All Forum Posts by: Mike Holland

I won't be able to make it to the meet up tonight at Nacho-Daddy's. Apparently now I have to pull a 12 hour shift today and will be at work until 8pm.

I brought my laptop so I could show Tiger M. and the others that are currious the program I've been working on to get their inputs. I was looking at the results in the analytics, the 50% rule falls within the probability analysis results as well as the 50% rule plus capital and interest. So I would be currious to see what input is given on the results.

Hop it goes well and sorry I can't make it. I'm interested in getting some more experience and networking in this market.

I've been doing market analysis research for the area and came across some information.  The 1st Qtr '14 Overall vacancy rates for the valley dropped one point from 4th Qtr '13 to 5.2%, based on Collier International Market Report for the Las Vegas area small multifamily properties.

According to the City of Las Vegas Redevelopment Agency 3% of the Las Vegas housing market are 3 and 4 unit multifamily housing properties.  In the area I'm looking, within a 5 mile radius; approximately 17% of the properties are 3 and 4 unit multifamily properties.  This makes this area dense for multifamily housing. 

Based on the metric information I've been researching over the past 8 moths the 4 zip codes I'm looking at investing in have has a moderate 2-5% increase in per capita income and a 4-5% increase in population over the past 2 years.  So the area is growing and becoming more financially stable.

So it seems like its a decent time to buy rent ready properties in the area in question.  Prices are still relatively low and the rental income potential is increasing along with the potential customer base.

http://www.colliers.com/en-us/lasvegas/insights/marketnews/multifamilyreport#.U887vGDjjIU

 It's difficult to get a hard number of similar units on the market within a mile because most of the owners do not list anywhere else but Craig's list and banners.  I know this unit is in a cluster zoned area near residential.  The unrenovated units that are not up kept well have a turnover of less than a year but the ones that are managed well go from 18 to 24 months and up.  It all depends on the work that's done up front vetting the tenant. 

I am definitely taking in Tiger M.'s advice and it has given me allot to think about.  I'm not saying my program knows more than his experience.  I'm just using it as an additional tool.  Just as mentioned in the BP podcast explaining the 50% rule, I consider that but also factor in the line items in the spread sheet that use current and accurate numbers.   This unit just happens to be decent in reoccurring expenses.  In accounting the easiest way to increase profits is to decrease expenditures.  Seems that's what this property has going for it.

It may seem as if I'm stubborn about this program I am making but I'm just trying to answer in as detailed as possible because I see the numbers here and know the information that in it is pretty solid.  Just bouncing it off other individuals is where it gets confusing because each have their preferred method of analysis.  They then try to apply what they know to something new that's introduced to see if it works in their minds eye.  That's where the 45% and 50% rules come in.  Tossing those guestimates in the middle of this will significantly alter the data output.   I've been looking at many other spreadsheets and always seemed to want more information  that could color the picture a little better concerning the properties.  Every tool used gives a better picture of what to expect.

Excel didn't translate well into forum posting so I pasted it into paint then copied it back out to paste into here.  Sorry for the previous garbled junk, its not letting me edit my post.

Here are the numbers so far that I have.  There are rules of thumb that people here seem to live by which is the 45% for expenses.  This property happens to have lower expenses than most that I've seen. 

I do not live by crisis management but I do incorporate the unplanned expenses in the business model tough.  The below example is a copy of year one data.  I have an additional $1000  planned for large maintenance every 5 years so the maintenance number goes up to $2000 every 5th year.   There are 10 years of projected expenses for the best case (95% occupancy), base case (75% or current status which ever is lower), and worst case (50% occupancy).  These are then weighted based on current and projected market trends and the statistics take into account the all 30 years of data weight based on weighted probability.  After year 1 there is also a significant property tax increase to cover potential increases in taxes to a significance of up to 100% increase in tax rate based upon property value.  So there are various overages built into the statement of cash flow that stress the property.  Based on the statistics you will get a probability of expected profits that is bracketed.  So essentially based on current data there is a 95% probability that your expected returns will be between X and Y annually.  There is still a chance that any given year you will go above or bellow the expected values but like I said this is a tool to weed through properties. 

