All Forum Posts by: Jim Goebel

@Troy R.

Good for being here and asking questions.  Like Aaron, I'm having a little trouble following your questions so I think there may be a little bit of a terminology and communication gap.  Don't worry - it happens as we get into something new.

Sounds like you've got the basics of debt and equity, but I do think there's something missing here.

Let's run two thought experiments, which I think track what you are suggesting:

First Scenario: You buy 500k worth of property, and for simplicity, let's say that is exactly 4 of the 8 you have your eye on. After doing that, you have 500k in equity, and you can go out and get equity financing. However, the moment you get equity financing, you now have debt. Note that banks will typically lend 70-75% LTV (loan to value) ratio so that means you need to keep let's say 125k in equity position, and you would have then roughly $375,000 in debt to work with to purchase your other properties (that you would then own outright). It doesn't sound like that will get you to your 1m dollar amount, but keep in mind that you can rinse and repeat the above (refinances etc) on a property by property basis. So if my math is correct one option for you would be to own say 5 properties using a 25% equity position and 75% debt position on them, and then own the other 3 outright. If you find a good lender they may be able to help you do all of this together, because I see the biggest downside of this method being that you may struggle on the timing to get through all the refinances, etc quickly enough to close if you want to move quickly.

Second Scenario: You buy all 8 properties using a combination of debt and equity from the outset.  To do this, honestly I think you'd probably either have to get a commercial line of credit, and engage with a lender directly.  Advantages of this presumably would be you can go faster once you get everything set up but the disadvantages are I think two fold: #1 - you generally have to put all your eggs in one basket with one lender, you end up taking longer to disclose everything you need to a lender on the front end, and #2 - terms can be in my opinion a little less stellar compared to especially owner occupied long term fixed rates (ie: balloons are common, higher rates, etc)

Different people will have different ideas of using leverage (amount of debt/equity ratio) but it really depends on the situation there.  I happen to value line of credit type financing a lot more than the 'close and pay' because you end up starting to pay on a note from day 1 when you take the latter route.

Hope this helps 

@Hunter Harms

@Cara Lonsdale

Hunter, what's your background?

Most of what happens for a remodel is really not that complicated.  Getting started is the hardest part.  I 2nd what Cara said, it sounds like you should be more involved.  If you don't know enough to think through order of operations / etc then that sounds like a way for your contractor to take you for a ride.

I stay super involved in our projects because it gets off the traintracks quickly if I don't.  I'm a type A and an engineer so it's hard for me to step away which has its own drawbacks.  However, you learn by doing, not by watching someone else do.  Jump right in, bro!  Regardless of what your background is, my recommendation would be....

Start demoing stuff.  Youtube it.  When you are close enough to figuring out how long it should take, maybe hire some day labor.

Bid out specifically the parts of the project that you KNOW you are over your head on.  For instance, if you've never framed a wall, and that's part of the project, hire someone to frame the wall.  But you should be the one driving, not your GC.

@Jay Hinrichs

@Russell Brazil

@Jack B.

Whether it's a PhD economist from a great school that gets behind the efficient market theories that drive the Capital Asset Pricing Model, or someone that studies/understands the inevitable irrationality and psychology that drives consumer decision making:

One of the basic concepts in economics is the concept of price elasticity.  Some markets and goods tend to have very inelastic price curves (for instance luxury goods), whereas other markets tend to be much more elastic.  However they ALL have elasticity, so saying that there will be no effect on demand is 100% wrong.  If we are talking about how large the effect might be - well - yeah, that's what we're talking about.

There's a couple other points here that should be mentioned:

#1 - the presence/size of tax deductions is akin to price because property taxes are often escrowed and rolled right into a monthly payment amount (i.e.: affordability)

#2 - Just because the net result of an effective tax increase on a certain class of property will have a downward effect on demand, that does not mean that the overall demand will decrease.  There are a lot of factors that drive demand.

Depends on the situation.

Gauge market's willingness to pay on both the sell and rent side of things, and go from there!

