All Forum Posts by: Leo R.

@Riko Roberson I built mine from the ground up in Excel. One advantage of building it from the ground up is that I thoroughly understand the model, its calculations, its limitations/blind spots, its usage, etc. (because I built it).

On the downside, I'm not an Excel expert, so I'm sure a serious Excel pro could create a model that's much better-designed than mine...and there are also probably programs that would be better-suited to the task than Excel (I just used Excel because I have some understanding of it, but I had no understanding of the other software options). 

The first models I made weren't very good (they had a lot of blind spots, weird quirks, inefficient ways of calculating things, etc.), but I improved them over the years, and now they're a lot better (though still far from perfect).

Although my models aren't perfect, they've still been incredibly useful--they've allowed me to capitalize on some significant opportunities, and also avoid a few serious mistakes. They also give me a sense of direction--I don't get lost in analysis paralysis, because the models basically give me a step-by-step roadmap of what to do..."If I do X, then in Y years, Z will occur, and we're 85% sure of that outcome, based on the model"

There are definitely times a model has been incorrect (it predicted something, but the real outcome was different)...but, even when a model is wrong, it teaches you something--and with that info, you can make even better models.

Another drawback of building the models myself is that it took a lot of time--I probably could have saved time by adapting an existing model...I initially tried to adapt some existing models I found online, but they weren't easily adaptable to my specific circumstances/variables/goals/usage--which is why I ended up building my own models...

@Jay Hinrichs exactly...which is why, in my models, net worth is broken down into different categories (e.g.; real estate equity, equity after capgains and selling expenses, cash on hand, stocks/bonds, other assets, etc.).

...a singular variable like net worth really doesn't say much about an investor's position without all those other variables...

Hey all,

Recently, I replied to a post asking folks whether they track their net worth. 

Personally, I do track my net worth. However, far more important to me are my financial projection models (which include projections about my net worth and many other variables over different time horizons). 

This got me wondering: how many BP folks are using projection models? If you're using projection models, what types of variables do you include? What types of time horizons do you cover? Why do you use projection models? What lessons have you learned from your projection models? How have projection models impacted your strategy?  Did you create your own projection models from the ground-up, or did you adapt someone else's existing models? Have your projections been accurate/inaccurate, and why?  ...if you're not using projection models, why not?

Here's a bit more info about my projection models, why they're so important, and why net worth (on its own) can be a completely misleading indicator of an investor's success:

Some of the main variables in my projection models include: expenses (broken down into various categories like personal expenses, capex, debt service, vacancy, etc.), income, cashflow, debt, DTI, equity, property appreciation, rent appreciation, mortgage paydown & amortization, rate of net worth growth, cost of living increases, hours worked per week, cash on hand, etc, etc.

I have short term (12-24 month), 5 year, 10 year, and 15 year projection models...sometimes I'll mess around with longer term (20+ years) projection models, but it's pretty difficult to project that far into the future, because there are so many unknown factors--so, the longer the projection model is, the less I tend to believe in its feasibility...

My projection models allow me to make more informed decisions about things like: whether to buy or sell a particular property, whether to refi a property, whether to rehab a property, whether to pursue or abandon a particular revenue stream, how to approach rent increases, how to manage risks, what debt to pay down first, whether a particular goal is worth the amount of hours I'll need to work to achieve the goal, what my goals should be, how to achieve various goals as efficiently as possible, etc., etc. 

In a nutshell, good projection models help you strategize. Sometimes the strategy the models reveal is to DO certain things (like rehab a property), but sometimes the strategy they reveal is to do nothing. Indeed, I recently ran some models that showed me that the best strategy for me, in certain areas of my portfolio, is to simply do nothing--don't make any big moves, just let things progress as they are...

A good projection model will show you not only how to reach various goals, but it also all sorts of potential roadblocks that could prevent you from reaching goals (as well as potential solutions to those problems). Projection models allow you to answer all sorts of "If I do X, what will happen in Y years?"-type questions.

