All Forum Posts by: Jonathan Twombly

@Warren Straley  I'm not sure whether to say "run as fast as you can for the hills" or "run as fast as you can to the bank" and get a check cut.

Here's my thinking, pro and con.

Cons:  

This deal has NOI of about $40,000 and the asking price is $690,000. That's a cap rate of 6.1% on a small deal in a very small market that is either losing population or growing very, very slowly (depending on which website you look at, and I am assuming this is in your town), as well as slightly increasing poverty between 2000 and 2010 (looking at the Van Wert County data on Wikipedia). That is WAY too high a cap rate for this asset and this market. It also likely has a ton of deferred maintenance at these rents. This owner is cutting things to the bone for sure.

In addition, the seller's expense numbers are not going to be the ones you get.  The seller's insurance is probably based on a very out of date replacement cost, that is related to their low basis in the property.  Yours will be higher.  Your real estate taxes will probably also be higher - you need to ascertain when the property will be re-assessed, whether on sale or later, but in either case, when it is reassessed, the taxes will probably be higher.  I don't see any labor costs here, either, which means that the seller was doing everything himself, and you will have to as well, if you want to keep the same cost structure.  There is no expense for landscaping, snow removal, pest control, waste haulage.

So the nominal cap rate the seller is asking for of 6.1% is likely to be even lower in reality on the expense numbers you would have to pay.

Also, you only have 2016 numbers. Where are the 2017 numbers, at least through November. You need a T12 through November at the very least.

One other consideration, which affects the vacancy rate and your ability to raise rents is that buying a house is very, very cheap there.  So rents have an upper limit.  And with a shrinking population, that means buying a house will only get cheaper over time, dragging on rents.

Pros:

Here is the opportunity I see.  I don't know what rents are like in that market, so take this with a big grain of salt.  But there might be a LOT of room to move on rents.  The median household income in your town is about $40,000/year.  The general rule is that people should spend between 25 and 30 percent of their income on rent.  That means the person in that town earning the median income can comfortably afford to pay between $10,000 and $12,000 a year in rent.  Despite what I said about the poverty rate increasing there, it is still pretty low, so people can afford decent rents.

In the meantime, the tenants at this property are paying between $3900 and $4300 in rent. Even if the building is subsidized housing and has rent limits, there is still probably a lot of room to legally raise rents.  However, this will likely involve a lot of tenant turnover, so you need to brace for high vacancies for a while and to spend quite a bit of money on turns.

In addition, I don't know what the local law is there, but if you can pass utility costs to tenants through RUBS or another bill-back system, this is another huge opportunity for you.

You may have a very good candidate for a rehab/reposition on your hands.  However, you will have to determine how much it will cost per unit to rehab the property.  Also you need to get a handle on the market vacancy rate.  If it is very high, than this strategy will be more risky, and that would explain why the rents are so low.  Also, at those rent levels, I suspect that the insides of these apartments are in bad shape, and they will be very hard turns, not light turns, and those will be costly.  You may be looking at $5,000-$10,000/unit depending on how bad they are.  But, it could still be worth it.  You have to run the numbers and see.

These are my two cents.  Take them for what they are worth.

One of the keys to investing in Westchester is proximity to downtown and to trains to Manhattan.  The folks who are reluctantly leaving the city and moving to the suburbs because they have kids and need more space, which they cannot afford in the city, want desperately to replicate their city lives in the 'burbs as much as they can.  They want to be able to walk to restaurants, cafes, and bars, and to commute into the city without having to drive to the train and park.  So the properties that are near downtown/transit are in high demand, and properties that are farther away from amenities can sometimes languish on the market.  

If you buy rental property that allows someone to live in Westchester without being dependent on a car, you will do well.

Of course, the numbers have to work and it has to cash flow for you.

That makes a lot of sense.  I've never been able to understand how some of these outfits can get $40K out of someone for coaching when $40K would be the downpayment for their first property - and usually the mark doesn't even have the $40K in cash and has to finance it with credit cards, ensuring that they will never be able to qualify for a mortgage on their first deal.  These companies don't actually care about their customers. What you said explains a lot.

@Dennis Johnson  It's frequently said in real estate that, "If you find a great deal, the money will come to close it."

This is guru-talk to sooth the nerves of people who suspect it's hard to raise money - and are right.  People don't want to talk about how hard it is to raise money.  It's bad for the coaching business.

That statement is correct only IF you have already built a network of potential investors.  This involves time and effort.  Here's what I recommend that you do, based on my past experience.

1.  Figure out what you want to invest in, and why you want to invest in that kind of property.

2.  Put together a team of professionals - the people you will need immediately once you find a deal to close it.  This includes:  a real estate lawyer, a syndication/corporate lawyer, a real estate accountant, a mortgage broker, a contractor, an insurance broker, and a real estate management company, at the very least.

3.  Create an investor "deck," which includes your bio, the bios of all the professionals above, a description of the kind of properties you want to buy and why, and a sample deal with projections.

