All Forum Posts by: Michael Gansberg

Hi @Michael Pike - I agree with the above posters, just factor it into the monthly rental amount. To increase profitability, you do have options- just reduce the water usage by 30% or so. It's not hard- install aerators in sinks which don't have them(and install Water Sense faucets when replacing faucets, they'll use about 15% less water than regular faucets.)

Then use low-flow shower heads(go for 1.75 gpm, anything lower will cause unhappy residents.) And the Niagara Stealth toilet uses only .8 gallons per flush, about half of the average toilet. These modifications will reduce water usage quite sharply. 

Hi @Doug Danoff - glad you're posing these questions. As a rabid capitalist, and an even more rabid, foaming-at-the-mouth environmentalist, I think about this stuff frequently. Math is quite helpful here, if you can bear some assumptions.

Let's assume the typical $700,000 house in Boston costs $5,000/year in utility bills. Let's assume that if you spend $80,000 now on geothermal and solar panels, you'll save $5,000 per year on utility bills forever, but if you spend $15,000 on regular heating and cooling equipment, you'll have a typical annual cost of $5,000 in utility bills. (note- this is rife with assumptions already. Geothermal and solar are cheaper to maintain, which is a big plus in their column, and will the cost of electric/gas/oil rise or decline over time?)

One can consider this case similar to a perpetuity, which is an annuity that pays out forever. There's a simple equation to determine the value of a perpetuity, it goes like this:

Present Value = (dividend per period)/(discount rate) 

More concisely: PV = D/r

If the dividend(in this case, $5,000 annually) is divided by the discount rate and the present value is greater than what you spent to install the system, then congratulations! It made sense to make the investment- so long as you can convince a buyer of this, of course. In the above example, an extra $65,000 was spent on geothermal and solar to yield a $5,000 annual payout(really it's divided over 12 months, but let's keep things simple, if it's not too late for that.) Assuming a 6% discount rate, the calculation looks like:

PV = $5,000/.06 = $83,333. 

Since the present value exceeded the investment by $83k - $65k = $18k, it looks like a savvy investment! What discount rate would make this a break-even proposition? $5,000/$65,000 = 7.7%. For discount rates higher than that, the proposition would be a money-loser. 

But I think you'd have a hard time convincing a buyer to pay an extra $65k for the above, regardless of their discount rate. There are air-source heat pumps that work very well down to zero degrees Fahrenheit, and some work well even into sub-zero temps. I think a good economic argument could be made for an air-source heat pump with a natural gas furnace to provide backup below certain temperatures. If you wanted to get really freaky, you could try to come up with an equation dictating the outdoor temperature at which the furnace kicks in based on the ratio of natural gas prices to electricity prices, taking into consideration the variation in efficiency of the heat pump relative to temperatures(but that would be pretty challenging! Not only the equation, but programming that equation into the system so it adjusts the starting temperature according to the current gas and electric rates.)

Before doing any of that, I'd make sure the low-hanging fruit has already been picked- LED lighting, water-efficient fixtures(sinks, toilets, shower heads,) possibly spray-foam insulation to reduce drafts, to name a few.

MG

What's strange to me about wholesaling is how often discussions of its legality pop up on this site. "Is it legal?" "Isn't it legal?" "Why is it illegal?" These are the sorts of questions one sees while looking through BP.

Why are there never questions about the legality of driving with a license, or selling real estate with a license? Because we all know those actions are legal. In wholesaling threads, the term "gray area" pops up with alarming regularity.

Why can't 3 year-old kids drive? Why can't kindergartners own firearms? Why can't unlicensed people(who may also lack training) sell homes which are often the repository of the homeowners' lifetime of accumulated wealth? Because the public demands protection for its citizens- it's part of the reason we pay taxes.

I understand the wholesalers' perspective - that real estate licensure is simply to protect a monopoly and guard the realtors, who pay lobbyists to maintain their wealth. There's truth to that- just like farmers pay their lobbyists to bribe the politicians to keep the corn ethanol subsidy, which doesn't help anyone but corn farmers(it likely hurts everyone else.) There are countless examples of entrenched industries using laws to their benefit. Wholesalers, that's life, get over it- or get a lobbyist and form an organization and get your own laws on the books.

But wholesalers- the other aspect of licensure, in this case, is certainly to protect the public. It's not perfect. It doesn't always work. But it's better than nothing. If you're opposed to the requirement of a license for representing a homeowner in the sale of real estate, are you also opposed to the requirement that you must get a driver's license in order to drive? Or what about becoming an MD in order to perform heart surgery? Hey, maybe we should just let anyone perform open-heart surgery, it can't be that hard...can it? 

Hi @Boris Alayev - I’m in a similar boat. Born on Long Island, I’ve lived in NYC since ‘95, and the numbers in NYC are even more challenging than they are on the island. I’ve solved it by investing in the Capital District and surroundings, and Buffalo(to a lesser degree.) 

Investors in NYC(and Long Island, I suppose,) depend on appreciation as a component of their return. I’ve always been more of a bird-in-the-hand kind of investor- the property must pay me now via cash flow, and appreciation is icing. 

Out of state investing can work for you, but consider areas that are within driving distance first- near NJ, and upstate NY for instance. If those don’t work for you, segue towards a spot reachable by commuter flight. Good luck,

MG

Ask him if he wants to be a police officer forever. Ask yourself the same thing. Wouldn't it be nicer if he had a source of passive income backing him up, if or when the day comes that he decides he'd rather not be an officer any longer?

