All Forum Posts by: Ben Nelson

Alyssa,

Great question. My first HUGE point...do NOT pick a market just because it is cheap! Cheap properties are cheap for a reason. You can have success in any market, but you need to know what you're getting into with lower end markets/properties before you do it, and choosing a market just because of the price/value factor is not where you want to start.

The FIRST question you should be asking is "what do I want my investments to do for me?". If you're looking for steady value and high cash flow, that's a very different market than if you're wanting long-term growth and appreciation. First figure out what you're after, THEN start looking for markets that meet and can deliver that result for you. 

Once you find some markets that can get you where you want to go, start narrowing it down by analyzing those markets themselves. Demographics, population growth trends, job and income growth trends, diversification of the local economy, etc. Find a market with strong drivers that point towards long-term stability. Don't invest in a "fad" market where one industry is driving growth and may only do so for a short-time (ie what happened in the Bakken with the oil industry).

Third, find an AMAZING TEAM. Investing long distance means leaning heavily on your team to implement your strategy and bring it to reality. A poor or mediocre team in an amazing market can give you a worse result than an amazing team in a good market. 

Start with what YOU want from your investments, narrow down your markets, and find an amazing team. Good luck! 

@Jeff Byrne getting looks like that is a sign you’re on the right track. It means it’s not in the “normal” thought process - and normal yields average results so why would you want that? 😊 keep pushing forward and don’t let the doubters hold you back. Surround yourself with those who do believe in your goals and who’ve been where you want to go.

Why are people generally not ok with “feeding” a rental property with negative cash flow, when they basically do this every day with standard retirement accounts? What’s the difference between putting extra cash into a hard asset like real estate vs taking cash out of your pocket to invest in stocks, etc.?

I’m not necessarily saying I’m a proponent of buying cash flow negative property or using this logic to justify it, it’s just curious to me why it’s so readily accepted to take money out of a paycheck for say a 401k, but not so much to put that money into a negative cash flow piece of property. Would love people’s thoughts on the mindset here. :)

I do a lot of mobiles here in Portland. I don’t know Texas as far as how they do their property taxes, but typically most areas if you look at your tax bill it breaks it out as “land” and “improvements”. Your total assessed value is based on the combination of the two. So, usually, with a manufactured home park the owner of the land pays the “land” portion of the property taxes, and the individual owners pay  personal property tax on the “improvements”. 

@Larry T. Did a better job of explaining #1 than I did thanks for bailing me out ;). Without those extra details my answer wasn’t super clear thanks for the additional info added

Interesting questions to be sure.

1) I’m not an expert in the banking system but you could certainly go way down the rabbit hole into how the banking systems work. But banks take in deposits to be able to lend the funds back out. By the way, the lend fractionally which means they don’t lend out the same amount they take in, they lend out many times more than they actually have. So if they have $10 million, while they could invest in the stock market at 12% (which, correct me someone if I’m wrong, but pretty sure they are not allowed to make that type of investment with deposits). However, if they can lend out $100 million on that $10 million - which they can - they are actually making 4 times as much money with 1/3 of the “return”. This is just the tip of the iceberg by the way. Start studying the financial system and banking and you’ll be shocked at how it actually works.

2) Amortization matters a TON because most people sell or refinance every 5-7 years on average. They’ve got the game figured out. Front load interest and you are perpetually paying interest forever. Yes, if you get a loan once and never touch it by selling or refinancing, it doesn’t matter. But who does that? Even as an investor, re-leveraging for more acquisition is typically part of the game. Every time you get a new loan you reset the amortization schedule and are just paying more interest up front.

3) It all depends on what you want to compare it to or how you want to look at it. Different investors want to look at different numbers. I agree, amortization should be taken into account for overall return. But cash on cash does play a purpose, plus it's an easier and quicker way to analyze something initially. Cash on cash is one metric while IRR is another. Just multiple ways to be making an analysis.

Just to touch on another couple factors, especially when comparing to the stock market, leverage is a HUGE piece of return. This is especially true when factoring in appreciation. While a return on a property might be 4% based on appreciation, if you only have 20% equity in the property and 80% as a loan, that return is NOT 4%...it’s 20%. Leverage can massively accelerate returns. Also, return on equity is another calculation you want to be making and paying attention to as you’re paying things down with amortization and as equity increases with appreciation. 

I think it really comes down to your goals as an investor. If you want to grow your portfolio faster, leveraging performing assets is a great way to do that. If your goal is to hit a monthly cash flow number, more leverage of course lowers that net to you. However, if you can use the cash to buy more and the net cash flow is better, or even the same, as not doing anything - in my opinion - it makes more sense to buy more. Increasing your overall assets will build your overall wealth, and wouldn’t you want 4 or 5 properties being paid off by tenants vs just one?

Again, everyone has different goals. Make sure you know what you’re really trying to accomplish and align your strategy and next steps with that.

Hi Steven,

I echo what Chase said...get educated and use what you can find for information, but it’s just that...information only. You NEED to have an attorney involved when you’re working in syndication. If you’re trying to save fees, DON’T even think about going down the syndication road. Attorney fees are a cost of business, and hiring the right professional to make sure you’re covering everything you need to is worth every penny. If you don’t, and you try to shortcut, you’re going to miss something and this is not a business you want a misstep like that. Penalties for non-compliance can be extremely severe. 

Now, don’t let that scare you away from syndication. Syndication is a beautiful thing and can produce amazing results for all parties. Just make sure you’re doing it right, for your own protection as well as your investors. 

Kol Peterson, as mentioned, is an excellent resource. You should also check out Dweller - www.dweller.com. They are doing some really cool things with prefab ADU units.