I did this very successfully for 2 years on a 4 plex I had in Alaska…GREAT family babysat it for that time and I cried when they left (and sold immediately)… it was enough for them to watch it and for me to visit every couple of months for the thorough go through……

Alaska as the long term threadies know, was my real estate training exercise from hell…. namely the lure of 30% yield on paper … aaaah, the newbie errors people make… sigh, so glad hopefully some people have gained from those days…. NEVER BUY COLD WET SNOW etc etc…

This ploy worked brilliantly for me – and back then, real estate was a hobby and a passion but supplemented by my real job so yield wasn't the big play ( THANK GOD) – in Alaska I would just be happy they were still standing another year.

I must say every storm I am through in Atlanta just makes me pray the same for my properties here…. GOD this climate over this neck of the woods is DIRE for longevity ……the GUSHING water and almost horizontal rain coupled with that wind……

Tenant issues aside……for those of you in Atlanta, please do not underestimate the severity of these storms…… coupled with humidity… nothing better than water + humidity.   Actually get an HVAC specialist who has done roofing.

Nah, i wasn't really serious, just saw an article about how Wells Fargo was going to try and get into rentals, lol.  They are coming up with new ways to better handle there inventory problems.  Have to get creative after you just dump so many properties that where bundled and sold off,  gov can't save the banks forever.  The politics is what really caused this whole problem, i don't think to many Aussies understand that aspect.

I'm surprised more hedge fund types didn't jump on this quicker, but it's easier cost wise to bundle this time around i guess.

Working with a hedge fund would be to much headache.  I would do it on a consulting basis and still do my own thing.

   

I am writing this post because of a conversation I had with 2 of the forum members recently as well as a larger Canadian group I met with last week.  Grab a cup of coffee and I am looking forward to hearing everyone elses stories.

With the surge of foreign dollars being invested in US housing markets, I have noticed a big discrepency in pro formas versus realities of ROI's.  Sadly, I see some on properties that I sell as well.  Being a commercial guy, I tend to put more "what if" expenses in my pro formas then most residential agents do to calculate an ROI.  First off, it is hard to derive that number on a 2 year history.  The market has gone 180 degrees in that time.  Everything is almost entirely done on a pro forma basis these days, which is your "expected" "estimated" ROI.

I've explained to many investors who I speak to that to me, a higher ROI or Cap Rate mean higher risk.  Lower cap rates mean lower risk.  Well, at least that's my theory.. So, are you an investor who is looking for big cash flow or big ROI?  Chances are you are buying into a very risky area where renter performance history has been sub-par.  Even good property management can only mitigate this a certain amount.  But the properties as a result of being in inferior areas are cheap.. Rental rates are higher for whatever reason..  But can incomes sustain rental rate growth?  In some areas, only Section 8 assistance can come close to pro forma rental rates. 

In my pro formas today, I calculate lower ROI's then my competitors on similar properties.  Do I lose business because of this?  Maybe.  That's fine by me.  I've built my business on referral and repeat business.  It's overwhelmingly stressful to continue to try to find new clients to sell to.  It's why I prefer loyal clients and their referrals   So that business decision is easy for me. 

It is laughable to think that you can get a 20% ROI in areas like Detroit.. Atlanta… Lehigh Acres…  Kansas City… etc…  Maybe on a pro forma but these areas are very high risk with non-violent crime happening every second of the day, ie.. home component / equipment theft.  Some say that investing in the bigger MSA areas (Metropolitan Statistical Areas) are better.  Well there are over 350 MSA areas in 51 states here.  Then there are over 400 MICROpolitan Statistical Areas in the U.S.  So where to invest where your pro forma is close to what a realistic return is? 

FYI, Lehigh Acres duplexes are advertised at 16-18% ROI by many agents.  To me, my pro forma is a 12% and at best 12.5%.  As being one of the pioneers of the REO duplex program in Lehigh Acres over 2 years ago, pro formas have gone all over the map because of price increases.  But last years duplex buyers where my pro forma stated 13.5% based on those prices just showed an ACTUAL ROI of 9% on average.  Too many reasons to explain but this is what the reality was.  I still have to say, 9% is not a bad investment!  Double digit returns look sexy on paper for sure, but is it real?  Unfortunately, that is what people rely on these days.

I'd like to see how homes in Atlanta and Detroit fared.  I had a Canadian investor group in last week.  They graciously let me look at their Detroit portfolio where they showed me their brokers pro forma of 24%.  They told me they would be happy with half of that.  They knew going in that they would never see 24% but believed 12% was possible.  Out of 17 homes they bought between them, the highest ACTUAL ROI was 3.7%.  Their homes were RIDDLED with non-payment, vandalism, theft, and tons and tons of maintenance calls.  I want to say it's the "unknown" factor when buying in warzones or those areas that have warzone traits.  But is it really "unknown", or is it greed of higher returns?  To me, investors simply want a return and they trust agents to get them good deals.  I believe most investors buying a 13% pro forma would be just as happy with a solid 8% Cap.  At least those I speak to are down with that.

