I have to agree with Tien here,as my WORST real estate rentals were BOTH condos back in the early 90's when the market was horrendous.As far as buying one with intention to live in/way of life choice,with the potential financial gains down the road...is fine

But along with the 'standard' rental headaches(esp. in this depressed market)....there are MUCH better RE investments out there IMO

Stephen

I don't know how it is where you are, but where I live there is a 3 year (!) wait to get Section 8 money. Do you know what happens when a S8 tenants gets evicted? The get shoved to the bottom of the list! That means that S8 gives me a really strong control over my tenants.

The first thing that I do when tenants come to me is ask if they have any money. One month deposit and the first month's rent are required. I have a 13 page application that includes the previous 3 year's residency and job history. The application must be filled out in its entirety including all phone numbers. A tenant that isn't motivated to look up a phone number in the book is not going to take good care of my property. The tenant must list all criminal violations. They must also include all evictions. They must sign a waiver that allows me to check their credit history and verify all information. The non-refundable application fee is $30.

When I get an application I first do a reverse look up on whitepages.com to find out if the phone numbers given are registered to who the tenant says. Lots of tenants will give you fake information or put the phone number of a friend or relative rather than the former landlord. If I find discrepancies the application is rejected immediately. I note why the app was rejected and file the app for three years.

Now I run the credit report and criminal history. NOw, be aware that the federal gov't in their infinite wisdom has passed a new law requireing that small landlords jump through lots of hoops in order to do legal credit checks. YOu should prob look into those regs to protect yourself.

Anyway, I look for certain things on the credit report. All my tenants have bad credit. But I want to know WHY their credit is bad. Debt due to medical bills is really common. So is bad credit due to divorce. But mostly I'm looking for prior evictions or outstanding collections from past landlords. If there is outstanding debt to other landlords I require the tenant to clear the debt before I'll lease to them. Nobody has ever taken me up on it, but its my small way of trying to give back to other investors. I also verify that the addresses listed on the CR are the same as those reported by the tenant on app. If not, the app is rejected.

If the credit report jives w/ the app. I move onto criminal history. I reject anyone that has been convicted of and sex crimes or domestic abuse. I don't allow abusers in my properties. Tenants are required to disclose if they have ever been ARRESTED for domestic abuse. This is harder to verify. So often the abused person will not press charges. Either way, I don't accept them.

For S8 tenants I don't require income verification b/c S8 already has done that. But for non-S8 applicants I require the last two pay stubs w/ the ytd earnings.

If they pass the criminal check, its time to pick up the phone and start making calls. When you talk to employers, don't say "Does John make $9.50 per hour?" You say, "how much does John make?". Use lots of open ended questions. "how much was the rent?" and that kind of thing. You're trying to catch lies, so try not to give up too much info. Sometimes I've had HR departments that won't give me any info even after I fax in the release. If you get someone like that try a question like, "john said he makes about $9.50 per hour, is that correct". That'll usually get you the information you want.

THE NUMBER ONE RULE OF TENANT SCREENING IS ASSUME EVERYTHING IS A LIE.

After you make all the calls, you can approve the tenant.

Now, according to federal law you can't discriminate on the basis of race, sex, religion, ethnicity, or disability. If a disable person in a wheel chair wants to move in and needs a lift installed you say, "Yes, that is fine, however the lift and all installation of the lift will be at your expense and the removal of the lift will be at your expense at the end of your tenancy." Some states also have more discrimination codes like, sexual orientation, age, children, etc. Check your local laws.

Other than those though, all other discrimination is FAIR game. You CAN legally discriminate against sex offenders, cat owners, dog owners, people that drive purple cars, smokers, non-sex offenders, etc. Just be sure to write out your criteria in order to avoid legal problems. If you don't write down your criteria (dated) and note specifically why you rejected an applicant based on that criteria, you could be in trouble if an applicant makes a discrimination claim against you.

Yes, all of my investments are within driving distance of me. I don't invest out of state because I can find enough deals in my area. All my properties are within a few hours drive.

The idea is to buy properties for less than market value or to buy properties where you can add value. What you're proposing is buying properties for market value just because the market value is lower than it was a year ago.

