Optimism and Positive Thinking

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<p>graphrix,</p>

<p>Without knowing how much money you have for down payment, it's hard to know what you could buy to generate positive cash flow as some you can and some you can not. It is very difficult to buy investment property with good cash flow now; I think because of fierce competition.</p>

<p>I like to invest in good property, meaning good location with good potential upside growth. Then I will have to put enough down payment to generate positive cash flow. Very boring thinking here. Future will tell if I make a good bet. </p>

<p>What can I do now to generate positive cash flow?. I probably put my money in either mutual funds or CDs. And wait for the time when I am able to invest in investment properties.</p>

<p>Back to what I was saying before when Is the right time to buy: Ready, willing, and able. Sounds like you are not able to.</p>

<p>Now, if it's a house to live in, I have a different tune. </p>
 
<p>NIR - I am ready, willing and able to buy a property for an investment income but like I said the cap rates even with a full cash payment make no sense. Not saying I have that much cash but even with 20-30% down it makes even less sense. I don't do this but even if you factor in a 6% rent increase it would take anywhere from 8-10 years before you start seeing a real positive cashflow. I do not see fierce competition and no offence I have an agent who knows this market very well and he even said the only people buying at these prices are fools. But there are not that many transactions in this market either. He said it is dead right now and too many were buying on appreciation and with rental units you cannot do that you need the cash. He is a good friend of the family and is waiting for the desperation to set in. Big properties with more than 8 units are selling ok but not the 4 units and the much larger buildings are selling like hot cakes. I can't deal with more than 5 and 4 unit financing is much better since it is not commercial. </p>

<p>Thanks for your honesty. At least we can see eye to eye on one part of the market. </p>
 
<p>graphrix,</p>

<p>I am in total agreement with you and your agent. </p>

<p>Personally, I do not like the 4-plexes because they are old and approaching their useful life (built 30+ years or so ago), and I do not see discount for aging buildings. The price does not make sense at all.</p>

<p>I do not like apartment building eithers. Our government is so unkind to landlords. </p>

<p>Trends are in your favor as there are much talks of rent increases and price decreases.; therefore, you may get your investment addition soon. Good luck to you.</p>

<p>I am a big fan of TIC when it comes to commercial/income producing properties. Just like residential, TIC builds commercial buildings for a wide range of prices so anyone can be a commecial property owner. Since TIC plans well, I see less risk with my investment. I like passive income (less work for me). You may have different thought.</p>

<p>I like to buy when no one buys. Example in 2004, TIC was having a hard time selling brand new commercial properties (100% occupancy guaranteed for 10 years). We bought with only 25% down and our cap rate was 4%. You may say not good, however, these property has risen in value by at least 80% already. It was just pure luck here.</p>

<p>When it comes to cost of borrow, we naturally go for the lowest. I leverage my personal residence to fund for my investment property to lower my cost of borrowing. Very boring here.</p>
 
<p>reason,</p>

<p>I will play nice since this is an excellent question. GSI is gross scheduled income. For example if you are looking at a 4-unit building and each unit rents for $1000 a month that would mean $4000 a month or $48,000 a year which would be your GSI.</p>

<p>GRM is the gross rent multiplier. For example if the sale price is $500,000 and the GSI is $48,000 you would divide them which would equal 10.42%. Personally I do not use this number. However you can determine the gross value of the property by taking the GRM 10.42 X the GSI $48,000 which would on a gross level equal a market value of $500,126. </p>

<p>However it is the cap rate that is most important. My conservative way of calculating the cap rate is to take the GSI $48,000 -45% for operating expenses and vacancies = $26,400 divided by the $500,000 price which would equal a cap rate of 5.3%. Going back to the GRM or with the cap rate of 5.3 which would be your Net Rent Multiplier or NRM the building now has a net value of $254,400. This doesn't involve a mortgage so please check out <a href="http://www.johntreed.com/positive.html">http://www.johntreed.com/positive.html</a> to learn more.</p>

<p>A very important thing to consider are those rates determined by the actual rents or by current market rents? No one wants to get stuck with a building that just signed four new one year leases at $800 a month when the agent said the current market rents are $1000. All that math above is thrown out the window. Be very careful many agents do not understand this and buyers get screwed because you have to honor the lease. Not only that but even if they are month to month the agent will use current market rents and not the actual rents. Trust me they will state a higher number than the actual. How much would it cost for a unit to be vacant for six months because the agent said it would rent for $1000 but could have rented for $800 the entire time? $800 X 12 = $9600 or $1000 X 6 = $6000. Ok now that I have overwhelmed myself it is way past my bedtime.</p>

