All Forum Posts by: Rabih El-Khoury

Thanks for the feedback gents. 

@Jefferson Smith in the manner i presented the case, unless i'm running a ponzi scheme, the deal itself doesn't/can't provide for the balance on the balloon payment. The only way the $34k would be made available is like @Jeff V. said, by re-financing. And the better chances for that re-fi to come up with that capital is if this is a BRRR project.

This is the conclusion I was looking for, and thanks for the help/confirmation guys: private funding only works within the context of BRRR.

Hi. 

I'm trying to figure out the math on a privately funded real estate deal and would appreciate your help. 

Time and again I've heard podcasts and read articles/posts on how private lenders get 10%-15% ROI but no source i've come across actually walks you through the math.

Here's how i'm seeing it; let's keep it simple and assume the following: 

$140,000: property price
$3,000: closing fees
$143,000: total cost to acquire property
$100,000: funds i provide
$43,000: funds provided by private lenders
$8,992: NOI (@ 1% rental income rate, 5% vacancy, 2% property tax, 5% Capex provision, 5% repair provision, $100/mo. property management fee, $588 home insurance, and another $700 misc)

$7,798: net annual cash flow after tax (CFAT)

Terms* with the private lender: 12% per year (non-compounded) on their investment, 1 balloon payment at the end of the 3rd year. In other words, at end of Year 3, they receive $43,000 + (12% x 43,000) = $58,480. 

*I like these terms (assuming they work, hence this post) because: (a) they're the kind of terms that would attract funding from my network of friends and associates; (b) I want their names off the deed in 3 years; (c) I do not want to have to sell the property to pay them back. 

Now, accounting for annual rent and expense increases, the CFAT for Years 1-3 are: $7,798, $7,909, and $8,022 for a total of $23,729. I owe the private lender $58,480, meaning I have to fork out $34,751 (the balance) to own the title clear and fulfill my promise to the investor. 

Is this how the private lending model works, or am i missing something here? 

Thanks!

Have you used this market analysis tool provided by https://www.housingalerts.com/ and if yes, what's your feedback? 

I happened on this site in my quest to build a more robust understanding of how to choose a market to invest in (i'm a turnkey/out-of-state investor). As a former forex trader, i appreciate the value technical analysis brings, and this tool is built on just that. In comparison, the predominant indicators referenced by literature and the BP community on market assessment are driven by a "fundamental analysis" approach. Factors such as population growth, GDP, job sector variety, unemployment rate, crime rate, urban sprawl, housing prices etc. Obviously data around these indicators could help build towards an educated guess of what the market might do in the next 1-3 years. But if you're following a buy-and-hold strategy, I haven't come across compelling evidence/literature that these indicators could project what will happen in 5-7 years, or even 10-12 years, which on a typical 30-year loan, is time when the amortization advantage (on tax break) starts to ease off and its time to sell. The fundamental analysis based on these indicators doesn't generate enough insight--or even confidence--that what's happening in the next 1-3 years will continue for 10-12.

What the inventor of this tool is saying is that technical analysis, through its crunching of tons of data points, can generate an indication of what housing prices will most probably do in the short, mid, and long term (covering 1 to 10 years). As such, it gives the user insight into the housing cycle and by then a indication to buy, sell, or hold. It's very interesting. Another thing about this tool, which i find particularly useful, is that it allows you to search across regions (i.e. Mid West, New England etc.) and tens of cities all the way down to zip code with a few mouse clicks. For someone like me has no geographic preference it saves tons of time drawing shortlists of cities and then reading up on the fundamental indicators. 

This is not an cheap to tool to access to. The entry fee ranges for $900 to $2000 depending on the level of geographic detail you're interested in (state vs. zip code), and the monthly renewal fee hovers around $90. 

If you've used this tool or anything similar to it, i'd really appreciate your feedback. 

Thanks! 

I haven't found one yet and i've been searching for a while. neighborhoodscout.com gives you both the average rental/month for a city but it's not the kind of tool where you can scan through a list and pick-out, say, those are doing between 1% and 1.5% versus the area classification (A, B, C, D etc.). If you do come across, would you mind sharing? 

population data: apps.urban.org
multiple city data: city-data.com

neighborhoodscout.com seems pretty cool but it is a paid service. 

i'm still compiling the list of portals to use. Looking for one that's economy specific. any thoughts?

I see where you're coming Hayden. I'm looking into buying turnkey properties all over the nation and so have been working on compiling KPIs that would allow me to shortlist states/cities to invest in based on their micro-economics. I also see where Joe and Alexander are coming from too and they make a point. See, ultimately, you're most probably going to hold any property you invest in for, say, 7-10 years before trading up. Two reasons for that: tax depreciation decreases over time (so you're losing that benefit) and second the house is aging making for higher maintenance costs and less appeal (think of what's cool to new couples in 10 years; Smart Homes, nice design etc... these need a newer house foundation not something built in 1983). As such, what i'm doing at least, is shortlisting based on the KPIs I think are important and the focusing on the property deal itself.  

Welcome and good luck! What has been working for me (and i recently started in REI) is reading a few books (7 in my case) and listening to podcasts. Once you get the gist of things you're single most important next step is fully understanding (1) property financials, cash flow, and how to estimate costs; (2) market dynamics. You do the first by crunching numbers on properties (think of it as homework) until you're comfortable juggling all variables and most importantly understand the impact of time value of money on investments. You will find that you'll come up with several questions. Posting them on BP and getting answers is very educational--i have learned so much. And the great thing is the info is recent/fresh and from first hand experience. Once you cover the basics your next step is to develop your investment plan/strategy. Here you'll find that books are the least helpful, followed by posdcasts, and that the best resource is again BP. Why? Simply because you can ask specific questions that cater to a specific scenario or objective(s) you may have.

I think 13% is doable @David Grabiner, perhaps not in the a single state though. Thanks for your input. 

Are you seeing 1%+ rentals in Tennessee?

@TJ P. I'm interested to see how your spreadsheet spat out $12k (i'll PM you my spreadsheet and we could compare notes). Speaking of 1.5%s, I modeled the impact of rental percentages from 0.8% to 1.5% in 0.05 increments on returns -- it's insane how weighty that factor is. I'd pay 0.25 pts on a mortgage or be willing to invest in higher property tax states as long as that 1.0%+ is there. That's why i think the only way to scale towards my goal is B-zones and 1.0%+ and use turnkey investment to allow myself to spread across nation in the hunt for those, as you said, scarce rental returns. 

Thanks everyone for your feedback and ideas, much much appreciated. Syndication is something I hadn't thought of. The baseline takeaway from what you guys shared is, while potentially doable if the variables play in my favor, the $24k objective is a high summit. @Jeffery Waicak no this isn't a hypothetical example: it's the cash I have (@Lesley Resnick; that's $120k new dollars of investment available every year) and the target I'd like to achieve. 

The other option is private investors: I have access to a network of people who, potentially, could provide an additional $50k every year. 

I'll look into syndication and into turnkey: my thinking re: turnkey is by not pinning myself to a particular state where I have a team in place (Texas) and fish for deals across the nation in markets that help meet my objectives chances are i'll edge closer to the goal. Easier said than done by all means.