All Forum Posts by: Samuel DeMass

@Reed Starkey,

I agree, having the "why" question answered is key.

My big 'why' is to have the flexibility to do whatever I want, whether it be travel, working on goals I deem important, or helping people.  My current motivation is time with family, but the end goal is the flexibility that is provided through financial freedom.

I'm committed to freedom.  It's in my veins.  I desire the flexibility and awesome it brings.

-Sam

@David,

Have you tried developing relationships with the bank? I've been given the opportunity of a first look at an REO, just based on my working relationship with my bank. I just asked if they had any REO's they were going to be putting on the market and they gave me the key to go check it out.

It didn't work out in the end, but if I were pursuing a strategy similar to yours, that's where I would start.

Lorraine,

I've got one attorney contact in NM, but it's out of ABQ.  

I'll be interested to know who you decide to use here in the ABQ.

I do have a relationship with a great Realtor team and title company, if you're looking.

I'd also love to share thoughts about the ABQ market in general.  What type of property are you looking at?

PM me if I there is anything I can offer.

Cheers,

-Sam

Hey Congrats!

Well done executing a successful strategy.

Were the things that went wrong related to the new purchases, or other well timed calamities-that it sounds like you planned for- on other properties?

-Sam

I might also point out that when your ROE starts to not fit the "highest and best use" of your capital, then it's time to do something.

That could be in the form of a Refinance to pull out equity to improve your returns, or sell the property to move into a bigger more suitable scenario.  There is certainly a point in which you don't want to be highly leveraged just to pull out the capital in a property if the market value gets over inflated.  You're better off selling and putting that money to use in a new income opportunity.  Buy low sell high type stuff.

Another interesting idea would be to get an interest only loan to maximize your cash flow while maintaining a steady state ROE.

Have you given this much thought?

Thanks for the replies!

I tend to have similar views about the balance as the majority it looks like.

I view it as the option to execute on the highest and best use of the income stream at with time as the critical actor.  It seems apparent to me that actually using it to pay down debt is counter productive, until you're ready to refinance if that's your objective.

It makes more sense to me to save the cash flow (true cash flow, not vacancy/maint expense savings) in a stockpile to use it when an opportunity comes along, whether that looks like a new property or an opportunity to improve either financially or physically the existing state of a income producing property.

The opportunity cost of something else coming a long is probably what I'm skirting around, but in my mind it makes sense to bring in a respect for time and opportunity to the equation.

I also feel like something I extrapolated from Gary Keller's Millionaire Real Estate Investor is worth sharing for anyone reading for nuggets.  It touches on a lot of the sentiment shared above and brought a really interesting concept to my attention.

I almost exclusively use COC (Cash on Cash) return for my metric of choice when pulling the trigger. It makes sense, but it's a snapshot metric. The second I sign the closing docs and the title is transferred my initial cash I'm investing becomes equity.

Equity by nature is based on value and principal remaining on the loan, it's the difference of the two. The basis of the concept is as the debt is paid down, your ROE (return on equity) goes down. If COC is a snapshot metric, ROE is the operating metric. At a certain point, your ROE will sink to a point where the highest and best use of your equity/capital is NOT being invested in the property. In other words, the faster you pay down the loan, the faster your ROE sinks and you should do something about it!

Like most, I like seeing numbers to instill concepts, so lets assume:

Purchase Price = 100K

Down Payment = 20K = Equity (for easy math, assuming no equity is in the deal)

Loan = 80K

For simplicity lets assume after taxes, insurance, vacancy, property management, and maint/repairs/capex, the property cashflows $3.5K/yr.

Therefore the COC is 3.5K / 20K = 17.5%

Now, lets look a few years into the future.  For easy math, value appreciation, rent appreciation, and tax benefits are being omitted:

Value = 100K

Loan = 65K

Equity = 35K

ROE = $3.5K/35K = 10%

Ok, 10% isn't bad, I'll take it...fast forward a few more years:

Value = 100K

Loan = 50K

Equity = 50K

ROE = $3.5K/50K = 7%

Well, 7% is the stock market average right?...lets pay down all that debt and be "risk" free

Value = 100K

Loan = 0

Equity = 100K

ROE = $3.5K/100K = 3.5%

At least I'm beating the nominal 3% inflation rate...

