Normally building is too expensive to make solid returns on your investment - at least with smaller units. I'm sure that if you can get 20 prime acres and build a 300 unit complex that might be different. I dunno, the prices for new construction in my market are really high. More and more now I'm seeing that builders are building spec duplexes but selling each side individually. Smart.

I've also noticed that there are some modular home companies that are building pre-fab duplexes. I think I even saw a pre-fab fourplex once. I have no idea what they cost though, but I gotta think that its less than stick-built construction.

Out of curiosity, why do you think that building seems more profitable?

What's the (rough estimate plz) average single family residence sale price in the areas where you own investment property? What's the typical monthly rent you would or could charge for these properties?

I live in Huntington Beach, CA, and from rough estimates on the typical rents charged here and the home prices, I'd say it's tough to make positive cash flow on a property. Any knowledge of my region (greater LA area)?

Since most people I know prefer building over buying and building seems a lot cheaper of course the bigger the more profitable it comes.

Well, if its profitable its profitable. I mean, if the numbers work then I'd say go for it. I doubt that the numbers will work though.

Building is rarely cheaper than buying. When building becomes cheaper than buying then builders go development crazy and build as much as they can in order to grab the money while they can. Besides, why would any builder in his right mind charge you less money to build a brand new building than it'd cost you to buy an older building? He wouldn't, he'd just raise his prices.

The price of a SFH depends on a lot of factors. Location mostly, but features are a close second. Ok, I'll assume that we're talking about renting normal ranch-style with garage 3 bedroom 1 bath houses, maybe about 1100-1400 square feet, built circa 1970. That is a typical rental house in my area. That house would retail for about $125,000 to $145,000 depending on location and condition. That house would rent for between $750-$900 depending, again on location, condition, and amenities.

Let me know if you want me to go over the numbers. But just glancing at these numbers you can tell that you won't get anywhere close to a positive cash flow. Even if you paid the bottom of the range ($125k) and rented at the top of the range ($900/mo), you're still negative cash flow on this property.

If you're strategy is to look on realtor.com to find a rental property, you need to reconsider that strategy. Nowhere can you buy property off of the MLS and rent it for a positive cash flow.

Nope, sorry.

Hi,

Thanks for all the quality replies. A quick question -- if we can't find positive cash flow rentals in this way, where should we be looking? I know you've touched on it a bit already, but if you could maybe elaborate.

My personal situation is that I want to invest in rentals in student towns. The main criteria that most students have when choosing a property is location (walking distance) to campus, which gives me a smallish radius to work with. I expect the purchase costs to be inflated to reflect that. I know that individual markets vary, but do you think it will be difficult to find a positive cash flow rental by looking at various listings/finding any house with a "for sale" sign and running numbers? How many properties would you expect me to look at under this scenario before finding one that has a positive cashflow?

What is your opinion on renting to students vs single family homes? It seems as though renting separate units within a single home will allow for a higher ROI, though with more likely risk (higher maint costs, possibly higher vacancy or partial vacancy rates, etc).

Any advice would be greatly appreciated, thanks

I disagree but that probably since I'm not living in states.

But I have another question which is probably pretty noob but I hope you can answer this.

From what percentage does a property come "positive cash flow", renting yield 10+%?

The best way that I know to find decent properties that cash flow is to join and REI club. Like I've already said in this thread, at my local REI club the first 10 minutes is devoted solely to people announcing deals that they have to sell. If you're looking for single family homes, you can find lots of bargains that way. Even if you're looking for duplexes and fourplexes you can find decent deals. It is important that you get to know other investors. They will bring you deals, refer you deals, refer you to motivated sellers, help you when you make mistakes, help you to avoid making mistakes, etc. Plus, its nice to make friends. Join an REI club.

Well, it depends on your investment criteria. Everyone seems to think that student housing is a cash cow. Its not. From the 'deals' that I see in the college town that I live in, student housing is basically break even or worse cash flow wise, and that does NOT include any professional management, and that DOES include the landlord doing basically all repairs himself. Bascially, student housing is an appreciation play. At least, thats my experience.

So if that description is something that you're interested in, I guess you could probably find lots of deals in student housing. You have to understand that the reason that student housing is so expensive is because there is high demand for it. So if you need to make positive cash flow from student housing, you better be goddam fast, because it'll get snapped up quick if it cash flows.


IMO, renting to families is far better than renting to students. Tenant turnover will be a major expense. The problem with students is that they move every single year. Families will stay longer in one spot on average.