Most home had to be re-rented several times per year, resulting in repeat management tenant placement fees.  And no…No property managers will waive that.  It's kinda their problem but not really. 

So, not to scare investors, but again, it's laughable to think you can buy 20+% ROI's on properties that can actually sustain that.  Give me a break.  The most accurate pro forma vs. reality comparisons I am seeing is in the bigger metro markets.  NY Metro….Los Angeles Metro…  But if you are looking for sub $100k properties, you are going to have a hard time getting close to pro forma.  THIS IS MY HUMBLE OPINION BASED ON WHAT I SEE PERSONALLY.  GOOD ROI's are still achievable.. But 15-20% would automatically raise a red flag to me. 

There are plenty of foreign investors buying $500k properties, getting a 4% return.  Some buying multi-family for $500k getting 8% returns. They buy in the bigger metro markets because of upside and of what is going on in the economy right now.  Who buys upside?  Isn't speculation one of the issues that got the US in trouble?  Yes, but it's very different these days for many reasons.  These smaller properties with promises of unbelieveable returns are very very tough to actually achieve your goals on.  I am reluctant these days offering anything higher then 10%.  I try to find ways to bring that down a little.  Maybe higher reservers, more vacancy, etc.  Remember, over-promise and under-deliver!!  Oh wait…I said that wrong

My 2 cents. 

Alex, thats why I contend that those that have bought property with short term Vendor financing say 3 to 5 years.. and where told as soon as things get better they can refi… This is just not the case and is ABSOLUTLY FALSE… These 50k and sub loans have never been easy to get Unless they are owner occ. Or maybe second homes… NOT investment properties and certainly not Foriegners. So my advice to those that have bought property this way is to either start paying your mortgage off now with higher payments I am sure they do not have pre pay penalties… and or be prepared to pay the balloon in cash.. DO NOT BUY A VENDOR FINANCE on the hopes and representations from any marketing RE salesmen etc that is telling you that lending will get better in a few years just not the case JLH

Ha – we do need to meet…. I remember being out one night in zip 89030 in Vegas at 44 degrees Celsius sitting in my now defunct little blow up pool looking the stars and thinking very, very very hard "what day of the week is this"…. it was the most wonderful, wonderful feeling to not know….

If anyone reads this and works in the ROFL 9-5 job that is 6:30am through until 3:30 am and where the greatest exercise you get is going for more coffee or a Rotary lunch or Chamber meal……..and Saturdays is just another day in the office with Sundays just a GREAT day to do some catch up office work without your staff hassling you…. THIS IS PURE BLISS.

I was probably more likely to die of a heart attack and stress slaving for others – I once worked out as an Exec. Director I made precisely $3.50 an hour for the work I put in ….. and PAID to go to a gym.

Sometimes I have to remind myself but I want this to remain fun and at the level that it is fun….. and I will….. without guns. I will take the sweat and sometimes tears to do that… hopefully helping others in the interim.

Steamline:

I think your experince is what most investors are going through be it foriegn or domestic.

Gross returns are just phantom,,, its net return… then you add in your cost to come and visit excetra and your neg geared right there.

Richard makes a great point… and one I made… there are very FEW if any Mortgage brokers that are professionals in the US that are going to work on 50k mortgage loan… With the new commission rules and full disclosure of Yield spread premiums Mtg brokers in the US have seen their incomes come crashing down… Thats why many either left the business or when to work with a bank for a wage paying job.

lol, a neck brace?

Alex
Couldn't agree more. Every one of my investors gets to sit in a cafe playing with pipe cutters and sharkbite and they all go home with a souvenir copy of Home Depot 1-2-3…….having walked the aisles…. some practice replacing faucets and angle stops just so they SEE what it really entails.

There is method in madness…  if you have an issue, even if you have ZERO real clue, you could sit in Australia and open your Home Depot 1-2-3, look up the problem (Leaking toilet) as explained by your property manager and go – aha, well is it the flapper or the flush mechanism or is it leaking from the angle stop….. ? You can see that for a novice it might take you 30 minutes….to fix problem "x"… (seriously that book tells you how to do ANYTHING in a house to code)….  but you will know enough NOT to be screwed.

Me with cars??  ROB ME BLIND…. I know nothing but nothing about them – it might as well be magic. I KNOW but KNOW I am being screwed every time I have to do anything…. it is NOT a good feeling.

AAAaaah, next lifetime.

The strong rental demand in both Atlanta and Florida is good for getting tenants… What you have to ask yourself is what place is going to give you quality tenants. Crime rate is usually a good indication. Liam

Hi Everyone,
I know there are some tools Jay and Alex on the forum might use that those outside the industry cant lay their hands on in regards to crime rate statistics for cities / area's in the USA.

However there are other tools and web sites out there, yet not all are useful or have current data.

I'm aiming to get a list of the best sites / publications  for everyone to try out.

What do you use ?  – post below.