This reader is a good example that flattery will get you everywhere.
I have several questions about little things, that never seem to be covered in books or blogs, but are important, as I have no mentor (besides you). No one I know invests in real-estate except for an old college classmate I noticed under comments for the League fiasco.(That cannot be good) These are really based on your experience as a manager.
My Questions are as follows:
1. I found your cap rate calculator under both landlord rescue and million dollar journey. You had indicated it wasn’t functioning correctly. Has it been corrected now online? If so can you email me the updated version? Thanks! It is very useful.
The cap rate calculator is not broken, but the makers did not include the mortgage paydown into the calculation. I didn’t create a new version, I had to leave something for readers to do.
2. Can other factors be added to it (I can’t do spreadsheets but a friend can) and is it copyrighted where I should not change it?
Add whatever you like to the spreadsheet and give it to as many people as you can. Me and another gentleman did the work on it, for the purpose of sharing it with investors. My only suggestion would be to avoid any dancing ladies on the spreadsheet…they’re distracting.
3. Is the old rule I was taught about 25% down, 15 year mortgage, and a 10% return still realistic now or in the future?
No. Certainly not in the primary markets.
4. Is there a average cap rate or return that the professionals or “old guys” you speak of tend to use. I do believe properties are over valued, but deals can be found in all conditions, so I am looking (BC)
Your cap rate should be as high as possible but in all cases it should be higher than your mortgage rate. Otherwise you are losing money. Do not be on the wrong side of compound interest.
5. Everyone speaks of cash flow positive properties, but what is a ball park percentage a person looks for as positive or as return on investment It seems everyone invests for mortgage coverage only, but as a former business owner, I agree with you that $100-$300/mo of positive cash flow is a bit silly for a down payment of $250-$500,000 dollars. I took a salary while paying down a business that increased in value.
Yeah, well there’s no money in rent these days I’m afraid. If you use the income approach you’ll lose every time to people hoping for capital appreciation. The specuvestors have been profiting for so long, they’re all that are left in the market.
6. I take it that the cap rate is the best evaluation of properties, since you never discuss market approach, cost approach, or income approach.
I know it’s the primary measure used by institutional investors, so I’ll throw my hat in with them. Homes are generally not investment grade.
7. Is there a rule of thumb acceptable to you for quickly evaluating properties prior to a cap rate analysis – I have read of the percentage of operating expenses being 35-45% of gross operating income, gross income multiplier, net income multiplier, and REIN’s (I Know!) 10% solution which seems to be a form of GIM. It doesn’t work anyhow, as no building that met their 10% criteria has ever cash flowed for me.
In this market I would say that I would look for strategic advantages in property as you’re unlikely to find a property that cash flows well. The problem is that you’ll generally have to work for that extra money. No one’s giving it away. If you have some kind of professional expertise try and leverage that to your advantage. Personally I would consider it a shame to buy a property that I just collected the rent on and waited to pay off, I’d want a little extra something something.
I don’t actually hate REIN any more than all the other woo woo bullshit positive thinkers. I have positive thoughts when I’m surrounded by positive cash flow not Amway salesmen. This is the result of magical thinking.
7. I know the vacancy rate and maintenance is covered in expenses but have read that a 3 month contingency fund is a good idea or a percentage of value, above the building up from expenses. Opinion?
A decently sized contingency fund is definitely a laudable goal. You never know when misfortune will fall and you should be prepared. You don’t want to lose your property because you have a deadbeat tenant. We are in the housing services business and like all other businesses the key to long term success is survival. Every business goes through tough times and you need to have the determination and preparation to make it over the hurdle and move forward.
Your Blog and Pieces under Million Dollar Journey are excellent. I have likely learned more from them than any other source. Your recommendation of Douglas Grey and John T. Reed were excellent. Douglas Grey’s “Making Money in Real Estate” is a difficult (as in boring but to the point) read but is THOROUGH. It and you have answered all my questions about investing except the above, which is experience oriented. John T Reed doesn’t pull punches and his “bad boy list” is an eye opener. I will be reading Douglas Grey’s “Canadian Land Lord Guide” for interest, but you and ROM’s BC have been a great source for management information thus far. Thanks in advance for your answers and I do realize they can only be guidelines/opinions. I prefer my name and email address not be used if you find any of these questions useful for a post. As you say, the investing is quite straight forward, but these little points could make a huge difference.
One additional thing I would add is something I have learned watching all kinds of investors for quite a while. You must like the properties you buy, some people are great managers and others are terrible managers and some are very astute buyers and sellers. In stocks there are some dividend players and people who make a fortune picking junior miners. Those are not the same types of investors. You must love the properties you own so much that you will gladly shovel the driveway when it’s -40 or you will gladly peruse the 75th page of the commercial lease your lawyer gave you to get your tenant to sign.