Am I missing something here?

[anthony91]

Isn't this downswing a good thing all things considered. With the housing market crashing, wouldn't more people become RENTERS instead of buyers? (ie. tenants)

I'm referring to a micro downswing specific to this asset and submarket.  Meaning a decrease in rents, decrease in population, decrease is occupancy, decrease in job growth etc.

Typically, yes, when the housing market is doing bad there will be more renters.

So disregarding cap rates and purchasing at a big enough discount or using a large enough discount will still satisfy my goals or 100/unit cashflow?

[LIGHTBEING]

Yes, all of that is good.  buy at a discount, Equity, $100/unit cashflow rule etc.  I'm trying to impress the importance of understanding your market you are investing in.  $100/unit today could mean $50/unit tomorrow, in a declining market.

[propertymanager]

Anthony,

Yes, you should buy at a big enough discount to ensure that you will receive at least $100 per unit per month in positive cash flow.  Lightbeing is absolutely right that you should consider the market in your local area.  For example, if the biggest employer in town is shutting their doors, then you might expect vacancies to go way up and you profit to go way down.  On a more subtle level, people may slowly be leaving your area which would indicate a bleak outlook in the longer term.  As I frequently say, you need to become an EXPERT in your local area.

The 50% EGI rule is inflating your numbers.  That's why I don't like using it.  You'll see at 50% that the expenses per unit are way too low.  Even Marcus & Millichap is marketing this with a 62% EGI. 

There is no 50% EGI rule that I know of.   The "50% Rule" does not use EGI, it uses gross rents (or gross potential rents, if you prefer that term).   So, when you say that the expenses are way too low, we/re talking apples and oranges.  If you add the vacancies back into the EGI to get gross rents, we're essentially at the same number.  I've never heard of Marcus and Millichap.

Mike   

[LIGHTBEING]

Thanks Mike, good conversations we are having lately 

Right, the 50% rule is on the gross rents, my mistake. 

Marcus and Millichap is one of the nations biggest brokerage firms.  They handle Investment sales, Finance, Reseach and Advisory.  They are the ones marketing this property.

M&M has the Gross potential rents listed at $230k and expenses per unit $2,784k(which is closer to the local average).  It works out to be 62.9% of the Effective Gross Income. 

However if you use the 50% rule on 230k = expenses at 115,000.  That would be $2395/unit.  In our examples, it's even less because we are being conservative on the rents per unit.  You see why they 50% rule doesn't work, it bring the expenses down closer to $2000/unit when they should be closer to $3000/unit or $250/unit/mth.

[anthony91]

Man 100/unit is harder to come by or needs rediculous downpayments. Would 80/unit be ok then I could work to lower expenses to get to 100/unit?

[LIGHTBEING]

What numbers are you looking at?  Is there room to increase rents?  Is there opportunity to lower operating expenses etc ?

This is why it's important to understand the market.

[anthony91]

What numbers are you looking at?  Is there room to increase rents?  Is there opportunity to lower operating expenses etc ?

This is why it's important to understand the market.

I am looking at pro formas so I undershoot the rents and over shoot the expenses.

I figure @80/unit and 50%expenses when I do my preliminary calculations. If I can get it down to 45% expenses, then my cashflow per unit can be moved to 100+/Unit, but there is no telling lawsuits vacancies etc. I would hate to have to bring a partner in for a larger downpayment. I still need to buy at a discount to get the 80/unit, then be a cheap bastard to get the expenses down.

[propertymanager]

Anthony,

If the numbers don't work, then you need to accept that and move on to find a better deal.  Unfortunately, you don't have much control over the expenses and basing your calculations on lower expenses is nothing more than fooling yourself (sorry to be blunt).  Yes, you could get lucky and the expenses would be a little lower, or you could be unlucky and the expenses would be higher.  That's a dangerous game to play.  The same is true of putting down a bigger downpayment.  That doesn't improve the deal.  All the big downpayment does is BUY the cash flow.  The deal is still the same but the cash flow is forced with the downpayment.  That downpayment is still costing you money.  Your opportunity cost of the money is the lost interest you could be getting for it.

When you're first starting, it is hard to be disciplined and wait for a great deal.  However, if you want to be successful, that is exactly what you need to do.  Make every deal a great deal and your business will prosper.  Accept a marginal deal and the result can be quite different.

Good Luck,

Mike

[cornerstonesvs]

Good point Mike,
new investors should take some time to study up on the cost of the capital they are obtaining and how that relates to the overall return on their deals.  Adding leverage may improve your cashflow, but it may not improve your overall return.

when you're starting out you want all these "sweetheart deals" to pencil out, but the fact is sometimes they just don't work out, no matter how creative you get.

There are some pretty creative people and deals on these boards.  For me, my first few deals were safe bets that i held for two years and made a couple of bucks on.  Not much,  but it was more than i started with and it allowed me to get more familiar with the paperwork and the pitfalls of the business.  it also forced me to develop some templates which i've used on other deals.

Good luck,

Craig

[anthony91]

Anthony,

If the numbers don't work, then you need to accept that and move on to find a better deal.  Unfortunately, you don't have much control over the expenses and basing your calculations on lower expenses is nothing more than fooling yourself (sorry to be blunt).  Yes, you could get lucky and the expenses would be a little lower, or you could be unlucky and the expenses would be higher.  That's a dangerous game to play.  The same is true of putting down a bigger downpayment.  That doesn't improve the deal.  All the big downpayment does is BUY the cash flow.  The deal is still the same but the cash flow is forced with the downpayment.  That downpayment is still costing you money.  Your opportunity cost of the money is the lost interest you could be getting for it.

When you're first starting, it is hard to be disciplined and wait for a great deal.  However, if you want to be successful, that is exactly what you need to do.  Make every deal a great deal and your business will prosper.  Accept a marginal deal and the result can be quite different.

Good Luck,

Mike

Thanks for the advice. It is just frustrating because I want to move on a property NOW, but just finding that sweetheart 100/unit deal is taking FOREVER!!!

[ruready]

What if you are keeping these units even after they are paid for?  Wouldn't you take that into consideration on your buying price as when its paid for it will be all profit - expenses.

[propertymanager]

What if you are keeping these units even after they are paid for?  Wouldn't you take that into consideration on your buying price as when its paid for it will be all profit - expenses.

NO!

Mike