Author Topic: Help me decide if we should buy an investment property  (Read 10589 times)

Mazzinator

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Help me decide if we should buy an investment property
« on: December 16, 2013, 03:39:29 PM »
So, i've been studying biggerpockets and other websites to learn about income properties. But i'm not sure if now is the time to make the plunge. I'm not sure just how much info to include, so if more is needed, let me know.

Looking to buy and hold sfr. I have a mentor would also be the PM. She's small time, owns 3 properties and does this on the side. She's my 'boots on the ground' and i used to live a few streets over from my chosen neighborhood. (I haven't lived there since 2001)

Looking at $20k for property with about $10k renovation. They vary, but for this discussion, i'll use these numbers for easy calcs. Rent should be about $600/month. Fits 2% and 50% rule.

$30k total cost
$3,600 rent (50% rule)
12% return ( is this correct???)

So here's the kicker... I'm in debt with a negative net worth.

We are set up to max out tsp (17,500) and 2 tIRA (11k) by DCA for 2014. We will get back a tax refund (we have changed the withholdings mid 2013)

Debt (all SL)
-$8k 0% (on CC will be paid off first/soon)
-$22k 3.5% variable
-$56k 4.75% fixed
Savings
$40k retirement
$10k cash (emergency fund)

So, the options are:
A) save up to buy income property by late/end of 2014 (we would keep the $10k EF)
B) pay off the debt first, then save up to buy income property (about 4 years from now)
C) something else???

Thanks for taking the time to read this and help out!!!


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Re: Help me decide if we should buy an investment property
« Reply #1 on: December 16, 2013, 07:02:35 PM »
So, to calculate your returns, you're going to need a few items. (1) Total property price (including fees/closing/reno), (2) your initial cash outlay, (3) estimated income (rent), and (4) estimated expenses. For a first glance, pro forma numbers (using the 50% rule and/or seller provided numbers) should be fine. If it looks like you want to pursue it, then you go deeper.

Important metrics for analysis:

Net Operating Income: Yearly Income (total rent) - Yearly Expenses. Using your numbers, this is
7200 - 3600 = $3,600/year

Financing does not change this number. Only income/expenses do.

Cash Flow: Monthly Gross Income - Debt Servicing. If you pay cash, your cash flow = your NOI.
$300/mo

Cap Rate: The ratio of NOI over capital costs for the property. So NOI divided by the total property cost (purchase + reno) If I assume you don't finance, your closing costs will be low, but let's just say you're all in for 32k. (question for the more experienced REIs -- do I factor soft costs into the total property price for cap rate, or just for COC return?)

3600/32000 = 11.2% <-- this number is good, I'd say. It probably also indicated you're in a rougher area, which can make landlording more expensive.

And, finally,
Cash on Cash Return: The ratio of your yearly profit over your total cash outlay. Since you're paying cash for everything, this is the same as your cap rate. While 11% is a sweet cap rate, it's a less sweet COC return. How do you increase this number? By using less of your own money, aka financing. This would mean lower cashflow, though, but better returns. It's somewhat of a philosophical decision, since how much you want to use leverage is directly related to your risk tolerance.

As for whether I'd invest in rentals while I have a bunch of outstanding debt, I can't really advise you there. Good luck!

daverobev

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Re: Help me decide if we should buy an investment property
« Reply #2 on: December 17, 2013, 09:48:06 PM »
You just need to make sure you have enough cash if things go bad, first and foremost (ie, to meet your debt obligations, not go bankrupt and lose everything).

After that, borrowing at x% to invest at X%+ is 'always' good. If your debt is 4.75% and you can earn 11% on it - it's a no brainer.

I know the debt and rental aren't tied, but money is fungible - it doesn't matter what it is and where it is, it's still money. You can either get 11%, or 4.75%, using that money. Easy choice, no?

The only caveat is my first point - don't take on so much that it can crush you. If you have a high savings rate, feel you are safe in your job, stable, etc - and have a reasonable emergency fund or other source of funds should the need arise (line of credit? diversified portfolio you can sell *a certain amount of* to meet your urgent needs?), making more money is always better!

honobob

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Re: Help me decide if we should buy an investment property
« Reply #3 on: December 17, 2013, 10:15:09 PM »


Important metrics for analysis:

 

  While 11% is a sweet cap rate,

What makes you think a 11% cap rate is sweet?  How does it equate to any predictor of profitability?

