So what do you consider a good cash flow deal?  I was once taught that a good cash flow deal is when rents are 1% of purchase.  So if a property rents for $1000, purchase must not exceed 100K.  Does that kind of cash flow excite you?

 Let’s take a closer look. 

 In this scenario assuming $150 for Tax & Insurance and 30% expenses, there is not much left over.  Does a 7% return excite you?

 I believe a good cash flow deal is when rents are 1.5 – 3% of purchase.  How about a deal with $3000 in rents for 100K?  Rents are 3% of purchase.  Is that possible, because that is some extraordinary cash flow?  My friends, it is possible.  Those are numbers from a deal we are working on right now, it is in a decent area and that isn’t even the best cash flow deal we have found.  Today’s market has resulted in amazing opportunities and there are some markets that have really high returns.  Let’s look at the numbers a little closer.

Wow, look at that CASH FLOW!!  Monthly Net Cash Flow is over $1500 per month and almost 2K if purchased with cash.  A double digit cash on cash return is considered good, 74% is astronomical.  It takes some digging to find these diamonds in the rough, but a few deals like that and you can start planning an early retirement.  It will probably not surprise you to hear that my market is #2 for highest returns based on a recent article in Business Week.  So, what kind of cash flow and returns are you getting in the markets you invest in?

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Are You Getting Great Cash Flow from your Rental Properties?

With so many foreclosures and distressed properties available, the current market conditions have resulted in the opportunity of a lifetime for savvy investors.  Finding great deals is one of the most important things for successful investors to do.  That said, it takes more than just evaluating a few deals.  Investors must get a ton of deals coming into their pipeline, efficiently weed out the duds and pick the best from the prospects.  Here are 8 ways to find great deals. 

1. Agents, Agents, Agents  – Contact a lot of agents.  Create a list of REO agents, even call title and get agent contact info.  Find agents who have lots of REOs and are good with investors.  Give them your criteria.  They can and will do a lot of the work for you.
2. Find asset managers at banks and agents that can send you properties before they go on the MLS – Being able to snatch up deals with no competition is huge.  If you prove that you can close on deals over and over you will keep getting fed great deals.  If you bail on deals without good cause you will risk ruining a very valuable relationship.  Treat the bank/sellers with respect and do not waste their time.
3. Wholesalers – Create relationships with wholesalers.  They are experts at finding great deals.  Give them your criteria and when a prospect is worthy you can jump all over it.
4. Marketing, Marketing, Marketing – There are so many foreclosures these days, but there are still distressed homeowners not in foreclosure.  People face financial hardships, divorce, probate, absentee owners, etc.  It is strongly recommended to have good targeted marketing campaigns to bring in more deals to your pipelines and the opportunity to negotiate straight with the seller.
5. Court House Steps – I know many people who buy right at the court house steps.  One huge advantage is there is often very little competition.  One disadvantage is that you cannot get into the house to do an inspection and thorough due diligence.  But you can see the outside and do as much due diligence as possible.  Many great deals are purchased at the court house steps.
6. For Sale by Owner – Homes sold by the owner are often not listed and do not get as much activity.  They usually go for much less than listed properties and present a great opportunity to negotiate straight with the seller.  Do not offend the seller, if you are too far apart simply decline but schedule a time to check back periodically as time will make the seller more negotiable.
7. Respond to Ads – Respond to ads in newspapers, craiglist, publications, online and social media.  There are a lot of great deals and motivated sellers posted on ads.  You can even offer a lease option to for rent or for sale properties.  Make sure to follow up.
8. Word of Mouth – Tell everyone what you do and to let you know if they know of a home that has to be sold.  Many great deals are brought to investors by people they know.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

8 Ways to Find Great Real Estate Deals

There are a lot of things to consider when evaluating a deal.  As real estate investors, we must find great deals.  Not good deals, but great deals where we can minimize risk, maximize annual return and control our success. 

