Are most of your apartments without fans/disposals/dishwashers?

Also, earlier you mentioned you added water meters for 15k and how it added x value. How do you figure out you need something added and calculate how much value it adds? Reminds me of flipping, when they add cabinets that cost far less than the value they add.

Wouldn't let me edit my above post.

Probably a newb question, but what can good credit be good for if you DON'T have a verifiable income/2 year report. Say you have a score over 700 but no job history, is that useful for anything?

Yes, most of my apartments are without disposals, fans, and dishwashers. I allow tenants to install ceiling fans on their own dime, and the fan must be removed when the tenant moves out or i charge them to remove it.

The water meters were installed in a mobile home park. When I bought it, the park paid for all water, sewer, and trash for all the lots. The water bill was costing about $800-1200 per month if I remember correctly. Obv a tenant isn't going to be diligent about combating leaky faucets and runnging tiolets if I'm paying their water bill.

The cost of installing submeters was $375 per lot. I had 40 lots, so the cost was $15k. So how did I know that submetering was a smart investment? Well, I save a minimum of $800 per month, or $9600 per year. $9600/$15,000= .64. Thats a 64% ROI. I didn't have to consult with Warrent Buffet or any other financial genius to make the decision to install the submeters.

Now, for a different type of rental, I'd work it a bit different. If I need to spend $400 on a new refridgerator to get the place rented, its not going to bust my brain to figure out what to do. A tougher call is painting exteriors. If I can lower my vacancy rate by a few points and possibly raise rents by a few bucks, I'd likely go ahead and paint. Painting has to be done sooner or later anyway. Might was well be as soon as it looks crappy, IMO.

I'm not really sure if I'm answering your question or not, so please clarify if I haven't touched on what you're interested to know.

Its useful because with good credit you can probably get a no doc loan.

Thanks, you answered my Q's.

i understand why you wouldn't spend the money yourself on fans disposals or dishwashers.... but if you let your tenants install it on their own dime... if they wanted to just forget about it when they moved out.... why wouldn't you let them?

Since my properties are rountinely inspected by Section 8, I have to constantly consider how to easily pass the S8 inspections. If I had a ceiling fan in an apartment that didn't work, that unit would fail inspection, EVEN if the lights on the fan did work. Sooner or later that fan is going to break. I'm not going to pay to have it fixed. I'd rather remove it and install a regular light. Regular lights are really cheap and hardly ever break.

So eventually that fan is coming out anyway. If I allow the tenant to move out and leave the fan then when the time comes to remove that fan I'll have to pay a handyman out of my pocket to do the removal. It makes more sense for me to make a rule forcing tenants to remove fans when they move. That way I can pass the cost of removal along to the tenant moving out now rather than eating the cost later. Obviously the best case scenario is for the tenants to remove the fan themselves.

Don't misunderstand me. I'm not only saying that I wouldn't install a dishwasher, garbage disposal, or ceiling fan. I'm saying that if I bought a property that had those amenities, I would actively REMOVE them before renting the units. I also remove storm doors and most of the window screens. Those are all things that break often and will cost you a failed inspection. Its not the end of the world to fail an S8 inspection. But fixing and dealing with those things will take up a lot of time even besides the additional inspections. The fewer mechanical items to fix, the better. Get rid of everything that is unnecessary. At least in low income housing thats true.

Spex,

Do you think it's realistic to expect to make a profit in RE by taking a relatively passive approach? That is, buy properties that are move in ready, and use a management company to rent them out for you?

I think that you could make a profit, yes. In fact, in terms of ROI you can do very well investing like that. You should be aware of a few things first.

1) since you are not making a positive cash flow, any gains will be nonrealized gains. They'll be the result of your tenants paying down your mortgage over time. The property will likely appreciate as well.

2) Since you're investment is highly leveraged, even a normal appreciation rate will juice your ROI. However, there is no guarantee that the property will appreciate. There is also no guarantee that you can rent the property.

3) since you are not making a positive cash flow, you will have to access your nonrealized gains in order to buy more properties. This is relatively expensive compared to reinvesting only the positive cash flow.