Mazzinator

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Re: Help me decide if we should buy an investment property
« Reply #4 on: December 18, 2013, 01:32:57 AM »
Thank you all for your help!

JT- looks like I was pretty close, thanks for the simplified breakdown. I've been searching and reading biggerpockets, not a member, but i find that forum hard to find any detailed info. It seems they just regurgitate the same info over and over..2% rule, 50% rule..blah blah

Dave- we are going to keep our EF ($10k) for that exact reason, and being new to RE investing i think it's best to keep it around until we learn the ropes.

Hono- i know you take a different approach, but i have no idea what it is or how you calculate deals. Would you mind explaining or answering your own question?? (I know you didn't ask me) but i would say that 11% is my profit. Unless i misunderstand your question..(still learning here)

Thanks again. I think we may go for it! Well, starting to save up anyways..it's going to be awhile..

_JT

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Re: Help me decide if we should buy an investment property
« Reply #5 on: December 18, 2013, 07:44:09 AM »


Important metrics for analysis:

 

  While 11% is a sweet cap rate,

What makes you think a 11% cap rate is sweet?  How does it equate to any predictor of profitability?

It's a rate of return, so I don't know that I'd call it a predictor of future profitability. How do you track how good an investment is, if not by rates of return?

honobob

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Re: Help me decide if we should buy an investment property
« Reply #6 on: December 18, 2013, 12:53:49 PM »


 

Hono- i know you take a different approach, but i have no idea what it is or how you calculate deals. Would you mind explaining or answering your own question?? (I know you didn't ask me) but i would say that 11% is my profit. Unless i misunderstand your question..(still learning here)

 
You are using cap rates incorrectly.  Cap rates are not used for residential properties.  cap rates are not used in commercial properties to determine profit.  Your GRM is 4.17.  Is that good?  What is a sweet CD rate?  2%...9% ? 

arebelspy

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Re: Help me decide if we should buy an investment property
« Reply #7 on: December 18, 2013, 01:06:44 PM »
You don't use cap rates that way.  It doesn't mean they can't be used that way.
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Another Reader

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Re: Help me decide if we should buy an investment property
« Reply #8 on: December 18, 2013, 01:22:23 PM »
By definition, the overall capitalization rate is net operating income divided by total cost.  That's all.  It's a concept that can be applied to anything that produces income.  It's commonly used to value or compare large commercial, industrial, or apartment properties.  Using NOI gets expense differences out of the comparison.  A cap rate can be used to value a house or two-four unit property.  GRM's are also used to value and compare these properties, with the caveat that expenses need to be similar in percentage.  Without a lot of context, a GRM does not tell you much about the actual or expected performance of an investment.

honobob

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Re: Help me decide if we should buy an investment property
« Reply #9 on: December 18, 2013, 03:21:26 PM »
You don't use cap rates that way.  It doesn't mean they can't be used that way.
You don't use cap rates that way.  It doesn't mean they can't be used that way.                             
You are correct.  I do not use cap rates incorrectly and yes, my point is that they are NOT being used correctly by anyone here.

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Re: Help me decide if we should buy an investment property
« Reply #10 on: December 18, 2013, 04:02:58 PM »
How many years of professional real estate valuation experience does Honobob have?  Has he ever been paid for his opinion of the value of a property or an interest in a property?  Is he qualified as an expert witness?  Has he ever testified in court or other judicial or administrative proceedings about the value of property or about how property is valued?  Does he hold a license, certification or designation in real estate valuation?  If not, I suggest readers take his opinions with a grain (or perhaps an entire shaker full) of salt.

arebelspy

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Re: Help me decide if we should buy an investment property
« Reply #11 on: December 18, 2013, 04:28:03 PM »
How many years of professional real estate valuation experience does Honobob have?  Has he ever been paid for his opinion of the value of a property or an interest in a property?  Is he qualified as an expert witness?  Has he ever testified in court or other judicial or administrative proceedings about the value of property or about how property is valued?  Does he hold a license, certification or designation in real estate valuation?  If not, I suggest readers take his opinions with a grain (or perhaps an entire shaker full) of salt.

No, but he did stay in a Holiday Inn last night win the real estate lottery*.

