Hello all. I am just getting my feet wet in REI (haven't bought anything yet other than my personal residence) and am actively looking for an investment property while studying REI on the side while I play poker for a living. I have joined an REI club as spex recommended earlier in the thread. I still feel like a total noob though, but am working on building a network and learning as much as I can from others who have experience. Thank you spex for starting this thread years ago.

I am curious to know if spex has changed his criteria for investing (10% CR, 25% COCR since the beginning of this thread)?

Also I am wondering what sort of target CRs and COCRs other investors use as a basis for choosing investments and in what location? I live in a college town in Ontario Canada and it seems near impossible to find anything even near this criteria. Then again as stated earlier in the thread MLS isn't the place to find properties to invest in...so I guess I need to get networking

I did however talk to a so called real estate investor at my first meeting of the REI group who said they own 7 properties. When I asked what their criteria was in terms of CR and COCR they told me that that stuff isn't really that important and that they aren't concerned with cash flow. This so called investors portfolio was entirely SFH's and a couple duplexes. Are there alot of fish at these things orr..?

In any thing in life most people are fish

The best deals are the properties that appear like dog crap on your shoe. It's why they can be had at a steep discount. It's then your ability to invest cash and time to improve them where the large profits come from. Of those who want the ease of functioning properties they can merely list and collect rent on, then extraction of free cash flow isn't a requirement.

To call them fish because they choose to allocate capital on a different basis is foolish. Time can be a larger component to some people.

I was under the impression that the only way to go about REI without speculating is to ensure adequate cash flows from the properties you buy given what spex touched on in this thread. Are you saying that focusing on investing in near b/e properties is still an adequate strategy?

Of course a b/e buy and hold strategy is not ideal for maximizing cash flow. Who knows what the guys level of knowledge is, what his motivations are, etc. Not every investor you meet at these meetings, esp part time residential investors are going to be sophisticated. He prob has a negative or break-even roi and his strategy is long term appreciation, buy and hold and have the tenant pay off the note.

First off, there is not one way to do anything. To use a poker parlance, if you never change it up, what happens.

The general ratios and program spex laid out itt is for a noob to learn about the business. It's designed to use minimal cash out of pocket, with maximum returns. If every deal fit that parameter, a RE bubble would be a biannual event. Then, there are many people who earn good money in their careers, who want a better than deposit rate return for passive investing. Sure the buy & hold strategy gets a bad rap, and is sub-optimal to the aggressive, but it does work for those who have other interests that they choose to participate in.

From a gross % return, the Lonnie deals are spectacular. But they are designed for the noob with low capital, and plenty of time on their hands. Once used for acquisition of a larger stake, even spex recommends to move away from those, and towards bigger deals.

One key concept of investing, is putting capital in play at risk. If that includes adding to your 401k every month, or buying more APPL shares, or paying down an appreciating asset, or just depositing $50 in a savings account, its a form of investing.

Finally got throught this awesome thread, really appreciate all the info, it has really changed the way I think about REI.

I do have one question, which either wasn't addressed or I've forgotten over the past few days of reading this:

What are peoples opinions on buying multi-family rental units in small towns.
Towns such as 15k people? 5k people? 1k people? Most of these towns are no longer growing and are either keeping the same population or very slowly losing population numbers.


ps. thx alot spex, and all the others that have added great information.

A couple of the most important criteria when purchasing rental property (whether SFH or MFH) relate to population trends -- growth, employment, immigration, etc. If the trends are downward, market rents will trend downwards as vacancy trends upwards. What may have started as a good deal (in terms of cash flow and/or ROI) can quickly turn negative.

Multi-family has some inherent risks above and beyond single family rental properties:

1. Valuation of multi-family is generally based on income-based appraisal methods, so decreased market rents and occupancy (i.e., lower NOI) will proportionately affect the value of the property;

2. Selling multi-family property is much more difficult as your buyer pool is much smaller. With SFH, your buyer pool is both investors and owner occupants; with multi-family, your buyer pool is necessarily investors;

That said, if you've decided that you certainly want to invest in rentals in a particular area, there are obvious advantages to multi-family over SFH:

1. Economies of scale;

2. Ease of management at scale;

3. Ability to positively affect value by improving management practices.

So, to summarize: Don't buy in declining population areas, but if you have to buy, stick with multi-family over single-family properties.