I run projection models that include disaster scenarios (e.g.; a massive '08-style collapse in prices), as well as best-case dream scenarios...however, MOST of my projection models focus on fairly modest outcomes (such as 2-4% property appreciation, 2-4% rent growth, etc.). It's these more modest, relatively conservative models that are the "meat and potatoes" of my strategizing.

Although net worth is part of my models, and many investors love to brag on their net worths, net worth can be an incredibly misleading number. Consider two hypothetical investors:

Investor A tells you "my net worth is $10 mil". That may sound pretty good...until you discover that their net worth is decreasing at a rate of $2 million per year, and they've got $100 mil of adjustable rate debt on a portfolio of D class properties that forces them to work 80+ hours per week just to keep the whole thing afloat...

Investor B tells you "my net worth is $1 mil" --to many successful investors, that sounds like a relatively insignificant net worth...but, investor B owns a portfolio of A class properties with zero debt, professionally managed, their cashflow is $500k per year, their net worth is increasing at a rate of $1 mil per year, and they only have to work about 1-2 hours per week to keep their machine going.

Personally, I'd MUCH rather be investor B than investor A (even though investor A's net worth is 10x of investor B's).

So yeah, tracking net worth is advisable, but it's only a small part of what an investor should be tracking and modeling, and net worth alone might not be very indicative of an investor's success...

An effective investor creates models to help them strategize, and those models inevitably include net worth, but they include a LOT more than just net worth (and as a result, they can be quite time-intensive to create)...but, the things that are most worth doing usually ain't easy...

@Douglas Skipworth yes, I track my net worth.

However, far more important to me are my financial projection models (which include projections about my net worth). The projection models show how I'll reach various goals. Good projection models are a lot more difficult to create than simply tracking my net worth, but they're incredibly useful. 

Some of the main variables in my projection models include: expenses (broken down into various categories like personal expenses, capex, debt service, vacancy, etc.), income, cashflow, debt, DTI, equity, property appreciation, rent appreciation, mortgage paydown & amortization, rate of net worth growth, cost of living increases, hours worked per week, cash on hand, etc, etc.

I have short term (12-24 month), 5 year, 10 year, and 15 year projection models...sometimes I'll mess around with longer term (20+ years) projection models, but it's pretty difficult to project that far into the future, because there are so many unknown factors--so, the longer the projection model is, the less I tend to believe in its feasibility...

My projection models allow me to make more informed decisions about things like: whether to buy or sell a particular property, whether to refi a property, whether to rehab a property, whether to pursue or abandon a particular revenue stream, how to approach rent increases, how to manage risks, what debt to pay down first, whether a particular goal is worth the amount of hours I'll need to work to achieve the goal, what my goals should be, how to achieve various goals as efficiently as possible, etc., etc.

A good projection model will show you not only how to reach various goals, but it can show you all sorts of potential roadblocks that could prevent you from reaching goals (as well as potential solutions to those problems). Projection models allow you to answer all sorts of "If I do X, what will happen in Y years?"-type questions.

Also, net worth can also be an incredibly misleading number. Consider two hypothetical investors:

Investor A tells you "my net worth is $10 mil". That may sound pretty good...until you discover that their net worth is decreasing at a rate of $2 million per year, and they've got $100 mil of adjustable rate debt on a portfolio of D class properties that forces them to work 80+ hours per week just to keep the whole thing afloat...

Investor B tells you "my net worth is $1 mil" --to many successful investors, that sounds like a relatively insignificant net worth...but, investor B owns a portfolio of A class properties with zero debt, professionally managed, their cashflow is $500k per year, their net worth is increasing at a rate of $1 mil per year, and they only have to work about 1-2 hours per week to keep their machine going.

Personally, I'd MUCH rather be investor B than investor A, even though investor A's net worth is 10x of investor B's.

