patrick.net

I shared this before. I’ll buy a property with thousands of negative cash flow each month as long as I know I can turn it around within 12 months with supside potential in equity. There must be a reason why we buy.

$5k/month of negative cash flow = $60k/year set aside to service the alligator. If we can get it to cash flow neutral in 6 months, that’s down $30k. If we can turn it $60k/year positive cash flow in 2 years, that’s $1M increase in equity. It’s simple math. The risk is so worth it, but it requires work and the foresight. I love how the outsiders call people like myself “stupid” for buying negative cash flow properties.

Built-in equity = you buy a property that’s worth $300k for $200k. That’s $100k built-in equity. How many years or decades would it take for you to get $100k in cash flow. I love built-in equity assets.

Eman says

Built-in equity = you buy a property that’s worth $300k for $200k. That’s $100k built-in equity.

OK, so it only works when you can buy property at a $100K discount... As if that happens in this market..

Eman says

I love how the outsiders call people like myself “stupid” for buying negative cash flow properties.

You left out the getting it to cash flow $60k positive part. You left us to wonder if all we need is to sprinkle some pixie dust.

GNL says

Eman says

I love how the outsiders call people like myself “stupid” for buying negative cash flow properties.

You left out the getting it to cash flow $60k positive part.

fixing and renting for higher amount likely, lots of properties out here borderline condemnation.

Eman says

Built-in equity = you buy a property that’s worth $300k for $200k.

that is why you have to exploit and engage in other practices as a buyer ... you have to find desperate and unsophisticated sellers ...
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FortwayeAsFuckJoeBiden says

GNL says

Eman says

I love how the outsiders call people like myself “stupid” for buying negative cash flow properties.

You left out the getting it to cash flow $60k positive part.

fixing and renting for higher amount likely, lots of properties out here borderline condemnation.

I assume so but, why leave it out? It's not the easy part. Especially when viewing the last rehab he posted.

Why not give a complete finance/math picture of one of his residential deals? I'm not doubting Eman, I'm just saying, why stop at the surface of a deal? It's not like he literally didn't just say "add 1 million in equity" as if it was some kind of magic.

Eman says

Built-in equity = you buy a property that’s worth $300k for $200k. That’s $100k built-in equity. How many years or decades would it take for you to get $100k in cash flow. I love built-in equity assets.

What is the one common thread of all those late night RE investor books/conferences? Find deals below market. Below market deals are definitely out there. I am in the DMV and I would say there are a ton of them...mostly the tear downs. Purchase a 1970 rambler on a good lot for $600K on up to ones I've seen even over $1 million. Then tear it down and put up a house large enough to cover the maximum allowed by local regulations for $1.6 - $2/$3 million. Those are the big boys (in residential anyway). We had a $14,000,000 2 miles from me go up about 5 years ago.

This real estate investor offers a free calculator for deciding whether to invest in real estate. He has a quantitative system which I assume Eman has one also.
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This real estate investor offers a free calculator for deciding whether to invest in real estate. He has a quantitative system which I assume Eman has one also.
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The one we use is called “Deal Analyzer”. It’s similar to the screen shot you shared above. We use a different spreadsheet to analyze for multifamily/apartment buy-and-pray.

As I previously shared, the maximum price we’re willing to pay for flips is 60% ARV, preferably closer to 50% ARV. I know the majority of flippers are willing to pay/buy at 70-80% ARV. Not our cup of tea at those prices.

Plenty of skeptics say “it’s impossible”. Just borrow a line from Henry Ford “If you think you can, or can’t, you’re both right.”

I’m a dreamer so I believe I can. I have big dreams. There were days I felt I was on the verge of achieving the next milestone of my dream. At the same token, there were days I felt completely defeated. The stress is real. Rather than whine and quit, I just put my head down, think things through, and keep pushing ahead. At the end of the day, it’s my destiny and I control it. Don’t have to blame anyone for anything.

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Eman says

Built-in equity = you buy a property that’s worth $300k for $200k.

that is why you have to exploit and engage in other practices as a buyer ... you have to find desperate and unsophisticated sellers ...
,

You don’t have to exploit anyone, or anything. You buy trouble assets that no one wants. They’re called “don’t wanter.” I used to buy assets at discount prices on a regular basis through short sales, REOs and at the courthouse steps. Iwog and ptiemann were the other two on Patnet.

