First off, lets not get confused about down payments (I'm not saying you are, I just want to be clear for the benefit of the noobs). You don't make a large down payment in order to make a property cash flow. For example, I could buy a property for $1,000,000 and rent it out for $1,000, putting $950,000 down. I'll get a positive cash flow but it's still not a good deal because my cash on cash return would be nothing and I'd be gambling on appreciation in order to make any money with this 'investment'.

Having said that, I'll answer your question. You're right, the down payment will affect the price somewhat. Thats is because the more you put down the smaller your mortgage will be. However, you STILL determine a purchase price based on a cap rate - not on a COCR. COCR has to do with the amount of cash outlay it takes to acquire the property and get it running. cap rate has to do with the the total purchase price of the property. These two are not necessarily linked, but usually they are.

Lets consider a few scenarios with different down payments. We'll use the 10% cap rate number that I determined earlier - $76,200 purchase price. Bascially, to determine the COCR for each scenario we have to change the mortgage payment to reflect the lower amount. We then take that number and divide it by our down payment to determine the COCR (oversimplified, but you get the idea). Below PP= purchase price; CR = cap rate; DP = Down payment; M= mortgage; MP = mortgage payment (assuming 6.5%, 30 years). So we've got $1100 in rents less 45% expenses. Our NOI is $605/month or $7260 per year.

CR - 10%
PP - $76,200
DP - $22,860 (30%)
M - $53340
MP - $337
COCR - $605-337 = $268 positive cash flow. 268x12 = $3216. 3216/22860 is 14% COCR. at 14% it would take you over 7 years to get your $23k back out of this property from rents.


CR - 10%
PP - $76,200
DP - $15,240 (20%)
M - $60,960
MP - $385
COCR - $605-385 = $220 positive cash flow. 220x12 = $2640. 2640/15,240 is 17% COCR. at 17% it would take you 5.88 years to get your $15k back out of this property from rents.


CR - 10%
PP - $76,200
DP - $7,620 (10%)
M - $68,580
MP - $433
COCR - $605-433 = $172 positive cash flow. 172x12 = $2064. 2064/7620 is 27% COCR. at 27% it would take you 3.7 years to get your $7600 back out of this property from rents.

CR - 10%
PP - $76,200
DP - $3810 (5%)
M - $72,390
MP - $457
COCR - $605-457 = $148 positive cash flow. 148x12 = $1776. 1776/3810 is 47% COCR. at 47% it would take you 2.13 years to get your $23k back out of this property from rents.


Can you see the pattern here? The less money you put down the faster you recover that money and the higher your COCR is. You can also see why putting more cash into a down payment is not necessarily wise. The more cash you dump in the lower your cash ROI is.

Now, that does NOT mean that its smart to buy properties at the RETAIL price and put nothing down. Not unless you have cash reserves to wheather some difficult periods of high vacancy or other problems. But if you buy the property for the RIGHT price you can put little money down and still get a good deal in terms of your cash ROI and CR.

Thanks for the reply to my other questions. I have some questions about how to structure the business.

What form do you use? i.e. S corp, LLC ect.
Do you put different properties under different LLCs?
Is it difficult to get financing under a LLC with no financial history?
How diffcult is it to move a personnel asset to the LLC?
How much litigation have you had to deal with in regard to your REI?

Anything else you think is important to know in regard to structure.

Once again great thread.

I own my smaller properties under my personal name. Larger properties are each in separate LLCs. I have an S corp that manages all my properties. I do it this way for tax reasons, which I'd rather not get into here. If you're just starting out I see no reason whatsoever that you need to worry about forming an LLC or anything.

Yes. The only way that is going to work is if you personally guarantee the loan, and even still, expect to do a little shopping. Like I keep saying, it helps a lot to go to small local lenders because they're a lot more flexible.

It depends on the asset and the lienholders. If you're talking about RE, you have to get the lienholder's permission to change the name on the deed and the mortgage docs.

I've never been sued by a tenant. I've had several instances where I could've been sued and wasn't. I've been lucky.

