Author Topic: Property Strategy : Never sell makes sense?  (Read 2397 times)

MustachianNoob

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Property Strategy : Never sell makes sense?
« on: October 02, 2018, 07:10:08 AM »
Hello,

I've been in touch with a couple of property investment companies. Their strategy appears to be the following :

1. Buy a new build in a sought out area
2. Rent the property to cover interest only (Buy to Let - interest only mortgage)
3. Wait for the Property to appreciate in value
4. Remortgage the property at 75% of it's new value
5. Use the equity to buy a new property : repeat steps 1 - 5

Now the above seems all well and good with the exception that they "advise" to never sell the properties. This is the one part I can't really get my head around. Does this make sense for mustachians or am I better off putting the money in the stock market and not having to deal with huge mortgages.

I have a long term view on the investment - say 10 - 15 years.
 

What say ye Mustachians?
Does it make sense to buy properties, remortgage them every 5 years and never ever sell them?

waltworks

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Re: Property Strategy : Never sell makes sense?
« Reply #1 on: October 02, 2018, 07:43:43 AM »
Works great over the last 10 years or so when there's constant double-digit appreciation.

Loses you your shirt quickly in a normal RE market.

-W

Jon Bon

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Re: Property Strategy : Never sell makes sense?
« Reply #2 on: October 02, 2018, 11:32:31 AM »
Sure it makes a TON of sense for the PM Companies!

More properties = more management revenues.

That strategy sounds like something you would hear on bigger pockets or one of those 'gurus' I can't tell you what prices will do tomorrow, but they are at near all time highs today. So YMMV on when and what you buy.

Good luck out there.

MustachianNoob

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Re: Property Strategy : Never sell makes sense?
« Reply #3 on: October 02, 2018, 03:27:30 PM »
Thanks for the responses. The companies seem to paint a rosy picture that everything will just increase but it still seems like a unhealthy level of debt.

There were a couple of podcasts that were talking about recent situation.
https://www.thepropertyhub.net/whats-brexit-done/ (skip to 5 minutes )

This podcast talks about over the last 50 year there were only 3 times a 5 year duration lost money.
https://www.thepropertyhub.net/are-buy-to-let-investors-turning-their-backs-on-property/

It's food for thought. I will research further and let you know how I get on if I go ahead with the off plan investment.

waltworks

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Re: Property Strategy : Never sell makes sense?
« Reply #4 on: October 02, 2018, 03:47:25 PM »
It's really not the level of debt (it's common to lever up) that is the issue here - I think you're misunderstanding. The issue is that you are *counting* on massive property appreciation to make any money. If the property doesn't appreciate, you lose money like it's going out of style. That's been a great bet for the last decade or so (in the US) but it also means people are now convinced property prices never stagnate or drop, and have decided they're geniuses. They're not, they were in the right place at the right time.

Second, if someone else is trying to sell you a system or idea, you need to stop and think about why they're trying to make money by selling you those great ideas- rather than just doing it themselves. Why do they need you? Answer: because it's a big scam (99% of the time).

-W

tralfamadorian

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Re: Property Strategy : Never sell makes sense?
« Reply #5 on: October 03, 2018, 06:33:24 PM »
1. Buy a new build in a sought out area
2. Rent the property to cover interest only (Buy to Let - interest only mortgage) Rent the property to cover PITIA, vacancy, management, maintenance, capex and profit margin.
3. Wait for the Property to appreciate in value
4. Remortgage the property at 75% of it's new value
5. Use the equity to buy a new property : repeat steps 1 - 5

FTFY

MustachianNoob

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Re: Property Strategy : Never sell makes sense?
« Reply #6 on: October 13, 2018, 09:33:16 AM »
Thanks tralfamadorian

Although covering the principle would reduce the ROI to <2% so then I may start to question whether it's worthwhile and would I be better off sticking the money in low fee tracker fund?

SwordGuy

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Re: Property Strategy : Never sell makes sense?
« Reply #7 on: October 13, 2018, 06:14:37 PM »
Thanks tralfamadorian

Although covering the principle would reduce the ROI to <2% so then I may start to question whether it's worthwhile and would I be better off sticking the money in low fee tracker fund?

If you're only making 2% for a ROI on a rental property, you're buying the wrong properties.   I'm making 10%-11% ROI just on the rent, not counting any appreciation.   (That's after subtracting all the costs, current and future, that should be subtracted.)