I assume that you're hoping that the value will increase rapidly in the near future. But how do you know that the values will increase? You don't. Apparently it hasn't occured to you that a year ago the prices might have been so inflated that they won't reach those heights again for many years. So here is my question for you: What is your plan if the property doesn't appreciate at all for 5 years? What will your ROI be? That scenario is very possible.

If you are serious about getting into REI, I'd recommend that you move to an area where you can get started with just a little money, or you get some money an start investing out of state.

Not necessarily. If you've got 20% to put down and a reasonably credit score you might be able to get a no doc or low doc loan.

Ask your banker. His opinion is the only one that matters. As far as I'm aware your parents can cosign a loan. But I don't really know for sure.

mmmm....I THINK that its illegal to invest student loan proceeds. Not that you have a huge chance of getting caught or anything. Maybe some of the other posters would have more info on this.

I, like Tien and StephenNUTs, think that condos are a poor investment as a rental. Condos don't normally cash flow. Also, you don't have any control over maintenance fees. My brother lives in DC and recently sold one of his three condos. Luckily for him a few weeks after closing the condo fee went up to $1,000 per month! That'll put a damper on your cash flow quickly. Normally condos are governed by a volunteer board that makes all financial and property management decisions for the facility. I've found that as a general rule volunteer boards of nonexperts tend to be incompetent, petty, arrogant, and short-sighted. Dealing with volunteer boards is part of REI. But I would never put so much of my investment into the hands of a volunteer board as you would have to in a condo.

Just my two cents.

These questions are primarily regarding commercial properties if you are taking those type of questions:

What sort of Cap rate and potential to increase rents would you be looking for in multi tenant commercial properties?

If a commercial tenant was paying on time on a month to month basis and his business could not handle a mark to market rent increase, would you raise the rent anyway or start marketing the space while he operates at below market rent?

If you were to put together a Limited Partnership and act as General Partner for a 50 unit commercial project what compensation in terms of percentages of cash flow and gain on sale do you think would be fair?

spex x,

Thank you immensely for all that information.

By commerical, I assuming that you're meaning primarily retail space? I'll start my response by saying that I don't really like to invest in retail space. There isn't anything wrong with it or anything, I just never really took to it that much. It probably has something to do with the fact that I haven't ever been able to find any really good deals on retail properties. I haven't owned any in some time. At this point I doubt that I'd consider branching into that market even if I did find a good deal because I'm already trying to move my investment into more passive instruments like notes and mobile home parks and maybe storage if I can ever find a bargain.

Anyway, in general I wouldn't consider a property that couldn't offer a minimum 10% cap rate and a 25% cash on cash return. I'm sure that these criteria are the primary reason that I haven't gotten much into the retail arena. But those criteria would be the same for multi tenant warehouses and storage.

Personally, I'd probably allow him to operate while I market. I dont' know that there is a clear right answer though and I think it depends a lot on the preference of the investor, his/her money investors, the business owner, and more importantly the market.

Well, first, I wouldn't do a deal in a limited partnership. Thats probably why I've only got 50 units after 15 years rather than 150 units. I don't work with partners at all. For some stuff I've got investors that take a lien position on the property.

Sorry I can't be of more help to you.

spex,

I'm aware its illegall, but I wouldn't put an absurd amount in from the college loans, so I would not get caught, and I'm cool with that.

Ya my parents can cosign, thremp actually corrected himself on the other thread...

As far as condos go, I figured it might not have as big of a chance for profitablitly, but I don't have to worry about anything like needing a new roof, leaky pipe etc. Maintenence fees I view as kind of an insurance policy when with a condo... instead of probably paying 150 dollars a month or maybe paying 1k for a few months, I could just consistintly pay 250 a month... PLUS I don't have to deal with the headache of doing maintenence on a home.....

acceptable logic?

online, what do maintenance fees cover in an condo? structural issues (roof, foundation, exterior painting, exterior plumbing issues) and lawn care?

the average homeowner spends very little on those areas each year. a $200 lawn mower and a roof every 20-30 years will cover much of it.

iver never owned a condo but i believe all of the upkeep that you would expect to pay on the interior is your responsibility.

What is a cap rate and how is it calculated?

What rate of returns are you using for your residential properties?

