All Forum Posts by: Jason Barnett

What market are you working in? San Francisco? :violin:

Are foreclosures sold for close to market value?
Is rehabbing an option in your area?
Are there new housing developments that you can get in on?
Different types of real estate will offer different rates of return (even in a bloated area)... condos might have hit a ceiling, but perhaps multi-units can be found for a bargain?
And of course different neighborhoods can make a big difference. In the suburbs of Dayton you can't find a double / multi unit for a price where you'll make positive cash flow, but if you go into a pocket on the north side of town then you can make a killing.

I just went through a (mildly) bad experience with Section 8. I had planned on renting out a unit to a Section 8 tenant, but when the inspector came they gave me a list of about 30 different things that I had to repair. Mind you that most of these are small items, but they are taking me a lot of time to get them all done. So I was wondering: does anyone here have a detailed list of items that Section 8 inspectors look for on these inspections? Or can you give me a link where I can get a checklist like this?

I am looking for something with specific items, not the generalized list of items on the Section 8 report itself. I ran into an inspector that was very picky and I want to be more prepared next time...

Thanks in advance!

I realize after re-reading my answer that I never said exactly what I would do...

In my area, with the deals that are available to me, I would take the $100,000 from my investment property and re-invest it somewhere else. Then again I get deals with good positive cash flow. :mrgreen: If I was looking at negative cash flow then I'd probably look for a new deal...

By long term I mean 15-30 years... lenders tend to charge higher rates for 100% financed homes and that is especially true for long terms. Interest rates are a combination of macro factors (fed funds rate, value of the dollar, etc.) and micro factors (loan term, loan-to-value ratio, FICO, etc.).

Your situation:
If memory serves you were going to get the $100,000 by dipping into equity of your 1st home. I assume you mean your personal residence? If this is the case I would suggest you forget this idea entirely. Personally speaking, I will not put my personal residence on the line for my business because I always want that security blanket. I can take calculated risks, but my personal residence is where I draw the line. How would you feel if a business (RE investment) caused you to lose your personal residence? Could you recover from something like that both financially and emotionally? For me the answer is probably yes to the first and no to the second... so I just don't dip into my personal residence. :protest:

If by 1st home you meant you would liquidate your first investment property... or if you're just more open to risk than I am... then go through the exercise below:

Short, short version:
You can get $100,000 at the cost of interest payments on the 15/5 loans. Can you make more money than that by keeping it for yourself?

Think of this another way...

If you take the 80/15/5 then you have $100,000 at a cost of <insert present value of 15/5 interest payments here>. If you can take that $100,000 and plunk it into another property that earns a profit that is higher than this cost then you're making a smart business decision.

Or...

You can take the $100,000 and pay it towards the purchase of the new home. This will give you a guaranteed return of <insert present value of 15/5 interest payments here>. Not only that, but it reduces your overall risk by reducing monthly payments and improves cash flow.

Good profit leads to equity. For residential / vacation homes / condos it might make sense to buy a home with negative cash flow in the hopes of selling later on appreciation. (How did I forget about that in my first post? Yikes!) However, with multi-unit buildings or (especially) commercial properties then you only want deals with good positive cash flow.

When you get down to it there are 3 types of "income":
1. Cash flow (money in / out of pocket... easiest for most people to understand)
2. Taxable income (what you report to the IRS)
3. Net Income / Equity (your total gains / losses including non-cash gains and losses)

In almost all cases the 3 measures of income are going to be different. In fact if you're doing things the "right way" then they should be different!
You want Taxable Income (2) to be as low as possible.
You want Net Income (3) to be as high as possible.
You want Cash flow (1) to be as high as positive, but if you have a lot of money saved up to weather the tough times then it isn't strictly necessary.
Net Income (3) is the single most important measure.

Your cash flow is mostly important for knowing that you can pay your obligations as they come due. If you have a negative cash flow deal then you're already paying for the "investment" every month... this doesn't make it a bad deal, but you should be paying close attention when someone tells you to buy on appreciation. You can make big money this way, but always be on the lookout for external factors that drive appreciation...

biggerpo: If I was going to figure out the total value of a deal then I would want to estimate several things:
- Cash flow (rents less expenses, not including mortgage(s))
- Appreciation in selling price of the property
- Tax benefits from owning the property (deduction of expenses against ordinary income... you need to know the marginal rate of taxation in order to do this...) in all reality you want to aim for losses on a taxable income perspective and this should reduce your total tax burden
- "Option" value: a sort of catch-all category for special items that can affect the value of the property. For instance if there is talk of a Wal-Mart that wants to locate on your piece of property in 3 years then this "option" has some value. A black-Scholes pricing model might fit in well here... it's not something that affects the average deal, but it would really help out land developers / rehabbers.

Good topic. Not sure what biggerpo has in mind, but here's the way I look at it.

First three terms: NOPAT, DCF and ROIC.

NOPAT = Net Operating Profit After Taxes. You want to take all revenues (rents) and subtract all non-capital expenses (water, maintenance, taxes, basically everything except interest expense for loans)

DCF = Discounted Cash Flows. There should be a formula in your Excel program to help you calculate this... you want to use the yearly NOPAT number as the payment... this is a critical concept in evaluating deals so be sure to google this for more detailed information.

ROIC = Return On Invested Capital. This means: figure out the DCF for a deal and compare it with the total invested capital. Total invested capital is Loan Money + Interest + Equity from owners (usually just cash).

Now... I primarily judge my deals on ROIC. The minimum ROIC I go for is 15% (if I want less than 15% I just plunk my money in the stock market and forget the headaches of real estate). For sure you want a deal where your ROIC is going to be higher than your cost of capital (i.e. the cost to borrow money from your lender). If you have a hard money lender that offers 18% interest rates then you want to aim for deals with about 35%+ ROIC (18% to my lender and 35% - 18% = 17% to me).

If you're looking to landlord and want to keep this 2nd house for a long time then you should consider which deal is going to give you the best long-term profit. 9 times out of 10 the best deal is going to be a single fixed-rate loan with no pre-payment penalties. Not only that, but one of the main reasons for being a landlord is the extra monthly income, NOT the extra monthly expenses!

The only reason to do the 80/15/5 at this point is if the profit you'll make on the second deal is astronomical. If it's just an average profit then you're just throwing money out the window. If it's below average then don't even think about doing it with the 80/15/5!

On the other hand... if you're just trying to flip the rehab / 2nd property then you want to have as much cash on hand to do the project. So in this case the 80/15/5 makes more sense... but it only makes sense if the rehab is going to net you a boatload of money!!!

You are in this business to make a profit.
You are in this business to make a profit.
You are in this business to make a profit.

While it isn't always easy to calculate... your goal is always to make as much profit as possible. If you're doing that then there will always be a way to get the financing for that next hot deal.

My best suggestion is simple: try to find contractors that are willing to work without trip charges. I'm willing to do an hourly rate for work or a flat fee depending on the type of work, but in any case I have negotiated with a local contractor to work on-site without charging me for the trip. :mrgreen:

In my opinion there are two things wrong with this equation:

1. Deposit is too low - you want the deposit to be as much or more than one month's rent. This is to be used for damages which (in my contracts) includes lost rent if my tenant breaks his or her contract.

2. Cash flow is a little tight. Your rent is 11% of your purchase price (which is pretty average). It's better than the 6ish % interest rate that you likely have so that's good, but all the same I try to get 15% or higher rent to price ratio.

I can provide REOs and pre-foreclosures in Dayton, OH (West / Southwest OH). Email me if you are interested.