All Forum Posts by: David Nolan

@Hannah HammondI am curious as to why you have not done a deal before if as you say..."I am a realtor and have lived in this market my entire life, I know the neighborhoods like the back of my hand and am very comfortable when it comes to knowing whether or not a property is in a good location" how do you know what is a good deal or not?

At 19 years of age to take someones $200,000.00 and try to make sound investment decisions is somewhat dangerous. I am also curious how someone who has $200,000.00 would want to risk such an investment with a novice property investor. No disrespect intended here. It is just that you have no real deal experience, you have limited real life experience in real estate given your age and I doubt that it would turn out OK for either of you. Your comment..."I am an aggressive investor though and am wiling to risk for great reward" leads me to ask who is taking the risk? It's not your money!

If you are serious about having access to these funds then I would suggest that you start with a small deal and see how it goes. Diving in with another person's $200,000.00 is foolhardy to say the least. Starting small limits your exposure and allows you to learn how things REALLY work in this business.

I admire your desire to succeed and the fact that you are young and keen to "have a go" is great, but don't do it with other people's money. Earn your own and then do it. That way if you should happen to make a mistake it's your loss not someone else's. This way you can be an aggressive investor.

@Christos PhilippouThe reality of this situation is that CAP rates are a function of the assumed market value of a series of cash flows based on current economic factors. A 10 Cap is a 10% yield, a 5 CAP is a 20% yield, a 12 Cap is a 8.33% yield etc. It is simply telling an investor what the potential annual yield of the investment will be at the asking price assuming all prevailing conditions remain constant and as @Account Closed rightly points out on numerous occasions it is determined by the market. The quality of the income stream is determined by the risk associated with that income stream and thus the yield is a true reflection of the market's appetite to risk. The higher the perceived risk the higher the yield needs to be to attract an investor. That is why some properties have lower CAP rates than others. Investors perceive lower risk in the lower yielding investments.

However, you would be wise to assess your investment choices using an Internal Rate of Return (IRR). if you want to understand this here is a link to a brief description.

http://www.investopedia.com/terms/i/irr.asp

Most financial professionals will assess investment choices using this rationale to measure the Net Present Value of a series of cash flows and it allows for the comparison of different types of investments across different markets when used correctly. It is also a simple function available in Microsoft Excel and you can get online help is learning how to set it up. This may also be useful for @Account Closedas a better way to compare individual deals and determine the best potential us eof your investment funds.

@Andrew MestasWelcome to BP and the world of property investing. I hope your career is fruitful, exciting and fun. However, to answer your question you are in the right place to learn and starting with the book you mentioned is a good place to start.

In regards to what you may like, that will depend on what part of the business you resonate with, so to that end I suggest you keep researching as much material on BP as possible and post questions when you are unsure of what you are learning or simply need more clarification. The more you post  and read what others post the faster your learning will grow.

You may also want to extend your reading to include books such as "The Richest Man In Babylon" by George, S Clason, arguably the best book on wealth creation ever written. You could also read the classic "Rich Dad, Poor Dad" by Robert Kiyosaki and some of the books published by experts right here on BP in the area of interest that you resonate with.

I hope this helps with your starting point. Good luck on your journey!

@Robert T. Let me see...You have a person who is giving you advice as to what to do with your property who wants to blatantly rip off some poor potentially uneducated would be home buyer for $10K and split it with you. If your supposed adviser, who also wants a fee for such advice, believes that the property is most unlikely to be worth $130,000.00 when the option is due and therefore the buyer will not buy the property then why, oh why would you even entertain such a dishonest deal?

I accept that you may be new to property investing and you are looking to learn however, that should not absolve you from an intent to take advantage of someone with less knowledge and or who may feel they are in a desperate situation and need to enter into such a potentially poor deal. There are many ethical and honest ways for you to make a good living in property investing, as very many of the people whose advice you seek on this site have done and continue to do. Please do not become one of those people who give property investors a bad name and cause genuine people so much financial loss in some future date.

So, if you want to do a deal that is ethical, legal and of value to all concerned then I suggest you do some research on this site around lease options and learn from those who do these types of deals professionally and know all the rules, including those in relation to crediting rent to a purchase and how Dodd Frank affects that. If this becomes your action then I wish you all the best. If not, then I hope you feel you can trust someone who is willing to take advantage of another human being so openly. I know I certainly wouldn't.

