On how to take advantage of biggest real estate gold rush in 20 years.

[JokerCrazyBeatz]

Lurking on this thread and having 0% clue whats going on but ive always found real estate such a attractive way to make money and is apart of my plans for success. But untill then *dashes back into the shadows*

 

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[MKHB]

I'm averaging about 14% Cap on these SFR.
Literally the management company makes or break you in this biz.

Kudos on the 1031 idea had it in the back of my head but never took action. Would be pretty neat to wrap it all into a portfolio and let it go.
Right now in my deal pipeline I have a 88,000 sq ft office building in the heart of north florida completely vacant for $2M. Problem however is serious water damage I estimate atleast $1M to fix and reissue any certificates needed. I never dabbled in commercial real estate or office buildings so I have no clue. Broker is telling me on avg lease rate per sq ft is $16 seems to good to be true.

With full service gross leases and load factor of 90 and 10% credit and vacancy your well above a CAP of 20.

Run, don't walk from this one.

Something don't smell right and if that's not enough it's Florida.

 

[MKHB]

Thanks for the info.
What would be the top 10 books to read?

None, real estate is not a spectator sport.

Stay away from "info for sale crowd" when it comes to RE. What works in Ohio or Illinois or Germany last year doesn't work in CA or NYC today. Unless this person has 20 years experience or at least a 50M net worth don't bother, they will be out of business when the recession hits.

The magic is in knowing when not to buy, anybody can buy when everything is going up.

There is tons of free info on the internet from reputable sources, CCIM, NAIOP, NAREIT, REI, MIT and my favorite source... real estate brokers.

Location...don't by in the country, don't buy in middle America (except in 18 or 24 Hour markets),
Keep your investing to in-demand areas coastal markets, CA, NYC, large urban areas.

And despite what you have been told, never buy for cash flow, unless you already have a lot of it.

RE is an appreciation not a dividend play; if you want a dividend buy a REIT they pay a 6-8% yield and you can be out of them with one phone call.

 

[Greg R]

Does the saying; "when everyone is digging for gold, sell shovels" apply here?

 

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[MKHB]

Does the saying; "when everyone is digging for gold, sell shovels" apply here?

Ahhh...we have a winner! You are correct it is more about taking advantage of the gold rush, not necessarily finding the gold itself.

However, the latest crop of up-market gurus and the suckers who listen to them, think ownership
of real estate is the quickest and only way to riches for those with no money or experience.

All they need is the 29.99 a month for the latest "Cash Flow Mastery Seminar/Website/E-book/Personal Coaching special.

If it's such great info and you can make millions doing it why are they selling it so cheap?

 

[Goldman snacks]

Tons of value in this thread, I was talking to a real estate entrepreneur, he mentioned how he was building an apartment building 100+ units and he was going to lease the apartments and then the bank was going to buy the leases and he was still going to own the complex, could you explain how this works, it was going over my head and I'm trying to learn as much as possible as he wants me to help him

 

[VESTED]

Tons of value in this thread, I was talking to a real estate entrepreneur, he mentioned how he was building an apartment building 100+ units and he was going to lease the apartments and then the bank was going to buy the leases and he was still going to own the complex, could you explain how this works, it was going over my head and I'm trying to learn as much as possible as he wants me to help him

There really is a lot to this answer, but I would suggest studying the term Net Operating Income (NOI), Debt Service Coverage Ratio (DSCR) and Loan to Value (LTV),and Equity Financing Vs Debt Financing.

In a nutshell, the bank or lender will do a Pro-forma to estimate what the NOI will be on the property if it is a multifamily unit. This will allow the bank to come up with an estimated value of the property (using different methods such as Cap rate). The bank will also use the debt service coverage ratio to determine the max loan amount. The DSCR is the ratio of NOI to annual debt service. This ratio is important to lenders because it ensures that the property has the necessary cash flow to cover the loan payments. Once all of these are factored the bank will determine a Maximum Loan Analysis based on the NOI, the DSCR, and the LTV requirements. Once a lender calculates the correct net operating income they will then calculate the above mentioned loan to value and debt service coverage ratios. Next, the lender will then take the lesser of the two loan amounts calculated based on the LTV approach and the DSCR approach. The "bank" will usually provide debt financing at around 80% of the maximum loan value.