The most recent “don’t wanter” was the flip we closed earlier this month. It was an REO languishing on the market for months at $750k. They kept dropping the price. We finally bought it for $515k and sold it for $1.05M.

GNL says

Eman says

Built-in equity = you buy a property that’s worth $300k for $200k. That’s $100k built-in equity. How many years or decades would it take for you to get $100k in cash flow. I love built-in equity assets.

What is the one common thread of all those late night RE investor books/conferences? Find deals below market. Below market deals are definitely out there. I am in the DMV and I would say there are a ton of them...mostly the tear downs. Purchase a 1970 rambler on a good lot for $600K on up to ones I've seen even over $1 million. Then tear it down and put up a house large enough to cover the maximum allowed by local regulations for $1.6 - $2/$3 million. Those are the big boys (in residential anyway). We had a $14,000,000 2 miles from me go up about 5 years ago.

If you’re truly interested, you could have looked at my previous posts. It’s a lot to type everything again on an iPhone. Here’s the link to one of them. I didn’t bother to look through them all.

https://patrick.net/comment?comment_id=1955329

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Eman says

Built-in equity = you buy a property that’s worth $300k for $200k.

that is why you have to exploit and engage in other practices as a buyer ... you have to find desperate and unsophisticated sellers ...
,

A couple properties I could think of, that were on the market for everyone to buy, were:

https://redf.in/tYUeuC - Bought for $640k. Sold for $1.325M

https://redf.in/QCgM2H - Bought $355k. Sold $700k

You don’t have to exploit anyone or find any unsophisticated sellers. They’re all there for the taking.

This was the most crazy one. Bought $771k. Sold $1.92M.

https://redf.in/OgyrYB

Eman says

This was the most crazy one. Bought $771k. Sold $1.92M.

https://redf.in/OgyrYB

you know how to find deals, that’s really good. i’m looking at redfin which is clearly not the right place. now i’m not looking for some insanely profitable investment, just better than cash. but man i’m clearly looking at wrong places.

Eman says

I’m a dreamer so I believe I can. I have big dreams. There were days I felt I was on the verge of achieving the next milestone of my dream. At the same token, there were days I felt completely defeated. The stress is real. Rather than whine and quit, I just put my head down, think things through, and keep pushing ahead.

Anything worth achieving requires this mindset. IMO

People can achieve amazing things. I love the story of Colonel Sanders. If I remember correctly, he was a serial entrepreneur and failure but never gave up. He eventually found success in his, I believe, 60s.

FortwayeAsFuckJoeBiden says

Eman says

This was the most crazy one. Bought $771k. Sold $1.92M.

https://redf.in/OgyrYB

you know how to find deals, that’s really good. i’m looking at redfin which is clearly not the right place. now i’m not looking for some insanely profitable investment, just better than cash. but man i’m clearly looking at wrong places.

Fort Wayne,

Learn the market. See the potential where others may not see. If you look at certain assets, they’re more valuable as a single family home (SFH) than a duplex, or triplex. Convert it from multi-units to a SFH. Re-layout the whole thing and make it an open floor concept, etc… People love open floor plans.

See if it’s easy to add/gain additional square footage on a hillside property. Everything is there already. Just have to build a retaining and perimeter foundation, if needed, etc….

Given the current interest rate and housing prices, having an ADU is a big plus. A 1/1 can be rented for $2-$2.2k/month. That can help to service $250-$300k of debt.

When you scale up to multifamily aka commercial property, look for underperforming properties. Say $1k/month/unit is worth $100k/unit. If its fair market rent is $2k/month, this means it’s worth $200k/unit when you get the rent to fair market. That’s $100k equity/unit. If the unit is nicely done up, people are likely going to pay $2.2k/month, which makes the unit worth $220k. The increase in value of the unit basically pays for itself and more. I’m keeping it real simple here. Not going to get into the convoluted math.

Just some pointers. Good luck.

Eman says

2.2k/month, which makes the unit worth $220k.

I look at renting my townhome for $2100 and make at least $900/month profit, deduct $400/month for HOA, $125 for property tax, $150 for insurance, $225 for rental management company and repairs . So multiply that $900/months by 12 months and divide by 4%.

That is $270,000 and is a very conservative estimate on the townhome's value.

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Eman, you're a smart fellah. Not sarcastic.