Depends on size of basement and what kind of renovations you are willing to pay for.

Could be anywhere from $15-100 per square foot, depending on the size (larger generates economies of scale), the layout (is it one big room or 15 rooms?), the features (does it need plumbing? is it all below grade? do you want data cabling? do you want a second kitchen? etc), the skill of the contractors (are they licensed and insured, or just handymen), the finishes (are you putting in $10 light fixtures or $10K worth of cabinets?), the location (building in big cities is much more expensive than small towns), the time of year (busy contractors are more expensive), etc...

You won't find depreciated prices in Ontario as you would do where Spex lives.

You just have to settle for lower returns if you buy and hold.

Anybody that buys properties that ignores cashflow either has a plan to redevelop that property, bought in a fantastic location that will appreciate, or is a fish.

I've been trying to read this thread since it seems like gold and really want to learn a lot of the things in here. I however have a specific question that I need help with. If anyone here is qualified to answer, I would really be grateful.

About 12 months ago, me and another poker player rented an apartment in Austin, TX. Everything was fine until Black Friday, and we decided to move and sublet the place. We found sub-lettors who paid around $200 less a month than what we were paying, a fine deal for both parties. The apartment complex did not allow names to be transferred on the lease so we had to receive 2 1/2 months up front and they had to pay for Sept-Nov (I think). Either way, to the crossroads. The sub-lettors have been fine and we have all paid our dues on time. Unfortunately, our move out date is supposed to be December 17th, and we just discovered that we needed to file 2 months ahead of time that we are indeed leaving, or else month-to-month starts up. The complex is saying they have delivered mail to the apartment about this, and the sub-lettors simply forgot to tell us about it. I don't think it was malicious in any way by the sub-lettors. However, the complex knew of our situation and they should have contacted either myself or my roommate letting them know what is happening, especially since they didn't hear back from the sub-lettors. Basically I am trying to see there is anything we can do if the complex is not reasonable about this. If I am missing any details, please let me know. Thank you for your time, hopefully someone can be of assistance.

AK87 - The fact that the apt complex didn't recognize sublettors (and may even have forbade it in the lease agreement), it really wasn't their obligation to ensure that they did anything more than to send a letter to the apartment. In addition, I assume it was in your lease that you needed 60 days notice to end the lease, so the fact that the apartment complex notified you at all was likely not a requirement.

I would talk to the sublettors and see if they'll agree to stay an extra month; if not, you may be out of luck (from a legal perspective).

That said, I'm not an attorney, so don't quote me...

I came across a REI selling three multi-family units (3,4,5). The financials for the homes look strong but they are located in a small community.

The community has a population of ~2k and is about 65 miles from the next major center. The major concerns I have about the community is a) 2001 to 2006 census shows a decreasing population b) avg income seems slightly higher than our regional avg but housing prices still seem very low; which may cause problems attracting renters or may cause poor annual inflation raises. c) avg rent is currently 33-40% less than regional avg.

Financials

asking: ~$400,000
gross rent: $54,000
down payment: 20%

my estimates
Utilities: $9,600
Taxes & Ins: $6,000
Repairs: $5,400
Vacancy savings: $2,400
Mortgage at PP of 400K: $18,000
Mortgage at PP of 310K: $14,000

I included two different purchase prices because I`m confident I can negotiate a better price based on a couple conditions:

a) seller lives far away and is having trouble with hiring & thus maintaining the property.

b) the units have been on the market for 10 months with little action.

c) I would buy the units as a group, instead of individually.

d) The seller has started to invest in forclosures closure to his area; it was inferred that he may need the capital.

Does this seem like a good deal and am I missing any other expenses.

Thanks to all that have contributed to a great thread!

The important numbers when evaluating an income producing property are the Net Operating Income (NOI), the purchase price and your monthly mortgage payment -- using these three numbers, you can determine the "cap rate" of the deal and your actual cash-flow from the deal. While there are a lot of other financial factors, there are generally the most important to the majority of investors.

