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Real Estate Wealth Generation

SteveO

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I should have known it would be something straightforward like: "They don't matter cause they're made up" :rofl:



And this, I'm guessing is why I've seen you mention in multiple threads that the most important thing is knowing the market.

All things said, I suppose this can be viewed as a good thing. If it were as simple as copy pasting a cap rate into a spreadsheet, going to a bank, then cashing the checks, everyone would be doing it, and there'd be no money to be made.

Thanks @SteveO reps++
There are a lot of "rules of thumb" that have been put forth regarding expenses. The 50% rule declares that the expenses will be around 50% of the income. This is used to help overcome bogus information.

It does not work though. How could it? Property taxes and insurance are about 2.5 times as much in Houston as they are in Phoenix. Turnover in California is less than half of what it is in Az. Rents are more than twice as much in CA as they are in AZ. Where is this correlation? This constant argument drove me away from Bigger Pockets. Some of the key contributors stuck by this rule and put it forth regularly.

If I have a stabilized property in a high rent area with low turnover, my expenses should be less than a low rent property with constant turnover. The ratio would be dramatic. I could have 30% on one and 70% on another.

Knowing your market allows you to come up with your own numbers. My data said that on a stabilized property in Phoenix, I would spend about $3200 per unit per year on expenses. This would NOT include capital expenditures which would need to be calculated separately based on the needs.

Because of market knowledge, I could drive by a building and with the seller setup sheet the rents could be determined. You could/should do rent comps by visiting other apartments in the immediate area. The sales agent will probably provide them but theirs are never accurate.

By making your own pro forma, you can make your own cap rate. This will be much more accurate if done right. It is at this point that you will find the golden 8 cap will not be achieved in most of the country. If it is, you may want to look closer at your data or look to another location. :)
 
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Chitown

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Thanks for your support! Any questions on the books, don't hesitate to shoot me an email or PM...
As for the next one, after about 18 months of work (with a co-author), I plan to finish the draft tomorrow, and will get it to my editor next week. Hopefully release it in May... :)
My pleasure, J!

You're the reason I'm on this forum - I found it, years ago, through the old link on your blog. Also, I can't believe it's been 5 years but I was the timekeeper for you and Marty at the BiggerPockets Conference in Denver, 2012.

I started reading "Flipping", earlier this evening. So far, so good. I've got a feeling the section on finding contractors will be worth the price of the book, alone. I'll definitely reach out with any questions I have. 18 months for the new tome? Congratulations! May can't get here fast enough. Hurry up, already!:smile2:
 

MidwestLandlord

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I highly recommend @JScott 's flipping book.

Also, I would 100% be a buyer of any real estate book @SteveO put out.

The quality of content both put out here in the forum is astonishing.
 
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slamrei

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Very good!

Barrier to entry is a major factor! Keep in mind that lenders are currently making it easy for most people. If they make it harder, the barrier increases for everyone.

How desirable are apartments in your location right now? Are investors clamoring to buy them?

Forget about your job for a moment and think about your overall goal. How much do you need to make in order to be able to live?

If you need 100K per year but can only afford enough rental properties to make you 30K, then a buy and hold might not be the right choice. Make some chunks of cash that will allow you to purchase the properties that will make you the 100K you need.

Thanks for your reply, SteveO.
Yes, barrier to entry is pretty high in my market, especially if you want to find a deal that makes sense. I hear they're tightening the loaning guidelines, so that will make it a bit tougher to get commercial loans. There are investors coming from everywhere to get a piece of the action in my market.

I think the chunk of cash can come in many forms. Selling my existing SFR's are not ideal due to tax implications. A 1031 is risky due to the time requirement, but I'm not opposed to this if I have the proper setup and deal in place. A cash out refi can produce the same chunk of cash if you have significant equity and it's tax free. I'm personally working on HELOC's so the funds can be re-invested in the properties that can get me to my goal when I find one.

