country, and you signed up for a mortgage in a middle class American neighborhood, I understand. If you work full time, for minimum wage, at some crap job, and feel like you deserve better and are willing to keep working to get it, GOOD FOR YOU! That, in my opinion is what prosperity in America should stand for.
But if you are some thankless middle income desk jockey, who just wanted to move up from 1600 square feet to 4600 square feet and have a boat, and have two cars in the driveway the size of the space shuttle, and if the loan screws up well, se la vi! Who cares?
Then you should sit in jail.
Call me crazy, that’s where I draw my line in the sand, and I imagine that’s where the rest of the watching world draws it’s line in the sand.
And I don’t want to leave this country, I want THOSE THANKLESS, DISHONEST PEOPLE to. I don’t give a crap if you were born in America.
The second to the last paragraph is a direct quote from The Declaration of Independence. It reminds us that the founding fathers of this country were revolutionaries, not afraid to stand against evil in the name of promoting liberty and prosperity for everyone. They were also HONORABLE MEN who would not default on a business agreement or overlook the unethical behavior of a greedy, fraudulent crook.
The “burn in a day†quote was obviously figurative.
Rome was another nation that was one of the world’s finest, regulated by a representative republic, There were multiple huge fires in Rome, the largest of which is referred to as the great fire of Rome.
Hence, there is an old expression:
Rome was not built in a day, but it damn sure burned in one.
It can take a lifetime to build a reputation, and a moment to destroy it.
So, not only are we expected to bail out the people with lazy bodies and lazy minds, but we are also beginning to bail out the people with dishonest agendas…. Say it with me America….NOOOO!!!!
All in the name of egalitarian socialism. There is a quote by one of the founding fathers of this country, by a man who signed the declaration of independence, Thomas Paine:
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it." --
If we are to be a great country
(Yes, if)
Then we must defend ourselves against our own most dishonest citizenship.

We have worked for 200 years to make the name “America†stand for what is right and what is just.
Thomas Jefferson, Benjamin Franklin, George Washington, Thomas Paine, or John Hancock would not default on his loan, NEITHER SHOULD YOU.

I love this. All of Wall Street is getting bailed out by the taxpayer. Why? Because they have “toxic assets.†Since we are abandoning free market principals (government bailing out all so called “capitalist business), what this amounts to is that Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, New York Mellon, Bank of America, Citigroup, Merrill Lynch, Morgan Stanley, State Street Bank and Wells Fargo are all being bailed out by the (say it with me) United Socialist Peoples Republic of America.
Meanwhile, the people who are paying the debt, which they agreed to pay, are getting to finance all of the irresponsibility that our lazy, inept, thoughtless culture can come up with.
A person’s word means nothing to anyone. The banks promised to pay. Now they won’t. The buyers promised to pay. Now they won’t. I am not financially ruined because my analysis was flawed. I am not financially ruined because strategy was flawed. I may someday be financially ruined because of all the “needy†people who promised to pay, and now they won’t.
So, if I decide to be honest, to be true to my word, to honor my contracts, I lose. I will have to pay full market value for my assets while banks and deadbeats get a communist discount. If I go back on my word, if I decide that my signature means nothing, if I decide that I am too weak, ill prepared, too dishonest, then I will be rewarded with the full value of today’s lower market prices.
So, not only do I lose as an investor, but guess what? My revenues are nice and large, so not only do all of the poor, helpless banks get all of my money, but the government gets to take the rest in the form of taxes. Where do the taxes go? To finance all of the people and banks who backed out of their financial agreements.
I hate every living person who allowed this to happen. It doesn’t matter how much money you take away from the taxpayer if it’s all going into corrupt policy. Every person, every bank, every business who backed out of their financial obligations should have the ethics to pay their obligations. But then, every murderer, every child molester, every rapist should have the ethics to refrain from creating victims, also. Maybe all of the people who don’t rape, molest children or kill people should be forced to serve the prison time for all of the people who do.
But when a long train of abuses and usurpations, pursuing invariably the same object evinces a design to reduce them under absolute despotism, it is their right, it is their duty, to throw off such government, and to provide new guards for their future security.
This country deserves to burn in a day. I firmly believe that the people who wrote our Declaration of independence would gladly offer a match.
Why should I believe in this pathetic excuse for a society?
If ever there was a time for Atlas to shrug, it is now.

So, PITI is $815. Renting this thing is going to cost money, vacancy, advertising, maintenance, repairs, paperwork, perhaps property management. A general rule of thumb is over time expenses go 40-50% of rental income. This may go down if the Home Owners Association (HOA) fixes roofs and air conditioners, but now you're paying HOA dues.
I am not a huge fan of selling right now. I think blood is running in the streets homes for prospective buyers are selling for historically low prices.
So, I have two questions for you:
1. Will you preserve your principal (the money that you’re putting in?)
2. Will you get an acceptable return?

Income
Rent $750

Expenses
PITI $815
Misc $300

Negative cash flow $365.

Since taxes vary locally, it’s hard for me to know how much is going toward the principal balance each month, but I’ll assume your initial loan was for 125K and say:

Cost to sell this place now (commissions, closing costs $10,000)

10 years of carrying costs: $43,800
Principal pay down over 10 years: $20,268

20 years of carrying costs: $87,600
Principal pay down over 20 years: $57,496

30 years of carrying costs: $131,400
Principal pay down over 30 years: $125,000

It seems like the negative cash flow outweighs the benefit of keeping this place, unless you just want to have an extra piece of real estate for your child, parent or whatever.
As an investment, it does not seem to make sense. Remember that at the end of 30 years, this property could cost 5 times what it does now, and when the principal balance reaches zero, the place starts to cash flow.

