All Forum Posts by: Greg Scott

While single family houses are typically valued on comps, apartments are valued on net operating income. Easiest way to think of this is if you pretend and apartment is a business that has nothing to do with real estate. You pay for the profit the business makes. In the case of apartment, NOI is the key profit metric.

In any given location or class of apartments, people will expect to get a certain level of return on their money. In a nicer neighborhood or newer apartment, they might be willing to have a smaller return than an rougher neighborhood or older apartment. This expected return is known as the Capitalization Rate or Cap Rate. Cap Rate = NOI/Acquisition Cost

So if a certain style of property in a specific area are selling for an 8% cap rate, you can calculate what any specific property should cost, based on the specific NOI of that property.

Jasmin:

I'd ask you to back up a level to make sure you aren't getting in over your head.

The Property- Have you run the numbers to know what you need to spend on rehab vs. what the house will be worth afterward?  Are you comfortable with the rehab quotes?  Are you comfortable with the anticipated after-repair value?

The Deal - Have you drawn up a written agreement with your friend so that both of you are clear what a 60/40 split means?  What happens if the rehab costs go up?  What happens if it doesn't sell as high?   How do you handle utility, tax, and maintenance costs if it takes a while to sell?

The People - How good a friend is this?   You are effectively plowing your money into someone else's property.  Have you considered making this a formal contract?

Just some things to think about.

Based on your $300/mo cash flow on $60K equity, you are only earning 6%.  So, doing nothing is not a terrible option, but not a great one

If you look at what you have, if you take out a 50% loan, I estimate your cash flow would shrink to $200/mo. So, if you buy an identical condo with 50% down, you would now cash flow $400/mo.  This would be an 8% return and $100/mo more than you had.  You can probably find a bank that will give you a portfolio loan (in-house loan), typically at higher interest than freddie/fannie.

My experience has been that condos do not cash flow as well as houses, all else equal.  I have been getting $300/mo cash flow (net of everything) from single family houses.   If you sold the condo and bought two houses that would give you $600/mo or 12% return.  

I've heard various definitions but the only one that made sense to me was simple mathematical quartiles based on monthly rent.  Highest 25% in rent are A-class, second 25% are B, etc.

I see that the author chose probably the most heart-wrenching example he could find to make his point.

The story would have fallen apart if he had written about the family that bought a $4000 TV and therefore couldn't pay the rent.

Of the Section 8 housing people I have had as renters, I had one that managed their household well.  I had two that were total disasters in almost everything they did.  (Example, smash the electric meter with a baseball bat to get out of paying electric bills, which matched the general destruction they did on the interior.)

One of the reasons the landlord here is wealthy is because he has had the financial self-discipline. I'm glad the article points out that he has helped a lot of tenants because of it.

I agree that those terms are pretty standard, although also usually the starting point that all property managers would provide.   Generally the lower-rent a property, the higher % the PM wants because they need to eat too. 

For my Texas properties that are similar to yours, I pay 80% at lease-up, 8% per month and 40% on release.  Not sure what I have on repairs, but I have a long relationship with my PM and they have never abused this.

All the points you mention are negotiable.

I have bought and sold wholesale deals.

What the wholesaler makes is mostly up to how good a deal he negotiated with the seller.   The end-buyer may or may not know how much the wholesaler made depending on how the closing is structured.  One wholesale deal I bought the wholesaler got a $27K payday.  I was thrilled for him as I still got a smoking deal of a rental property.

If you are referring to earnest money deposit on the deal, I've typically seen $2K-$6K as a deposit.  The wholesaler typically gets paid the rest at closing.

BTW  http://affinitygm.com/

I've used CNR.  They are investor-friendly and have good prices in some DFW areas.  (I typically go for replacement costs with moderate deductibles.)   Alternately Affinity is completely investor-focused and I use them for my other properties because they can write policies in any state.

I have made claims with both agencies and had decent experiences.

Good luck

Exactly right.  Now lets add in two benefits you didn't mention.

1) If you had 100% equity, your cash flow probably exceeded your depreciation expense.  Therefore, in addition to property taxes, you will pay income taxes   Once you have leveraged up, you can get to a point where you will pay ZERO income tax even with the increased cash flow.  (Awesome, isn't it!)

2) Now you own $2M in assets instead of $1M.   Assume there is zero appreciation.   After your tenant has helped you pay off the loans, you are now worth $2M instead of $1M.  However, if you do get appreciation, you now have x2 increase in net worth over time.  (Also awesome)

If you manage it well, leverage is your friend.