I may be a bit naive in my thinking, but I think there's a bit of a safety net with Apartment investing. I don't think we're going to have a bubble like we saw in the last cycle. With the amount of rent increase in the past few years, there should be buildings where rent has not kept up with the increase. You should be able to buy them at the lower NOI value, and increase NOI and value of the building by raising rents alone. I know it's not as simple as that, but I feel that forced appreciation alone can act as a hedge during the downturn if you play this game right. The tough part is finding the deal and knowing your market!
 

slamrei

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This constant argument drove me away from Bigger Pockets. Some of the key contributors stuck by this rule and put it forth regularly.
. There's also a lot of sharks in biggerpockets, so people need to tread carefully there. A lot of poster there also feel they need to be "right" to ensure they keep a good reputation in the eyes of the BP community. I actually learn a lot from there, but you do need to be able to filter out the junk. I found this forum not too long ago, but feel that people here are generally trying to help each other out instead of just selling a dream.
 

slamrei

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And this, I'm guessing is why I've seen you mention in multiple threads that the most important thing is knowing the market.

All things said, I suppose this can be viewed as a good thing. If it were as simple as copy pasting a cap rate into a spreadsheet, going to a bank, then cashing the checks, everyone would be doing it, and there'd be no money to be made.

Thanks @SteveO reps++

I spent the past 3-4 month intensely educating myself about Apartment investing, and I learned that cap rate is very misleading when it comes to buying. But there's also value in know what the market cap rate is in "your area" so that you can properly value your building after it's stabilized. Otherwise it's tough to properly value a building when buying. It just depends on how you use it.
 
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SteveO

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I think the chunk of cash can come in many forms. Selling my existing SFR's are not ideal due to tax implications. A 1031 is risky due to the time requirement, but I'm not opposed to this if I have the proper setup and deal in place. A cash out refi can produce the same chunk of cash if you have significant equity and it's tax free. I'm personally working on HELOC's so the funds can be re-invested in the properties that can get me to my goal when I find one.
I would look into the boot if you sell a property that has been refinanced. The cash out is temporarily tax deferred unless you keep it till you die. I believe that there will even be boot if you exchange a property that has been refinanced.
 

SteveO

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I spent the past 3-4 month intensely educating myself about Apartment investing, and I learned that cap rate is very misleading when it comes to buying. But there's also value in know what the market cap rate is in "your area" so that you can properly value your building after it's stabilized. Otherwise it's tough to properly value a building when buying. It just depends on how you use it.
How do you know that the market cap is correct? Who is tracking the data that states what cap rates are? The agents tell an information gatherer what the cap was on the sale. Of course they want it to sound good so they can entice more sellers.

They do the same thing with vacancy rates. Some agency calls a bunch of apartment buildings and asks the onsite manager how many vacancies they have. If course they are proud, have deals in the works, and perhaps want to sound good. So they may answer 6 vacant when they have 10. The promising leads should count right? But there is no one to verify the data and nobody that really cares. The discrepancies only help the sales and reporting markets...

You are correct that you need to know your market. But you need to know it better than propaganda.
 

SteveO

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With the amount of rent increase in the past few years, there should be buildings where rent has not kept up with the increase.
You may be able to find that. I find that when there are a lot of buyers that the market begins to write in the proforma on the income as if it is fact.

I am not saying that you can't find a deal. They are there. But in this market you will need to be well connected. The agents will be presenting all the best deals to their star buyers that have already built a strong working relationship.
 
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SteveO

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The tough part is finding the deal and knowing your market!
No disagreement here. But there is more to knowing your market than meets the eye.
 

slamrei

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How do you know that the market cap is correct? Who is tracking the data that states what cap rates are? The agents tell an information gatherer what the cap was on the sale. Of course they want it to sound good so they can entice more sellers.

They do the same thing with vacancy rates. Some agency calls a bunch of apartment buildings and asks the onsite manager how many vacancies they have. If course they are proud, have deals in the works, and perhaps want to sound good. So they may answer 6 vacant when they have 10. The promising leads should count right? But there is no one to verify the data and nobody that really cares. The discrepancies only help the sales and reporting markets...

You are correct that you need to know your market. But you need to know it better than propaganda.

You pose some very good questions. I have not thought about it before and just assumed the data were accurate. I see how it could be misleading now. I follow other metrics you mentioned like price per unit and price per sf as well and see how this could paint a more accurate picture.
When you have time, I would love to see you detail how you value your property after it's stabilized.

I understand where we are in the market, especially my market. Even though I like to buy an apartment building, I won't pull the trigger unless there's a deal. If I can't find one, so be it. I'll just wait and sit out until the opportunity presents itself.