I'm sure taking monetary advice from lottery winners is the best way to go.

;)

*His words, that's not me being snarky.  The second sentence is.
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Mazzinator

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Re: Help me decide if we should buy an investment property
« Reply #12 on: December 18, 2013, 08:20:25 PM »


 

Hono- i know you take a different approach, but i have no idea what it is or how you calculate deals. Would you mind explaining or answering your own question?? (I know you didn't ask me) but i would say that 11% is my profit. Unless i misunderstand your question..(still learning here)

 
You are using cap rates incorrectly.  Cap rates are not used for residential properties.  cap rates are not used in commercial properties to determine profit.  Your GRM is 4.17.  Is that good?  What is a sweet CD rate?  2%...9% ?

I don't get it... Do i want the GRM number to be a bigger number or smaller???

30,000/7,200 = 4.17
60,000/7,200 = 8.3

I want a higher rate of return, like the CD for 9%...so should i offer $60k for this property???

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Re: Help me decide if we should buy an investment property
« Reply #13 on: December 18, 2013, 08:37:48 PM »
The GRM has the inverse effect of the cap rate.  The higher the GRM and the lower the capitalization rate, the higher the value.  In one case you are multiplying the gross rent by the GRM, in the other you are dividing the net income by a capitalization rate.

Edit:  As a buyer, you want a lower GRM and a higher capitalization rate.  If the market for these properties prices them at a 5 GRM and you can get the property at the 4.17 GRM, you may have a bargain.  Until you drill down through the operating expenses and determine they are proportionately similar to the properties priced at the 5 GRM, you don't know for sure if you have a bargain.  GRM's are useful tools for screening, but you take home the net income, not the gross rent.  Make sense?
« Last Edit: December 18, 2013, 08:45:22 PM by Another Reader »

marblejane

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Re: Help me decide if we should buy an investment property
« Reply #14 on: December 18, 2013, 09:15:54 PM »
I think that the point that Honobob is making is that NOI does not equal cash flow, therefore the cap rate does not equal the rate of return.  If you use the cap rate as your rate of return, you are not considering the effects of financing.

Mazzinator

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Re: Help me decide if we should buy an investment property
« Reply #15 on: December 18, 2013, 09:19:33 PM »
Ok, thanks... I was thinking one must want a lower GRM, but bobs CD reference confused me ;) So, he wants higher "value" properties???

And how does someone using the GRM determine their expenses? I can determine the fixed expenses, like taxes, but vacancies or wear and tear i don't know how much it will be, especially because this is my first income property. I feel like i 'have' to use 50% total, at least for the first few years.

So another thing i don't understand (it happens a lot) is how to compare this to the 4% swr. I know my example has a lot of assumptions. I'm just trying to understand the therory behind it.

For example, say i buy 4 of these houses. $120k. I would net $14,400. To get this via 4% swr, i need $360k. 3 times the amount invested. Does it compound differently?? I can see the pain in the ass factor, but...

Thanks again!!!

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Re: Help me decide if we should buy an investment property
« Reply #16 on: December 18, 2013, 09:22:28 PM »
I think that the point that Honobob is making is that NOI does not equal cash flow, therefore the cap rate does not equal the rate of return.  If you use the cap rate as your rate of return, you are not considering the effects of financing.

No financing here. All cash.

If i did have financing, wouldn't i just subtract the P&I from "my" 50%?

Another Reader

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Re: Help me decide if we should buy an investment property
« Reply #17 on: December 18, 2013, 09:58:29 PM »
You are correct.  The operating expenses of the property are independent of how it is financed.  The cost of water, carpet, refrigerators, advertising, taxes etc. do not depend on how you finance the property.  You pay principal and interest from NOI.

I think one of Honobob's points is that an 11 percent cap rate may not be high enough in a war zone and is not achievable in high priced San Francisco.  In San Francisco, you may not cash flow much going in, but the theory is you will raise rents faster and profit at resale from the appreciation.  That's Honobob's game.  In Detroit, the value may go to zero, but if you have a net income of 20 percent of your investment a year for 10 years before that happens, you still made a good return on your investment and you recovered your investment through the cash flow. 