In my market, I get a one time 50%-60% jump in property value over full after-repair cost when the property is ready to rent.  Then I'm subject to the vagaries of the market.  We're not a high-appreciation market like the big coastal cities with booming high-wage job markets.

I know people who do much better than I am, but they're smarter about it, better connected in the industry, and work harder at it than I do.    They also leverage their property purchases and I don't.  I could do better if I borrowed, but I'm not willing to do that.  For us, the extra risk isn't worth it despite the potentially much higher return.


I view our rental properties as our bond portfolio, giving us a steady income that's not directly tied to the stock market valuations.

tralfamadorian

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Re: Property Strategy : Never sell makes sense?
« Reply #8 on: October 14, 2018, 07:19:09 AM »
Thanks tralfamadorian

Although covering the principle would reduce the ROI to <2% so then I may start to question whether it's worthwhile and would I be better off sticking the money in low fee tracker fund?

With the numbers you have mentioned, yes, you would have much better return on index funds.

monarda

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Re: Property Strategy : Never sell makes sense?
« Reply #9 on: October 14, 2018, 08:23:32 AM »
Thanks tralfamadorian

Although covering the principle would reduce the ROI to <2% so then I may start to question whether it's worthwhile and would I be better off sticking the money in low fee tracker fund?

If you're only making 2% for a ROI on a rental property, you're buying the wrong properties.   I'm making 10%-11% ROI just on the rent, not counting any appreciation.   (That's after subtracting all the costs, current and future, that should be subtracted.)

In my market, I get a one time 50%-60% jump in property value over full after-repair cost when the property is ready to rent.  Then I'm subject to the vagaries of the market.  We're not a high-appreciation market like the big coastal cities with booming high-wage job markets.

I know people who do much better than I am, but they're smarter about it, better connected in the industry, and work harder at it than I do.    They also leverage their property purchases and I don't.  I could do better if I borrowed, but I'm not willing to do that.  For us, the extra risk isn't worth it despite the potentially much higher return.


I view our rental properties as our bond portfolio, giving us a steady income that's not directly tied to the stock market valuations.

This is us, too.  We don't work very hard and don't leverage a lot.
We plan to pay down our loans- We're currently less than 40% LTV
Steady income that we pretty much are living off of now. 
Yeah, like bonds. That's a good way to think about it.

Blindsquirrel

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Re: Property Strategy : Never sell makes sense?
« Reply #10 on: October 14, 2018, 05:25:19 PM »
 Swordguy is spot on!  Paid off rental property is a great way to get mostly passive income. Yes it is more of a PITA than bonds but the yield is much, much better. Also, rental income is treated much better than W2 income with the tax man.

Megma

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Re: Property Strategy : Never sell makes sense?
« Reply #11 on: October 26, 2018, 02:01:15 PM »
Thanks for the responses. The companies seem to paint a rosy picture that everything will just increase but it still seems like a unhealthy level of debt.

Yeah this was the conventional wisdom before 2008 "buy property, it always goes up" and now we should know how that worked out.

Like WaltWorks said, anyone who is a selling you a product, you need to think about if your interests and theirs are aligned. If they get money because you own 100 properties (and they get paid to manage each one) their goal is for you to own as many as possible, they don't care if you are making any money on these "investments."

It's like banks that will happily loan you 1) more money than you want/need/can really afford and 2) with no money down. They collect your fees on every new loan and interest while you're paying. They want you to take a loan and charge extra interest if the loan is risky, then you pay the insurance on the mortgage if you default, so why would they say no? Instead they say things to you like "Oh I pre-approved you for a little bit more in case you see a house you want and it's higher."

MoneyMatrix

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Re: Property Strategy : Never sell makes sense?
« Reply #12 on: November 11, 2018, 11:13:47 AM »
I remember a few companies like that sell new construction rentals in 2006 or so.

The problem is you are not making money when you start, and they are usually building in areas with lots of land. If there is a downturn, the rents will possibly go down, and then you are competing with all the other new construction rentals that are exactly the same and the properties are getting older, so you might be getting lower rents and negative appreciation.

It's pretty risky. Those companies that I remember were gone pretty fast. Trada was one...

https://www.biggerpockets.com/forums/92/topics/12930-trada-properties-anyone-ever-bought-a-4-plex-from-them

Checkout bigger pockets for more info..