A disclaimer, I'm leaving out a lot of important variables for simplicity of math to help uncover the trend I was trying to point out.  Most of the variables that move over time only exasperate this trend.  The only thing I can put my finger on that would reverse the trend is a non-proportional increase in rent appreciation compared to a slower value appreciation.  Even so, I think they generally trend in a linear fashion and generally nullify each other relative to the ROE issue.

I went way over the top on this explanation, but it was good for me.

I hope you've also enjoyed it.  Please let me know if you have feedback for me or have differing opinions.  We're all in this together.

Take care,

-Sam

Hey BP!

I wanted to start a discussion to hear other arguments or inputs other than my self generate content on the following:

1.) Is maximizing cash flow or loan paydown/payoff more important?  #askBP

2.) Why?

Thanks for your time!

-Sam

I started at 18, with just enough knowledge to be dangerous.

My folks had been doing it for years and I finally decided to have dad sit me down and explain why I kept busy during the weekends and summers mowing and painting the rentals.

I was blessed, in that everything was in place for me to get started with very low entry barriers.  The market, at the time, was such that 100% financing was a norm.  I knew, and still do great business with and learn from, my banker on a personal level.

We expressed interest to our realtor network in the local area that I was looking for a starter investment home.  A realtor brought a absentee owner's listing to our attention.  She just wanted out, and so we made an offer.

42K, if I remember correctly was the purchase/offer price.  I got a loan for 55K, sunk in the remainder into repairs and upgrade (the largest being central heat/air) and a small cash reserve.  I think it originally rented for around $550 or $575.  I was young and didn't understand the full extent of the numbers or analysis.  I was able to refinance a few years down the road and improve the cashflow equation, which may have ultimately been in the red at first, but it was never realized via out of pocket expenses.

@Marty L.,

Good deal.

The great news is you've already started, so that's taken care of, now just go figure out how to finish.

Focus on the one thing that will get you to your goals. First the Refi, then the HELOC.

I admittedly stole this idea from Gary Keller's "the ONE thing".  It's less a real estate book and more a get stuff done/self help book. 

BiggerPockets has everything you need to go out and purchase an investment property with enough knowledge to be successful, all for free.

Good luck!

"Fortune favors the bold" - latin proverb.

-Sam

@Ronda McCormick,

I don't have much experience with finding buyers, but I do have experience in small towns without REIAs.

I tend to agree with the idea that networking is a lifestyle choice.  I feel like the least forced and the most organic way of building the network is by talking about what you do to the circles you're currently in.

Here's a free piece of grey matter outsourcing for you: set up coffee or lunch with a local realtor. Explain to them that you're a REI and would like to keep a market scan for upcoming properties that might work as investment properties. Even as a wholesaler you should be up on what is available in the market.

Once you find the right realtor contact, you can throw them business that won't necessarily fit in the parameters of your business model.  They win, you win.

Speaking from the standpoint of a buyer:

You're going to need to put together a solid package detailing the investment opportunity and introducing them to the local area.  A standardized report would work great, with the right numbers.  Just make sure you find out what your buyers want to know and you can make your workflow super simple.   

I work with a couple wholesalers. The less professional ones will only send me a text with the beds/baths and asking price (and maybe a guess at an optomistic ARV). This is a huge pet peeve of mine. If you honestly think I'm going to lift a finger to dig into a property with minimal effort on the wholesalers part. I'll verify all day long once something is proven worth looking at. We all have craigslist and a million other internet resources. I could spend my time looking for deals all day, but then why would I work with a wholesaler? It just cracks me up, and strikes a nerve.

I also think BP is a very valid place to network.  I think a bunch of like-minded folks in the same cyber-space is a prime location to find people who might be interested.

I'd love to hear about what you're doing in Dalhart.

Good luck!

-Sam