All Forum Posts by: Account Closed

Jason, I have not use that service nor any national service like it.

We use contingency fee attorneys for collections. They are able to tack on their "fee" and collect the full amount from the debtor.

Tell us a little about what you are trying to collect and maybe we will have some specific ideas to give you.

Originally posted by Jon Klaus:

Thanks Jon, that helps clarify. Another variable that has probably been dealt with is the average age of the portfolio. Expenses will run higher on a portfolio with an average age of 60 years vs. 5-10 years. Anyone mind addressing that linking to where it's discussed?

Thanks

The numbers don't really show that.

If you stay on top of the preventative and corrective maintenance your expense structure won't change much. Obviously, a 60 year old property what was neglected for 10 years is going to be in worse apparent shape than a 10 year old even minimally maintained property.

However, you should be setting aside reserves for major rehabs. Eventually, you will rehab the kitchen and bathrooms or you will find it harder to rent and your rents will be lower.

Matt, my suggestion is different than what you have already read here.

First, ignore anyone saying you do not need to complete your education. That should be your focus.

Second, you said you have some money saved up. I would suggest you not start buying real estate until you have finished your education. I would suggest you take the cash you have saved and look into some well performing ETFs with good option spreads. These are things you can do with as little as a couple of hours a month if you want and easily earn 3% a month on the money. If you put more time into like, like a couple of hours a week, you can get it up above 5% a month. By the time you are finished with grad school, you can take half of the funds (or more if you wanted) and leverage your way into some really great real estate deals.

Third, don't look to just one asset class to give you security. I recommend you find a copy of Buckets of Money and read it. Once you finished with school, start putting that strategy into place.

Fourth, actually work in your chosen career for at least a few years. You may find you actually like it since you know you will not have to depend on it forever. You can still invest in real estate at the same time but experience will give you an additional fall-back option to make money should times require it.

Originally posted by Jon Holdman:

This rule of thumb isn't intended to identify exact expenses every year. Regardless of the tax treatment, you either paid that $26K out of pocket, or you got a loan to cover it. If you did your evaluation of the building assuming you would never have to replace that HVAC, you would be hurting if you had to suddenly cough up $26K.

EXACTLY!

This is a conversation I have, especially with desperate agents and brokers, at least once a week.

If you own 20 houses for 20 years, you're going to have to pay for a bunch of roofs and HVACs. You better account for them in evaluating those properties. The 50% rule is just a simple way to try to account for some of those "lumpy" expenses.

Nobody can predict when you're going to have a nasty eviction with months of lost rent and a bunch of damage. But there's a real chance that will happen. If you have 20 properties for 20 years, you're pretty much guaranteed to have one, and probably one every few years.

Anything you can identify as a problem and capture should be included in your accounting.

And, yes, the 50% rule is irrelevant for doing your taxes.

Well said.

Originally posted by Jon Klaus:

OK, but typically I'll amortize and depreciate those CapEx's. I put a new HVAC into a property this summer. $26K. I am not going to expense that for me, my banker, or Uncle Sam. I'm going to depreciate it.

That brand new HVAC system has a useful life. For discussion purposes, let's assume 10 years. You know the replacement cost now is $26K, you can project the cost to replace 10 years from now. You can base the reserves you need to accumulate on that number and include those in your analysis numbers now.

Not really doing the math, but suppose your projection was it will take $35K to replace the system 10 years from now. You can either simply divide by 10 and figure your reserve amount for the system is $3500 a year. Alternatively, you could simply use the depreciation schedule but adjust it for projected inflation.

The thing is, somehow, some way you must be accounting for what you are going to have to spend in the future if your intent is to hold for the long term. If you have enough properties, your pooling of these reserves performs much like an insurance pool. Something may happen and you may have to replace something earlier than anticipated but over the long haul, by setting aside the amounts you project, you build up enough reserves to keep your business running smoothly when major repairs/replacements are needed.

I hate to beat on this dead horse, but that is why the business model is so important.

Originally posted by MikeOH:

Originally posted by Taz:

First, a description of what is included in the operating expense numbers for analysis and what is not.

Taz, if you're doing this for the purpose of comparing it to the 50% rule, it is important that you include the vacancy expense and the capital expenses. That will require a little extra effort, because vacancy usually isn't calculated as an "expense".

I'm looking forward to seeing the data!

Mike

Mike, we track vacancies as an expense item. On the capital expenses, for the purpose of analysis we track reserves accumulated for capital expenses. The report will go into detail but as an example, suppose we are buying an apartment building today and the inspection indicates the remaining life in the roof is 10 years. We will estimate the cost to repair the roof in today's dollars and project forward based on anticipated inflation the dollars needed 10 years from now to replace the roof. When the roof gets replaced, we use the reserves to replace it. If there weren't enough dollars, we go back and adjust the reserve projections to improve the correction factor of our model. The same is true if we set aside too much.

