All Forum Posts by: Ray Johnson

@Mo Farraj There are many ways to structure the debt on a rental property. The most popular way to structure a Buy-and-Hold portfolio is to purchase your properties with as little cash out of pocket and let your tenants pay-down the mortgages. When an investor purchases the property the only money they will/should spend out of pocket is the initial down payment and closing cost.

An example is your $200k property cost you $40k down payment and $3,000 closing cost = $43,000 out of pocket investment  

If you property Nets you $1,000 per month cash flow you actually start making money on month 44 because this is the first month after you've hit the break even point provided you don't come out of pocket for anything else.

On this example if you collected your reserves at the right amount and don't get hit with large vacancies, you're making from year 4 going forward not including any appreciation.  

There are some business models that choose to flip because they want the cash today and don't want to be landlords and aren't concerned with appreciation. You also lose your long-term appreciation and the ability to transfer property non-taxed via 1031 when flipping a property

@Christopher Coleman The only way I see you flipping a short sale is if the amount owed is underwater close to what the bank is asking, the property is also in really bad condition and the ARV is significantly higher. I would think a Wholesaler or someone scrubbing the late mortgage list would have found one by now, if not, the only way to make any money is if it falls into this area.

Example of this could be:

1) Property is really bad shape and currently valued at 100K, last update in 1975 and hard to sell turnkey

2) Loan balance is 125K and owner lost job and cant pay the mortgage (bank agrees to take something between 100k-125k)

3) ARV Comps in the area are at 250k

You're basically saying you're willing to give up some of your profit to the bank (the amount between loan balance and current market value) to make this deal happen. If you're in a really tight market it's possible but in a tight market Short Sales sell fast to Owner Occupants.

What's the ARV versus what the bank wants? What's your rehab cost? these numbers plus the bank spread will tell you if this is a deal or not. Also the bank will need to approve your offer price so projecting too far away from the ask will get you a no in the current sellers market.

@Nicholas Gray I agree with @Uwe G. Especially since it's the path I went down. While I went the MBA track early on then into the Private Equity sector, I think with you education you'll easily make it in the Financial sector at some level. There are plenty large REITS that you can get into at the entry or intermediate level, the jobs aren't quite 9-5 that schedule is for low paying jobs, It'll be more like 8-7 or 8-8. In my 20' starting out with an $84K a year job it was a great starting point which greatly increased over time, this was in 2003 so I don't know what entry-level pay is these days or how it compares to your current income, what I do know is having an extremely high paying W2 allows me to easily invest in RE. In addition to the large REITS another RE associated jobs would be RE Engineering firms, maybe a different type of engineering will be a better fit.

I meant the mix of the 6 apartment buildings? since 80 of the units fall under your 40 duplex number

@Frank Wolter This will depend on the amount of equity you're able to get to re-invest versus the amount of cash flow you're currently getting. It's not just us Cali investors buying in Cleveland so you should be able to sell your properties pretty easily.

What is the property mix of the 120 units?  Are all 120 units in Cleveland?

If you have 120 individual properties or a large portion of your portfolio is not multi-family of 20+ units or more, I'd recommend selling most or all of it and using the money to leverage into buying a property in the 200+ unit range. 

 The goal is to get to the point where you have 2 or 3 Assets that total 800-1,200 units, when people are talking about financial freedom that's what they are referring to because Assets at this level are truly passive investments. 

Keep in mind we've seen this movie before, in good times everyone flocks to Ohio, Indiana, and Missouri, then when the markets turn a majority of investors dump assets in these areas first so if you can exit an over-inflated market near the top I'd say jump on it, that's the definition of buy low sell high.

@James Wise When I look at investment opportunities in the Cleveland area, I'm not seeing anything that fits my investment criteria of "B Class" or above neighborhoods, Do you ever get anything in these neighborhoods? 

With all of Cleveland coming in at around 60% of the city being "For Rent" rental properties, it seems like at some point B class properties in Cleveland should come online.   

@Jason Malabute many Quantitative Analyst conduct these studies in conjunction with economist, the problem you face are the limitless variables that can be used to skew the data to reflect what you want of what you don't want to see.

You can go far down the rabbit hole on this topic, keep in mind that there are thousands of variables associated with wage growth.

A simple at one variable when trying to project wage growth:

The most obvious is the cost of capital that companies use to expand or continue operations. As cost of capital continues to increase (which it will) this expense gets bigger for companies to fund operations which means less of an increase in payroll expense if a company wants to maintain a certain income to expense ratio and is not in a large income growth phase.

The other side of this same coin will have labor and inflation analyst that will say when the cost of capital increases, companies will experience the an increase in operations cost or cost of goods produced. These economist say the company will or should raise the cost of goods or talented personnel hired so companies can maintain the same or better bottom line. 

This will allow for wages to increase so people can maintain the same cost of living in line with inflation, As we all know the cost of living has outpaced wages so this assumption doesn't always pan out either.

Also look at various regions of the US, There's a reason why some of in CA get surprised when we come across someone that isn't making a six figure income and in other parts of the US people are surprised if someone is making more than 80K a year and they think that's really high. Wage growth is also regional and occupation based as well.

Not sure what it is you're trying to associate wage growth with but this is such a vast topic you'll have to have a more precise target if you're trying to make wage growth a useful quantitative and qualitative tool.

@Justin Worsham you don't have a rental property, you currently have a non-profit charity in which you're subsidizing a tenant to live in your nice property at your expense.

Sell it tomorrow, there's no reason to lose $1,500 of your money every month.  

@Jared G. First thing is a "Great Deal" to you may not be a great deal to someone else. There are investors on BP that are looking for $100 a door cash flow and others that won't touch anything below $500 a door, so a great deal is subjective to the individual investor. The important question for you is what do you consider a great deal? Other things to consider are market, and property type. I have several properties in NW and NE DC which some are "Great Deals" to me and some are good deals to ME!

@Austin Petrie I see you're in Los Angeles, Are the properties in LA or spread out across the United States? If the properties are in Los Angeles, Exit all of them immediately and let someone overpay in the current LA market, Then purchase an apartment complex at the Institutional grade that will deliver you a couple of million a year in cash flow.

When I worked in Private Equity and a new client showed up with over 20 million worth of debt free real estate spread out over 15 or more properties, It always surprised me that consolidation into one asset never came to mind.