Spex,

We are in the process of finding out more information on these lots. The current owners did not charge rent per the real estate agent. I don't know if they owned the homes and lived in them or what the deal is. Currently we are checking on are rent in the nearby towns for their lots as well as placing a test ad on Craigslist to see what kind of interest there is in that specific town. Also checking with the city on zoning issues and utilities. Each lot is set up with its own water and electric. I'll update when we get more information.

BTW, each time I've talked to the realtor she stresses how motivated the seller is. The lots appraise for $17,250. I hope to get them for much less than that.

Thanks.

What discount rate would you use for evaluating keeping the park?

Cost of capital [plus a bit to allow for interest rates rising] or some sort of opportunity cost measure to include the fact you don't have the money to do the other two flips? If the latter, how do you calculate it?

Do you really need to sell the park to free up capital or is getting it revalued if you buy cheap and then refinancing to get more money not as easy as it sounds?

I'd use an opportunity cost rate, but more simplified. I'd just take a typical stock market return of say 10%. Doesn't really matter all that much though. It doesn't have to be exact to be useful.

No, you don't have to sell at all. This depends on what your goals are. you may want to be more aggressive, and in that case, you should sell. Or maybe you want to be more passive, in which case you'd sit back and collect cash flow. But when you're doing these kinds of projects, its important to realize that the lion's share of the gain is made by increasing the income. After that your cash flow & equity gains are going to level off. If you want to make even more money quickly, sell out and buy another flipper. But it depends on what you want to do.

spex, I'm looking at an unusual deal right now and wanted to get your input.

Seller owns 75 single-family houses, free and clear, and is trying to decide whether to sell them now as a bulk package or sell them off one by one.

Make the following assumptions:

1. Seller could sell the package now and net $8MM cash at the table.
2. Houses currently cash flow $55k per month NOI.
3. If they were sold one at a time, you wouldn't sell any for 3 months and then 5 apiece for the next 15 months, even.
4. If they were sold one at a time, your cash flow would stay the same for 3 months and then decline evenly over the next 15 months to zero when the last one was sold.
5. If they were sold one at a time, the total net proceeds of all sales would be $10MM.

Ignoring tax implications, what's the discount rate Seller would be taking by selling the package now instead of selling off one at a time? I know it's somewhere approaching 20%, but I can't figure it exactly.

(I was told there would be no math.)

I think you are confusing the term 'discount rate'. A discount rate is the safe rate you use to calculate the discounted current value of future cash flows. Lets assume that you use a safe rate of 10% - roughly your average stock market return. Or you can use a Tbill return if you want. Whatever you feel comfortable with. So what we're comparing is the difference between the cash flows of selling now and investing at 10% and selling over time and reinvesting each cash flow at 10%. Its important to understand that in an NPR calc the farther out a future cash flow is the less value it is going to have.

Ok, so here is how this is going to work. Scenario A is he takes $8M now, so NPV is the wrong calculation (no future cash flow to calc). If we assume that he can invest that $8M at 10%, after two years he'll have 9.68M for a 1.68M gain.

Now, rejecting $8M now in favor of scenario B - sell houses off individually - is the same as PAYING $8M for the properties now in hopes of making more in the future. So we'll use $8M as the cost of this deal. Basically, if he keeps the houses for 3 months, then sells them off 5 per month until sold, his cash flows will be
Cost: -8M
Year 1: 6.479M
Year 2: 4.044MM
NPV: 1.21M

The NPV of that stream of CF at 10% discount rate is a gain of 1.21M. Since the expected value of A (1.68M) is bigger, that is the best investment.

Spex, isn't the NPV of deal A 0 by the definitions used? You compared the NPV of scenario B with the future value of scenario A.

Should be I think.

Scenario A:
Year 0: $8mm

NPV = $8mm

Scenario B:
Year 0: $0mm
Year 1: $6.479mm
Year 2: $4.21mm

NPV = $9.121mm

Yup, you are completely right. I totally flubbed that calculation. For instructional purposes to everyone following this unwieldy thread:

I screwed the calc up for simply not thinking. the NPV calc assumes that the money can be invested at the discount rate. The calc shows you if you are going to make more or less than your desired ROI. So if you know you can get 10% on your investment elsewhere, NPV will factor in the opportunity cost of that 10% ROI, and figure out if the proposed income stream is beating that ROI. A negative NPV is NOT beating that ROI, and a positive NPV IS beating that ROI. If the NPV is 0, then the value of the future cash flows equal to the discount rate.

So the post above is correct. Scenario A NPV = 0 and B NPV = 1.121M. Scenario B is clearly the better choice.

