All Forum Posts by: Tom Mole

@Charles Wiegert, the numbers you find on Loopnet (and pretty much anywhere else) are crap until proven otherwise. If you think you're liking the numbers on Loopnet, contact the broker or the seller directly. Ask for the Rent Roll and the Trailing 12 Income & Expense report, then see what your NOI looks like. It'll likely still be crap, but of a less smelly variety.

Proforma numbers are generally pure pipe dream, so figure out the real numbers based on what they give you. Look closely for left out expenses and overstated income. Understating vacancy is one way that sellers use to do both at once. Never depend on the seller's vacancy numbers, instead figure out the market vacancy rate and round up.

Taxes are always understated. Very often the property will be reappraised right after the close of escrow and, really, which way do taxes always head? Estimate your taxes based on after sale price, not what the owner currently pays.

There are a bunch of these little nits to deal with. Think "trust, but verify" on everything.

You may want to ask my friend @Chris Tracy. He is in your part of the world and he could be a big help to you working through the nits.

Cheers!!

I like the way @Chris Tracy thinks. There is no particular reason that a small apartment should have greater returns than a larger one, all other things being equal. The smaller unit counts have slightly better returns because they are priced lower. Sure the returns may be lower on the the 200 unit, but that is an indication of how they are more desirable.

Several things factor into a higher price per unit on larger communities. For example, in most towns there are fewer larger complexes than smaller ones, so the competition is greater and the price follows.

One of the big problems with smaller unit counts is the way that vacancy weighs in. One extra vacancy in a 10 unit has 20x the impact on the bottom line as it would in a 200 unit. This can work both ways of course. Sellers like to brag that their small buildings are more profitable because they are 100% leased, which may even be true at the time they say it. 

However, when market vacancy for the area is 10%, they should have at least one unit in 10 vacant at any given time on average. Sometimes landlords slant the table in their favor by offering concessions to renters to get them in and keep them. These make the property appear more desirable but the expenses go straight to the bottom line. To compensate sellers very often don't mention these expenses in calculating the Net Operating Income (NOI), instead they offer proforma numbers that conveniently leave out such costs and thus make the income seem higher. Be very careful with proforma numbers. In fact be downright paranoid about anything that comes in the marketing packet.

Another factor to consider with larger unit counts is that they are rarely owned by Mom and Pop owner-operators. They are owned by sophisticated investors or syndication entities. These folks know their way around a spreadsheet. You may not be on a level playing field, but that doesn't mean you're out of the game.

Consider partnering with someone who has done a few deals. Make sure that you know what goes into evaluating commercial properties. It ain't the same as residential. Above all, if you you're not sure about something, ASK! As @Jeff Kehl pointed out, the leverage in larger complexes that can make you a lot of money, can work against you as well.

I would not focus too much on what might go wrong. That is loser thinking. I would instead consider what could go sideways, figure some options for mitigating that, then I would focus on what could go right! Done well you could be out of the Rat Race in one or two big deals.

Cheers!!

@Joe Trometer you are wise to ask first when you have such fundamental questions. This is certainly not something to just take a stab in the dark and hope for the best.

I could explain to you all about cap rate evaluations, but I get the feeling that this may not be your best direction. You may have an opportunity to create higher gains by selling your portfolio in pieces. Have you given any thought to selling each parcel independently?

You did not provide too many details about your financing, but I'm gonna assume that you may be facing a significant capital gain since you're thinking of doing a 1031. Is it possible that you might sell one or two parcels for enough to retire your debt for the entire portfolio leaving the remaining properties free and clear? This could alleviate the need to do a 1031 exchange altogether.

For most people a 1031 defers taxes, but it does not get them out of the landlording business. You still have to find an investment to exchange to and often that will be another buy and hold.

Another solution that may mitigate your tax burden AND get you out of the business of being a landlord may be to master lease-option your portfolio. The buyer would takeover the landlording and you and Lori would collect a regular cashflow taxed at a rate that you're accustomed to paying. I know you said that you did not want to seller finance, but I would at least look at the advantages before turning up my nose at the benefits.

