Adventures with lyrical - buying a business

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Silence_sl

shitlord
2,459
4
Tyreny said:
Something I can"t seem to wrap my head around is how to you buy a piece of property (using debt) and end up taking in enough profit to actually make a living? The payment on a ~300k at 6 - 6.5% mortgage is in the neighborhood of $2200 a month and where I live you can only fetch about 1700 a month in rent on a house in that price range. Even if you could charge $2500 on a $2200 mortgage thats not nearly enough to live off of.

Does everyone who has a profitable rental property own it out right or what?
Not that I do it, but a college buddy did it...his idea was to have the tenants pay the mortgage and he would cash out at the end of the note, and not live off of rent money.

Went pretty well even after the divorce and the 50/50 split. He used the income from that to open a B&B with his new wife that they still have to this day...really more of a small hotel than a B&B but it is low stress and good income.
 

Shonuff

Mr. Poopybutthole
5,538
790
Divinefactor said:
i just tell them to buy an apartment building, since I dont really see how they could make a substantial amount of money from the investment :p
How would owning an apartment building be better, profitability-wise? I"ve always thought that this would be the way to go, but in my market, the apartment buildings are selling for a price where the debt service is almost equal to what they bring in.

For the amount of money invested, I"d almost rather own a business with a long time in business and a great reputation. It seems like its easier to get a higher return (unless you can somehow rent with very little risk).
 

Shonuff

Mr. Poopybutthole
5,538
790
Tyreny said:
Something I can"t seem to wrap my head around is how to you buy a piece of property (using debt) and end up taking in enough profit to actually make a living? The payment on a ~300k at 6 - 6.5% mortgage is in the neighborhood of $2200 a month and where I live you can only fetch about 1700 a month in rent on a house in that price range. Even if you could charge $2500 on a $2200 mortgage thats not nearly enough to live off of.

Does everyone who has a profitable rental property own it out right or what?
About ten years ago, I know a guy who owned three dealerships, cattle auctions, farms, and had several hundred rental properties. With the rental properties, his strategy was that he"d buy ten properties and pay cash. He"d then finance the 11th home, and use the proceeds from the ten homes he"d paid off to pay the debt on the 11th to zero. Then he"d had 11 homes paid off, and do the same for the 12th. He just kept rinsing and repeating until he had several hundred homes. He"d also pull cash from his other businesses to buy homes ten a time. It doesn"t take a math genius to realize that eventually he could pay a house off every few months. I am thinking it might be easier to pony up for an apartment complex.

His strat sounded great until you realize that not many people can afford to pay for ten homes with cash. I wish I had asked him more questions back then - I think he"d think I was pretty weird if called him up now and started grilling him over his real estate strats ten years after we last spoke.

The funny thing is that the guy was filthy stinking rich, but just a normal guy. He spent most of the day having his employees do the work for him, and he"d just shoot the bull and tell jokes all the time. He dressed, talked and acted like Joe Schmo.
 

Grooverider_foh

shitlord
0
0
I have several friends who bought to let during the housing boom - one ended up owning a Maserati ($130,000) 10 houses etc so he was clearly making considerable money.

He was able to do this due to the housing value boom, due to the availability of cheap credit with no strings attached. Here was the secret guide to becoming a property millionaire in the early 00s:

1. Find an area with high rental demand (i.e. an area with large numbers of students for instance)
2. Buy a house with an interest only mortgage (i.e. only pay the interest back, NEVER any of the value of the house). This step enabled you to earn a profit on the mortgage, as you would be able to charge more rent than the value of the interest.
3. Continue to accumulate houses, until you are mortgaging 10-15 houses. In the area he was in, this equated to 250,000 dollars per house i.e. 2.5million in DEBT.
4. Because the availability of credit was so high, housing was in extremely high demand. The property bubble began to expand and house prices were increasing 10% each YEAR.
5. Sit on the houses for 5 years, compound growth in value put the properties up from 2.5million in total to around 3.5million (roughly). You now own 3.5 million in property with 2.5 million in debt.
6. Sell the houses at the height of the bubble (hard part).

You have just become a millionaire in 5 years.

This happened to a few people I know, I couldn"t get involved because I was still at university and didn"t have the capital at the time to purchase property. We"re all suffering for it now however, in the Uk..
 