Families have a reputation of being really hard on properties. I don't know about that. All tenants are hard on properties. I bet students are pretty rough on properties too. It's probably a wash.

I'm not sure what you mean by 'renting separate units within a single home'. Renting by the room? If renting rooms is what you mean, then you could be right in certain situations. Rooming houses are a pain sometimes. The vacancy is higher on average, but the cash flow is higher depsite that. The trick with rooming houses is to make sure that you're adding significant cash flow by renting by the room.

Normally in rooming houses the landlord has to pay utilities. that'll jack your expenses. Also, if you're smart you'll have a cleaning person clean common areas every other week. If you don't do that, you're making a major mistake. It'll get nasty fast. Plus you'll have to advertise more often, so that cost will be higher. Overall, my rooming house runs about 60% expenses.

So taking the additional expenses into consideration, you've gotta end up a lot better off than just renting by the apartment.

You determine positive cash flow by taking the gross monthly rents, subtracing expenses, then subtracing debt service. Whatever is left is your cash flow.

Don't buy properties that are negative cash flow. Also, don't buy properties that are cash flow neutral. Buy properties that have a positive cash flow and you'll be fine.

stephen, no hostility directed at you. I just didn't want you know who trolling a really useful thread and screwing it up. I have gotten some useful info from this and want to keep it informative and useful. Good try, but based on his past posting history I am pretty sure he is impervious to anyone's comments.

I find it kind of odd that at a meeting of experts you can find great deals. It's almost like playing the 2+2 poker tables and finding passive fish, no? What factors make the most savvy RE investors sell at bargain prices?

First, I want to clarify that not all investors at REI clubs are savvy.

there are lots of ways to make money in RE. Some people have businesses wholesaling properties to other investors. That is, they find motivated sellers with equity, get the property under contract, and resell the contract to other investors, taking a small commission for themselves. Other times a small flipper will find a deal but not be able to take advantage and so he flips the property to other investors. Other times someone flips a house but can't sell it fast enough and is willing to take a hit on the purchase price - taking a small profit over a big loss. Other times an investor is retiring and just wants to get rid of properties - these people can offer great terms. Sometimes experienced investors will take new people under their wing and show them how to flip properties for a piece of the upside after finding a deal - that happens quite a bit.

Like take me for instance. Say that I somehow found or was referred to a great bargain that is below my radar - maybe a single family home or something. I dont' want to fool with single family homes. So I'd flip that deal to another investor. No big deal. Or say that I just bought a property and i'm trying to make something out of it. I don't have time or money right then to chase another deal even if I wanted to. i'd pass that deal along to other investors.

Another thing that is common is that people THINK that they want to be RE investors, but the reality is too much for them. this is really common. People just want to get rid of properties and be done with the tenant problems. If you've got 3 or 4 properties sitting empty or with tenants that don't pay rent and you can't evict, and those properties are costing you $1500 per month each to hold, how motivated are you after a few months? Pretty motivated. I see that happen pretty often, and its the primary reason that I decided to start this thread.

This stuff is very very common. Join an REI club. you'll see. Besides, what's the downside? $100 membership fee and a few hours of your time.

Spex,

Really great thread. I appreciate you doing this.

I posted about month and a half ago about a potential investment that I was looking at. The numbers were $160,000 $1,200rent in current monthly income. (Even though I felt the rents could be closer to $1,500). So based on your formula Annual gross scheduled income= $14,400. Net Operating Income = $14,400- .45($14,400)= $7,920. * 10% cap= $79,200.

The reason I was bringing this up had to do with my question. The formula you use it is almost impossible to find a deal. Forget MLS, FSBO, SFH's, almost all duplexes, etc. These numbers just don't seem to work. Now I realize, that your cap rate should be higher because, afterall, managing multi-unit mobile home sites is a lot more hands on and risky thany managing a duplex.

However, does there come a time when you just have to buy even though you cannot get the cap rate, and COCR you want. I even tried using your formula with an 8% cap rate and these numbers seem to be off also. What would you suggest to do in a situation like this?

Thanks again for all your insight and knowledge.

OH and I do agree with you 100% on buying for Cash flow purposes only and not appreciation. Although, I would like to discuss some thoughts I had on appreciation with you.

When you are purchasing a single family home, you have to compete with buyers who are planning to live there. I think this is primarily why Spex's requirements for investment will rarely work there. The main difference between you and the other buyers is that they get to write off their mortgage interest. Investors do not.

Nope, not impossible. Just difficult. Thats what makes it a 'deal' instead of a regular purchase. If it were easy everyone would be rich.