If I were to master lease-option this portfolio, I would focus my buyer on the cash flow potential and calculate my price point to achieve it. If you take payments in this way, you can receive a regular income without the problems associated with tenants, termites and toilets.

You sound a bit like a "motivated seller". You may want to consider offering your portfolio in the BiggerPockets Marketplace where fellow BP'ers can legitimately make offers on your properties without violating any of the sites policies and procedures.

I hope this gives you some food for thought. Let me know if you have any questions about what I've suggested.

Cheers!!

Deconverting condos feeds renters' growing demand

I have a theory on what you're seeing in Lincoln Park. The article above suggests that rents are increasing faster than prices, which would lead to increasing cap rates. This is just one article and there's no doubt this it's not the whole story, but this just came out at the top of my search for news. It appears that you're seeing higher cap rates because the market is shifting that way.

When the cap rate on a project doesn't make sense, Google any news on the market cap rate. I used, "lincoln park chicago market cap rate". This article from the Chicago Tribune dated June 24, 2016 came up about link #3 on the first page. I wonder how much more could I have found if I'd just kept looking.

I really didn't put enough time our effort into this to call this done, but I hope I got you thinking in a new direction. You can and should do your own due diligence. Let me know if you come to a different conclusion. I'd love hear what you come up with.

Cheers!!

Hey @Joe Au,

Despite what @Frank Jiang says, not all debt is bad. In fact debt can be very good. Debt can mitigate risk. Debt allows you to get into more and larger deals. Debts can build your portfolio faster and safer than all cash.

First, debt allows you to use less of your own money. The less of your investment capital at risk the better. Next, debt provides a solid form of asset protection. When combined with asset isolation your exposure is generally limited to your equity in the property under attack. The greater your debt the lower your exposure. I know insurance can protect you too. You should have insurance, but policies have caps. You could be sued beyond the limits of your policy and then they go after your equity. You can protect that capital by placing it into more isolated assets, spreading your risk and increasing your ROI (return on investment.)

Debt is leverage. Leverage can be good, very good. The most successful investors use leverage. Debt supporting positive leverage is good debt. Debt support negative leverage is bad debt. Leverage can amplify your investing capital, which can increase your income and net worth at the same time.

It amazes me how often an all-cash investor will buy investment properties without any financing, but still buy their personal residence with an 80% bank loan. Go figure!

The bottom line. Yes, debt can be good or bad. As others, like @David Dachtera, previously pointed out, good debt supports assets that put money into your pockets. Bad debt takes money out of your pockets.

I hope this helps. 

Cheers!! 

Oh, I do love a challenge! 

@Justin Cabral, I trust this property is in FL, right? Florida is a judicial foreclosure state, so the process can take for-ev-er, but they do happen eventually and once they do things move quickly. A time frame of years is not atypical in that part of the world. So, let's stick a pin in that for now.

You mentioned trading texts with the wife. Have you talked to her face to face yet and gone over the options with her? If not, great, you could be working from a clean slate. If you have spoken with her, did you find out about HER situation as she sees it?

If you sat down to a cup of coffee and asked her what are her plans with the house, what would she say? Is she able to decide on the disposition of the house, or would her husband have to weigh in? Does she "just love" the house and doesn't really want to move, or does this place remind her of her failed marriage? Is she still in love (with her husband) and is hoping that he'll come back so they can put this mess behind them and live happily ever after? I mean, really, what does the world look like to her?

So, let's make some assumptions and climb inside her head for a minute. Most folks facing divorce are delusional to some degree. Most folks facing foreclosure are as well. Folks facing both divorce AND foreclosure would be positively psychotic if they did not show some signs of living in La-La Land. Therefore you will be working with an impaired seller. Your job, Mr Phelps, (should you choose to accept it) is to get her to open her eyes and face the music (which may be the theme song from Mission Impossible.)