This leaves the owner to find the other "20%" financing, either through an investor with equity financing, preferred returns, debt payments, etc. This 20% is higher risk, since the bank will be paid first, in addition, this 20% will be required to be used first for the construction process. Once construction is complete and the property has around 90% Occupancy, the value of the property can be re-evaluated based on actual pro-forma numbers, and this will usually allow the owner to obtain 20% equity if the construction was done correctly, and the rents are equal to what was projected. This will allow the owner to convert the construction loan to a commercial loan (using same methods above with ACTUAL numbers) and hopefully he can pay off the "20%" investors, which will allow him to hold the property with a 80% LTV (having 20% equity), and produce cash flow while paying down the commercial loan.

There is A LOT more to this and many different variables to financing, this is just the basic overview. Typically the owner will be required to have at least a net worth equal to the property (or his investors) and be required to put in around 1%-5% of his own money.

Check out the book "Finance for Real Estate Development" from ULI, if you want to dig into the weeds.

 

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[HoneyBadger]

Whats your experience investing in residential RE?

Notice he didn't respond? I have tried in multiple threads to ask for what experience he has on subjects that he offers advice in and have yet to see a response. Let this be a warning to anyone reading this: Take everything with a huge grain of salt from anyone that can't back up what they say.

 

[devine]

Does the saying; "when everyone is digging for gold, sell shovels" apply here?

This needs to be the first sticky quote on TFLF.

@Vigilante what do you think about it?

 

[MKHB]

Tons of value in this thread, I was talking to a real estate entrepreneur, he mentioned how he was building an apartment building 100+ units and he was going to lease the apartments and then the bank was going to buy the leases and he was still going to own the complex, could you explain how this works, it was going over my head and I'm trying to learn as much as possible as he wants me to help him

I have never heard of this type of strategy? It almost like a build-to-suit/master lease hybrid strategy.
Why would a financial institution want the risk of short term obligations (residential leases).
Who owns the dirt, I assume your friend.
Who is financing he construction of the building?? 100 units at 850 sf ave with common areas and site improvements = 15M
Who is managing the property, collecting the rents, paying the note?


Is this a ground lease, maybe the bank is buying the building (leases/cash flow) and your friend or his heirs retain possession and receive ground lease rents.
Is this some sort of Air B N B strategy, is it a LITCH or low income credit swap

Sounds interesting would love to hear more.

 

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[VESTED]

I have never heard of this type of strategy? It almost like a build-to-suit/master lease hybrid strategy.
Why would a financial institution want the risk of short term obligations (residential leases).
Who owns the dirt, I assume your friend.
Who is financing he construction of the building?? 100 units at 850 sf ave with common areas and site improvements = 15M
Who is managing the property, collecting the rents, paying the note?


Is this a ground lease, maybe the bank is buying the building (leases/cash flow) and your friend or his heirs retain possession and receive ground lease rents.
Is this some sort of Air B N B strategy, is it a LITCH or low income credit swap

Sounds interesting would love to hear more.

Sorry,
I misread his post, I thought he was asking how his friend could still own the property while producing cash flow and the bank holds the note. I'm not familiar with a bank buying leases, and if they did, I assume it would be more than a year at a time!

 

[Rez]

And despite what you have been told, never buy for cash flow, unless you already have a lot of it.

I've been investing in real estate for over 10 years now and this is the first time I've heard someone say you shouldn't buy real estate for cash flow. I'm interested in hearing more about why you feel this way, if you'd care to elaborate.

 

[MKHB]

I've been investing in real estate for over 10 years now and this is the first time I've heard someone say you shouldn't buy real estate for cash flow. I'm interested in hearing more about why you feel this way, if you'd care to elaborate.

I buy real estate to play the appreciation game, I think Robert Kawasaki should focus on market crashes and his bugging out (doomsday) strategy.