Forget MLS and FSBO. To find bargains you have to hunt. The MLS is a tool for finding properties. We're not looking for properties. We're looking for motivated sellers. Find the motivated sellers and there are your deals.

Funny, I see a duplex as far more risky and more hands on than a mobile home park. Its interesting how different investors can have different perceptions on these issues. Kind of like my aversion to retail property.


Look somewhere else.


Ok, post your thoughts here and we can discuss them. I think that appreciation is a very misunderstood concept in REI generally.

n/t

Any opinions on the quality of CREOnline as a resource?

Excellent. Highly recommended.

What types of potential advantages does an investor with alot of capital have in the residential real estate market?

Related to the above question, a RE agent in this area who primarily finds flips for investors, and herself, has turned myself and a good friend of mine (who traditionally is a land investor, hence doesnt have much residential experience, nor do I) onto a potential investment. This gutted home is approx 3400 sq ft living. It was damaged by a hurricane 2 years ago. It was bought up, along with 50 other properties by an out of state doctor/investor who is now getting rid of his last 3 homes (this being the best deal of the 3). It has a new roof/partially finished 2 car attached garage. Its recently put on the market for 110k. It is unable to be financed in its current (gutted) condiition. RE agent says estimates of 70k for turn key given in its current state (obv, we'd get other opinions). Now, this property is very much like its surrounding properties in both size, yard, etc. Comps ppsqft range from 70-90 in this area. If we could get thisi thing fixed up for under 200k it appears to be a reasonable deal for ~ a years worth of work (est. 6mo for repairs, 6mo to sell it). 3400sqft @ say $75 sqft = ~ $255k selling price for a possible 55k profit in one year.

Relating this to the first question, is this a good example of how having cash can be a plus for a RE investor? It would involve possibly tying <sp?> up ~200k for a year's time, with a projected 25%+ COCR..., however having the ability to front this kind of money (since one cannot get a traditional loan for it), means the market of potential buyers is much smaller (this is my guess at least). Does this seem like a reasonable type of niche to pursue? What types of questions do we need to be asking to protect ourselves here? What might we not be thinking of.

Any and all help is appreciated Also, thanks for a wonderfully informative thread thusfar, Ive read the whole thing

I'm not sure exactly what you mean. Are you asking what advantages RE has for investors w/ capital, or what advantages capital has on your potential in REI? Or both?

Goddam, this response is going to be long...here goes....

SEE GUYS?! I keep telling everyone that other investors are the best source of deals...PROOF!

Ok, stop right there! First, how does the price for the gutted property comp to other sales of gutted properties in the area? Thats your first question. This might be a bargain price, or it might be a sort of normal price for such a property.

Now another thing. A property without a bank is like a bird without wings. mmm...I dunno, maybe not, but you understand what I'm getting at? Does this seller expect a buyer to have $200k in cash to buy and fix the property? Of course not. Since he's an investor, he maybe expects the buyer to try to find a hard money lender to finance this deal. The problem is that if you borrowed the cash from a HML, this deal would be too thin. And he must know that if he's rehabbed a package of 50 houses. So that would indicate to me that the $110k price is a blind shot rather than a realistic expectation. Maybe not though, but thats what my gut says.

Ok, now, the way I'd probably go about this deal is make him like 2offers (after you determine the value - but lets assume that $110k is the true market value). First, you offer him like $50k cash, close in seven days. Second, offer him like $70k, $15k down, and he finances the balance at 10% with a one year balloon. You'll have to crunch the numbers to figure out the bests ways to match price and terms to your benefit. But if you make him carry the a note you'll be into this property for much less risk and you can juice your ROI by...well...a lot.

Lets assume these numbers are correct. You're leaving out all the transaction costs for both buying and selling. They're significant, so you've got to include them. I mean, just the realtor's commission for selling is 6% - that knocks your $55k profit down to $40k. Now you're looking at an ROI of 20%. Personally, I wouldn't do this deal for 20% despite the fact that $40k is a lot of money. I know LOTS of experienced people that would do this deal though. Also, how quickly is the market moving in this area? You might be stuck with the property for a while. That'll lower your ROI even further.


Yes, you are thinking exactly right. Cash gives you the ability to move quickly and take advantage of deals that other people miss. Also, the seller that MUST sell for cash and has an unfinancable property is in a tough spot because the pool of buyers is really small. But with your assets I wouldn't recommend flipping houses. Flipping builds capital, but it won't make you wealthy because it can't produce any residual income. IMO, you'd be smarter to try to focus on larger income properties. You can flip those too, but you make a lot more for doing it. Plus you've got the additional benefit of creating long-term income and additional net worth as your tenants pay for the property.

