All Forum Posts by: Tom Mole

@Brian Corbett and @Monica Corbett

Now that's what I was talking about. The links you provided tell a lot about the deal. It's like you just turned the light on in an otherwise very dark room. Despite me being old, I'm not at all opposed to using whatever technology you can lay hands to. I'm not even going to risk arguing with @Rick H. about the value of technology (or the limits thereof). Just remember that your computer really doesn't care if you blame it when things go wrong. Success or failure is a human decision, but you seem to have addressed that nicely.

It looks like you did your homework and have pretty good idea what to expect. It appears to be a workable small deal, provided that your analysis is accurate against reality. What advice would you be looking for?

My biggest concern, not addressed by others, is this; do you have a cash-out refi plan? Have you talked to the banks? Most big banks won't talk mortgages on such small loan amounts. The local banks might. The problem is that tiny mortgages are hard to sell, so the bank has to carry their own paper. The big guys hate that. So, do you know who is going to cash you out?

Hey, great job on this deal! You may be newbies, but you're the kind of newbies that take action, real and meaningful action. Stick to it. Ride out the bumps. Soon you won't be newbies anymore.

I believe the only way you can create a PDF of the Deal Analyzer report is if you're a Pro member. Perhaps you could post the most important numbers and ask about your concerns. There are plenty of folks here to help you analyze your deal.

@Bisty Joshi

I took a look at the website you referred to. I'm not sure how this site is supposed to help you build your RE investing business. It looks like it a monument to Adam L Stanley for Adam L Stanley to promote himself. Is this really what you're looking for?

If you're looking a place to get your questions answered, well, you've already found BiggerPockets.com. If you're looking learn how to get started, check out the resources right here first. 

So, looking at your profile, I understand that you're just getting started and you're looking to invest with little capital. A lot of people start (and end) from this point. No technology or guru is going to help you until you know why you want to invest and what you want to do.

All right, what makes Bisty tick? Where do you want to be in 6 months, 1 year, 5 years, etc? What appeals to you about RE investing? Are you looking for streams of income or lump sums of capital? What do you consider a good return on investment?

If you're serious, I'd be happy to help. 

@Matt Hernandez

Many questions come to mind. You said that a 6.25% cap is reasonable, so I'll assume you've checked that rate is what the market will bear in that neighborhood. Have you actually vetted this?

Have you asked the seller how they reached their valuation? Many sellers just pull the price out of their butts based on what they want, not based on market valuation. This is so frustrating. Often they hear from their real estate agent who says "the inventory is low", but the agent doesn't have a clue how to evaluate and a commercial deal.

How motivated is this seller? You said that you'd pay a premium for the potential of this project, but I think you've factored that in when you accepted that the NOI could easily be pushed to $72k. That is more leniency than I would give the seller. I buyer As-Is, Where-Is and How-Is in current state and condition and so should you. That means, given a 6.25% cap and actual NOI of $44,646, the price should be $714,336 and at their asking the cap is a mere 2.29%. Based on your belief in your ability to lower expenses I figure your max allowable offer at $1,152k. DO NOT OFFER A PENNY MORE THAN THAT! Bottom line: that is the bottom line.

Delusional? Yep! Most assuredly, but a big part of negotiation is education. Explain how commercial valuations are done. Explain about the cost of sitting on the market for a long time. Find your seller's pain and amplify it. Have a chat about the cost of waiting for the market to catch up with a highball asking price. What happens if this apartment sits on the market for six months to a year with screaming tenants and clogged toilets. Then, show how accepting your offer solves all the seller's problems.

If she's still unwilling to let go of her inflated expectations, then let the market teach her. Just keep following the property and renew your offer every few weeks or so. No matter how much you might love this project, it's still not worth it to pay the seller for what you have to do to make the property worth what she's asking for it. That's just stupid.

On the off chance that someone comes along and meets her price, well good for her. There's just no accounting for "stupid money". At least it won't be you taking the loss. There are plenty of apartments out there no matter what her agent tells you.

