All Forum Posts by: Wes Brand

I'll quote myself: That's not what you're paying? Exactly. The number[$ per door] is absolutely meaningless without more information. 

At the very least we should be talking about returns: "What ROI are you looking for with SFH?" While that doesn't tell the whole story, it also means someone isn't purchasing a 650k property and "making" 200/month.

All of the "Looking for 100-200 per door" stuff is useless without at least knowing the buy in price. 200 / month in free cash on a 20k property means you'll have doubled your money (assuming you can sell) in a bit over 8 years. 200/month in free cash on a 50k property is kind of bad; you'll double your money in about 20 years. 

That's a pretty poor investment...I wouldn't want to pay 650k per SFH for 200-250 per month in free cash in an area with no appreciation.

That's not what you're paying? Exactly. The number is absolutely meaningless without more information.

 Personally I look for at least $10 per door and a buy in price of $1. 10x my investment in the first month!

I'm going to jump in here as well and support @Account Closed's position. 

There's no shame in admitting you're a poor person. You need some amount of cashflow to live; that cashflow could be from rentals, it could be from your day job, it could be from savings, or something else entirely, how you get it is entirely up to you. 

Personally, I don't want to get into a property where I'm paying more than it's bringing in income because I'm not entirely set for retirement yet. But that's a choice based on my personal situation; and I want to make the best investment I can given that choice. If I already had enough money to live on without thinking twice about it saved up, well, I'd be free to take an investment that leaves me with less liquidity in exchange for a greater upside. 

Part of evaluating a deal is looking at what the appreciation rates are going to be. Part of it is also evaluating what the "cashflow" is going to be. Part of it is evaluating what the costs are. Let's take the following example:

Let's say you had 1 million in cash. 

Property 1: 

Initial cost: 1 million dollars. Rents for: 5k/month(net 2.5k using 50% rule)
Rent Appreciation: 0/mo

Property value appreciation: 100% every 10 years for the last 50 years.

Property 2: 

Initial cost: 100,000. Rents for: 2k/month (net 1k using 50% rule) * 10 (for total of $1million)

Rent Appreciation: 0/mo

Property Value Appreciation: 0%. It doesn't go down, but it doesn't go up.

If you hold the property for 10 years with property 1 you have 300k in rents, 1million in appreciation, for a total of 1.3 million ROI in profit less taxes and such.

With property 2 you have 1.2 million in rents, 0 in appreciation for a total of 1.2 million in profit less taxes and such.

Let's say you hold it for 20 years: 

3 million in appreciation, 600k in rents, total return of 3.6 million.

Or

2.4 million in rent less taxes and such.

How realistic is it that you'll see 0 appreciation over the next 20 years? In some markets, quite likely. Their prices don't move. Can you live off the appreciated value in property 1? No. But that's the point -- you're giving up a more profitable investment in exchange for an investment you can live on. If you had 5 million in the bank, would you be looking at buying a bunch of 100k properties? Maybe, if you thought they were going to double in price in the next 2 years. Would you do it for the cashflow? Highly unlikely.

@Andrew Taylor see the edit to my comment above. It's not even that I doubt your ability to get it done, it's that if I'm an investor with 700k to spend I'm going to question it. Also finding the deal isn't that great of a thing. In startup land the idea guy is a running joke unless s/he has the network to bring in the seed money, has the operational talent to run a company, or the technical talent to build the product. (Ideally two of those)

Additionally, if you get it wrong, how do you make good on your promises? Say the entire building is infested with termites and you and your inspectors miss it (just an example) total loss. You now owe 2.6 million less 30%. 

I see why that's an attractive number, but I don't see why I'm investing it with you instead of someone with a long track record of successful deals. You're not bringing the financing, you don't have experience running a small scale apartment building, you don't have experience with doing these kinds of deals, you can do repairs, but what else?

What I'm asking is: What makes you better than the next guy with a dream to sell? Why is my money safer with you than another syndication group? 

My recommendation here: Walk on this one and cut your teeth on a smaller deal you can afford solo(to build experience+credibility), or work on finding an experienced partner who can lend support to the deal. Not financial support but operational support.

Just as an example, which pitch sounds better?

Hey, I found this 2.6 million dollar student housing apartment building trading at below market with an expected return of 290%  after 5 years. I've never run an apartment building before and I don't have any of my own money invested in the deal.