So there is a significantly greater stress test that's put onto the property.  It takes into account 10 years of 50% occupancy, 10 years of 75% and 10 years of 95%.  This also includes $30,000 of maintenance over this period and $6,000 of periodic or unplanned maintenance.  All of this is without increases in rent rates, actual 100% occupancy, or early pay off of capital debt.  The 45% may be a good rule of thumb number but I see it as a snapshot for a short term hold that has limited factors.  I'm not discounting it's use as a quick analysis tool but I would rather show a stress on the property over a longer period of time if I am to buy and hold. 

So before I get flack about the 0 for the Federal Taxes there is allot to take into account with this. They factor depreciation as a loss and anything under $14,999 net profit is not taxed under an LLC. So on this property there should be roughly $6,000 in depreciation that comes off the bottom line at tax time as an expense. This will offset the taxable net profits to the less than taxable level even if the property is paid off early.

I also have capital reserves planned and have been working with a business banker with wells Fargo to set up my business account.  There are things called sweep accounts in which you state what minimum amount you want to hold in your account and at the end of the day anything over this amount is pushed in an overseas money market.  This may net fractions of a percent each night but it will end up earning 3-4% on the overage per year.  This isn't allot per say  but its more than the traditional account or CD will provide, you have access to your funds, and your money is working a little more for you.

The 5% economic vacancies was based on the current discounted rents of the tenants v. the desired rent amounts.  This information is from the owners current numbers provided.  Management service was calculated into the expenditures from the company I will be working with at 8%.  I have not signed a contract yet so if anyone has any recommendations please feel free to chime in.  Based from the reviews, tenant feedback, and services provided in their contract (not signed yet) the company will provide the service I am needing.  The owner did not account for management service in his published numbers but I used the numbers I was going to use. 

Even at a maintenance of $1000 a year the expenses, with everything accounted for, goes up  to roughly 34%.  Since I'm using variable factors for potential income based on the probability of occurrence; the acceptable range of vacancies over a cumulative number of years is between 5 and 25%.  This also accounts for the outliers of temporary 50% vacancies and still flow cash to an acceptable level.  I do not look at seeing one property will flow a specific amount of cash per year. I know it will always be variable so I look at blocks of acceptable cash flow based on the statistical probability of occurrence.   So with the numbers there significant probability that I will cash flow between  $6,500 and $9,000 a yea  That is a net between 30.3-42% of the gross rent, at 95% occupancy,  which matches you guy's numbers. 

When doing a statistical analysis of data, over a cumulative 30 years, and weighted on probability of occurrence it reduces the need for 100% accuracy.  All your expenses aren't necessary unless the total missed expenditures is  greater than the probability of error.  So in laymen's terms if you are calculating to a 5% error and you miss 4% worth of expenses then statistically it is not significant enough to effect the outcome.  So if its 5% or greater you need to recalculate to get a more accurate number. 

Vacancies in the area typically run between 30 and 45 days per the realtor.

Sorry if I get technical. I like to use statistics to analyze data and found an interest in accounting and finance because of my father-in-law and this MBA program I'm in.  I'm trying to quantify in numbers to assist in decision making.  But again, I definitely listen to experience though.    From what I've seen, allot of the numbers people come up with are super precise and the overage or shortfalls are a SWAG (Scientific Wild A$$ Guess).   Statistical analysis gives you more basis for your estimates.

The bills are actually fairly reasonable on this one.  I called and verified insurance quotes, electric, water, trash, sewer and have copies of all of the bills and financials for the property for the 2nd quarter.  Not including debt servicing the bills are 23.7% (with an estimated 5% economic vacancy) of net rental income not including debt servicing. 