Here are the 4 most important things to remember when evaluating deals:

1. Avoid Speculation as the only way to profit – Appreciation is great, but it absolutely cannot be the only way to profit.  The fact is, the value of the market is out of our control.  At no point in time should investors buy at market value and speculate for appreciation.  Who wants to take a gamble and risk taking a loss when they can control their success by buying 30% below value?  Appreciation is an extra bonus, follow the next 3 tips and never speculate as the only way to profit.
2. Max 70% LTV – The total cost of purchase, fees and any repairs must be a maximum of 70% of the value of the property.  If not, pass and get 10 or more prospects like it and cherry pick the best deals.
3. Rents are 1.5-3% of Purchase – A property that rents for $750/month should be purchased for no more than $50,000 or rents are 1.5% of purchase.  Some higher priced markets it is very tough to find this type of cash flow, you are lucky if rents are close to 1%.  The best markets with the highest returns there are many deals with max 70% LTV and rents are 1.5-3% of purchase.  These markets you not only minimize risk, but you maximize annual return which should be the goal of all investors.  Sometimes, you can find really great cash flow deals where rents are $2400 and total cost in is only $80,000 or rents are 3% of purchase.  Now that’s some cash flow!
4. Strong & Multiple Exit Strategies – With equity and cash flow you end up with multiple exit strategies.  You can sell at retail, sell to another real estate investor, wholesale, seller finance a sale, lease option, rent and hold, refinance, sell the note, sell the entity holding title to the property, quick claim deed the property to transfer title, etc, etc.  Having multiple exit strategies is a must and significantly mitigates risk.  You must also evaluate and if possible test your exit strategies to ensure you have strong exit strategies.

Here’s the recap:

Photo: Jacob Botter

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

The 4 Most Important Things to Remember When Evaluating Real Estate Deals

The best way to learn is by doing.  So what is better than exercises that will teach beginners the skills they need to become successful in real estate?  Not only that, but they can be done fast and with very little expense.  If you are a beginner real estate investor and dying to learn the business, the series of learning exercises I am providing are a must.  Everyone can learn from these exercises so by all means, take this challenge and sharpen your skills.

Your first exercises are to Buy and Sell something on Craigslist and post your results in the comments of this post.  Not just Buy and Sell, but to do it right.  You are looking to buy the diamond in the rough and get people to fight over the item you are selling.  Besides not having a plan, not buying right is the 2^nd biggest mistake made by beginner real estate investors.  In this exercise, you must buy an item for 50% of its value.  The methods used are almost identical to how you can buy houses at deep discounts.  Master this, and you may have mastered buying right.  Finding great deals and buying right are critical to success in real estate.

 Buy – Select a normal item that will have some demand such as a TV, bike, laptop, electronic, etc.  I did it with a TV, laptops and even bought a car.  We are trying to simulate buying an investment property at an extreme discount, so pick an item that people want — not an obscure item that has little to no demand.  If you can’t think of anything pick an item in your home you want to upgrade for a discount.  Buy something at around 50% or less of what it is worth and do not buy unless it meets your criteria.  If you do not know what it is worth, look at similar for sale items.  Call and find out what they sold for so you have comparable sales.

 What do you have to do? 

1. Play the numbers game – the more prospects that meet your criteria the better the deal.  Get as many motivated seller leads as possible into your pipeline and cherry pick the best one until you find that diamond in a rough.
2. Find out if they are motivated and what that motivation is – If they are not motivated, pass and move on to the next one.  Motivated sellers will sell at a discount.  Always find out why they are selling as they will give you a great reason why they should discount the price such as they need the money today.
3. Do not deviate from the criteria of 50% of value – Never ever pay more than your criteria dictates.  Pass and find another.  Remember, this is a numbers game so the solution is to get more leads not compromise and overpay and take on too much risk with lower return.  By doing this, you will avoid huge mistakes that investors make all the time.
4. Do your due diligence – Make sure if it is a larger item like a car to do your due diligence and get an inspection.  Investment properties always require an inspection and thorough due diligence to mitigate risk and likelihood of unpleasant surprises.
5. Negotiate down every chance until you get a no – Give reasons why it is not the best fit or point out flaws without offending them.  Tell them you are still interested but want to reflect it in the price and ask for a reduction.  Do this until they say no.  Then you have found their bottom line lowest they will take.  Do this every chance you get.  Don’t forget to negotiate terms.  If they say no, maybe they will drop it off to you to make it easier for you.