This illustrates something else important too. I ALWAYS have other investors check my math before I do a deal. I tend to be too hasty at times with my calculations b/c I find it boring to recheck them after I do them once. It never hurts to have another set of eyes on the problem.

Thanks guys, that is great.

I may have misused the term "discount rate," so I guess my question is really return on investment:

What is the ROI of investing $8MM today and getting $10MM in 18 months, based on the staggered selloff I mentioned?

You gotta do an IRR calc in excel or open office. I'm too lazy to do it for you. Its easy to do though, particularly in open office.

Hey spex. Thanks a million for both starting this thread, and even more appreciatively, continuing to respond in it.

Here's my situation:

I am looking at buying vs. renting a condo in the current Toronto market. Basically just something small for myself, a 1bdrm in one of the large complexes by the lake / financial sector for ~$300k seems to be ideal locationwise.

My situation is that I spent the last year "flipping" a home in Toronto that turned into a rental property as the market turned grim and selling made little sense. (http://forumserver.twoplustwo.com/62...-house-443916/ - tl;dr) It's turned out to be a pretty great rental property given the crazy low mortgage and the fact that its in a part of the city that pretty much all speculation leads to being the next up-and-coming area.. so my plan is to hold on to it for at least 5+ years as a rental property.

That left me with living back at home with the parents for the time being as I got my feet back under me financially through poker (after having not sold the house), and now looking to move back into the city on my own in the near future.

I'm just curious if you have any insight for me. It's probably pretty relevant that my career plans are essentially to keep generating cashflow through poker while investing it, most probably into real estate with income properties in Toronto. So if I do choose to buy, in 5 years from now if I'm looking to move into a home with a family (oh god) or whatnot, I'll probably be in a situation where I can hold onto it as a rental property (and hopefully add it to my already blossoming RE portfolio..)

I'm currently leaning towards buying, but I don't want to make a blind decision without at least taking renting into consideration beforehand. I'm guessing it might be a good idea for me to really run some numbers seeing how my flexibility gives me leverage and options, like say, renting the condo (for myself) and using the down payment $ for alternate RE opportunities like a separate rental unit for example.

Any advice or direction is much appreciated. Thanks.

16.03972084 %

I compounded annually to establish your opportunity cost. Of course to be completely accurate you would need to get a more detailed analysis based on the staggered selloff. That is assuming all transactions are uniform, or at least knowable. Why would you want this, and why can you not do this yourself?

Bump.This shouldn't fall off the front page.

Took me off and on three days to read this epic....great info. Thanks bro....now what about the cliff notes Lol

Hey Spex,

Thanks for this thread, I've read through its entirety.

I'm just wondering whether you have read John T Reed's "Succeeding".
If so, was it worth the read?

After reading some reviews of his stuff, its coming across to me like he is very self-righteous and narrowminded regarding people who are in circumstances that are different to his or a circumstance that he has not experienced. e.g. he thinks living in one spot for your whole life is the best thing because it is more "stable." (pfft)

Anyone else with anything to add about J T Reed's books, in particular, "Succeeding"?

I've read most of "Succeeding" here are a few thoughts (in no particular order):

1 - PRO: Reed gives his unvarnished opinion (which I like). Even if I don't agree with him on certain things at least I know where he stands. He isn't trying to hide the ball or conceal his edge. I have to give him props for this, he isn't some "the only thing standing between you and success is you" con artist. He knows life isn't about "fair" and he lays out reality from his perspective. He has some really practical solutions for some of life's more significant issues.

2 - CON: He is hyper-critical of things he does not favor (e.g. the military, large organizations). Putting the substance of his analysis aside, I found the hyper-criticism tedious (bordering on whiny at points).

3 - PRO: It is practical (not a bunch of pop psychology self help nonsense). There are a decent number of gems (i.e. ideas that make you think, possibly change your behavior) as well as a number more obvious ideas that we all need to be reminded of (e.g. exercising is good for more than just your muscles).

4 - CON: I didn't find the book to be well organized or thought out. It's like a bunch of mini-essay's compiled into chapters and bound into a book. This is a good thing if you just want to see his thoughts on a particular subject (or read it while your in the bathroom), not so good if you are looking for an in-depth analysis or easily identified coherent "system". It is self published (i.e. the number of typos exceed the average).

5 - PRO: He is substantive. It might not be pretty, it may be one sided, but it certainly isn't fluffy.

6 - CON: There are certainly places in the book where his causality conclusions are suspect. If you have an appreciation for the "unknown unknown" or "black swans" then this will probably give you some pause at certain points (in my opinion its not fatal, but worth noting).

Overall, I am a bit indifferent about the book. I think the best way I can summarize the book is: that it is like sitting down for a beer with an ex-West Point Harvard MBA who is determined to tell you how the world works and he expects you to just soak it up. Which is kinda of nice in some respects. But as you've alluded to in your question, can be a little condescending as well.