Despite the industry norm I've seen of not taking into account debt servicing to make the playing field level for cash buyers. For my analysis I like to consider the accepted norm and my circumstances together. So yes I look at all aspects of the financials to include a business measure of EBIT, ROI, and Net profits. Because honestly who cares if the property has a 10% for expenses, if debt servicing is 80% then you just took it in the teeth. So yes look at the industry metrics but make sure the money works for your financial situation. Otherwise you are back to that situation I said before, you are trying to convince yourself something will work. Don't manipulate the numbers to support your decision manipulate your decision to support your numbers.

The spread sheet is just an objective way to analyze the data.  Not so much make up for experience.  My father-in-law has been an accountant for nearly 50 years and is a build and sell investor.  If I get to the offer point I run the numbers by him and he tells me if its a realistic expectation or not. 

I use a weighted method of analyzing the potential income of the property which spreads between 5-50%.  The Best case, base case (current situation), and worst cases are weighted by probability of occurrence based on market trends and predictions.   So the vacancies are all calculated in the factor.  If the property still cash flow's under this stress test: expected returns are to the right of the base case in the analysis, positive returns over 10 years, and 10 year proforma showing acceptable returns  then it is worth looking at.  All of the other metrics such as 2% rule, and cash-on-cash return should be considered as well.  But again all stuff to be considered not so much be the decision maker.

What's the time and location of the meet-up?  I'd be interested if it lines up with work.  I've got a few irons in the fire so to speak drumming up extra cash to help with purchasing  the properties.

1-  Expenses from the gross income are in that 40-45% area on this property

2- I developed a property analyzing program with the mentoring of a PhD in Accounting who has 20+ years in the property business.  It starts with the property purchase price and calculated the cash on hand required to purchase the property.  The financed amount is pushed into an amortization table.  You can put your lending rates and terms into this and it runs the full table including capitol, interest per payment, payoff amount per month, and cumulative interest.  This information is pushed to 3 separate tabs to analyze the financials.  It takes the best case, actual case, and worst case scenarios with the cash flows.  You can input rent amounts and various operating expenses. 

The NOI and Cash flow is calculated using capital expenses less interest, taxes, and capital interest are all taken into account at various stages for each. These are ported into a proforma bar graph and cash flow graph illustrating the 10 year of cash flows. Last, the information is ported into a statistical analysis tab which takes the net present value of future cash flows of all 10 years of each scenario then runs a statistical analysis taking into account the probability of occurrence and expected results. The expected results varies depending on the information provided and shifts to the left or right of the current scenario. If its to the right of the present scenario statically there is a greater probability of consistent cash flows at or above what your currently seeing. To the left of the current scenario you should expect a probable cash flow that will be at or less than what you are currently seeing.

It also calculates the 2% rule, rent required to meet the 2% rule, effective debt rate, purchased equity, WACC, cash on cash return, and market valuation based on CAP rate compared to market CAP rate, and equity gained for each scenario. I use this to weed out the units I want then investigate further. I run the crime reports from LVMPD at various 30, 60, 90 days, an 1 year. I look at the historical crime reports that show the 10 year average crime rate trends. I do a little satellite research as well using my old AF skills. I to a sociological report of the area... notably counting toys. Kids are notoriously protective of things like bikes and balls. So I count the bikes and balls per block. If there are high numbers of these in the area kids feel they will not be take and be a fairly safe.

I also type the cars in the area with street views giving a random sampling.  The make and condition of the cars can show allot how the tenants will take care of stuff.  Also, you can look at the surrounding properties to see if there is trash piled up, bars on windows and doors, and graffiti on the buildings in the area.  I research the hell out of a property before I make an offer.  There are 9 or 10 properties I look at with the cash flow analysis for every 1 I want to look at further.  Of those that cash flow, I look at 7 or 8 before I dig into the counting and boots on the ground analysis.   

So I really only put offers on 1% of what I'm interested in.  The offer is based on a factor of the previous sale price, previous market growth, appraised market value, and equity added to the property.  I set a limit and will not go past that even by a dollar.  Over valuating the property will only hurt you as an investor in the long run.  I've lost out on deals where only $750 would come out of pocket because down the road the increase in amount financed would put me into an unacceptable level of risk.  I draw a line and stick with it.  Sure there is the what if regret but I buy with analysis, numbers and my head; not so much my heart.

