All Forum Posts by: R Sean

Originally posted by John Hatch:

Over the past year my wife and I have been able to rehab 3 houses and rent them. In two cases we weren't able to attract the right tenants ourselves and went with a local real estate company. They charged one month's rent to find a tenant. We're handling the month-to-month management ourselves. As the first year is coming to a close I see in our agreement that apparently we'll owe the realtor another 1 month's rent if they tenants stay. And also every year after that too. Is this common practice?
If it is I guess I'll have to be more diligent in getting our own tenants.

Is the agreement cancellable?

Originally posted by Rich Weese:

My Garland,,(dallas) TX 154 unit was 13% vacant. Through some new stategies, in 3 months , have reduced vacancies to 2%. Rich

Rich,

What strategy did you use to lower vacancy to 2%?

Originally posted by Vikram C.:

Rich, I was not trying to compare TX to CA. That one's a no-brainer. I was trying to compare TX to other cheap states such as AZ. More precisely, I was trying to figure out a proper way to account for the tax differential. TX might still be the best game in town. But I think we need to come to that conclusion after accounting for the huge tax effect.

Roman, it is not captured in the NOI figures. The NOI assumption of 50% is a general assumption. But if one state is going to have 10% of GSI as an extra tax, then that state's NOI will be correspondingly lower.

Your approach works if you assume rents are equal, which comparing class A California MF vs. TX class A MF, there is up to a 50% difference.

Looked at another way Vikram: if NOI is correspondingly lower, so will the value of the asset, keeping the yield unchanged. 10% on a $1000 NOI is the same yield as 10% on a $800 NOI, but each yields very different asset values.

Values are driven by a multitude of factors: supply constraints, land values, SF home affordability, interest rates, capital markets, blah, blah....which impact the going in yield (cap rate) of a propsective investment.

Originally posted by Vikram C.:

While doing the due diligence for an apartment building in Texas I noticed that the property tax rate was quite high compared to many other states. I understand the state has no income tax, but that's not relevant to out-of-state investors.

I think when we look at Texas properties, we should consider the real price to be about 25% higher than what we pay to account for this tax differential. Here's how the numbers look to me based on a simplified example:

Gross Scheduled Rent: $200
NOI: $100
CAP: 10
Purchase Price: $1,000

Comparing Texas's approximately 3% property tax with a state that has 1% property tax, we get a 2% hit each year based on the property value, which means the real comparable NOI is lower by $20.

Thus, comparable NOI = $80
This means we should have paid $800 for the property and not $1000.

If we do not account for this while comparing investment opportunities in different states, we could end up paying a whopping 25% more for a texas property than a comparable property in a state with lower taxes.

I understand there are ways around this, such as setting up a C corp, taking salaries out, etc. but none of them are costless.

Anyone having a contrary viewpoint? Or a solution to this problem? If it were a small difference, I would not think much about it but paying 25% extra seems like a lot to me.

Vikram,

RE taxes are an operating expense and thus included in your NOI figure. Your 10% yield captures the tax effect. Stated simply, using your numbers, you are buying an after (property level) tax yield.

No need to figure in differentials.

R Sean

Justin,

I'd be a hesitant to say this is 'cash flowing' nicely.

Let's do some math...

Total rental income.... $825/mo
NOI (using 50% rule)... $413/mo
$100/door cash flow.....($200)/mo
Net to service debt.......$213/mo

$213 payment @ 7.5% for 30 years is...

$30,500 (rounded.

So your $39k deal may not be that great....

Hey Rich,

In Houston, the property management fee is typically 3.5% of COLLECTED revenue, not projected or potential revenue.

This aligns the interest of the landlord (you) with the PM company. The more they rent and collect, the more they make and the more you make.

R Sean

Originally posted by Adarrin Smith:

WHAT IS GENERALLY A GOOD CAP RATE AND NOI FOR COMMERCIAL BUILDINGS?

Adarrin,

This is an excellent question and one that can generate several answers.

A cap rate--in the sense used in the answers here-- is the NOI for a stabilized asset over it's purchase price.

A cap rate IS NOT...

- an indicator of cash flow, only CASH is...

- an indicator of value

- an indicator of whether you should purchase

A cap rate is

- a VERY loose measure on whether to do further research on the prospective investment

- often used as jargon to sound like a good investment and cloak for cash flow...

There is also a very big difference between an unleveraged cash yield (cap rate) and a leveraged cash yield (cap rate)

An unleveraged cash yield (cap rate) is NOI over purchase price -- which includes ALL closing costs

A leveraged cash yield (cap rate) is NOI after debt service over equity (Purchase price plus closing costs less debt)

Typically (used very loosely) your leveraged cash yield (cap rate) will be higher than your unleveraged becuase of the positive leverage of debt. If that's NOT the case you are negatively leveraged, which means the cost of your debt capital is MORE than the yield on your equity capital.

Hope that helps.

R Sean

Will,

Welcome to TX. If you were a couple hundred miles east (Houston), I'd treat to lunch. Enjoy your stay in SA and have a blast at the Alamo and Riverwalk.

From a multifamily perspective SA will have great opportunities with the BRAC realignment and consolidation in the city.

R Sean

Originally posted by Vikram C.:

In my vocabulary, "investing" refers to deploying money for returns, so you cannot invest without money. But there are many things in RE that one can do without being an investor. Bird dogs, wholesalers, brokers, etc. are in the real estate field without being real estate investors. If you can manage a project, even rehab is possible if you can convince a hard money lender to lend to you.

BTW, you had a million bucks yesterday. What happened to it?

Didn't go anywhere :lol:

I was just inquiring. I always like to think about the 'scorched earth' scenario and how I'd start if I had hard work and a dream (which I do..just saying)....

Assume I have little equity, questionable credit, and relatives that aren't wealthy, but I still have the passion for REI.

How do you suggest one start? Thanks in advance!

R Sean