What do you think of this deal?

Catinthehat wrote:

<div class=”d4p-bbt-quote-title”>Nigel Kibel wrote:</div>
I am seeing great opportunities in the United States because the economy is improving and with a lot of Americans moving to states like Texas and Florida those economies would seem to have a bright future.

Make hay while the suns shines because the weather is about to change for many.

As I’ve mentioned many times under previous pseudonym’s the US economy is tanking and that will accelerate for the bottom 70% this year. Consumer CPI is off and running led by food prices. The widening drought situation and water shortages could actually intensify and the good ol’ days of dust storms and soil erosion as in the 30′s is beginning to happen again. Texas agriculture is a shadow of its former self. Fracking has a finite shelf life and oil volumes have been declining although we could see a serious spike in oil prices soon if the Iraq/Syria debacle isn’t contained. Throw in what appears to now be a serious and overt attack on the US dollar reserve status things are looking decidedly risky for anything involving the US.

Texas and Florida are benefiting from flight from poverty as people look for better opportunities. Engelo’s Toledo is a good example of population contraction in rust belt states. They’re moving to places like Florida because the news on the grapevine is telling them there are more and better opportunities there.

The prime risk for the US now is a declining dollar and rising energy costs. In tandem they’ll reek a fair amount of pain and misery in a country that already is 3rd world in many parts. When Mex illegals start heading back to Me’hico you know things aren’t too bright.

Hey Cat,

Do you mean this Toledo?
http://en.wikipedia.org/wiki/Toledo,_Spain

I haven’t bought that one yet :)

Vamonos…. hehe

It already fell :)

Picked it up and slicing through everything now hehe

sciencesurf wrote:

Awesome cash flow Engelo!

It got me thinking though.

Assuming initial purchase cost $12000 + $10000 Reno = $22000

Revalue $40000 upon completion.

Lets say the Toledo property goes up 10% per year for the next 3 years, compounded. You make around $15k in unrealised capital gain on top of the $18k after the reno.

Is this worth all the time and risk? Be interesting to know the gross yield on this one to see if you’re making up for it in positive cash flow.

Would you say compounding is more effective on Australian properties selling for much larger figures? I know if i made $15 grand for three years in the market I would be less than impressed.

Next week I begin my next reno project on the Sunshine Coast. 1 week – in and out. Total spend $5000 with projections of capital increase of 4 to the dollar. Your’s is barely gonna hit 1:2.

I havn’t got my head around US realestate yet. Please let me know if i’m completely off the mark and missing something.

Cheers

Hi sciencesurf,

Thanks for your post reply.

Toledo and the US market should only be considered as a cashflow play. I would never recommend to anyone investing in US real estate with the hopes that they will see the market appreciating in the near future.

The cashflow on this particular deal and many others is stupidly big when compared with the Australian market.

Rent – $750pm x 12 = $9,000

Expenses:
Management = $1,000pa
Taxes: $1,000pa
Insurance: $500pa
Other: $1,000pa

NET= $6,500 / $22,000 = 30% yield

Just as an FYI I maxed up all expenses. I will most likely self manage if we don’t move in and the “Other” expense i just put in the for FUN haha

With a 30% yield there really isn’t any need for growth.

Cashflow is KING IMO.

The income can be re-invested into more properties and they can all compound together.

Imagine owning 20-30 of these with all cash. That’s my goal that I am working towards.

Please feel free to go to my personal website and under the blog tab you will find the my most recent post I had published regarding this exact same topic we are discussing now.

Thanks for reading and have a great day.

ps. It took me a long time to wrap my head around investing in the US and how it all works ;)

Catinthehat wrote:

Figures are are always good until they trash the place or turn it into a meth lab ;-)

In management there’s a term called ‘span of control’. This refers to how many things/people a manager has under their command/responsible for. Outcomes usually deteriorate as span of control increases. A manager for example with 5 people is far more effective and productive than one with 25. Same goes for portfolio sizes. 20 – 30 Toledo properties is equivalent to only 2 in Australia. You can see the risk profile of something happening goes up exponentially. So 6500/yr sounds really good but $6500 worth of damage can be done in the blink of an eye and with little effort.

Something to consider is that 30 properties at say $5k apiece is only $150k. If I had $500k invested I’d want a lot more than that to keep me happy.

Individual numbers look attractive but at the end of the day portfolio performance is the criteria you need to look at.

Beware of catchy phrases like ‘cash is king’. They are meaningless and distract many from focusing on the other issues like preserving capital. In markets like these your capital can disappear or diminish faster than you can exit.

I give you a better than even chance of doing OK Grasshopper but there’s high levels of risk everywhere. The single best thing going for you is that you are on the ground in amongst it.

Thanks Cat,

Ill take “better than even chance” from you all day long haha

Have a great day.

sciencesurf wrote:

Hi Engelo,
Hi Science,

Please see my replies below in bold

Thanks for your reply. Cash flow is king – catchy phrases and royalist words..
That Cat already smashed me on the “Cash is King” phrase haha

<div class=”d4p-bbt-quote-title”>EngeloRumora wrote:</div>
Toledo and the US market should only be considered as a cashflow play. I would never recommend to anyone investing in US real estate with the hopes that they will see the market appreciating in the near future.

