All Forum Posts by: Bill Goodland

I think everyone's quick answer is money, or a solid investment vehicle that can provide a high ROI if done properly with the tax benefits, cash flow, and appreciation. For me personally, it's not just the money. It's the freedom and opportunity for myself and my family to be able to do and have whatever we want within reason. I was raised to have a very frugal mindset, so even to have the option to buy something without having fear of not having enough money down the road is freeing in itself. I also know that RE will give me the opportunity to experience anything be it travel, starting a business or a non profit organization. I want to be able to give back to humanity and causes that are important to me and have a real impact on a lot of people with my money. Being successful is nothing without being fulfilled.

I personally wouldn't pay down your mortgages and just keep acquiring as much as you can. I am a fan of the "buy till you die strategy" and here's why. By leveraging(not paying cash, but using a mortgage) you can maximize your COC return. For example, paying 100k cash for a property that cash flows $550/month or 6.6k a year is a 6.6% COC return. Or by leveraging that 100k between 5 100k properties at 80% LTV(20k down on each), cashflow $200/month/unit is 12k a year or 12% overall COC return. Plus depreciation, mortgage interest deduction, and other deductions between multiple properties that increase your deductible expenses, decrease your taxable income and thus tax burden. Not to mention, if that area appreciates 5% so every house is now worth 105k in a year you now have 25k equity(20k down+5k appreciation, ignoring amortization) that is a 25% extra return on cash spread between 5 investments instead of 5% bonus return on cash if your 100k down increased to 105k.

Originally posted by @Jeff Copeland:

Originally posted by @Bill Goodland:

Most newbies are surprised when they discover that 99% of MLS properties are not deals or good rentals.

That's an interesting observation Bill, and probably not far from the truth. But I just did an MLS search, and there are 497 single family homes under $200k, and another 28 MFR properties under $200k in the MLS in my county (Pinellas) alone. According to your math, that means there are 52+ potential great deals sitting on the MLS right now waiting for the right investor to come along.

And I would further challenge that a very high percentage of all "off market" deals are not good deals either. People who are successfully marketing to motivated sellers are doing so at incredibly high volume, with very low response and conversion rates. 10,000 post cards or yellow letters might get you 10 phone calls, of which half are not legitimate prospects. And of the remaining five, one might be worth doing a deal on. (Obviously, response and conversion rates will vary widely)

Both methods can work, but those who are completely writing off the MLS as a source of properties are missing out. I did 33 deals last year as a realtor, 21 of which were investor purchases right off the MLS, all of which were great deals.

Furthermore - just because something on the MLS doesn't look like a good deal doesn't mean you can't negotiate it into one. Case in point - I just closed on a house of Friday that was listed on the MLS for $120k. I bought it for $96,200.

I'm not saying don't do you your own marketing - those are often the best deals. I'm just saying People complain in these forums all the time about how there are no deals to be found on the MLS, and that simply isn't true. 

I agree Jeff, it definitely depends on the area. In my hometown, I haven't seen a property worth a buy and hold look in a long time; whereas the area I am looking to invest seems to have 5-10 properties at any given time that look like they have good potential. I am not someone who's going to complain about no MLS deals, what I am saying is, just because it is on the MLS and an agent tells you its a good deal, does not mean you should believe them without doing your due diligence. Point being that I believe you should buy something, even if its not perfect, but not if it doesn't cash flow, because I think there are enough cash flowing deals out there to find whether on or off-market.

Yes, a bank appraisal would be perfect for finding out the value and thus your equity in the property. If you don't want to pay for one, I'm sure networking with a local agent would be able to find you pretty good comps to give you a better idea of the value for your estimates. 

@Joshua D. I would recommend you check out this BP article on the calculation on a rental property. https://www.biggerpockets.com/renewsblog/2013/01/1...

and this for ROI http://www.investopedia.com/articles/investing/062... as it probably explains it better than I can. Exact ROI can be tricky to calculate I believe because RE ROI incorporates a variety of factors such as purchase price, rehab, loan pay down, appreciation, cash flow, exit strategy etc.  

Like I said, cap rate is really only used for commercial investing when a cap rate is essentially set in stone based on the type of investment. What I think you're really referring to is a COC(cash on cash) return. Cap rate is essentially a COC return of a property if you paid cash. By leveraging(not paying cash, but using a mortgage) you can maximize your COC return. For example, paying 100k cash for a property that cash flows $550/month or 6.6k a year is a 6.6% COC return. Or by leveraging that 100k between 5 100k properties at 80% LTV(20k down on each), cashflow $200/month/unit is 12k a year or 12% overall COC return. Plus depreciation, mortgage interest deduction, and other deductions between multiple properties that increase your deductible expenses, decrease your taxable income and thus tax burden. Not to mention, if that area appreciates 5% so every house is now worth 105k in a year you now have 25k equity(20k down+5k appreciation, ignoring amortization) that is a 25% extra return on cash spread between 5 investments instead of 5% bonus return on cash if your 100k down increased to 105k. I wouldn't stress, just take educated action and buy till you die.

