All Forum Posts by: Alexander V.

@Llewelyn A.

I'm not denying the possibility that IRR may in some cases be worth considering, I'm saying that it makes sense for entry level real estate investors who are buying SF or small MF properties (most BP members) to use CoCR as their primary metric in most cases.

Also, I'm not trying to pick a fight here, but I think we both know that your "real world" example is not so real. First of all, it isn't even real estate. A mobile home parked on rented land is personal property, not real estate. Even a fixed mobile home on owned land that has been legally converted to real property still has a depreciation schedule wildly different from the overwhelming majority of real estate situations.

Secondly, you say that CoCR cannot handle any scenario beyond the first year. I concede the point but counter that the IRR cannot handle any scenario prior to the last year. Case in point? You just posted a figure in which the investment went into negative cash flow after the second year and then assumed that the investor just ignored it and held for another 18 years... I realize you were just using that as an example, but it is laughably unrealistic. People on BP buying one house or a duplex or trying house hacks are going to be frequently buying or selling or refinancing. CoCR is a bad metric for comparing a series of big static purchases that are going to be held very long term, but IRR is often a bad metric for a small relatively high-liquidity purchase that may be sold or renovated or refinanced in a matter of years or even months after initial purchase. 

Saying that using CoCR instead of IRR is "why only 5% of the Investing Populations will sit on the rich side of the fence and the other 95% will try to climb over" is... let's just leave it as hyperbolic, at best. 

Edit: P.S., the BP calculators that are pushed so hard on newbie investors in the podcasts factor in changing income/expenses and appreciation/depreciation and very clearly display returns over time. I seriously doubt anyone literally just sees a positive cashflow and buys without any additional thought to location or the possibility of changes in future revenues, nor have I ever heard any BP contributor or employee suggest such a thing.

When the economy turns and an investment goes diabolically wrong, you have an infernal rate of return.

This thread strikes me as essentially "people in different markets with different goals, different financial circumstances, and different experience levels use different strategies than me... therefore they must be wrong!" Most people here don't define cashflow as if they were accountants and they probably don't analyze everything like hedge fund managers. I wonder if that could be because they are not accountants or hedge fund managers? Go to the about section of the website: "our goal here at BiggerPockets is to help ordinary people like you build wealth through real estate."

I realize that BP is open to all levels of success and experience, but the primary goal of BP as frequently stated by the company on their literature, webinars, and in the podcasts, is simplifying real estate investing so that ordinary people who are not rich or formally trained investors can get involved. Ordinary people are going to feel overwhelmed if they start listening to a podcast or join the forums and immediately get hammered with GAAP terminology and complex analytical algorithms. Moreover, most "ordinary people" would have serious problems weathering an economic downturn or financial rough patch without having positive operational cashflow. If the annualized appreciation on your property over 10 years is projected at 5% each year, that looks great on paper, but if the investor loses the property after year 1 due to negative operational cashflow and exhausted reserves following a shift in market conditions it becomes irrelevant information. This is a real concern that ordinary people--BP's target audience--have that experienced investors with a healthy diversified portfolio and significant reserves may not need to worry about as much.

I don't think that using operational cashflow as the core metric on BP is an error or a misunderstanding, I think it is a conscious choice due to it being a simple and safe metric that minimizes the likelihood of newbie investors experiencing overwhelm or major loss early in their investment careers and going back to "watching dancing with the stars". 

Care to elaborate on a 0% down bank loan that anyone can apply for? Or do you mean anyone in the military community? VA loan or Navy Federal Credit Union, perhaps?

If you're set on pursuing a BRRRR and are searching for value add opportunities, you may want to consider some loan options that allow you to wrap the cost of a renovation into the loan. You said that the market in which you are interested has homes which are extremely outdated and have a lot of potential, so if you're attempt to add a lot of value, it may be more worthwhile to apply for something like an FHA 203k loan or (if you or a spouse are military) a VA loan combined with the VA rehab program.

If you just get a 0% down loan on an extremely outdated home, you could still be looking at substantial out of pocket repairs (not to mention that many banks are hesitant to loan on homes which need work). An FHA 203k is typically 3.5% down if I'm not mistaken, but the bank can finance the renovation if approved. So say you buy a house for 200k with 0% down, and you need to put in 50k of renovation work to complete the BRRRR. That's 50k you have to come up with out of pocket to finish the project, making the total cost 250k with the bank only financing 200k of it. An FHA 203k requires a 3.5% down payment, but 3.5% of the 250k project total is only $8750... This is a circumstance in which 3.5% down can end up actually costing less out of pocket than 0% down.

Just something to consider. Best of luck with whatever you choose to do.

I'm interested in talking to an investor-friendly real estate agent in the Harlingen/Brownsville region of TX. Send me a message if you're an agent who knows the area! Thanks!

It seems very odd to me to try to judge whether an investment deal is good or not based on $/door without knowing how much cash was initially invested. $'s are for W-2s, %'s are for investments. Whether or not $500/door is "good" depends on the number of doors, how much the property costed, how much the projected appreciation is, etc. Am I wrong in saying that? It's like saying "my fund pays an annual dividend of $2 per share, is that good?" Any answer is meaningless without knowing the cost per share and at least some basic fundamentals.

A SFH is different from a duplex, which is different from a triplex and 4plex, which are all totally different from 5+ units. But legally speaking, what makes something a "unit" in the view of the city planners as opposed to an ad hoc division on the property? For example, my cousin in college rented a single room in a 4 bedroom house. It was a SFH, but it had 4 different people renting 4 different rooms. I've heard of this particularly in college towns and in areas like SF where costs are extremely high. Is there any legal barrier to leasing subdivided spaces in a large house on an ad hoc basis as opposed to partitioning them off as "units" with individual meters and entrances?

I'm just trying to wrap my head around zoning laws. It seems like a case of unnecessary complication--if you lease out 3 separate rooms, it's fine. If you label them as "units" and add separate meters, suddenly you have a billion legal papers to file, city officials to navigate, and rezoning fees to pay.

@James Wise I appreciate you taking the time to provide such an informative response! I'll definitely keep all of your input in mind, and I'm reading the article you linked now. Thanks for the help.

Hello, this is my first post on the forums, and I'm in need of some advice.

I've been analyzing potential properties for about an hour per day for a while now, just trying to get a feel for analyses and markets. I've noticed that in some markets, it seems impossible to find a property in which the numbers work; however, in others, it seems like almost every property looks good on paper. Specifically, I've noticed that Cleveland OH has dozens of duplexes for under 100k renting for $600-$900/month/unit, even in some of the lower crime neighborhoods on the west side.

When every deal looks good, I know something is wrong, but I'm too new to see what it is. The biggest issue that I can see is that almost without fail, the small multi-family homes in Cleveland are 80-120 years old, and I'm unsure of how to accurately estimate repair costs and hidden expenses. If the repairs are 10k (as some of the sellers claim...), half of these properties would have a CoCROI of 30%+ with a conventional loan at 20% down, which is possible for a home-run deal but clearly not for just about every duplex on the market. So what are the potential issues that make these on-paper good deals in-reality bad deals?

For a couple examples:

https://www.realtor.com/realestateandhomes-detail/...

https://www.realtor.com/realestateandhomes-detail/...