Denver for instance if you are 300k in on a rehab and it rents for, say $2000, no way would I rent if it can sell for $450k.

Here in Des Moines we've bought houses for 40-60k that rent for $1300/mo and I'd do that any day of the week.

So, it depends.

Doesn't sound too bad strictly from your financials.

I don't know your market there but hey, I guess the key question is would this type of profile work for you with where you are in your life?

Here's some questions I'd want answered before moving forward -

• Why is the current landlord getting out?  Sometimes there's a real reason/another part of the story.  Time vs payoff not worth it?  Moving?  I'd want this story to check out.
• Do you have experience being a landlord?  Is this something that may appeal to you?

@Jared V.

Hi Jared

Cool on the life switch - a few questions that may help you filter down your list:

1. How important are 'other things' i.e.: perhaps still keeping your IT skills current, other entrepreneurial irons hot, etc?  If they are you may want to evaluate those markets based on what other intangibles they have going for them in that vain.
2. How much capital are you working with?  I think your strategy/ultimate 'product' and portfolio mix will drive a lot.  Last I looked, Denver is one metro that is like an SF lite, when it comes to real estate.  There's a significant FLOOR to get in the game - even completely distressed houses last I looked didn't move for less than $240k.  I don't know how your other markets compare but there are major metros that don't have that same uniform floor where you could do a lot more in terms of volume with the same starting capital.  I'm guessing Colorado Springs would fall more under the category where you will have an opportunity to get into stuff for much less.

A few follow up thoughts: 

Anthony I think has some good points.  

I don't want to disuade you especially because it sounds like you are a decent way down the road already, Evan, however here's what I think are the primary possible 'selling points' of a 'shipping container home':

• Novelty - for people that want something 'new and fresh'
• Mobility - ability to pick up and move, note that network effects and places to credibly move the container home to are going to be key here
• Price - presumably a container home should be WAY cheaper than a full built home

@Evan York

Of those three, it sounds like you ONLY have the first, that there would be some novelty.  I think those selling points ring true to your end customers (renters or buyers) or for a bank.  If I'm a lender I don't want to lend on something unless I really think it has wings.

I'm really not trying to be a wet blanket, I promise.

I really think one of the biggest challenges (opportunities) from a design and conception point is coming up with a true 'quick connect' way to connect the utilities and maintaining control of that over time.  I think without that, these can't be mobile and I think that's a lot of what's driving your cost, too.  

Hi Nicole

@Nicole Wood

My wife and I lived in a home with roommates, renting out the rooms to others.  We did not have kids at the time.  It was a sacrifice for both of us but it was especially hard on my loving wife because of expectations of privacy and frankly, getting adjusted to our trajectory in life (which I think has been a very good one since we got engaged).

I do have some strong opinions on the matter.

For many people, delayed gratification is a concept that needs to be discussed and acted on.  There would no doubt be real challenges associated with house hacking with kids present, however one of the greatest advantages of that (beyond financial) is that your kids get to observe you and your significant other making decisions that help you long term.

Even if they are too young to understand all of the implications of that, they will understand later and you will have an opportunity to discuss the decision in more detail which is absolutely huge.

All this said, have you considered getting a multi family unit where there's at least a wall up in between spaces?

I think I would probably advocate for that if it's feasible. Perhaps a 2-4 unit MFR.

@Evan York

I've got some interest in container homes as well.

A few thoughts on container homes:

1. Great learning experience and accessible.  Lower capital inlay per home compared to anything else so from an educational standpoint I've heard about many architecture programs using these as learning experiences.
2. Per above, this will generate some 'buzz' but buzz and hype are completely different than being ready for prime time.  You're pretty far down the road here which is great so I'd really love if you can answer some questions:
   
