All Forum Posts by: William Jenkins

I see a lot of people on here recommending the "infinite leverage" model.  Buy.....rehab......refinance out all of your cash (or more)....... and then repeat. 

This system will work perfectly until it doesn't.  That day may be tomorrow, next month, or 10 years from now, but it will happen.  When it does it will likely ruin you. 

Leverage is a catch 22.  It can amplify you gains and also amplify your losses.  Some of the most successful investors I have seen in the 2% game, have had very little to 0% leverage.  They got there slow and steady, and their cash flow became a snowball that allowed them to buy more and more.  They didn't make as much on the way up (circa 2000-2006), but they didn't go broke in 2008 either.  They were fat, dumb, and happy, while everyone else was losing everything.   

With $150k cash, I would:

1.  Learn the game first.  There have been many suggestions on this thread on how to do that. 

2.  Make a move when you find the right deal, pay cash, work the deal, and then reflect. 

Your new acquisition will be more work, more time, more of a challenge, and less profitable then what you originally thought.  This will not make it a failure, it is just the way it is.  Being in it all cash will allow you to make these mistakes and not get burned.

After deal 1, move on to deal 2, then 3, and so on.  You will become an expert along the way, but it will come with time.  Keep leverage very low, sleep at night, and have cash to buy when everyone else is selling.       

Although it is certainly going to vary by area, here in St. Louis, MO hedge funds have halted their purchases for about the last 6-9 months.  I have seen no indication at they are ready to start back up either. 

In this market, I do not believe they are getting the returns that they are seeking due to a lack of appreciation.  This market is 2 tiered in the areas that they are investing in. 

On one hand you have distressed property sales.  These were moving quickly and for higher and higher dollar amounts due to the frenzy of investor money (hedge funds included).  This activity is backing off now although there are still mom/pop buyers and some turnkey out of state investors picking them up here and there.  Prices seem to be declining steadily but not crashing. 

On the other hand you have retail sales.  This is the likely exit strategy the funds were looking at for offloading their property for a capital gain.  This market barely recovered over the last cycle, and seems to still be stuck in a rut.  The funds are going to have a very difficult time here locally selling their properties this way unless the market changes drastically and soon.  I believe this is why they have stopped buying in this area. 

They have 2 options at this point here.  1.  Hold on to their portfolio and manage it for the long term or 2. sell to local investors at prices likely less than what they paid.             

I am 33, so I was in your shoes not too long ago.  I did my undergrad in finance and then graduated with my MBA in finance as well.   

I can tell you right off the bat, that most on this forum are not going to recommend going back to school for your MBA so that you can advance your corporate career.  Almost all on here are entrepreneurs, and by that very definition, their goal is to do everything they can to get out of the day to day employee grind and run their own lives and businesses.  Many on this forum would probably advocate not even going to college (just a guess), because they would view that as a distraction (time and money) to pursuing your own path.

I think you need to look at your MBA as an investment and then run the numbers.  You need to analyze the cash investment, calculate the return (increase in salary), and then discount that out by how many years you plan on working in the corporate world.  If you are already thinking about how you are going to grow a rental empire so that you can quit your day to day, then I think you should avoid the MBA.  If that is not the case, then I would say an MBA from a top tier school could be the proverbial golden ticket in the corporate world. 

My path was and is still to this day somewhat of a hybrid. I don't regret getting my MBA at all, and would do it again tomorrow if I had to. For me personally, my degree has paid off with a very high ROI.

I am in St. Louis, MO and I agree with Vince.  There will always be areas of any major metropolitan area that will be dangerous, but that does not mean you should discount the entire City. 

St. Louis is commonly ranked a top 10 city for crime because they typically only include the actual City of St. Louis, and not the entire metro area.  The St. Louis metropolitan area is made up of over 100 separate municipalities, not just the City of St. Louis.  Many of these municipalities are very safe, and if you add them to the calculation it drives the overall crime rate for the area way down.