DublinOdae

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Re: Property Strategy : Never sell makes sense?
« Reply #13 on: November 11, 2018, 06:45:10 PM »
Hi,
  I would suggest a different approach. First, never buy a property to bank on appreciation alone. Think of appreciation as the icing on the cake, not the cake itself.

A better approach, specifically if you have a timeline of 10-15 years until retirement is to use the BRRRR strategy and combine it with something I call the Rental Refi Ladder. BRRRR stands for Buy, Renovate, Rent, Refi, Repeat. Money is made in real estate when you buy, not when you sell. You need to buy low, which means the properties you should be looking for are not new builds but homes that need renovations. That way, you can take advantage of sweat equity.

The beauty of BRRRR is that you only need one chunk of money to start with and you can buy as many properties as you want. Once you buy, you have the property renovated up to "rental standards" - clean, updated, nothing super fancy because it's a rental. Then you rent it out and have your property manager manage the property for you. Once it's rented, you want to refi it at 75% ARV (after-repair value).

You can do this in one of two ways: wait the 6 month seasoning period and get a regular refi; or use delayed financing, which is an option if you paid cash for the property and get an FHA mortgage. Through the refi, you get your original investment back and maybe a bit more on top of that - at which point you repeat the whole process over and over again.

Let me give you an example of a deal I just finished - this should give you a better understanding.

1) I purchased a HUD home that was listed for $120K - I always bid 50% less than the list price. They countered and I got it for $68K.
2) The home needed about $10K in work - it wasn't too bad, just needed updating, painting, some drywall repair, yard clean-up, etc.
3) For me, I want to be all in (purchase price + rehab) for no more than 65% of the ARV (after-repair value). So going in, I knew I needed to get everything done for less than $80K or so.
4) I got a hard money loan for the purchase as well as the rehab.
5) Finished the renovations and had a tenant 2 weeks after that.
6) Because I didn't pay cash for the property, I didn't qualify for delayed financing, so I had to wait the 6 month seasoning period to refi.
7) At that point, the home appraised for $125K. Because this is an investment property, the bank will only let you refi up to 75% of appraised value, which was $93,750 ($125K x .75).
8) The hard money lender received their money, plus interest ($83K), and the rest of the money went into my pocket ($10K) tax-free because it's a loan, not a sale. Basically, I got paid $10K to purchase this home, and now am receiving about $250/month in positive cash flow from the property.

No where in this example did I mention appreciation because that's only icing on the cake. Because I received my entire initial investment back, plus an additional $10K on top, any return I receive from this property is infinite. And I have no plans on selling because I'm building my rental refi ladder.

I'll purchase three of these deals per year for the next 10-15 years. They are all on 30 year fixed rate mortgages, but I'm paying them off in 15 years. If I purchase 3 per year for the next 15 years, I'll have a portfolio of 45 homes.

On year 15, the first three properties will be paid off - free and clear. This is when I will refi those three for 75% of their value and use that as tax-free wealth in early retirement until I can access my retirement savings. This is the same concept as laddering bonds - except with real estate. Every year after year 15, I'll have 3 properties being paid off and mortgage free, which allows me to refi them and take the cash tax-free. You don't have to be so aggressive with 3 properties; you can just do one a year if you want. It depends on how much money you want to receive from the refis.

Just one way you could use real estate to fund your early retirement. I know I threw a lot at you there - if you have any questions, don't hesitate to ask.

~Dublin

tralfamadorian

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Re: Property Strategy : Never sell makes sense?
« Reply #14 on: November 12, 2018, 06:13:45 AM »
. They are all on 30 year fixed rate mortgages...

Who is your lender for 30yr fixed loans after you reached your Fannie limit?

47%MMM

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Re: Property Strategy : Never sell makes sense?
« Reply #15 on: November 19, 2018, 11:28:55 AM »

1) I purchased a HUD home that was listed for $120K - I always bid 50% less than the list price. They countered and I got it for $68K.
2) The home needed about $10K in work - it wasn't too bad, just needed updating, painting, some drywall repair, yard clean-up, etc.
3) For me, I want to be all in (purchase price + rehab) for no more than 65% of the ARV (after-repair value). So going in, I knew I needed to get everything done for less than $80K or so.
4) I got a hard money loan for the purchase as well as the rehab.
5) Finished the renovations and had a tenant 2 weeks after that.
6) Because I didn't pay cash for the property, I didn't qualify for delayed financing, so I had to wait the 6 month seasoning period to refi.
7) At that point, the home appraised for $125K. Because this is an investment property, the bank will only let you refi up to 75% of appraised value, which was $93,750 ($125K x .75).
8) The hard money lender received their money, plus interest ($83K), and the rest of the money went into my pocket ($10K) tax-free because it's a loan, not a sale. Basically, I got paid $10K to purchase this home, and now am receiving about $250/month in positive cash flow from the property.

