Author Topic: Consider 100k CARES Act withdrawal to fund rental property acquisitions  (Read 1483 times)

VanityFIRED

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Hi - thanks in advance for any input from the collective knowledge base.

I already own 4 SFH rental properties, so I have a little bit of experience with what is involved.  Also, I'm already FI, however I have been working part-time just to keep me busy and grow wealth a little bit more here and there.  I got laid off in October from my engineering job, and now I'm considering taking advantage of being "affected by Covid-19" as an opportunity to access $100k of my IRA without paying a 10% penalty.

Generally speaking the houses that I'm buying cashflow $400-500/month.  They cost about $180-200k and after downpayment, closing costs, cleanup and minor renovations, I'm looking at a out-of-pocket cost of about $50k.

Oh, also, my wife is still working full-time (because she enjoys the work and it's very flexible), so I know we can get at least one loan, hopefully two.

So 2 houses cashflowing $800-1,000/month for $100k, plus the taxes I'm paying on the $100k withdrawal gets spread over 3 years. Plus our income right now is in the 10-12% tax bracket...

That's a near 10% CoC return before counting principle paydown, depreciation, appreciation, inflation etc.  Once all that is taken into consideration, the total return is over 20% which tends to beat the market on average...  math seems to make easy sense...

Is anybody else considering this?  Am I overlooking anything?  Thanks!

waltworks

  • Magnum Stache
  • ******
  • Posts: 4765
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #1 on: December 04, 2020, 04:49:26 PM »
Why? You're already FI, go do something that makes the world a better place if you're bored.

-W

VanityFIRED

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #2 on: December 04, 2020, 05:37:11 PM »
Wasn't really the question asked, but lots of reasons.

1. I enjoy real estate investing.
2. Being a good landlord and providing safe, clean and affordable housing DOES make the world a better place.
3. Just because I'm FI doesn't mean I quit caring about returns
4. I'm not exactly sitting on my wealth like scrooge mcduck... i like to think that I do use it for good.
5. I think that's enough...

What exactly was the point of your reply?

waltworks

  • Magnum Stache
  • ******
  • Posts: 4765
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #3 on: December 04, 2020, 06:17:18 PM »
Look, you're laid off and bored. You're smart. You enjoyed making money and achieving FI. I get it.

But you came in and stated, basically: "I'm already set, and even if I wasn't my wife likes her job, but I can take advantage of a government program aimed at people who need help to make more money that I don't have a use for."

You need to look at what you want your life to be about. If you want to make more money and work more, fine, buy some rentals. They sound just fine. You can die with a ton of money.

But you might want to consider whether continuing to play the game when you already won is your best route to being happy and making the world a better place, and sorry, being a decent landlord, while not actively harmful, isn't really helping anyone that much.

You're better than that. Go find something cool that excites you that makes a real difference.

-W
« Last Edit: December 04, 2020, 06:28:42 PM by waltworks »

PMJL34

  • Stubble
  • **
  • Posts: 190
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #4 on: December 04, 2020, 09:07:29 PM »
I can see why OP didn't like Walt's response, but I think it's legit.

On one hand you are saying you are FI and just want to play and stay busy.

On the other hand, you are saying you were working just two months ago  (laid off at that, so not like you quit, as in you would still be working today if you could) and your wife works full time and you are looking for more income.

Are you really FI or not? Because my answer would be very different depending on the answer.

If you are FI, why would you need to dip into your IRA at all? You have rental cashflow, savings/checking acct, W2 (from wife), and brokerage account. Is this risk even worth it? What happens if this investment doesn't work out? Would you now risk being non-FI? Real estate isn't a money maker in 2020. You also claim a 1k cashflow on 100k and I don't buy it, I would need to see a case study. For all of these reasons, I don't think the risk is worth it if you are FI. I would rather do something else with my time and effort.

If you aren't FI, then this makes perfect sense and I agree that it can be an opportunity. I would again need to see a case study before I could say it is a good or bad bet.   

EDIT: I do get kind of triggered when people claim they are making the world a better place by landlording. GTFOH, you are doing it for wealth building and income (including myself). Ain't no one doing this out of the kindness of their heart to help hardworking human beings. Not aimed directly at you OP, it's a common thing I hear and it needs to stop.   