Here's what I expect her price to be based on. She may know that her house is only worth what is owed on it, but she needs it to be worth $550k because after paying the mortgage, transaction expenses and sharing half with her ex, what's left is the money she needs to carry on. She may have heard that she can stay for years "rent free" in the house while the foreclosure process drags on, so she may not be in any particular hurry to sell.

You know, of course, this is just BS. You need to gently and respectfully disabuse her of this point of view. The no-BS assessment is that the market will pay what the market will pay with little regard for her "needs". Furthermore, in a judicial foreclosure a deficiency judgement can track and haunt her for years into the future. Ask her if she knows what a "zombie loan" is. (Make sure you look it up too.) The bank can come after her for all that back "free rent" and other expenses if they don't get enough at auction, which sounds probably in the case.

She may be hanging on because she's just not ready to let go of the "life she had in this house". Hanging onto the good ol' days has held more than one seller in the past until they lost their future. It's best to demonstrate the value of getting on with her life and just keeping the good memories. Remember, if this is the house she lived in with her ex, chances are pretty good the many of those memories are worth forgetting.

Now, you've done your job well. She's willing to sell to you. Her ex is on board as well. You're ready to sign contracts, but wait there's that nasty mortgage to face up to. The house is worth what's owed, so what does your seller actually need to get out of the deal? It's not always money. Maybe she would take one for the team, if only she could stick it to her estranged husband. Would she consider letting you take over payments? This way there's no taxable income. (There still may be profit based on her buying price, but her personal exclusion probably covers that.) With no proceeds she gets nothing, but even better HE gets nothing.

Maybe she just wants to retire the old mortgage, the husband, the memories and everything. She just needs enough to cover the mortgage and transaction costs. You don't need a broker in the deal, so you offer $440k all in and she accepts. Now what? You've just bought a property at comps. How do you make anything on this?

It kinda depends. The first thing that comes to mind is a Sale-Lease Option. What does the rental market look like? Are people dying to own in this area? Could you find someone with a good income, but crappy credit that wants to own instead of renting? If so, great! If not, well, this isn't likely a good short term capital gains project. What did you plan to do with this property, if you got it? You never actually said why YOU would want this property.

I hope this helps. Please let me know if you have any questions or want more ideas.

Cheers!!

@Eva Karnaukh, if I may be so bold, a big part of your problem is attitude. (No disprespect intended.) I mean you're looking for deals on the MLS where competition is highest, then expecting that the seller will see things from your point of view as an investor. It seems like you've reached that point that we all must cross where we realize this is harder than the gurus led us to believe.

So, you looked and looked, finally finding this gem. The realtor's listing blurb probably said something like "handyman special" or "investor wanted" along with "price reduced for quick sale" and "move quick, this one won't last". What you found is a Fixer-upper being marketed to the value-minded retail buyer. This is not what you want.

You'll want to pass on this "opportunity". OK, keep an eye on it, if you want, but pass on it right now. So, then, if not this one, then what? Be willing to stretch a little. The good deals are out there, sometimes even on the MLS. Often enough you'll have to be very creative to make the deal work.

The Great Deals are not on the MLS. Usually the seller of a great deal hasn't realized that he would even sell when you first meet him. Your job is not just find them and cash in. Your job is to educate. Educate your seller about the advantages to him in selling to you. Show him how he will save money or have great peace of mind or greater profits....whatever. Getting the seller to sell to your advantage is a sales job.

A great saleman once said "You can sell anything to anybody. Just find out what they want and get it for them." So, what does your seller want? Everyone wants more money, but that is not always the most important thing. Some want a problem to go away. Some want to sell quickly. Some just want to sell to someone who cares about them and seems nice. There's a million things to want. Money is just the universal medium and we've all been trained, buyer, seller and investor alike, that it is the ONLY thing. Great salesmen (and saleswomen) know that this just isn't always true.

