matjone Posted March 16, 2012 Share Posted March 16, 2012 Is anyone taking Buffet's advice and buying single family homes? I am seeing some in my area that seem like they would deliver excellent cash flow yields. The difficulty I have is getting comfortable with the leverage and the concentration of so much capital in one investment, especially since I live in a rust belt city that may not have good economic prospects in the long run, and have no experience managing rental properties. If anyone operates in this field and would be willing to share their knowledge, either on here or through pm, or even give some good book recommendations on the subject, I'd appreciate it. Link to comment Share on other sites More sharing options...
moore_capital54 Posted March 16, 2012 Share Posted March 16, 2012 We started a fund in November to purchase homes in Las Vegas. We have acquired 100 homes for less than $5 million US and are slowly renting these homes out for an average of $500-600 net return per month. Link to comment Share on other sites More sharing options...
prunes Posted March 16, 2012 Share Posted March 16, 2012 Moore how are you handling the management? The real money to be made here is in developing a scalable management platform... Link to comment Share on other sites More sharing options...
yseric Posted March 16, 2012 Share Posted March 16, 2012 That's a great question. How do you manage the 100 homes. I assume you would need to hire people to do that? I‘m thinking of some real estate investments as well. Any info would be appreciated.. :) Link to comment Share on other sites More sharing options...
bargainman Posted March 16, 2012 Share Posted March 16, 2012 Also what are the issue around owning a home in a different state? I presume there are a number of tax issues on top of the pain in the neck real estate management issues? Link to comment Share on other sites More sharing options...
matjone Posted March 16, 2012 Author Share Posted March 16, 2012 Moorecapital, if you don't mind me asking, what kind of cash flow return do you get out of these properties relative to the money you put up? I understand if you don't t want to talk about it but it might give me a good check on what I think I can get out of the properties I see. I also wonder what type of percentage you figure for maintenance. Link to comment Share on other sites More sharing options...
moore_capital54 Posted March 16, 2012 Share Posted March 16, 2012 We hired a local company down there to do it, they charge us 8% of gross rents, the figure I quoted you was NET of all costs. Right now about 70% of the homes are vacant so the jury is still out, but we feel good about our prospects for capital appreciation over a 5-10 year period. We are not looking to buy much more homes or we would consider setting up our own management co, this was really just a punt on housing down there, if were right well produce 20% CAGR over 5 years, if were wrong well probably break even, but the LP's liked this bet because at worst we distribute homes to them pro rata. I do know of a group in Maricopa County that is up to 850 homes and manage everything themselves, those guys are claiming they rent homes within 3 months or less at 12-17% cash on cash yields.... Overall, I think investors will do better buying equities over the long-term, but once again its a very easy product to sell as people love the idea of owning tangible real estate. My partner and I will probably net 10-20 free homes from our fees alone :) Shit I guess I am falling into the "Tangible property" trap as well, will be nice to just have some homes cash flowing for my daughters when im gone... BTW this reminds me of a funny joke I heard this week: What do you call an Asian RRSP? ....................... A Vancouver Condo! :) Link to comment Share on other sites More sharing options...
matjone Posted March 16, 2012 Author Share Posted March 16, 2012 Yeah I should have clarified, when I said maintenance I meant a figure for repairs. I have figured 10% of rent for property management, plus about $3 a s.f. for repairs. That seems high, but the info I could dig up said to figure 1%-4% of the value for repairs, which seems in line withmy. experience as a homeowner. Link to comment Share on other sites More sharing options...