How have you analyzed the risk you are taking on by buying properties in a flood area? Rich dad said that you should always be paid for any risk that you take on. Even if you get good rent to value ratios, is there opportunity cost there in buying these properties un-leveraged compared to buying higher priced properties with leverage to generate better COC returns? I'm not saying these are bad investments by any means, I'm sure plenty of people would kill for 1.75% rent to value, but I hope these are all things you consider.

Have you networked at all yet with your local REA to see if any private lenders would be interested in financing the deal or potentially partnering?

Do you have a strong track record where the bank would feel safe lending to you?

When you say raised, do you mean borrowed? Because if so, it sounds like you are over-leveraging yourself and not having much "skin in the game". Once you have a great deal locked in, have a track record, with skin in the game I'm sure you will be able to make this deal and many others work.

If you can't make this deal work, rather than give up on it I would see whether you could potentially wholesale it to another investor. If you are unable to generate any interest in the deal, I would then reevaluate if it is in fact a deal. Best of luck!

Hello Sunshine! Great to see that you're reaching out and asking questions to the BP community but I would seriously invest some more time in your education before taking on such a big investment that could potentially not cash flow. I would first recommend reading BP's Ultimate Beginners Guide at biggerpockets.com/ubg. It's free and has a ton of great information on how to pick your strategy and invest in properties that align with your goals. I would advise that a beginner NEVER focus on appreciation. Could it work? Yes. But your payoff 9/10 will not justify the amount of risk you are taking on, not to mention the opportunity cost of investing in a more traditional cash flowing property.

Do you want to focus on cash flow? Find the highest rent to value ratio you can find(>2% rule). For example a 40k house renting for $800 a month meets the 2% rule(more of a guideline to strong cashflow)

Pro - strong cash flow monthly

Con - low chance for appreciation and potential headache tenants

Do you want less tenant headaches and chance for appreciation? Look in better neighborhoods with better schools. Less cash flow and better chance for appreciation.

If you fall somewhere in the middle like I, along with most people do, look for properties in decent areas, with decent cashflow(at least $200 a door AFTER accounting for vacancy, capex, repairs, PM, PITI, lawn/snow etc.) Most newbies are surprised when they discover that 99% of MLS properties are not deals or good rentals. But once you develop a criteria, you will know where to look, how to negotiate, and how to generate wealth and monthly cash flow with all the benefits of the IDEAL investment(Income, depreciation, Equity, Appreciation, Leverage).

To clarify. NOI =Gross Revenue - Operating Expenses

Cap Rate = NOI/Property Value

Cap Rate assumes you paid cash for the property because debt service is not included in operating expenses is more commonly used on commercial properties; however it can be a good quick analysis tool on residential properties. The reason it matters more on commercial properties(5+ units or more) is that they are valued based on cap rates and not comparable sales(as they are in residential). For example, 10-20 unit apartment complex in blank county are trading at an "8 cap". Therefore, if these similar properties are trading at a certain cap rate, if you increase NOI by either increasing revenue, or decreasing expenses, you will therefore increase the property value.

As far as your numbers and whether or not you should sell, I would first define your goals and see if your investments align with your goals. If you want to reach financial freedom and generate wealth for you and your family while limiting your risk exposure, which I think most people on here are; I think you're on the right track and I wouldn't sell unless you can think of 3 reasons why you should(desperately needing the money, being maxed out on loans, property not cash flowing, bigger opportunity cost from putting money elsewhere.

The number 1 thing I would look at as you're trying to expand your portfolio is not only your COC return, but the return on your existing equity over time. As long as you are young, I would try to maximize your return on equity and safely leverage as much as you can without selling off unless you have to. By safely leverage, I mean ensure that you are appropriately accounting for all expenses especially capex and vacancy and are mitigating risk by making sure you have strong tenant demand and they're not all dependent on one employer.

Sure, a nice 15k check from selling off a property is nice, but remember that it is a taxable event if you don't defer. Now, if this many properties are too stressful for the quality of life you desire, or you need the money to live off of go ahead and sell. But I wouldn't recommend selling properties off out of fear that you're not doing something right. The number one regret I hear from older investors is that they didn't hold onto enough properties or didn't acquire as much as they could at a young age. I think you are on the right track and snowball your way to more wealth. Once you get to a property with like 70% equity and a lower return on your equity than you would like, I would then try to 1031 exchange that into a bigger property beginning with 30% equity and allow it to build over time while capturing all of the tax benefits. Sorry for the long post, but I hope my 2 cents was worth something. Good luck!

I understand anyone wanting to diversify their investments, but I also suggest you look up and watch Warren Buffets take on gold vs. businesses, or stocks in a business. He can explain it a lot better than I can, but the idea is that something like a business, real estate, or farmland will almost always hold some sort of value, and give you a constant return that is not as speculative as gold. Basically buying it in hope that someone will pay more for it later. Gold may be cool and nice to look at, but in my opinion, I'd rather take the advice of the most famous investor of all time and buy assets that produce something.

Happily achieve, don't try to achieve to be happy