All Forum Posts by: Marcus Auerbach

Residential 1-4 is easier to get into and learn. 5 to 8 units, even 12 units is one of the thought asset sizes; you have all of the downside of commercial, but without the scale and upside. Basically poor man's MF. 

If you want to replace 300k in 4 years, your only path is medium-sized or large MF. You'll probably need 150-200 units, that's a 15 to 20 million $ portfolio. It can be done, but 10 years is a more realistic timeline.

We don't have the labor to make more things in the US. 

We still have about 7.4 million open jobs and vs 7 million unemployed. You can't drive unemployment to zero. Anything under 5% is considered full employment. And we are at 4.1%. So while it sounds great to "bring jobs back" - who is going to do them?

And we also have a qualification problem. A modern auto factory does not require much unskilled labor. Material is moved by automated forklifts, and assembly is either done or assisted by robots to meet TQM standards. Much of what you need are engineers and highly skilled workers. We are already short on both.

I doubt that most of the 40% unemployed men of the inner city of Detroit are a good fit for a modern day manufacturing plant.

The Apple CEO Tim Cook said famously: people think we manufacture in China because labor is cheap. The real reason is they have a vast pool of HIGHLY qualified skilled labor.  Video.

I have spent almost 20 years working for a global manufacturer. For any machine that was produced in our US factory and the components needed to assemble the decision was to either fully automate the process to 24/7 production here in the US - or offshore to MX or CHN, the difference being the response time to change orders (6 months vs 6 weeks) due to geographic distance. MX kept us more flexible.

Here is a picture of the BMW plant in Spartenburg, SC and if you want to see the list of jobs they have it's here https://www.bmwgroup.jobs/us/en/location/location-spartanbur...

@Bernard Wallace check out Mach1 Lending and F Street Hard Money in Milwaukee. The first thing they will do is confirm the ARV, but even if it is a bit lower there should be enough meet on the bone for asset based lending. Don't forget holding cost and commissions.

Also, I think Jay was referring to the lenders and I have to agree, many residential lenders will not understand what you are talking about..

Another good way to think about this decision is if you want to have this property in your "collection" 10 years from now. Would you be happy to own it in this neighborhood with where things are going or do you only like the numbers?

In my market (Milwaukee) distressed properties are not a business model anymore. Our market is so extremely dry on inventory that you can't get a discount to match the condition. First time home buyers vastly underestimate how much it will take and pay full price. The last few properties we bought were all basically move in ready. 

We stepped in on deals that fell through on financing and bought them cash with a small discount (about 10%) in exchange to keep the sellers original closing date and be able to close on their new home. By the time I would have been able to get the rehab done, gotten a tenant in place, we were not that far from picking up another 10% in market appreciation for basically doing nothing. Maybe not the best CoC return, but a really good return on my time.

Good plan. Let me add a couple things. Taxes become a bigger consideration on an older portfolio. You don't have that much to write off anymore. That's where new mortgages come in, because the cash you pull out is tax-free. Not everyone wants to grow their portfolio, you could also 1031 into a DST if you want to be passive.

The other thing I would do is get proactive with rehabs. Our portfolio is all 1950s and 1960s housing and we gut rehab them to reset the clock for the next 30 years. If you rehab well and you have good tenants a property will look just fine after 10 years. (If you have the wrong tenant it can look like ready to rehab after 1 year BTW). 

Reinvesting money gets you higher rents AND better tenants. That has become a huge consideration for me over the years, there is massive benefit to that combination.

What we do now is systematically replace old driveways and roofs. We have a list and we do several of them every year. Similar with furnaces, we have a list of old HVAC and have started swapping out older ones. Paying half the cost of a new unit in repairs in the middle of winter and you still have an old HVAC makes no sense. I'd rather do a scheduled replacement in summer.

Great post @James Hamling

Love your plan, but let me tell you where the issues are. REP status requires that both of you work in RE, at least one full-time and the other more than half. Look up the rules. I still think it's a great plan, but you want to make sure you are not hating the lifestyle. 

You need a love for brick and mortar to sustain REI long term, not everyone has that and there are other businesses that you might like better. And as far as getting licensed, 85% quit in year one and of those who remain, another 80% quit in year 2. Because the reality of the job is not what they thought.

For most people it takes about 10 years to build a portfolio that can sustain them, but it can be done faster if you have funds to start with. It took me 7 years to quit my executive W2 role, but I was also incredibly lucky to start buying rentals in 2009 and Milwaukee RE was cheap back then. Today it's tough to find a deal that cash flows with 20% down, but it will 5 years from now.

 yes, exactly what Rebecca said ;-)

This is going to sound harsh. When you picked this financial framework you have made the classic noob mistake of looking at everything through a cash-flow lense. The good news is that this deal is a great learning opportunity and you start asking the right questions. Let me back up.

The four basic sources of wealth with RE are:

1.) Equity: forced appreciation and natural appreciation

2.) Leverage and amortization: principal pay down

3.) Cash flow

4.) Tax benefits

Cash-flow is one of the smaller benefits and should not be the primary reason you buy a property. To gain an intuitive understanding of this use the BP rental calculator, punch in 1 million property value, 10k monthly rent, 3% appreciation, 3% annual rent increase. Look at the results after 10 years and after 30. Cash flow get's dwarfed by the other components. If you increase appreciation to 5% the results get even more extreme. 

Once you realize this, you start asking the right questions: how can I manipulate the input-numbers to optimize the outcome.

As far as this property: keep it and let time do it's thing. It's called buy&hold not buy&sell for a reason. Cost of selling is too high. Cash flow and property value will improve with the years.

Give inflation a chance to work for you. In 1960 a new construction home in Milwaukee was 14,900 - including air conditioning and AC was a big deal back then! Today that house is worth about $350,000.

You want to grow your portfolio wide, before you grow it deep. 

The more properties you have in the game for the longest period of time, the better. So you want to pay as little as possible for existing loans and use as much as you can for additional down payments.

Once you have enough (which is not easy to determine) you start paying off the one with the smallest principal first, that will increase cash flow. Now you focus all free cash flow on the second etc. until all properties are paid off.

But that's still not the end game. At this point you are out of tax write-offs, so it's probably the best idea to take out new 30y loans and pay yourself - borrowed cash is tax free.

The party with exuberant returns is clearly over, we are back to reality and normalized returns. 

You can still make solid profits with STR, but the times where you could buy any weird cheap property, put some lipstick on and rake in the profits are over. Quality matters now and with that you see a consolidation to professional operators and prime locations. We have a few clients in Milwaukee who have traded out of STR and into LTR with us.

And even in vacation destinations, a wave of regulations down to the municipal level cuts into the viability of STR or in some cases renders them impossible.

Last summer we rented a house on a small lake in Wisconsin for a family gathering. It was great, someone brought a guitar and we I think 10 people are sitting around the firepit having a good time. Even though we are all in our 50s and kept it down, it was clear that we were the loudest on the little lake.

Most other homes were either dark or there were two people quietly enjoying a drink, like our neighbors. The homes are close together, each lot has maybe 80-100' of frontage. While they were good sports and did not say much other than hello, I could tell they would rather not have us there. And another group next weekend, maybe even less restrained. While most other homes are only occasionally used by their owners. 

I can see how someone will go to the next townhall meeting and be angry about the nuisance STR brought to their quiet sanctuary ...