So yeah, tracking net worth is advisable, but it's only a small part of what an investor should be tracking and modeling, and net worth alone might not be very indicative of an investor's success.

@Alan Asriants hopefully this is a useful example of how to manage rents:

For many years, I either didn't raise rents, or the raises I did were minimal. Today, my rents are a deal for tenants, which means I get tons of applications, and I'm able to choose the highest quality tenants. Most of my tenants are upper middle class, 700+ credit scores, have graduate degrees, and are very professional (which makes my life much easier, and saves me lots of time--which saves me money). My properties are all A and B grade, so the tenants are usually very satisfied with the quality of product, and most of them recognize that they're getting a deal. In fact, the tenants are so happy, it's not uncommon for them to send me Christmas cards, and some tenants have even baked cookies for me! I've had tenants from both ends of the spectrum, though--and I can say from experience that happy, highly-qualified tenants make property management 100x easier.

Now that I'm firmly at the bottom end of the rent market, with highly satisfied tenants (who are unlikely to leave), I plan to begin yearly rent increases going forward, starting this year.

My target is 2.5%-5% rent increases every year for at least the next five years for renewing tenants. When there's a tenant turnover, I'll attempt a 7.5% or even a 10% increase, and see how the market responds (if I get crickets, I'll lower the price).

Even with those increases, my rents should remain at, or below market rates (because I'm currently well below market). Because my rents will remain at, or below market (even with the increases), and because my existing tenants are highly satisfied, I'm hopeful that the rent increases won't cause any tenant turnover...time will tell...

One problem I may encounter is that rents in the broader market are currently pretty flat, so even though I'm currently below market, there may be a ceiling to how far I can increase. However, with regard to the flat rent market, I have a few things working in my favor:

1. Most of the data we see about rents being flat is based on multi fam properties (particularly super high end A+++ units--some of which are even seeing rent deflation). My properties are single fam and small multi fam, and the type of tenant I rent to is quite different than the type of tenant who rents the multi fam units that currently have flat/deflating rents. I'm usually not competing for the same customer as the large multi fam properties, and so my rent market dynamics are different (and hopefully more amendable to rent increases). This is an example of why it's so important to understand one's customer and one's specific rent market niche. The rent market is not a singular market; instead, it is comprised of many submarkets with different customers, different property types, and different dynamics--and thus, different capacities for rent increases. Obviously, a single fam B grade 3 br 2 ba house is completely different than an A+ luxury apartment, and rent increases may look completely different at each of those properties (even if they're in the same neighborhood).

2. There is a severe shortage of single fam rentals in the neighborhoods where I own single fam rentals. I'm hopeful that simple supply & demand will allow for moderate rent increases for at least the next 2-4 years.

3. Even though rents are flat or deflating for many properties in many markets (esp. high-end large multi fam), nothing lasts forever--and eventually the market dynamics will change. I'm in a spot where I can wait it out--if I'm affected by the broader market and my own rents have to go flat for several years, it's not the end of the world for me. That's the value of using conservative financial models--you don't overextend yourself, which allows you to weather storms (or flat rent periods).

Having said all that, do I know for sure that all these things will pan out as I expect? No, I can't predict the future (nobody can). In fact, I'll probably be wrong about a lot of it, and unexpected factors will inevitably enter into the mix. But, I'll do my best to be prepared for unexpected setbacks, and I'll try to keep my operation flexible to changing market dynamics while making sure that each property is fulfilling its highest and best use...it will be interesting to see how it all unfolds...

Hopefully that's useful info.

Good luck out there!

@Caroline Gerardo interesting data...

Real estate values can be (and usually are) hyper local, which can make city-wide data difficult to interpret.

In my market, the entire metro area is down approx. 6% off the peak, but in some zip codes we're down 20%, and in other zip codes we're up 10%+ (and these zip codes are only a 5-10 minute drive from each other!).

The story gets more interesting when you start looking at that type of neighborhood-level data and trying to deduce why one neighborhood would be down 20% and another is up 10% in the same city...

