Author Topic: Eggs in One Basket  (Read 4451 times)

yddeyma

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Eggs in One Basket
« on: October 18, 2014, 04:41:23 PM »
I am very new to the rental game.  I finally got fed up with my day job and, with a partner, invested in two rental properties about four months ago.  They're going well.  Both houses I purchased are in the same neighborhood, cost about $50k and gross about $1k/month.  The neighborhood is the cheapest, lowest working/middle-class neighborhood in town that we felt was still safe.  Anything cheaper than this and you start getting into slums. I feel safe enough there to go by myself at night, but not by much.  I'm ready to purchase my third property, but my business partner and I are having a small disagreement.  I want to spend a little more capital and get a house in the next higher up neighborhood.  My fear is that if the neighborhood starts to go downhill, all of our houses are there.  And its the most likely neighborhood to go downhill in town, since its one of the oldest.  Our town is not a like a large city, there's so much empty land people just build more houses (and pretty cheaply) if they can't find something up to date in town (out of town and in town are only 10 minutes apart).  My partner feels this is not a significant enough risk to merit looking elsewhere.  Adding to the issue is the fact that, at the moment, there are NO houses that meet our criteria on the market in the other neighborhood, but our current neighborhood has several!  I know that, logically, the reasons I invested in this neighborhood in the first place are still valid.  But I feel that it's kinda like buying stocks.  Just because you like a certain stock, doesn't mean your ENTIRE portfolio is invested in it.....

Thoughts?

sammybiker

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Re: Eggs in One Basket
« Reply #1 on: October 18, 2014, 04:50:12 PM »
How much longer until you can work without this partner?

Partners are great but I prefer to work with them only as a contractor relationship...eg I make final call on everything.

yddeyma

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Re: Eggs in One Basket
« Reply #2 on: October 18, 2014, 04:55:02 PM »
I really like having my partner.  It's nice to have someone validate my good ideas and question the bad ones.  I'm still trying to figure out if having all our houses in one neighborhood is good or bad.

tracylayton

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Re: Eggs in One Basket
« Reply #3 on: October 18, 2014, 04:55:43 PM »
All 4 of our rental homes rent for $1100 to $1395/month. We did have one that rented for $750/month, but we had fewer (almost zero) high quality applicants in that price range. The other 4 are in nice neighborhoods and have appreciated quite a bit. I would diversify, too.

waltworks

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Re: Eggs in One Basket
« Reply #4 on: October 18, 2014, 06:24:59 PM »
You can take on a lot of risk there and still be ok. Even if rents drop 50% you're hitting 1% rule!

Buy as many of those as you can.

-W

escolegrove

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Re: Eggs in One Basket
« Reply #5 on: October 18, 2014, 09:22:51 PM »
Personally I wouldn't put all of your eggs in that basket. What you are describing is very noticeable in my area too. We buy class A properties. I can tell you that when the neighborhoods were "squeeze" this month that one of my houses really felt it. It was in the lowest "a" area. We had to reduce the rent considerable so it rented well. Personally I prefer houses in the nicer areas.

I also only have my husband as my "partner" it make my life MICH easier :)

Lyssa

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Re: Eggs in One Basket
« Reply #6 on: October 19, 2014, 03:36:47 AM »
I wouldn't as well. Even having all your properties in one city/town still sounds like one basket to me. What if two big employers in the area close or downsize?

Since you mentioned stocks as a comparison: Are you invested in a completely different asset class (stocks, bonds) yet?

Full disclosure: I have a 10% bonds, 10% REITs, 10% commodities and 70% stocks asset allocation. I chose REITS instead of purchasing real estate because imho a single or a few properties always are too many eggs in one highly volatile basket.

Feel free to disagree (after all private landlording is popular enough to have its own subforum!), just my 2 cents.


yddeyma

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Re: Eggs in One Basket
« Reply #7 on: October 19, 2014, 06:10:32 AM »
The problem with REIT's for me is that I"m trying to generate income.  Growth alone does not get me where I want to be.  Until I can find a stock, REIT or other investment that can return a 15% dividend rentals seem the best way to go.

hexdexorex

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Re: Eggs in One Basket
« Reply #8 on: October 20, 2014, 04:26:45 PM »
REIT's are great dispersing risk.

The individual properties within a REIT I would doubt are that great (if they were they wouldn't be sold to public investors.)

sheepstache

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Re: Eggs in One Basket
« Reply #9 on: October 20, 2014, 06:11:26 PM »
Do you and your partner contribute capital 50/50? Or what I'm asking is how long until you could save up enough to invest without them? As you say, there isn't anything ready for you to buy anyway. And from their perspective, wanting the lower cost property means it shouldn't be too much time until they can save up enough, no? It sounds like you don't want to lose this good relationship but maybe you can figure out some creative solution that allows you to do the higher-quality rentals on your own. Though you're doing well in one niche so it might not be wise to change, but perhaps your next project could be a flip together, which would free up capital in a shorter timeframe, allowing each of you your own next project? Or maybe there's some different project they're enthused about and you could promise to immediately put your share of the proceeds of the high-quality rental towards that.

daverobev

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Re: Eggs in One Basket
« Reply #10 on: October 20, 2014, 06:22:57 PM »
Well, you're talking relatively small amounts of money. What's the ownership structure? If 50/50 you're only talking $75k.