 Here are my results:

1. TV – 1 year old 52 inch HD TV for $500 selling for $1000 and $3500 brand new.  The seller had it playing Gladiator when I showed up so that was just an extra bonus.  3 years of use and zero issues.
2. Laptops – 2 laptops and a nice laptop bag for $50 worth $200+.  Used one for a year then gave both away but still use the amazing laptop bag.
3. Car - A 2001 car that will last 5 years bought for $1K worth $3K.  There are some dents which is OK, when fixed the car is worth $5K.  Just like buying a rehab.  I first negotiated it down from $2700 to $1800.  Then got an inspection and negotiated it down to $1400.  Then after test driving it negotiated down to $1200.  Then got it down to $1000 at the purchase meeting.  This is where I got the ‘No’ that told me it was the absolute minimum sales price.  This is a larger item so I made sure I got a full diagnostic inspection.  I passed on 3 other cars that I had inspected.  It has already been driven for 2 years with zero issues just routine maintenance.

 What will you learn?

1. Find motivated sellers – They will sell at a discount and you can often negotiate terms like get them to drop it off at your location.
2. This is a numbers game – Maximize your leads then lowball enough sellers and you will find your diamond in the rough.
3. Learn to talk directly with motivated sellers without any competition - They are likely more motivated and will give you a better price.
4. Negotiation skills – It never hurts to ask.  Find their motivation.  If they need to sell quick, say you can only do $X if you buy that fast.  Negotiate the price down first before seeing the property and at every meeting or conversation negotiate down more until they say ‘No’.  If they are asking $300, it is worth $400 then you will only pay $200.  The $200 you will pay should be exactly in the middle of the current asking price and what you will pay.  First ask what the lowest they will take and maybe they will drop to $250, and then ask for $150 since $200 is in the middle.  It is a psychological thing that the seller thinks he is also winning by getting you to come up and meet in the middle.
5. Ask for reductions without offending the seller – Anytime you see the item, have it inspected or talk to the seller mention a flaw or something that makes it not the best fit.  Then say you are still interested but you want to reflect it in the price and ask for a reduction.  Again worst case is they say no.
6. Learn to get comps – Look at comparable for sale items and call if necessary to find out the sales price.

 Additional tasks:

1. Obtain motivated sellers lists – Get foreclosure/default, probate, absentee owners, expired listing and other lists.  If you do not know where to get these, contact local investors, real estate agents, title, escrow, county recorder’s office, etc.  Keep looking until you find these lists as they are out there and most people do not know about them.  Other lists are for sale by owners, rehabs, for rent lists, etc.  This step is necessary as the best deals you will find are by getting sellers from these lists to contact you.  You will negotiate directly with the seller usually with no competition.
2. Create a direct mail postcard – This step can be easily completed using any of the online services that send out direct mail.  Many of the mass email services such as Vertical Response, Constant Contact, Infusion and even Click2Mail provide the functionality to create and send mailers online.  Go through the steps to create a postcard that you would send out.  You want to invoke a response, use a P.A.S. message or Problem-Agitate-Solution.  I recommend researching this type of message.
3. Phone – Even if you are comfortable on the phone this exercise is great.  I want you to call 3 complete strangers and get them to give you advice.  Use your phone number but with the last 4 numbers different.  Ask for the wrong name and explain to them you accidently dialed the wrong number but maybe they can help you.  Get them to recommend somewhere to eat, get coffee, a good movie, place to get some specific item.  Make up a story like you are heading to a date and meant to call your friend to recommend a restaurant and maybe they can help by telling you the best sushi restaurant in an area.  This will get you comfortable talking to complete strangers and asking them to do something for you, such as sell you an item for 50% of its value.

Post your results as comments so we can all learn from your experience.  Also post any questions before, during and after.  Happy Buying!  Oh, and stay tuned for additional exercises.  As I said, these are hands on exercises that will help beginners learn the skills needed to be success extremely fast.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Learn by Doing, Exercise 1 for Real Estate Investors – How to Buy

The current state of the economy has resulted in many challenges for Americans.  Foreclosures are at record highs, unemployment is very high and we are in the worst recession since The Great Depression.  Times are tough, but we must adapt.  Savvy investors see this time as an opportunity to make some of the best investments of their lives.  In 30 years, we will talk about how we could buy properties for almost nothing during this recession and we wish we bought 300 more doors.  This time is not without risk, below are 6 tips for investing in tough times.