RE is a liability, it requires time, money, effort, is very liquid and when it does shed cash flow it is taxed above at my effective rate. If my main goal is cash flow real estate is not my first choice and even if it was I would simply buy stock in a REIt and get a 7-9% return and be able to bail out at any given notice.

If cash flow is as agnostic as some claim why is there such a bifurcation in cap rates between say an office building in Beverly Hills and an office building in Toledo Ohio; if both throw off 100k a year in cash flow, why is one worth 2M and one is worth 1M?

In terms of risk; what would be riskier buying 2 office buildings in Toledo and collecting 200K per year or one office building in BH and collecting 100k per year, over a 20 year period and what terminal cap you think would be greater? Or if your not into the hypothetical, do a forensic analysis and go back 20 years and see how this scenario would play out. What property would suffer worse in a downturn, what property would have the greatest potential for NOI growth.

In my mind it's not even close.

 

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[biophase]

Sorry,
I misread his post, I thought he was asking how his friend could still own the property while producing cash flow and the bank holds the note. I'm not familiar with a bank buying leases, and if they did, I assume it would be more than a year at a time!

I read this to mean, don't buy a property just because of its cashflow.

I can easily find $50k houses in small towns with $300-$400/mo cashflow. If I was going for maximum ROI, these would be it. Or, mobile homes probably produce better cashflow ROI. However, I'm not just looking at pure cashflow. I want (in my mind) the best overall investment for ME.

So I purchase 1br condos that are around $100k and cashflow $600/mo, near my home. While I don't get the best return on my money. I know that I can get some appreciation, due to the area. I know the type of renter I will get in this area since my unit commands above average market rents.

Everyone is different. Some people own 50-100 tiny homes in tons of small towns across the country, cashflowing like crazy. But those homes probably have small chances of appreciating. Then I have friends who have break even homes in southern Cali that jump a few hundred thousand dollars in a good market and that's all they wait for.

 

[danoodle]

I read this to mean, don't buy a property just because of its cashflow.

I can easily find $50k houses in small towns with $300-$400/mo cashflow. If I was going for maximum ROI, these would be it. Or, mobile homes probably produce better cashflow ROI. However, I'm not just looking at pure cashflow. I want (in my mind) the best overall investment for ME.

So I purchase 1br condos that are around $100k and cashflow $600/mo, near my home. While I don't get the best return on my money. I know that I can get some appreciation, due to the area. I know the type of renter I will get in this area since my unit commands above average market rents.

Everyone is different. Some people own 50-100 tiny homes in tons of small towns across the country, cashflowing like crazy. But those homes probably have small chances of appreciating. Then I have friends who have break even homes in southern Cali that jump a few hundred thousand dollars in a good market and that's all they wait for.

I appreciate this post because it definitely makes me question my own strategy of purchasing these cheap homes for cash and seeing crazy cashflow but little to no appreciation. I like to get a minimum 20-30% CoC return without even using leverage. I guess my plan is to build up my cashflow to where I can live quite comfortably, then I will most likely move into "higher end" homes that will technically cashflow less, but will retain their value or even appreciate while attracting stable, low-maintenance tenants. For now these cheap-o homes are working for me, but I know I will need to adapt my strategy and/or incorporate others as well. I did just get a contract on my first multifamily building - a 4-plex for 15k that will rent for $450 a unit and needs 20-30k in repairs so I am starting to branch out some.

I do have a question about how you would use property management to your advantage. I have been approached by multiple people to start a property management company and it is a HUGE need in my area. My only qualm is becoming a slave to these people and it seems the work is not worth the effort. Maybe if I have a very good system in place that was mostly hands off, but I would love to hear about how property management could be a good technique as I can just see all the headaches it would involve.

 

[LuckyPup]

Ask me how to take advantage of the coming tsunami of activity in :

Commercial Development
Landlord Leasing
Tenant Rep Leasing
Asset Management
Property Management
Construction Manager
Asset Management
Energy Management
LEED Consulting
Energy Star Modeling
1031s
Reverse 1031'
Sale lease backs
Build to suits
Creative work space
Live work space
Recapitalization

1031's and reverse 1031's: the opportunity?

 

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