There are two sources for return of and return on invested capital, the income and the resale.  For a given yield on the investment, the lower the projected resale value, the more the return must come from income.  A cap rate is a snapshot in time.  It's the ratio between net operating income and the total investment.  It's the market's perception of how quickly income must be turned (capitalized) into value to be an acceptable investment for the risk perceived. 


Mazzinator

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Re: Help me decide if we should buy an investment property
« Reply #18 on: December 18, 2013, 10:57:46 PM »
Thanks!

Is there a good website or other resource with this info? I looked on neighborhoodscout, but i'm not sure how acurate it is. I've seen most people say zillow shows zestimates higher.


AlexK

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Re: Help me decide if we should buy an investment property
« Reply #19 on: December 18, 2013, 11:05:05 PM »
OP what city are you in? The prices in my area have risen so I can't find any deals I consider worth it locally but even at the low in 2011 they were not as good as your numbers.

honobob

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Re: Help me decide if we should buy an investment property
« Reply #20 on: December 19, 2013, 02:03:48 AM »
How many years of professional real estate valuation experience does Honobob have?  Has he ever been paid for his opinion of the value of a property or an interest in a property?  Is he qualified as an expert witness?  Has he ever testified in court or other judicial or administrative proceedings about the value of property or about how property is valued?  Does he hold a license, certification or designation in real estate valuation?  If not, I suggest readers take his opinions with a grain (or perhaps an entire shaker full) of salt.

No, but he did stay in a Holiday Inn last night win the real estate lottery*.

I'm sure taking monetary advice from lottery winners is the best way to go.

;)

*His words, that's not me being snarky.  The second sentence is.
How many years of professional real estate valuation experience does Honobob have?  Has he ever been paid for his opinion of the value of a property or an interest in a property?  Is he qualified as an expert witness?  Has he ever testified in court or other judicial or administrative proceedings about the value of property or about how property is valued?  Does he hold a license, certification or designation in real estate valuation?  If not, I suggest readers take his opinions with a grain (or perhaps an entire shaker full) of salt.
Another reader  You always seem to respond with an attack on me instead of adding anything to the discussion.  Why is that? As far as your questions on my credentials I can answer yes to all.  and not only do I have the experience and training I have been involved in easily over $40 BILLION worth of properties.  When you get to your first billion let me know.
« Last Edit: December 19, 2013, 02:12:40 AM by honobob »

honobob

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Re: Help me decide if we should buy an investment property
« Reply #21 on: December 19, 2013, 02:35:19 AM »
I think that the point that Honobob is making is that NOI does not equal cash flow, therefore the cap rate does not equal the rate of return.  If you use the cap rate as your rate of return, you are not considering the effects of financing.
Actually my point is that NO ONE HERE IS COMPUTING A NOI !!!!!!!  THEY ARE MAKING UP NUMBERS (50%) THAT COMMERCIAL INVESTORS SPEND TENS OF THOUSANDS OF DOLLARS TO GET ACCURATE FIGURES.  THEN THEY COMPARE EACH OF THOSE LINE ITEM EXPENSES TO THE MARKET TO SEE IF THEY MAKE SENSE.  All this is done just to see what the market is at that time place and property type.  This is not done to ensure any type of "return" on their investment.  This cannot be done with residential properties correctly because no one tracks and records these figures on a scale to be available in a correct format to the investor.

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Re: Help me decide if we should buy an investment property
« Reply #22 on: December 19, 2013, 06:35:40 AM »
Mazzinator:

You are asking all the right questions.  I suggest you look for Arebelspy's reading list that is referenced on several threads and make use of the local library to work your way through the list.  Search out and attend some local real estate investors associations meetings (watch out for people pitching expensive "education" at those meetings).  Strike up some conversations with the other attendees.  Ask family and friends if they know anyone that currently investing in real estate and take them out for coffee or lunch.  You might meet flippers and rehabbers at your local Home Depot, I have had a lot of interesting conversations with them standing in line.  If you know a couple of real estate agents, ask them for referrals to agents that work with investors.  Let the investor agents know you want to get into investing and pick their brains about the market and the plusses and minuses of investing in it.

A good web site of a San Diego agent that works with folks wanting to invest for retirement is Jeff Brown's BawldGuyTalking.  Read through his articles and take a look at the videos.  There is a lot of good, basic information there.