That’s really interesting to read. I don’t think I have once read that ‘in print’ from a US based investor. I guess that negates some of the risk of investing in property. All you need is for the US economy to ‘hold in there’ :)
It all comes down to the people you work with on the ground and that the numbers you are buying into suit your end goal. Buying in a particular area based on hope that it will go up in value is not a sustainable way moving forward IMO.

<div class=”d4p-bbt-quote-title”>EngeloRumora wrote:</div>
The cashflow on this particular deal and many others is stupidly big when compared with the Australian market.

Percentages are only relevant to the capital they are based off. 30% net yield in the US could be equivalent to a much smaller yield in Australia. For example, after expenses/depreciation we are pulling close to $3k cash-flow per year for one of our Sunshine Coast investments. It sits at a ‘measly’ 7%.
Ill just say this. The average person can live a very very decent lifestyle anywhere in the Midwest with earning $40,000 – $60,000pa. Based on the deal example I provided around 10 properties ($250,000 – $300,000 cash approx) would need to be owned outright for these numbers to be hit.

Are you worried you might be missing the leverage you can gain in Australia? Some Buyers Agents promote positive cash flow as a sweetener to the deal – not a reason to buy – The old to make money in real-estate you need to buy into capital growth. Minimise your holding costs, choose the right location and time to invest’. etc.
I have had a similar mindset before and would never follow it again lol. My experience has led me to believe that all real estate investing should be only cashflow based. Any appreciation is just a bonus. There are many ways to skin a cat (freckle), this is just how I prefer to do it.

<div class=”d4p-bbt-quote-title”>EngeloRumora wrote:</div>
Rent – $750pm x 12 = $9,000

Expenses:
Management = $1,000pa
Taxes: $1,000pa
Insurance: $500pa
Other: $1,000pa

NET= $6,500 / $22,000 = 30% yield

Closer to $5500 but whose counting ;)
I knew quitting school at 14 was a bad idea hahaha

<div class=”d4p-bbt-quote-title”>EngeloRumora wrote:</div>
The income can be re-invested into more properties and they can all compound together.

I like this notion. Re-investing with cash made from positive properties is difficult in Australia. Most investors choose to access equity from other properties for future purchases – on the pretext of tax deduct-ability. Your method seems a lot ‘cleaner’. Slowly building an empire. Reinvesting with cash only is the smartest strategy I’ve come across so far. I can understand why you thought twice about buying the Go Pro :)
Build a strong foundation with cash only and then later on look at leveraging and taking higher risk. Want a decent stream of $$$ coming in every month first tho. I have been down the road of pulling out equity to purchase more deal and decided to pull out of that strategy very quickly. That strategy was one of main causes that brought the US real estate market to its knees. Unless you can have a decent surplus of $$$ coming in after the refinance I wouldn’t do it ever.

<div class=”d4p-bbt-quote-title”>EngeloRumora wrote:</div>
Imagine owning 20-30 of these with all cash. That’s my goal that I am working towards.

Theoretically awesome, in practice, possibly not that easy. As the Cat mentions, don’t US tenants scare you!?
Good luck to you mate!
They don’t scare me where I am investing as they will probably be my neighbors when I move into the area lol. I have in the past collected rents in very very bad areas. Having an Aussie accent you can get away with murder in the US. I could probably get through to Obama if I tried calling the White House haha

We bought our first two houses with cash deposits (40k each). At the going Toledo rate I might have had 5-6 properties by now!
Well done on your purchases. Its a very different world out here than back home in Aus. As mentioned before there are many ways to skin freckle (sorry I meant Cat) haha

I will definitely check out your blog. If the ‘Cat’ holds you in high esteem you must be doing things right.
We go way back. I admire his very rude and brutal approach sometime haha jokessss

Cheers

Catinthehat wrote:

<div class=”d4p-bbt-quote-title”>EngeloRumora wrote:</div>
Please feel free to click on the link and go up and down the street and let me know if you would consider this a “bottom” poverty ridden area?

https://www.google.com/maps/@41.69973,-83.573364,3a,75y,4.85h,81.43t/data=!3m4!1e1!3m2!1s4xqsgjEcgUqt9C3V3BMBHA!2e0

It’s showing all the signs of urban decay. Another ten years and it’ll be another slum if things get any worse. The housing type is high maintenance and in a socioeconomically depressed hood/city/state the long term outcomes aren’t positive. It’s inner city bordering on the worst crime areas of Toledo

It’s probably an average area for Toledo. In Auckland or Christchurch it’s where you’d expect to find Black Power and The Mongrel Mob.

Having said that though it’s probably a good fit for your PI strategy. Lower middle class and predominantly white with low unemployment comparatively.

I await your arrival mate.

Taking you here http://www.mancys.com/

Very old Italian mafiaso style place.

Dinner will prob set me back 1 months rent hahaha