First of all I just wanted to thank you spex for doing this, it really is amazingly insightful for those of us trying to get our feet wet in this industry.

I'm going to give you my situation and would like some feedback. I'm 23 years old, graduating in April, and have intentions of being a property investor with a good friend of mine. We will have no other responsibilities come April, and our plan is to begin by flipping houses, dumping profits into bigger flips. Then once we have a greater working capital we'll have more options. We're just not totally interested in managing property just quite yet.

I've now read a few books on both general property management and flipping, and feel like I have about as much knowledge as anyone can without any experience (which I totally understand, really isn't that much..) I feel ready to attack a project, except for the area of finances. We are in a totally different situation than the people who these books are aimed towards. Neither of us will have any "taxable" cashflow with which to approach mortgage brokers with, as any money I've made the past 3 years has been from poker. I have ~$350k tied up in mutual funds, and ~$100k liquid cash in money markets put away for the first flip. I would think purchasing the first house to avoid mortgage payments altogether would be optimal, but I would really like to keep that other money put away and "start small" like anyone else would. The last thing I want to do is get ahead of my learning curve just because I have the finances. So in summary, I'm terrified to approach a mortgage broker. I really have no idea how to go about it other than setting up a meeting, dressing nicely, and having documents showing my assets.

Any tips on any other areas would be greatly appreciated.

Building is almost always more expensive than buying. That is partly because any time building is cheaper than buying, the builders go crazy building as many homes as they can to get that money. I've seen this happen a number of times. The builders just build and build and build. Then half of them go out of business because they flooded the market. Then homes get bought up over time. Then the builder forms a new LLC and builds and builds and builds.

Builders are dumb.

EVerything associated with building a house is expensive. Contractors are expensive. Materials are expensive. Labor is expensive. Permits are expensive. Construction loans are expensive. Everything is expensive. Well, someone has to pay for all that expense. Guess who? You.

In my experience, housing markets put irrationally high values on new construction. I think that buyers believe that a house built with modern construction materials and methods is fundamentally better. I think that is wrong. I figure that if a house has been standing 100 years, thats a pretty good indication that it'll stand 100 more years. Besides that, a house is only as good as the person who built it. I've seen friends buy new construction houses that turned out to be hastily and sloppily thrown together, and that will fail over time.

This sounds like a reasonable plan to me. Another thing that you could do is flip the houses and then refinance and rent. if you buy right and only refi the money you put in back out you'll get wealthy fast. I recommend that you cut you teeth in the landlord biz on some small properties before jumping into anything bigger.

First of all, why didn't you pay your taxes? If you want my advice, the first thing you should do is get an accountant to figure out your bill for the back taxes and pay up. Its not like the taxes go away - the IRS will just charge you interest. I think that the IRs can't audit taxes more than 7 years back, but still. Pay them.

if you want to flip houses a mortgage broker is not the person you need. You need a hard money lender. you'll need to borrow a portion of the after repaired value of the property. Banks only will want to loan you based on the current value of the property - meaning that you can't borrow the cash for fix up. A hard money lender will give you a portion of the after repaired value of the property, which is what you need.

Second, mortgage brokers are not scary. They make money by finding you loans. You could look like a complete bum and the mortgage broker would try to find you a loan. All he is going to do is send your information to banks to see what they have available for your situation. But don't waste your time because no mortgage broker will be able to close the deal on a flip. Either go to the bank directly or go to a hard money lender.

Having said all that, I'd recommend that with your significant cash assets you do not borrow any expensive money from banks and hard money lenders. Why pay them to give you what you already have? I don't know what your market is like, but $450k should be enough to do plenty of deals. And your returns will destroy the returns from mutual funds. What I would do is pay for one deal with the $100k (depending on the market you're working in - 100k might be enough to do several deals), refinance the 100k back out and rent the property. Then repeat over and over and over and over. Pretty soon you'll be rich.

You wouldn't believe the holding costs on a flip property if you've gotta borrow from a HML. Your expenses would be so low compared to your competitors that you'll have the pick of the litter on the choice properties.

Thanks for the timely response.