As you wade through all this information, stop back with questions.  There are a number of small investors on this site that will be happy to answer your questions. 

arebelspy

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Re: Help me decide if we should buy an investment property
« Reply #23 on: December 19, 2013, 07:04:08 AM »
[MOD HAT ON]

Honobob, please calm down.  You have been warned about this behavior before.  No personal attacks have occurred, but if your belligerence persists, mod action will occur.  This includes your (over)use of capital letters to try and express a point. 

See site rules 1, 2, and 4, as well as Graham's Hierarchy of Disagreement.

Thanks.

[/MOD HAT OFF]
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arebelspy

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Re: Help me decide if we should buy an investment property
« Reply #24 on: December 19, 2013, 07:08:48 AM »
I think that the point that Honobob is making is that NOI does not equal cash flow, therefore the cap rate does not equal the rate of return.  If you use the cap rate as your rate of return, you are not considering the effects of financing.

Well naturally, cap rate assumes an all cash purchase.  If you want to look at rate of return (excluding appreciation) using financing, you'd do a cash on cash return (which is just noi minus the debt services divided by the amount you put in).

I think that the point that Honobob is making is that NOI does not equal cash flow, therefore the cap rate does not equal the rate of return.  If you use the cap rate as your rate of return, you are not considering the effects of financing.

No financing here. All cash.

If i did have financing, wouldn't i just subtract the P&I from "my" 50%?

All cash, cap rate is fine for a rate of return.  You'll obviously calculate actual expenses, not just assume 50% (though using that as an initial rough estimate is fine). And you are correct on what you'd do if you had financing, cause the first 50% (roughly) is expenses, and financing doesn't affect that.  How you pay for the property doesn't change the expenses.

Thanks!

Is there a good website or other resource with this info? I looked on neighborhoodscout, but i'm not sure how acurate it is. I've seen most people say zillow shows zestimates higher.

Neighborhood scout is not a good resource, no.  Zillow and such generally are inaccurate as well, and at best give you an initial ballpark.  Comps on the MLS are the best source for data on residential properties.

You are asking all the right questions.  I suggest you look for Arebelspy's reading list that is referenced on several threads and make use of the local library to work your way through the list.  Search out and attend some local real estate investors associations meetings (watch out for people pitching expensive "education" at those meetings).  Strike up some conversations with the other attendees.  Ask family and friends if they know anyone that currently investing in real estate and take them out for coffee or lunch.  You might meet flippers and rehabbers at your local Home Depot, I have had a lot of interesting conversations with them standing in line.  If you know a couple of real estate agents, ask them for referrals to agents that work with investors.  Let the investor agents know you want to get into investing and pick their brains about the market and the plusses and minuses of investing in it.

A good web site of a San Diego agent that works with folks wanting to invest for retirement is Jeff Brown's BawldGuyTalking.  Read through his articles and take a look at the videos.  There is a lot of good, basic information there.

As you wade through all this information, stop back with questions.  There are a number of small investors on this site that will be happy to answer your questions. 

A big plus one to all of this!
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 two kids.
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Re: Help me decide if we should buy an investment property
« Reply #25 on: December 19, 2013, 07:24:41 AM »
Hey Arebelspy:

Would you mind compiling your list of books and the suggested websites and information sources that have been recommended at various times?  Lots of people ask Mazzinator's questions and it would be very helpful to pin a Beginning Real Estate Investors Resource List as a "read this first" or FAQ post.

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Re: Help me decide if we should buy an investment property
« Reply #26 on: December 19, 2013, 08:07:44 AM »
Hey Arebelspy:

Would you mind compiling your list of books and the suggested websites and information sources that have been recommended at various times?  Lots of people ask Mazzinator's questions and it would be very helpful to pin a Beginning Real Estate Investors Resource List as a "read this first" or FAQ post.

Indeed.  This is long, long overdue.

I'll get started.  Thanks for the nudge.  :)

EDIT: Done.  Here's the link: http://www.mrmoneymustache.com/forum/real-estate-and-landlording/real-estate-book-recommendations/

It's not perfect, but it's a start.
« Last Edit: December 19, 2013, 08:22:25 AM by arebelspy »
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Mazzinator

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Re: Help me decide if we should buy an investment property
« Reply #27 on: December 23, 2013, 12:42:45 PM »
Thank you all for the info here and in other threads. I plan on reading (books, forums and blogs) as much as i can.

