Author Topic: Confusion surrounding Landlording  (Read 1349 times)

Sulame66

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Confusion surrounding Landlording
« on: March 02, 2017, 10:10:39 AM »
Hi, I have posted in the investor's forum on this and have done more research and have a wealth of questions about landlording. I go back and forth between if it's a good or bad idea. I go back and forth on where I might potentially do it. I go back and forth on how much money I should be investing. Here are some of my questions:

- Pretty basic: Why would I (using my current situation) want to continue to rent @ 900 a month, put 25% down on an investment property (25% is the minimum to put down on an investment property?) around the price that I would be looking for in a home for myself (175-200 ish) which can then rent for around $1,500 and try to break even or make a little profit on this each month ... instead of just moving into the house myself and immediately gaining the 900 a month I was tossing on rent?

- Still basic: What is the 'cash flow' mechanic everyone talks about? Are we talking about a spreadsheet that is something like: Day 1 - dropped $40,000 on down payment + closing costs + repairs. Day 20: Paid $1,200 on mortgage. Day 22: Paid $100 in insurance. Day 30: Got $1,350 rent from PMC (after they take their 10%). Etc. Then I somehow calculate a rate of return and figure out how long to get out of the red and turn a profit?

- Somewhat intermediate: If I buy in the same city or metro so that I can be close by if needed (to either move into eventually or fire the PMC and do it myself), that further emphasizes my first question. If I choose to buy elsewhere, I now need to look at EVERY CITY IN THE COUNTRY to figure out what is best. Seems impossible. For example, I looked in Birmingham as it was a top 100 metro in an 'A' state (Alabama, Alaska, etc.) There are houses for $30k that probably require $20k in upgrades that can rent for $800. But the schools are 2-4, and I have no idea what the neighborhood is like. Clearly, there are people living in Birmingham in these properties or it wouldn't be a top 100 metro. Are there going to be squatters? Are drug dealers on every corner? Is everyone just not educated but friendly and it makes absolutely no impact on anything as long as they pay me my $800 a month?

- Somewhat intermediate: What about tax implications and legal issues? I'm not a lawyer. What if I live in state 4/50 and I buy in state 11/50, then I need to move to state 43/50 for a job? What if I need or want to eventually sell the home but don't live in the state and either keep the proceeds or put it into another house? What if that house I want to buy is now in state 34/50? Etc. etc.

- Advanced: What about looking forward to retirement? Should I only look in cities I'd be ok retiring to in 30 years so that I already have a property? What about as a vacation home, even though tenants live there? If so, do I need to travel all over to see if I like the area before purchasing? What about predicting the area and state 30 years into the future? A city could be great now but be horrible in the future (Detroit). A city might be horrible now but awesome in the future (can't think of any ...). Do I want something on the outskirts of a major metro? In the middle of nowhere? Etc.

- Advanced: What about acreage and unused land? What types of homes to actually look for? (No HOA, only single family detached, pool, 3 car garage, cul-de-sac, near things, away from things, etc.) Are homes from the 40s a no-go due to repairs? Are homes from the 2010s a no-go due to being overpriced due to new tech? What if it's brick in the middle of cottages? What if it's stucco in the middle of log cabins?

- Advanced: How much to invest and risk? If a $50,000 home is expected to return 10%, and a $100,000 home is expected to return 10%, which should I pick? Why? Based on this, should I be looking for something that is 50% of what I'm approved for? 20%? 100%?

- Advanced: Is this even more of a plunge than buying a home? If I buy a home for myself now and meet my future wife tomorrow and we're living together in a year, I just dropped a ton of my money into a rental property and we don't have capital for a house of our own.

- Advanced: Like with anything in life, optimizing and automating is ideal. How can I go through major markets and ultimately pick a good investment just doing this on my own at night on my tablet? Are there programs? Websites?

- Is this just another area of real estate completely dominated by groups of cash buyers and REIT investors? That I have no hope of competing against?

- Is this a terrible idea for somebody like myself who overthinks literally everything to the point of crippling my decision-making?

Thanks!

waltworks

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Re: Confusion surrounding Landlording
« Reply #1 on: March 02, 2017, 12:06:43 PM »
Dude, go read a bunch of the longer/more involved threads here. You will find answers to your whole laundry list. If you've got the time to type that up, you've got the time for some reading.

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KarefulKactus15

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Re: Confusion surrounding Landlording
« Reply #2 on: March 02, 2017, 01:58:42 PM »
You dont have real estate issues, you have analysis paralysis.   

https://en.wikipedia.org/wiki/Analysis_paralysis

I used to suffer form this to the form that I couldnt get anything done.   Finally I read a book about productivity and one of the suggestions was to give critical thinking a maximum time per task and go with the best reasoned option at the end of that time span.    Maybe this wont work for you, but its helped me greatly getting ideas from concept to reality.