Best of luck!
« Last Edit: December 04, 2020, 09:14:03 PM by lilbenny34 »

Papa bear

  • Handlebar Stache
  • *****
  • Posts: 1674
  • Location: Ohio
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #5 on: December 05, 2020, 06:25:54 AM »
I see no reason not to buy more rentals. I donít think Iíll ever truly stop either. 

But I donít like the idea of taking the money out of your tax advantaged accounts to do it.  You donít keep a cash position for new purchases?


Sent from my iPhone using Tapatalk

sailinlight

  • Stubble
  • **
  • Posts: 156
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #6 on: December 05, 2020, 08:33:41 AM »
You might want to look into a self directed IRA if you're really set on using that money to buy more rentals.

PMJL34

  • Stubble
  • **
  • Posts: 190
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #7 on: December 05, 2020, 07:49:08 PM »
Papa bear,

You don't think you will ever stop buying rentals? EVER? That's interesting to me.

As much as I love real estate, it's still a stressful transaction for me. I am looking to buy one more rental, but I am 34yo. After that, I don't plan to look for anymore deals unless there is some 2008 event again and something falls in my lap (even then, if stocks are equal discounts, I would probably prefer that). I even like carpentry and people and generally enjoy the whole process, but it's still a lot of work. I don't trust PMs and manage myself. I don't think I would want more than 4-5 units max and even less when I RE. Keep in mind I'm in VHCOL so a little different rules here too.


SndcxxJ

  • 5 O'Clock Shadow
  • *
  • Posts: 88
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #8 on: December 05, 2020, 08:55:09 PM »
I wouldn't pull money from tax advantaged accounts to get further into real estate.  It takes time to get that money in there and it can serve as a nice diversification to the real estate you already own.  This is coming from my RE heavy point of view. 
If anything I would recommend focusing on getting your income up to qualify for a loan since being newly unemployed, with rentals as one of your main income sources, the DSCR might not be in your favor right now and, in my belief, calculated leverage is something to consider in this low interest environment.

Papa bear

  • Handlebar Stache
  • *****
  • Posts: 1674
  • Location: Ohio
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #9 on: December 06, 2020, 07:46:16 AM »
Papa bear,

You don't think you will ever stop buying rentals? EVER? That's interesting to me.

As much as I love real estate, it's still a stressful transaction for me. I am looking to buy one more rental, but I am 34yo. After that, I don't plan to look for anymore deals unless there is some 2008 event again and something falls in my lap (even then, if stocks are equal discounts, I would probably prefer that). I even like carpentry and people and generally enjoy the whole process, but it's still a lot of work. I don't trust PMs and manage myself. I don't think I would want more than 4-5 units max and even less when I RE. Keep in mind I'm in VHCOL so a little different rules here too.
I like the work!  Looking at houses, showing the places, designing, remodeling, etc I find to be a lot of fun.  Plus, since itís basically a family business, I get to work with my brother and dad on some of these places.  So, I donít think Iíll ever stop looking to buy.  But weíll probably change what we look for over time. 

Weíve got a couple of 1031 exchanges to go through in 2021, so weíre going to have to buy 2+ places.  Thatís going to cause a bit of stress, since we donít like the current rental supply. So weíre talking about vacation rental properties as a potential option.  Buy a fixer upper on the beach or a ski town? Sounds like fun to me! Letís get on it!


Sent from my iPhone using Tapatalk

PMJL34

  • Stubble
  • **
  • Posts: 190
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #10 on: December 06, 2020, 11:34:46 AM »
papa bear,

Fair enough! I think the big different between you and I is that you have a solid network and it's a family business that you enjoy. I'm in this by myself (well my partner likes to chime in and helps with the process, but it's really all on me). That certainly could change the equation for me as well if I could do this with my dad and brother.

I was just making the point that Walt was. Which is that, if you are already FI don't go looking for more rentals just because. They are a lot of WORK and it is a risk. Also, the "two most addictive things in the world are heroin and a paycheck." Best to break that habit if you are FI unless you truly enjoy rentals.   

kendallf

  • Handlebar Stache
  • *****
  • Posts: 1065
  • Age: 54
  • Location: Jacksonville, FL
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #11 on: December 06, 2020, 11:44:38 AM »
Hi - thanks in advance for any input from the collective knowledge base.