1.  Find the best deals – with so many available deals, savvy investors should get a ton of prospects into their pipeline, weed out the duds and cherry pick only the best ones.  Stick to your criteria and walk away if the deal is not good enough because there are 10 more like it and many will be good enough.
2. Generate private money and financing solutions – Financing is a challenge and cash is king.  Generate private money and have financing solutions in place.
3. Show a successful track record in good times and bad – Investors that defy the odds and have success in good times and bad are in a great position to have continued success.
4. Mitigate risk by having multiple exits – One exit strategy is not enough.  Always have backup plans, be ready for worst case scenarios and mitigate risk with multiple exit strategies.  Tremendous equity and tremendous cash flow is a must.
5. Do not take unneeded risks – Never ever do a deal that is not a smoking deal during tough times.  Do not ask questions, just do not do it!
6. Do your due diligence – Always be thorough in your due diligence.  You can avoid many unpleasant surprises when buying.  When selling, always qualify buyers with your lender so you do not waste months in escrow and have the buyer’s financing fall through.

Photo: Tony the Misfit

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

6 Tips for Investing in Tough Times

After many deals, there is much I have learned but still many tips I wish I was given before investing.  In reality, I likely did come across these tips but they are often only internalized after experiencing the ramifications of them hands on.  Here are 6 tips beginner real estate investors should know about; make sure these stick! 

1. Have a plan – Most beginners get so excited over the possibilities of real estate that they jump into any deal no matter what the numbers, risk, and exit strategies are, and do whatever they can to make it work.  This can result in disaster! Not having a plan is planning to fail.  Choose one strategy and focus on nothing but that.  Document that strategy in a business plan and you will significantly increase your chance of success. 
2. Don’t close on your first deal until you have 5 deals to cherry pick from – Your first deal is the most important, doing this will help in countless ways.  Finding deals where the numbers make sense is one of the most important processes in real estate investing.  Do not fall in love with your first deal, become a master at finding deals where the numbers make sense and cherry pick from the best ones.  You will avoid the excitement and mistake of doing too many deals too fast especially too many bad deals.  Only do home run deals and grow your business at a nice, manageable pace.  If you master finding deals, you will have tons of worthy prospects to cherry pick from and profit from in different ways.
3. Always have multiple exits – Make sure you are at a max of 70% LTV and your property cash flows.  Do not get stuck with one exit strategy that could fail due to things beyond your control.  Be prepared for the worst case scenarios and you will mitigate a lot of risk. 
4. Don’t be a follower and do what everyone else is doing – Do your own thorough due diligence so you are making an informed business decision instead of making a decision because everyone else is doing something.  If everyone is doing it, it is probably too late, too saturated and too risky.  The best deals have no competition.
5. Stay away from hot, over hyped, over competitive markets – Have you ever heard of buy low sell high?  In hot markets you often times missed the boat and are buying high.  You should target markets and deals where you can buy low and add value.  Get great LTVs and extremely high rent to purchase ratios.  Then any appreciation is gravy.
6. Generate private money and reserves – Banks are not the only way to finance deals.  Private money opens up tons of opportunities and is the best way to fund deals in today’s market.  Cash is King!  Having reserves is also mandatory as there are always surprises.

What warnings and tips would have helped you?

Photo: love･janine

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

6 Tips Beginners Must Know Before Investing in Real Estate

A while back, I mentioned my project installing a bathroom ceiling fan as an example of something automated systems wouldn’t help with – a dirty, uncomfortable job I had to do myself.

That doesn’t mean the job had to be nearly as difficult as it was.  I could have saved a huge amount of time if I had taken some steps to learn the building beforehand.

A Hugely Annoying Day

Like most bathroom ceiling fans, the Broan 678 actually attaches to ceiling joists.  This means that to install it, you really want to work from above.  It’s pretty darned difficult in a building like mine because there is no easy access to the attic.  I knew of three possibilities:

1. I could remove some of the suspended ceiling panels in the kitchen or living room, get my body up there, and work my way over to the area over the bathroom.  (The bathroom did not have a suspended ceiling, as most don’t, because suspended ceiling tiles are not very water-resistant.)
2. I could work from the roof down.  The good news was that the apartment was on the top floor and there was a roof hatch.  The bad news was that getting to the roof would be a chore – I didn’t have a ladder that could reach it from the street.
3. I could cut into the drywall around the ceiling fan, thereby making an opening big enough to take out the old ceiling fan and put in a new one.  This was my least favorite option because it was the most complicated and time-consuming.

The first option was my favorite, so I brought out my stepladder and started working my way around, taking out ceiling panels one by one, looking for a path to the bathroom area.  No path was to be found.  The previous owner (PO), or the one before that (PO-1), or somebody had thoughtfully partitioned off the entire attic with vertical wallboard panels.  I’m not sure why he did this, but it may have been for fire suppression.