First of all, I failed to mention that I am Canadian. After extensive research and talks with an attorney, we concluded that the fuzzy laws on online gambling in Canada did not dictate for me to pay taxes as I was (and still am) a student, not a professional poker player.


This really surprises me, as it was not mentioned at all in either of the 2 flipping books I read. Both of them recommended finding a good mortgage broker for your "flipping team", as opposed to a bank.. and they never mentioned anything about a hard money lender. I was under the impression that I would be in talks with a mortgage broker for a pre-approval letter and to discuss mortgage options on my price range.. then as I found a potential flip I could make an offer, and upon succession I would put ~10-20% down, have a mortgage for the rest, and pay for the renovation and carrying costs with the rest of the cash I have. If this is not the case, I need to do some wikipedia'ing on hard money lenders..

Just how fast can you make a lot of money in real estate? If you could elaborate on time vs. money and risk a bit that would be great.

Do you want to know how fast it CAN be done or how fast you're likely to do it?

Well I'm a pretty big real estate noob and it is something I want to read up on and educate myself, but I guess I'm a little curious about both. I mean, is the distinction between the two the difference between someone just starting out and if someone with a ton of experience were to start over? Or is there a ton of luck in finding deals in the right place and the right time involved in the "how fast it CAN be done" or does it simply have to do with how much risk you take on? I guess I'm mostly interested in how fast I'm likely to do it keeping in mind I could def throw $100k (or more) into starting out if that sped things up a lot.

Oh sure, I see what you're saying. Yeah, you could get a bank loan for whatever the purchase price is and then use your own funds for rehab. I had it in my mind that you wanted to borrow the fix up money as well. You probably wouldn't use a hard money lender unless you had to, which you don't. But you don't really need to use a bank either. I mean, the closing costs alone with all the bank fees, etc. will be a huge drain on your profit margins. If you've got the cash, which you do, you should probably just use all of your own money rather than borrowing. That is just my opinion.

Well, if you find the right deals you can make a lot of money very quickly. In my experience most of that money is made in equity. Like I've said in the OP, I'm a buy and hold investor. My strategy is to build equity over time. However, as I've pointed out already in this thread, at a 10% cap rate every $1 in additional income creates $10 in additional equity. So if you can buy the right properties at good prices and create additional income you can generate a lot of money very quickly.

I related the story of how I took a half full mobile home park and increased my monthly income by about $3k per month plus added about $300k in value to the park in one year. I know a guy who did the same thing but he made over $800k over two years on a MHP. Similar things can be done with apartment complexes except usually they aren't quite that profitable.

One strategy for you could be to take your $100k and flip a few houses to build capital. Or you could just buy a smallish apartment complex and reinvest the cash flow. If you only did 3 small deals per year you could probably make a decent middle class living within 3 to 5 years. But over time it gets easier to grow too. AFter 5 or 7 years you'll have significant income from your properties plus significant equity built up. So you can take that money and start looking at commercial properties. Over time it gets to a point where you can't reinvest the money fast enough and you've got to start socking it away in mutual funds and stuff. But it takes time.

RE is not a way to get rich quick. Just like any other investment, the reward is in proportion to the risk involved. Riskier properties pay more. I'm pretty comfortable with that.

I guess I’ll bite here since no one else has. So you’re suggesting buying the house outright with the 100k refinancing all of it out and then purchasing another place with that money then repeating, correct? Is it easier to refinance out equity rather than getting funding initially?

Also I know that you are a buy and hold seller but what is your stance on quick flips? If properties do not meet adequate cash flow requirements but can be bought at a discount and profit can be made by flipping the property for FMV are you for it?

yeah, you get the idea. Buy *and fix* the property with $100k. I don't know if a refi would be easier than a loan, but I do know that it'll be a lot cheaper. However, my gut says that it should be a bit easier to get the money for a refi here because your refi amount should (if you bought the property right) give the bank a stronger LTV position after the refi compared to the purchase.