Divinefactor_foh

shitlord
0
0
Lyrical: My comment on housing prices only going up was sorta a joke... the economic trouble we are in right now is partly due to the false idea that the value of a house always goes up.

Apartment buildings really are location specific in terms of what can make you money. In Los Angeles, apartment buildings if run well will make much more money than a rental home. In Riverside, a rental home will be the wiser investment.

It is important to note that even though both of these plans deal with real estate and housing... they are not the same. A rental home is like ONE apartment. Before I sold off a couple of the buildings, I had more than 300 apartments.

I have to say... grooveriders plan is um... just no. However, if you or someone you know is actually planning on doing that lemme know. I may be interested in buying up those properties for pennies on the dollar.

I am not a very business savvy person. I know what I know how to do, and I am a great middleman. The idea of buying a business in a field I dont know doesnt sound like something I would be able to do, so I cannot compare investing in a new business rather than buying an apartment building.

Like I said earlier, one of the things to look for in the apartment building is how many years it will take before it pays off its debt, anything more than ten, and I have absolutely no interest, now due diligence is VERY important because some people may want to dump an underperforming unit before it shows up on the books. If all the units in your area are barely making back debt service... are the property values going up? Another thing to remember is... even if the building is just paying debt service... if the value of the property goes up... that is entirely profit (minus the time spent). If this is the situation your region is in, using a property management service seems like a good idea as they generally run on a % of profit rather than a flat fee, which would mean that the actual return on investment is the sale of the property after the mortgage is paid off (which in the properties I seriously consider is ALWAYS less than 10 years) .

However, I think you would be better served investing in another business rather than a rental property in your area.
 

Grooverider_foh

shitlord
0
0
I"m not saying to do that now, it would lead to financial ruin.

But that is how several people made large sums of money a few years ago, utilizing the now defunct property boom. I thought I made that clear from my post.
 

Luthair_foh

shitlord
0
0
I had a business professor speak about getting into rental property. The basic idea was to continually remortgage existing properties to purchase new ones. He mentioned that a barber in the area he knew started with $100k cash and over something like 5-10 years had ~100 million worth of property.
 

Shonuff

Mr. Poopybutthole
5,538
790
Luthair said:
I had a business professor speak about getting into rental property. The basic idea was to continually remortgage existing properties to purchase new ones. He mentioned that a barber in the area he knew started with $100k cash and over something like 5-10 years had ~100 million worth of property.
What exactly is would the process of remortgaging property be like? Care to share more info than what you did?
 

Divinefactor_foh

shitlord
0
0
Honestly, we really dont need more anecdotal evidence of people owning millions in real estate based on 0 interest financing, because guess what? They don"t actually own millions in real estate, the bank owns lots of toxic pieces of paper.

Real estate for real estates sake right now is worth nothing. That house you thought was worth 1million? 250k right now, IF you can sell it.

Can we keep the get rich quick schemes out of real threads?
 

Divinefactor_foh

shitlord
0
0
Lyrical: Its not really a remortgage, its a refinance when the value of the house goes up... this ties into the joke I made earlier about housing prices only able to go up :p

So basically, you take out a Loan for 300k and buy a house. Time passes, you make payments (maybe only paying off the interest to keep your costs low)etc etc... the value of the house goes to 400k. You refinance the new value of the house as a cash out. The new loan pays off the balance of the old loan, and gives you the difference in cash. You then take this cash to use as a down payment for another house...

So at the end of the first cycle... you have a house and extra money that you didnt start off with that you use to buy another house! You repeat this cycle...

Its a wonderful scheme that works because property values of houses can only go up! Oh and 0% interest for a certain period of time made this risk free etc etc... more loopholes i cant get into right now.
 

chu_foh

shitlord
0
0
Grooverider said:
I have several friends who bought to let during the housing boom - one ended up owning a Maserati ($130,000) 10 houses etc so he was clearly making considerable money.

He was able to do this due to the housing value boom, due to the availability of cheap credit with no strings attached. Here was the secret guide to becoming a property millionaire in the early 00s:

1. Find an area with high rental demand (i.e. an area with large numbers of students for instance)
2. Buy a house with an interest only mortgage (i.e. only pay the interest back, NEVER any of the value of the house). This step enabled you to earn a profit on the mortgage, as you would be able to charge more rent than the value of the interest.
3. Continue to accumulate houses, until you are mortgaging 10-15 houses. In the area he was in, this equated to 250,000 dollars per house i.e. 2.5million in DEBT.
4. Because the availability of credit was so high, housing was in extremely high demand. The property bubble began to expand and house prices were increasing 10% each YEAR.
5. Sit on the houses for 5 years, compound growth in value put the properties up from 2.5million in total to around 3.5million (roughly). You now own 3.5 million in property with 2.5 million in debt.
6. Sell the houses at the height of the bubble (hard part).

