Author Topic: Cash-flowing on a fully paid property  (Read 1049 times)

jeromedawg

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Cash-flowing on a fully paid property
« on: April 16, 2019, 11:15:28 AM »
Hey guys,

Quick question to throw out there: are there a lot of people out there who drop all cash on "investment" properties, either paying it off in full or to where only a small loan is taken, with the intent of renting these properties out for the cashflow (also thinking it's a great investment)?
Background: our upstairs neighbors recently moved to NorCal but purchased the upstairs unit in 2017 for $635k and are renting it for $2900/mo. Prior to moving into that upstairs unit, they had come from another condo down the street same situation - purchased it, lived there, then held to rent. They are young and the wife has been in and out of jobs (working from 2010-2014 low-level 'coordinator' assistant type jobs, ad then going back to school for 4 years to get into software dev). The husband has been working since 2012 (probably with a starting salary of around $60k and now I'm guessing into the $100-150ks if not maybe a little more). So something's not adding up - I don't see how they could have taken a standard 30yr mortgage out especially with TWO properties like this and the income they have. The situation here is a little different from the context of the question, since in this case they lived in the property before renting out, so I guess I'd also ask if there are a lot of people who also do this (live in for a few years, then hold to keep and rent for "investment" purposes). I honestly don't know how common this is or if *most* people just prefer to sell and roll the funds into another home (per section 121)
My theory is that one or both of their parents have gifted a lot of cash to them which helped either pay those properties off mostly or in full, and now they are holding both places and collecting rents on them.
Not sure if they bought another place up in NorCal or not but considering how cost-prohibitive it is up there, my initial guess is not and that they're 'leveraging' the rents they're collecting down here to either pay for or offset the cost of living up there.

« Last Edit: April 16, 2019, 11:17:48 AM by jeromedawg »

Archipelago

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Re: Cash-flowing on a fully paid property
« Reply #1 on: April 16, 2019, 09:02:09 PM »
Quote
So something's not adding up - I don't see how they could have taken a standard 30yr mortgage out especially with TWO properties like this and the income they have.
Hypothetical situation: they could've bought house #1 in 2012 or 2013 with a low down payment (government loan), then in those 4-5 years experienced a great deal of appreciation, at which they could've taken equity out from home #1 and put it towards a second house. Or, like you said, it could've been that they inherited a fairly large sum of money and used it to buy property.

Either way, buying a house for $635k and renting it out for $2900 makes for a fairly sub-par investment. That investment situation is a fair bit less "optimal" than the basic index fund investing (plus maximizing tax sheltered accounts) strategy frequently spoken about on these forums.

aasdfadsf

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Re: Cash-flowing on a fully paid property
« Reply #2 on: April 16, 2019, 10:20:06 PM »
I'm not sure if I understand the question. Do people buy properties with cash to generate income? Of course they do. Ultimately, the ability to generate income is what makes real estate worth something.

People obsess over mortgages, but whether you use your money or someone else's isn't necessarily that big of a deal. Capital costs always exist because your own money has an opportunity cost. If you can get a safe 4% with your money with a diversified investment portfolio or borrow someone's money for 4%, then it's a wash. If you can't generate a profit with a mortgage, then you've almost certainly made a bad investment.

SwordGuy

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Re: Cash-flowing on a fully paid property
« Reply #3 on: April 17, 2019, 08:28:27 AM »
I'm not sure why you think it's any of your business how these folks are financing their lives.

Do people make bad real estate investment decisions?   Hell yes!   There are gobs of people who are renting their old home to cover the mortgage and think they are making money.   Why do they think that?  Because they were too damn lazy to learn how to calculate the numbers correctly, that's why.   Or the Dunning-Kruger effect is in play.

Why do you think that these folks are paying cash for a $600,000 home.   Damn near no one does that -- even if they can.

$2900 on a $600,000 home is not a great cash flow investment.   But there are 4 ways to make money in real estate investing and cash flow from renting is only one of them. 

I'm sure that any of @arebelspy 's neighbors who figured out they were buying a house a year wondered how they were doing that on two beginning teacher's salaries.   And yet there was no inheritance, just hard work, smart work, and a really high savings rate.

 






waltworks

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Re: Cash-flowing on a fully paid property
« Reply #4 on: April 17, 2019, 08:45:34 AM »
I'm also not clear on your question, but if it is "are people really stupid enough to spend $650k to get a gross $2900/mo" the answer is yes. That happens all the time.

I talk to people in my neighborhood (million dollar houses that rent for $4k/mo or so) all the time who are going to move and rent their current house out because they think it's a good move. They have literally not run any numbers and think the stock market is "gambling".

There is a TON of dumb money in RE.

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monarda

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Re: Cash-flowing on a fully paid property
« Reply #5 on: April 17, 2019, 09:13:25 AM »
I'd agree with others in that it's none of your business. Even if more $ could be made with different properties or on the stock market, the cash flow might be "enough" for them. Seems to me they are "gambling" on appreciation happening while they own the unit.

Also, in some areas 0.5% properties are all you'll find. We aren't that low, but you can't find 1% properties here anymore (to speak of).