I dunno, normally if the property can be bought at a sufficient discount to make a flip profitable, the property could just as profitably be rented at a positive cash flow. but it depends on the market. I'm vaguely aware of some markets where rents are so low and housing prices so high that any hope of positive cash flow is crazy.

I'm not against flipping. I think that flipping is great. Its fine. its not what I do though. First, its too much work for me. Second, there is too much competition. Third, flipping generates income but doesn't really create wealth unless the proceeds are reinvested into something else. As a strategy to build capital its great. But I know guys that have been flipping for many years and none of them are wealthy. Well, a few of them are wealthy, but thats because they flip and reinvest in rentals. I guess that i see flipping as a way to build capital, but not as a long-term way to build wealth.

Farmland may still be the best way to play the real estate market.......at least through this decade.

Is this the time to sell land? For some folks, the answer is "yes" in their situation. But that doesn't mean the land market has peaked yet.

"There are a number of people who are thinking this is the time to pull the trigger and move on, particularly with land that has been inherited," says Mike Duffy, Iowa State University Extension economist who coordinates ISU's annual statewide land value survey.

The latest survey results, released at the end of 2007, show the value of an acre of farmland averaging $3,908 or 22% higher than a year earlier. Since the year 2000, when the average price of Iowa farmland was $1,857 an acre, Iowa land prices have more than doubled.

Land value to stay strong for awhile

The survey has been conducted yearly since 1941 and Duffy has compiled the results since 1986. In more than two decades of being involved with the survey, he's never seen an increase like the one witnessed in 2007. The 22% increase is the greatest one-year increase since 1976 and set a record for Iowa land prices for the fifth year in a row. In terms of dollars, the average price increase of $704 per acre in 2007 is the highest in the 66-year survey.

"It is my general feeling that we're going to see a strong land market in Iowa for at least the next five years," says Duffy. "I don't see anything that leads me to believe that we're going to see a real downturn."

Crop price is main driver for land

The two primary things driving land prices upward are high grain prices and low interest rates. "We've seen a fundamental shift in demand for corn due to ethanol production," says Duffy. "I don't think this demand will diminish in the near future. The world as we know it here in Iowa has changed. Where the changes will settle out, and when, is not known."

Even if technologies are developed to produce ethanol from a feedstock other than corn, most of them would involve using the same land that is used for corn. "So, even if the alternative sources such as cellulosic ethanol do become commercialized, the demand for the land will remain strong," he points out.

There is concern about the rising cost of crop inputs and uneasiness over whether land prices are too high and how long the "land boom" will last. "Some people in our 2007 survey expressed a great deal of concern that the market may be due for a correction," says Duffy. "On the other hand, some said the naysayers were overreacting and the market was continuing to show strength."

That strength was reflected in the fact that 37% of the respondents in ISU's survey reported more sales in 2007 than in 2006. "We are seeing more sales at auction," he adds, explaining that some land brokers are using auction sales to let the market determine land values. "People think this is the best way to capture the increase in value."

It's a different situation today

Unlike the previous run-up in land values in the 1970s, Duffy says the current surge has occurred without a big increase in farm debt. That minimizes the risk of a land price crash like in the 1980s, when land values plummeted to less than $1,000 per acre.

Duffy points out that ISU's annual survey reports average values - there are individual sales made that are higher and lower. For example, at the end of 2007 he heard of an auction price approaching $8,000 per acre in Washington County in southeast Iowa.

Statewide in the 2007 survey, the best quality land averaged $4,686 per acre, an increase of 22% over 2006. Medium quality land averaged $3,666 per acre and low-quality land averaged $2,655. While the increase in land values is good news for landowners, it means non-owners will be paying higher cash rent for cropland. Duffy estimates a 25% increase in cash rents for 2008.

I'm not really sure what to say about this. Is this a question for me? I know a scattered few people that invest in farm land. I have no idea whatsoever what the appeal is. Of course, I know nothing about farming. If I did, I might feel differently.

I don't have a problem with investing in farm land as long as it is income producing. i guess that renting farm land isn't that much differnt, in theory, than renting apartments or mobile home lots.

