All Forum Posts by: Collin Placke

@Daniel Peavey you are pretty much spot on. The $20k you’ve spent in 10 years does reduce your cash on cash return. However, if the $20k was routine maintenance and repairs it should come out of the numerator as expenses, not added to the $50k denominator. If the $20k you spent were “capital improvements” like new upgraded floors or countertops then you can add it to the denominator as capital.

For example, you made $7k per year and spent $20k over 10 years and let’s call it split $10k in repairs, $10k in capital improvements.

Your net income would be $7k minus $1k per year in expenses ($10k in 10 years) so $6k per year net income.

Your capital would be $50k purchase plus $10k in additional capital improvements so $60k total.

$6k per year net income divided by $60k capital gives 10% cash on cash and a 10% annual return, and over ten years your total ROI is 100% ($60k earned on $60k investment).

@Daniel Peavey maybe I was a bit confused. The denominator in the cash-on-Cash calculation should be the total cash you have in the deal. Purchase cash plus capital improvement cash.

I assumed it was a $25k cash purchase and a $25k capital improvement for a total of $50k. Is this not the case?

If you did not pay all cash on the original purchase just adjust the purchase amount down to what you paid in cash.

A true ROI calculation is a bit different because it adds up the total return on investment divided by the initial investment... quick example would be say you make $5k year one, $6k year two, and $7k year three on a $50k initial investment. You take total returns of $18k and divide by $50k initial investment for a total return of 36% divided by a 3 year investment term equals a yearly ROI of 12%.

Sorry I do this math for a living, but I may not be great at teaching it.

For properties I'm involved with:

GP on one 250 unit apartment complex in Memphis where April collections were 1% higher than March and February. 

LP on 560 unit complex in Memphis that was down 6% on collections in April vs March and Feb.

GP on 170 unit complex in Montgomery, AL that was down 13.5% compared to prior months, but this isn't a great statistic for the area because we are also actively trying to free units up for renovations on this asset. 

Over-all, not the doom and gloom we first predicted... but May could be another story!

Just like any turn-key investment, be weary of their pro-forma (projected returns). Run your own numbers, don't blindly trust theirs. 

Can I ask a deeper question... is something drawing you to invest via one of these platforms? Is it because it seems more passive and turnkey? Or are you just curious of other people's experience with them?

Yes, it would be based on what you estimate you could sell your house for, not based on what you purchased it for with the caveat that it doesn't work very well for single family homes. 

Single family sales are not based on NOI and cap rate, they are based on comps, or comparable single family properties and have no basis on income, therefor no basis in cap rate.

For single family, a better KPI to look at instead of cap rate would be your cash-on-cash returns which is your return on equity deployed. You can compare this measurement to similar investments to determine whether your equity is earning the most it can at any given time. 

For this, your cash-on-cash would be $25k purchase, $25k improvements, and $9k/year NOI. So $9k/$50k = 18% cash on cash return which is pretty healthy and would be hard to beat elsewhere.

Your cap rate would be $9k/$95K which is 9.1% but I'm not sure how useful that metric is in single family. 

@Cary Cheshire glad to see other O&G professionals getting involved in real estate! As a petroleum engineer, I firmly believe there is no better investment to smooth out the volatile ups and downs of the O&G industry than real estate investments. 

Would love to hear more about what you have in mind for this transaction and what your ultimate goals are. Reach out to me on here or find me on LinkedIn and let's chat. I've done BRRRR and I've done large multifamily, so I'm sure I can help you with the numbers on anything in between. If not, I have a network of people way smarter than me I can call.

By the way, I'm starting a new community on LinkedIn called Rigs to Real Estate to help other oil and gas professionals make smarter investments in real estate that can keep income flowing in no matter how bad oil prices get. Would love for you to join when I get it up and running. 

Collin

Live where you want, invest where the numbers make sense. That being said, Arizona is more landlord friendly than CA, and AZ will have less threat of rent control. 

If they are same price, can you share what the difference in cash flow is? How much research have you done on the markets? What are your ultimate goals?

There is plenty of info around here to help with any concerns you may have about investing out of state. Feel free to reach out to me for advice and I'd be happy to walk you through how my wife and I decided to buy our first rental in Fort Worth, TX which is 800 miles away from our home in Denver. 

Collin

I'm guessing you are referring to smaller apartment buildings based on 6% to 9% for property management. With the 100+ unit complexes I invest in we are closer to the 2% to 4% range. That being said, I have a few comments... 

Remember a 3% decrease in expenses does not equate to 3% increase in property value. You have to divide by cap rate, so in reality that 3% savings would equate to a much larger gain in equity depending on your market cap rates. 

Property management can make or break your investment. It's one of the most important additions to your team. Vet the discount PM thoroughly. Secret shop one of their properties. Ask about their systems, are they cutting corners on marketing to get that discount rate? Talk to other apartment owners who use them. 

Bottom line, if they do a good job for less money then by all means use them. It's not always "you get what you pay for." Maybe they're newer in this town and want to build a presence and utilize great technology to help save money compared to older PM's more established in their ways. 

What state are you in? Maybe @Andrew Postell can help? He was a great resource for me. 

Bring your popcorn, this looks like an incredible course with great subjects!