All Forum Posts by: Account Closed

@Ben Feder ABSOLUTELY not. Run comparables. 

It can be accurate. It can also be inaccurate. Do the research now and comp the hard way. After a couple months of this, you'll know values in your market of choice off the top of your head anyways.

If you buy cash you will probably get a little bit of cash flow. I wouldn't try it with debt service, tbh. Flip something. Invest elsewhere. Or invest in a different type of asset. San Diego isn't a "cash flow" market even when the market is low, the money there is always going to be better if you make an equity play. I wouldn't make an equity play in a peak market, though.. unless you plan to exit the equity position pretty soon.

@Oscar Tol 

I think you can invest in CA, but if you exit a property quickly enough to take your profit with you. Basically, if you're in it for the flip. There's absolutely no point in buying rentals here now, just to have them lose value through a recession and make zero or negative cash flow. I don't even wan't to hear about tax benefits... who wants to lose money just to pay less taxes, lol.

1% deals don't even cash flow well at such a small scale.. nevermind a 0.5% deal. 

I'm not telling you to go invest out of state, but make a list of all the alternative strategies you have. Real estate investing has gotten so sexy, that people just want to do it because it seems like what rich people do & it's cool now. That's not the reality. Some investors make money, some investors make a ton of money, and some investors lose their butts. Which one do you want to be?

BRRR takes some skill- building a forced equity position is something one should capitalize on. Many new investors make the mistake of trying to build low risk/low yield passive income and save tax money too early in their investing careers. If you're going to be an active investor that WORKS on your deals- force equity, liquidate, pay the taxes, and move on to the next deal. That 30% in ordinary income tax you pay will be WELL worth generating revenue that will contribute directly to the growth of your portfolio when it's small and needs to grow.

If you INSIST on BRRR'ing- BRRR a property in a market where the cash flow is high enough to compare to the equity position you have.

EX: 

***I would much rather keep a BRRR that's 30k in forced equity on a 100k ARV duplex that NETS 4k/yr cash flow after realistic expenses and debt service. Your options here are take the 30k or take the 4k passive per year. Not a terrible ratio.

***I would NOT keep a BRRR that's 90k in forced equity on a 300k SFR that nets 1200 a year cash flow after realistic expenses and debt service (maybe not even that lol). Your options here are take the 90k or 1200 passive a year. I would question the fundamental business competence of someone who didn't take the 90k...

ESPECIALLY in a peaky 2019 where that equity position could be diminished by an amount significantly greater than the short term capital gains taxes you pay after selling it. If you sell after 3 months, you pay 27k in taxes on that 90k profit, and maybe 15k in realtor fees (if you use a realtor) and 2500 in closing costs. That's 40k taken out of your cut. If the market softens and value is reduced by 20% (which is very optimistic for inland empire based on historical volatility), you lose 60k of your equity. If it is reduced by 30%, your equity is buh bye, and you make $100 a month. 

Don't forget- you pay taxes on rental income as well. And the rate is comparable to the short term capital gains tax rate. You pay taxes on the debt paydown portion of your mortgage too.

The big lesson here is if you're going to buy and hold something, hold an asset that isn't going to lose much value during economic correction, and one that cash flows well enough to make it worth holding through a whole market cycle.

I did a few BRRR's when I started investing out of state, 3-4 years ago. I think it's a terrible idea.
You're doing all the work a flipper does, but taking a small slice of cash flow rather than liquidating that equity position. 

Remember, active investing is usually more profitable than passive investing. And it should be. 

If you truly want to be passive, find a high cash flow property thats already stable and put 20% down with commercial financing. Conventional financing will require 25%. If you want to be active, and do all of the work associated with finding a good deal and rehabbing it... make some real money doing it. 

There are many other issues with BRRR scalability. Time associated. Debt to income ratio. Appraisals. Another thing most BRRR lovers don't consider is that commercial lenders (who you will have no choice but to use eventually if you really want to grow a substantial portfolio) will NOT refinance you after some short period of time at the property's market value if it means you're getting every dollar you invested back. They insist you have skin in the game.