Thanks for sharing your knowledge and experience here with us.
I'll definitely buy your book if you decide to coauthor it.
 
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Envision

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Yes.... not buying right now. I liquidated all of the apartment buildings.

The problem with this strategy is that taxes must be paid if there is no 1031 exchange. I did exchange some into a commercial strip center just before they really popped in value. The rest were cashed out and taxes paid. I did purchase the golf course as well but would not wish that kind of work on anyone. :)

The current plan is to just hang on and collect cashflow until the apartment buyers go away.


Where I live fourplexes have gone from $300k - $450k in about a year. The duplex I bought in May of 2015 for $157k could now sell for $230k

There are developments on every corner of the city and people are buying 3,4,5 caps that I dont understand how they would ever cash flow.

Im glad you said just collect cash flow and wait. Because Ive been having this dilemma of if i should wait or just jump in anyway and ive been siding with just waiting it out, building my business and saving cash for when it comes down.e
 

SteveO

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When you have time, I would love to see you detail how you value your property after it's stabilized.
The criteria is simple and not scientific. From the first post:

My Criteria:

  • Past price or cost per unit
  • Current price
  • Change over time
  • Direction of rents
  • Job growth
  • Building permits
  • Number of square feet or units built over time
  • Rent growth
  • Rents compared to house payments
  • Vacancy rates and changes in vacancy.
I will expand on these as time is available. But as food for thought, why would you buy at 100K per apartment unit when 8 years ago they were at 20K? There is a real answer for this.

Always buy in a decent location. I like mid-century apartments in GREAT locations. Using market knowledge, I would figure out the real income and expenses. Determining this is critical and will take a lot of due diligence in the early stages. Over time, I was able to take a quick glance at a building and using the BOE (back of the envelope method) and know what the income and expenses would be.

The agents and I always talked cost per unit. I was pretty dismissive of their stated cap rates and believe that other seasoned investors were as well. I was up on the anticipated sale amount and tracked every sale in the city.

I have already given a couple of real examples but will give a hypothetical as well. If I found a 20 unit deal at 40K per unit and it looked as if it would sell at 85K per unit, my evaluation would be as follows:

Purchase Price 500K
Cost of rehab 20K per unit or 400K
Holding costs 65K
Cost of sale 85K

Total cost 1.05M
Sale 1.7M

650K profit calculated.

Projected hold time is 1 to 2 years.

A little slim but doable.

There is more than one way to do a deal like this:
  • Put 1.05M in cash into the deal
  • Borrow from a bank
  • Find partners or investors
  • Hard money loan
Most people don't have this kind of cash.

Most banks are not going to make these kinds of loans. They have guidelines and restrictions. I had one that would make a loan like this but they had to show it penciling out differently. They would not give much of an LTV either. Certainly not based on projections.

Investors are a real possibility. It is a tough road though. Investors are difficult to sell. They will want a cap rate and will want to be involved in the due diligence. After all, their money is at stake, not yours.

Hard money lenders could work as well. I have found them to do as much as 65% of the projected value at a cost of about 12% per year. Depending on the deal, they are not likely to allow you to have nothing to secure the deal. They may let you in for nothing depending on your experience and the strength of the deal.

Don't forget that you will have an additional cost of as much as $260K to the hard money lender. So time is of the essence.

The carrying costs are based on the fact that you will always have some vacant units while rehabbing. The faster that you can get the rehabs done and units leased up at the projected rate, the sooner you can sell. This will help reduce the carrying costs.

If you have done your job right and the market is improving, there will be plenty of buyers. If you made this purchase at the height of the market and buyers are starting to leave.... Then there is a problem. Timing is critical.

I rushed through this post. Will clean any mistakes if they show up.
 

slamrei

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The criteria is simple and not scientific. From the first post:



Always buy in a decent location. I like mid-century apartments in GREAT locations. Using market knowledge, I would figure out the real income and expenses. Determining this is critical and will take a lot of due diligence in the early stages. Over time, I was able to take a quick glance at a building and using the BOE (back of the envelope method) and know what the income and expenses would be.

The agents and I always talked cost per unit. I was pretty dismissive of their stated cap rates and believe that other seasoned investors were as well. I was up on the anticipated sale amount and tracked every sale in the city.

