All Forum Posts by: Scott Pigman

I stand corrected, thank you. For the record my source was a friend who works in code enforcement for the city of Toronto - but he's not an investor himself.

How long does it take to evict up there? I've heard that in Toronto at least you can't evict during the winter months.

Well I'm confused. You want the deal and it's one of the best deals in the area but you're trying to get out of the deal. Sounds like you want another deal, not this deal. I guess you want this house but not at this price.

(bump)

I guess math scares people :-S

Some observations on the formula:

• as the balance decreases it gets harder to cash flow
• as the value increases, it becomes easier to cash flow

Neither of those facts make sense to me, but the first one is especially hard to wrap my head around. Why should paying off your balance make it harder to get cash flow?

A week or two ago there was a discussion regarding the 50% rule based on this "positive cash flow" article by John T Reed (actually Reed uses 45%, but that's neither here nor there for my question).

In the article Reed presents a formula for determining if a rental property will have positive cash flow or not, but I can't make sense of the reasoning behind the formula and Reed doesn't really explain it. I'm wondering if anyone here can explain the reasoning and comment on the formula's validity.

He says, 

so that's,

LTV * C < CapRate --> positive cash flow

(C = Annual constant)

He goes on to define the terms like so,

LTV = Loan/Value

C = (annual payments) / (loan balance)

Cap rate = NOI / Price

NOI (Net operating income) = income - expenses

If you do some algebra you can restate the formula as,

(loan/value) * (price / loan balance) * annual payments < NOI --> positive cash flow

Being somewhat simple minded I would have thought that the formula for positive cash flow would be simply,

annual payments < NOI --> positive cash flow

But I don't understand the multipliers on the left side,

(loan/value) * (price/balance)

Can anyone explain to me why they should be considered?

One final observation, if we assume a "no money down" deal, we can somewhat simplify the formula:

Loan = price - down payment

let down payment = 0

then, 

Loan = price

therefore,

(price^2/(value * balance) < NOI --> positive cash flow

but I don't know if that really helps or not.

Anybody got any ideas?

So everyone is ready to jump down the CPA's throat for not being gung ho about buying investment property. I guess one shouldn't be surprised, it is a bit like asking a home brewing club if one should be a teetotaler.

I'm going to play devil's (or Ramsey's) advocate here (again).

The fact that the OP is still complaining about school loans after 15 years of practicing is a red flag that he might not have control of his personal finances. Doctors are somewhat infamous for jumping into the whole "I'm a doctor now so I deserve the matching his-and-hers BMWs, the 5000 SF house in Yuppie Acres and the killer home theater," -- and having debt up to their eyeballs.

If that's the case even successful investing isn't going to solve his problems. If making more money was all it took to solve financial problems then there wouldn't be any bankrupt lottery winners or football stars. It ain't a money problem; it's a behavior problem. 

Frankly I agree that Dave Ramsey does go overboard with the "save save save and never borrow" message --- but that doesn't change the validity of his core message that financial problems are seldom caused by having a lack of income, but rather by poor spending habits that need to be cured first.

First thought, "a month or so," ain't a hell of a lot of time have been studying real estate before jumping in to buy something, so that'd scare me regardless of whether you had 0% or 100% to put down.

Second thought is, is your accountant's objection only that you shouldn't borrow for investment properties, or do you also not meet some of the other "Dave Ramsey" rules?

• Do you have a budget?
• Do you spend less than you earn each month?
• Do you have a three to six month emergency fund?
• Have you paid off your other debts besides the mortgage and school loan?
• Are you contributing money to a retirement fund?

If you can answer yes to all of those then is agree that your accountant's probably too conservative. If you have to answer no to most or all of them, then he's right. You need to get control of your existing finances before taking on another debt.

Now personally I'm not fully on team Ramsey, but I definitely have one foot in his camp. About six years ago we did the whole rice and beans thing for a year and paid off "everything but the house" and it was one of the best things we ever did. It meant that later when we became parents my wife could quit her job to be a stay at home mom -- it's not for everyone I know, but it's what she wanted and we couldn't have done it if we still had all of our other debt.

But what I do regret is that we did buy into the whole DR "only borrow for your primary residence, if even then" philosophy and as a result we spent most of the recession on the sidelines missing out on deals that are probably gone forever. 

I see Zestimates as a finger in the wind to see which way the wind is blowing and that's about it.

In states where sales prices are public record AND where zillow is able to access them then it seems like an okay tool for getting rough sales comp data, at least for a first pass evaluation.

I suspect it's value doesn't just vary state-by-state but also by county and municipality within some states.

Try looking  up the local assessor's office for your area and see if they have online records and compare those to zillow.

I know if you sold me a meth house without telling me its history I'd be pretty d*** upset.

Meth houses came up in a conversation I had earlier this week with a friend who's a housing inspector for the city of Toronto. According to him the chemicals can get leached into the studs, can't be treated, and even after the house has had all the drywall replaced they can affect the air quality.