All Forum Posts by: Craig Kleffman

 Hey Paul - 

Thanks for the note.  Minor pre-amble:  I'm just politely arguing, making a point - not pounding on the table here.  No disrespected is intended whatsoever.  

The above doesn't make sense to me for at least one basic reason.  This is a triplex.  It is priced at around $350/sf, if memory serves.  That same investor could buy a five unit for roughly (something like) $200/sf.  In other words, once one goes to commercial real estate (five and six units and above) and leaves behind residential (1-4 units) there's a natural cliff.  NOw, the 1-4 unit cliff, is subsidized by residential purchasers like myself who can compete with the professionals by way of a 3.5% downpayment and the highly leveraged world of fha loans - which means more demand can--and apparently does-- drive the price up.  But why would the professional looking to add more doors want to mess with 3-4 unit properties - aren't they well served in this hot market to stick to those 5+ unit properties?  

Happy to hear the thoughts.  AGain - just my view - I may be 125% wrong - and I'd be delighted for someone to show my why that is so.  Honest.  

cek.

So let me understand this (and I mean this 100% respectfully, but admittedly with a dash of sarcasm):  The rich folks like to invest in a deal that loses $50k or so a year, because that's good for taxes?  And as far as 30-40% down with "nice cash flow" that ignores what the value of the 30-40% down (e.g., $50-70,000).  They're putting in $50 the first year, with the best case scenario they'll lose it based on cash flow.  

Now, the other side (mentioned above) I totally get.  Sure, whatever they lose in cash flow they'll get back in strong appreciation as has occurred for the last 50 years in so-cal.  So that they'll lose $50k in cash, but gain $50k in appreciation (or more).  And as that continues, so the argument goes, one should endure great losses now, for the promise of appreciation tomorrow.  OK - that I "get" (to some degree).  There's always a reason . . . not always a great reason -- but people are mostly very rational.  

-craig.  

I agree it seems crazy high (just my luck of course).  

But, it dawns on me --there's a much bigger question:  Who *IS* buying these properties, what is THEIR analysis, and WHY are they doing it?  Are they buying cash?  Are they borrowing?  Are purchases doing all cash deals?  Why buy a fourplex, when just slotting yourself into 5+ units drops the cost per square foot by at least $100?  If people are buying to live in it (like us) - are they just financially dumb?  

I mean, not that anyone asked - but I can show you a pile of properties that are admittedly cheaper than this - but nonetheless $1.0MM to $1.25 MM or so, that will present a similar sort of lack of cash flow, lose money for multiple years scenarios. . . 

Love to hear the answer to THAT!  :-).  

cek.

I thought I'd share this report I just generated.  

The report is here, incidentally:

https://drive.google.com/open?id=0B5YbSRYrt3Q8WXN1...

We're looking at, among other things, opportunities in Orange County for triplex and fourplex properties that we can attain using fha financing.  We qualify for the max - and I'm happy to leverage our way into a multifamily.  Uniquely, however, we need a true owners unit give the four person family I head (me, wife, and two young kids).  

So, we found this place for $1.75 million.*  It's a nice looking place - but how the hell do you make the numbers work?  Turns out you don't.  The itemized expenses are $12,000 a month against $8,000 of gross rents.  So, expect a loss of at minimum $4k a month.  

This is a triplex, with the main house assigned a rent of $3,400 a month.  So that, we would need to expect to fund a housing cost to our family of $7,400 per month (3400 in "rent" to ourselves and another $4,000 in loss a month).  

Then, I thought through - what about creative financing? What if we did an interest only balloon payment. Even then at a 5% interest only with a 10 year balloon, we'd have an annual finance cost of $87,500, or about $7,291.67 per month. With a traditional FHI mortgage the finance cost is PI of $8,057.74 plus another $850 for PMI; so nearly $9,000; the savings is about $1,800 a month, but that leaves a $2,200 a month loss - which is $26,400 in annual loss.

Now what is not on the analysis, however, is our tax issues.  We would take the loss which would reduce our taxable income.  We would gain access to a write-off of the property over its 27.5 year expected life.  So, the annual depreciation on a $1.75 million purchase would be $1.75mm/27.5 years = $63,634.54 as a reduction from our income on the property.  So that, instead of us being taxed on $190,000 of joint income, we would be taxed on ~$127k of income instead.  In other words, about 1/3rd of the depreciation ($63,634.54 /3 = ~$21k) in taxes we don't send to washington or sacramento.  But, even with an arguable (someone correct me if I've got it wrong please), tax benefit of $21k, we still end up about $49,000 LESS the $21k tax benefit still amounts to a $28k loss.  i suppose that's the speculative payment for hoping that soCal real estate appreciates at the rates it has done since the early 1960s.  I suspect one would not even break even on this property - even when including the tax benefit - for another 4-7 years.  

