All Forum Posts by: Jeffrey Gordon

2% - 50% rule Question

Hi folks, I have heard this rule this week for the first time (THANKS) and have been reading all the forum posts I can find about how it is used to screen etc. Will bevery helpful in convincing my son what the true operating expense range actually is for rental properties.

I am modifying some excel models I also picked up here this week and converting to my own version of decision making tools.

I am not clear on when you back into the "value" by taking 50% of Scheduled Rental Income as Net Operating Income do you assume you are going 100% loan proceeds with no equity? Or are you using some other model to get to the value.

illustration:

Duplex

Scheduled mo.Rental Inc $2,000

Less Vacancy 5% 100

Less: Other Op. Exp. 900

Net Income 1,000

Less: Profit per door/mo 200

Available for P&I 800

Rate 6% 30 yr Term

"backed in loan amount" $133,433

If you were putting some cash in the deal you would add it to the $133,433 to get to the purchase price, or you would only offer
them the amount the loan is?

thanks

jeffrey

Mike,

wow, i can only imagine the super shorty leaves most folks speechless when it is flashed.

jeffrey

I moved the 2nd floor of a 1700 sf daylight duplex in Seattle in 1997 about 10 blocks. I had it for a dollar (on a handshake with the apt. developer till i got the Building permit) up to 5 days before the move after developer had scavenged out the daylight areas etc. when he told me he really needed 5k (lesson learned)!

Moving company was $17,500 and they were pros. Public works was about $1,500 for someone to drive the route the week before we moved it. The Cable and Telephone work was about $4k. Along with architectural, engineering, permits etc. I was in the 1,700 sf for about 50k in seattle. Not a bad deal, but your costs would be the same for 600 sf probably.

rule #1 move the biggest and nicest house you can fit down the road--preferrably 1 story.

We made good money on that property, build a 1,700 sf ground floor with another unit and full 3 car shop garage I ran my renovation business out of till 2006. We did a light remodel on the upstairs in addition to updating furnace/water heaters etc. Sold it all for $430k in may 2006 near top of seattle market. Always pissed me off that per sf we got terrible price compared to single family homes.

Watching that sucker go down hills and around corners was amazing at 3am sat. morning. House was 34' wide x 50' long and lot was 50' wide x 104' long. Seeing them swing it off a narrow city street into the lot was pretty amazing---met all the neighbors in their bath robes that morning.

We jacked it up 12 feet in the air on cribbing, poured some footings and chained that sucker down for 5 months as we were in the middle of another rehab--pretty amazing to get used to walking under that house after being terrified the first week!

best fun was watching folks heading down the street past what had been an empty lot for 20 years and see them catch a glance of the 2nd floor and hit the brakes wondering what the heck was going on :)

Best thing about a project like that is I can not imagine ever being overwhelmed by any renovation or new construction project again--okay maybe putting a house on a barge and hauling across Puget Sound or something to a waterfront lot--that is another story.

problem with most houses to be moved is developer seems to decide at last moment to try and reduce demo costs by "selling" it to someone to move. Trying to put together the building with permit and a site to put it on in short order is not easy, especially in developed areas. Pro movers usually have a "temp" storage yard they can relocate them to, Seattle wanted a "demo" bond in case we didnt follow through with everything--i.e. they held $5000 till COO so they could haul it off if I didnt finish it.

Movers Rule #2 Meet the demolition contractors as they always would prefer to move a building and save on the demolition costs and keep an eye out for major projects--highways, airports etc. that involve getting rid of lots of existing houses.




jeffrey

Hi Will,

thanks for such a thorough overview. I have been discussing using an IRA with my son. He had looked into it for traditional real estate buy and hold investing--he has mid six figures in an IRA he inherited--This should be enough for him to go discuss the concept further with a good RE tax Attorney/CPA friend.

can you run through a scenario with either rehabbing or buy and hold using a self directed IRA?

I assume that there are a lot of folks who may have a self directed IRA with signfiicant funds that might be good lenders for our projects where they good earn a great secured rate of return etc.

I assume the pooling of several IRA funds would lead to some type of security registration requirement, so hopefully there would be folks with large IRA's as they convert out of their 401k's etc----ie. $1-5 Millon etc. that might see the benefit of putting 10-20% of their money to work in property mortgages on good lower LTV, cash flowing properties.

any real life examples discussing costs of borrowing, terms etc. would be great.

thanks

Jeffrey

Only BOA would want to restrict the demand for the crap they lost their bu_ts on by adding a clause they probably have no ability to enforce from a personnel standpoint--they are all a bunch of losers, time to wake up and smell the coffee and be thankful investors are willing to wade in and suffer through their god awful customer service to prevail and actually close on a property!

guess that is how they got in the jam in the first place--no clue--guys at the top have become disgustingly rich and the staff couldnt find their faces with two hands.

jeffrey

I have a close friend who works in the FHLB system as a recourse UW we were talking today about how many loans she sees with Chase/WA mu that are over 400 days delinquent but not foreclosed on. California Foreclosure report this month reports the same idea--should be way more foreclosures and REO properties, but FDIC, which is broke, is letting lenders and banks slide on marking to market as that would immediately wipe out all the lender/bank equity. Kinda of like Japan in the lost decade US is providing liquidity to the idiots who leveraged 30 to 1 and lost the bet. This is going to be dragged out and covered up with printing press, paper and ink.

Putting a floor under the residential housing market should be the very top priority of politicians, everything else hinges on equity in our homes, we can lose the commercial market to some extent, but firming up the residential market should be job one.

will they extend, my guess is yes, but I would not bet on it. if they dont, look for the slow down in the entry level in the next quarter.

if i was king for a day, i would do two things.

1. Any foreigner who buys a $500,000 and above home gets immediate green card status when they close, subject to background check

2. New tax credit for 2010 is $15,000 for anyone and available at closing.

this would feed the "move up market" and stablize those prices. It would also bring a lot of wealthy new citizen to this country who can buy there own health insurance and create wealth and jobs.

It will be a lot less expensive to bail out FDIC, Fannie, Freddie, VA, FHA by using tax credits to support the housing market than taking over lenders and MBS etc.