Author Topic: Articles showing when real estate investing is a bad idea?  (Read 4263 times)

Joel

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Articles showing when real estate investing is a bad idea?
« on: March 16, 2014, 06:01:51 PM »
Living in California (Sacramento), I'm familiar with the housing prices being very high. This leads to everyone being in a rush to buy a house and lock in the low mortgage rates. In fact, many older people suggest purchasing property as an investment. Personally, I'm not purchasing a house to live in as I plan to leave my current job in less than five years and do not want to be tied to a specific area. Further, most property available does not rent for a high enough price. For example, the condo we live in sold for over 300k but only rents for 1200/month. Nowhere near the 1% rule.

Anyways, I have a friend being pressured into purchasing real estate as an investment who sought out advice from me. I told him I personally would not do it unless rents are 1% of the purchase price at a minimum, and I have not found anything that meets that threshold.

Can anyone point me in the direction of some articles showing what is a good investment and what is not? General rules to follow, etc. specifically maybe something pointing out real estate investments are not always the best idea. I was hoping to forward it on to my friend and let him research it himself. I know I have seen articles here, and researched it myself but can't seem to find an article that isn't filled with emotional reasons, instead of just from an in segment perspective.

AlexK

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Re: Articles showing when real estate investing is a bad idea?
« Reply #1 on: March 16, 2014, 06:05:44 PM »
http://www.biggerpockets.com/real-estate-investment-calculator

That calculator is OK but generally you can just refer him to the bigger pockets forum.
« Last Edit: March 16, 2014, 06:10:26 PM by AlexK »

the fixer

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Re: Articles showing when real estate investing is a bad idea?
« Reply #2 on: March 16, 2014, 07:55:54 PM »
You can make money in real estate without following the 1% rule. 1% means amazing income property deal, but different markets (especially urban ones) behave differently. Seattle is another area where the 1% rule is impossible to follow, but there are landlords here who are making money.

My opinion on it is that, at a minimum, a rental property should produce some amount of positive cashflow: NOI minus the mortgage payment with say 20% down. It should be possible to find properties that meet this requirement in Sacramento. The 1% rule essentially works out to a property that would cashflow even at 100% financing, which is great but not necessary for a property to be a good investment.

arebelspy

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Re: Articles showing when real estate investing is a bad idea?
« Reply #3 on: March 17, 2014, 07:11:26 AM »
You can make money in real estate without following the 1% rule. 1% means amazing income property deal, but different markets (especially urban ones) behave differently. Seattle is another area where the 1% rule is impossible to follow, but there are landlords here who are making money.

My opinion on it is that, at a minimum, a rental property should produce some amount of positive cashflow: NOI minus the mortgage payment with say 20% down. It should be possible to find properties that meet this requirement in Sacramento. The 1% rule essentially works out to a property that would cashflow even at 100% financing, which is great but not necessary for a property to be a good investment.

I disagree with most of this.  There is a reason why 1% is cited as a minimum, not an "amazing income property deal".

It depends on your goals, of course, but something better be at 1% (or much better) for me to even be close to interested.

Otherwise, for a 2% return, why not just get TIPs or equities if you're feeling frisky?  Lower returns is way too much work for no return.

And yes, 1% can be found in Seattle.  Just maybe not on the MLS.  But if you're shopping on the MLS except in rare circumstances, you may be doing it wrong (from an investment perspective).  That's retail, not wholesale, prices.
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Fishingmn

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Re: Articles showing when real estate investing is a bad idea?
« Reply #4 on: March 17, 2014, 09:06:12 AM »
I don't think he is referencing a 1% or 2% return. He is referencing a guideline that monthly rents = 1-2% of purchase price. This is much different. BiggerPockets advocates for the 2% of rent rule but most don't find anything close to that unless the go into really tough neighborhoods.

Getting at least a factor of 1% can be a good option to weed out alternatives but you really need to run the numbers on each one from there.

I also disagree with Arabel - there's nothing wrong with shopping on MLS for many beginning investors. Yes, it will be harder to find deals and you will be competing against many more people but most people don't have the knowledge or time to start up a marketing campaign to seek out off market deals. 

Seek out stuff on MLS that isn't as widely sought out.  For example, older condo's (my last deal this summer was a condo that rents for $845/mo and cost $47k), twin homes (many people don't search them as they are a separate flag on MLS) or markets that are 30-45 miles outside the major metro.

arebelspy

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Re: Articles showing when real estate investing is a bad idea?
« Reply #5 on: March 17, 2014, 09:25:31 AM »
I don't think he is referencing a 1% or 2% return. He is referencing a guideline that monthly rents = 1-2% of purchase price.

I understand what he is referring to, thanks.  :)

What I am saying is when you don't meet the 1% rule at a minimum, even if you barely cash flow, as he suggests is okay, your returns will be only a few percent at best ("Don't meet 1%?  Expect that to be your return" is a catchy, if a bit hyperbolic, way to say it ;) ).  At that point I wouldn't bother investing in real estate, as you can get those returns with much less risk and hassle elsewhere.

Sorry I wasn't clear on that.  If you hit the 2% rule, I'd expect around a 12% return.  If you're hitting closer to a 0.5-0.8% rent to price ratio, I'd expect closer to a 2-4% return.