NOI is the amount of cash you have left over after you collect all rents and pay all bills, other than the mortgage. These "bills" include things like taxes, insurance, vacancy, capital expenses, rent loss due to non-payers, maintenance, property management (if you use it), etc. Most people underestimate NOI because they forget that they'll have expenses like replacing a roof and HVAC system every 20 years -- while that may be a long-term expense, keep in mind that part of every rent check theoretically will be used every 20 or so years to cover these expenses.

A good rule of thumb is that all these expenses will -- in the long term -- equal about half of your gross income. So, if you're generating $54K per year in gross rents, to be safe you should assume that $27K of that is going to all these expenses and lost income over the long-term. So, in your example, NOI is about $27K per year.

Cap rate is basically the ROI your property is generating assuming you don't have a mortgage (assuming you paid all cash for the property). While you may not have any plan to buy a property all-cash, the value of this ROI number is that any two investors can use it to compare the same property, regardless of how each of them may finance it.

Cap Rate = NOI / Purchase Price

In your case, if you paid full price, the cap rate would be:

$27,000 / $400,000 = 6.75%

At your $310,000 purchase price scenario, the cap rate would be:

$27,000 / $310,000 = 8.7%

So, if you paid all cash, your returns would be somewhere in the 7-9% range at these purchase prices. While every location and every property has it's own cap rate, generally I like to see cap rates around 10-12% these days, except for properties in great locations and/or great condition -- those will have lower ROI, but there are the obvious benefits of location and condition that improve the resale value.

Now, the last piece of the puzzle is how much you'll actually be earning given your financing strategy. In this case, you say you'll be putting 20% down and paying either $18,000 or $14,000 per year in mortgage (your numbers above). So, assuming an NOI of $27,000, your actually cash flow and cash-on-cash return numbers for this deal would be:

$400K Purchase:

Since you're earning $27K per year and spending $18,000 on mortgage per year, you'll be earning about $9000 per year on the deal at these numbers. Your ROI (cash on cash return) would be your cash flow divided by your investment (down payment):

COCR = $9000 / $80,000 = 11.25%

$310K Purchase:

Since you're earning $27K per year and spending $14,000 on mortgage per year, you'll be earning about $13,000 per year on the deal at these numbers. With your $62,000 investment, your cash on cash return is:

COCR = $13,000 / $62,000 = 21%

That last number is very decent, but here's my concern:

In order to get a mortgage payment of $14,000 per year on a $310,000 purchase and 20% down, you'll need to get a loan of about 4% over 30 years. I don't know of any institutional lenders offering this type of loan these days. Is the money coming from the seller in terms of seller financing? If so, that's the best part of this deal, and may be a reason to do it. With conventional financing terms (about 6.5% over 20 years is what you'll find these days), the numbers above don't work out at all, and I'll highly recommend avoiding this deal.

Btw, the other variable that was neglected here was the gross rents. If these rent numbers are on the low side or the high side (due to mismanagement by the current owner or weird lease terms), all the numbers above could change.

I agree with your overalll assessment, but I'm confused by your loan expectations. Are the interest rates you expect so much higher because it is a multi-family unit? Because 4% at 30 years is the going national rate for a mortgage right now.

4% over 30 years is the typical rate for OWNER OCCUPIED properties these days. In other words, if you're buying a house to live in, you can get those rates.

Investor and commercial loans are MUCH different. Typically rates are a couple points higher and the amortization period tends to be shorter (10-20 years). Also, these loans (at least these days) generally require at least 25-35% downpayment by the borrower, along with a personal guarantee.

Thanks for the advice AU.

Will update later on.

I know nothing about REI but a sudden opportunity came up and I was wondering what I should do.
I recently bought a townhouse in a new build area (no driveways, grass, fences etc), and a house down the street was bought by a REI pre build, and now he's trying to sell it. He's only got one offer on the house, it's lower than he's willing to go, so he was wondering if I wanted pay for the fees to keep the house running (mortage, house insurance, utilities, etc) until April when the area will be completely developed. He has too many properties right now and can't manage and pay for them all. Most people buy in May-April, and there will be a hospital being built across the street by then in a developed area, he figures he can get an extra $50k on the sale. (Selling now for $465k, could be up to $530k in April).
It will cost me $2k/month to keep the place running, from Dec-April is 5 months so I will invest $10k.
We are trying to negotiate a reasonable ROI I can get where we both win, what should it be? What other factors should I consider?

flettl2 - Unless your area is highly unusual in terms of climate or seasonal employment, I think it's highly unlikely that just waiting a few months will increase the value of this property by nearly 15%. It's also quite possible that the investor knows this and is trying to take advantage of you (though maybe he's naive as well).