You have just become a millionaire in 5 years.

This happened to a few people I know, I couldn"t get involved because I was still at university and didn"t have the capital at the time to purchase property. We"re all suffering for it now however, in the Uk..
Lol sure...an"average guy" as you say getting a mortgage for multiple houses in the value of 2.5 million.

Are you all fucking stupid? Everyone"s a goddamn millionaire or knows one on these forums.
 

Grooverider_foh

shitlord
0
0
No, i"m not stupid. That was the state of the mortgage market in this country around 12 months ago.

You could get a mortgage of interest only, for the value of 110% of the house. Additionally, "buy to let mortgages" were freely available to anyone with a small deposit (5%?).

It is essentially the reason the economy is completely fucked - people getting credit they couldn"t afford. But lots of people made out like bandits.

Sigh.
 

chu_foh

shitlord
0
0
Grooverider said:
No, i"m not stupid. That was the state of the mortgage market in this country around 12 months ago.

You could get a mortgage of interest only, for the value of 110% of the house. Additionally, "buy to let mortgages" were freely available to anyone with a small deposit (5%?).

It is essentially the reason the economy is completely fucked - people getting credit they couldn"t afford. But lots of people made out like bandits.

Sigh.
Stop feeding us shit. Yes the RE bust is because ANYONE could getAmortgage. An "average" guy as you state would in no way be able to get a combined mortgage of 2.5million.

You were trolled by whoever told you that shit.
 
Lyrical, any advice for starting a business from scratch? Or just give more lectures! Everytime I read your replies I imagine you are like a professor.

Basically where I live I see two prospective businesses to open. One is a club, I live in a college town and there are only 2.5 clubs (one isn"t really a club just a large bar with room to dance) both which have fairly small dance floors and seem to "do it wrong" when comparing them to the clubs at the actual college I went to. The second one is a Red Mango or Pinkberry franchinse. My college campus has a huuuuuuuge amount of asians and a large amount of health conscience trendy yuppies. Being that one (or both?) of these franchises came from Asia, I think it would be pretty popular. Now I was told, but haven"t looked into this myself, that you can"t purchase those franchises like a normal fast food place, but the company chooses where to open up places so, if true I guess the only option with that path would be to make a local version of it (diff name same product basically).

So thats my prospectives, the area consists of 2 main downtowns, the campus one, which can be walked to from the dorms, and the city downtown, which is not practical to walk but is less than 5 minute drive from campus. Campus downtown actually has a few vacant properties along the main street for lease. The city downtown has a lot of vacant properties on the main thorough-fares. The campus downtown is simply 1 street about 8 blocks long. The city downtown is multiple streets in a small area resulting in about 4x4 blocks in size.

For competition, the two other main clubs are in the city downtown. Both same style (trying to look classy, expensive booze). The half club is on the campus downtown of the style of not classy looking inside at all (cement floor, no ceiling covering the pipwork and shit) but much much cheaper. There is a coldstone at the campus downtown (dessert place though not same product). And a local ice cream place only open in the summer a few streets down not in downtown area really.

I"ve got a decent business education (though not formal persay) my major was half technology half business. So I am fairly good with marketing and management, PR, but not very knowledgable on accounting and economics. Now currently, I don"t have cash to put down. So the only option would be a loan or VC (in this market lol). I also have a full-time job (9-5) which I would like to keep. That being said, I have no problem putting the post work hours into this endeavor. I assume because of this I would need a manager (for the pinkberry) to run it while I run my job.

So what would you do to "make it happen"? I know the obvious steps like scope out the properties, get pricing, etc. I am just looking for general words of wisdom like watch out for x or y. Or what method I could use to determine if either of these ventures would be worth it with my specific situation. Pipe dream keeping my normal job and doing this thing? What additional steps would I need to take (besides hiring a day manager) to maintain that.