I already own 4 SFH rental properties, so I have a little bit of experience with what is involved.  Also, I'm already FI, however I have been working part-time just to keep me busy and grow wealth a little bit more here and there.  I got laid off in October from my engineering job, and now I'm considering taking advantage of being "affected by Covid-19" as an opportunity to access $100k of my IRA without paying a 10% penalty.

Generally speaking the houses that I'm buying cashflow $400-500/month.  They cost about $180-200k and after downpayment, closing costs, cleanup and minor renovations, I'm looking at a out-of-pocket cost of about $50k.

Oh, also, my wife is still working full-time (because she enjoys the work and it's very flexible), so I know we can get at least one loan, hopefully two.

So 2 houses cashflowing $800-1,000/month for $100k, plus the taxes I'm paying on the $100k withdrawal gets spread over 3 years. Plus our income right now is in the 10-12% tax bracket...

That's a near 10% CoC return before counting principle paydown, depreciation, appreciation, inflation etc.  Once all that is taken into consideration, the total return is over 20% which tends to beat the market on average...  math seems to make easy sense...

Is anybody else considering this?  Am I overlooking anything?  Thanks!

What's your leverage now?  That would be the relevant data point for me.  If your wife lost her job and you had a sudden rash of vacancies, could you cover your loans?  How stressed does that make you feel?  Evaluate that and decide.

I too considered using the CARES act loan provision (so not even income tax, if repaid on schedule) to buy another house.  Eventually decided I didn't want the stress this year and did nothing.  I was considering it for ~September time frame (as that's when the $100k loan provision expired for the TSP, where my money is).  Since September, the market has had a strong continuation of its growth that I wasn't expecting after the initial recovery from March's slump.  So, my inaction isn't looking so bad right now..

VanityFIRED

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #12 on: December 06, 2020, 01:05:52 PM »
Thanks for the replies - even Walt's... albeit a little gruff and snarky.  They all give me pause for consideration.

Here's an example of my most recent house that I purchased in June 2020 (which is where our normal RE acquisition funds went):

Contract Price $180k
20% DP: $36k
Interest Rate 3.5%
Closing costs $9k
Prop Taxes: $3.7k/yr
Insurance (2% deductible): $1k/yr
Assumed maintenance: $500/yr

Renovations: $19k
ARV: $200k-ish
Equity:$56k

Rent: $1595+$35/mo pet rent = $1630

I think that covers everything.  I know folks will say I'm underestimating maintenance costs, and that is possible, but part of the $20k rehab was a new HVAC unit and I will replace the roof myself in a year or two... so yes there may be maintenance issues, but the average costs of my other 3 properties were about $500/year, so I'm just going with that.


Although I didn't get expect to need to explain my total financial situation just to get some advice on a financial decision, I'm happy to give some more details. 

I'm technically FI.  My wife and I could both stop working and we could figure a way out to live without needing jobs. However...
A good portion of our assets are in tax deferred accounts.  I'm in the process of setting up a Roth Conversion Ladder, but that will take a long time to get fully converted.

Also, we have been talking about having a child.  This is a relatively new development.  Our first 7 years of marriage this was not really on the table, but over the last couple years, it's been seeming more like something we are ready for/interested in.  This adds some murkiness to our future financial costs, and if I can add to our buffer, I will.

Also, as some others may have experienced, once you quit working full-time, you are available to all sorts of new things.  Some of those new things are free and some cost money that you hadn't originally planned on.  So rather than being constrained OR going back to work full-time, I look into ways to grow wealth outside of the W-2 world... to me that seems like real estate. 

In regards to the jobs that both my wife and I have/had... we recently moved to a new town/state and both thought it would be a good idea to get jobs for a couple reasons... 1) to meet people and get plugged into the community and 2) so that we could have W-2 income to get a loan on our personal residence.  She got a full-time job that she enjoys, and I got two part-time jobs, one at a small engineering office and another at the local bike shop.  Both of my jobs underpaid me compared to what I was making before we moved, but the AMOUNT of income was less important to me than the bank seeing that we had regular jobs.  Two part-time jobs felt like too much time management and so I quit one of them at the beginning of this year.  The second job, the one i got laid off from, was proceeded by a conversation with the firms owner that if work got scarce, I understood him keeping his full-time employees busy by taking my hourly work from me and giving it to them... it took 4 months of covid to get to that point, but it finally happened, no big deal.  I've got a house that has plenty of projects to keep me busy (which I enjoy). 