If you really want to jump into this deal, here are some suggestions:

- First and foremost, you should have some guarantee that you'll be reimbursed for any expenditures you make. This means that you should require a legal interest in the property (be put on the deed or secure a mortgage) that will essentially ensure that you get some money out of a sale without having to take legal action (if he doesn't want to pay).

- Next, make sure you know how much he's into the property for. For example, if he paid $350K and it's worth between $450-530K, you're pretty much guaranteed to get your money back with some additional return (i.e., he has enough equity to ensure you get paid). But, if he bought the property for $450K and is just hoping that he can sell for a good bit more, be wary -- he may be looking for someone to cover the costs while he tries to figure out how to get himself out of a mess.

- Make sure that you have some say in when he sells. What's to stop him from deciding that he doesn't want to sell until next year when the market improves? If you have no say in this, it could be a long time until you get your money back.

- Along with the point above, make sure you have some timeframe for which you'll be paying the holding costs. You say Dec-April, but is that in writing? What happens if the place is still only worth $465K in April -- or worse yet, what if the value drops to $400K?

- Make sure your $2000/month estimate is correct. That amount would barely cover a mortgage on a $300K loan, and it sounds like he's into it for more than $300K. Plus, you have taxes, insurance, lawn care, any maintenance issues, etc to consider.

All-in-all, it could be a good deal, or it could be a scam. As long as you protect yourself legally, there may be a way to make this a good investment. But, if he has any issues with you trying to protect yourself legally, or if he refuses to allow you to have any say in when/if you sell and for how much, beware.

The key to any good real estate investment is knowing your exit strategy, and it sounds like the details of the exit strategy on this one have yet to be worked out.

If you wanted to do that, probably should just make it a loan at 15-20% APR secured by a deed of trust, assuming that he only has the mortgage on it and he has equity in it (that offer on the table - his mortgage) > your loan amount, and that your note will be in second position. I would probably want to make sure there was significant equity, so he can't delay repayment for a few months and then walk away if he doesn't get his desired result.

Regardless, I'd probably pass. I think most hard money lenders would probably want a minimum of 2k to do this, and they have the knowledge and experience to do this painlessly. If he offers you significantly more, it should be really suspicious, and you should ask him why he wouldn't just go to a hard money lender.

He bought it for $360k, he put down a 35% deposit. Then he probably put in about $20-30k on upgrades, granite counters, pot lights, appliances, hardwood etc.

Personally, I disagree with the post above about taking a second position lien on the property -- regardless of the amount of equity, second position is going to provide additional risk that I wouldn't want.

If you can get some type of equitable interest in the property, it sounds like he has enough equity to make this a decent deal. But, I would suggest working with an attorney to ensure that your interests are fully protected.

I know i've said this before...but this is an amazing thread.

I finally bought my first mobile home for $900. I'm attacking craigslist and the newspaper and trying to sell as is, but I'm going to make some small improvements as I go. I'm definitively going to repair parts of the floor, but I feel pretty comfortable with that. I also more than likely have to retile the bathroom floor...we'll see how that goes.

My question is what type of appeal work should be done? All of the electrical outlets are cracked/broked, should I fix those? The carpet is dirty in a few spots, but doesn't necessarily need replaced. The windows are some of the ugliest things I've ever seen...but I feel like that may not matter. I'm continuing to read wheels on deals/this thread, but I just wanted a few questions/ideas going forward if anyone wanted to supply them.

thess123 -

For a home in that price range, the key isn't going to be doing massive improvements, but instead, to provide financing terms that are appealing to your buyer demographic. We've done a few "lonnie deals" (buy low priced mobile homes and resell using owner financing), and the ROI is unbelievable.

Take a look at my blog (http://www.123flip.com) and you'll see some details around the 5 mobile home deals I previously did.