I am a buy and hold investor, and there are certain areas that I would not touch with a 10' pole (north city), although I would say I am comfortable investing in about 90% of the areas around here.         

I am curious to see everyone individual and geographical take on where their market currently stands, and in what direction it is going.

I am in the St. Louis, MO area. I mostly work in a very niche area of CRE but I also work residential to a certain extent (mainly for my own personal buy and hold portfolio). Here is what I have seen in the residential market, and where I see things going:

2011 & 2012 - The Bottom

2013 & 2014 - Slow build up in the latter half of 2012 into 2013 with things getting to a pretty frenzied pace by the middle of 2014.  Pretty significant value gains with many people jumping back into the market.  Hard to tell if it was like 2006, but many seemed to be throwing fundamentals into the wind just to "get yield."  There was also a strong hedge fund buying presence.   

2015 - Market seems like it has been slowly rolling over since late 2014.  There is still low inventory, but buying activity seems to have cooled significantly.  Many properties seem to be hitting the market overpriced, and are now suffering regular price reductions.  The largest hedge fund(s) in the area have put all buying on hold. 

2015 & Beyond - I think we will see lower prices in this market in 2015

What does your market look like?          

I don't finance my properties so that doesn't play a part.  Here is an example of one that I purchased not to long ago. 

Purchased for 20k, and rehabbed for an additional 7k.  Total in the property 27k. 

The property currently rents for $675.  This exceeds the 2% rule ($675/$27000) and is actually a 2.5%.  Check. 

With the 50% rule I would have a 15% cash on cash return (Income $8100 - Expenses $4050 = $4050 NOI)($4050/$27000= 15%)

Now you are probably asking, your calculations don't meet the criteria you specified above regarding the 20%-25% returns with the 4-5 year payback.  In this case the property had a new roof, new HVAC, and a lot of other qualities that lead me to believe it will be lower maintenance over the long term.  I think those qualities will get me to the returns stated above.     

I am curious to see how some of the more seasoned investors feel about levering up their properties as opposed to holding an all cash portfolio.  If you feel comfortable sharing, I would be curious to see what leverage ratio you feel most comfortable with and why. 

This discussion is probably more geared towards the 2% Midwest type crowd, but anyone is welcome.     

My own personal view is that I don't ever count on appreciation.  My main concern is cash flow, right here right now, and everything else is icing on the cake. 

When I first started buying, I had never really heard of the 2% or 50% rule, but honestly working backwards it pretty much validates my investment strategy.  Here is the way that I evaluate deals, and I think I have seen others refer to it as well:

I simply look at how long it takes to recoup 100% my investment, and I look for deals that have non-levered 4-5 year paybacks.  This equates to 20% - 25% cash on cash returns.  I evaluate all expenses on an individual basis.  I look for properties that are in stable neighborhoods although they are usually in C areas.

In my view it is a lot harder to get hurt on a long term horizon if you are able to get all of your money back out of the property in the first 5 years.    

Railroad land has been used in the past, and there are companies in the wireless infrastructure field that focus their energy on finding these deals.  Railroad land has quite a few advantages (federally backed so no zoning regulations), although there are quite a few disadvantages as well.

One of the biggest disadvantages of railroad land that I have experienced (and this is a very general statement) is that the land is usually not near the people.  There are thousands of miles of tracks and switching stations throughout the country, but most of it is rural.  Wireless is all about being where the people are located.       

Tower Point Capital is one of the companies that I bid leases out to for the landlords that I represent, although I have never solidified a deal with them. 

There is a little bit of art and science that goes behind negotiating a lease buyout.  Unlike more traditional real estate transactions the highest price isn't always the best choice due to the terms of each offer and the individual variables that relate to each deal. 

For example, if you are of an older age, and are strictly looking to maximize cash today without regard for future opportunity, then I would steer you towards deal structure A.  If you are younger, and want to monetize your lease, but still retain potential future upside on the deal then I would steer you towards deal structure B.  There are of course hybrid deal structures and other circumstances that make no one deal identical to the other.  The terms in these deals are just as important as the payment.