3-  This guy is his own neighbor, at least in this part of the block.  All 5 units are right there next to each other. 

4-  The rent potential is a goal not a reason. I always try to see if there is an added benefit to purchasing the property but first and foremost the numbers need to make sense.  There has to be cash flow in all scenarios. But if you have a property it doesn't make sense to not want to capitalize on your properties potential.

5- The property is located next to a private golf course that is pretty well maintained. Not the path of progress but I'm looking at holding the property.

6-The property is located on a tree street.  I absolutely avoid states, cities, most presidents, most definitely MLK's. 

8. The guy is liquidating his properties because he is starting ventures elsewhere and needs the cash.

8.  All of the steels in the area are pretty rough, not rent ready, no tenants, and in horrible area's. You have to dump buckets of money into them to get them to the bottom end of the market. I want something with current cash flows that I can renovate as each tenant moves out then offer it to existing tenant to keep advertising costs lower at a slightly higher rate with a multi year lease

 Some are pessimists, some are optimists, I'm a realist.  I try and do everything I can to keep my head in the game and my heart for my family.  If any of the numbers make me say, "Well I think I can make that happen with some luck";  I do not even consider that property.  There is a risk there I am trying to convince myself to take and in business that may not be in the best interest of the business.

There are several deals I have under speculation and one that I have an offer currently on the table.  2 story 4plex, all 2/2's; in a working class neighborhood here in Las Vegas.   Each unit is running $470 currently which is below market by $100.  The unit is in a lower crime rate area comparable to the similar neighborhoods in the area.  They are fully leased with 50% being long term tenants and 1 recent tenant on a multi year lease. 

The economic vacancy is 1% and the NOI runs at $18,000. After debt servicing and taxes it cash flows $10,200 a year. The cash on cash runs 25.2%. The unit has new AC, water heaters, smoke alarms, security lighting, and fire extinguishers to code. Technically there is no rehab needed but I will be remodeling each unit as they come available to capitalize on higher market rents. I can keep remodeling costs down because I work with general contractors and I can get good deal on labor and supplies. That and my sister in-law is works in interior designer firm a firm in Los Angeles and wants to help to build her portfolio in the middle class area.

The owner has 5 properties for sale (20 units total) in the same area and all have the same returns and currently offers them in a package but I can only afford the one at the moment.  The lender I have has good rates but will only finance 75% loan value. 

Soooo if some one can float me $140,000 I can close the commercial deal on all 5 properties.  I'm more than open to that.  ;)

Hello all,

My name is Michael Holland and I wondered across the Biggerpockets pod cast on YouTube and decided to join the forum.    I am 33 years old  and a 14 year Air Force veteran.    I was recently separated because of some torn muscles in my shoulder so time to start the civilian life.   I work full time as a DoD contracted security manager and going to school full time getting my MBA. 

I decided to start a business a few years back purchasing small multifamily properties rehabbing them and holding the property and providing a variety of services to improve the quality of product I offer to my customers.   With being in the military for many years I was a long term apartment tenant and saw how the majority of investment and multifamily property tenants have been treated; as a source of income.     I plan on changing that one property at a time.  It has only been recently that I started moving forward on the business plans seeing I will not be collecting a retirement at 38 as planned previously.  I'm in the middle of trying to close my first multifamily deal in the Las Vegas area so wish me luck.

I am new to the multifamily property business personally but it's been in my family for decades.  My father has been doing buy and holds in Dallas, Texas since 1956 and my father-in-law does build and sale property in Peru.  So I have several touch stones to go to for advice at both ends but I am never afraid to reach out and ask questions when I don't know something.  My ear is always open for unsolicited advice as well and I'm looking forward to digging into the site and getting as much information as possible to improve my understanding and positioning in this market.