All Forum Posts by: Vince Rosario

I understand @Will Barnard . Just to be clear, I'm always on the side of conservatism. I didn't articulate that properly, I meant to say that the expense to income ratio profile for a property will be exactly the same for every property. When I mentioned expense line items, I'm referring to the ones that aren't always clear: vacancy, repairs, maintenance, legal. Quality of management will tend to change this expense to income ratio, along with the condition of the building and planned holding period for a particular strategy.

I was under the impression that the 50% rule is used primarily for valuations and developing an offer price on income producing property. If that is the case, wouldn't holding period, quality of management and the current condition of the property distort valuations if the 50% rule was strictly followed? That would say the ratio of expense to income must hold at .50. And because expenses are 50% of income, one could find themselves discounting the price of a property for no legitimate reason, leaving room for another investor to snatch up the deal. That was a bad statement. I made earlier..good catch.

I agree Jon Holdman but isn't that what due diligence is for? I expect you will have to find what the expenses are anyway. Even if the seller intentionally hides expense line items, couldn't you consult with an experienced property manager to do a walk through with you to uncover likely expenses? Maybe we're making the same point: if you are very inexperienced it's safe to go by 50%. If you're are a relatively cautious person who does homework, I argue that you will find all of the expenses that are considered material. If you're not sure, create new expenses as long as it's justifiable and realistic because you will have to sell this to the person selling the property. I just don't want to immediately discount the price of a property by overstating expenses when you can just take a little more time to get closer to actuals. This is what beginners should do anyway or just get out because this is not your business. The real value is in a property's future potential and if your valuation is found reasonable to the seller. I'm only talking about multi-units by the way. Multi-unit pricing is heavily dependent on NOI. Any other thoughts?

Awesome...thanks for the input guys. I really appreciate it.

Matthew Mucker , I just want to remind you that this 50% rule, is again, just a crude tool used in financial analysis. If there was some kind of paper by some respectable company that compiles data from many income producing properties to estimate long-run expenses that you could use in negotiations, it still wouldn't work in your favor. Financial analysis in general are all estimates, assumptions, educated guesses since no one can predict the future. You see evidence of this all of the time. The most respected economists and financial engineers are often wrong in their forecasts. Why?? There are two reasons really: their assumptions were too rosy or too grim or their mathematical formulas didn't take into account the context of a particular situation or economic reality. We could cite sources or create fancy formulas all day if we want to sophisticated. To use the 50% rule in negotiations is to make the unreasonable assumption that the probabilities of incurring each expense line item is EXACTLY the same for each and every property ANYWHERE. Every situation is unique. Something as simple as the weather in your area will determine how you plan for roof repair etc.. as well as the insurance you buy. I could make this easy for you and everyone else. You can ignore the 50% rule as long as you know all of the expenses for a property and make REASONABLE assumptions for future vacancy and maintenance/repairs. The only thing you can use to arm yourself in negotiations is to make reasonable assumptions. If you find yourself trying hard to make a deal a "good deal" you're assumptions about the financial future for a given property are probably way off.

Good pick up David Beard . I don't know much at all when it comes to transactional costs and I didn't consider the commission that gets paid to the seller's agent. I'm going to take another look at this.

Also as a side note, I can complete my due diligence and close in 2 weeks. I'm sure this is a benefit to him as well. Thanks Joe Gore I do have my financing lined up and ready go. I'm just hoping my offer makes sense, especially to the seller.

Also as a side note, I can complete my due diligence and close in 2 weeks. I'm sure this is a benefit to him as well.

Background Information: So this guy is selling his duplex (he lives in one side) on the MLS that is obviously overpriced. I understand that he wants to get the most for this property, but according to comps and my cash flow analysis, it's just not worth what he's asking. The listing agent said he really needs to sell this duplex fast because he just bought four-plex, and for whatever reason, he doesn't have the time or resources to manage both at the same time. Here's more info on the situation: Property Purchased: 10/17/2012 Purchase Price: $268,000 (sold for 10/17/12) Loan Amount: $263,145 Down Payment: $4,855 (equity) List Price: $340,000 (selling price) My Offer: Offer Price: $283,000, this includes: - $268,000 his purchase price plus - $6,000 closing costs, plus - $9,000 to seller Short term capital gains tax (assuming 25% marginal tax rate): -$3,750 Cash to seller: $5,250 Return on cash (for approximately 1yr, 2mo): 108% There is no known upgrades to the property while under his ownership for about 14 months. Here's how I see it - owning this duplex for a little over a year is essentially the same as loaning $4,855 to someone, getting that money back in a little over a year, plus $5,250. I'm also assuming that his tenant didn't cause him too much headaches over this time. The property's value hasn't budged much due to ongoing foreclosures as part of the problem. There's also no comps in the area that comes even close to $300,000 ($340K he's asking). Cash flow will also be severely negative at the $300K+ range. From my understanding, he has two options: (1) continue to keep the property listed hoping someone will overpay for it, while losing money (other unit is currently vacant because he's currently moving into his four-plex) or (2) get the property out of his hands so he can focus his time and resources to his new four-plex, give him a good return on his invested cash, and giving him a quick close. Am I missing anything here? Am I off on my calculations anywhere? Is this even a good deal for him?? It appears that time is of utmost importance to the both of us. According to the seller's agent, he wants out quick while I want to lock in an interest rate quickly before it rises again. Any input will be greatly appreciated. Thanks in advance.

You might want to look into crowd-funding.

If you concern yourself with cap rates then what's most important is WHY you have the cape rate you do. Cap rates are simply ratios that compare operating efficiency (NOI) to comparable sales, stated as a rate. As long as you understand the economic environment in which you operate, then cap rates can be useful tool for quick screening. What this calculation doesn't tell you, which in my opinion is most important, is the opportunity or future potential a particular property has over others. Cap rates are also used for valuation, but let's face it, valuations are purely ASSUMPTIONS. You have to then ask yourself if your assumptions about the future are in-line with others. If not, an opportunity may exist. Mortgage rates are pretty much out of your control and are influenced by the supply/demand for MBS or other other long-term debt. It's also influenced by the federal reserves interest rate policy so you just have to go with whatever the market gives you or just work around it. Mortgage interest has nothing to do with operating efficiency anyway, it only impacts your cash and overall debt load. What's most important for income producing properties is operating efficiency. This is the value and potential your property has over others and you can expect a high price for it if you choose to sell. Anyway, back to your question. This idea of knowing your market is really a two tier approach, both on a macro and micro level. On the macro level, we look at government policies and if they are conducive to growth in real property ownership. We also look at the business cycle, which is driven by employment, fiscal policy (govt spending) and monetary policy (cost of capital, basically interest rates). On the micro level you can look at similar things within your state: employment, education, industry, wages, crime, population and development. Notice that by keeping up with market rents, which is essential to knowing your market, you are essentially gauging the growth/decline in trends for all of the points previously mentioned. In other words, employment, education, industry, wages, crime, population and development directly cause rise/decline in rental income. You can track rental income to ensure it's in-line with other properties so to avoid opportunity costs, but the bigger more important question is whether or not rental income will continue to rise. This question is at the heart of market analysis.