All Forum Posts by: Dan Brewer

Personally, 100% bank financing without a personal guarantee is non-existent. Tell me a bank that will do that. Really. The only hope for that is a very low LTV, which sounds like it does not exist in this deal.

Not sure I agree with everything that was said in this column about cap rate.  Its a confusing concept, and I often am asked to explain it to investors. But rather than point out differences with other posts on this topic, I will add my persepective.  And others may not completely agree either, haha!  I think @Bill Gulley did a pretty good job of explaining cap rate.  I'll try to further simplify.  

Cap Rate is simply the return an investor wants on an asset. And Bill G is correct, it does affect value inversely. For instance, if I have an asset that produces $10,000 a year net income (NOI if you wish), and Investor A seeks a 5% return on his investment (essentially a 5% cap rate), then he would theoretically value the investment at $200,000 (10,000/.05). Investor B seeks a 10% return on his investment (essentially a 10% cap rate). Therefore, he would theoretically value the investment at $100,000 ($10,000/.1). So a LOWER cap rate creates a HIGHER VALUE for the SELLER.

Bill G is very correct in noting the risk/reward tradeoff with cap rates.  Typically an asset sold at a higher cap rate probably has more risk than an asset sold at a lower cap rate. Otherwise, the seller would be prudent to sell it at a lower cap rate and therefore a higher price (assuming the market will pay the price).  I further agree with Bill G that the Cap Rate analysis for lower priced assets is much less relavant, because there are so many other variables to consider.  Single family investments included.

Further, you as the seller never establish the cap rate for an asset, the market sets the cap rate.  This is confirmed simply by asking too much for an asset.  If it is overpriced, its likely you will not find a buyer.  Cap rate will fluctuate for many reasons, but a pretty common reason is supply and demand.  When demand is up, and supply is down, the cap rate will drop.  This is great for seller, terrible for buyers, for they will have to pay more.  

Personally, I have moved away from smaller assets for a number of reasons, many of which Bill G alluded to.  I focus on larger assets. Currently, I am very passionate about senior housing investment - the timing in the market is perfect, and it will be for the next few years.  There is far too little supply, and tremendous demand by institutional investors. So what is happening?  The cap rate is dropping, and the value is increasing.  The market is establishing the cap rate, not anyone else.   

Hope that helps! 

Willa - 

I have two perspectives on leverage.  

1. Just like the stock market, leverage is good (and wise) when prices are rising.  It's like buying stocks on margin. Once you are satisfied with the increase in stock price, you sell, pay off the margin, and take your profits.  When stock prices are falling, leverage is bad.  Now you purchased on margin, anticipating higher prices, and the opposite occured.  Now you are losing money. And leverage only magnifies the losses (just as it magnifies the gains when prices are rising).  the key is to know when to get in, and when to get out. 

@Franklin Romine made a key point - what is your strategy?   Based on what I can gleen from your posts, sounds like you are a buy-and-hold investor.  Assuming this is true, then the declsion to use leverage changes.  You are not so much concerned about how the pricing of homes fluctuates.  You are more concerned about the cost of the funding, and (hopefully) the rate is fixed.  If the rate is not fixed, now its starting to get dicey.  Nobody thought interest rates in 1980 would hit 18%+. But they did.  Any rates that were indexed went through the roof.  Nobody thought what happened in 2007 would happen.  But it did.  The crash of 1980 hurt both fix-and-flip investors as well as buy-and-hold investors.  The 2007 crash primarily hurt the fix-and-flip investors.  Buy-and-hold investors actually saw interest rates drop over time, although getting loans on new acquisitions was pretty much impossible.  And when the markets crash like they did on 1980 and 2007, rental demand GOES UP.  Rental rates remain stable or increase.  However, rent volatility increases as well.  Renters lose jobs.  Their savings and income gets stretched.   So kind of a double edged sword.  

2. I have been on the capital side of the business for 21 years now, and have seen a lot.  My philosophy is that in general, the fix and flip market is fully matured. There is lots of competition for deals.  Supply is thin.  Prices are higher.  And the most forboding indicator - its taking longer to complete the flips.  That is a absolute sure-fire sign that its time to reduce risk.  Not everywhere, not with everyone.  But in general, its reality.  I think Atlanta is one of the bright spots.  I am sure there are a few other great markets as well.  But most are fully matured.   Therefore, those who leverage in the current fix-and-flip market are taking greater risk.  The lenders too.  

On the buy-and-hold side, leverage is OK (I emphasize OK) as long as you have low, fixed rates, your property is a mid-rental rate property in a highly desireable area, and you are not so overleveraged that it will be tough to cash flow with some hiccups in the economy.  And most of all, you still maintain very high cash reserves to help you weather any storm.  

I saw a lot of investors crash in 2007.  Just about anybody who was leveraged suffered.  That is why today I err on the side of caution.  As Warren Greenspan stated, irrational exuberance is a bad thing.    

Vic - 

I focus very heavily on passive income - true passive.  I'm on the capital side of the business, and only place my investors in assets that are truely passive to them.  In addition, I look at the qualifications of the management team. The issue I have always had with single family rentals is that they are not passive, regardless of what the seller tells you, and on most locations there are very low barriers to entry (if any at all) to be a property manager.  

