All Forum Posts by: David Begley

 Thanks for the mention Rick, I'd love to attend.

David 

Let's not get mired in the details here!  The bottom line is why in the world should a Wholesaler be guaranteed a non-refundable deposit/fee if the deal falls through - even when a result of that Wholesalers ineptness?  A Realtor typically puts in many times more expense and time than a typical Wholesaler and they certainly aren't guaranteed a commission if a deal falls through.  Why should unregulated Wholesalers? 

1. Require them to justify the ARV and repair estimates they present.

 2. Never, ever agree to a non-refundable deposit.  A normal Earnest Money Deposit requirement and language as found in all real estate contracts is sufficient.

 3. Find out if the property will be purchased at a double-closing, and if so, the party responsible for the closing costs of the original seller/wholesaler.  I personally would not agree to pay these costs, but if the deal is sweet enough.....  

4. Purchase title insurance. 

Did you pay the original owner an EMD PLUS a non-refundable "deposit" too? If not, why not if you are a genuine buyer and have the money to close on the deal? I would never do business with a Wholesaler requiring a non-refundable deposit. Why should the Wholesaler get paid when the original buyer backs out because the double-closing wasn't adequately disclosed? Why should the Wholesaler get paid when the end buyer shows up to find out that he is responsible for not only his closing costs, but also the closing costs of the original owner and Wholesaler, and that fact was adequately disclosed and they decide to walk?

If a deal is on the up-and-up, a non-refundable deposit isn't needed.  If the Wholesaler is trying to pull a fast one, or not adequately disclose his role and the risks of the process, he will require a non-refundable deposit.  It would be wise for all, especially newbies that get blindsided, to know the difference.  

“Never argue with an idiot. They will only bring you down to their level and beat you with experience.” - George Carlin

@Account Closed 

Okay, here is the education. We both have $1,000,000, no more, no less. With my $1,000,000 I pay all cash for a property with a 5.0% cap rate; with your $1,000,000 you leverage with a 10% interest only bank loan to buy a $4,000,000 property (75% LTV, borrowing $3,000,000) also with a 5.0% cap rate. With me so far?

Using the 50% rule for both properties, the NOI for my $1,000,000 investment is $25,000 annually and $100,000 annually for your leveraged $4,000,000 property. When I net the debt service from both properties, I yield $25,000 for the unleveraged property. The annual interest on the $3,000,000 loan is $300,000 annually, or a negative cash flow of $200,000. Still think leverage is always preferred?

Now we know we made a bad investment and both will have to sell for less than what we paid.  Guess who still owes $3,000,000 to the bank after liquidating assets and who doesn't?  Risk v. Reward.  If leverage was ALWAYS better, the lines stretching out of the banks and HMLs offices would be longer than this stupid thread.  

Bob, no smart investor is going to take that imaginary $2,000,000 and invest it in an asset yielding less that the cost of funds.  While leverage can increase profits, it can likewise increase losses.  Leverage adds risk to the equation and not understanding that or having a simpleton's understanding of it (as you most certainly do) will be a costly lesson some day.  Several people tried to educate you today, but  you obviously won't listen to reason or try to educate yourself.  Good luck dude.  

@Account Closed 

 Are you saying you'll make up for a negative spread in volume Bob?  What 70% are you talking about?  Your original comment "You'll always make more profit by using leverage" is what I am taking issue with.  It is not just patently false, it is completely ridiculous and anyone with even high school finance knows better than that.  I, along with everyone else on here, just cannot understand your logic and you've yet to explain it.  The math is perfectly obvious in my tables above.  What is it you don't understand?  I don't even know what you are talking about the 30-35% of your portfolio compared to 100% of J Scott's???  What does that have to do with anything?

Yes, you CAN use leverage to enhance your profits and control more properties, but to say "you'll always make more profit by using leverage" ignores negative spreads between asset yields and debt costs and always assumes assets will appreciate.  We know neither is the case and to assume leverage will always increase yields and profits is beyond idiotic.  

Positive leverage occurs when placing debt on a property improves the overall rate of return. Whenever the return component in the property is higher than the interest rate on the debt, positive leverage will occur. Consider the following series of cash flows:

As shown above, the unlevered cash flows produce an internal rate of return (IRR) of 8%. The acquisition price of this particular property is $3,025,000, as is indicated in time period 0. In the levered series of cash flows above there is $2,000,000 of debt placed on the property at a 4.5% interest rate amortized over 10 years. Because the interest rate component of the loan (4.5%) is less than the return component of the property (8.0%), positive leverage occurs and the levered IRR improves to 12.55%.

Now let’s consider a scenario where the same $2,000,000 of debt is placed on the property with a 10 year amortization. But this time the interest rate is 10%.

As you can see from the levered IRR above, this is a negative leverage situation. In this case more debt is not better. The IRR in the levered example actually decreases to 5.4%. This happens because the interest rate component of the loan (10.0%) is higher than the return component of the underlying property (8.0%).

 I've read enough of this thread to give me a big old brain cramp, and can hardly believe the argument on a forum such as this.  Do I understand that someone is actually arguing that it is prudent, or actually smart, to invest money in an asset yielding a rate of return that is actually lower than the cost to borrow those funds?  That IS ludicrous  - check with the Savings & Loans in the late 80s to see how that movie turned out.

Controlling Assets is NOT the name of the game when those assets aren't throwing off enough income to produce a net yield higher than your leverage, or borrowing costs. To think otherwise is just crazy talk - but it did take Trump a few bankruptcies to learn that lesson though, didn't it?   

To say that leveraging will ALWAYS be preferred and yield better results than not leveraging is just patently false.