A lot of RE investors have gone broke by investing in break even properties. A lot of others have done reasonably well. Any period of extended vacancy or a series of major repairs will not only bring your ROI down to nothing, but you'll also be in serious risk of financial ruin.

You'd be wise to reread the post by Belok in this thread. That poor guy is in a bad situation - and his partner is an experienced house flipper and RE investor. Those guys made more than one mistake. But you know what their biggest mistake was? Buying wrong. plain and simple.

I've seen it happen more times than I care to remember. A prospective RE investor thinks that the world of REI has been waiting for him to show us how REI should be done. Well, we aren't waiting to be shown. I don't know even one successful RE investor that would buy a negative or break even cash flow rental property. Not one. And I know a lot of successful RE investors. The fact is that buying positive cash flow properties is very low risk and offers very high returns.

Ok, now having said all of that stuff, I'll say this. You COULD buy a break even CF property under the following circumstances:

1) you have a bunch of other assets to tap if there is a problem
2) you limit you RE portfolio to only THREE break even properties
2) you limit your RE portfolio to ONE deal every three years
3) you put a MINIMUM of 20% down on each property
4) you KEEP a minimum of 20% equity on each property
5) you NEVER leverage your property to the point where there is a negative cash flow
6) you have a well thought out and developed goals for your RE portfolio
7) you spend a lot of time considering if other more passive investment types would get you to that goal in a similar time frame

If you can limit yourself to small time investing and you've got other sources of income to cover your payments if something goes wrong, I'd say that there is nothing wrong with buying break even property per se. Basically, you want to be able to weather a storm.

I know that it seems impossible that a RE market would collapse, or that you could possibly have 4 of your 8 units vacant for 4 months. But believe me, those things happen. Can you afford to carry the debt on the vacancy? If not, don't invest in a break even property.

When you mention the seller carrying a portion of the note, does that basically mean the owner is financing part of the purchase price? If so, how is this deal usually done as far as interest rates and repayment terms?

This is probably all location specific, but what would you recommend for a first time RE investor just getting broken in? How would this opinion change if the investor has 10k to work with? How about 100k, 500k, or 1MM?

What would you say your average ROI is on properties you flip? What about residual % yield on stuff you are renting/owner financing? I'm still adding more hard money loans to my portfolio which due to the credit crunch are now yielding 14-16% vs the 12-13% I mentioned earlier in this thread and am wondering if anything/everything you are doing is beating that. I'm guessing it's a little of both.

It goes without saying that your options become a lot more limited with a smaller bankroll. If you've only got $10k to work with, I'd say that you need to generate some capital. The best way that I'm aware of to generate lots of capital fast is to sell/finance mobile homes. Depending on where you live, you might be able to flip a house with $10k too. But flipping is a lot more work, a lot more stressful, more competitive, more expensive, and much more risky. So if you've got $10k, I'd just about always say start with mobile homes and spread that $10k out as far as possible into little deals. Then in a few years you'll have the MH income plus a larger bankroll to work with for other stuff.

If you had $50k, I'd still argue that you should start with mobile homes. But in that case, I'd recommend that you only put maybe $20k into the MHs and use the rest to try to find an appreciating asset. You can do a lot of little MH deals paying $200-$400 per month with $20k and that adds up fast. However with $50k you might be only able to do one or two RE deals. Spreading out half your roll on lots of small deals will help defray the risk of starting out.

If you've got $100k liquid or more it gets a lot more difficult. Partly that is because $100k is a lot of money to risk on anything that you're first starting out in. Also, the answer is going to depend quite a lot on where you live. If you're in Mahattan, $100k would barely make you a downpayment on a studio apartment. If you live in Oklahoma or Texas $100k could be the downpayment on a 20 unit multifamily. Finally, the answer depends a lot on what your goals are. If you plan to develop a portfolio of income producing RE the you're obv going to make different moves w/ $100k than if your goal is to develop a portfolio of farm land or other land assets.

REI, like any other investment type, requires a some amount of expertise. If I were starting out w/ $100k, I'd try to spread it around to 3 or 4 different classes of RE investing. With $100k, I probably wouldn't try to work with MH directly. Rather, what I'd do is find someone that is already flipping MHs and either buy notes from him or partner with him. That'll keep you more passive.