My post was meant for 'is it ok/better to buy investment property if i still have debt' I understand posts usually go off topic, which is fine.

I just needed to know if using the cap rate calc can be compared to other "return on investment" calcs as i'm trying to use math instead of emotions with PF. To compare debt payoff, index funds and real estate i'm tyring to get a generic rates/formulas. I know it varies and past performace doesn't equal blah blah, but i'm just looking for an acceptable amount.

For example,
My debt 4.75
Index funds 7
Real estate 12

Step 1 for me was this post. Where should i send my "extra" cash?

Should i pursue/look into it more real estate?
Send it to debt?
Open a taxable account?

Thanks again!!

Also, i'm looking in Savannah, but my husband is military so we move, a lot. We live on Oahu now. We will be moving next to Charlottesville, Va. And have lived in Clarksville, Tn Pittsburgh, Pa Ft. Lauderdale, Fl Sierra Vista, Az (to name a few) My point is, I have a good grasp on the rent side and seeing what makes a desirable rental property and what doesn't.

Honobob- maybe start a new post explaining GRM. How to calculate it, why it works, how it is used... This way, when a newbie comes on here you can reference your post instead of retyping it over and over (thus avoiding arguing)..just an idea...

Another Reader

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Re: Help me decide if we should buy an investment property
« Reply #28 on: December 23, 2013, 01:32:05 PM »
Mazzinator:

Comparing investments is not as simple as comparing nominal rates.  For example, the interest rate on your debt is 4.5 percent.  To the debt holder, they receive a series of payments that yield 4.5 percent.  Once the debt is paid off, there is no reversion of an asset to the lender.  All they get are the payments.  If you own a piece of property, you receive the net income over the time you hold the property, and then you receive the net proceeds from the sale of the property as well. Stocks generally increase in value over time, and if the company pays dividends, you get the income while you own the stock.  Again, you can sell the stock.  The comparison you have made therefore is not accurate.

Gross Rent Multipliers are a "back of the envelope" method to estimate the value of a property.  For example, assume there are a number of 4 plexes in one area, and assume the average GRM for sold 4 plexes in the area is 8.  If the gross rent for a specific 4 plex is $500 per unit per month, the annual scheduled gross income would be $24,000 and the "back of the envelope" estimate of value would be $24,000 x 8, or $192,000.   However, you would need to know a lot more about 4 plexes in the area and how this 4 plex compares to know what it is really worth.  Make sense?

Having read some of you entries in other threads, in you shoes I would want to be out of debt before I took on much investing outside of retirement and emergency savings.  The stress level you experience with debt in the background seems to be very high.  In your shoes, I would want the debt gone and then I could start seriously investing stress-free.

SunshineGirl

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Re: Help me decide if we should buy an investment property
« Reply #29 on: December 26, 2013, 08:45:52 AM »
To your original question, I personally would make paying off debt a priority while you study real estate investing and your neighborhood more.

Nords

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Re: Help me decide if we should buy an investment property
« Reply #30 on: January 13, 2014, 08:35:26 PM »
Thank you all for the info here and in other threads. I plan on reading (books, forums and blogs) as much as i can.

My post was meant for 'is it ok/better to buy investment property if i still have debt' I understand posts usually go off topic, which is fine.

I just needed to know if using the cap rate calc can be compared to other "return on investment" calcs as i'm trying to use math instead of emotions with PF. To compare debt payoff, index funds and real estate i'm tyring to get a generic rates/formulas. I know it varies and past performace doesn't equal blah blah, but i'm just looking for an acceptable amount.
I'd advocate a more holistic approach to your portfolio design before you start picking properties.

In general, being debt-free places you in a stronger negotiating position.  If you seek financing then you can persuade the lender that you have the reserves to handle vacancies and repairs.  If the real estate market collapses the day after you buy the property, then you have fewer expenses to carry while you ride out the recession.  If you decide to renovate a property, it'll be easier for you to finance your own work or to tap a line of credit.

Real estate is an excellent diversifier from other investments, and it generally keeps up with inflation.  It certainly ties up enough "dead equity" to keep you from doing dumber things with your money.  However it's also illiquid with high transaction costs, so it's a long-term commitment.  When you're moving every few years in the military, you have to have a really great real estate team and a trusty property manager.  Doing that right will cut into your profit margins, and doing it wrong is a financial disaster.  It might be better to wait until you've settled in one location (homesteading, twilight tour, retirement, separation) before starting to invest in real estate.

