All Forum Posts by: Bay H.

I learned about 50% rule and 2% rule here and their general use cases. I'm wondering whether there is any simple rule of thumb for cash flow generated from the spread between cap rate and interest rate.

For example, 1% rent/value ratio would give 6% cap rate after 50% rule. The formula for amortization is non-linear. Say if financed at 20% down and 5.5% 30yr fix, is any rule of thumb / empirical way to derive cash flow and COC quickly?

Thanks @William Walker for another direction to look into. I'm aware of some of these funds for different areas of investment but never made the link of using them for RE. Thanks for pointing that out!

Is your 28% projected IRR leveraged with collateral? Is it a flip?

The other extreme is venture capital investment where the return could be huge but the bust rate is crazy too. So it's all about the right vehicle for the right needs.

Good point, @Matt Mason! Prop 13 in CA is really saving people a lot of money over the long run. Rising property tax at other states may eat into cash flow gradually over time...this point never crossed my mind, or not yet. Thanks a lot for pointing it out!

@Marco Santarelli's main point of seeing the forest instead of the trees is still totally valid. I will remember that

Thanks @Chris Clothier for your comments and information on property management. I guess BP can be a good reference point in addition to other check points. Investing is associated with risks. Things can still go wrong even with a great property management team in place. So having a reasonable expectation and attitude can help set the right tone for the whole experience.

Thanks @Joel Owens for your comments.

Two questions:

1) If there is good management in place, what is the role of a local partner? If just to keep an eye out and check things from time to time, I assume anyone local that is trustworthy and reasonably capable could fit this role, a friend, a family member etc.? Has this been your experience? The name partner implies a very serious business relationship with substantial profit sharing so just want to clarify the roles.

2) You mentioned "Many are talking about houses and hot markets versus commercial." Under this context within your comment, is multi-family / apartment complex considered as "houses" or "commercial"?

oh, I did find "Pro" level membership so the Syndication forum must be there.

Sorry, my bad.

Thanks @Johnson H. for the step by step instruction (hello, my neighbor!) and thank you @Marco Santarelli for the inputs! Yes, should focus on the forest, not the trees!

After reading many forums and discussions, I now have a much better idea on how feasible $1500 monthly positive cash flow on $150k capital is. (This goal itself is somewhat arbitrary because no one in the family will have to count on this cash flow for living but I have to start somewhere and limiting my parameters.)

12% cash-on-cash looks like obtainable, especially factor in the financing. Assuming a property with 8% cap rate, 70% loan at 7% interest, the cash-on-cash return would be

0.08 Price / (0.3 Price + 0.7 * 0.07 * Price) = 22.9%

With this calculation, I did not include principle paydown because it is amortization schedule dependent. So actual monthly cash flow would be lower but still well above 12%.

Now my questions are:

1) I noticed many posts mentioning 5 yr balloon with 20-25 amortization. Is 20 - 30 year loan not common for commercial loans? I'm only looking for general / common practice. I read that sometimes if you have good relationship with a local bank, you can get sth exceptional. But those are special cases.

2) Will bank give me loan for commercial property if I have never own or manged one?

3) @Johnson H., you mentioned signing up for all the wholesalers, turnkey providers, investment providers etc. I'm a little bit concerned whether that would be considered as unethical or offensive (of course, unethical is too strong a word here - but you get what I mean), just like when you buy a house, the buyer agent does not want you to work with other buyer agents. What is the norm? Is it usual or unusual that you sign up with one trustworthy person (maybe find on BP based on people's feedback?) and they go out to find you a property that meets your needs? Or is it just everybody talking to everybody? Some providers require signing an NDA so sounds like exclusive kinda of deals.

4) In each area, say Atlanta, Texas, Memphis etc. there are many companies/websites showing investment properties with excellent investor testimonies. Things all sounded easy, investors are all taken good care of by these investment firms/providers, rents just rolling in. Of course, reality must be not as rosy, especially for out-of-state people. How do I know which provider to work with? I read some give compensation if the investment went sour,... Is this the ideal type of providers to pursue because they are very confident with their deals or is this a talking point bait?

