All Forum Posts by: Kyle McCorkel

@Michael Quarles

That's great feedback, thanks!

Can you clarify what you mean by your walk away number, and how you explain it to prospective sellers?

@Jack B.

How does having less debt equate to less risk?

Let's say you have properties worth $2M and you have $1M in debt on those properties.  Let's also say you have $1M in cash, so you could pay off the properties if you wanted.  

Now, let's say you pay off the properties and now have $0 cash and properties worth $2M with zero debt.

Now, let's use your extreme example of a natural disaster wipes out ALL your properties and insurance doesn't cover it at all....would you have been better off paying off the properties, or keeping the debt?

Let's say a natural disaster doesn't come, but instead you have a few vacancies and also need to replace a few roofs and furnaces.  On top of that you still need to pay property taxes and insurance.  Uh-oh, Mr. Bank, can I have some of that money back? (Answer: Nope, not without qualifying for a loan and paying closing costs again!)

My point being that debt is fine and even preferable if you have cash reserves.  High cash reserves equals less risk.  Dead equity is more risk because it's cash you can't access in an emergency.

I've been sending letters and postcards for about 8 months now and I'd say 90%+ of the respondents are what I would call tire kickers. These are people who aren't truly motivated or just don't get it - for example on a property with an ARV of $150K that needs $30k in rehab, I'll offer something like $85K and they absolutely balk and say they were expecting an offer of $150K!

Oh and they also want a quick, cash sale and don't want to go through a realtor.

How do you weed these people out or educate them so that you don't waste both your and the seller's time? I put in all my mailers that I'm a real estate investor looking for properties that need work. I tell them over the phone that my goal is to make a profit, and my price will be based off ARV minus repairs minus profit. When I go to the property I show the seller everything that needs to be repaired/upgraded and explain that I will be putting tens of thousands into the property. After all this prepping, when they finally hear my offer, nearly every time they are absolutely floored/insulted.

Does anybody have any techniques they use to help to filter these people out?

As long as it’s not in a complete war zone you should totally add a dishwasher. It’s 2019 not 1919. Good renters want modern amenities like dishwashers! Not to mention washer and dryer, overhead lighting, etc.

I had my license for a year and a half and dropped it for this reason. Not just because I wanted to wholesale, but also because of all the restrictions on marketing and the general lack of support from brokers for a real estate investors. Most brokers just lacked the understanding and creative thinking needed to support an investor-agent. At the end of the day I got tired of jumping through all their legal hoops just to get MLS access, so I decided dropping the license was my best choice for my business.

@Andy Grabis

I think your logic is totally correct, and I also like that you are asking yourself "what is the absolutely worst case situation?"

The impact of debt paydown can't be ignored.  It is pretty small for the first several years of ownership but every single month your principle paydown goes up a little bit.  Add multiple properties and the effect is even more.

I have almost $1M in mortgage debt but my debt paydown rate per month is almost $1500.  Keep tons of cash reserves and chill out, and let your tenants pay down that debt.

@Paul Allen

Thanks for your thoughtful response! I was hoping to get more input after preparing these numbers but I suppose people are more interested in the threads about the when the next real estate crash will be, or the latest real estate scam :)

I'm by no means a tax expert - but I always had the understanding that through the use of depreciation and 1031 exchanges one could defer taxes almost indefinitely.  For example, our ~$24K of cash flow has been 100% income tax free plus we had an additional $39K of paper losses to offset other income.  Holding property has been extremely beneficial to reducing our tax burden...but I do understand things can get more complicated on the sale of the property if you aren't utilizing a 1031 exchange.

I totally agree about your comment regarding passive vs. active. For that reason my portfolio returns of ~20% per year are actually disappointing to me. When I consider my time commitment to real estate investing, I really want a 50%+ return per year (which I think I can achieve through adding value through BRRRR's).

@Sean McCluskey

That's such a great question. I've asked myself the same. I have certain school districts that I don't buy in because I think re-sale will be a major problem, and I don't buy in D class areas. Generally I try for B and A. But, like you said, if a deal came up that I can BRRRR and leave minimal capital in the deal....and it was a C class area, I'd probably take it.

So there's your answer, and another question for you to consider: what will re-sale look like in that area? If it's truly a C class area you will probably need to sell to another investor so your chances are slim to sell for more than you paid for it.  Which might be OK, if you make great cash flow on it and have paid down your debt principle significantly before selling (not to mention the initial equity that you created through the initial rehab).

I've been tracking every dollar in and out of my REI activities for the past few years and decided to back-test the numbers to answer the question: What if I would have put all those investment dollars into a super passive, super low cost index fund such as SPY?