@Robert Easter Most professional property investors will use IRR (Internal Rate of Return) as a measure of the value of a deal and is readily calculable in Excel. Here is a link that explains what IRR is:

http://www.investopedia.com/terms/i/irr.asp

This is a measure of the expected net present value generated by a series of cash flows over a given period of time. It is just one part of the decision making process and one that will help somewhat in comparing one investment against another.

Using leverage is one of the best ways to create wealth and the key to doing it successfully is to learn how to manage risk. Risk management and controlled leverage will become your best friends in this business.

Keep learning from the posts here on BP and don't forget to seek advice before your next deal. There are lots of very talented contributors on here who will be happy to help you.

Good luck on your journey!

@Angela Harding Could I suggest to you that it is possible to forecast growth in a market. Your comment of, "Right now looking at our market we have nowhere to go but up. However, I can't predict that. No one can." Is a limiting belief that will not be of great service to you. There are many people who can and do successfully predict where a market is going. Whilst there are no guarantees their predictions will be correct the ability to understand and read economic data and population trends has proven over many decades to be a really good forecaster of growth in property markets.

I would suggest that if you are not familiar with this type of analysis that you undertake some study to find the key drivers that grow markets. Things like jobs growth, population trends, redevelopment activities, housing affordability, interest rates and where they are headed, current supply rate, normal supply rate etc. ALL prices are driven by supply and demand so understanding these forces will give you the crystal ball you are looking for. However, as I said, there are no guarantees but an educated opinion based on sound research will help you immensely.

@Mike R. Trading up is the way to go. If you consider the effort involved in buying, improving and either refinancing or selling is the same basically if the property is worth $50,000.00 or $500,000.00. The difference is that you get a much higher return for your time and effort at the $500,000.00 range. Trading up therefore is one way of saying, "I value my TIME more now than I did in the past". Instead of earning a few dollars per hour I earn a few hundred or even a few thousand dollars per hour.

One of the great challenges most novice investors and even a lot of experienced investors get wrong is not their knowledge of property or how to do deals, but their mindset is wrong. It is not geared to maximum wealth creation. having the right mindset is crucial to optimising your wealth creation strategy. Congratulations to you for accepting there may be a better way.

@Angela Harding Thank you for your kind words. I am happy to know someone got something from my post. You sound like a smart investor who knows what you are doing. However, I would like to suggest that by not investing for appreciation you are missing some of the game. Many times I have made money by looking for property that has a very clear upside to it. For example, the property may be in line for rezoning to a higher value use, it may be in a gentrification area that is creeping outwards, it may be in an area where there is clear growth on its way due to positive changes in the employment in an area. To not look at these factors means you are potentially missing some future big pay days.

Investing for just cash flow has its place, but it also comes with a lot more risk that many people on this site seem to ignore. Just read some of the posts on BP from veteran investors about buying low end property to discover some of the down side that you would not necessarily think of. Vandalism, long term vacancy, costs of eviction, breakdowns, unexpected repairs etc. These things do happen and when I look at the yield I want from my property investments, which after all is why I am doing this thing, I also have to look at the risk associated with securing that yield. The higher the risk the higher my yield needs to be to make sense of the investment. Why take risk when you don't need to.

Investing money is about getting the best return you can relative to the risk you are prepared to take and need to take. Property investing has the same rules.

However, many investors starting out have little capital available and so they tend to favour low end property. Property they can afford to buy. But let's imagine for a moment that you have say $200,000.00 of cash in the bank and you want to invest in property. Your choices are varied but I 'll look at two scenarios. Scenario 1. You find a property that you can buy for $600,000.00 that you can invest $200,000.00 into to rehab. Total Investment $800,000.00. Now you should not be doing this kind of rehab if you cannot add 25% to your total cost. So the end value should be circa $1Mill. To keep this example as simple as possible because it is being made to highlight a point and is not an actual set of numbers. So, you sell the property for a net $1Mill and make $200,000.00 profit. Time to do this can vary but let's say 6 to 12 months.