----------------------------

And I disagree about landlords not being able to create good in the world.  When I was in college, one of the people I learned the most from during those 5 years was my landlord.  He turned out to be a great person, and offered some life lessons that I wouldn't have learned anywhere else.

Also, do you know what kind of housing crisis would exist if there were no landlords?  We meet a need of society.

We have built relationships with tenants and although we are strict with our rules, and who we let live in our properties, almost all tenants that have ever left have always thanked us for providing the house to them and being prompt to make repairs when necessary.  You can do good in this world and make money at the same time.

----------------------------------------------




waltworks

  • Magnum Stache
  • ******
  • Posts: 4765
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #13 on: December 06, 2020, 01:54:30 PM »
A freestanding SFH probably costs $500 a year just to *repaint* in/out every 20 years, let alone maintaining/replacing mechanical systems, roof, driveway, etc. Where on earth did you come up with that number?

I agree that you can make money and do good at the same time. Being a landlord isn't actively bad. But it's not something that's really particularly good either (especially if you're a cheapskate about maintenance...)

-W

VanityFIRED

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #14 on: December 06, 2020, 02:07:22 PM »
It's funny that you mention painting.  We have a sprayer and we painted the outside of the house in about 6 hours over 2 days.  Granted most of the house exterior is a brick facade.  Total paint cost was $125 in paint.  Like I said we are very attentive to maintenance.  When it needs it, we do it, when a maintenance request is made we fix it. 

Frankly, I'm not too concerned about maintenance costs... 99% of them are a straight deduction when tax time comes.  Very few exceed $2500 de minimus safe harbor condition.  We put money into the house on the front end and it mitigates a lot of maintenance costs down the road.  But if something comes up we address it.  I've only been at this for 5 years or so.  Still learning of course, but just haven't seen the maintenance needs that you are suggesting.

waltworks

  • Magnum Stache
  • ******
  • Posts: 4765
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #15 on: December 06, 2020, 03:50:56 PM »
If you're not counting your own labor as an expense, then go for it. I've got some home maintenance you can do for me for free too, I'll buy the paint. :)

Seriously, I hear this sort of thing all the time. Do people really think long onerous tasks are "free" if they do them themselves? There's a word for doing work you otherwise wouldn't bother with in exchange for money... and that word is not "investment".

-W

waltworks

  • Magnum Stache
  • ******
  • Posts: 4765
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #16 on: December 06, 2020, 04:04:04 PM »
FWIW, here's how I'd analyze this deal:
-Cash in $65k (assuming you paid closing costs out of pocket)

-PITI $650+$390 = $1040/mo
-Management (my time = not free) = $100/mo  This would be quite a bit more for professional management
-Vacancy @5% = $80/mo  Lots of people assume 10%
-Maintenance/Capex = $300/mo (I added $50/mo for the pet)

I usually include some SHTF and I get sued by a tenant or something else weird happens expense number but not everyone does.

So $1520/mo is my overhead plus or minus a bit for the pet damage (the wear and tear on floors from dogs... ugh)

At a rental rate of $1630 that leaves about $100 a month in profit. On a $65 layout (plus a bunch of work to find/close/fix up the place) that's awful.

Even dropping the maintenance to $100/mo you're not doing well. I'd want at least 10% cash on cash.

-W

PMJL34

  • Stubble
  • **
  • Posts: 190
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #17 on: December 06, 2020, 07:27:59 PM »
Vanity,

You seem like a good dude. I'm a family man and I hope you and the wife decide on having kids (or not) based on your worldviews and not on financial constraints. That's awesome that you know how to do a roof! Roofing is extremely hard labor!

I get that we all want to be FI, but let's stop declaring ourselves FI when we aren't (not yet at least). You still need to work and so does your wife. I'm glad you decided not to pull money out of your deferred account.

Your most recent deal is most likely cashflow neutral without your time, knowledge, and stress. Put it this way, if you could no longer do the work yourself, then what? I'm assuming you are managing the other 4 rentals too and doing your own work. If you can't do the work anymore, you could lose money real quick. There's no way around it, you have to factor in the costs in the analysis. Walt's vacancy and management costs are low to me. We all know pets can do major damage. Capex will be high and you know it.