Finally, consider your exit strategy.  I suspect that the exit strategy of 95% of landlords is "probate".  That might be a tax-efficient plan, but do you really want to be managing a portfolio of rental properties (or riding herd on a property manager) when you're 82 years old?  At the very least, get these things into a revocable living trust or a family limited partnership so that the turnover is easier when the time comes.

Honobob- maybe start a new post explaining GRM. How to calculate it, why it works, how it is used... This way, when a newbie comes on here you can reference your post instead of retyping it over and over (thus avoiding arguing)..just an idea...
The moderators and some of the other posters have years of history with this situation.  It's worth taking their reactions into consideration.

Hey Arebelspy:
Would you mind compiling your list of books and the suggested websites and information sources that have been recommended at various times?  Lots of people ask Mazzinator's questions and it would be very helpful to pin a Beginning Real Estate Investors Resource List as a "read this first" or FAQ post.
Indeed.  This is long, long overdue.
I'll get started.  Thanks for the nudge.  :)
EDIT: Done.  Here's the link: http://www.mrmoneymustache.com/forum/real-estate-and-landlording/real-estate-book-recommendations/
It's not perfect, but it's a start.
Thanks-- you covered my picks!

Mazzinator

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Re: Help me decide if we should buy an investment property
« Reply #31 on: February 12, 2014, 04:37:54 PM »
Thanks for all your help.. I just wanted to update of "i finally found an answer" to my question. Not sure why it took so long, but again, for some reason i have a hard time sifting through the info at biggerpockets.

http://www.biggerpockets.com/renewsblog/2010/06/30/introduction-to-real-estate-analysis-investing/

Quote
Cash-on-Cash Return (COC)

Just like there are multiple measures of income — NOI (financing independent income) and Cash Flow (financing dependent income) — there are also multiple measures of return. As we’ve discussed, the financing independent rate of return (the theoretical return on a fully paid property) is the Cap Rate, and of course there is the real (not theoretical) rate of return as well. This is called the Cash-on-Cash (COC) return, because it is directly related to the amount of cash you put down on the investment.

For example, we discussed that if you took $100 and put it in a savings account, you’d receive $4 per year, or 4% ROI. The COC is the equivalent measure of how much return you would make if you put that $100 into the property.

COC is calculated as follows:

COC = Cash Flow / Investment Basis

In our example, the annual Cash Flow was $11,621, and the investment of cash that we had to apply upfront on the property was $98,000 (this includes the downpayment, the improvements, and the closing costs). So, our COC is:

COC = Cash Flow / Investment Basis

= $11,621 / $98,000

= 11.86%

*****As this return is directly comparable to our savings account return, we can see that we are getting a better return than either a savings account or in a diversified stock portfolio (albeit with a lot more time and energy spent).***** THIS!!!

While it’s completely up to you on what rate of return you need to purchase a property, it should be obvious that if you’re getting less than a 10% return on a property, it’s probably not worth your investment (you’d rather take that money and invest in the stock market where you can do a lot less work).

But, before you run off and make any final decisions based on COC, consider that the Cash Flow you make on a property isn’t the only thing that affects your bottom line…

For us, we've decided to focus on tsp, ira and a portion of our sl at least for now. We will revisit this idea in the second half-ish of 2014. For now, i doing a good bit of studying!! And that makes me feel productive and gets my mind out of 'debt fatigue' and into something positive!!!

Any other links like this would be appreciated :)

Also, looked into the book suggestiongs too, got to get motivation to get to the library (bus ride with 2 kids isn't exactly fun, for me) Thanks arebelspy!

arebelspy

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Re: Help me decide if we should buy an investment property
« Reply #32 on: February 12, 2014, 05:40:09 PM »
For now, i doing a good bit of studying!!

Awesome.  That's exactly the way to do it - start learning (and then, at some point, jump in - because you will never know it all, but you'll know enough after a few books to get out there and learn via experience).

Also a good time to work on saving up a down payment (or the whole thing, if it's a small purchase).

Let us know if you have any questions along the way!
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 two kids.
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