~Dublin

Dublin, So many questions... How do you select these HUD homes? Are they in your immediate area? Do you manage them yourself or through a prop manager? I've invested in low income RE before in the past with mixed results so I'm curious.

Thanks!

tralfamadorian

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Re: Property Strategy : Never sell makes sense?
« Reply #16 on: November 19, 2018, 11:47:29 AM »

47%MMM

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Re: Property Strategy : Never sell makes sense?
« Reply #17 on: November 19, 2018, 11:52:48 AM »
How do you select these HUD homes?

https://hudhomestore.com

Thank you but that question about "how" was more based on selection criteria...

DublinOdae

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Re: Property Strategy : Never sell makes sense?
« Reply #18 on: November 20, 2018, 02:04:48 PM »

1) I purchased a HUD home that was listed for $120K - I always bid 50% less than the list price. They countered and I got it for $68K.
2) The home needed about $10K in work - it wasn't too bad, just needed updating, painting, some drywall repair, yard clean-up, etc.
3) For me, I want to be all in (purchase price + rehab) for no more than 65% of the ARV (after-repair value). So going in, I knew I needed to get everything done for less than $80K or so.
4) I got a hard money loan for the purchase as well as the rehab.
5) Finished the renovations and had a tenant 2 weeks after that.
6) Because I didn't pay cash for the property, I didn't qualify for delayed financing, so I had to wait the 6 month seasoning period to refi.
7) At that point, the home appraised for $125K. Because this is an investment property, the bank will only let you refi up to 75% of appraised value, which was $93,750 ($125K x .75).
8) The hard money lender received their money, plus interest ($83K), and the rest of the money went into my pocket ($10K) tax-free because it's a loan, not a sale. Basically, I got paid $10K to purchase this home, and now am receiving about $250/month in positive cash flow from the property.

~Dublin

Dublin, So many questions... How do you select these HUD homes? Are they in your immediate area? Do you manage them yourself or through a prop manager? I've invested in low income RE before in the past with mixed results so I'm curious.

Thanks!

Good question - I haven't reached my limit of 10 homes. I just got started with this strategy so I have only one finished and rented out and one in the works. When I reach 10 homes, I will go through a commercial lender because there is no limit to the amount of mortgages you can have with a commercial lender - as far as I know.

~Dublin

DublinOdae

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Re: Property Strategy : Never sell makes sense?
« Reply #19 on: November 20, 2018, 02:18:25 PM »
As for how I select the homes, for now, I only want to invest in properties that are in my immediate area (Philadelphia), however, I am not opposed to looking in other markets once I've established a good ground team in that area. But to answer your question, when I use the BRRRR, I want to be all in (purchase price, renovation budget, and holding costs) for 65% of the After-Repair-Value (ARV).

I use a site called 'House Canary' - the first 30 days are free, then it's $9 per comp. I pull comps for a property from there, as well as zillow's pricing tool, bank of america tool, and FSBO pricing tool (the last three are free - links are below). I'm looking for the 1% rule, where I can charge approximately 1% of the ARV in monthly rent. What I've found is that some less expensive areas actually have great returns using the 1% rule, however, the property is not going to appreciate as quickly over the long run - which is crucial to my Rental Refi Ladder.

So, it's a delicate balance. I'm constantly looking on the HUD website to find new properties to look at. There is always a waiting period with HUD because owner-occupants, gov't agencies, and non-profits get the first shot at the homes before investors are allowed to bid. I look for properties that have been open to investor bids for approximately 60 days, although I have bid on properties after 30 days. Time is a great motivator, and the longer these listings "age", the more willing HUD is to accept a lower offer.

The beauty of HUD is you aren't dealing with an owner-occupant that will get insulted if you offer them half of what they are asking. The key to this strategy is to find a solid HUD qualified real estate agent that is willing to put in a ton of offers for you. That can take a little time to find, but these agents are out there.