4.  Create an investor qualification form that captures a potential investor's name, contact information, accredited or sophisticated investor status, and how much they are willing to invest if you find a deal that they like.

5.  Make a list of everyone you know who might be interested in investing, and who is also an accredited or sophisticated investor, and make a guess as to how much they might want to invest.  Then, take 25% percent of that number.  This is the absolute highest number you should assume that you are going to be able to raise from your friends and family.

6.  Create a spreadsheet for investor contacts that includes their name, contact information, date you first met them, date you gave them the qualification form, date you received it back, date you spoke with them about their objectives, how much they want to invest, and any comments you want to capture about their job, willingness to invest, available assets, etc.

7.  Start talking to everyone about your real estate plans.  Give them the investor deck from (3) above and the qualification form from (4) above.  Start tracking them on your spreadsheet (6).

8.  Find out a way to keep in touch with all these people, whether it is through regular phone calls, a newsletter, etc.  You don't want them to forget about you between the time that you talk with them the first time about your plans and the time you actually get a deal.

9.  Be sure to ask every person you talk to whether they know anyone else who might be interested in investing too.  When you send out newsletters, etc., be sure to ask there too.  If you don't ask constantly, people will not remember to make referrals.

10.  After a while, your investor spreadsheet will start to have a total dollar figure from all the people who have said they are interested in possibly investing.  You should assume that the actual amount of money you can raise from these people is 25-35% of the total number you have accumulated.  In other words, if your friends and family have in total said that they are willing to invest $1,000,000, you should assume that you will be able to get only about $250,000 when you have an actual deal in hand.  It's not that people were lying; it's that life happens to them.  I can't tell you how many people in the last few years told me that they were going to invest with me, and then decided to buy a new house with the money instead, or invested in something else before I found a new deal for them.

11.  While you are doing this, you must continue to look for deals to feed the machine.  You need to be constantly looking for deals and looking for money to do the deals.

Hope this helps!

@Gareth Fisher  Thanks very much for this post.  Real estate is not easy, but there is an entire industry devoted to making it seem like it is.  That industry is very powerful and very good at propagandizing the ignorant.  I constantly tell people that real estate is hard, and get so much pushback from the people who have no actual experience and want to keep up the fantasy that it is easy money - or want to keep up the image of real estate as easy so they can sell something.  

I do podcasts and I also coach people who seek out my help.  And I don't sugarcoat things.  I tell them straight up that you won't succeed in this business if you come to it with nothing.  If you have no business skills, no networking skills, no money of your own, no network of people with money, and no desire to work hard with no results for a long period of time, you will find it extremely difficult to succeed in this business - because even if you have all those things, it's still tough to succeed.

Do I turn people off this way?  I'm sure I do.  But it's the truth.  Real estate is a business, and succeeding in business requires real effort, money and time.

 I hear the world's tiniest violin playing for your boss right now.  Once autonomous vehicles become common and it becomes clear that the overwhelming majority of accidents are caused by people doing things like driving sports cars through red lights because they are too important to wait 5 minutes, it will cost something like $2000/month for insurance on a human-driven car.  Most people won't care.  They desperately want to text in the car, rather than drive it, and autonomous cars will mean that they won't even have to stop texting during the time they are in the car, meaning that the only times they won't be texting will be when they are asleep.  (Completely waterproof phones for texting in the shower must certainly be on their way as we speak.)

 You know what the tipping point for self-driving vehicles will be?  When insurance companies have collected enough data to be confident in offering lower insurance rates for self-driving cars than human-driven ones.  Almost all accidents are caused by human error.  So, one day, if you are going to drive your own car, you are going to have to take out a very, very expensive liability policy for the privilege of doing so.  At some point, only the very rich will be able to drive their own cars - if they want to.  

Anyway, who would want to?  I'd rather climb into the car at night, get a good night's sleep, and arrive at my destination (loser:  the hotel industry and AirBnB), or be able to work for the entire ride while my car drives itself.

Of course, since "driver" is the single biggest job category in the US, our economy will nose-dive when autonomous vehicles take over . . .

 That’s insane.  How is that sustainable?  It has to be a bit bubbly there!

@Joe Splitrock  I don't disagree with any of this.  I just find it hard to get my head around it.  But, then again, that's why I live in Brooklyn but invest in the Southeast.  I love living here, and I can afford it, but I don't have enough stomach lining to invest here, where you need to put down 40% for the property to cash flow, and you are relying entirely on appreciation to make money - which means you need to time the market, take on a lot of risk, or have a holding period of forever.

Plus, while the actual gentrification of the city has not finished, gentrification has already been priced into every market in the city.  For your $1,000,000 right now, you are not necessarily buying into a nice neighborhood with decent schools.  You're buying into a neighborhood that you are hoping will be nice, with decent schools, in 5-10 years.

@Jay Hinrichs I don't know exactly where they are going, but every time I am in a restaurant in Greenville, South Carolina visiting my deals, it seems like the waiters and bartenders all have New York accents . . .