-Craig.

____

* Yes, I'm aware FHA loans don't reach to $1.75 million - this is what generated me reviewing this deal to see how one could expect to do. I didn't want to get into the complex math of a seller carrying paper. Turns out, though, once I ran through the numbers - neither fHA nor private seemed to come close making a workable deal. The max fha loan for a fourplex in Oc is around $1.25 million for a fourplex.

Hi, 

I've been providing an ongoing log of my first direct mail campaign (here:  https://www.biggerpockets.com/forums/517/topics/34...).  

At the outset, I thought the weakest piece of this process would be fielding inquiries that arrive from postcards and yellow letters.  And, that seems to be true so far.  Oddly, the first mailing of 1,000 postcards produced absolutely zero responses.  The yellow letters, on the other hand, have produced 11 responses in six days.  But, as many predicted the responses seem to be "low quality."  Here's a breakdown:  

* 4/11 were agents who picked up a listing in the last 30 days; they were delighted to hear I wanted to buy their listing but confused as to why I wrote them a hand written letter.  On the one hand, I'm not sure how much value this lead has.  On the one hand, the owner is actually interested in selling the property -- which is good.  But, on the other hand, the property sits with a real estate agent/broker and is on the retail market.  Given the retail structure of the proposed offers/deals - seems like it would be unlikely to get a wholesale deal.  (But I have heard some folks buying directs from sellers via agents with great knowledge of the costs of repairs and otherwise.  I suppose anything is possible).   

* 4/11.  This group has demanded that I not write them again.  One demanded that I "stay out of his perimeter" which is really weird.  I don't see converting him from prospect to business deal, no matter how good anyone is.  

* 3/11.  I've had 2-3 that our angry, stand-offish, but want information from me.  One had a 21,000 square foot lot, with a 900 square foot 2 bedroom 1 bath house in the middle of the san fernando valley in LA.  She said the value was in the lot, not the house--but the inexplicably said the house was fixed up 10 years ago and needs no work.  She was a landlord, but refused to provide the rental income (saying, instead they "shared the water bill" and on follow up "what about the rent, how much is it" she simply refused to answer and demanded to know "how much you pay for the place.").  Earlier she'd said she rented the house to an old friend.  So, I asked, "how about I come by tonight and take a look at it so I can make you an offer."  And she said she couldn't get me inside because she had a tenant (and - of course - that's weird, as her tenant was supposedly her good friend). 

Given that experience, I take the view that she's unmotivated and I more or less have written her off.  Have I missed an opportunity?  Those with experience talking to kooky sellers, what would you do with her?  Would you call her back?  Say what to her?  

(I have two more examples I can give you too, along the same lines. . . Perhaps they are tired landlords, perhaps they just want a free appraisal).  

* * * 

In sum, I often tend to think about things along their natural continuums. No question, if I mailed 10 million pieces (10 mailings to 1 million people), I'd get about a 1% response rate or about 100,000 responses. Of those 100,000 responses, I'd bet about 80,000 would be worthless; perhaps 20,000 would have some value. Surely, at least one of those would be supremely motivated--so, no doubt they exist, but the critical question is whether one can get to them in an ecomically feasible manner (this mailing, for instance, would cost about $4 or $5 million; so if I were flipping a SFR in greater LA, I would lose millions on that deal, despite my conversion).

This is the opposite, of course, of the more typical problem:  A new wholesaler sends 100 letters and is shocked at a 0% response rate and declares direct mail doesn't work.  (It didn't work for him in a one mailer campaign, directed at a mere 100 homes).  So, somewhere inbetween there has to be a sweet spot. 

* * * 

So, with all of that in mind, any tips on how one smartly handles the phone?  I can maybe take a few calls at lunch, but that's pretty hard.  I suppose I could outsource our calls - but there are so few calls relatively, it doesn't make financial sense.  Finally, I do feel like it's good for me to work the phones and take a few hundred calls - that would probably provide me with a better sense of what the calls look/feel like when I ultimately outsource that part of the business.  

Love to hear your comments, criticisms, or questions.  

--Craig.

Not so much info, as his contact info/identity.  

cek.  

I was recently told I should look up Shawn Watkins' (phoenetic) posts about wholesaling.  But, apparently I don't have his name spelled right.  I've tried a variety of different spellings but I'm not finding it.  Anyone able to point me to his account?  

Thanks!  

--Craig.

@Riley F. so where are you some eight months after the last post to this thread?