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In my 'mean and lean' days I dabbled in fixer-uppers for a fast turn, but never found prices that allowed me to hold the property, service the mortgage and not be negative cash flow. What was I doing wrong?

It sounds strange, but the biggest difference I see in trying to do a few fixer-uppers and what Mr. Lee is doing (and I am no real estate expert and I definitely know only what I read in the article about Mr. Lee's business, so take this with a huge grain of salt) is the large scale of his operations. He is going out looking for guys doing this on a small scale and who are struggling. He buys their properties at a very attractive price. I would guess that gets him into properties that don't need to a great deal of work to be rented at a good price. (The example in the story was interesting: he spent $375,000 to buy five houses, which he was going to rent them for $800 to $1200 each, or around $4,000 to $6,000 per month for all 5 at full occupancy. Assuming 75% occupancy, that's at least $3,000 cash flow to service the $375,000 purchase and his initial repair costs (which he is trying to keep low). If he can get money for 6% or less, he can run cash-flow positive even at $3,000 (and then there should be some depreciation to help him also). If he can get better than 75% occupancy or gets more than the minimum rental prices indicated, he should be making a profit.)

He is also probably getting favorable interest rates on the money he borrows considering how the general low interest environment. (If he is a gambling man and has serious sang froid, he might even be able to borrow a lot of short-term money for very favorable rates, but that would be very risky indeed since interest rates are practically guaranteed to go up.)

I wouldn't be surprised to find that there is also some government money somewhere in this mix (for instance HUD section 8), although I don't see any indicated in the article. If he is clever enough to help the occupants into such programs, he might be able to turn a good profit from such since it should help keep his occupancy rates up. (I am not aware of anyone that has tried to do this, and I may be way off base on this one.)

In my 'mean and lean' days I dabbled in fixer-uppers for a fast turn, but never found prices that allowed me to hold the property, service the mortgage and not be negative cash flow. What was I doing wrong?

You obviously failed to invest your first thousand dollars in the "no money down" books, tapes, etc. advertised ad nauseum on tv over the years.

:-)

Prices for private homes (and condos) these days are usually way too high to justify holding them as rental property. You see places that would rent to the 800-1200 a month figures in the article, for more like the 375,000 he paid for all five. There isn't any way to hold such an overpriced house. To make it "pay" you have to live in it - most of what you are getting is just the value of having the house yourself. And you can't remotely get that much back by renting it out.

What these operators are doing is looking for places where the house prices are dramatically lower than that, but that will justify good rents with a little fixing up. That typically only happens at the edges of shifting neighborhoods, where over this line crime is high etc, and over that line things are better and prices are more normal. Buy things at the line or over it, at the run down dump prices (75,000), then rent them to people from the other side of the line at fixed up prices (800-1200 a month). Obviously there are extreme risks in this. Of not renting the places, of the neighborhood going south on you, etc.

In tonier places the game at the moment is a trade that is the reverse of this. People take over rental property and divide it into condos, to capture the vastly higher prices people pay (at these low mortgage rates etc) to own, than can be carried by the capital of the rental property, at existing rents. In CA, the Boston area, anyplace owner prices are in nosebleed territory, that is the profitable trade, not holding to rent.

In parts of the country that aren't overpriced and are underpriced, apartments can be held in large blocks, but typically not justified in private homes. Each apartment winds up valued at 50-100k, typically. Some small operators own a few buildings this way, most are run by larger chains that operate in whole regions, with hundreds of units (and up).

The other profitable real estate activity is building additional single family houses, wherever demand or nearby prices are high, and zoning and infrastructure things aren't unmanagable. Companies like Pulte and Lennar do that. You can make a new house in Phoenix for 100k, that will sell in 3 months for more than that. That by size and amenities etc, would go for 250k or more in the NE and for 500k or more in CA.

That is effectively arbitraging construction costs against nosebleed house prices. If there is any level of mansion people will leave Boston, New York, or the bay area to have, then that will eventually cap the explosion of house prices in the hot markets.

"What was I doing wrong?"

You bought too high!

All real estate profits hinge on up front costs. If you buy too high you must be damn lucky to ever get a return on investment. 99.9999% of the time in this situation you will not be lucky. Mortgage Auctions, repos and depressed properties are the answer.

I just bought a 2br/1bh home that is in a commercial zone for 8,700 bucks! For another 30K I can have it in tip top shape. At that point it will be worth over 50K just for the house alone not including the commercial potential of the property.

Pay cash

In my 'mean and lean' days I dabbled in fixer-uppers for a fast turn, but never found prices that allowed me to hold the property, service the mortgage and not be negative cash flow. What was I doing wrong?

Using a "fast turn" instead of a "buy and hold" strategy regardless of the negative cash flow.

Our 1983-bought $117,000 San Diego property was in negative cash flow the entire time we paid the 15 year mortgage until the mortgage was paid off 9 years into the loan.

Now, that property spits out $1,400 per month in rental income and is worth about $400,000.

My only regret is that I did not "buy and hold" ten more just like it.