The tenor of your post though seemed to indicate that farmland is a good investment because of expected appreciation around the ethanol buzz. On this I disagree. I do not think that its smart to invest in RE primarily for appreciation. mainly that is because I have no control over appreciation. I have control over cash flow. So I invest for cash flow. I recommend that you do too.

Spex, most people just ignore Fishhead when he talks about farmland. He is bullish on commodities, so thats why he brings it up a lot.

J

First off, renting farmland is much easier than renting to tenants in an urban setting. There are no tiolets to repair, painting, etc.,etc............one just rents out the land and collects the money.

Over the years, farmland has been a terriffic investment.......and has done so without the aid of the current ethanol buzz..........................



If you add the increase in value plus rental rate minus property taxes for Illinois farmland, your return would have been 15.6, 17.8, 11.9 and 10.8% on a one-year, three-year, seven-year and 15-year annualized basis.

In comparison, if you had invested in a Dow Jones Industrial Index fund, your return would have been 13.9, 5.4, less than 1 and 9.1% over the same corresponding intervals, the Illinois economists say.

That's generally been true for farmland across the U.S., says Terry Kastens, ag economic professor at Kansas State University. "Since 1950, the average annual return on farmland (cash return plus appreciation) has been 11%," Kastens reports.

"For the stock market, the average annual return since then has been 12.5%. But stocks are way more risky than farmland," he adds. "In the 1960s and 1970s, there was a 20-year stretch when farmland was double the return from the stock market."

Bullish on farmland much more than commodities as a whole.......but grain commodities do aid farmland values when they are high, you are correct..........and I'm bullish grains right now. The world demand for corn right now is quite simply, "huge".

Fishhead

You seem to preach about farmland and its related commodities on every thread

I know this is Spex's RE thread in which he has done a fantastic job. I have a decent commercial/apartment portfolio myself,but your knowledge of the farmland market (i know spex replied he knew as little about it as I do ) is intriguiging to me.....so I have a couple of questions for you:

1.How many farm acres do you currently own and in what states?

2.What crops do you specialize in cultivating?

3.Do you breed livestock?

4.What company do you buy your farm equipment from?

5.Do you currently live on a farm?

6.Were you home-schooled on the farm growing up?

7.Do you lease out your farms or do you just flip them for the quick BIG BUCKS?

8.Were you surprised at the results in the Iowa causcuses ?

Thanks in advance

Just one short question(probably with a long answer) Why are you talking about buying if instead I could simply build a duplex triplex, condo etc, seems a lot more profitable or not?

This is going to slow up my trip to the beach(clearwater) today........



1.How many farm acres do you currently own and in what states?

Only in the state of Iowa, although I've been looking at numerous other states the past 1-10 years.......own over 200 acres currently.

2.What crops do you specialize in cultivating?

Only corn and soybeans.

3.Do you breed livestock?

No

4.What company do you buy your farm equipment from?

There is no need for equipment, as this is the responsibility of the tenant/farmer. Growing up on a farm, we used John Deere more than anything else.

5.Do you currently live on a farm?

No

6.Were you home-schooled on the farm growing up?

No, attended a very small school in Iowa, the same one that Colts TE Dallas Clark attended. The average class size was/is 20-40 students.

7.Do you lease out your farms or do you just flip them for the quick BIG BUCKS?

Lease....leasing will return approximently 4-8% on your investment immediately after expenses..........not taking into account what the value of ones land does.

8.Were you surprised at the results in the Iowa causcuses ?

No, as I usually find them overrated and don't take much stock in them.

This is an ask spex x thread.

NOT an ask Fishead about his farmland which is the answer to everything. Can we keep it on track and not let Fishhead sidetrack it. He can make an ask me about Iowa Farmland thread if he wants. There is a lot of really good questions and advice here and a lot of us would like to see the thread stay on track and learn from it. Thanks.

Hmmmmm Pancho

I was trying to EMBARRASS and stop this dope/troll Fishhead (with my obviously sarcastic post) from continuously posting non-sense on what is probably one of the BEST threads on BFI I have read by spex

Think/Read between the lines ....before you come to a conclusion!