This makes our analysis model a closed-loop self adjusting model. As a result, the accuracy improves over time. With almost a quarter century of data, it is pretty close. However, it will be interesting to see how well it adjusts over the next few years, just as it was to watch it adjust in the late 1980's. But, back then, I only had 5 years of data.

This is why it is critical he explain his business model because an analysis model had better damn well be built to support a business model. Otherwise, it will never be even close to accurate.

If someone were to use my analysis model to buy property as an appreciation speculator, I guarantee they will lose money over a long enough period of time. They may see some success with it for a while, maybe even a few years. But, over the longer haul, it won't maximize your appreciation except by sheer dumb luck.

On the other hand, it will maximize your cash flow, which does directly affect the net present value of the investment at any given moment.

A major change we are making to the model this year is to provide continual updating numbers. That means if we are three years into our 10 year roof example we can see based on recent history how likely our current reserve projections are and adjust them.

I think you can begin to see that while we use the 50% thumb nail rule as a quick gating number, we do not buy based on it. The devil is always in the details.

Originally posted by Tim Wieneke:

Where I can legally carry, I'm always carrying a gun (at least 1, usually 2). My business doesn't bring me near a gun; my principles do.

When the Constitution was written and the Bill of Rights adopted it was EXPECTED that every male citizen over the age of 16 years would have ready access to guns and know how to use them.

There has never been a situation where a criminal, illegally armed, was stopped by having fewer guns at the scene.

I encourage everyone to read John Lott's More Guns; Less Crime

Like Tim W, MikeOH and others, it is very rare I am not well armed and I don't directly manage any of our properties.

Originally posted by nationwidepi:

Thanks to all who contributed to the cause of the thread which was 0.
It appears that there are certain individuals who are not interested in the posted experiment. Fine. I won't waste any more of my time as it appears that many seem to be threatened by the possibility of being wrong.

You are right. I absolutely should not have stepped in and took a whiz on your thread.

It is always slow between Christmas and New Years and I have an intern who works on our research team who could use some extra money. I am going to send her an email to see if she is interested in compiling this data from the data we have. I will provide summary results here with a link to the detailed report.

Here is what I propose.

First, a description of what is included in the operating expense numbers for analysis and what is not.

Then, I will get them to summarize it by rent amount for inclusion here. The following buckets will be used.
< $700
$701 - $1000
$101 - $1500
> $1500

The detailed report may have more granularity in the rent amounts.

The detailed report will also report based on state, major metropolitan area and age of property. It may even include some other break outs depending upon how easy it is to get corollary data for things like income in the area, educations levels, etc. All of that is available but I am going to limit her to 40 research hours so that may or may not come together in that time frame.

It is what it is. Understand though, our business model values cash flow higher than anticipated appreciation.

Now, here is what I ask of you, nationwidepi. First, at least provide the same data in summary form for your holdings. Second, either point me to the thread where you have explained your business model or explain it here. What is the driving factor in how you expect to make money? What things are you willing to trade off to obtain your primary metric?

For example, my partners and I value cash flow OVER expected appreciation. We will readily accept little or no appreciation if the cash flow or the potential to build higher cash flows exist in the deal. This means when we buy, it is at a steep discount.

The title you chose says otherwise.

Originally posted by MikeOH:

As we have seen here MANY times before, having people combine all their expenses is pointless, because most people don't even know what the expenses are. If you really want to do this, people need to list all the individual expenses, so we can see what they are ommitting or considering "off budget".

At any rate, if anyone is going to post, please post all the individual expenses so that we can ensure everything is included.

Mike

Mike, I absolutely agree with you on this. Wow, wait a minute, is THAT a sign of the end times? We actually agree on something?

Actually, I agree with Mike more than it appears.

In a bigger sense this is a waste of time because no matter what data is posted here it is not verified and cannot be reliably verified.

So, if it all tracks to approximately the 50% mark, so what? If it doesn't, so what?

I continually have discussions about what is and is not included in the "expense" numbers. People don't understand it because they don't understand business. They don't get why property taxes and insurance are part of the expense numbers but principal and interest aren't even though interest is a deductible expense for taxes.

The thing is I have seen enough data from enough sources to feel secure in using the 50% as a RULE OF THUMB.

You are correct when you say with higher rents the numbers adjust somewhat but not enough to be significant when looking at the bigger picture.

Obviously, any investor is free to use any number they are comfortable using. But, for me and many like me, 50% is the MINIMUM number I will use to analyze the deal.

Did his dealing not show up on the background check or has he recently started dealing?

As to how you found out.. don't the neighbors around your rentals have your contact information? If the police raid the house, wouldn't you expect a neighbor to call you about it?