Author Topic: Give me your opinion... or a push in the right direction  (Read 2368 times)

SpicyMcHaggus

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Give me your opinion... or a push in the right direction
« on: August 29, 2014, 12:48:10 PM »
I'm 30.
As of 12/5/2013 I own a duplex that is rented (tenants downstairs, me and room mate upstairs). It covers 90% of the mortgage.
I have killed my clown car habit (sold vehicle I had loan on, have much cheaper AWD car with decent MPG).
My GF and I are getting more serious, as is my room mate. He would like to rent out the entire upstairs, and my GF would like me to move in with her.  This is +$300 / month on the duplex rent, and -$0 to her. We've discussed how I will manage her duplex and provide handyman type work in lieu of the rent.
I have $200k in investments; 401k, IRA, rIRA, etc. My taxable accounts are producing $500/ month in dividends, which is reinvested in various index funds. I do pick a few stocks from time to time (AAPL, FB, mostly tech and finance), but not often.
Mint.com has helped me reduce spending and thus every few months I have to empty(not all the way) the savings account into one or more investments.
I am not against landlording, and would like to use it to increase my monthly income and f*ck-you stacks.  The problem is the local market here (SEWI) has high taxes and mediocre rents. A friend is doing the same in Denver and profiting $600-1200/mo on homes with purchase prices under 200k. When I do the maths and include our local property taxes here, it seems the same capital would only net you $300-400 maximum. In order to seek higher returns here, you must get into riskier properties (commercial, low income, apartment blocks).

Am I crazy for flying out to Denver, going in on a property to test the waters, and expanding my rentals in a much more profitable area that is a 4 hour flight away?

Here's the options I have come up with:
I could invest the down payment money in indexes or dividend funds.
I could invest in some market spread options. Made decent money here back in college.
I could purchase more rentals in my locality and make 1% of the purchase price in monthly rent.
I could purchase rentals in another state and have them managed, making a higher return even after mgt fees.
I could pay down the mortgage and possibly refi to eliminate the $50 monthly PMI charge.
I could increase my 401k contribution from 11% to 17%, thus eliminating the monthly surplus (and also my freedom to invest as I see fit).
I could use $ to increase side-hustle of fixing cars. I love cars and motorcycles and have done well in the past fixing and selling.  ($1000 profit / $3600 purchase price average over the last few years).

The reason this is posted in this subforum is that I'm leaning toward investing in rentals in another state.
« Last Edit: August 29, 2014, 12:51:51 PM by SpicyMcHaggus »

Poorman

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Re: Give me your opinion... or a push in the right direction
« Reply #1 on: August 29, 2014, 03:08:13 PM »
I would kill the PMI before any of the other options.  If you annualize the premium amounts ($50 x 12 = $600), then divide that by the amount of principal outstanding above 80% LTV, I think you'll find that it's an expensive waste of money.  For instance, if your balance above 80% LTV is $12,000, then the $600 per year would equate to a 5% interest rate on that money.  Add that to your mortgage rate and it's like an expensive 2nd mortgage for that amount above 80% LTV.  It's also no longer tax deductible as of 2014.

If your property has gone up significantly since you bought it, another option would be to get it re-appraised at the current value to get rid of MI, instead of paying the balance down.

Beyond that, I would pursue the strategy that has the highest realistic return for the amount of hassle your willing to deal with.  The car and motorcycle hustle sounds promising, but it might not scale well after a certain point since it depends on your labor and time to make it work.

waltworks

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Re: Give me your opinion... or a push in the right direction
« Reply #2 on: August 29, 2014, 10:44:58 PM »
More details - what does the duplex rent for, and what are your costs? Could you really find 1% rule properties in Denver? I lived in Boulder until a few years ago and I don't think Denver is cheap at all - it never really crashed after the bubble years and housing is $$$ most places, whereas rent isn't bad - but maybe I'm wrong.

-Investing in index funds is easy and in the long run almost guaranteed to make you nice money. It is zero effort.
-Options trading sounds like a risky waste of time unless you want to make a serious career/business out of it. And if you want to do that, it's not really an investment, it's a job. So if you do better in your current job than you think you would trading options, forget it.
-If you want to buy RE, buy whatever will give you the best return, unless you just love being a landlord and unplugging toilets, in which case by all means buy locally.
-PMI? Are you kidding? Kill that immediately by whatever means necessary. Jeebus. That's low hanging fruit.
-Are you getting a match on the 401k, and how much income tax will you avoid by maxing it out?
-Fixing cars is a job, not an investment. Totally different question and it doesn't belong in an investing discussion.