(Up until 1977, my two story building was a three-story building.  The third story had been gutted in a fire and simply removed.  Nobody, including me, wants it to become a one-story building.)

So much for the first option, on to the second.  I got out my Multimatic ladder and went through an elaborate process to lift it up to the second-floor fire escape platform.  All the while I was imagining elaborate disasters with falling ladders, with or without me on them.

In the end, however, the ladder did make it up to the fire escape, I made it up the ladder to the roof, and over to the hatch.  I opened the hatch and discovered another huge challenge.  PO, PO-1, or somebody had built a nice little room under the hatch, again with vertical wallboard panels.  The only thing I could do with the hatch was climb down it into the little room, presumably eventually falling down through a suspended ceiling panel or two on to the second floor and breaking at least a few bones.  (Bear in mind I had already cheated death once with the ladder and would have to do so again to get off the roof.)

So much for the second option.  It was now time to start working from the bathroom itself, cutting around the drywall surrounding the ceiling fan, and so on.  That’s what I did, anyway.  It was in the midst of that project that I made my one smart move.  After installing the new ceiling fan, but before replacing the drywall I had cut away, I tested the new fan to make sure it worked.

Had I not done so – had I installed the fan, replaced the drywall with all that entails (cutting a new piece, putting up backing boards, screwing the new piece on, filling, sanding, and painting), and then found out it didn’t work – I would have climbed back out onto the fire escape, ignored the useless ladder, and done a swan dive on to the payment.  My children would now be fatherless.

Anyway, the ceiling fan went in, the drywall was repaired, a new tenant has since moved in, and life is good.  Of course I did waste a heck of a lot of time with Options #1 and #2.  The next time a bathroom ceiling fan fails, I’ll move right on to #3.

My serious point

Like most BP posters, I have a lot going on in my life, and really can’t afford to waste a lot of time on what should be simple repair jobs.  I would have saved a ton of time if I had just learned the building before the repair was necessary.

I’ve owned the place for almost six years.  That’s plenty of time to have checked it out thoroughly.  I could have opened that hatch on some previous day when I was up there and had time to poke around.  I could have checked out the attic space on that same or some other day.  After learning the building (and there’s lots more to learn, these are just examples), every future repair job that involved those areas would have gone much more quickly, with less stress and aggravation.

So here’s my challenge for you – how well do you know your building(s)?

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Save Your Sanity, Learn Your Building

Even the most bearish economist is predicting that commercial real estate prices will fall up to 40 percent from peak to trough. However, the data released yesterday from Moody’s Investor Service shows that in April commercial property prices plummeted a record 8.6 percent. According to Moody’s data, commercial property prices fell a total of 29.5 percent from their highs in 2007. This leaves another 10 percent drop in prices if the most bearish economists are correct. In my opinion, much of this drop was due to a speculative credit bubble that caused commercial property buyers to purchase properties that would never produce a positive cash flow, even assuming a strong economy and strong demand for commercial real estate.

I believe that most of the declines in commercial property prices that can be attributed to the credit bubble have mostly taken their toll on prices. But, I surmise that we could experience an even greater decline in commercial property prices due the fact that the economy is fundamentally unsound. If one closely examines the fundamentals of supply and demand for the commercial property sector, the prospects for continued price declines becomes readily apparent, especially in the retail and office building sectors of commercial real estate.

Background to a Crisis

During the speculative credit bubble, developers built many more office buildings and retail stores than could possibly be sustained. Now that unemployment is in the double digits and major economic sectors like the automotive industries are going bankrupt there is less demand for commercial property. There have been many large, well known, retail brands either going bankrupt or severely cutting back growth projections. In a small city, near where I live, there are at least fifteen Starbucks. How many Starbucks stores can one small city support? Circuit city is out of business, Brandsmart may be next. Car dealerships are closing their doors around the country. These are all commercial real estate tenants whose absence can’t easily be filled. The list goes on and on. If so many large retailers are going out of business or curtailing operations then there will be even less demand for all of the vacant commercial retail space.

Commercial Real Estate Breakdown & Predictions

As local, state and federal governments go deeper into debt they will be increasing taxes even further on businesses and property owners. This means higher taxes for the owners of commercial real estate. If the costs to hold a property increase, then its intrinsic value must decrease.

