All Forum Posts by: Christian Malesic

It is a plan. It is not for me, but it is way better than most people have. It gets you to a level of success as you define it.

The important thing is to work out a plan NOW, and get started NOW. All of us with a degree of success wish we started this ealier.

Your REO of 12 months ago makes my point. At this stage of the game, they are really looking to unload. Why not dust that offer off, check your remodel quoates out and go back in with another offer on that one?

On the photo: Thanks. I am really a fat, old, gray haired guy; but, that fella looked good - so I decided to be him for the internet (just kidding.. it really is me).

How do you eat an elephant?

You might say: What? You ARE kidding, right? I mean, come on, the thing is huge. It will take forever. I am a big guy and a bigger eater, and I can not see how I could EVER eat an elephant. Really, are you serious? How DO YOU eat an elephant?...

The answer is obvious: One bite at a time!

Do not get caught up in the emotion of it all. Take one step. Do not worry about the 20th mile of the race, a marathon runner will explain. Focus on getting out of the starting blocks. Then focus on getting to your comfortable pace. Then keep it up.

You are right. You will need a portfolio of 20 properties, probably many more, if you want this to be a full time job with a comfortable living. (BTW, good luck with $200 cash flow per month, it is more like $100.) How do you do it? Start with getting out of the starting blocks. Take your first bite. Buy your first.

This business is all about OPM (Other People's Money). Your scenario uses OPM initially, then uses your money (paying off the loans fast to cash out and experience the unburdened cash flow earlier). If you can afford to not absorb the cash for personal use and can keep it in the business, how about this: Instead of your proposed example, take that same cash and use it to as leverage to buy 1,2, 10 more properties, with the bank financing as much as you can get out of them and you using your cash to fill in the blanks?

The methodology in this business is very different than in others – it takes some thinking through. For example, in my construction business we want debt low, rates lower, and look toward the debt-free days. Less debt means less monthly payments (better cash flow) and less spent long term on interest. IOW, I keep more profit instead of paying out that ‘profit’ to lenders in the form of interest.

REI is very different. To use an absurd example to make my point: I do not really care if the interest rate is 30% to borrow the money as long as I get that money to do my awesome deal and the property will still cash flow afterwards. Sounds crazy? Not really. Let us say the gravy deal will still cash flow $100 per unit per month for all 3 units, or $300 positive cash flow per month, or $3,600 per year at 30%. It is a great property with great upside in a fast renting and growing area. Appreciation potential looks outstanding and I just plain old like the property (for business reasons). If no one else will give me the money at a better rate, my choices are to take the usury deal or pass on the property all together. That is, to take the great property that will look good in my portfolio, that appraises right, that cash flows $3,600 per year, that can be refinanced later OR to pass on it because of financing.

Our top priorities then are to add great deals to inventory and manage those properties well to cash flow positive. Surely, it is a secondary priority, only after the above is achieved, to get expenses down (ie. interest rates). I would much rather put 24% in my pocket and finance for 6%. But $3,600, in our example, is better than $0.

PS – Now all we need to do is attract ‘All-Cash’ to this thread to join the debate. His thinking is as his forum name implies and he makes great arguments to support his position.

Business is business. Run your numbers. Study the area, the property, the stats, the local government, etc.

Once you have done all that, run your numbers and run them solid. If you know the deal inside and out, who cares if he laughs? He either he agrees with you or loses you as a buyer.

Now, of course, you will calculate your numbers at a 'nice to have' point as well as a 'drop dead' point. Start your negotiations near the nice to have point.

Your interest rate suggestion is not outlandish. I would probably proceed the opposite way - meaning: giving him a better than market rate, but trying to obtain the property at a purchase price under market value.

Offering 60% of list is not realistic at this point though I would try if you have the time and your Realtor has the patience.

They will list it as such for the first 30 days (as a rule). REOs usually come out on the low side of market value for at least 30 days and then drop their price or are a little more flexible to negotiate after that. Every 30 days reaches another milestone for Property Managers and their flexibility improves. Some lenders go by a day of the month, ie the 1st or the 15th, as opposed to 30 days on the market (DOM).

During that 1st month they are also less open to taking anything that is not within 90% of asking. Some are sticklers and will want as much as 98% of asking.

Having said that, we are in a strange market. The rules of the game are changing.

Where in PA?

I am from Harrisburg.

You can read member's profile by hitting the "Profile" button right below their post.

We got into a pretty good debate about Month to Month (MTM) vs annual leases.

It is embedded within another thread right here on this forum called "Cash for Keys" and begins with the 12th post down on the first page.

Check it out, then come back here to post further questions.

http://forums.biggerpockets.com/viewtopic.php?t=18283&highlight=

We always called the use of equity in currently held properties to buy new properties “the shell game”.

We will start simple. For explanation purposes I will make the math easy. Let us say that your bank's rule is that they will give you 75% LTV (Loan to Value ratio). That means that the bank will give you 75% of the appraised value of the property. Let us also assume that by some odd coincidence, every property you want to buy appraises at $100k exactly (again to make the math easy).

For the first purchase, you negotiate a savvy deal and are able to purchase the property for $53k. Add $2k in closing cost and $5k in rehab costs to round you out at $60k. That means you now own a property you have invested $60k in that is worth $100k (as appraised). You have 60% LTV. You decide to hold it and look to buy the next one.

Low & behold, you find another property that appraises for $100k. You negotiate to buy it for $73k with $2k in closing fees and $10k in rehab costs for a total of $85k. But, the bank will only give you $75k (75% LTV) so you are $20k short. Where do you get the $20k? In our example, you have the bank put a 2nd lien on the 1st property for $15k (bringing that property to a 75% LTV) and you cough up $5k out of pocket.

This is how currently held property can be used to buy new property.

Of course there are a number of assumptions used in the above, which are covered by me and others in other posts. Such as: (1) Will banks lend 70% LTV, 75% LTV, 80% LTV, or even 90% LTV? The short answer is: expect 75% LTV or less in this market. Also, (2) banks are giving 75% LTV of the appraised value OR purchase price, whichever is LOWER. This also cramps the style of new investors. It does not, however, affect the shell game. In fact, this is where the shell game shines. The difference being, of course, the initial cash needed for the initial property.

Rather than me going on and on, hit us with other questions and either I or others will try to give a better answer.

Are you looking to start a new hobby or run a business?

It sounds like a simple, even obvious, question. You may even detect a bit of sarcasm between the words; though it is meant purely and seriously.

If it is a hobby, you may approach it cavalierly. Each of our personalities are different and we will approach this new hobby as per those personalities. Some will stick our big toe in the water, evaluate, pitter-patter, hum-haw, then wade in to our ankles. Other will back up, get a good run going, and dive right in. One thing is sure, it is all for fun. The fun is in the learning process. The game is about making our mistakes, learning, then improving.

Should we approach a business the same way? I would argue not only ‘no’, but HECK NO. Mistakes cost time and even more money. We will make mistakes for sure. We will need to back track, refigure, and re-attempt. We will only do so, however, by accident - not as part of the game. In business, we analyze and prepare for ALL variables. Sure, we will miss a few, but we definitely will not miss a bunch.

What is your approach to Real Estate Investing?

Should the Businessman hire a CPA out of the gate? Without a doubt. An attorney? No hesitation.

Should a hobbyist? Probably not.