All Forum Posts by: Cary F.

@Matt Ransom 

Fee revenue is a very real thing in the banking industry. We do a lot of analytics around customers who pay late, but always pay before 30 days past due. 

The majority of them continue to pay late fees and stay close to current on their accounts. Of course, there are credit risk metrics that we keep an eye on in case the client's ability to pay deteriorates further. 

@Lauren Heart

You should have the property inspected before a tenant moves into any unit. Have the proper documentation that shows that there is no bed bug infestation or presence of any kind.

Write into the lease that if bedbugs become a problem after the move in date, that the tenant has to pay for the extermination procedure. (Deductive reasoning suggests that the tenant brought the bedbugs into the property.)

Of course, this is for the next unit you lease. I wish you the best of luck in navigating this sticky scenario.

@Grant Hamlin

If you cannot figure out if college debt is worth it or not, then how will you ever become an investor? Is college education not an investment? Do you not require debt to be a real estate investor?

The obvious answer is yes, you need to finish your degree. The average ROI for business school is usually > 20% if you study accounting, finance or economics.

The language of ROI for real estate is spoken in accounting terms. Value creation for real estate is calculated using an income statement. Equilibrium rent analysis is used by considering macro economic trends. Additional returns in REI are rooted in the practice of finance...

Here's another warning...  People on Bigger Pockets are usually biased against college education. But the data suggests that people with college degrees earn far more than people without college degrees most of the time. That earning power will improve your real estate investing!

So..  If a degree will increase your earning power, and if your education will enhance your investing game, then why would you not finish the degree?

The only thing that doesn't make sense is you investing 2 years of time and money into a degree that you don't finish. Now that is a true waste of resources.

From a REI perspective, I think the 4 hour work week is WILDLY overrated. From a productivity and efficiency perspective, I think the book is solid. It's probably better for W2 corporate people than for investors.

From my perspective, true real estate investors should study compounding interest, economics, finance and accounting. REI is all about risk management and valuation. Well guess what? Risk management and valuation are both functions of accounting, finance and economics. There's a reason most major banks have so much real estate on their balance sheets.

@Tony Wooldridge

As Gordon Gekko said, lunch is for wimps. I feel that retirement is for wimps (haha jk). As Tim Ferris said, knowing what to do with your free time will actually become a major problem if you're used to being busy.  

I want to own and manage a portfolio of CRE and Notes with total assets of at least $20MM by 2035.

That being said, if you can acquire and control $20MM in properties, then you can do $100MM so why stop there?

I don't see this as a way to quit an awesome corporate gig. But when my portfolio gets so large that I need to quit, then I'll have a thought. 

@Account Closed

Okay so the banking person here has to say it:

1. Leverage - What asset class has more leverage than 20:1? Uh..  none. Good luck getting a loan for your business with 20:1 or 10:1 leverage.

2. Buying Power - What asset class can you lever against 10:1? Uh.. Very few if you have little cash or don't own a company.

REI is a means of acquiring other asset classes as you can lever against it. Whether those other asset classes are stocks, fast food chains, apartments, dry cleaning companies or 711s is up to the investor.

Without that buying power that REI can create, an investor is somewhat limited in how they can allocate their funds.

@Andrew Acuna

If your goal is to build a large real estate portfolio, then you will not do so successfully without PMs. Literally any business must have the potential of scalability in order to become successful. Without a scalable model, your business will be limited to the effort of the entrepreneur. One of the largest competencies of REI is scalability through other people's time (OPT), often times carried out through PMs.

If your goal is to own a smaller portfolio, then perhaps doing your own property management makes sense.

If you want to acquire medium to large scale apartment buildings, then you probably won't even get a loan from a commercial bank without proof of using a PM with a solid reputation. It's literally a part of the underwriting process. 

Great question..  I spend a lot of time thinking about this one. 

@Paul Bowers

10% of CapEx is simply a rule of thumb.

Buying a cheap piece of crap property is going to have massive CapEx requirements potentially in excess of 100% of rent. Brand new properties will have very low CapEx requirements as low as 2% of rent for the first few years.

The fewer doors you have on a property, the more volatile the CapEx requirement. The larger and more standardized the property, the more predictable the CapEx. I would look into average CapEx requirements by unit size, property age and property class. I'm guessing these numbers stabilize for large multifamily properties.

@Robbie Taylor

It's much more difficult to create value or equity on 1 - 3 unit properties than it is in 4+ unit properties. 1 - 3 unit properties are valuated on comps but 4+ unit apartment buildings are valuated on Net Operating Income (NOI) and Cap Rate.

If you can lower operating expenses in an apartment by $3,000 a year (only $250/month) with a Cap Rate of 10%, then you've literally just created $30,000 in equity. To do this, find an apartment that has some value add opportunities such as billing utilities back to tenants or a property where you can manage with increased efficiency.

Apartment building investing is where all the money/opportunity is. Hell, even some of the podcast hosts are starting to consolidate. There more I study real estate, the more I realize that small multifamily should only be purchased so as to eventually purchase large multifamily properties. I'm sure many disagree with that but it's literally a fact.

Check out these podcasts if you're interested:

http://www.themichaelblank.com/podcasts/

http://www.oldcapitalpodcast.com/

@Robbie Taylor

Very interesting strategy... I like the lead generation and marketing piece of your plan. Sounds like you have a nice corner on the market. Also, congrats to you and your family on your excellent careers! I'm very much in favor of the corporate gigs combines with REI even though so many people are trying to quit their jobs.

Everything I'm saying is from a finance and opportunity cost perspective. There's still significant downside to owning properties free and clear even if you're using money from other properties to finance purchases. 

The opportunity cost is forgone leverage for larger and larger deals the longer you sit on your equity. If you extract your equity and lever up on all of your properties every year or so, you will eventually be able to do deals that are in the tens of millions. This is not an exaggeration..  It's just math. Let us consider the following:

Assume you put down 20% on a $100,000 apartment. Assume further that you've added 20% in equity by creating value for the property. With the down payment and value add, you now have $40,000 in equity.

>> Extract that $40,000 and lever it up with a 20% down payment on a $200,000 property.

>> Repeat the equity extraction process every year or 2..

>> Deal 3 will have a purchase price of $400,000

>> Deal 4 will have a purchase price of $800,000

>> Deal 5 will have a purchase price of $1,600,000

>> Deal 6 will have a purchase price of $3,200,000

>> Deal 7 will have a purchase price of $6,400,000

>> Deal 8 will have a purchase price of $12,800,000

>> Deal 9 will have a purchase price of $25,600,000

>> Deal 10 will have a purchase price of $51,200,000

The use of leverage in real estate is an exponential function as it relates to deal size potential. 

The only assumptions here are that you put 20% down and that you add 20% value to an apartment by either increases revenue or decreasing operating expenses.

These assumptions are rather conservative in the CRE industry. If you want to discuss this in more detail, perhaps I can send you a spreadsheet that shows the details of these calculations.

Thanks!

Cary