In my city, there's some data suggesting that the most affluent zip codes are up 8-11% YOY, presumably because the buyers in those areas are cash buyers not affected by interest rates, and who probably did pretty well in '23, based on macroeconomic data... but that conclusion isn't foolproof, because we do have some very affluent areas that are down 11%, and there are also some very low SES areas that are up 5-10%....so, I don't know...

A conclusion is only as strong as the quality of the data, and the data is sending some mixed signals, at least in my market....

@Christopher Fovel selling vs. holding depends on things like: the grade of the property and neighborhood, the ease (or difficulty) of managing the property, the potential for future appreciation and rent increases, the cashflow, the goals and position of the investor, the rate and terms of the debt on the property, etc., etc.  Unfortunately, you didn't mention any of these factors.  ...as you mentioned, it also depends on tax ramifications--I'll leave that question to the CPAs.

Have you run financial projection models to estimate how much this property might appreciate, and how much it will cashflow with rent increases in the next 3, 5, 10, and 15 years?  If you haven't run those types of projection models, I'd highly recommend doing it--this will give you a  much better understanding of the pros/cons of holding vs. selling.

Is your reason for selling so that you can take the money and buy more real estate? ...if so, then this may be a tricky needle to thread. Since you've owned your duplex for over 2 years, I assume you're locked in at a low rate, but a new property would have a much higher rate (and the price would also be high in today's market). $80k isn't a huge down payment in most markets, so even with that money to put down, finding cashflow at a new property would be a challenge right now.

Since you've already house hacked this place and gained valuable experience in that process, it might be smart to just keep that duplex, and go out and try to find another property to house hack again--rinse and repeat. If a strategy has worked well in the past, I'm inclined to repeat the strategy over and over until it doesn't work anymore...

As a general rule of thumb, I don't like to sell properties unless there's either a ton of equity, or there's a real problem with them (for instance, if a property is a huge headache to manage).

Good luck out there!

@Cameron Pronk you mentioned that you're brand new to the game, but you've listed out a ton of rules for yourself. What are you basing these rules on? (Since you're brand new, your rules aren't based on first-hand REI experience)...this is a bit like creating a bunch of rules for yourself to follow before you fully understand the game.

I'd suggest stepping back for a moment. 

As you learn more, you may discover that some of these rules you're creating aren't useful (for instance, putting 20% down isn't always the best route).

It sounds like you're considering an out of state investment--read up on why OOS plays are usually a terrible idea for a beginning investor (I and others have written about this issue a lot on the forums). ...we see tons of beginning investors on the forums with nightmare stories of OOS plays that crashed and burned--read up on those, too.

There are far better strategies than OOS for beginning investors.

As others have mentioned, a house hack is one of the best ways to get started in REI. Again, plenty of folks have written about what makes a HH such a great entry point for beginners, so I'd suggest reading those posts, too.

Good luck out there!

@Mike Boss completely ignoring the numbers for a moment, what is the tenant pool and rate of demand like in that area?

Typically, rural = few people = few tenants = more vacancy between tenants. High vacancy can ruin an investment (even if the other numbers are good on a spreadsheet).

Plus, as others mentioned, the numbers aren't good.

@Jose Jacob @Dru Hill Another major difference between a retail client and an investor client is that a retail client might only buy/sell one or two properties in their entire LIFETIME.  

A legit investor might be buying/selling one or two properties every 12 months (or more!).  

Do I, as an investor, have higher expectations of my agent than a retail client? Yes. Does my agent have to work harder for me than a retail client? Yes. Do I bring my agent 100x more business than a retail client? Absolutely.

My agent makes more in commissions working with me for 12-24 months than he'll make working with a retail client for their entire lives--that's why my agent moves heaven and earth to make sure he's a key player in my operation.

If you're an agent, and you can find legit investors and make yourself indispensable to them, deal flow won't be a problem.