BargainValueHunter Posted March 16, 2012 Share Posted March 16, 2012 We hired a local company down there to do it, they charge us 8% of gross rents, the figure I quoted you was NET of all costs. Right now about 70% of the homes are vacant so the jury is still out, but we feel good about our prospects for capital appreciation over a 5-10 year period. We are not looking to buy much more homes or we would consider setting up our own management co, this was really just a punt on housing down there, if were right well produce 20% CAGR over 5 years, if were wrong well probably break even, but the LP's liked this bet because at worst we distribute homes to them pro rata. I do know of a group in Maricopa County that is up to 850 homes and manage everything themselves, those guys are claiming they rent homes within 3 months or less at 12-17% cash on cash yields.... Overall, I think investors will do better buying equities over the long-term, but once again its a very easy product to sell as people love the idea of owning tangible real estate. My partner and I will probably net 10-20 free homes from our fees alone :) Shit I guess I am falling into the "Tangible property" trap as well, will be nice to just have some homes cash flowing for my daughters when im gone... BTW this reminds me of a funny joke I heard this week: What do you call an Asian RRSP? ....................... A Vancouver Condo! :) Dumb question but, What would keep Buffett, Paulson or Ackman (who have indicated that this is a golden age for rental properties) from organizing such an effort and scooping up thousands of homes in Vegas, AZ, FL or CA? I think they could muster the resources to build scale in this space. They have all indicated that they "couldn't" do it in mass to the point where it was worth it (given the scale of their other investing initiatives). Link to comment Share on other sites More sharing options...
ERICOPOLY Posted March 16, 2012 Share Posted March 16, 2012 We hired a local company down there to do it, they charge us 8% of gross rents, the figure I quoted you was NET of all costs. Your phone rings today. A tenant has burned down one of your houses. How much of this hassle does the property manager do for you? Does he file the insurance claims, get permits to rebuild, deal with the contractors to have the new home built? Or are you finding yourself in Las Vegas on a "business trip"? Scenario #2: The roof needs replacing on one of your properties. Do you have to make any phone calls to anyone other than the property manager? Or does the property manager take care of everything? I basically mean to say, "how much managing does the manager do"? Link to comment Share on other sites More sharing options...
yseric Posted March 16, 2012 Share Posted March 16, 2012 @BargainValueHunter, great, great, great question! I've been thinking the same thing, when Buffett and Ackman said it's hard to scale, what do they really mean? @ERICOPOLY, I've talked to a few individual home investors, they all said property management companies don't do much. They ended up doing most of the work themselves. Now this does not mean all property management companies are like that. Also, I'm curious, when you go buy the house in Las Vegas, do you actually go check out the house? Buying 100 houses in a few months seem like labor intensive, but I could be wrong.. :) Link to comment Share on other sites More sharing options...
MVP444300 Posted March 17, 2012 Share Posted March 17, 2012 Just a word of warning: owning rental property is not a passive investment like stocks or bonds where you can put money in, leave it in a brokerage account for few months or years and just monitor the company by reading 10K/10Qs as they come out, and cashing dividend checks quarterly. Its A LOT OF WORK and a HUGE HEADACHE!!!!! Personally I prefer real estate rehabs, but that is another discussion entirely and is not what is being discussed in this thread. Whenever you buy a house, trailer, or apartment. Make sure you do your homework before cutting a check. By homework, I mean, figuring out what the average rent will be for the type of renters you want for the property in question and what the going rate is for comps to your property whether you will rent it as is or fix it up to get more rent out of it; make sure you hire a reputable closing attorney before closing on the property (yes I've had issues with crocked closing attorney); make sure that you have looked at the plat and know the dimensions of the property (yes I've had issue with property boundary). As with stocks or bonds, know what your risk and minimize them as much as possible before you make your purchase. Financially speaking, before I buy a property it has to meet certain guidelines that I have before I'll even considering buying it. 1. The rental unit has to make money the first year. 2. I want a minimum return on capital of 40 to 50% per year; by that I mean, my net profit from the rental income will have to yield that much return versus what I'm willing to pay for the property before I'm willing to take the risk in buying it. Trust me, you'll need those returns to make it worth doing lol Word of warning: I've seen some people who try to enter the business thinking they can rent a property at $400 or $500 per month and be able to keep all or even half of that revenue. That isn't happening period! You need to very carefully figure out what your property taxes will be (excluding homestead exception), insurance expense, maintenance cost, clean up cost, administrative fee, factor in a vacancy period/renters cheating you out of rent, and so forth to get your net profit margin and then use your net profit from what you've estimated to figure out what type of return you get. 3. Have a very large margin of safety, at least 50%, in the purchase price from what you figure out is the intrinsic value of the property. The more disrepair or age of the property the more margin of safety I want when buying. There will mostly likely be unpleasant surprises you'll find after your purchase. 4. Regardless of how much you love the property, be able to walk away from any negotiations if the purchase price doesn't meet your financial guidelines that you set forth before doing it. Don't be afraid to low ball an offer under your estimated intrinsic value, you'll be surprised how many offers you get accepted especially if you can pay cash for a deal. Below are some of the unpleasant things I've experienced over the years when dealing with renters. --A $35,000 and $44,000 bill on two houses after the tenants left. They knocked holes in the wall, destroyed the lawn by spinning tires, ruined the floor by turning on the water/leaving it on, knocking out all the windows, and other bad things. Note Insurance doesn't cover damage done by the tenants. --A woman burning herself alive in the trailer by smoking with oxygen tanks and the property being destroyed. --Having air conditioning/heating units stolen. $5,000.00 out the window each time that occurred. --Property being left with roaches all over the place. --Being sued for someone falling down the steps- A 300 pound woman should not be walking on high heels down steps. I hope that I scared you enough. lol Link to comment Share on other sites More sharing options...