5) @Joel Owens , thanks for listing a number of scenarios. This suggestion would fit us better - "A seller looking to retire selling at a good cap with a property that Is fully performing with good tenants can help safeguard your investment and be more hands off." I understand and accept that the return may not be as high as turn-around deals. What implication is it to have a partner? We have W2 and other capital for reserve but we are lack of availability in terms of time or "mind". Does this situation dictates a partner? Or will work with the investment provider and a good property manager good enough to cover this case? We have no problem overseeing the books (and want to) but cannot fly out frequently to deal with tenant/management issues.

6) @Michael B. mentioned risk free return is 2%. Thanks for the reminder! I am very keen to understand what the main risks are for the scenarios mentioned, ie. good tenants + good management in place + good rental market. How realistic does such combination exist in one single property for 8%-10% cap rate? in what price range? Or is this very rare? Is it more obtainable in multi-unit / commercial investing comparing to buying a SFH at an expensive area ($150k down payment)? I'd like to minimize the number of transactions and closing cost overhead.

7) @David Beard You mentioned "I would not purchase an apartment project from across the country, with you having no experience, that is just a recipe for disaster." em.. a little bit discouraging... but can be very true, really. The key question is what I can do to mitigate the risks? Reading books, knowing the jargon, picking a good areas etc. can all be helpful but they cannot make up for the lack of real experience. Many people do start with SFH. Are there success stories for multi-units investments as the starting point?

BTW, I could not find Syndication forum on the forum front page. (I wiped my eyes many times... ) Is it only open to higher membership levels (if there is such a thing)?

Thanks so much everyone for all the suggestions and bearing with my naive questions. I'm learning everyday.

Ali, thanks so much for sharing your experience and knowledge! Really appreciate you compare these popular cities on their cash flow potential in general.

I will start with Atlanta. I like this city. It is a good point about the higher property tax rate in Texas. It really eats into cash flow.

For a newbie to start, is it usually recommended to find an investment company in Atlanta area? Who is good? Do I sign an agreement upfront and pay a fee for them to pass deals to me to evaluate? Or, should I start with MLS/Redfin/Loopnet and contact the seller agent to get more detailed?

Thanks so much for all the feedback. Extremely valuable!

Michael, what do you mean by "secondary investments that grow during these cycles"? I'll look into those. Thanks a lot!

Thanks for the feedback. Great to see a local investor, Aaron!

The same company advertise a mini-studio type of investment with developer guaranteed 25% annual return for 5 years or about 40% estimated floating return for $54,950/studio.

http://www.hotmarketinvestment.com/#!mini-studio-investment/c1kki

The developer is called "North Dakota Developments"

http://northdakotadevelopments.com/project/great-american-lodge/

The location for the mini-studio project is close to Watford city.

The capital for this investment is not very large comparing to SFH, $54950 vs $244950. Of course, the construction looks like some mobile home type of temporary housing. The nightly rent is $139, shared with the developer. I figure with 25% guaranteed return for the first 5 years, basically I can recover the cost. After 5 years, even worst case if the rent drops to $40, there is still some positive cash flow anyway.

What do you think?

This is advertised to me.

http://www.hotmarketinvestment.com/#!brand-new-home/c19f6

$250k for 3bdrm new SFH with $3000 monthly rental in place already.

It does not fit 2% rule I know. But sounds like pretty good cash flow opportunity.

With 50% rule, ie expense to be $1500 instead of quoted $573, the final cash on cash return (assume same $986 mortgage payment as stated) will be about 8%.

This is a new property with pretty high rent so I think probably the expense would be lower than 50% so the actual return would be higher. What do you think of this deal?

I understand this is not a killing deal. But is this a reasonable turn key deal for a passive investor?