Or

Hey, I found this 2.6 million dollar student housing apartment building trading at below market with an expected return of 290% after 5 years. I don't have any experience running apartment buildings or any of my own capital to invest, but I've assembled a great team of advisors. I have Jim, the director of student housing at the school on board, Jaine, who has been managing apartment buildings for the last 20 years signed on as the on site manager, and Fred, who typically doesn't get out of bed for deals under 10 million but is advising me on this one as a personal favor.

@Luis Miramontes While cap rates and SFH don't normally go together, the safer the investment market the lower the rates you'll see. So I'd say the better schools and more desirable market means a lower cap rate. You could get something trading at non-market (market cap could be 5.5% and you buy it at 6% cap) but that means either you're taking on non-typical risk or you got a good deal and can turn around and sell it for market cap and profit on the spread.

 No worries. It didn't seem like a slam just that I was misunderstood -- I'm totally fine with 'house hacking' if it improves my situation (I currently live in a '2 bed with no living room' situation with a roommate). I'm trapped by rent control but it's a trap of my own making...I mentioned in another thread, but when I lived in NYC I moved every year as rents increased, so I was always in the same price range. I won't compromise my savings rate.

That being said, I don't view personally living in Richmond and doing rehab work as improving my situation unless I get paid for it (purchase price low enough where the rehab makes sense, or rents high enough). Ideally I find an in demand location and manage to force some appreciation via rent increases. Now, an investment property in Richmond...especially if it's near 1% now, in a decent area, and likely to appreciate...that's more tempting.

My budget numbers are to ensure I don't get overleveraged if the SF/surrounding area rental market goes south and the tech scene goes poof, not the maximum I can qualify for. I don't want to go anywhere near the maximum leverage I can take out based on DTI unless there's a significant upside.

EDIT: Actually that's true of all my conditions...I can compromise on any of them if the returns are right, but the more things 'wrong' the better the expected returns need to be.

@J. Martin Long term I won't be in the SF area. I plan to end up on a mountain, actually several mountains in different locations around the world so I can be in winter all year round. :)

I always consider deals that have been on the market for a while. Typically there's a very good reason they've been on the market for a while, but that reason might have nothing to do with me, or the seller may have finally gotten beat up on price enough to come down and I get lucky. I have no problems contacting listing agents, spending time on phone calls, and various things like that. I don't need to find an agent to do all of the work for me(Of course there's value in a good agent). That said, most of what pops up is nowhere near breakeven, even considering I rent out a room or airbnb it. 

For example, there was a listing that appeared on the market recently for a 2 bed in SF at 1 million. I could rent it as a 2 bed for 4-5k, but that doesn't even cover the debt service, let alone any of the other fees. If I moved there and put my current under market rent towards it and rented a single room, well, if I get lucky I could get 2k for the room. That still leaves more than my current rent to make up just to cover debt service. (or, since debt service has some equity, to cover taxes + HOA +interest)

@Arlen Chou I'm saving more than the difference between market and my current rent. While I'm not going to post net worth related things on the public internets, suffice it to say that I'm on the path to retiring in 10 years or less (depending on stock returns) if I invest in solely index funds and never get another raise. Could I afford market rent? It'd cut into my savings rate, and I'm not willing to save under 50% of my income, so...no? I wouldn't be homeless, but I'd be searching for a way to get my savings back up to my goals. I'd probably go with a 3 bed and 2 roommates, or a 2 bed and airbnb it. I'd easily qualify for either of those options as the only person on the lease.

Does it make any sense to give up my below market apartment for the privilege of paying a bank interest + the state of CA property taxes? Not unless it has positive monthly cashflow implications or gives me some kind of other benefit. 

@Rick 

I'm definitely prepared to hear this market isn't for me and I should focus on out of state instead. I do have real constraints on the time I can dedicate to real estate, and I would be competing with people who have far more time and real estate acumen than I. I'm more curious how the people that make it work do it. From what I've gathered, it's a mixture of getting in at the right time, being willing to sacrifice certain things (or having them be not a sacrifice at all), networking, and having the time to spend putting in some personal sweat equity. 

I'll look into foreclosures. I haven't researched them at all yet (way too many things to learn :)