beerbaron Posted March 17, 2012 Share Posted March 17, 2012 Below are some of the unpleasant things I've experienced over the years when dealing with renters. --A $35,000 and $44,000 bill on two houses after the tenants left. They knocked holes in the wall, destroyed the lawn by spinning tires, ruined the floor by turning on the water/leaving it on, knocking out all the windows, and other bad things. Note Insurance doesn't cover damage done by the tenants. --A woman burning herself alive in the trailer by smoking with oxygen tanks and the property being destroyed. --Having air conditioning/heating units stolen. $5,000.00 out the window each time that occurred. --Property being left with roaches all over the place. --Being sued for someone falling down the steps- A 300 pound woman should not be walking on high heels. Lol, that is the reason why I buy stocks. Not buildings I'd like to do other things with my life then to repair walls! Link to comment Share on other sites More sharing options...
thomcapital Posted March 19, 2012 Share Posted March 19, 2012 why bother? it's chicken feed for them and probably more trouble than it's worth. Buffett's advice was to go out a buy a single family home "for yourself" and put a 30 year mortgage on it. If he said someone could do well buying up a lot of homes and renting them, I believe he meant you would do well; but probably not as well as he can do investing in securities. And he can do that from his bedroom or office. He was making a comment that it's safe for j6p, who is always afraid to buy something unless it's "rising," to wade back in and start buying real estate again. btw, if the guy who goes out and buys 100 homes and rents them out does well over the next five years, how well do you think a bac shareholder is going to do? Saw this in today's WSJ (Wall Street Explores Landlord Business, A1-2): Buffett... said in an interview on CNBC last month that he would buy up "a couple hundred thousand" single-family homes if he could do so easily, given the high yields on rental investments. I've really enjoyed this discussion. Link to comment Share on other sites More sharing options...
Parsad Posted March 19, 2012 Share Posted March 19, 2012 why bother? it's chicken feed for them and probably more trouble than it's worth. Buffett's advice was to go out a buy a single family home "for yourself" and put a 30 year mortgage on it. If he said someone could do well buying up a lot of homes and renting them, I believe he meant you would do well; but probably not as well as he can do investing in securities. And he can do that from his bedroom or office. He was making a comment that it's safe for j6p, who is always afraid to buy something unless it's "rising," to wade back in and start buying real estate again. btw, if the guy who goes out and buys 100 homes and rents them out does well over the next five years, how well do you think a bac shareholder is going to do? Saw this in today's WSJ (Wall Street Explores Landlord Business, A1-2): Buffett... said in an interview on CNBC last month that he would buy up "a couple hundred thousand" single-family homes if he could do so easily, given the high yields on rental investments. I've really enjoyed this discussion. Why doesn't Home Services of America open up a property management office in each real estate office? Buffett buys the properties and has his own company manage them...as well as for others. I'm sure there is plenty of demand for quality property managers who provide good service at a reasonable price. Should be no different than the real estate franchise business. Berkshire could become the largest property manager in the U.S., and is probably one of the few companies that can scale that across the country. Also creates more recurring income for Berkshire, and keeps another service business within the company in a related industry. Cheers! Link to comment Share on other sites More sharing options...