I'm glad you treat your tenants well and have built relationships with them. That's awesome! Shitty landlords are scums. "landlord" is a terrible word BTW and needs to be changed. Anyhow, I believe everyone who rents homes should be kind and have a heart. Furthermore, everyone should just be kind and have a heart to everyone regardless of the situation. This doesn't make you special or make what you do "a better world." Now if you decided to rent to disenfranchised populations AND charged them sliding scale rent/extremely below market rent and help them in other ways, then I'd say you are doing something special and making this world a better place. Instead you are charging market rent and in return, doing what you are supposed to do, which is be kind and maintain the home (your home btw, so of course we take good care of it lol). No one said that you can't make money doing a good thing. However, again stop it with the whole landlords are making this world a better place. It's just false and self-serving. end rant.
 

waltworks

  • Magnum Stache
  • ******
  • Posts: 4765
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #18 on: December 06, 2020, 07:51:51 PM »
Yeah, when I buy an investment (property or otherwise) it needs to make me money/support my family if I decide to move my kids to Spain for a year, happen to have plans that day/week/month that the furnace craps the bed, die of cancer so my DIY skills aren't available anymore, etc.

Otherwise what I have is a job. That could be a fine thing, if what you're looking for is a job. But it's not an investment.

-W

VanityFIRED

  • 5 O'Clock Shadow
  • *
  • Posts: 28
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #19 on: December 07, 2020, 08:15:55 AM »
Vacancy is not a certain expense.  There's no such thing as deferred vacancy.  If I rent out a house for 5 straight years, and then my tenant moves out with his proper 60 day notice, I will not have a 6 month (10% vacancy)... that's just not accurate.  It's one thing to budget a 10% vacancy when you don't know the market and you are so risk averse that you need to expect the worse case scenario, but it's not real life.  Even if it were, 10% vacancy says that you are such a crappy landlord that your average tenant never renews their lease.  This is not real people.

Also, management costs.  A well set up rental doesn't take a lot of time to manage.  If you want to take $100 from my cash flow and move it to "mgmt expenses" great, but it's still money in my pocket.  As for the time, it doesn't take any time.  We're talking a phone call or two per month, for all houses combined, not each house.  I'm sure this depends on the class of rental/renter that you are working with and the age of the property, but similar to vacancy costs, you can't go read a book that says XX% for this expense and then never question the accuracy of it, or the applicability of it to your specific situation.

Maintenance costs - $500/year is your pro-rated cost for a 20-yr paint job???  How in the world do you know that my house would cost $10,000 to paint?  You know nothing about its size, I already informed you that the outside is 95% brick.  Again, you all make these assumptions and then put on your real-estate/retirement police uniforms and start spouting off about how you are experts in your field, but you aren't considering how local real estate is.  There's so many factors that go into the maintenance costs of a property, and these are not fixed.  They can be lowered over time and mitigated.

I'm sure you are all nice people in real life, but you don't make this a pleasant experience for somebody trying to share ideas and information.  I'll step aside and let you all have your forum back.  Can't say this was enjoyable.  Such a different experience compared to the BP forum.   

To the folks that actually answered my original question, thank you. 

Papa bear

  • Handlebar Stache
  • *****
  • Posts: 1674
  • Location: Ohio
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #20 on: December 07, 2020, 11:07:46 AM »
Vacancy is not a certain expense.  There's no such thing as deferred vacancy.  If I rent out a house for 5 straight years, and then my tenant moves out with his proper 60 day notice, I will not have a 6 month (10% vacancy)... that's just not accurate.  It's one thing to budget a 10% vacancy when you don't know the market and you are so risk averse that you need to expect the worse case scenario, but it's not real life.  Even if it were, 10% vacancy says that you are such a crappy landlord that your average tenant never renews their lease.  This is not real people.

Also, management costs.  A well set up rental doesn't take a lot of time to manage.  If you want to take $100 from my cash flow and move it to "mgmt expenses" great, but it's still money in my pocket.  As for the time, it doesn't take any time.  We're talking a phone call or two per month, for all houses combined, not each house.  I'm sure this depends on the class of rental/renter that you are working with and the age of the property, but similar to vacancy costs, you can't go read a book that says XX% for this expense and then never question the accuracy of it, or the applicability of it to your specific situation.