That's just my opinion though.

Yea, the realtor said that they personally dont have the capital and/or time for a project of this magnitude, hence turning us onto it. Whether or not that is the truth... meh.


Good question. I'm not sure how one would come up with comps for gutted property. This isnt exactly the most populous area of the country. Greater area has ~100-125k people and the hurricanes are long gone... I guess we could dig around a bit and see what pops up though.


Well, the story is that the investor is an out of state doctor who bought all these homes and who flew out his brother-in-laws company to work on them for the last couple years. For some reason or another they got tired of the work and are selling off the last few properties in various states of repair. I think they do expect a cash offer if I heard the realtor correctly...

Now the RE agent told us the owner had turned down offers of 95 and 97k and wouldnt take < 100k (this was maybe 10-12 days ago, property listed for possibly 3 weeks now). However, I just spoke to my partner and he told me the property is now listed for 100k. This makes me suspicious of what the RE agent is telling us... I mean, the guy drops to 100k and didnt take 97k before? I just find it hard to swallow... could the RE agent be BSing us?


I'm not sure how we'd pull it off that quickly, though I guess we could simply stroke a check..? Though I'm not sure I/we could coordinate all of the appropriate inspections and whatnot in time... hmm


Well, I don't think either me or my potential partner want to finance anything. We both have plenty of dormant cash... in fact, that is the entire reason he's even looking at something like this. Normally he does large land deals, but the market is soft atm locally so we thought we might cut our teeth on something residential assuming we could find a situation where there wasn't much potential downside and at least 3x the return we could get in stable corp bonds, blah blah.

Well, we had no intention of paying >100k for the property, and now, I wouldnt even pay that given its listed at said price. The rehab work was quoted at 70k turn key, and I factored in an extra 30k just because I'm a pessimist. Now, that 200k figure gave us an extra 30k for all of the wtf growing pains and things we may overlook... is this a reasonable buffer for our inexperience? I don't know... 15% wiggle room was something I pulled out of my ass, but it seemed reasonable.


Well, while I'm not entirely sure of the 250k range, I do know the 350-500k range of homes has about a 9 month absorbtion rate right now, that is to say, a 9 month backlog. I budgeted 6 months to move the home for ~$75per sqft when the comps are showing 70-90 per sqft... is this an unreasonable estimate? Having the cash tied up another couple months wont hurt either of us, though I understand it will lower the rate of return. I can ask a friend of mine who is an agent about the abs. rate of the 250k range and get a more precise figure though...


Agreed. I don't necessarily want to flip houses for income, but I do very much enjoy 20%+ returns vs 7%. It is however something that my partner and I can do on the side if/when the right opportunity arises.

Also agree. I would love to own an apt complex or ten. However, its not something I/we have done before. I think starting out with 1m+ RE investments probably isnt the wisest move for a couple of rookies. I do wish we had gotten on the ball sooner though as we live in the "Go Zone" and this is the last year to take advantage of very lovely 50% first year depreciation that is possible in such territories.

Are there any books or other resources out there that I could peruse that are geared specifically towards investments in apt complexes and the like? I'd love to start reading up.

And I value it greatly. Thank you very much for your time and efforts sir.

First I'd like to thank you for opening up my eyes to several concepts. I finally figured out the mechanics of the seller holding a note on the property.

Have you ever contributed an article to creonline.com? I've read a ton of those articles, good stuff. Sounds like it's up your alley.

Great thread.

""Forget MLS and FSBO. To find bargains you have to hunt. The MLS is a tool for finding properties. We're not looking for properties. We're looking for motivated sellers. Find the motivated sellers and there are your deals.""

I know you have gone over this before so forgive me. But where exactly should I be hunting? I am a member of my local real estate club, I have cold called, I have made business cards with "we buy houses" and passed them out (not as much as I should have, and I have slacked off lately, but have passed out a few hundreds) and I have scouted neighborhoods extensively, although admittedly they were probably not the best neighborhoods for rental properties. Any other strategies that you can think of? I have the time and energy to hunt for deals.




""Funny, I see a duplex as far more risky and more hands on than a mobile home park. Its interesting how different investors can have different perceptions on these issues. Kind of like my aversion to retail property.""