Here's the graph, with explanations and assumptions below (for the personal finance geeks):

REI Total Return - 3 years:

Cash Flow: $25K

Debt Paydown: $26K

Forced Appreciation: $50K

Market Appreciation: $30K

TOTAL Return: $131K return divided by $215K principle = 61%

SPY Modeled Return - 3 years:

TOTAL Return: $38K return divided by $215K principle = 17.6%

Definitions:

• Principle - defined as the total money left in the deal. For example, if I bought a $100K property with a 20% down payment and $5K in closing costs, then my total money in the deal would be $25K. This calculation get's a little more complicated for BRRRR's. Let's say through the buy and rehab, including closing costs, I'm all in for $82K, and I get $76K back. My principle in this scenario would be $6K.
• Cumulative cash flow - Total cash flow for this time period (Total Income minus total expenses, including PITI)
• Debt paydown - Initial debt balance at purchase minus current debt balance
• Market appreciation - an increase in appraised value without extensive rehab. These were properties that I obtained HELOC's and re-appraised for more than I paid for them. For example, if I purchased for $100K and it appraised for $105K at a later date, I logged that as "market appreciation" of $5K.
• Forced appreciation - a property appraised for more than I paid for it after extensive rehab (a.k.a. BRRRR). Using the example above, if I'm all in for $82K and the property appraises for $100K, then my forced appreciation is $18K.

Assumptions:

• To create the Hypothetical SPY graph, I modeled what would happen if I invested the exact same principle with the exact same timing into SPY instead of into a property. Every time you see the principle increase, it means I bought a property that month. You will see the impact of the market tank at the end of 2018.
• The Historical SPY graph is similar but assumes that SPY goes up at a consistent (and in my opinion, generous) 10% annual rate.
• I only count appreciation if I have a new appraisal. This is conservative. Some of my properties have probably gained market value in the last few years since I bought but I don't want to make that assumption in this analysis until I have a new appraisal.
• Taxes have NOT been taken into account, but I think you all know that real estate beats the stock market hands down in this category.

My biggest takeaway is that you need appreciation to achieve outstanding returns in real estate. We focus so much on cash flow - which I think we should, for many reasons - but I think it's also important to be in a market that has good appreciation prospects AND/OR force appreciation through BRRRR's.

Also, BRRRR is clearly the superior buy and hold strategy. I started doing them about a year ago which is where you see my forced appreciation really shoot up in 2018. Plus the amount of principle is drastically reduced.

I've been tracking every dollar in and out of my REI activities for the past few years and decided to back-test the numbers to answer the question: What if I would have put all those investment dollars into a super passive, super low cost index fund such as SPY?

Here's the graph, with explanations and assumptions below (for the personal finance geeks):

REI Total Return - 3 years:

Cash Flow: $25K

Debt Paydown: $26K

Forced Appreciation: $50K

Market Appreciation: $30K

TOTAL Return: $131K return divided by $215K principle = 61%

SPY Modeled Return - 3 years:

TOTAL Return: $38K return divided by $215K principle = 17.6%

Definitions:

• Principle - defined as the total money left in the deal. For example, if I bought a $100K property with a 20% down payment and $5K in closing costs, then my total money in the deal would be $25K. This calculation get's a little more complicated for BRRRR's. Let's say through the buy and rehab, including closing costs, I'm all in for $82K, and I get $76K back. My principle in this scenario would be $6K.
• Cumulative cash flow - Total cash flow for this time period (Total Income minus total expenses, including PITI)
• Debt paydown - Initial debt balance at purchase minus current debt balance
• Market appreciation - an increase in appraised value without extensive rehab. These were properties that I obtained HELOC's and re-appraised for more than I paid for them. For example, if I purchased for $100K and it appraised for $105K at a later date, I logged that as "market appreciation" of $5K.
• Forced appreciation - a property appraised for more than I paid for it after extensive rehab (a.k.a. BRRRR). Using the example above, if I'm all in for $82K and the property appraises for $100K, then my forced appreciation is $18K.

Assumptions:

• To create the Hypothetical SPY graph, I modeled what would happen if I invested the exact same principle with the exact same timing into SPY instead of into a property.  Every time you see the principle increase, it means I bought a property that month.  You will see the impact of the market tank at the end of 2018.
• The Historical SPY graph is similar but assumes that SPY goes up at a consistent (and in my opinion, generous) 10% annual rate.
• I only count appreciation if I have a new appraisal.  This is conservative.  Some of my properties have probably gained market value in the last few years since I bought but I don't want to make that assumption in this analysis until I have a new appraisal.
• Taxes have NOT been taken into account, but I think you all know that real estate beats the stock market hands down in this category.

My biggest takeaway is that you need appreciation to achieve outstanding returns in real estate. We focus so much on cash flow - which I think we should, for many reasons - but I think it's also important to be in a market that has good appreciation prospects AND/OR force appreciation through BRRRR's.

Also, BRRRR is clearly the superior buy and hold strategy. I started doing them about a year ago which is where you see my forced appreciation really shoot up in 2018. Plus the amount of principle is drastically reduced.