Maintenance costs - $500/year is your pro-rated cost for a 20-yr paint job???  How in the world do you know that my house would cost $10,000 to paint?  You know nothing about its size, I already informed you that the outside is 95% brick.  Again, you all make these assumptions and then put on your real-estate/retirement police uniforms and start spouting off about how you are experts in your field, but you aren't considering how local real estate is.  There's so many factors that go into the maintenance costs of a property, and these are not fixed.  They can be lowered over time and mitigated.

I'm sure you are all nice people in real life, but you don't make this a pleasant experience for somebody trying to share ideas and information.  I'll step aside and let you all have your forum back.  Can't say this was enjoyable.  Such a different experience compared to the BP forum.   

To the folks that actually answered my original question, thank you.
Waltworks isnít wrong here.  Heís breaking down your rentals into your return on capital investment vs return on your labor.  Both of those make money.  But as a return on your capital, you could be doing better on those properties.   Nothing new here.  Iím surprised the BP crowd didnít blow that up, but maybe theyíve gone soft. 

Iím going to reiterate my answer to your original question again.  I would not take money out of your tax deferred accounts to buy so-so rentals.  If you want to buy more places, wait for a deal and build your cash cushion back up.  Let your IRA grow tax free and use it as a hedge if RE shits the bed again.

Since youíre only a few years into this real estate investing, you ARE going to run into some long vacancies.  You ARE going to have some major capital expenses that you canít diy your way through in a timely manner.  Itís ok.  Itís going to happen. But donít overestimate your returns by thinking the past 4 years is typical. 

Iím about 15 years into a a rental that was a total gut, everything brand new, including mechanicals, place that was built in 1910. Maintenance has been low and mostly DIYable.  But. Iím on my last legs on my AC unit.  Itís been through 3 r-22 charges and has a slow leak.  Itís not worth keeping it for the next time.  Figure on 2-3k for a replacement.  Kitchen and 2 bathrooms are showing wear and need a facelift.  Itís functional, but doesnít show as well compared to similar properties and are affecting my top dollar rents.  New floors, vanities, and surrounds in the bathrooms. New cabinets, counters, appliances in the kitchen.  Iím just counting down the days until that needs to get done.  And I definitely wonít be able to DIY all of that in my time frame between tenants.  Itís a student rental and turnarounds are usually 2-3 days.  So, Iíll have to ďpayĒ for a vacancy and get a couple of people in to crank out the work.  $$$. Amortize those projects over 15 years and my expenses on a month basis go up.  Donít forget that they factor in! 


Sent from my iPhone using Tapatalk

Jon Bon

  • Handlebar Stache
  • *****
  • Posts: 1253
  • Location: Midwest
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #21 on: December 07, 2020, 11:11:55 AM »
Vacancy is not a certain expense.  There's no such thing as deferred vacancy.  If I rent out a house for 5 straight years, and then my tenant moves out with his proper 60 day notice, I will not have a 6 month (10% vacancy)... that's just not accurate.  It's one thing to budget a 10% vacancy when you don't know the market and you are so risk averse that you need to expect the worse case scenario, but it's not real life.  Even if it were, 10% vacancy says that you are such a crappy landlord that your average tenant never renews their lease.  This is not real people.

Also, management costs.  A well set up rental doesn't take a lot of time to manage.  If you want to take $100 from my cash flow and move it to "mgmt expenses" great, but it's still money in my pocket.  As for the time, it doesn't take any time.  We're talking a phone call or two per month, for all houses combined, not each house.  I'm sure this depends on the class of rental/renter that you are working with and the age of the property, but similar to vacancy costs, you can't go read a book that says XX% for this expense and then never question the accuracy of it, or the applicability of it to your specific situation.

Maintenance costs - $500/year is your pro-rated cost for a 20-yr paint job???  How in the world do you know that my house would cost $10,000 to paint?  You know nothing about its size, I already informed you that the outside is 95% brick.  Again, you all make these assumptions and then put on your real-estate/retirement police uniforms and start spouting off about how you are experts in your field, but you aren't considering how local real estate is.  There's so many factors that go into the maintenance costs of a property, and these are not fixed.  They can be lowered over time and mitigated.