Stay smart my friend. Submit your LOI, negotiate/educate, then hold your ground. Great find. Now go find another.

@Nicholas Moffett, how can I help you? 

I agree with @Christopher Telles that your posts at the front of this thread sound pretty arrogant and entitled. I agree with @Anthony Gayden that you are probably just frustrated. I've been there too. Finally, I agree with you that sometimes people will answer your question with what they think you need to hear, instead of specifically what you asked. I'll help you. What do you need to know?

OK, now that I've kissed everyone's butt, let's get to your original point. You wanted to know exactly how to buy a good investment property. So, what are your investing goals? Do you want to reposition apartments or hold performing MFR's for cashflow? Are you an apartment guy or self-storage type? How do you feel about hospitality, like hotels and motels? Would you invest in senior living facilities or mobile home parks? Do you want to invest locally or are you open to long distance investing?

What do you consider a good return on your investment capital? How do you feel about partnering with others? How willing are you to learn? Do you know what NOI is? Can you explain the relationship between cap rate and price?

I'm not trying to be nasty, rather trying to figure out what you need to know. There are many ways to skin this particular cat. You say you have $200k that needs to be placed. Would you like me to help you park that into a good investment? Fine, I can do that. Send me an email. You wanna know how to do it yourself? Fine, I can help you there too. Be coachable.

So, let's get started. Post the answers to few of the above questions. I'll give you pointed responses without the rah-rah stuff. Fair enough?

Welcome, @Bethany Weinmann, to the BP community! First of all, you and @Ryan Paltridge should become colleagues and keep in touch. There's just nothing like having someone at your level and in your area that you can share war stories and concerns with. Find the Connect button in his post above and click on it.

There is a lot of content on this site. Start listening to the podcasts and, if you can, join @Brandon Turner's free weekly webinars as often as you can. Check out the AskBP mini-podcasts too. They're awesome, quick , single topic presentations. You'll love 'em. You can find all this stuff on the Learn tab above.

Build your network! Follow the forums that interest you and contact the posters who say stuff that sounds really smart. Next, find and attend as many local REIA's (real estate investment associations) as you can. Say NO to the upsells, instead meet people and get to know them, who they are and what they're investing in. This is a "people" business. Get to know people. Avoid telling too much, but ask a lot of questions. Folks like to talk about what THEY are interested in, so listen a lot.

I yet don't know @John Cohen, but he sounds like he might be a big help for you. Connect with people like that every chance you get. Next thing you know you'll be doing deals with some of them and you'll be in business.

You said you're really interested in real estate investing. Now if you want to be really successful at real estate investing figure out WHY you're interested. You'll need to have a big enough "why". The successful investors always have a "why" bigger than "I want to make a lot of money" or "I just love it". They have something more like a mission. They are driven. Passion fades and hope is not an action plan. Be driven!

Feel free to contact me. I'm looking forward to hearing your success stories. 

You go Girl!!  :D

@Toben B., your expenses seem a little high against your estimate of income, but it's still in the ballpark, particularly if you were round up. Also, do not include painting as a monthly expense. If you find yourself saying "one time", then it's a capital expense, not a monthly and it goes into a different budget category. Similarly, I would figure out my GSR (gross scheduled rent) without taking out vacancy, instead add 8% (or more) vacancy as an expense and rework my PM costs.

So what is this property worth? I don't know. It depends what you're looking for, where the property is located, what the market will bear, and lots of other stuff. Remember in commercial deals you're not buying a building, you're buying a business that happens to have a building in the deal. You're buying tenants, reputation (good will) and the market as well as the building. 

What the market cap rate? Are you looking for capital gains or cashflow? What do you consider a good return on your investment capital?

I estimate your NOI based on the numbers you gave at just under $26k. Allowing a 7% cap rate would indicate a price of $371,428. At 8% cap the price drops to $325k. DO NOT offer more than that. Get it for less if you can. In any case find out the market cap rate. That is what you compare, not the dollar price, on commercial deals. Once you know the market cap and you know the actual NOI you can calculate the price. The formula is, price = NOI/cap rate. Easy, huh?