<p>No offence to nirvinerealtor as I know that if she said it would rent for X it would actually be X or she would get someone to rent it for X. </p>
 
Oh and I know you believe in appreciation but when it comes to an investment property you cannot even consider it. IT IS ABOUT THE CASH FLOW. The point is you do not want to subsidize a renter you want the renter to subsidize your mortgage on your primary residence not just the investment property.
 
<p>graphrix,</p>

<p>While I agree with you about THE CASH FLOW factor for investment property. </p>

<p>What is your take on duplex and triplex? These type of homes are somewhere in-between residential and/or residential-income.</p>

<p>Also, your -45% does not apply to brand new buildings where still under builder's 10-yr warranty. Many are triple net.</p>

<p>Reason,</p>

<p>When buying investment property, if you are not a pro yet, please find a broker who is a "sharp shooter" in the field. Like graphrix said, you will only look at numbers. The "sharp shooter" broker will also provide future projection and income analysis for you. This broker has to be honest and trustworthy too. Good luck.</p>
 
<p>graphrix,</p>

<p>Wow! Thank you so much for the information! Umm, in addition to the website. Are there publications/books that one can read more on this subject?</p>

<p>So the CAP rate takes into consideration the operating expense & vacancies? Am I reading that correctly? In your example, regarding the CAP rate of 5.3% you had derived the net value of $254,400. How was this calculated, again? I am kind of slow with numbers.</p>

<p>You also mentioned the "rent amount" that RE agents might or will inflate. Is there a way to know the actual rent vs. market rent quoted by RE agents? </p>
 
<p>As a person having a few rental apartments (16), it is easier to buy in bulk. Buying dual/tri/quad is difficult because you need to put as a minimum of 30% to as high as 50% down. That folks, is BIG money. To make my two 8 unit systems work well, I had to put down nearly 40%. The good news is that the units in that area are slowly being bought up and there is a decent appreciation rate going on as well as the rents are going up decently too (but you're talking pennies on the dollar at that point).</p>

<p>You do need a sharp shooter, they will most definitely help you find the right property, BUT you also need to be able to have them provide the data for their decision. That can be difficult sometimes. Anyways good luck</p>

<p>-bix</p>
 
<p>graprhix/nirvinerealtor:</p>

<p>For educational purpose, here's an example on a rental property:</p>

<p>Price = 1.5 million</p>

<p>GSI = $71,100 CAP = 3.07% GRM = 21.1 Net Inc. = $45,990</p>

<p>From the above-mentioned number. How would a potential buyer determine if this is a good buy or not? Taking into account that the RE agent/broker is honest and provided the "actual" rent. </p>

<p>Thank you in advance for your time and advise. </p>

<p> </p>
 
reason,





Consider what the CAP rate is telling you about the assumptions of buyers in this market. You can buy this property and receive a 3.07% return on your money, or you can put it in the bank and receive a 5% return on your money. Obviously, real estate carries more risk than a savings account, so the property must appreciate strongly to compensate for the risk and lack of cash flow. If you believe in strong appreciation, this is a good deal. If you don't see strong appreciation, this is a very, very bad deal.
 
<p>reason,</p>

<p>What type is this property? </p>

<p>Good buy or not? What is the future income growth? A good property is more likely a good buy.</p>

<p>I think you might have to give us the specific address so we can disect it for you.</p>
 
<p>nirvine</p>

<p>It was a random pick. I remember the prop. was in GG. You'd mentioned "what is the future income growth?" How do we go about figuring that?</p>
 
<p>Reason, </p>

<p> good numbers, but they are a wee bit low. You can play with the comps in the area some and some money that you put down on the loan, but really, the first order cut is almost half of what you'd want it to be. it would be a mightly fine line, i'd go in and offer a lower bid price (min 5-7% lower). Of course have your ducks in a row to make the buyer see as little pain as possible....</p>

<p>As for possible growth, just look at the rents in the area, see if you can do a time relation and or extrapolation. I bought in Costa Mesa because its slightly better, but it was nothing like my little triplex near Crystal Cove!</p>