You're doing fine. Go be a great salesperson! Find another deal. Look harder and deeper than the retail buyers and realtors go. Go find a motivated seller, buy his property, make a reasonable profit, then rinse and repeat.

Cheers!!

@Vincent Chen,

Allow me to expand on what @Chris Tracy said. Its sounds like you're concerned with keeping the deal affordable so that you can handle them alone. You indicated that you'd prefer to have all the control and all the profit. Of course you also get with that ALL the risk. Real estate investing is a team sport for a reason.

If you insist on having total ownwrship of your portfolio, then you will surely end up with a smaller portfolio than you might. The work will be greater and the rewards lower. You had better not make any mistakes since any losses are all yout own, paid for out of your personal assets.

While your cash flow may be higher, your ROI (Return On Investment) will surely be lower. Really, how many small apartment building can you buy with the money in your checking account? By leveraging your investment capital through debt and equity partners you can maximize your ROI and limit your exposure. You'd be able to purchase more larger projects with leverage than small deals without it.

While it it's true your personal cash flow would be reduced by sharing with partners your number of income streams should more than make up for that. Let's do a little example

You're considering two potential deals. #1 is a 20 units apartment and #2 it's a 120 unit building. They are both in the same area of town and are priced at $30k/door. Each unit rents for $950/month and expenses run $450/month in either project. You check your account balance and determine that you have enough cash to buy #1 outright, but #2 would require taking a loan. The debt service would cost $350/door, reducing your cash flow to $150/door.

Now, the heart wants what heart wants so you figure your cash flow for #1 first. 20 doors x $500/door per month gives you $10k/month cash flow. Being a great investor, however, you're compelled to consider the potential of #2, which requires you to use leverage. 120 doors x $150/door per month comes to $18k/month. Not bad right? It gets better.

Let's take a leap down the rabbit hole. Consider what happens when you offer your equity investors $100/door per month of your cash flow in exchange for all of the acquisition costs, so you pay nothing from your own pocket. Sure your cash flow gets pretty thin. It's down to $50/door per month, a meager $6k/month, but remember, you haven't spent a penny to make that money. Woohoo! How many deals like that could do before running out of investment capital?

It's really a matter of shedding the shackles of the limited thinking of our parents and teachers. We must think like investors, not employees. Employees think "how much" does this building cost. Investors think what is the "rate of return".

I hope this helps.

Cheers!!

I am not a tax guy AND I live in California, so do NOT consider this post as tax advice. That said, let share what my tax guy said.

An LLC is fine way to hold property that you intend to own for a short period of time, but you will see better tax benefits on long term, cash flow properties in an S-Corp. This is due to dollar for dollar write-offs available to a corporation that are not allowed to an LLC.

The intention of a Limited Liability Company is asset protection, not tax management. The same can be said about land trusts. Corporations are another matter. Depending on how you set them up, you could end up paying much more or much less tax. This is where you need a competent tax planner familiar with corporate taxation. 

So, talk to your tax guy. I don't mean the friendly people at your local H&R Block either.  I do mean a real corporate tax planner competent in both federal and Tennessee tax law. (Think "tax attorney".) Perhaps Amanda Han could refer you to someone local to you.

In this forum you cannot legally get the answer you're seeking, but hopefully you get an idea who to ask and what ask about. I hope this helps.

Cheers!!

@Riley Hinshaw, it sounds like you need more deals. You're not reaching the motivated seller through you own marketing at this point, but somehow others are. I would suggest you do two things concurrently.

First, go meet more wholesalers. Craiglist is fine, but you'll do even better to meet folks face to face. Check Meetup.com for RE investor meetups. Go to the meetups, find the wholesalers and tell them your story. A lot of wholesalers would jump at a good, reliable co-wholesaler that could consistently clear their pipeline.

Second, go talk to the wholesalers that you've been working with. Find out what they're doing that's working then go do that. If you could get more deals in the door on your own, you would not have to split the assignment fees.

It sounds like you may have found you niche. Go develop it and build your business.

Cheers!!