BargainValueHunter Posted March 19, 2012 Share Posted March 19, 2012 why bother? it's chicken feed for them and probably more trouble than it's worth. Buffett's advice was to go out a buy a single family home "for yourself" and put a 30 year mortgage on it. If he said someone could do well buying up a lot of homes and renting them, I believe he meant you would do well; but probably not as well as he can do investing in securities. And he can do that from his bedroom or office. He was making a comment that it's safe for j6p, who is always afraid to buy something unless it's "rising," to wade back in and start buying real estate again. btw, if the guy who goes out and buys 100 homes and rents them out does well over the next five years, how well do you think a bac shareholder is going to do? Saw this in today's WSJ (Wall Street Explores Landlord Business, A1-2): Buffett... said in an interview on CNBC last month that he would buy up "a couple hundred thousand" single-family homes if he could do so easily, given the high yields on rental investments. I've really enjoyed this discussion. Why doesn't Home Services of America open up a property management office in each real estate office? Buffett buys the properties and has his own company manage them...as well as for others. I'm sure there is plenty of demand for quality property managers who provide good service at a reasonable price. Should be no different than the real estate franchise business. Berkshire could become the largest property manager in the U.S., and is probably one of the few companies that can scale that across the country. Also creates more recurring income for Berkshire, and keeps another service business within the company in a related industry. Cheers! Better yet...Sears could do it as an add-on to its home services business! Don't think Eddie would go that way though... Link to comment Share on other sites More sharing options...
compoundinglife Posted March 19, 2012 Share Posted March 19, 2012 Buffett was asked once why he didn't invest in Real Estate. He said "the stock market is too easy". In 1998 at a Florida Univ. MBA talk he was asked about real estate and said that buying corporations that deal in real estate is not great because they get taxed and the shareholder gets taxed, when the shareholder could easily do real estate on their own and avoid the double tax. I assuming he was saying this in comparison to say something like Coke, where the corporation gets taxed and the shareholder gets taxed on the div, but its not a business you can do on your own. He also mentioned that REITs work around the double tax issue but there is still overhead, someone with $1000 to invest might be wise to go with a REIT to be in real estate but someone with 1,000,000 should probably buy real estate outright to avoid paying the management overhead of a REIT. He also mentioned that at that time (1998) there was nothing Berkshire found attractive in real estate. Thats part of the reason I found it interesting that he was talking it up on recently. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted March 22, 2012 Share Posted March 22, 2012 Here is a company that buys the distressed residential property in a short sale or foreclosure for a depressed price, and then sells it back right away to the prior homeowner for "fair" price. Then the company is entitled to 50% of the future capital gains of the property after that: http://www.nytimes.com/2012/03/22/your-money/program-in-massachusetts-helps-those-facing-foreclosure.html?pagewanted=1&_r=1&partner=yahoofinance 1) book an immediate gain on gap between distressed price and fair price 2) entitled to 50% of any future property appreciation Link to comment Share on other sites More sharing options...
Myth465 Posted March 22, 2012 Share Posted March 22, 2012 This was on the daily ticker a few months ago, sounds like a good program. Link to comment Share on other sites More sharing options...
Rabbitisrich Posted March 22, 2012 Share Posted March 22, 2012 Looks like those guys even made money in 2009. The fair value measure is questionable given the premium over estimated forclosure sale proceeds. Foreclosure sales are much less annoying than short sales. What is the major advantage over the bank reducing principal? Perhaps the repurchase loan is at below market rates and terms. Maybe the bank accepts bids through the short sale process and only agrees to this project when conditions look poor. Link to comment Share on other sites More sharing options...
value-is-what-you-get Posted March 22, 2012 Share Posted March 22, 2012 The distressed real estate investment to rent out seems good by the numbers however the reality is that you purchase the investment and then must incur capex and maintenance charges. Furthermore, to get income from your investment while perhaps waiting for the market to turn and realize a capital gain, you rely on one customer per unit - who, by the very nature of the relationship, is unqualified to purchase same building/unit even at distressed prices. Having been a landlord several times with multiple unit buildings I found the best possible tenant was an approaching or at retirement age single person. Turnover's low, rent gets paid, small issues brought to your attention before they become big issues, no property destruction. All-in-all, it's a good way to get a levered investment when you don't have much money but it is not passive and some personality types are just not suited to it. I prefer discounted stock in companies. Link to comment Share on other sites More sharing options...
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