Sorry, I don't know.

I'd be more inclined to look at decent buildings that you can get cheaply rather than buildings that have to be turned around. As long as there are people there, you'll have some market for rentals. But it seems like people are leaving. Similar things are happening in Detroit. I wouldn't invest in these markets just because they're cheap. Not unless you have a strong provable income on the property.

Hrm. Any insight to what the largest monthly expected swings cash flow wise in your portfolio are to your overall cashflow (Like... you own a water park that makes 10k a month in the summer and costs 2k a month in the winter. If you're cashflow is 300k a month... Whatev. If its otherwise 7k a month... This could be an issue.)? Its seems this is something I should care about, but I'm not really sure at what point I should be bothering to.

Hopefully this will be one of the multitude of BR related issues that I research and never have to use :/

I'd just average it. In the summer I'd set aside enough cash to cover my expenses in the winter. I'd average all the income and expenses for the year to determine my monthly cash flow. Everything should become apparent to you in the due diligence process.

Word. Perhaps I'm nerding this out too much.

There are probably good and bad ways to handle it though (and thus an optimal way).

Yeah, I'll probably play with the numbers. Since mostly it interests me, though I doubt there'll be a significant advantage to knowing exactly how to manage cashflow v just averaging or using a good guesstimate.

RE is not a science. markets are extremely localized down to the individual street or block. This goes for rent as well as sales. For this reason you cannot come up with formulas to estimate cash flow expenses. The only proven formula is experience.

Stop please. This is absurd. I was merely curious what spex did, if anything, to quantify known cash flow risk. This is simple to do and you can list the known knowns and known unknowns from which to quantify downside and some sort of reasonable risk prevention.

I don't want to derail this thread, but its very obvious to anyone reading that there is a better method. Whether it is worth it to figure out the better method is an entirely different question, but the answer lies in math. Not guesstimates or voodoo or witchcraft.

I'd be more than happy to explain the little I know about variance/risk/etc in another thread wrt Kelly staking if there is interested in another thread. But fair warning, I'm like noobzor compared to people with actual skillz. Though I have a decent grasp of the fundamentals.

I'd definitely guess no ;p

Its atleast useful to create/know the results of some models so you can atleast make some better generalizations. But yeah, I mostly agree. To try to learn optimization stuff solely for RE is pretty pointless. But some of the conclusions are pretty interesting wrt a wide variety of things and optimal risk etc etc.

Though if I wasn't already a dabbler, there is 0 chance I'd bother with it.

i think my response came off wrong. There is a way to quantify expenses/risk/cash flow. Yes you can estimate vacancy rates for your local area. You can take a look at a property and inspect every nail and board. You can evaluate every house within a mile radius that is for sale or has sold. You can come up with estimates for cash flow/risk/equity but experience, experience, experience.

What I trying to say is that each deal is different and has to evaluated as such. Trying to estimate unexpected repairs/costs/vacancy rates is not an easy thing to do and varies greatly from one property to the next. Experience is the best weapon you have in real estate.

Gitty,

Yes. I agree with that totally. You must have experience to create accurate assumptions otherwise your calcs/models/etc will be worthless. Garbage in, garbage out.

I'm referring more to known cash flow differences, which stemmed from the question about including heating bills in with rent. Rent would be constant, while heating costs would change this would give a known non-linear cash flow which (assuming cash flow isn't magically all up front) is less preferable than linear cash flow. To use and extreme example if we knew a business would earn 2 mil per month or lose 1 mil, but only cost 1 dollar, it would clearly be unsuitable for me. But if it earned 20k per month or lost 10k per month and was still 1 dollar it would be a insta buy. At some point there needs to be a cut off drawn to discern the amount of risk that variable cash flows present, especially when coupled with other unknown costs (emergencies, repairs etc) in a portfolio. To get a completely accurate figure would be silly. But generally people are way way too nitty for optimal growth (making as much money as possible as soon as possible) and would be quite surprised.

Spex,

Again thank you for this thread. I am currently reading Deals on Wheels and feel I have a lot to learn before I try a "Lonnie" deal. However, if a really good deal popped up, I would jump on it and learn as I go, but I don't have any knowledge yet of how to recognize a good deal. Just came across this ad and was wondering what you think.

"I have a 2 bdrm trailer 14X70 that I need to give away. It either needs to be moved off the lot or you can put in an application to live at the trailer court. The roof was recently tarred and the furnace is fairly new, with central air. There are new windows in livingroom and kitchen and hallway. Has washer and dryer hookups, may leave the washer and dryer if I can not find a place to use them myself. There is a built on porch. It is an older trailer so there are some things that eventually need to be fixed. The trailer is located at XXXXXX. Rent is approx. $360ish. it varies every month because water/trash and taxes are added on and they send you a card telling you what you owe for that month. Because of personal problems I can not stay there and can not afford to move the trailer. It is yours to haul away or to apply at the park. Please call XXXXX for more details."

First thought is that it will have to be moved (even though the seller says it can stay). Otherwise, wouldn't he easily be able to find someone to take it for free? I looked up the trailer park - it's about 30 mins from where I live and has about 250 lots. Worth a look?

