All Forum Posts by: Bill Briscoe

" And that can best be justified if you're seeing a 2-4% increase in value annually over the long term. I get the idea of cash on cash returns, but if someone told you that you would see 1% in price gains over 20 years (in other words, a 20% gain), you'd have to ask yourself if that acceptably beats inflation and the cost of the interest on the mortgage, and I bet you'd decline to purchase if you had that crystal ball. Don't we need to see a 3% increase in value per year to beat inflation, and a 5% increase to beat the interest on the loan? Perhaps it all comes down to cash on cash returns, but I then wonder if that is somewhat of an artifact or illusion if prices aren't growing by 5% a year on average.... "

But you don't have to beat inflation to make an acceptable return. Price appreciation is just a bonus IF your rents cover debt service and expenses plus enough extra to pay a cash return on your equity invested. Look at how price appreciation works when combined with leverage:

Purchase $100K house with 20% down Interest Only (just for simplification) at 6%. Appreciation is 2%. Payment is $400/month interest only. After maintenance and vacancies, tax, insurance and expenses, you expect to make $600/month NOI from the rents. $400 goes to Debt Service leaving $200/mo Cash Flow. $2400/$20,000 cash invested is a 12% cash on cash return annually- which may be acceptable, but it ignores the appreciation.

If you sell the house at the end of year 1 (ignore transaction costs just for illustration) for $102K - up just 2%, that's $2000 of additional capital gains which boosts your total IRR by 10% up to 22% ($4400/20000 invested). That's what 5/1 leverage can do for you.

Yes, I would still buy now. But look for deals. How do you know prices are going to come down? How extreme has the run-up been in your area? $/SqFt?

But a dip in 2 years wont hurt you if you are going to hold for 20 years and IF rents don't fall off so much that you can't stay solvent.

If you are happy with the projected returns you can make at todays prices and your expected rents/price appreciation, then pull the trigger.

Of course, I say all this from my regional perspective. Our values have jumped some in OK as well, and there is new construction, but nothing seems that extreme given the oil and gas job growth and the normal population growth in the area. And I'm still not buying new construction. There are foreclosures to be had that offer instant equity if you manage the rehab costs right.

However, if you have seen local values jump say, 25-30% or more YoY in your town, then I might look towards another area as something that extreme could indicate more of a bubble than a recovery.

A little follow up scenario example: Property with a value of close to 135K, rents for $1200/mo, expect 2%+ appreciation per year, mortgaged for $97500 at 5.125.

Pmt (P+I) is $530/mo for 360 months.

With tax and insurance and a decent allowance for maintenance, we can clear $300/month.

Granted its not a GREAT investment to start with, but we have about $22K cash into the property which gives us $10-15K in additional sweat equity if we sell the property to the tenant and skip the realtor commissions. In the mean time, $3600 BTCF/22K cash invested in a 16% cash on cash return, which I can live with.

Now suppose we add that $300/mo cash flow to the mortgage payment? How fast can we snowball this property? It would take 163 months to become debtfree. That doesn't sound very good to me. So the only way I can get this property paid off before all three of my elementary school kids are graduated from college is to sell the property and take my captial gains.

What would you do?

Hi William. I would say it depends partially on your Investment strategy. For the slumlord or the investor in Cleveland/Detroit, etc who can purchase those 2% properties for $20K, then I'd say definitely try to pay off and go all cash.

But from your post above it sounds like your strategy is more similar to mine - buy the middle class $100K +/- homes that rent for $1200+ month. These types of neighborhoods can (not always) lead to lower risk tenants, fewer maintenance calls, lease purchase scenarios, etc.

However, when you are buying properties for 100K vs 20K, it is difficult for many of us to pay all cash or even to pay that off from the cash flows in under 5 years. So I'm not trying to do that right now. My strategy is based on buying foreclosures in this market (in appreciating neighborhoods), rehabbing and building $10-20K in sweat equity plus some appreciation over time, then hopefully sell the property to the tenant while cash-flowing in the meantime while the tenant builds up their credit/income history to qualify for a loan. If I can sell the property in 2 years or so, I should clear enough cash to make down payments on 2 more properties.

The county does assessments, not appraisals. The tax assessments often have no relationship with the true property value. What does Zillow say the property is worth? What are Comps going for? What does your Realtor friend say it is worth?

Also, if most of the units are rentals, what are they renting for and what is the vacancy rate? $750/mo sounds pretty low to me considering over a third of that goes to HOA fees. I wouldn't be very interested unless I could feasibly raise rents in the near future. Your monthly burn rate is just too high.

"No pets means no pets. The pet goes or you go. Surely this tenant didn't just forget to mention this beast. It was an intentional omission, or as I like to call it, a LIE. I would be inclined to give notice to vacate. I hate liars. "

Nobody LIED! This dog is not on my property. It lives at the tenants son's house. The son is moving to a new city and my tenant simply asked if she could keep the son's dog for a few months while son was getting settled.

If it were a small dog, we were inclined to accommodate her because she is a good tenant and will likely buy the house at some point - she has great credit and just needs to show enough self-employment income this year to qualify (IOW, take fewer business expenses and legal deductions).

The picture is from the application. Now, given that it is a pitbull, we are not going to consent to that dog.

No you don't. You do need to execute a valid bargain and sale contract, transfer earnest money, then engage an agreed upon title company to handle the closing and possibly hold onto the earnest money.

I would start by calling the title company and ask for help. They one's I've used have been helpful in navigating the legal steps in the past for me.

Do you own the house yet? If so, good luck.

If not, and you don't have experience dealing with these types of repairs, I'd suggest you run (don't walk) away. I do have enough experience with various foundation issues to tell you that often the "fix" doesn't permanently resolve the problem.