Not-maximal returns doesn't mean dumb. They might have a very conservative approach, like we do, in our case, because we're approaching retirement (too old to consider it "early"). They are young, but their return in this situation probably still beats CDs or savings accounts. I bet it beats CDs, and if they get some appreciation in the next 5 years, bonus. And if the market tanks in that interval, they will learn a valuable lesson.

waltworks

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Re: Cash-flowing on a fully paid property
« Reply #6 on: April 17, 2019, 11:55:43 AM »
2005 called, they want their "my area is special and these price increases are going to just keep going" cliche back.

Look, a 2% return on a single $650k piece of RE does not compare to a CD at all. That RE can be destroyed or rendered uninhabitable in any number of ways (only some of which insurance will cover -ie tenants are dealing drugs and the feds seize the place), it can't be sold easily, quickly, or cheaply, it's not FDIC insured, and if a big employer or two moves out of town or there's a recession, you might not find tenants at all or be able to sell it.

It's more comparable to owning stock in a single company that pays a 2% dividend, that you can't sell without 3-6 months advance notice and paying 5-7% in fees . It might be fine - but it's WAY riskier than a CD.

Renting out a $650k property for $2900 is not "conservative" in my view. Bonds and CDs are conservative. Stocks are conservative if you have a long time horizon.

Investments that are non-diversified, illiquid, and have very low returns are NOT "conservative".

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Archipelago

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Re: Cash-flowing on a fully paid property
« Reply #7 on: April 17, 2019, 01:16:02 PM »
Quote
Renting out a $650k property for $2900 is not "conservative" in my view. Bonds and CDs are conservative. Stocks are conservative if you have a long time horizon.

Precisely! :)


ilsy

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Re: Cash-flowing on a fully paid property
« Reply #8 on: April 22, 2019, 02:07:58 PM »
Hey guys,

Quick question to throw out there: are there a lot of people out there who drop all cash on "investment" properties, either paying it off in full or to where only a small loan is taken, with the intent of renting these properties out for the cashflow (also thinking it's a great investment)?
Background: our upstairs neighbors recently moved to NorCal but purchased the upstairs unit in 2017 for $635k and are renting it for $2900/mo. Prior to moving into that upstairs unit, they had come from another condo down the street same situation - purchased it, lived there, then held to rent. They are young and the wife has been in and out of jobs (working from 2010-2014 low-level 'coordinator' assistant type jobs, ad then going back to school for 4 years to get into software dev). The husband has been working since 2012 (probably with a starting salary of around $60k and now I'm guessing into the $100-150ks if not maybe a little more). So something's not adding up - I don't see how they could have taken a standard 30yr mortgage out especially with TWO properties like this and the income they have. The situation here is a little different from the context of the question, since in this case they lived in the property before renting out, so I guess I'd also ask if there are a lot of people who also do this (live in for a few years, then hold to keep and rent for "investment" purposes). I honestly don't know how common this is or if *most* people just prefer to sell and roll the funds into another home (per section 121)
My theory is that one or both of their parents have gifted a lot of cash to them which helped either pay those properties off mostly or in full, and now they are holding both places and collecting rents on them.
Not sure if they bought another place up in NorCal or not but considering how cost-prohibitive it is up there, my initial guess is not and that they're 'leveraging' the rents they're collecting down here to either pay for or offset the cost of living up there.

At first, I though, well yes, I do that. I buy rentals all cash because they are sold cash only, there is no way around and no bank will give me any money for those at the time of the purchase, and I rent them for cashflow.

But then I read further and wonder, what the hell are you asking. Could people afford doing whatever they are doing or are they selling drugs and pretend they are making money from rentals. Well, I will bring my example again, if anyone would bother to think how can I afford a house in my high end neighborhood after being divorced (no alimony or child support) with 3 dependents and on my tiny salary, yep that is very weird (I assume people don't bother because they think I get shit load of money from my ex and they feel better about themselves). But I not only can afford my primary residence, I also have several rentals bought with cash. That should be a total shock, especially if you count only my salary. And I can assure you, I don't sell drugs, and I can show my spreadsheets that have boring calculations of all my expenses and all my income for the past 6 years. It's pretty boring and the only conclusion you can draw from them, is that one dollar bill eventually accumulates to 100 dollars; 100 dollar bills to 1,000 dollars and so on. Ah, and compound interest rocks, it's way more powerful than people can imagine.

And I often wonder why more people aren't doing what I do? Why they struggle and wonder how others can afford buying with cash, and why things add up for others, but not for them? That's because they are too lazy to change their lifestyles, too scared to figure out that they are the problem of their own success, and they are afraid to fail. Well, maybe others reasons too, like they are bad at math and spreadsheets in general.

I'm sure there are many other mustachians who do the same, buy with cash, live beyond their means, invest in money producing properties, retire early, and wonder what is wrong with the rest of the world, why the rest of the world cannot add dollar bills and get $100, $1000, $10000, $100000, $635K?

lhamo

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Re: Cash-flowing on a fully paid property
« Reply #9 on: April 22, 2019, 06:31:24 PM »
If either of them are from China they may be using money they (or their extended family) got from the housing bubble there, putting it into what is perceived to be a safer market -- it has gotten harder to move money offshore but lots of people are still doing it.  The price:rent ratios are even worse returns in China, so they may feel they are getting a great return.  Long-term plan may be to have kids in the family coming over here for university live in the units.  If they can use them to establish residency that also pays a premium in the form of local versus out of state tuition rates.