Spex any good books on buying Foreclosures or REOs? I want to get my first property this summer and am trying to read up on as much as possible to have an idea of what I am jumping into.

yup, definitely worth a look. I'd jump on it if I were you. Talk to the park manager first to determine if they'll play ball with you. Obv, sometimes a 'free' trailer might end up costing you lots. Unless this thing is a 1990 or later and in decent condition, its probably not worth moving. In any case, IMO, a mover is not a good first lonnie deal. I believe that Lonnie recommends against moving homes.

Spex,

Thanks for your thoughts regarding the Rust Belt. I was wondering... I noticed that you really stressed how middle class neighbourhoods are unsuitable for finding positive cash flow investments and investors should be staying with lower class areas. However my father feels our focus should be on decent properties, of which we will be trying to buy reasonable quality. Of course COCR will likely be less but in the long run one's risk should theoretically be reduced and gains from appreciation will be higher.

We have a bankroll of approx. $1 million to put into this venture so we won't be starting at the bottom so to speak. We will likely be looking at commercial properties and larger apartment buildings if we look at residential. Is my father's view reasonable or are we missing something?

You can't find decent properties of good quality in low income areas? I beg to differ. Why do you think this?

Huh? How do you figure? What about middle income areas do you think will reduce your risk? Middle class people are almost NEVER long term tenants. My tenant turnover is less than 5%. You think that a property that isn't S8 will have that low of a turnover? No way.

I've got another question for you. You think the gains from appreciation will be higher. What will fuel that appreciation?


I think that you need to think your ideas through very carefully. I would seriously question some of the assumptions that you've made above.

Thanks Spex. I'll use Michigan as an example. The state as a whole is in economic crisis and many counties are declining in population. However there are other counties that are increasing in population and I feel will do well in the future. Land on Lake St. Clair and St. Clair River is relatively cheap, yet here on the Ontario side you can't buy any urban or semi-urban lakefront/waterfront property from Toronto down to Windsor for less than 7 figures. My father feels those areas are currently undervalued and buying or developing there will be profitable long-term. Baby boomers will be retiring and purchasing waterfront properties around there. If we buy say a retail plaza or waterfront apartment building in these counties it could be lucrative but wouldn't be considered lower class. I guess my question is, are you saying that with commercial properties you would still stick hard and fast with lower income neighbourhoods?

I am just trying to compare the logic my father uses for approaching real estate investing with yours. I'm sure there are multiple paths up the mountain so to speak.

What is the best way to capitalize on all the foreclosers that are going on right now?

Either negotiate short sales with banks or buy REO properties. Either way, buy for less than fair market value. Most of the time you'll need to fix these properties. So buy for less than FMV, fix, rent or sell. Thats about it.

Do you just walk into banks and start asking about their available properties or are there other channels for this process?

What do you mean by 'undervalued'? A property's value is determined by what a willing buyer will pay for it. Are you saying that properties are selling for less than what most buyers will pay for them?

As to RE being 'profitable long-term', I'd say that RE will be profitable long term just about anywhere. Not everywhere will show the same appreication rates. But you can make up for less appreciation by collecting cash each month in positive cash flow. Then you can reinvest that cash into other properties.

Besides, profitable someday doesn't taste so good when you have to eat beans every day because you're going bankrupt right now. If you buy properties that make you money right now, then you don't really have to worry about it.

So just to be clear, what you're proposing is that you buy a property that will show break even or negative cash flow because it is in a location that you suppose will someday be a hot destination for retirees? Is that about the gist of it? I'd urge you to take another look at what happened to the speculators in Miami, Vegas, etc. Those guys were thinking the exact same thing.

I've got news for you. If you buy at less than about a 8.5% cap rate you can't make a positive cash flow. Your expenses and debt service will eat all the money. Besides that, banks don't like to lend you money unless you can make at least a 1.1 debt coverage ratio. But that is irrelevant. What are YOUR minimum criteria. Thats what counts. Have you and your dad sat down and really thought through what your goals are with this investment?

yes, you are right about that. I have one philosophy among many. Partly my philosophy is the result of that I started with nothing and I've never been able to afford to lose any substantial amount of money. I only had one shot, so I stuck with investments that made sense and I've never taken many chances. Now I'm to the point that I don't need to take any chances, so I don't.

IMO, what you're proposing is gambling. I would rather find a deal that makes sense today than a deal that might make sense in a few years if x, y, and z happens. That is just my opinion. FWIW.

yeah, you can do it that way. Most banks have a realtor that they deal with to handle their REO properties. I dont' fool with single families anymore though, so you might ask GiddyUp what the best way to find the REOs is.

Spex not sure if you saw my question, maybe GiddyUp can answer. I am also interested in REOs and foreclosures, I am in Ohio so a similar market to what Johnny is seeing in Michigan.

Any good books to read up on that you might have heard of on these subjects? Also any good online forums for these type of talks? Zillow.com is a shiathole for discussions.