Scenario 2. You have the same $200,000.00 and you buy 10 properties at $20,000.00 each. You cannot borrow on these because lenders don't like them. I wonder why that is? However, you now have 10 properties to manage and they return to you a net $600.00 per month each, so you have $6,000.00 per month coming in, which is taxable income by the way. How long will it take to make the same $200,000.00 profit as in option 1? Answer, a little over 33 months. This assumes you have not breakdowns, vacancies, rent collection issues etc. Which would you rather do with your cash in this case. Invest for 6 months or even up to 12 months in a good quality flip, or invest for 33 months for the same potential return?

Before people start challenging my figures I only want to make a point and that point is that the more capital you have the more choices you have to invest in and then the lower end properties lose their attraction. Many of us have started at the lower end, learned our lessons, hopefully earned a few dollars and moved up the scale as we got more capital. Capital rich investors can and do invest for appreciation because they can afford to wait for it to reach them. Capital poor investors cannot do this because they need the cash flow to make a deal worth doing. I hope this makes sense and as you increase your capital base you will look for deals that offer you a bigger upside of appreciation whilst still getting a bargain at the front end.

@Mike R. The simple answer to your question is not, should you buy at full retail, it should be what is the position in the current cycle that warrants full retail? Let me explain. ALL property markets operate in cycles. Each cycle has a top and a bottom. Both the top and the bottom can only ever be clearly seen after you have passed them. In other words they are not known until after the event. However, with due diligence and some knowledge and a lot of work you can learn to read the indicators of where in the current cycle a market is sitting at and therefore make an educated guess of where it might lead to. There are many posts on BP covering this topic, so research those to get the basics of understanding property cycles.

Now, imagine the property you are considering buying is in a market that is on the upswing in its cycle. That is to say the property cycle is rising and with rising cycles come increasing prices. Demand is rising whilst supply is falling causing an increase in prices. In this instance it is fair to say that property will sell at or near its full, CURRENT, retail value. If you can find sub retail values in these markets you stand to make even better profits moving forward.

Now imagine that the market you are looking at is at the top of its cycle. Again, prices are high and demand is higher than supply so property sells at its full retail and in many cases above full retail. In this scenario there is only really one place prices can go, and that is down. Cycles go up and down and when. like being on a roller coaster, you are at the top, the next stage is down. Prices fall and you lose equity.

Note, neither of these scenarios should have any immediate bearing on cash flows. Cash flows are an object of return on equity. in other words, if you paid cash for your property then it will no doubt cash flow very nicely. If you are highly geared then the cash flows may not be so good.

So, the answer to your question is, "what is the purpose of your investment"? If you are buying at or near the bottom of a cycle and you understand this then you may pay full retail and have poor cash flow by looking for the upcoming growth in the market. If you look at @Account Closed's comments he clearly shows that he would have bought his properties at or near the bottom of the cycle. He was investing to make capital gains, not short term cash flows. I say short term because rental increases always follow rising prices. I say follow, because rental returns are a factor of yield for an investor and the greater the value of the asset the greater the cash yields should be to warrant the investment in the first place. Bob therefore was playing the game ahead of time. He was buying low priced property in an increasing market that he knows will increase in rental yields. He would then, as he no doubt does, increase his borrowings from the increased equity and cash flows to free up capital to go again. Thereby reducing his initial investment in the property and raising his IRR, plus having the funds to invest in other deals.

If, on the other hand you are buying for cash flow only then you are only partly playing the game and missing where the real money is. The real money is understanding investment cycles, in this case property cycles. Buy low sell high. Or, buy low, refinance high, buy low again, repeat. Follow Bob's lead because when a guy spends most of his working life as a professional property appraiser as he did, from what I know of him, you would be wise to acknowledge that he understands market cycles. He knows when to buy and when not to buy.

Would I pay full retail for a property? Absolutely, in the right market conditions. Would I prefer to get it below full retail? Absolutely. But I invest to make money and making money is what it is all about. Knowing your market and where it sits in its current cycle will make these decisions easier for you to make moving forward. If you do not understand your market and its cycles then these decisions will always be difficult to make.

Good luck on your journey!

@Josh Hogan Welcome to BP. If you become a Pro member you can advertise on the site. Not only that you will get great value from all the amazing resources that there are on here.

Good luck with your ventures!