   1. How are you developing your site?  Are these units presumably going to be stacked up on top of each other?
   2. How are the units going to be purchased - who owns them?  If you, does that mean you'll be a leasor of those units (via AirBNB)?
   3. Site development: how are you going to tie in the plumbing/mechanical/HVAC systems to your central utilities?  Related to this, how are you going to meter these?  
   4. How mobile are your 'units' going to be?
   5. How do your site development costs break down vs your 'per unit' costs ?  If I'm wearing my lender hat I want collateral and I don't want my money used for stuff that isn't backed by collateral.  For instance, land purchase price, and site development costs should be separately financed.
   6. Per #5, also wearing my lender hat, what community/etc is out there so that if a lender did have to take control of these units, they have the assurance that they can do something with it?  IE it has liquid value, etc.
3. Tied to this, concern from traditional institutional perspective (regulatory, permitting, lending) is going to be unique to each institution but here's what I see:
   1. Regulatory ie Permitting Etc: major concerns here because how the containers are tied together from a systems perspective, metered, etc has major life safety implications.  I'd guess the code on this is nascent at best.  If stacked up, how do you disconnect the plumbing, electrical, etc.  What's the longer term end game of your land and plan after you get past 2 units?
   2. Lending: If I'm lending on a home I get collateral.  I don't like lending on something that's reasonably mobile given that I don't know 

Honestly I don't know much about your area but 200k sounds like a lot.

Granted you have some invested with A/E firms and land costs etc but I'd love to see how that breaks down a bit more...

@Mike S.

Greetings again!

Just my perspective here :)  I think it may help to adjust your expectations a little - hear me out ---  while you may find what you're looking for, I think it will be harder to come by because of recent policy changes and the big picture of the policy landscape currently..

There are cash flow properties, and there are equity properties.  When you can get both in one property, great!  I got that 'breakdown' when talking to someone and hadn't been thinking of things that way.  We have a couple properties that we currently think of as cash flow properties with limited prospects for appreciation, and we have some that I think we can reasonably hope/expect some decent appreciation over time.  It sounds though like you are talking about something different when you speak of appreciation.  When you are talking about a Boston, my assumption is that in certain areas there will be 200-500% appreciation when you look back over the last 20-40 years.  My guess is that the combination of a lot of the drivers I listed in my other email, coupled with land scarcity, drives some crazy appreciation.  San Fran and NYC I think fall under this.  If this is what you are looking for I'd suggest looking for those combinations.  But here's what I believe to be the macro drivers that are working against what you're saying you want.

My view and the WSJ view is that the property tax deduction will have a negative effect of 'top end' (ie: top quartile) type properties in MAJOR metros.  Not a crazy effect but a solid effect, when we're talking for instance about the average 750k-1.5m USD home in say, Washington DC.

I'm hoping that same change in policy will have a dramatic effect on the 'bottom end' type properties in certain metros as well.  As an example, the multitude of $30-50k properties in perceived bad areas of Chicago will hopefully get a new lease on life and attract capital given that literally those kinds of properties often have an effective tax rate currently of 10-20%.  It's just silly and when you have a $5,000 property tax due every year eating into your bottom line, there's no justification for investing in those areas.

I think the key question on the 2 above points is going to be how the local policy makers adjust and if they make the RIGHT decisions.  Local property taxes in say Chicago will not just suddenly and magicly change - there would need to be conscious choices by policy makers to do the right thing by operating more efficiently.

Effectively the property tax deduction has been a massive subsidy from the federal government to the local governments and SOME residents of these local markets.  Inherent in this subsidy is a distortion of economic incentives and unfortunately there will be some corruption mixed in as well.

On balance these local markets were positively affected by the prop tax deduction however it came as the cost of the 'meat and potatoes' homes and homeowners being 'crowded out' by CRAZY high property taxes.  Again, the 30-40k home in Chi town with an 15-20% effective prop tax rate is a good example.  And there are probably HUNDREDS of THOUSANDS of these properties out there/available. 

This is only possible in markets that have those $500k - 1.5m USD homes, and have quite a few of them.  I can only think of maybe 5-8 markets like that around the US.  It's unfortunate that there are often follow on consequences of well intended policies (which I assume the prop tax deduction was)

I guess you and others can draw your own conclusions from this but all this leads me to a possible investment strategy.

And hopefully, good things for the 'bottom end' of these major metros if the local policy makers make the right decisions.