The point I was trying to make here is you cannot expect the same return for different types of investments. A duplex in an upper middle class neighborhood will invariably have a lower cap rate, because the tenant risk is much lower than a 16 unit apartment complex in a low income neighborhood. I guess what I was trying to say was I sholdn't be so fixated on a 10% cap rate because I am looking at different kinds of properties than you?






Ok, post your thoughts here and we can discuss them. I think that appreciation is a very misunderstood concept in REI generally.



OK, here are some of my thoughts on appreciation and would like to hear what you think. I think in a way you are downplaying appreciation to much. Now, like I said I agree with you 100% re: appreciation. What I mean is I wouldn't buy a property because I thought it was going to appreciate if the properties cash flow was horrendous.

But let try and use an example to explain what I am talking about. Say you have the oppurtunity to buy a property for $500,000. All you have to put down is 2% or $10,000. Would you every buy the property and play it for appreciation if you could get it to break even or just barely cash flow?

Here is what I mean. Say the Gross Rent for the property is $48,000. Net opertating income is Gross Rent-(50% Expenses)= NOI=$24,000. So you can pay roughly $2,000 month in mortage payments. And say the seller offered you owner financing at 4.75% interest only. Your monthly payment comes out to $1,939.58. Would/Should you ever consider something like this and play it for appreciation?

Say 3% annual appreciation, (afterall most landlords structure 5% rent increases each year, and as you know rental properties value is tied to it's income stream; so IMO this is reasonable) your return on the year for appreciation is 150%.

Hopefully, you were able to understand the point I was trying to make and it wasn't too hard to follow using my example. The reason I mentioned this is becasue like I said I am having trouble finding properties that meet your criterias for cash flow returns and this is an investment strategy I am considering taking a look at and would love to get more knowledgeable opinions. Also, thinking about doing something similar (barely breaking even cash flow wise) but buying properties with equity.

I guess you don't really need comps for the gutted property so much as you need good comps for what the final product will be like. I wonder what accounts for the range of $70-$90/sq ft. I assume its amenities, but pay attention to the distance from the subject property too.

This story doesn't really add up to me. I don't know though, in the GO Zone there has been a lot of money made over the last few years, so maybe a cash offer is reasonable for this guy to expect. But asking $110k and turns down $100k...I'm having a hard time buying that considering the situation. Even at $100k it seems likely that the guy is making a profit. But who knows? I've had realtors exaggerate other offers before. Normally, I just tell the realtor to give me a call if and when there is less competition for the property. Like I've said, I'm looking for motivated sellers. Someone that has multiple offers for his property probably isn't too motivated.

Well, it doesn't have to be exactly that. Be creative - there is lots of room here for you guys to come up with something. This is a deal that is wide open to every kind of crazy scenario. You're limited only by your imagination.

Fair enough. Consider too that this won't be passive. At the minimum you'll be scrambling to get your contractor hired and started on the project in the beginning. AFter that its basically up to you to keep your man working on schedule. I'm somewhat of a nag to contractors. I pay well though so they indulge me.


I mean, its obv hard to say given that I haven't seen the property. Best case is $80k profit less transaction costs, worst likely case is $55k profit less transaction costs. If that works for you, I say move forward. I think that having a 15-20% buffer should be plenty. Honestly, this seems like a pretty low risk scenario to me no matter how you cut it. So maybe the absoute worst case is that you make a tiny profit or break even. I can't imagine a situation where you lose money on this deal unless the place burns down or another hurricane wipes it out.

Your analysis seems conservative enough to have me convinced. It seems reasonable for sure.



I've made lots of mistakes in my investing career. IMO, the biggest mistake by far was not buying up choice properties immediately after Katrina. Second biggest mistake was not buying GO Zone properties immediately after the announced all those juicy tax incentives...sigh....

I do agree that maybe you should take it slow getting into REI. I wasn't intending to say that you should jump into large properties, and obv I wasn't expressing myself clearly. I think that this particular deal seems fine on the surface. I just wanted to confirm that you are intending to move into some more substantial investments rather than continuing to buy and flip. I'm glad to hear that you are going to do that.


Well, there are two parts to this. First is the property management side, and second is the financial analysis side. For property management, I recommend the book "landlording" by Leigh Robinson and John Reed's "How to manage residential RE for maximum cash flow..." For the analysis side, I recommend Ray Alcorn's "Dealmakers guide to commerical RE".

Also, if you're uncomfortable there is nothing wrong with hiring a due diligence company to help you through the buying process.

Nope, never contributed there. I do like that site though and I've gotten lots of great ideas from there.