Also it doesnt directly answer your questions, but check out the real estate suggested books.  Ive read most of them and it improved my understanding. I believe the suggested books would give you the framework to understand and answer the questions you listed here.

http://forum.mrmoneymustache.com/real-estate-and-landlording/real-estate-book-recommendations/

And like Walt suggested, dig around the forum!


Mola

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Re: Confusion surrounding Landlording
« Reply #3 on: March 02, 2017, 05:06:25 PM »
Good questions. If you are first getting into this then learning isn't analysis paralysis IMHO. Like others have mentioned, there are a lot of places to go to learn more. But since you posted I'll reply.

- Pretty basic: Why would I (using my current situation) want to continue to rent @ 900 a month, put 25% down on an investment property (25% is the minimum to put down on an investment property?) around the price that I would be looking for in a home for myself (175-200 ish) which can then rent for around $1,500 and try to break even or make a little profit on this each month ... instead of just moving into the house myself and immediately gaining the 900 a month I was tossing on rent?

Since you have a down payment, the only reason to keep renting and instead invest in a property would be because you value the freedom of mobility that renting offers you. But you don't have to give that up and not invest. Buy a property to live in that would also make a good rental, then if you want to move its a rental. Or buy a duplex or a triplex and live in one of the units and rent out the others. Now they pay your mortgage, you learn more about landlording, and later if you move you can knowing that you can rent the unit you vacate.

- Still basic: What is the 'cash flow' mechanic everyone talks about? Are we talking about a spreadsheet that is something like: Day 1 - dropped $40,000 on down payment + closing costs + repairs. Day 20: Paid $1,200 on mortgage. Day 22: Paid $100 in insurance. Day 30: Got $1,350 rent from PMC (after they take their 10%). Etc. Then I somehow calculate a rate of return and figure out how long to get out of the red and turn a profit?

Cashflow = Rent Amount - (Money you spend on operations (repairs, insurance, taxes, etc) + Money you spend on debt service (Principal and Interest)). That HAS to be positive. Two things to note in that equation: Cashflow is not just the money over and above the mortgage and you don't factor appreciation into it. Cashflow is partly about making money, but its primarily about risk management. The more cashflow you have the more adverse situations you can weather.

This is THE book to read on it:
https://www.amazon.com/Estate-Investor-Financial-Measures-Updated-ebook/dp/B018HOKXBG

- Somewhat intermediate: If I buy in the same city or metro so that I can be close by if needed (to either move into eventually or fire the PMC and do it myself), that further emphasizes my first question. If I choose to buy elsewhere, I now need to look at EVERY CITY IN THE COUNTRY to figure out what is best. Seems impossible. For example, I looked in Birmingham as it was a top 100 metro in an 'A' state (Alabama, Alaska, etc.) There are houses for $30k that probably require $20k in upgrades that can rent for $800. But the schools are 2-4, and I have no idea what the neighborhood is like. Clearly, there are people living in Birmingham in these properties or it wouldn't be a top 100 metro. Are there going to be squatters? Are drug dealers on every corner? Is everyone just not educated but friendly and it makes absolutely no impact on anything as long as they pay me my $800 a month?

As someone who is currently looking into other cities, yes this can be a lot of research. If you are also new to real estate investment it can be overwhelming. But I do suggest you spend some hours looking at other cities anyways. It helps to better know your own backyard to compare it to others.

- Somewhat intermediate: What about tax implications and legal issues? I'm not a lawyer. What if I live in state 4/50 and I buy in state 11/50, then I need to move to state 43/50 for a job? What if I need or want to eventually sell the home but don't live in the state and either keep the proceeds or put it into another house? What if that house I want to buy is now in state 34/50? Etc. etc.

Too many things here to unpack

- Advanced: What about looking forward to retirement? Should I only look in cities I'd be ok retiring to in 30 years so that I already have a property? What about as a vacation home, even though tenants live there? If so, do I need to travel all over to see if I like the area before purchasing? What about predicting the area and state 30 years into the future? A city could be great now but be horrible in the future (Detroit). A city might be horrible now but awesome in the future (can't think of any ...). Do I want something on the outskirts of a major metro? In the middle of nowhere? Etc.

Even buy and hold investors do not often buy and hold things for a 30 year horizon. If you feel comfortable with a place for a 7 year horizon you are probably good. Even more unknown then what a city will be like in 30 years is what you will think like. Future you may think LLing sucks or future you may own several multi-million dollars large apartment complexes. The chances of future you owning the same exact houses you buy in the next year though is small. I wouldn't tie myself up in knots about it.