I have already given a couple of real examples but will give a hypothetical as well. If I found a 20 unit deal at 40K per unit and it looked as if it would sell at 85K per unit, my evaluation would be as follows:

Purchase Price 500K
Cost of rehab 20K per unit or 400K
Holding costs 65K
Cost of sale 85K

Total cost 1.05M
Sale 1.7M

650K profit calculated.

Projected hold time is 1 to 2 years.

A little slim but doable.

There is more than one way to do a deal like this:
  • Put 1.05M in cash into the deal
  • Borrow from a bank
  • Find partners or investors
  • Hard money loan
Most people don't have this kind of cash.

Most banks are not going to make these kinds of loans. They have guidelines and restrictions. I had one that would make a loan like this but they had to show it penciling out differently. They would not give much of an LTV either. Certainly not based on projections.

Investors are a real possibility. It is a tough road though. Investors are difficult to sell. They will want a cap rate and will want to be involved in the due diligence. After all, their money is at stake, not yours.

Hard money lenders could work as well. I have found them to do as much as 65% of the projected value at a cost of about 12% per year. Depending on the deal, they are not likely to allow you to have nothing to secure the deal. They may let you in for nothing depending on your experience and the strength of the deal.

Don't forget that you will have an additional cost of as much as $260K to the hard money lender. So time is of the essence.

The carrying costs are based on the fact that you will always have some vacant units while rehabbing. The faster that you can get the rehabs done and units leased up at the projected rate, the sooner you can sell. This will help reduce the carrying costs.

If you have done your job right and the market is improving, there will be plenty of buyers. If you made this purchase at the height of the market and buyers are starting to leave.... Then there is a problem. Timing is critical.

I rushed through this post. Will clean any mistakes if they show up.
Thanks SteveO. Really appreciate this. I repped you with whatever little I had. :)
The criteria is simple and not scientific. From the first post:



Always buy in a decent location. I like mid-century apartments in GREAT locations. Using market knowledge, I would figure out the real income and expenses. Determining this is critical and will take a lot of due diligence in the early stages. Over time, I was able to take a quick glance at a building and using the BOE (back of the envelope method) and know what the income and expenses would be.

The agents and I always talked cost per unit. I was pretty dismissive of their stated cap rates and believe that other seasoned investors were as well. I was up on the anticipated sale amount and tracked every sale in the city.

I have already given a couple of real examples but will give a hypothetical as well. If I found a 20 unit deal at 40K per unit and it looked as if it would sell at 85K per unit, my evaluation would be as follows:

Purchase Price 500K
Cost of rehab 20K per unit or 400K
Holding costs 65K
Cost of sale 85K

Total cost 1.05M
Sale 1.7M

650K profit calculated.

Projected hold time is 1 to 2 years.

A little slim but doable.

There is more than one way to do a deal like this:
  • Put 1.05M in cash into the deal
  • Borrow from a bank
  • Find partners or investors
  • Hard money loan
Most people don't have this kind of cash.

Most banks are not going to make these kinds of loans. They have guidelines and restrictions. I had one that would make a loan like this but they had to show it penciling out differently. They would not give much of an LTV either. Certainly not based on projections.

Investors are a real possibility. It is a tough road though. Investors are difficult to sell. They will want a cap rate and will want to be involved in the due diligence. After all, their money is at stake, not yours.

Hard money lenders could work as well. I have found them to do as much as 65% of the projected value at a cost of about 12% per year. Depending on the deal, they are not likely to allow you to have nothing to secure the deal. They may let you in for nothing depending on your experience and the strength of the deal.

Don't forget that you will have an additional cost of as much as $260K to the hard money lender. So time is of the essence.

The carrying costs are based on the fact that you will always have some vacant units while rehabbing. The faster that you can get the rehabs done and units leased up at the projected rate, the sooner you can sell. This will help reduce the carrying costs.

If you have done your job right and the market is improving, there will be plenty of buyers. If you made this purchase at the height of the market and buyers are starting to leave.... Then there is a problem. Timing is critical.

I rushed through this post. Will clean any mistakes if they show up.
Thanks for taking the time outlining the steps. I know you're really busy with the golf course. Really appreciate this.
 
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