Also just some general questions:

Any experience with VCs and getting funding that way? You didn"t say in your original post, but since you seem a business pro I wondered if you knew. I think since I am young (23) it would be preferable since I would have no loan and am not too concerned with making the most cash to start. Simply making it work. Though I have never heard of getting a VC on such a small business heh.

I had more questions, but now I forgot. Dangit.

Command me Lord Lyrical!
 

Shonuff

Mr. Poopybutthole
5,538
790
DisgruntledOrangatang said:
Everytime I read your replies I imagine you are like a professor.
I am more like a student that wants to help other people. The year it took to buy the first business was hell, and I figure I can help others cut corners.

DisgruntledOrangatang said:
Basically where I live I see two prospective businesses to open. One is a club, I live in a college town and there are only 2.5 clubs (one isn"t really a club just a large bar with room to dance) both which have fairly small dance floors and seem to "do it wrong" when comparing them to the clubs at the actual college I went to. The second one is a Red Mango or Pinkberry franchinse. My college campus has a huuuuuuuge amount of asians and a large amount of health conscience trendy yuppies. Being that one (or both?) of these franchises came from Asia, I think it would be pretty popular. Now I was told, but haven"t looked into this myself, that you can"t purchase those franchises like a normal fast food place, but the company chooses where to open up places so, if true I guess the only option with that path would be to make a local version of it (diff name same product basically).
It sounds as if you are able to see opportunities. That is a plus. The author of Rich Dad, Poor Dad talked about how if you wanted to be an entrepeneur, than you need to be able to see the world in a different light. He suggested that you go out, and take a drive, and look for at least one opportunity. Once you can train yourself to find one opportunity, than you can see opportunities for the rest of your life.

I have to be honest, when I was still in my MBA program, I had a hard time seeing entrepeneurial opportunities in the world. All I could think of was going to work for someone else. It probably took me about six months to change my point of view.


DisgruntledOrangatang said:
I"ve got a decent business education (though not formal persay) my major was half technology half business. So I am fairly good with marketing and management, PR, but not very knowledgable on accounting and economics. Now currently, I don"t have cash to put down. So the only option would be a loan or VC (in this market lol). I also have a full-time job (9-5) which I would like to keep. That being said, I have no problem putting the post work hours into this endeavor. I assume because of this I would need a manager (for the pinkberry) to run it while I run my job.
Honestly, it looks like its going to be tough to do what you are trying to do, given your cash situation. VC"s won"t touch this. In b-school, one of my classes was taught by a guy who ran a venture capital fund. He said that VC"s look for a potential return of at least 50% - its going to be near to impossible to generate returns like that in an old economy type business that you are looking at.

When I was 25ish, I looked at starting a nightclub. I called a friend who owned a bar, and we went over the type of equipment I needed, as well as money for rent, liquor, payroll for six months. I also did monthly projections for three years. They say it takes an average of three years for a start-up to make money, so until then, you are burning through cash faster than Bill Clinton at Booty Land. I had 20K to my name, and it wasn"t enough to secure a bank loan (I got turned down).

As far as having a manager run the business - do you have the cash to do that? Most business owners (at the beginning of the business) work crazy hours. How much would you have to pay for someone to work 80 hours a week? Its also pretty tough to be self-employed and own a business. Do you have a job where you can come and go as you please? If the manager gets sick, who would do his job? You"d either have to take off from work, shut down the business, or carry extra personnel (which requires more cash).

Don"t forget that landlords also have to approve your deal. Some of them use the same requirements that a bank uses. Depending on the market, they are going to want your business plan, projections, and they are going to want you to have alot of cash. We had this problem in Atlanta. On the first business we were going to buy (the restaurant), the landlord would not sign a lease with us unless we had $500K in cash AFTER we bought the business. Many landlords have net worth requirements for renters also. In Atlanta, many of them required that you could document that you had a net worth of $300K+.

Your cash on hand sounds too low (but you didn"t say how much you had) to do this. I am not saying its impossible or that I have all the answers. I have a friend that started his business on just $800 (which was every penny he had) and now makes $150K+ a year (and he still has no bank loan). I have another friend who started his business for less than $1K, and makes $50K a year as an absentee owner (with no debt). Anecdotal evidence aside, the odds are against you until you can get some more cash.

P.S.: Excuse my grammar and typos, but its the holidays and I am busy with family.