I would challenge the 40 percent figure and would argue that prices could drop even more due to the dismal state of the economy at large. I would go the record to say that the commercial property sector could see real price declines of up to 70 percent from peak to trough. The worst might still be ahead of us.

Source: Reuters
Photo Credit: strangelv

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• ‘Wave of foreclosures’ to hit commercial sector, Insider Q&A; told (lansner.freedomblogging.com)

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Is This the Bottom for Commercial Real Estate Prices?

Many apartment buildings are now facing foreclosure because of falling prices, stricter underwriting guidelines and 5 year mortgages becoming due. For the astute buyer of apartment buildings these apartment building foreclosures could represent an investment windfall.

As a glaring symbol of the burst bubble in national residential real estate prices, the National Association of Realtors announced recently that a full 63% of homeowners in Las Vegas are now “underwater” in their mortgages. This simply means that they owe more than their property is currently worth. For many of these people, it simply makes no economic sense to continue paying for their mortgages when the underlying asset is no longer worth what they owe. This situation will probably lead to further foreclosures and further declines in real estate prices. As all eyes are currently watching the steep decline in residential real estate prices and rising foreclosures, the commercial side of real estate has hardly begun to realize the problems that may be looming on the horizon for many apartment building owners.

Homeowners in Las Vegas, for example, who are able to continue paying their mortgages may decide to hold on to their property for a few years and hope that real estate prices recover. They are able to make this decision because, presumably, they have 30 year mortgages. In contrast to residential mortgage holders, many investors in commercial real estate are holding on to 5 year mortgages. This means that they will be forced to refinance their properties when the notes become due and it couldn’t be happening at a worse time. Many apartment buildings rose in value right along side residential real estate prices and too many of these owners paid too much for their properties because they figured that as long as they were seeing a net profit every year from their rent collection then they had nothing to worry about.

Market Conditions Lead to Great Opportunity in Apartment Market

During the real estate investing frenzy apartment building buyers didn’t take into account the possibility that real estate prices would drop so precipitously is such a short period of time. Now, many apartment building owners are facing a dire situation. For example, let’s assume an apartment building investor purchased an apartment building in 2005 for 1 million dollars. He came out of pocket for $200,000 and he financed the purchase with a 5 year balloon note that becomes due on January 1, 2010. He financed 80% of the purchase price. In the last years, however, the market price of his apartment building has dropped 20%. It is now appraised by the bank as being worth $800,000. Unfortunately, when he goes to the bank to get a loan, the loan officer tells him that the bank has changed their underwriting guidelines and they are now only willing to finance 70% of the appraised value of the property. Now, he is only able to finance $560,000. The problem is that he still owes just around $800,000 on the property. The difference between $800,000 and $560,000 is $240,000. Unless the apartment building owner can come out of pocket to pay this additional $240,000 to the bank then he will eventually be forced into foreclosure. It is safe to assume that many apartment building owners will make the same choice that thousands of home owners have, to walk away from the mortgage and the property, chalking it off as a lesson learned.

For the first time buyer of apartment buildings, this could be a windfall in the making. There could be thousands of properties, in good condition, appearing on the market at rock bottom prices.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Apartment Building Foreclosures Create a Buyers Market for Apartment Buildings

We put together the following video presentation in 3 parts to help you learn about the basics of Short Sales, how they work, etc. Other topics covered include Credit, Deed in Lieu of Foreclosure, dealing with the banks, and Taking a Short Sale Listing etc.

PART II

PART III

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Learn the Basics of Short Sales (Video)

How High Is Up?

The answer can be as simple as one flight of stairs. It also can be as grotesque as 300%. Since I’m talking about real estate, I’ll skip the flight of stairs type of answer and concentrate on the 300% side.

Unless you’ve been living in a cave in Zimbabwe, you know the real estate market has taken a directional turn – down. In some areas, if the articles I read are correct, like Detroit and Cleveland, you can literally buy foreclosed properties for less than 10¢ on the dollar. That looks like one heck of a deal to the naked eye.

However, if you do the numbers, it is actually one hell of a bad buy. In order to understand why I say what I say let’s look at the math of gains and losses. By the way, you can get exact numbers by doing an Internet search for that exact phrase. My numbers in this post are rounded down to the nearest whole number.

Math Is A Two Way Street
I will use $1000 as the example number. Making believe your property was worth $1000 two years ago and is now worth only $620 means you’ve sustained a 38% decrease in value. If you’ve seen 38% before that’s because someone wrote an article that says 38% is the average decrease in property value in the U.S.