You could go several routes depending on how much work you want to do. With $100k you could pretty easily buy a multifamily that produces some cash flow each month. One thing that I'm doing is developing manufactured home with land packages. Its kinda like development for dummies. Basically all you have to do is get the utility lines run, grade, add cinder block foundation, plunk on the home, sell, repeat. I can develop packages like that for between 50%-70% of retail value. You could certainly do something like this w/ $100k. Personally, I'd try to spready my cash out into a few areas.

When we start to talk about more than $300k liquid for REI, we're really starting to get into a whole other realm. At a certain level you're starting to swim with the sharks, as it were. There is a certain threshold accross which you start dealing with people that are very competent and the deals get harder to put together on all fronts. If you're inexperienced, I wouldn't recommend that anyone try to buy a big commercial property. Your inexperience will be obvious to everyone involved and it could make things hard between lenders w/ no confidence and sellers and don't believe you can close the deal. Plus, you're at risk of losing a lot on one deal. Youu don't have to hit a home run every time - singles and doubles win the game. I dunno, I'd recommend that you try to start small.

Obv the definition of 'small' depends a bit on your bankroll. So maybe if you've got $300k you could invest in a small multifamily rather than a single family home. But try to keep your money spread around. It wouldn't hurt to invest in some MH notes and to find a HML that will invest your cash into flips. Spread it around.

This is a tough question with no clear answer. So feel free to clarify if I haven't been making sense or haven't answered your question.


I don't really flip properties - I'm a buy and hold investor. As for average ROI its really hard to say. As I've said, I look for distressed properties that can be bought for bargain prices and where I can add significant value. I've had properties where I doubled the value of the property in a year by fixing it up and renting it out. Most of the time I can add 20% to 30% of the value just by getting the places rented out. So thats the equity portion.

I don't invest at less than a 25% cash on cash return. That is the minimum standard. So I don't know maybe what my average ROI is, but its at least 25% on cash invested plus any equity gains.

I'm not knocking 14%-16% ROI on passive investments. I think that is fantastic considering that you're just sending a check.

Great Thread.

Could you expand on the types of costs that make up to the 45% you use to evaluate a deal?

I've read this thread with a lot of excitement, I think there is a ton of great information here, thanks for starting it.

With that said, I see that you recommend Mobile Homes for someone with limited cash($10k) so that they can generate enough capital to move on to bigger and better things, you seem to refer specifically to Lonnie Scruggs or "lonnie deals".

I don't understand how $10k is really going to mature into enough money to do bigger deals doing these deals though.

Lonnie Scruggs advocates taking low down payments and holding a note on the balance. With $10,000 we wouldn't be able to do very many Lonnie deals, maybe 3 max.


Are you referring to flipping these Mobile Homes and NOT holding notes and instead looking for deals that will give us cash right away? Or are you saying to actually hold notes on $10k for X amount of years to generate this capital.

Advertising
management
cleaning & maintenance
repairs & improvements
trash & utilities
Insurance
taxes
landscaping & lawn care
miscellaneous - supplies, equipment, etc.

Is three not enough? If you spend $3,333 on each home and collect $250 in payments per month, you can buy one each in Jan, Feb, March. If you take $700 down on each and 3 notes paying $250 each per month in April you've got $2600. In May you've got $3350 and u can buy another MH. In June you've got $1700 and in August you've got $3700 and can buy another home. In September you've got $1950 and in October you'll have $3200 to buy another home. In November and December you'll have jsut about enought to buy a home each month.

So with $10k you can create up to 8 notes paying you $250 each for at least the next 24 months. $250x8x24= $48,000 in 3 years out of a $10k investment. And thats if you stop churning your $10k after one year.

Another thing that you can do is create the notes and then sell them for cash. I know several guys that would buy a package of 8 notes if you can offer them a 35% yield on the high risk notes. Lets say that you've got a note for $7,000, 12%, 36 months, paying $232 per month. Your investment is $3,333 less $700 downpayment, so your investment is $2633. If you sell it at a 35% yield, you could get $5193 for it. Thats a profit of $2560 so you doubled your money.