Essentially you have left out most/all of the detail needed to give useful advice... but you need to wrap your head around the difference between an investment (your money working for you) and a job (you working to earn money). If your goal is to make as much money as possible, by all means start side hustling/getting a second job. If your goal is to have passive income, probably just invest in slam-dunk RE deals if you can find them (IMO you will not in Denver), or index funds.

-W

escolegrove

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Re: Give me your opinion... or a push in the right direction
« Reply #3 on: August 30, 2014, 12:36:26 AM »
My husband is active duty military so we own all over. Our properties are class A and we don't fit the "rules" and have done very well. While we have managed to reduce long distance costs a whole lot through self-managment. I have found that managing long distance still costs money

*silly repairs like $250 for caulking because you have to hire a plumber instead of doing it yourself
*travel costs when reviewing the property
*we manage long distance but others are not so comfortable

When we retire our plan is to sell all the properties doing a 1031 and reinvest them locally.

SpicyMcHaggus

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Re: Give me your opinion... or a push in the right direction
« Reply #4 on: August 30, 2014, 01:27:51 PM »
PMI is there because I was cash poor at the end of a renovation project on the previous house.
There's currently $17,000 outstanding until I could refi without PMI. That's like 3.5% APR. ($600(annual) / $17000 ). I think the SP500 does better than 3.5% annually.  The PMI on this loan does not disappear; the loan would need to be refinanced.
The cost of the duplex is $1135 / month. The bottom has a low-income tenant at $700 / month, which is below market approximately $100. I am in discussions with the housing authority to increase this. Any advice on this appreciated!
The upper of the duplex would rent at $750, leaving me a net of around $300 / month. It's not great, but it's a little. 

Regarding the Denver properties; they can be had, it's a matter of being able to bid on one before it sells on day 1.  There are good houses there to be had if you look daily.  I have a friend there who is in property maint/renovation to do the management and repair work for a percentage of rent.

waltworks

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Re: Give me your opinion... or a push in the right direction
« Reply #5 on: August 30, 2014, 02:07:37 PM »
Read the stickies at the top of the main RE page. You still haven't provided the info needed to really advise you well. We would need PITI numbers, original purchase price, loan balance and interest rate, etc, etc, etc. in order to really advise you. A cash-in refi might make great sense if you eliminated the PMI and dropped your PITI a bunch. It might make no sense at all too, but you haven't provided a very complete picture of what's going on.

If your P&I is the $1135 number, and you would expect using the 50% expense rule to net $750 or so, you may actually be losing money in the long run. Are you familiar with the 1%/50% rules?

I guess I'm also not sure what your question is.

Generally if you are participating in a low-income housing project with a city, you will end up with pretty much zero control over what you charge in rent (and getting *out* of that kind of program can also be hard/impossible), so I wouldn't count on that changing anytime soon.

-W

Poorman

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Re: Give me your opinion... or a push in the right direction
« Reply #6 on: September 02, 2014, 03:38:28 PM »
PMI is there because I was cash poor at the end of a renovation project on the previous house.
There's currently $17,000 outstanding until I could refi without PMI. That's like 3.5% APR. ($600(annual) / $17000 ). I think the SP500 does better than 3.5% annually.  The PMI on this loan does not disappear; the loan would need to be refinanced.
The cost of the duplex is $1135 / month. The bottom has a low-income tenant at $700 / month, which is below market approximately $100. I am in discussions with the housing authority to increase this. Any advice on this appreciated!
The upper of the duplex would rent at $750, leaving me a net of around $300 / month. It's not great, but it's a little. 

Regarding the Denver properties; they can be had, it's a matter of being able to bid on one before it sells on day 1.  There are good houses there to be had if you look daily.  I have a friend there who is in property maint/renovation to do the management and repair work for a percentage of rent.

You're not looking at it correctly.  The principal above 80% LTV is costing you 3.5% + your mortgage rate.  So if your interest rate is 4%, it's costing you 3.5% + 4% = 7.5%.  That cost of capital is too expensive to invest in the S&P in my opinion.  Paying off the PMI is a risk-free return, whereas investing in the S&P comes with normal investment risk.

Since you can't pay off the PMI, you should try to refi asap.  Rates might be lower now than when you first got the loan, so it would be a win/win if that were the case.