I had high hopes for the book and was slightly disappointed. But, to be clear, he is a smart guy, he gives a unique perspective and I definitely got something out of it (just not really what I expected). All that being said, I will be reading some of his real estate books. My guess is his writing/analytical style is more suited to narrower topics like that.

[Edit] As a more direct way of answering the question. If knowing how a self made, no nonsense, ex-West Point Harvard MBA guy looks at life is valuable to you (or worth $29.95 or whatever to you), then I'd say the book is worth it.

I haven't read that particular book. So I can't comment. Reed just published a new book "Best Practices for the Intelligent RE Investor". I got it a few days ago and I'm about 100 pages in. I've found it to be hands down one of the best REI books I've read, even having only completed 100 pages. Maybe the best overall. So basically, the first 100 pages of this book are superior to about everything I've read in the field over the last 15 years. Scary. I don't agree with everything, and I feel that he goes off on some tangents that are only marginally helpful. But its still absolutely great. I don't know if anyone is still following this thread, but if you are, buy that book.

I'll also second Lumpr's opinion. Reed's work is substantive. It is opinionated. It tends at times to be arrogant. But what it NEVER is is a waste of money. You can learn something important from everything the man as written (that I've seen anyway). And in some areas, like RE tax avoidance, lease/options, buying below market, and others, his work stands head and shoulders above the rest. its also fairly priced and retains resale value via Amazon and Ebay. So you're not taking a huge risk.

I've read a bunch of his books, and I think they were worth it. One thing that others haven't said is that alot of his books overlap and he recycles stuff. So the same article might show up in 3 different books. That said I still think his books are interesting and a good value

Thanks Spex, I was pondering which one of his books to read next (once again you deliver).

Quick Question:

I have a deal coming up. Here is the basics. The house is in a crappy neighborhood. 3 bed/ 1 bath. Seller owns it free and clear. Bought it in February for $6,250 ran out of money while doing repairs. Wants to get out of it. He said he is going to lose his house soon if he can't sell it.

The ARV is about $20k assuming it is just up to rental code. Market rent is about $650 per month. I am still unsure about repairs. I'm gonna be walking through the house today.

My strategy is to get it for as cheap as I possibly can. Tie it up with an option and flip it for a profit. The margins are pretty slim and it is in a bad neighborhood. But it's super cheap so I am gonna market it as a cheap deal that people can get into for minimal investment.

Specific Questions.

#1. Should I consider something besides just a straight option.

#2. I figure knowing the guy is hard up for cash he probably won't be too eager for a zero down land contract.

1. I doubt he goes for giving you an option that you can flip to another investor. Why would he?

2. Why not just buy the house for $6250, fix it, then rent it out? Everyone wins.

On Reed's website he even has a suggested reading order list somewhere. I have 5 or 6 of his books. They are the best stuff I have read too. I got a lot of useful info from his book on managing investment property.

Spex - This thread is awesome. You are the man.

After reading this thread, I started to look for deals. The closest thing I came to was this:

4 units all 1br/ba, semi-sketchy neighborhood (but I know it well enough.), fully rented.

Price: $250,000
Expenses: $6600 property tax, 5k otherwise (owner estimated)
Annual Rent income: $32,xxx

Now here's my questions:

-Do those expenses seem low for a 4 unit older building? Owners says no major repairs needed anytime soon (water heaters/roof relatively new.)

-That leaves my cap at 8%. He would need to come down to about 200k (possible) If so, do you see any other potential problems or is that about right? (COCR will be above 25%)

Thanks again,

-Craig

5K is just enough to maintain the 4plex in as is condition.

Larger capital expenditures in the future will not be budgeted in the 5K.


What is the market value of the 4 unit?

Buildings under 5 units are still evaluated by market value, not income.

This deal isn't so bad at around 200K, not great, but not so bad.

Cool thanks, Tein.

The estimated value on Zillow is $228k. Wow, I'm glad you asked me that. Also, the building last sold in 2003 for $245k.

If you were buying this, at what price would you call it a "deal"? $175k?

-Craig

You shouldn't ask me if I think it's a deal or not. A deal is a relative term.
If you're okay with 8% cap rate returns, then it's a good deal to you.

At 150 000, it's a steal and I wouldn't think twice to buy it.

At 175 000, its a pretty good deal.


This is going by your market value of 228 000$ by zillow. I wouldn't rely too much on Zillow, an agent could give you better estimates.


How is your market doing? Dropping?


If you were to offer this owner something. Just offer him his mortgage plus closing costs.


Whenever someone asks me why the offer is so low, I say:
"that's the recession price".