If you put together a package of 10 such notes, you might be able to find a HSNL on this site player that is interested in buying a partial interest in your package for a 20% yield. In this case, you would split the monthly payments but you would be responsible for servicing the note (i.e., making collections, etc.). So you've got $2600 in the note. If you sell half the cash flow at a 20% yield, you'd get $3121 cash for it. You just profitted $521 PLUS you get to keep $116 per month in cash flow. Its a good deal for him and you. For him, he gets 20% on his money on a passive investment and u take care of the problems. For you....well, its obvious.

Over 3 years, how many deals can you put together like this? Answer: a lot. Over 3 years, how much time will it take you to operate this business? Answer: not very much.

I already posted on a similar question earlier in this thread. Yes, the seller is taking back part of the PP as a note. As for terms - whatever you can negotiate. Most of the time the second will have a balloon after 5 or 7 years.

What are the details of creating a note? Are there any examples online you can point me to? In MH deals, are any other documents required. I just don't want to learn the hard way when I fill a foreclosure that I didn't have all the required documents.

For us starting out in MHs... how do we learn how to evaluate a MH's worth. Never living in one myself I have no idea what fair market value is?

Do you suggest putting ads on craigslist saying "we buy mobile homes for cash" which would seem to pull in motivated/desperate sellers. Then once you negotiate a deal with the buyer follow it up with another ad saying "Mobile Home For Sale, Low Down Payment, Owner Finance, No Banks!!!" ????

Get the book 'Deals on Wheels' by Lonnie Scruggs. Everything you need to know about that MHs is in that book. I couldn't improve on Lonnie's method, so I'm not going to repeat everything here that he talks about in the book. Everything is in that book.

do you have any experience with his other books "How to Make Money With Mobile Homes" or "Taking The Mystery Out Of Money"

Are there any set rules for banks to determine if they can give me a conventional loan, or if I need to qualify for 203K rehab loan?

I am interested in some properties that will require work. I would rather spread the work out over a few years and finance rehab with cash... so I would prefer a conventional loan.

Have you ever had an issue with paying a mortage through one of your LLC's? My father and I just set one up, and have recently been told by a mortgage broker it can be an issue down the road. Isn't this standard? I thought the whole idea of the LLC was to limit your exposore, and if you are paying the mortages out of your personal accounts, and are commingling funds, then haven't you defeated the purpose of the LLC in the first place? Was I just given bad info? Thanks for taking the time to do this, lots of great info in this thread.

Hey Spex. I posted this in REiclub and want to know your input on it.

I live in Montreal / Canada and the market here can be described as "post-hot" like it was post-hot in the united states in 2006.


Sellers still think their properties are worth the moon and agents still think the market is "hot hot hot" and will never go down. As you can imagine, buying revenue property to achieve cash on cash return of 25% or at a 10+cap rate would be needing to buy property at 50% of it's current value.



On to my question:


I am beginning to think about expanding into the buy-hold area of real estate. I wanted to know, is buying in today's post hot market at 70% LTV as well as positive cashflowing 50-100$ / unit enough to waddle through the real estate slump?

The last thing I want to do is start buying a bunch of "steals" today and then find out my bargains that I invested money to buy today end up becoming break even properties 2-4 years from now.

The last thing I want to do is buy something at 70% of market value today, and 3-4 years from now see the markets depreciate 15-20% over that time span and I'm in my properties for 85-95% LTV.

What do you suggest I should do in a post hot market in terms of buy and hold?

Do you allow tenants to keep dogs, cats, or other pets? Why/why not? What do you do if a tenant keeps a pet that is not allowed?

Yup, I've read all of this books. the Money w/ Mobile Homes book is more of the same thing you see in Deals on Wheels. Taking the Mystery Out of Money is some pretty basic time value stuff. Lonnie is obsessed with compound interest. I think that his idea was to right a book for blue collar types starting out in investing. I works for what it is, and I'm sure it wouldn't hurt to read it. But IMO its some pretty basic stuff.

If you're serious about pursuing MH notes, I'd recommed reading all three. I learned a lot from Lonnie's stuff, and his ideas have made me a lot of money over the last few years even though I don't focus on single wide deals.