I say who cares what the average value is because I don’t live in an average value area. I live in one of the highest foreclosure states in the Union. You too may live in an area where the foreclosures are still running rampant. Therefore, 38% means very little.

That’s why I say 38% is just another number. But that’s going down a side track. If you are looking for your property to rise back to the $1000 value to restore the loss, by what percent must it go up?

61%.

Wow, that’s almost twice what it went down. Yep, but that isn’t as bad as if it went to a value of $250 meaning it experienced a 75% decrease. To restore the value of $1000, it would have to rise in value by 300%. To me that is a bigger wow.

As the percent of decrease increases, so does the rise in value percentage. In other words, if you can buy a property that has decreased by 90% like in the cities I mentioned above, your rate of rise would be close to 450%. Remember, this is a rounded number so do your research.

Opportunity Is In The Eye Of The Beholder

So what do these numbers actually mean? Depending on what side of the numbers you are on, they could be disaster or opportunity. Let’s say you bought a property for $250 and it went to $1000 in an acceptable period of time. You just made a fantastic return provided you sold it with very little expense.

If you owned the $1000 property and it slipped to $250 but did nothing, you are simply sitting on an asset that has decreased in value. No big deal if you aren’t planning on selling and can afford to continue to pay the mortgage. No big deal also if you needed a big loss for tax purposes and decided to sell. That actually may be an opportunity. On the other hand, if you must sell, you just encountered disaster.

When I was a stock broker, I remember people using the sell at a loss strategy. They would sell stocks that had slipped in value so they could take the loss to offset gains and reduce their taxes. I fully realize this may have limited application. However, it is still an option.

The purpose of this post was to present the two sides of the math, in general terms, that comprise this market. The numbers are illustrative only and meant to jump start the thinking process and the manner in which you look at your investment(s). After all, it is your money at risk and you should have as many facts as possible in order to make an informed decision.

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This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

How High Is Up? A Look at Real Numbers Defined by the Real Estate Collapse

Finding the right apartment building to buy for an investment can seem like an overwhelming and daunting task for the first time apartment building buyer. However, if you know a few things to look for when purchasing an apartment building everything becomes a lot easier. There are good things to watch out for and some very bad things as well. The good things allow you to locate apartment buildings that have a strong chance of making you money over the long run and the bad things mean that you will have problems making profits.

Here are some warning signs to watch out for when locating apartment buildings to buy. If you see that your potential apartment building investment has any of these attributes, run the other way.

1) Rent controls that limit the amount of rent you charge or limit the amount you can increase rent. It makes no sense to invest your hard work and energy into any enterprise that will not reward you for your labor. With apartment building investing, the reward comes in profits and positive net cash flow. If rent controls do not allow you to charge a fair market rent then you will always be struggling to pay your bills and make a profit. There are thousands of apartment buildings out there with no rent controls.

2) Structural flaws and deficiencies in load bearing walls or in the apartment building foundation. The key word here is “structural”. As an investor you don’t want to purchase a building that has serious structural flaws because the repairs on these problems cost a lot more money then you might think. Even if the building is apparently priced to reflect the cost of the repairs it is best not concern yourself with a building that is in extremely bad physical condition. There may be unseen issues that could eventually lead to the building becoming condemned. The building also may not qualify for bank financing if the problems are severe.

3) Environmental issues such as toxic mold or buried oil tanks that are leaking. Make sure you research your investment very well. Most states require sellers to disclose the presence of environmental hazards on a property; however, it is up to you to do your due diligence. Mold remediation and the removal of buried oil tanks can be very costly.

4) A large majority of the units are occupied by tenants who are receiving subsidized rents from the government. The presence of many subsidized renters can mean that the tenants are gainfully employed. This can lead to problems such as crime and drug abuse.

5) An area with a large surplus of vacant units. If an area has vacancies at 15% or above then you will have trouble renting your units. Watch out for areas that are offering huge incentives and free rent to prospective tenants.

6) A bad neighborhood. Do some research and determine if the neighborhood you are looking at is safe place to live. Ask yourself if you would feel safe living in that neighborhood with your family. Drive around the neighborhood at different times of the day and night. Are there people lingering on the street corners during the week day? Does there seem to be an unusually high level of police activity?

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This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Buy an Apartment Building — With Warnings