Are these all after tax numbers? In general, how much do taxes bite into your returns?

What area of the country do you operate in?

How many hours on average do you spend looking for and completing a deal?

What do you guesstimate your long term returns have been through RE investing?

Do you think your RE investments would beat a buy-and-hold investment portfolio over your career if you instead made $25 an hour playing poker those hours you searched for deal and managed properties and just invested the money in passive investments?

What are the most serious and most common risks of RE investments and how do you minimize them?

Do you have other investments other than RE to balance market risks?

How do you see RE investment strategies going forward? Will taxes and gov. regulation continue to decrease profits or will RE be more attractive than a passive stock market strategy?

Thanks and love the thread!
--Jeff

Can't you buy a duplex instead or do you live in an area where it must be a condo. A duplex would probably be better. In any case, in any investment I think that you have to look at your overall financial picture. I think that your plan will only be valueable if you take the money that you otherwise would've spent on rent and invest it elsewhere. That way you come out ahead even if you only break even on the condo over 5 years. But as a pure RE investment (i.e., considering only the income from rents), this would not be a deal IMO.

spex,

thanks alot for your help and time in responding to me.... just because of 250 dollars a month (and minus some money in other expenses) this would be a bad investment?

Cap rate (capitalization rate) = NOI / purchase price
where NOI (Net Operating Income) = gross income - expenses before debt service

The rate of return that I need depends on the property. My minimum criteria are 10% cap rate and 25% cash on cash return (ROI). Those criteria are not set in stone - I consider each deal on its own merits. For instance, I might accept a lower cap rate if my COCR is real high.

Those are before tax numbers. As I said in the OP, taxes are simply too hard to discuss here. My tax liability is irrelevant anyway because it would be very difficult to duplicate for someone starting in REI.

Good question. I check all of the local MLS listings and Loopnet several times per week. I don't often buy properties from these venues, but I like to keep abreast of whats on the market. I go to lots of REI club meetings and I share a meal with other investors, bankers, RE brokers, etc, a few times a week. I don't know if all of that amounts to looking for properties or not, but thats how I find them.

The time it takes to make a deal depends more on the seller. If he needs to close really really fast, the property is higher risk, and thus, the price will be much lower. But normally the whole process takes about 6 to 8 weeks all told. Not that much time is actually needed to review documents and such. What takes time is conflicting schedules - inspectors, lawyers, city officials, etc. I dunno, it depends on the deal.

I dont' have a clue. Sorry, I guess that this would be something that you guys would want to know if your're starting off. But I jsut don't know how to calculate it. Its high.


Yes, I'm sure that my returns would kill that scenario. For instance, I bought a half full mobile home park for 12% cap rate and a 27% COCR at its current income. I then filled the other half of the park using other people's money. It took about a year to do working a few hours a week. AT $240 lot rent and 35% expenses, filling those spots increased my monthly cash flow by about $3,000 PLUS I get a peice of the notes on the homes PLUS another $300,000 in additional equity. I did that in one year (a good year, granted).

Then the next year I installed individual water meters at a cost of about $15,000. That increased my bottom line by about $800 per month (64% COCR) PLUS an additional 80k in equity.

Also, any management work I do is because I want to. I also do some of my own renovations and stuff as a hobby. I have managers that do the majority if day to day operations. A lot of my working hours are spent on bookkeeping and stuff, and looking at new deals takes up a lot of time.

Underestimating expenses by far. The best way to combat this is to get good realistic numbers from the seller. Also, you have to have an idea of what expenses you should be seeing on the paperwork. So education is important too.

[/QUOTE]
Do you have other investments other than RE to balance market risks?[QUOTE]

Yes. I have money in mutual funds. I also own a few position in local small businesses.

ick, very very tough question. I just don't really know. I can tell you this though: Government regulation and compliance is getting ridiculous. Taxes will always have an impact on REI. However, I feel that every investment type has these same risks.

If you want to comp REI w/ stock investing, I can't really help you. I don't understand stock investing at all. However, based on what I've read on this forum (and most of it I just don't understand), I can say that stock investing seems a lot harder than REI. REI is pretty easy if you're willing to learn and think creatively.

$250 negative cash flow less expenses is a bad investment. That is exactly what I'm saying.