I mean - don't be pressured, but be open and rational. Gut fear is helpful IF you can work through it and come to a logical conclusion. Of course, if you can't deal with stress and want to sleep at night...

Also, don't be under the impression that more expensive houses = better tenants. You may find cheaper homes have less issues generally.

I'd start putting money aside, if you're going to buy many more houses, so the next place can be bought 100% by you, perhaps in a different state entirely.

Offtopic rant: Apostrophes are not necessary for acronyms! SUVs, REITs, etc. The apostrophe denotes ownership -  my REIT's yield went up to 10%, my SUV's a lardy gas hog with the aerodynamics of a brick wall. But SUVs are so pretty! REITs might make you rich!

/rant

retired?

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Re: Eggs in One Basket
« Reply #11 on: October 20, 2014, 08:27:22 PM »
I shall try to incorrectly place as many apostrophe's (first one) in my post's (second) as possible.  Geez.

I might branch out.  Nice to have a partner, but....

Keep working on selling the idea to him/her.  Tell him....these are my goals and risk tolerances.  I won't buy another in this locale.  I would buy one here. 

The reason to disagree is potential or perceived return, as well as initial investment amount. 

I wouldn't put the partnership above your own comfort level.

yddeyma

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Re: Eggs in One Basket
« Reply #12 on: October 20, 2014, 08:36:35 PM »
Just wanted to say that I don't have any issues with my partner.  We both agreed that we would not ever buy a house unless we were both on board with it.  It is a friendly disagreement.  I just wondered if I am being too conservative or right to feel a little uncomfortable.  I am a pretty conservative person for most things.  Seems like most folks would branch out so far. 

Overseas Stache

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Re: Eggs in One Basket
« Reply #13 on: October 21, 2014, 02:57:39 AM »
If it was me I would buy more properties that meet your criteria for returns. If they happen to be in the same area than so be it, take the higher return even if there is a risk in the future for the property to devalue. If the properties did devalue it would likely come with a reduction in value for the entire city/town. This would then make property values in the nicer areas cheaper and thus give you better returns in the nicer areas and that would be the time to invest there.

johnhenry

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Re: Eggs in One Basket
« Reply #14 on: October 21, 2014, 08:34:53 AM »
I've been squarely in your shoes before.  I own mainly SFHs that are concentrated in one region, with several of those in one town, and several of those in the same neighborhood.  That neighborhood is where I started out, and I've managed to accumulate several there because of favorable numbers, but I've also made an effort to diversify, trying not to sacrifice returns. 

You are wise to consider some diversification by investing in a different part of town, a different town, the countryside, etc.  But.... if you (and your partner if you remain tied to him) have the funds ready to pull the trigger on the next deal and you have the opportunity to buy a place that will bring monthly rent at over 2% of the purchase price.... that's pretty hard to pass up.  A handful of properties that produce that kind of cash flow can help fund other ventures down the road as they become available.  If growth of this business is an important part of your strategy, securing some very high cash flow places early on will be extremely valuable. 

I'd continue to look hard for other areas that may meet your criteria in the near/intermediate future.  If you find a specific deal or even an area that has potential see what your partner thinks when presented with a real (less hypothetical) option.  If he still balks, there's no reason you can't take that route on your own.  But until you find something else worth your time and money I wouldn't be afraid to add more holdings in that same neighborhood.

Even if things (rent rates and/or property values) start to decline in that neighborhood, the cash flow is so good now that even a few good years of owning a place like that may prove worthwhile.  It sounds like you have a good thing going with your partner.  But a word of advice.  If you two disagree about a growth/expansion strategy, that's no big deal.... you just don't do the next deal together.  But an exit strategy requires more planning.  The places you are buying will probably make sense to hold for a long period, so hopefully you aren't "forced" to sell by market circumstances.  But at some point, one of you may think that it makes more sense to sell one of your holdings and put that money in a better investment.  You may be presented with a sweet deal that he doesn't want any part of.  But what if you can only make that deal happen by selling/exchanging your investments with him?  Just something to think about. I would consider any deal with a partner, no matter how cordial, to have some risk because of challenges presented when an exit strategy needs to be employed.

yddeyma

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Re: Eggs in One Basket
« Reply #15 on: October 21, 2014, 11:00:40 AM »
Thanks johnhenry.  I must have been channeling the message board when you posted this, because I just scheduled to look at the last few houses not in our neighborhood.  I figure if I can't find one, I'll invest in our current neighborhood.

And, you're right, we are short on the details about exit strategy.  We have basic stuff in our Operating Agreement, about death and inheriting, etc.  But only a couple of basic clauses about separating from the business when we're alive.  We will definitely get that ironed out.  Plus, an exit strategy for when to dump a particular rental (time, neighborhood degradation, profit degradation, etc.) is going to be essential.

Thanks for the help!