This is kind of a round about answer, but maybe it helps. If you want clarification, be sure to ask. Feel free to contact me if you want to drill down on anything here. I'm happy to help.

Cash on cash is what it is. That is not to say that tax consequences should not be considered, just not in this ROI calculation.

Look to IRR (internal rate of return) to include taxes and other things. So, why don't we forget about cash on cash and just at IRR? Because, cash on cash is easy and IRR is complicated. There are lots of ways to calculate return on investment. Each method serves a different purpose; hammer for nails, screwdriver for screws.

Most of the time it's enough for smaller deals to figure the cash on cash returns. You can treat the tax bennies as gravy, so there's no reason to bust your brains out and pore over spreadsheets just to make a $200k deal maybe $100 sweeter. Save that energy for the multimillion dollar deals where it's worth the effort.

In your example, does a 7% ROI meet your investing criteria? If so, do the deal. If your tax situation would net you another 10% over and above, then by all means, do the deal. I would double check my calculations, however, if I found that my tax bennies exceeded my cash of cash returns on a residential deal. Something sounds fishy. Maybe you could provide the details of your analysis. It would be interesting to review your model.

@James Clark, good job qualifying your sellers. Now take the next step. Ask the seller to carry. You don't get everything you ask for, but you don't anything you don't ask for. Basically, I totally agree with everything @Christopher Telles told you.

That being said, do you need or even want seller financing? What are you planning to do with the project? If you're going to wholesale it, do you know if your buyers want seller carry? Many don't, so know your market. If you're looking to rehab and flip it yourself, seller financing can really grease the bearings of getting the deal done. If you're planning to buy and hold, look very carefully at the terms the seller wants. You could be stuck with it for a long time.

I wouldn't worry all that much about the due on sale clause, however, if you're planning to hold the property, you might want to consider a sales-lease option (which could, but probably won't trigger "due on sale") or a land contract, which almost certainly won't cause acceleration. If you're flipping, there's just nothing to worry about. The bank won't foreclose before you've finished and sold the property. No sweat!

The note part that @Rick Stein was referring to is the promissory note that you'd sign that's really a sophisticated I.O.U. Sometimes sellers will sell these notes to others to liquidate cash, but probably not the sellers you're talking to. A bigger issue is making sure that the financing is in compliance with Dodd-Frank laws. Get a qualified broker to assure that originating this loan is not going to land you or your seller in court. Wrapping the existing financing is probably easier to understand. If you're not sure what any of this means, then by all means ask until it's clear. This is important.

Good job so far. Keep moving forward. You're doing great.

@Devin Scott, I've got to disagree with several of the other posters. Your numbers indicate a 10% cap rate, which is usually easy to cashflow at 100% financing. As you and others have pointed out, FHA is not really an option here.

I'd rather see the seller carry the first 80%, but I'm sure you've already had that discussion. If the seller will carry for 60 months at 5% amortized for 30 years, that's reasonable secondary financing.

My biggest problem with this deal is the smallness of it. One vacancy on a quad represents a 25% hit on your GOI, so be sure to have plenty of reserves. 

If the numbers vet and the existing income is genuine, I'd be making an offer. How's your credit? In fact, if there's equity in your other properties, you may be able to cross-collateralize to help qualify. Just make damned sure this deal is a deal. I'd look especially close at expenses. You can kill your cashflow quickly by underestimating or trusting underreported expenses. You can find out for sure during the inspection period.

So, what is the local market like? Crime, unemployment, quality of the neighborhood, rent comps, etc. What is your exit strategy? Is this project close to where you live, work and play? I mean within an hour commute from home so that you can personally put eyes on it regularly.

It sounds like there is potential here. If you agree, make and offer. Get it under contract (with standard "weasle" clauses, of course) and come back here for the next step. Good find!