I'm sure you are all nice people in real life, but you don't make this a pleasant experience for somebody trying to share ideas and information.  I'll step aside and let you all have your forum back.  Can't say this was enjoyable.  Such a different experience compared to the BP forum.   

To the folks that actually answered my original question, thank you.

$500 a year in maintenance is impossible.

I guess maybe if one is a contractor that can do their own roofing, plumbing, electrical, hvac, etc etc. You might be able to get away $500 in materials. I mean replacing a bathtub is going to be about that much in materials.  I think the paint job thing was just an approximation. Continuing that theme on that a roof is what ~$10,000/25 years. That alone costs you $400 a year. None of us know anything about your house(s), but they do cost money to repair. If you are doing all the work yourself you are basically buying yourself a job. This is a fine approach that many do here, but when it comes to valuing a rental you need to include those costs compared to other opportunities.

The thing that lots of guys over here keep saying is that unless a rental produces cash every year, it is not a good rental. Sounds like these target rentals are marginal at best when it comes to cashflow.  However many people on here are banking on appreciation. Many of them HAVE in fact gotten rich. But in the end if your business plan relies on speculating that the RE market will continue to increase in value it is a bad business plan.


PMJL34

  • Stubble
  • **
  • Posts: 190
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #22 on: December 07, 2020, 11:34:30 AM »
Vanity,

I too haven't had a single vacancy in over 5 years. I like to believe that it's because I provide a good home and it's in a very desirable area. But honestly, I've just been lucky. My good friend has a similar home in a similar city and has averaged 1.5 months of vacancy per year over the past 4 years and I don't think it's her fault at all. Good tenants move regardless of the home sometimes, pandemic like today could hit and you could be without a tenant for a long time, if either of us ever get a bad tenant and need to evict, that's certainly more than a month worth of costs. Shit happens. I like to project with proven numbers and be realistic even if I haven't experienced it (yet).

Management costs are real. Again, I manage myself, but there is a cost to that. I don't even know what your point is? You are listing the homes, showing the homes, answering calls and more. You think that's not a job and costs time and money?

Painting entire interior and exterior every 10 years is absolutely normal (I typically paint interior for every new tenant). That costing 10K over 20 years is very very reasonable and I could only dream of that price in the bay area if i were to hire it out. Now with that said, I buy left over paint from painters/oops paint if they have what I want for cheap. I have a paint sprayer and rollers and all that shit and do it myself. Now your brick homes certainly could be less for sure. BUT it's work. You have a dog, you know damn well there's gonna be dog damage. That's why you are charging extra rent. I don't know what type of flooring you have, but you must know that there is a high likelihood some of it will need to be replaced same for doors. That little $35/month won't cover a fraction if there is actual damage. Maybe you get lucky and the dog doesn't leave a single scratch, consider yourself lucky. You said you are handy, you know how many things in a home break or just need maintenance and updates. Small stuff from swapping air filters to cleaning gutters all the way to bathroom/kitchen updates and roofs and there are hundreds of things in between. I don't even know how you are denying any of this? Again, if you can no longer do it, then what? Do you then accept that your positive cashflow is now negative? That would be terrible, agree?

I post responses as honestly as I can and maybe readers can take something from it. I think it would be wrong of me to post something as a "yes man" or just say "go for it" if I don't agree with it. BP is 90% sales people who tell people to go for it and play nice in hopes of buying your business. Please don't fall for that.

I still stand by my statements. That doesn't mean that I'm right or you're wrong. I hope you can enjoy the different perspectives. I certainly do.

edit: the above two responses were submitted before I submitted. I agree with both papa bear and jon bon.
« Last Edit: December 07, 2020, 11:41:11 AM by lilbenny34 »

theoverlook

  • Bristles
  • ***
  • Posts: 351
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #23 on: December 08, 2020, 08:22:09 AM »

I'm sure you are all nice people in real life, but you don't make this a pleasant experience for somebody trying to share ideas and information.  I'll step aside and let you all have your forum back.  Can't say this was enjoyable.  Such a different experience compared to the BP forum.   


Do you want honest feedback or a backrub and a mimosa? I've bristled at waltworks in the past, but you know what, he wasn't wrong. He's just not afraid to tell you what he thinks of a deal.