Another issue: a lot of investors come to me with BRRR portfolios of 3/5/10 properties...whatever they could reach before debt to income stopped them from getting more loans... and they couldn't qualify for a commercial loan afterwards! The commercial lender looks at something called "global cash flow" on a buyer; one factor of which being how well do their real estate holdings cash flow using THEIR OWN CONSERVATIVE CASH FLOW CALCULATIONS, and the bank sees all of these low cash flow SFR's investors own as a financial liability that may diminish the buyers ability to pay the monthly debt service & maintain healthy reserves on the new property being considered.

I could go on and on :P

@Rob Bergeron so much demand for premium products these days. People's wants & needs will shift when their disposable income + sense of economic well being changes as well. High end properties are steals when markets are low :)

@Jeff Byrne My parents and friends doubted my entrepreneurial aspirations from the start, all the way through today. They know I'm making money hand over fist too, btw. Mom thinks I should go to grad school. Dad thinks I need to stop flipping little apartment buildings (I flip about 80 a year) and buy and hold larger unit counts. Friends think we're getting lucky, then ask us for jobs. Hell.. I was in the little lounge at the Sac Kings game last night and a bunch of older dudes joined my business partner and I at our table, asked us what we did, then told us that the fact that we're focusing on cash flow over appreciation makes us a losing business out of the gates. Even my investors think I'm stupid for selling them the property I do instead of keeping it! LOL.

You know what I say? GOOD.

I'm crazy and do what everyone else dares not so I have all of this uncharted territory to myself, and will continue to scale my business without competition. 

There's limited space in the promised land, my friend. Go plant your flag, you're not going to convince anyone to come with you.

@Dave DeMarinis I'm gonna spill some more beans. If you find markets with MUCH HIGHER cash flow than comparable markets investors have identified, then EVENTUALLY when those investors do come across it, they will pay a price that gets them a comparable cash flow to the markets they're already investing in. Some math will reveal that that price will be a higher with a magnitude that is in direct proportion to how much better that market cash flows.

EX: 

Everyone buys 100k houses in a popular market, market A, at an 8% cap. 

You find market B, which is very similar to market A, just less popular. You buy a 67k house at a 12% cap. Once the folks from market A discover market B, they will eventually be willing to to pay 100k for your house, which gets them to an 8 cap. 
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This, ladies and gents, is how you identify appreciation opportunities in "cash flow" markets. With a substantial effort, you can even exert some level of control over appreciation- which I'm sure the general BP population will deny. 

I just bought an 8 unit at a 27% cap rate (you read that correctly) in one of these market B situations in a C+ area and haven't done a thing to it. At what cap rate do you guys think the investors from market A next door will pay for it? 

@Dave DeMarinis  you better mention that we're not affiliated before that post gets flagged because that's a PLUG, lol! I do appreciate it of course.

That's an interesting point about the low rents, and a valid one. I like to see 2 bedroom units renting for about $700-$800 in C+/B- neighborhoods where we target small MFR. That way, a 100k duplex generates a substantial operating reserve and still cash flows.

Dave, how large are the assets you've purchase in hunstville, and what's the avg price per unit & avg rent per unit that you're targeting? What are the cap rates on the assets you're purchasing, at market value? What asset classes are these neighborhoods?

Thanks!

I knew @Dave DeMarinis would be on this post.

Small MF is a great starting point for a lot of investors looking to go out of state (unless they've got too much cash and want to skip straight to the point, which I don't know I'd recommend to any new investor in a peak market). Is the tenant pool just not a fan of the small MFR product, Dave? What type of assets and areas are you finding assets in that have the highest possible cap rate + a feasible turnover and management profile? Is small MFR just priced too closely to SFR rentals in these neighborhoods? Is there an abundance of SFR rental units available in these areas?

My experience is that tenants in working class areas see small MFR as a second option to renting an SFR, which is ok in markets where demand is high enough to create a price gap between the two, and supply a steady flow of tenants into both property types. The markets I operate in have great plex performance. When SFR's are available for rent in overabundance, nobody is going to want the plex product to live in unless they are lower quality tenants for the area.