Spex, what a really great thread. I appreciate taking your time trying to educate some new investors. (Including myself)

background:
I'm 21 and I have one more semester of college for my A.S degree. Originally I wanted to be a chiropractor. Things have changed and I want to do business/REI. Sure, I have read all of the Robert Kiyosaki books and heard people say how easy it is to make positive cash flow. RIIIGHT

You mentioned you were involved in development, and commercial re. Warehouses, strip malls, office space, etc. What are you opinions about returns in these categories, and are you in them still? What would it take me to get started in these areas

I have been looking to invest in single mobile homes, or even parks if I can get financed. (I am a student, and I farm and play poker for dough) Getting financed will probably be my biggest issue, due to lack of tax returns + steady job.

Problem: Analysis Paralysis!!!! Should I just start in 1 area and go from there, or..? In my experience residential has been a pain for the money. I've heard commercial offers the best opportunity for HUGE returns, is this true? Thanks man! Jonathan

Great answers and much appreciated! I wasn't referring to retail specifically, more like office and service. I agree 100% with your NOI requirements, the prices of most all deals where I live seem to bee banking 100% on appreciation and I am a cash flow guy. You make me feel sane!

The GP compensation I was referring to was if you raised money from limiteds to invest with your philosophy, what do you think would be fair percentages of cash flow and gain on sale for you to take? You may not want partners, but with your knowledge, track record and investment niche I bet their are lots of people who realize they can't do what you do but would probably love to do it with you.

At any rate, thanks for sharing, I particulary liked the mobile home finnacing idea. Good stuff.

I've found it to be more difficult to find great deals in commerical properties than in apartment buildings. I'm not currently into any retail, office or warehouses, however, I'm actively looking for storage. It does take a lot, both in terms of experience and money to get into the commerical arena. I'd recommend that you start much smaller and build slowly. Remember too that you don't have to hit a home run every time - doubles and singles are what wins games.

It takes a lot of time to get rich in REI. Anyone that tells you different is just wrong.

Financing gets easier if you've got money for down payments. You either need money or credit in order get a loan for RE - from a bank at least. In my experience, despite what gurus will say, its not possible to start in REI with neither money or credit. But if you've got about 20% to put down you can get a no doc or low doc loan at a slightly higher interest rate.

Obviously I love the mobile home idea - I've already suggested it to another poster in this thread. I think that is hands down the best way to start out.

Well, thats kind of what I like about the mobile homes. They're very very low risk if you buy them right. If you buy a MH for $1000 that will retail for $4000 easily, how hard will it be to get your $1k back out of it in a pinch? Not too hard.

Any commercial RE is NOT FOR BEGINNERS!! DO NOT ATTEMPT TO BUY COMMERCIAL PROPERTY WITHOUT PROPER EXPERIENCE. If you've got analysis paralysis now, why do you think that making a much huger investment would help that? Start out slow, gain experience and money, and build your confidence. The best way to start is to just start.

I understand and completely agree about starting small and then proceeding from there. How do you find mobile home parks for sale, and what "system" do you use for analyzing there value(and upside potential.) I have a good chunk of change for a down payment, 40 to 45K, I'm just not sure which way has the most room for "seed growth".
Isn't there certain codes for old mobile homes that is a standard, etc?
Do you post on any other REI forums? biggerpockets, thecreativeinvestor...

lets talk about the current real estate bubble. how do i go about finding the best possible deal for my price range? i am interested in bargaining skills with the bank and the seller of the house.

sorry for the basic question but how does one 'put in a bid for a home'? is it just calling the Realtor and making an offer?

what websites are the best for finding listings without inflated prices.

The best way to find good MHPs for sale is to drive around and ask park managers if the park is for sale. Right now is a great time to buy MHPs. It seems to me that a lot of the guys that made MHP investments when MH living as in its prime (late 70s through 80s) are ready to sell off and retire. A lot of the time these guys are willing to sell but not actively pursuing buyers. That is what I've done and now that people know I buy them I get referrals to other parks to buy.