I focus on private real estate investment funds in well underwritten deals managed by experienced, competent, qualified managers.  There are a variety of these available, from very low risk to higher risk, and I feel they can provide the 6% risk-adjusted margin you seek.   I agree with your perspective on diversification, and one option is to invest in several such funds.   

Thanks, Dan

@Steve Wilcox 

Amen.  

Everyone - 

We had a nice first meeting.  Very informal, just perfect.  And as expected, we already have some potential positive connections where the attendees could do business together. Fabulous!

There was unanimous agreement for a followup meeting, so I will hold another one in December.  I'll expand the horizon, invite more people. Since we are getting into the holidays, attendance might be more challenging due to our personal obligations.  For those who can make it, that would be great.  I'm thinking either Saturday AM, the 13th, or Tuesday evening, the 16th.  Let me know your thoughts, and we will go from there!  

The entire focus for these meetings is networking, connections. mentoring, education, and community.  If you like that, then that's great. 

I will also formalize this via meetup.com, and let you know when that is available.   

Thanks, Dan

First of all, I want to note what @Jay Hinrichs stated - SELL WHEN YOU HAVE A PROFIT. What a great concept to remember, especially for new investors.  

Over theyears I have done a ton of SF investing and lending out of state, in fact much more than I have done in KC where I am located, and this is a great investment market.   Just a couple words of advice:

1: Make sure that you have the personality and make up to invest out of state.  If you are the type that cant sleep at night because you cant drive by your property everyday, then don't do it. 

2. Property Management is critical.  Once you have a property manager, and lets assume its a good property manager (big assumption), it does not become a passive investment, especially out of state.  Now you need to manage your property manager.  If you don't, another investor is.  Sqeaky wheel gets the grease.  

3.  There are many tools available today that help you quickly analyze out of state property.  Personally, I will not provide any capital or recommmend any of my investors provide capital for an out of state SF property without using a tool called RentFax.  Much like CarFax, it provides critical location information on the specific property - school systems, crime, unemployment, etc - the same items you would consider if you were going to move into a specific area.  It summarizes it into a simple index score, and also provides detailed information should you choose that option.  It's cheap - $5 to $10 depending on the the level of detail you want.  I have no economic interest in this tool, nor do I recieve anything for referring anyone to it.  But I promote it by having a link on my website - www.TheCapitalMan.com, and then click on "RentFax" in the upper right hand corner.  You will benefit greatly.  

Good luck and good investing out of state!

Dan

Shaun - 

There is a high correlation to the quality of the tenant and the quality of the area the property is located.  Higher quality tenants are not looking to move in to low quality areas. Just think of your own personal housing criteria.  With lower quality tenants, you get lower quality results. GENERALLY higher vacancy, non-pay, legal costs, property damage, tenant turnover, etc.   And vacancy in a low-quality area for any length of time is SHEER DISASTER. Vandalizm, theft of the AC unit.  They will cut the walls and pull all the copper wiring out of your house.  I can keep going, but you get the picture.  

This does not mean that a property in a low-quality area is a bad investment. There are plenty of investors that do quite well with them.  But you need to go in with eyes wide open.  Many investors are intoxicated by the apparent high cash flow on these properties. But my previous paragraph begins telling the real story.  

My advice is if you do decide to invest in properties in low quality areas, don't dabble in it.  Commit yourself to it.  Become really good at it.  Buy lots of them.  Develop the reationships and connections that are going to help you keep it tenanted, keep your tenants in line.  

Great property management in low quality areas is almost an oxymoron.  The managers that are good tend to have their own investments in the same area, so when a great tenant applies, is the manager going to think of your property first, or their property first?  I can tell you where I am betting my money.  

Also think of your exit strategy.  Disposition of these properties can be challenging, and often for less than you paid. I have plenty of investors who approach me and ask me to help them move these properties.  Unless I know someone who specializes in those properties, I cannot help them.  I do have plenty of investors that would purchase them if I recommended the properties to them, but my ethics prevent me from making such offers. The casual investor will likely get burned on properties in low-quality areas. 

In summary, it's agreat investment category if you have the right mentality and commit yourself to it.  Otherwise, I suggest you seek other opportunities. 

Thanks, Dan

Hi everyone, 

Lets plan on meeting at Lamar's Donuts at the KU Edward's campus, 12520 Quivira Road Overland Park, KS 66213. In case you have not been there, its a very large space with several comfortable sitting areas. And if you like donuts, its tough to beat Lamar's!  There is also a Sarpino's Pizza in the same building, which is very good. 

I have a sitting area reserved from 10:00 AM to Noon.  Let's plan on getting together at 10:30, but I'll be there about 10:00 AM. We will conclude for sure by Noon, but I am willing to stay as long as anyone else wishes to stay.  @Pauline Allen, just let me know when you feel you can make it, and I am happy to stay.  

I really look forward to meeting all of you, hopefully you can make it. Sorry for the delay in responding, just been traveling very heavily lately.  I'll do better next time!

Thanks, Dan

Hi everyone, thanks for oyur interest in the group.  Sorry for "going dark" for a period, I have been traveling extensively.  

The meeting will be on the 22nd as planned.  I am considering two times -  10:30 AM, and 1:00 PM.  Please let me know your thoughts on your availability for either time, and then I will go with the time thats most covenient to the entire group.  I'll confirm a location in the nxt couple days as well.  I really arreciate your interest!