<p>-bix</p>
 
<p>reason - I will discuss and run the numbers later tonight. For now I have some answers for some of the posters but I promise I will be back.</p>

<p>NIR - You said: <em>"What is your take on duplex and triplex? These type of homes are somewhere in-between residential and/or residential-income."</em> When I speak of rental properties I am referring to residential units like a duplex and the like. I don't view SFR's or condos as a rental unit to purchase. If you have lived in it and your loan balance is low or gone keeping the property as rental can make sense. Personally I prefer four units and my rental property was originally a four unit but we built an additional unit since the lot was big enough. Lately most duplexes have been way over priced when you break it down on a per unit basis. I also try to avoid buildings with 1 bedroom units and love to find buildings with 3 bedroom units. </p>

<p>You said: <em>"Also, your -45% does not apply to brand new buildings where still under builder's 10-yr warranty. Many are triple net." </em>You must be talking about commercial here and that is a whole other story. I do not have experience in commercial properties. I will say that I am concerned with the amount of for lease signs in the airport area of Irvine and Tustin. Especially when I have seen a sign twirler offering the first month free the last three days on Red Hill. </p>

<p>You also said: <em>"What is the future income growth?"</em> I do not recommend trying to figure out future income growth and that is why I am adament about actual rents vs. current rents. There are way too many variables that can happen and a buying decision based on this or future appreciation is not a good idea at all.</p>

<p>Bix - I agree Costa Mesa is great . I haven't seen any bulk deals lately but I haven't been watching the rental prop market that much either. The last one I saw fell apart and for whatever reason two never sold. Of course the real cap rate was 1.8% so maybe that was why.</p>

<p> </p>
 
<p>reason,</p>

<p>How you figure future income growth? This is where the sharp shooter brokers come in. After you select your property, a commercial appraiser comes in and does his job. This appraiser will provide a comprehensive evaluation of current and future income for the property (land use). The bank will study this report carefully before they lend you the ~50-75% LTV.</p>

<p>I will give you a couple of examples. ~8 years ago, the properties in the area of Sand Canyon &5 were less than $100/sq. ft.. The general plan showed a big population growth in the future. In today market, it runs upward $500 - $700/sq. ft. The area is fairly central and next to the Y.</p>

<p>Property with long term lease about to expire, will see income growth in the near future.</p>

<p>You have seen what real estate did in Little Saigon. Someone projected a huge demographic change and made billions.</p>

<p>I think properties in the Irvine Spectrum area has good potential income growth as more new housing developments and new businesses are coming in. Properties are running about $500/sq. ft. with a current rent rate of $3/sq. ft. CAP rate is 5%.</p>

<p>Investing in real estate is very risky; however, can be very rewarding. Many people I know made enough money in real estate investment to retire even in their 30's.</p>
 
<p>Ok numbers running time. </p>

<p>The estimated cap rate the agent posted is on the high side because they factored 35% vs. what I use 45%. If you use my 45% the cap rate is 2.61% making the net rent $39,105. Or a net rent multiple of 38.36 which you can look at as to how many years it would take to get back the $1.5mil. Even I will say rents will go up in that time but a cap rate at 2.61% it be a while to catch up with inflation which is around 3% in OC. And I would also say that the value will appreciate in that time but again it will take a while with that low of a cap rate.</p>

<p>To break even you would have to put at least a million down. Depending on the interest rate a $500k mortgage would have a payment around what the monthly net is. </p>

<p>The way I look at it is if I put $1.5mil in the bank at 5% in ten years I'd have $2.4mil. If I bought that place in ten years I would have had to raise the rents 5% a year so in ten years I would have netted $530k and the property would have to appreciate to $1.87mil to match the $2.4mil. Can you raise rents 5% a year and will it appreciate to $1.87mil? Maybe it will appreciate more and you won't have to raise the rents as much. Maybe both could be higher but that is a lot of stress and work when you could sleep for ten years and know that money will be in the bank.</p>

<p>If you put 30% down the gross rent wouldn't even cover the mortgage having to come up with about $15k a year out of your own pocket. Add the $16k in property taxes you would have to come up with $31k just to keep the place. </p>

<p>There will be better deals out there in the next few years than that one.</p>

<p> </p>
 
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