With $45k I'd start by financing mobile homes. Once you've got 100k, you can take a chunk and buy a small multifamily while your MH money continues to work. Then repeat. IMO, the only problem with financing MHs is that they don't appreciate. What I could see happening is that you get into a cycle where your notes are constantly paying off and all new acquisitions just replace the notes that are paying off, i.e., no growth. But if you got 20 MH notes paying you $250 per month it won't take long for you to generate significant capital for investment into other venues. Plus you've got that $45k spread out over lots of small deals which limits your risk a lot more than buying one property.

haha, you're telling me. When I meet investors and brokers and tell them my criteria, they just guffaw and tell me that's unrealistic. I shrug and say, 'yeah, well...'

I dunno, there are just too many variables. It depends a lot on the project in question, my track record aside. Part of the reason that I've never taken well to working with partners is that the stuff I buy most RE investors - particularly those that would be LP candidates (money w/o knowledge to make the deal themselves) - are not keen to invest in. They think that its too risky and expect returns that leave me with little to stick in my own pocket.

Another reason that I don't think I could be pinned down is that it really depends on how badly I need the LPs money. My philosophy has always been that I only need enough money to get the things that I want. I'm not like Donald Trump that likes to get richer just for the challenge. So taking doing stuff like taking LPs and whatever might make me richer, but it won't really improve my life too much. So it comes down to that I just don't really need the money. I've got enough to take advantage of opportunities as the arise and I'd hate to give up a piece of that to LPs.

Is your goal to buy an income property or a personal residence?



I'm not aware of any. I know that there are several that advertise foreclosures for sale, but I can't speak to the reliability of those sites.

Spex,

I've owned one rental property, a triplex, and I quickly found out that I wasn't cut out to be a landlord. After a year and a half I lost a substantial amount of money just from being too lazy to enforce rent deadlines and all the other things you shouldn't do/put up with as a landlord. At the time, I was 4+ tabling 100/200 - 300/600 all day with poker, which I'm sure a lot of people here can understand made me care less about driving a half an hour to collect $425 from a tenant. It's ok, lesson learned.

Now I'm heavily involved (about 75% of my net worth) in high yielding Trust Deed loans out west that pay 12-16% and are secured by the value of the property. Our LTV's are a very conservative 40-50%. I've figured out that being strictly an investor has been the better option for me in real estate.

With that in mind what do you think some other avenues for me are with REI that doesn't involve me owning any property. I'm looking for a MINIMUM 10%+ annual yield, as anything less I'm better off investing in the stuff I'm already in.

I visit creonline.com quite a bit and have read a lot of the mobile home investing ideas. I think this might be the avenue I would actually be intersted in buying property. I met a guy playing live poker last week that does mobile home investing as a career. What he described was just what I've read on creonline. He buys cheap from desperate sellers, does some repairs, and quickly resells the property for a big profit. He also holds the note at up to 23% interest. All of that certainly makes sense to me, as the people living in mhp's are probably not the smartest people on earth with finances. It seems to me they would be the easiest mark possible. Just give them a payment they can afford.


So that's me... the lazy REI wannabee

There are a few avenues that you could pursue. First, when you say you're Trust Deed loans, that emcompasses several things. I think that we've kinda talked about this in the past and you said that these loans were on new construction buying the paper from developers? Is that right?

Anyway, you could expand that into buying more and different types of RE paper - like specifically discounted notes. Now, I can say that it is difficult to find quality RE paper. But if you get plugged into some note brokers the offers will come to you. Check out www.noteworthyusa.com for more information. Honestly, I'm a relative noob when it comes to paper and I've only done a few deals.

Another thing that you could do is start loaning hard money to house flippers. The hard money lenders that I'm aware of make about 20% on their cash. As a lender I think you'll have to jump through some hoops to get started - like state and federal red tape. If you're not into the red tape thing, I'm POSITIVE that if you go to an REI club meeting, stand up and say, "I've got private money to lend as a limited partner or mortgage holder" you'll get plenty of action for a 10% yield. Obv you don't want to tell people that you only need a 10% yield though.

Well, MH investing isn't exactly hands off. You're probably going to have to chase your payments from time to time. What you could do though is buy the notes from MH investors after they're created. You could buy partial notes too. Partials are nice b/c you can make the other investor service the note. I bet you could make yourself a minimum 20% yield on passive MH notes.