I may have the numbers wrong, so plug them into this kind of analysis and see what you think. Be sure you don’t underestimate expenses.

Unfortunately, your job as a taxpayer is to pay taxes. I’m sure that you’d like to believe that you have a reasonable amount of control, this being a democracy, but you don’t. I would like to quote an essay that I read recently, it’s called 545 people by an author named Charlie Reese:

One hundred senators, 435 congressmen, one president and nine Supreme Court Justices – 545 human beings out of 300 million – are directly, legally, morally and individually responsible for the domestic problems that plague this country.

I completely agree with that statement. Now, it is definitely in your best interest as a taxpaying citizen to have someone try to fix this problem. Whether the people who fix this problem have more money than you, or whether people who have more money than you benefit more from the proposed solutions (tax dollars) are totally irrelevant. The point is that this problem needs to be fixed. The reason why the Great Depression lasted as long as it did, with the severity that it had, was due to the incorrect approach by Andrew Mellon, the Secretary of the Treasury at that time. He thought that economy would rebound quickly if the government stayed out of it. Nothing could have been further from the truth.
We need people buying stocks, real estate, businesses, commodities and labor. The banks are going to have to calculate their losses and get back into the game, and people who borrow money will need to be more accountable for irresponsible fiduciary.
We must fight for redemption. Fight to hold true to all that is good in this country and all that is good in this life.
If we don’t, we will all lose.
You will lose your chance to borrow money. You will lose your chance to get a small business loan. This country’s financial reputation will be destroyed in the eyes of other nations!
People who default on any financial obligation should be held accountable for every penny AND assigned to community service! If you don’t feel like working to pay your bills then you can work for not paying them.
Financial institutions should be given tax loopholes inversely proportionate to their level of charge offs and REOs. This would actually hold their feet to the fire and encourage them to work with people in default.

First, you should know what developers are aiming for in terms of dollars per square foot. If the average price of commercial property in your area is $100 per square foot, then I would run those numbers and not pay more than that. Many investors have formulas which say “my goal is to buy properties at 60% of after repair fair market value.” So, once again, assuming that the average price for commercial property in your area is $100 per square foot, then using the above goal, you don’t want to pay any more than $60 per square foot, and you would reduce that amount by any repair costs or deferred maintenance costs.
Cash flow investors calculate what they are willing to pay expressed as the percentage of the rents in terms of the purchase price. Cash flow investors never look at properties that will have a rental income of less than 1% of the mortgage balance. Many cash flow investors want a rental income of 2% of the mortgage balance. For example, a monthly rental income of $1000 cannot warrant a mortgage balance of more than $100,000 (1%), and many cash flow investors want to see a mortgage balance of not more than $50,000 (2%). Taxes and insurance can vary widely based upon location, as can expenses like snow removal and maintenance. You should determine what criteria you have for cash flow per unit, then run financial statements to assure that you are getting the desired cash flow. Beware of underestimating expenses! This is a mistake that most beginners make. A 4 month vacancy, an eviction, a lawsuit, or a large repair like air conditioning or roofing can eat into your cash flow and make you business a total waste of time in terms of making money, which is why we go into business. Right?
Good Luck!

No, I'm not a realtor. I am an investor. Income information is hard to collect because everyone always wants to break it down by region or ethnicity.
Once again, I tried to collect this information as carefully as possible. Upon further review, I was mistaken with regard to household income. The sources and percentages are listed below.

For 2000 household income

http://censtats.census.gov/data/US/01000.pdf

($41,994)

For 2007 household income

http://www.census.gov/Press-Release/www/releases/archives/income_wealth/010583.html

($48,200)

So, up 15%
_________________________________
per capita money income went up 22% from 2000 to 2006:

http://www.census.gov/compendia/statab/tables/08s0657.xls
_________________________________

The bureau of economic analysis stated that personal income grew 25% in the last four years:

http://www.bea.gov/newsreleases/regional/spi/spi_newsrelease.htm

Calixto, I believe that Jason was referring to the annual appreciation in the value of real estate over a 30 year period.
I have tried to research this matter as carefully as possible. Apparently, single family building permits are down 60% from last year in California, but multifamily building permits are up 36%. Overall building permit activity fell 36% from one year ago, and they are calling this the lowest level since 1991. Meanwhile, the population is expected to increase at a fairly steady rate of 500,000 to 1,000,000 per year in the state of California. This number is variable based mostly upon amnesty and movement of native population.
This information bodes well for appreciation because while the workforce loses its members who are skilled in building homes, demand will clearly increase. Combine this with the fact that developing countries are driving up prices on building materials, and we have a formula for continued appreciation. (Please, God, just one more bubble!) It's a joke, People!
Median price of a single family home in California
These are the numbers, adjusted for inflation in 2000 dollars:
2000
$211,500
1990
$249,800
1980
$167,300
1970
$88,700
1960
$74,400
1950
$57,900
1940
$36,700

These are the unadjusted values:

2000
$211,500
1990
$195,500
1980
$84,500
1970
$23,100
1960
$15,100
1950
$9,564
1940
$3,527

As you can see, adjusting for inflation is a fool’s errand, because if the country is in a recession or an inflationary period, it skews the data. This is why no one should put too much credence in the Case-Schiller index.
So, if you paid cash for a home in 1940, your annual return on the money would be just over 7%. Extrapolating from this data, the median price of a single family home in the state of California should be about $420,000 in 2010, and the current median price of a single family home should be $365,000.
The current median price of a single family home in California is $409,240 or about 12% higher than it should be, if it continues to follow the trends of the preceding 60 years.

These are my projections for the median price of a single family home in California:

2015
$590,000

2025
$1,172,250

2035
$2,327,650

This assumes that inflation, income, building costs, and population growth remain consistent, and it assumes a current median value of $365,250.