All Forum Posts by: Austin Fruechting

Cap rate still gives you an indicator of cash on cash return even though it's not used for valuation in under 5 units. However, pro-forma's are not actual performance. I see things listed (from duplex to apartment complexes) that claim a cap-rate of X... based on a pro forma.  When you run the numbers based on actual performance, you often see that their 9cap on pro-forma is actually a 6cap in reality. My guess is something similar to that is what is going on and why it hasn't sold. Have you done a cash flow analysis on it?

Also, if it's rented towards the top end of what it could rent for given the size, location, and remodel work that is already done... you won't be able to BRRRR it. The things you are talking about won't increase the rents or perception of the property much at all. If those things would increase the rents significantly, then you could consider it.

Every few days this topic comes up...

There is more than one way to make money in real estate. There is not one ultimate supreme clear cut winning best investment strategy that everyone should follow. 

There are so many individual variables... time available, income, cash available, market, end goals, personality, etc etc... Learn the concepts and strategies. See which ones are possible in your exact personal situation at this point in time. Then figure out your best plan of attack to reach your end goals.

**and after you pick the strategy for your goals; don't assume that everyone should do it your way and that you know what's best for everyone else. If you learn the concepts and strategies you'll see validity in all of them**

My end goal was financial freedom. I invested for cash flow, not for land value and net worth building @David Song , but that doesn't mean my strategy is right and yours is wrong or vice versa. I will say that your assessment of capital expenses making a cheaper property a non-viable investment is wrong. And the assessment that "no land value" means "throwing money into water" is also wrong... and here's why:

That's factored into the numbers. Yes a $4k HVAC system represents a lot larger percentage of my monthly rent, but that's factored in and I still make money. And before you say well in 10-20 years you won't make money because those costs will go up, I believe that to be false too. Rents would have gone up during that time and my mortgage would stay the same providing more income. In addition to that; there have been rentals in these markets for generations. So if that were a true statement about these markets, it would have had to have been true decades ago as well, which would mean there would be no viable rentals today. Clearly that is not the case.

Secondly; it's not throwing money into water. It's investing for cash flow. I don't care what the value is in 10 years on my properties since they're bringing in ~$200k annually in cash flow. My total purchase and rehab costs have been ~$5mm.  I'll take my $200k per year AFTER all of those expenses and cap-ex. That's a total of $2mm of cash flow in that 10 year period. I'd be ok if the values stayed completely flat and I received exactly zero appreciation with those returns. I don't need the land value to double during that time to make money.

Early bird gets the worm... second mouse gets the cheese. 

 That made me laugh! 

Exactly! There are so many individual variables... time available, income, cash available, market, end goals, personality, etc etc...

Learn the concepts and strategies. See which ones are possible in your exact personal situation at this point in time. Then figure out your best plan of attack to reach your end goals. 

@Andrew Johnson - For sure! I see so many properties listed and being sold at prices I just don't understand! 

And I also agree; I would always rather miss out on a deal by being too conservative than get into a bad deal because I was too optimistic!

I don't ever plan on renegotiating my offers. If that LOI goes in that's what I'll pay. The only way that changes is if there is something truly hidden found during due diligence and inspections... and it would have to MAJOR if my offer was a super quick one because again, I will only do the quick offer when it's obvious grand slam. If it's looking more like a base hit or a double, all the numbers need to be spot on. There's just not the room to absorb any additional costs then so you have to be on.

I was chatting with someone via private message.  I think this is good information for everyone so I wanted to post it here.

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Make it a point to learn something every day. Whatever it is, no matter how big or small, make a step in your education every single day.

I still read real estate books all the time, listen to podcasts, read blogs, analyze properties, etc. I continually learn about different investment strategies, different types of investments, and different points of view. All of that helps solidify and carve out MY specific plan and what's best for ME to do given MY situation at any point in time.

There is no set play book to follow. There are MANY different types of investments, strategies, and structures. Every one of them can work, but they won't all work for everyone.

The goal in my opinion is to understand all the theory. To know why you make every single decision you make. To know why each of those decisions is the best strategy FOR YOU at the given time for YOUR situation and goals. 

@Andrew Johnson - I agree with what you're saying and I was responding as you were typing too. I usually don't use any numbers from realtors other than the rent.

My quick offer situation is only when I can quickly identify something as a grand slam. A quick drive around the property will give a good idea of cap-ex/deferred maintenance and I'll put in a figure for that. If it's a grand slam I know I have enough room to absorb some additional expenses if they arise.  

 I understand! I'm a numbers nerd. The amount of spreadsheets I have saved is just ridiculous. I've always looked for value add and have done a lot projects since the beginning. If I have a few photos of a typical unit; I know what to cost out for what level of finish I want to do. Then multiply it by 28. It doesn't take that much longer than toking at a duplex IMO. I also know what to expect for flat roofs, parking lot resurfacings, etc.  The offer in an hour situation is only when I know it will be a grand slam... and that would be with all expenses will be padded (if I think it will be $12-$15k per unit for rehab, I'll plan on $15k. If I think it will be between 50-55% expenses, I'll go with 55% etc etc). 

Another caveat: the ability to put that offer in confidently on a grand slam has only come because I have put thousands of hours in over the last 7 years. And if it were a new market I would have already spent an additional 100+ hours researching and analyzing.  So yes, that offer can come in an hour if needed, but only because of countless hours over years of doing this.