I also disagree with Arabel - there's nothing wrong with shopping on MLS for many beginning investors. Yes, it will be harder to find deals and you will be competing against many more people but most people don't have the knowledge or time to start up a marketing campaign to seek out off market deals. 

Sure, stuff on the MLS can be fine, but it's not a "deal" - it's buying at market value.  I have bought off the MLS, and still do.  But I don't tell myself I'm getting a steal.

Further, if you want to beat the MLS prices (i.e. the ones on the MLS in your location don't fit the 1% rule, such as in Seattle), you'll have to go off MLS.  I'd rather go off MLS and find a deal that hits at least the 1% rule than buy one off the MLS that doesn't.

If you are a beginner in an area where your MLS doesn't hit 1%, I'd tell you to go off MLS, or not invest.  I wouldn't just take mediocre returns because that's what the lazy option is giving you.  YMMV.

Seek out stuff on MLS that isn't as widely sought out.  For example, older condo's (my last deal this summer was a condo that rents for $845/mo and cost $47k), twin homes (many people don't search them as they are a separate flag on MLS) or markets that are 30-45 miles outside the major metro.

I'd rather have a good property that fits my model than compromise on that and buy some oddball non-conforming property just to buy off the MLS.  Everyone needs to set their own criteria though, I'm glad your strategy is working for you (and I know it is, I've seen and appreciated your posts on E-R.org, so don't take this as critical against you, just caution for the new people, as I've seen way too many buy a random property from the MLS they think is a deal and get in over their head and have no margins to bail them out).  :)
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the fixer

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Re: Articles showing when real estate investing is a bad idea?
« Reply #6 on: March 17, 2014, 01:01:33 PM »
Well, there are theoretically deals to be found in Seattle from looking at recent sales from the past few years. A small percentage of the sales are for an extremely low price that, based on what I know about the rental market, should rent for about 1% of the selling price. What I don't know is how much work these houses need (most are very old) or whether these transactions were from estate transfers or something.

So if a new investor like myself or the OP's friend wanted to obey the 1% rule for a first buy-and-hold rental property, what should we be doing? Try going through a wholesaler (I know little about this except they claim to only accept cash)? Start a mini-company and spam the world with "we buy houses" fliers, postcards, and letters? I've read Schaub's book and I've read the thread on finding deals and it still doesn't make sense how you can do this on a small scale to find 1 or 2 properties.

James

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Re: Articles showing when real estate investing is a bad idea?
« Reply #7 on: March 17, 2014, 01:11:07 PM »
Anyways, I have a friend being pressured into purchasing real estate as an investment who sought out advice from me. I told him I personally would not do it unless rents are 1% of the purchase price at a minimum, and I have not found anything that meets that threshold.


When friends are pressuring friends to get into an investment, I would take that as a negative indication for that particular investment. Not that it would be wrong, just that I wouldn't count that as a reason to invest, just the opposite. I want to get into an investment when everyone else is saying get out, but I realize the fundamentals are in my favor.

Johnny Aloha

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Re: Articles showing when real estate investing is a bad idea?
« Reply #8 on: March 17, 2014, 03:36:44 PM »
This discussion is sounding (once again) like a cash flow vs appreciation discussion.

For the OP: if he isn't knowledgable enough to determine the risk vs reward for a market/investment he is considering, I recommend he do two things: 1. determine short term and long term goals, and 2. get educated.

For #2, I'd start with listening to most (or all) of the BiggerPockets podcasts, as well as other RE podcasts.  And reading the books ARS has recommended.

Understand the basic rules of thumb (50%, 1%, etc) and make an educated estimate if they will apply in the local market.  Rules of thumb are rarely attainable in my market, yet my investments are still (very) profitable. 

Understand that there are different RE investment styles (just like there are different stock market investing styles).

Personally, I've looked at a lot of 1-2% deals, but haven't pulled the trigger yet because the risk vs reward equation isn't as favorable as I want.

a.g

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Re: Articles showing when real estate investing is a bad idea?
« Reply #9 on: March 19, 2014, 09:23:28 PM »
But if you're shopping on the MLS except in rare circumstances, you may be doing it wrong (from an investment perspective).  That's retail, not wholesale, prices.

I'm a newb, so I gotta ask- where do you find your next purchases?

arebelspy

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Re: Articles showing when real estate investing is a bad idea?
« Reply #10 on: March 19, 2014, 09:31:33 PM »
But if you're shopping on the MLS except in rare circumstances, you may be doing it wrong (from an investment perspective).  That's retail, not wholesale, prices.

I'm a newb, so I gotta ask- where do you find your next purchases?

http://www.mrmoneymustache.com/forum/real-estate-and-landlording/any-tips-for-finding-desirable-investment-properties-(aside-from-the-usual-mlsr/
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a.g

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Re: Articles showing when real estate investing is a bad idea?
« Reply #11 on: March 20, 2014, 10:07:47 PM »
Thanks arebelspy :)

arebelspy

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Re: Articles showing when real estate investing is a bad idea?
« Reply #12 on: March 21, 2014, 07:05:29 AM »
Thanks arebelspy :)

Sure!

The Fixer also just started a similar topic to discuss this issue (probably in part because of your question):
http://www.mrmoneymustache.com/forum/real-estate-and-landlording/real-estate-shopping-beyond-mls/
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.