That's the idea behind real estate investing. When done correctly, you should be able to leave your day job at some point. Buy a nice property- maybe even pay up a bit for a lower cap rate, and demonstrate to him the steady income you've begun to generate with your capital(and hopefully a lack of problems with tenants as well.) When he sees that, he'll start siphoning off from his ordinary paycheck to invest in your next collaborative venture which will make both of your lives better. 

Hi @Drew Y. - I think that's a great question. Connecting stock investing and real estate investing is a useful exercise. You mentioned Security Analysis by Graham - I haven't read it for many years, and my memory is foggy on it, but I recall a few principal principles which I think are applicable to your post(for those who haven't read it, Buffett credits much of his investment style to the teachings of Benjamin Graham.) Here are two relevant principles.

1. Margin of Safety. In stocks, Graham suggested that overpaying was very bad. I believe Buffett later modified this to the effect that he'd rather overpay a little for a great company than dramatically underpay for a lousy company. I like Buffett's modification- if I overpay a bit for a great house/apartment building in a great(or improving) area rather than underpay a bunch for an average/lousy house/building in a declining area, over time, the former situation should prove more lucrative than the latter. My 15 years of real estate experience has lent support to this idea.
2. Economic Moat. In stocks, Graham suggested(I believe- I read this book about 20 years ago!) that companies with moats- economic advantages which competitors would have a difficult time imitating- were better investments than companies without those advantages. Patents would function this way for many companies, I believe.

Regarding economic moats, I think that's more challenging in real estate. Patenting processes with substantial advantages and preventing competitors from using them seems fruitless. Real estate, after all, isn't rocket science. 

However, where creating a moat might not be feasible, creating a steep hill(with a few archers and a dude or two pouring boiling oil down on any would-be encroachers) might be possible. For instance, after a decade in the industry, a real estate investor should - if he/she is doing the job properly - have an economic advantage over new investors. For example, they'll have property management teams, banking relationships, insurance relationships, good attorneys, a track record of acquiring and operating properties, and so on. This protective hill will enable that investor to sometimes get off-market deals which may be more lucrative(due to less perfect information about the asset, for instance.) The hill might even enable an experienced investor to pay more for an asset and do better with it than a newbie who pays less(due to operational efficiencies, good management, and lower interest rates for the experienced investor, for example.) In that way, the universe of possible acquisitions should usually be larger for the experienced investor. 

A simple analogy is to the casino game of craps(which I don't play and I don't understand.) From what I've been told, however, a craps player can get decent(even?) odds once they pass the initial hurdle of poor odds. A real estate investor's career path should be similar. Their early deals have the advantage of time, but the greater disadvantage of their experience. Later on, their experience should make their deals much more lucrative, though they'll have incrementally less time to enjoy those profits. 

MG

@Margie Fuller - I'd have started with a more upscale property requiring less work and in a better area(they were available and affordable, but I was lured by higher theoretical cap rates, which proved illusory.)

I've repeated that mistake over the years- I've often thought that high-yielding properties would be more lucrative, but in the end, they've generally proven not as profitable as better properties in nicer areas. Not to say I haven't had home runs from those kinds of properties; I have *wink* *wink*, but not enough home runs to justify the added risk, IMHO. 

MG 

@Julia Bykhovskaia - congrats on leaving your job. There’s nothing like not having a boss- how does the saying go? “Entrepreneurs are the only people who will work 80 hours per week so they don’t have to work 40 hours per week.” 

I’m currently in the same boat🚣♀️, having been self-employed for most of my adult life. The last time I had a job with a pay check was in college! So people in our circumstances just have to work harder to get a loan. Community banks work better, in my experience - the loan officers are more often willing to understand your story instead of being forced to check the boxes like loan officers at big banks. Make sure to tell it clearly and concisely- with a focus on your track record and your ability to pay.

MG

@Austin F. - many of my best deals have been owner-financed, hopefully this one works out for you. I can't provide a form letter, but here's how I start these negotiations:

• offer slightly less than what you consider an optimal solution in terms of price, duration, rate, and down payment. For instance- let's say ideally you'd want to put down 25% and would be very happy with 6% for 5 years with a balloon and a 25 year amortization. Offer 20% down, interest-only at 5.25% for 7 years with a balloon. This will allow the seller to counter right into your sweet spot.
•  You'll have to sell yourself as well. In a sense, you'll be business partners with him for the duration of the loan. What would you want in a partner? I'd want someone easy to work with, who pays on time, and who has a track record demonstrating ability, along with a few references.

For that last point- I had a 10 unit deal that practically hit me in the face about 5 years ago. My PM and I were driving to one of my properties, and he said, "Oh, I know of this ten unit deal, but the price is kinda high, I doubt you'd be interested." I said, "Tell me more!!!"  

It turned out to be the best deal I've done by many metrics. I found out later that the seller knew a VP at the community bank which finances many of my deals. The VP worked directly with me on financing many deals. The seller said to the bank VP, "What do you know about this guy Mike?" 

The bank VP replied, "I've worked with him for years. He pays like clockwork." I'm certain that the reputation I developed by honest dealings and timely payments with the bank(my primary lender) led to the consummation of that 10 unit deal(which I subsequently refinanced with the same bank about 2 years ago.)

Good luck! MG

@Jason Turo - go for it. I currently run my real estate business off a 3 year old ASUS(that cost me $186 when it was new in 2015. After tax.) Though I do that mostly for amusement- I'm considering upgrading to a Dell XPS 13, as I've begun to notice the speed penalties attendant with the cheapest laptop in the world. Chromebooks are cheap- if it doesn't work, sell it off or give it to a friend.