I know what it costs to maintain an owner occupied home, and commercial rentals. I don't have any residential rentals, but I know that $500/year is a fantasy figure. Think of how many systems there are on a house, and what it costs to replace just one of them. A small to medium sized furnace and AC combo is what, $5000? The expected life span is 16 to 20 years - beyond that and you're spending more patching it up than you would to replace it. That alone is $250 - 300 per year. Add on roof, paint, wall patching, siding, flooring, appliances, cabinets, counters, plumbing, etc etc etc. There's just no way a long term rental is going to cost $500/year in maintenance. And if you do the work yourself GREAT but count the labor as a cost, I do. I assume about $50/hour in labor costs which is low. That way you've compensated yourself for your time and given yourself an approximate budget for future repairs when you're not able or willing to do them.

waltworks

  • Magnum Stache
  • ******
  • Posts: 4765
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #24 on: December 08, 2020, 08:42:03 AM »
Really, there are two ways to look at "unexpected" expenses. We see this all the time on the forum, both in the RE section and elsewhere.

In some people's minds, "unexpected" things happen to you randomly because of bad luck. Despite your careful budgeting, your car's transmission blew up, or your phone died, or your dog ate 5 pounds of uncooked rice and had to have his stomach pumped. Or, for RE, there was a leak nobody noticed and you have to replace a bunch of drywall in the downstairs bathroom, or the furnace blew up, or you need to paint and can't find anyone to do it and the place sits empty for a month. Somehow, you never seem to get ahead!

At some point, you realize that over any meaningful time period, **** happens. You might not know exactly *what* part of your rental property/car/family/etc will cause the expense, but you know, after years of going through this, that transmissions/HVAC/pets aren't indestructible, and that basically you're going to have to assume that a big expense to replace/fix them is always on the horizon.

Hence you plan for those "unexpected" expenses by setting aside extra money in your budgeting (for both general life/finance and for RE property deal analysis).

Including those sinking funds in your analysis will indeed make many of your RE deals look pretty bad. If you'd rather buy bad deals and have everyone cheer for you, great. It sounds like BP has gone that way, which honestly isn't too surprising, since a lot of people in the RE market at this point do not remember the 2007 crash and the attitudes leading up to it. We're seeing a lot of people here trying to defend terrible rentals too.

You might get lucky with appreciation (as everyone has for the last decade, myself included). A lot of people rolled those dice in 2005-2007 too...you never know when the music's going to stop.

-W

J Boogie

  • Handlebar Stache
  • *****
  • Posts: 1464
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #25 on: December 08, 2020, 08:53:12 AM »
Looking back, I've probably gotten my ass kicked by Waltworks a couple times here as well. It's a rite of passage. He's the subforum spirit animal.

waltworks

  • Magnum Stache
  • ******
  • Posts: 4765
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #26 on: December 08, 2020, 09:07:32 AM »
I wouldn't do it if I didn't love you guys.

If I disliked the OP as much as he thinks, I'd be cheering for him to buy awful deals.

-W

sammybiker

  • Bristles
  • ***
  • Posts: 433
    • Making 200k in equity in 6mo - Back down the rabbit hole, long distance RE
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #27 on: December 08, 2020, 10:53:38 AM »
Looking back, I've probably gotten my ass kicked by Waltworks a couple times here as well. It's a rite of passage. He's the subforum spirit animal.

Same, ha!

waltworks

  • Magnum Stache
  • ******
  • Posts: 4765
Re: Consider 100k CARES Act withdrawal to fund rental property acquisitions
« Reply #28 on: December 08, 2020, 11:21:44 AM »
Maybe I need that in my sig "honorary RE forum spirit animal/cantankerous cynic"...

Really, the joke's on me (sort of). I sold all my rentals a couple years ago when "rents just don't justify the insane values" or something along those lines. If I was bored I could go find an old post with a really embarrassing quote something like that, I'm sure.

I'd bet I missed out on a couple hundred thousand bucks in appreciation, minimum (all of my places were in areas that have boomed during Covid).

So to those folks who went against my advice and rolled the dice (there are probably lots) - congrats. I was wrong! I very well could be wrong about OP's deal too, because who knows how long the appreciation party will continue.

-W