Fort Wayne,

$500k is plenty of money to buy an apartment building in your area IMO. Here are some more numbers, and I’m sharing this based on real life experience.

Say $1k/mo rent = $100k value/unit. When rents are low, expenses tend to be high. The owner likely spends 60-70% of that money on expenses. At 70%, this leaves $300/month/unit or $3.6k/year, or 3.6% cap rate aka 3.6% ROI.

One turnover, spend $25k to rehab the unit to get $2k/mo rent. Say on a 10-unit building, your cap rate just went from 3.6% to 4.8%. $11k/mo in gross rent vs $10k.

Two turnovers = 3.6 cap to 6 cap
Three turnovers = 3.6 cap to 7.2 cap
Four, five, six turnovers, etc… See how fast it scales on such small increase in revenue?

Next, instead of spend $25k on rehab, say you spend $35k to deck out the unit with higher end materials and amenities like dishwasher, A/C, inside laundry, etc. Additional $200/month in rent increases the value of the unit by $40k. Spend $10k to get $40k in equity. That’s 300% ROI.

Merry Christmas.

Say your market is trading/selling at 5 cap rate aka 5% ROI. People will call you names for buying a 3.6 cap. With 3 turnovers, you have increased the value of the building by 44%. What’s the ROI on your $500k + $75k rehab?

Say you get 5 turnovers in 5 years, you decide to refinance, pull out the equity and buy a second building. In a decade, you’ll have both cash flow and so much equity. Your spouse can then tell her boss “if you like your job, you can keep your job.” 2 to 3 decades out when you and your spouse kick the can, your kids will have a nice chunk of tax free money (up to $11M or so)?

Real estate is about control (the asset) and leverage (OPM). Time will do most of the heavy lifting.

Eman says

Real estate is about control (the asset) and leverage (OPM). Time will do most of the heavy lifting.

Yeah so you raise the annual rent at least at the housing aggregate of PCE or CPI which annually is about 6.5% ?

Your real property will appreciate at least about 4% a year over 20 years.

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Eman says

Real estate is about control (the asset) and leverage (OPM). Time will do most of the heavy lifting.

Yeah so you raise the annual rent at least at the housing aggregate of PCE or CPI which annually is about 6.5% ?

Your real property will appreciate at least about 4% a year over 20 years.

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We raise rent 5% annually since they’re way below market. After 5 years of ownership, the average rent on the existing units is $1,205. Didn’t raise rent one year due to the pandemic.

In general, we keep the rent the same, or raise 2.5%, if the tenant renews the lease for another year. We raise 5% if they opt for MTM.

3 natural turnovers so far out of 12 units. The rehabbed units are rented for $1,850. Zillow has FMR of $2.2k/month.

If nothing changes, we should be able to get all our money out of the deal in a couple years through a cash-out refinance. The ROI should be infinity then. If we’re lucky, we’ll get a couple more turnovers between now and then. Then the cash out refinance will be even more lucrative.

Eman says

The ROI should be infinity then

yep, i wish i could borrow money at 5% rate and make at least 15% off of it

residential real estate seems the safest to borrow money as far as leverage

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Eman says

I shared this before. I’ll buy a property with thousands of negative cash flow each month as long as I know I can turn it around within 12 months with supside potential in equity. There must be a reason why we buy.

$5k/month of negative cash flow = $60k/year set aside to service the alligator. If we can get it to cash flow neutral in 6 months, that’s down $30k. If we can turn it $60k/year positive cash flow in 2 years, that’s $1M increase in equity. It’s simple math. The risk is so worth it, but it requires work and the foresight. I love how the outsiders call people like myself “stupid” for buying negative cash flow properties.

I didn’t read everything after this comment so maybe you mentioned it. Tax consequences to your benefit as well. You’re writing off the loss against other gains while getting the equity built up on another property and if you sell in 2 years that’s long term cap gains.

That’s why I’ve never understood short term flips. Unless you get an amazing deal that 30%, if I recall correctly is awful.

Cashflow and all the numbers are key. Don’t forget about the tax man as a reminder. A wrong decision could be a 30% hit on the deal. Depending the value it could be 10’s or 100’s of thousands once you sell. All the other numbers matter in the now, but once a year in April and when you sell is an important factor in the other numbers. I’ve seen people get burned on the back end of deals not thinking of taxes and what looked good turned into a break even situation or sometimes a loss.

Note: typing on the phone if this reads like I’m retarded.