- Advanced: What about acreage and unused land? What types of homes to actually look for? (No HOA, only single family detached, pool, 3 car garage, cul-de-sac, near things, away from things, etc.) Are homes from the 40s a no-go due to repairs? Are homes from the 2010s a no-go due to being overpriced due to new tech? What if it's brick in the middle of cottages? What if it's stucco in the middle of log cabins?

Land doesn't cashflow unless you are leasing it for agriculture or something. No cashflow = more risk so I would not advise it as a starter place for real estate investment. Personally, I avoid HOA because it is one more expense that I have no control over, like taxes. Thus it increases my long term risk. Age of house isn't so important in my opinion. What is important is capital expenditure. A 1920s house may be in awesome shape and a 1990s house may need $50,000 of work. It doesn't matter either way as long as the numbers pencil out. Lastly, if its an outlier like the stucco along the row of log cabins (I'd like to live in THAT city) then again it could pencil out but the other thing you have to keep in mind is your exit strategy. That odd house may take longer to sell or sell for less in the end. So you need to weigh that.

- Advanced: How much to invest and risk? If a $50,000 home is expected to return 10%, and a $100,000 home is expected to return 10%, which should I pick? Why? Based on this, should I be looking for something that is 50% of what I'm approved for? 20%? 100%?

You are talking two different types of risk here.

First, interest rate risk. The cashflow you make is largely arbitrage between the cost of the money you borrow and the return on the rent you are making. If you can get money from the bank at 6% and rent out at 10%, you are making that spread. Landlording is a form of banking. So the interest rate risk is the risk of that spread narrowing. With 30 year fixed mortgages you don't have a lot of risk that your cost of money is going to increase. So what you want to avoid is that your rent prices will deflate or you operating costs will increase more than your rent (HOAs present interest rate risk). Largely your long term rent is going to be a product of job growth/decline in the city. Not particularly of the specific house, unless you suck out the capital by never fixing anything. So to your question of home values, stick to what working class people in your area rent. If they rent 100k houses, then stick around that band. If they rent 400k houses then that is fine. But don't try to rent the 400k house in the 100k neighborhood.

Second, credit risk. Or the risk that you will default. That one is probably a little easier to state. Don't invest more than you can afford to lose.

- Advanced: Is this even more of a plunge than buying a home? If I buy a home for myself now and meet my future wife tomorrow and we're living together in a year, I just dropped a ton of my money into a rental property and we don't have capital for a house of our own.

Back to my first point

- Advanced: Like with anything in life, optimizing and automating is ideal. How can I go through major markets and ultimately pick a good investment just doing this on my own at night on my tablet? Are there programs? Websites?

Optimizing and automating are things we do when we have a known process. You don't know what you are doing. You need to learn it by reading and doing. Then you will find ways to optimize and automate it yourself. Things that look like slick automated ways to invest easily generally mask the risks: crowdfunding real estate. They are fine if you know the risks, but they are not fine if you don't have experience first.

- Is this just another area of real estate completely dominated by groups of cash buyers and REIT investors? That I have no hope of competing against?

When I got started I had very little. However, I happened upon this website called mrmoneymustache and by living frugally and stuff I suddenly found I had cash. That gets you started and while the guys with 400k in cash present a barrier to entry, there are always ways in if you keep at it and keep learning and trying.

- Is this a terrible idea for somebody like myself who overthinks literally everything to the point of crippling my decision-making?


You are better off than the guy who buys a $5000 dollar course on "Get Rich With No Money Down" and tanks their whole family's financial future. You are worse off than the guy who learns but eventually tries. I personally don't paralyze myself with worries about risk, but I do tend to paralyze myself with the fun of learning and always wanting to read a bit more before I do something - so effectively its the same. I treat things as experiments, and as long as I try my best to make every experiment profitable and use money I can afford to lose (even if I don't want to) I can get over my hurdles.

SwordGuy

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Re: Confusion surrounding Landlording
« Reply #4 on: March 02, 2017, 09:38:39 PM »
Go to the book thread and look up Frank Gallinelli's book on Cash Flow (etc.).   Also the Millionaire Real Estate Investor.

Read Gallinelli's book first.

For 2 reasons.

1.  It's about the numbers.  Just the numbers.   You make or lose money in real estate on the day you buy, so the numbers damn well better be right.   Or you better be damn luckyl

2.  If you aren't willing to sit down and learn the math for this you have zero business doing real estate investing.   Period.   Might as well learn that about yourself early.   

It's obvious to me from your questions that the above information isn't really understood.  The math is not overly hard but it is very particular.

The Millionaire Real Estate Investor covers the process of acquiring property.   There are a lot of ways to fund real estate purchasing and to structure a good deal that don't require blindly paying the retail price for a property.