Hope this helps - let me know if you have any other questions - I'm happy to share what I know.

Links:
https://www.zillow.com/sellerlanding/pricingtool/
https://realestatecenter.bankofamerica.com/tools/marketvalue4.aspx
https://www.forsalebyowner.com/sell-my-house/pricingscout/landing/
https://www.housecanary.com

~Dublin

clarkfan1979

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Re: Property Strategy : Never sell makes sense?
« Reply #20 on: November 21, 2018, 11:04:10 AM »
This is my strategy for the last 11 years.

1. Buy an ugly house with good bones in a high demand neighborhood with 5% to 20% down as a primary residence. 
2. After a 3-6 month rehab, be at 40-50% equity.
3. Live in it for 3-5 years and then rent it out when you move.
4. Once your equity position gets to 60-70%, refinance to bring it down to 40%.

Last year (Nov 2017) I was at 70% equity across two properties for a total of 439K of equity. I owed 186K on 625K of market value). I refinanced one rental property at 25% and pulled out 145K. I was able to get a slightly lower rate, so that helped a little. I used the money to help me buy a primary home in June 2018 at 603K that needed work. It was under contract in March 2018.

Now one year later, I'm probably around 41% to 45% total equity across 3 properties, depending on the value of my primary. I think comps are more difficult on Kauai because inventory is so low. Across the 3 properties, I owe 810K and the value of the 3 properties is 1.375M to 1.45M. This is 565K to 665K of total equity.

If the rent on my two rentals went down by 41%, I would then be $25/month short of covering total expenses. However, I would still be getting $550/month toward principle pay down.

Based on book, the millionaire real estate investor, the average equity position for people who have more than 1 million in equity in real estate is 40%. I try to stay above 40% equity at all times.

If you have a job that is uncorrelated with real estate prices (some sort of guaranteed government job) I think you can take more risk and leverage more.






JoJoP

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Re: Property Strategy : Never sell makes sense?
« Reply #21 on: November 22, 2018, 08:40:01 PM »
Hello,

I've been in touch with a couple of property investment companies. Their strategy appears to be the following :

1. Buy a new build in a sought out area
2. Rent the property to cover interest only (Buy to Let - interest only mortgage)
3. Wait for the Property to appreciate in value
4. Remortgage the property at 75% of it's new value
5. Use the equity to buy a new property : repeat steps 1 - 5

Now the above seems all well and good with the exception that they "advise" to never sell the properties. This is the one part I can't really get my head around. Does this make sense for mustachians or am I better off putting the money in the stock market and not having to deal with huge mortgages.

I have a long term view on the investment - say 10 - 15 years.
 

What say ye Mustachians?
Does it make sense to buy properties, remortgage them every 5 years and never ever sell them?

Yes, it makes sense to buy properties and never sell them, but I think the plan, as outlined in  bullet points 1-5 is flawed.  As others mentioned in the thread, some points will work against you.

1) There is an inherent conflict of interest with the management/investment firm since their role is to manage your properties for a profit
2) Bargains are made at purchase.  New homes are generally not bargains, but rather the epitome of market price
3) The soundness of real estate investment is a beautiful combination of low purchase price, good financing rate, sweat equity for improvements, future appreciation, depreciation and tax advantages, good rental juju, luck,  etc.

 Do your research and don't trust the first expert you meet.  Or the second. Or the third.  Keep learning until you're confident with your knowledge base. 


But, yes, we are buy and hold types.  Never selling the rentals makes sense to us.  We have 10 rentals with a current market value north of 3MM and 1 mortgage of less than 150K.   I paid off one mortgage last week, and it's a sweet, sweet feeling.    We don't even want any more rentals, as this program is sound, working swimmingly,  and should continue to fund our life indefinitely.  In a pinch, we could finance or pull an equity line/private loan out of any of them. 

FWIW- We flipped one house in 2012.  It was not our forte.  We made a profit, yes, but it was hard work, very time consuming,  and we're better at other things which make us money.  It took about 10 months to buy, rehab, list, get into escrow, and close escrow on the sale. That was fast for us, but slow for professional contractor types.   If we'd held it just one more year, and enjoyed the magic of buying at the bottom and selling in a rising market, we would have doubled the profit.  If I still owned it today, 6 years later, I'd have 250K in equity and a net of 60-80K in rental income after expenses- more than 300K total.... sigh....  Hind sight is 20/20.