Author Topic: Is this a good plan?  (Read 6055 times)

Frugal373

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Is this a good plan?
« on: June 10, 2013, 07:40:24 AM »
I am thinking about investing in rental properties by buying them cash. The plan I have would be to buy one rental property per year for about 100k each. From my current income I can save about 100k a year, so this would be doable. Assuming that on average I can rent out these properties for 1k per month and assuming approximately 300 per month for taxes/insurance/property mgmt, each property should give me pre-tax cash flow of 700 per month before factoring in maintenance expenses. The idea would be to never sell these properties, but to just live on the rental income some years down the road when I have accumulated a large enough portfolio. Given that I would own each property with zero mortgage to pay, I could definitely deal with vacancy issues and the like....not that that is the ideal case obviously, but I am just being realistic.

Is this a good idea? Am I missing sth totally obvious?

tomsang

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Re: Is this a good plan?
« Reply #1 on: June 10, 2013, 10:15:58 AM »
The governement is giving away free money.  Put the minimum down and get a mortgage for the remainder.  A sub 4% loan is a gift from the government don't miss out on it.  See http://www.mrmoneymustache.com/forum/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/  for the pros and cons of a mortgage. 

If you are flexible I would live in them so that you can get better rates, less down, etc.  Finding properties that mathematically pencil out are getting tougher compared to a few years ago. 

Good luck!

Frugal373

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Re: Is this a good plan?
« Reply #2 on: June 11, 2013, 05:49:44 AM »
Thanks a lot for the advice, appreciate it!

Daleth

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Re: Is this a good plan?
« Reply #3 on: July 04, 2013, 10:04:58 PM »
Agreed. If your income is high enough to save $100k/yr, it's high enough (assuming good credit) to qualify for an excellent rate on 15-yr fixed loans (or 30yr but you get a better deal on 15yr and it saves you tens of thousands if not more over the life of the loan). By "qualify" I mean meet the bank's required debt-to-income ratio; the interest rate, of course, depends on your credit.

Assuming you're not planning to live there, you will need 25% down and about another 5-10% in closing costs etc. for each house, so with the $100k, in your area you could buy THREE houses each year instead of one. Even if you are planning to live there the bank may require a substantial down payment, much more than the baseline 3%-5% FHA amount, if you're buying a multi-unit to be a partial investment property... we needed 15% down on the 3-unit we live in.

Since you're in an area where decent houses can be had for $100k, you would be looking at something in the neighborhood of $750-$1000/mo per house on a 15-yr fixed loan, depending on property taxes in your area and on how good your credit is (i.e. what interest rate you can get). If you can get them for less than $1000 and rent them for $1000, then you have three houses per year for which someone else is paying your mortgage (i.e., buying you a house) and also giving you a few hundred bucks a month to help cover your expenses (maintenance etc.). One of the KEYS here is to get fixed-rate mortgages, because then apart from occasional possible property tax increases, the mortgage stays the same but the rent goes up every other year or every year.

Then in 15 years, you start getting rid of the mortgages--starting 15 years from now, every year three of your houses will stop having mortgages! Making all the rent, minus property taxes/maintenance, yours... and unless you buy in an area that's going downhill, the rent will have gone up pretty significantly. This to me sounds like an excellent retirement plan. It's what my husband and I have done, except that we aren't going to be able to buy three houses a year anytime soon (in the past year and a half we bought three properties totaling six units, of which we live in one, and that's it for a while until a new cash influx occurs).

One thing to consider is what you can do to maximize the rent. Like, would an extra $3000-$5000 investment up front to spiff up the bathroom and/or kitchen, or refinish the wood floors, or whatever, enable you to attract higher-paying tenants? Also, once you find good tenants, don't gouge them--our policy with good tenants is to keep the rent the same in year 2 and only raise it in year 3, because if you raise it every year you increase the chance of losing good tenants and going a month or more with nobody there.
« Last Edit: July 04, 2013, 10:09:50 PM by Daleth »

FrugalZony

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Re: Is this a good plan?
« Reply #4 on: July 05, 2013, 01:14:51 AM »
Well, yes, mortgage rates are low, but the thing is, you have a much better position as a cash buyer
We are looking at investment properties in a similar price range and have been outbid a couple of times now
We bid using a conventional loan and 30% or more downpayment and when I look at what has sold
or gone under contract since we started looking 95% are cash buys.
Plus the few that are conventional loans (only came across 1 FHA) were over asking price, whereas most
cash deals were at or below asking.
YMMV depending on your area

Just something to consider!

arebelspy

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Re: Is this a good plan?
« Reply #5 on: July 05, 2013, 01:34:18 AM »
I wrote a post, buried somewhere on the forums, about how buying 4 houses putting 25% down is much better than buying 1 in cash for 100k.

Idk where it is, but MMM made a post that quoted a big block of it.  Read strategy 2 here, the italics was from my post: http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/

Post if you have any questions, but if you're decent at math you should be able to follow it pretty easily.

Best of luck!
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Zamboni

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Re: Is this a good plan?
« Reply #6 on: July 05, 2013, 06:05:27 AM »
^I like the way you laid out the math there. Thanks!

I'm a bit of a debt-phobe, so I like the conservative 50% rule.  Do you keep any cash cushion for major issues (tenants REALLY trash the place, longer than expected vacancy), or does this not come up for you because of intelligent landlording choices?  Bear in mind that I grew up in the hood, so I've seen tenants really trash places;  I've also watched Hoarders, and many of those folks are renters.  Not that I'm going to let that stop me from investing, as it must be a small percentage, but I think I'll stick to middle class areas if I can afford it.

Another Reader

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Re: Is this a good plan?
« Reply #7 on: July 05, 2013, 06:31:45 AM »
Middle class neighborhoods are no guarantee.  I'm dealing with a problem in a nice area of Tempe right now.

I'm a big believer in cash reserves.  There's a reason for the 50 percent rule of thumb.  After almost 20 years, my experience says you will have problems.  Other landlords tell me the same thing.  This may be the year you replace two A/C units at $4,500 each.  Or a tenant declares bankruptcy and you can't get him out for 6 months.  Or you replace a roof at $9.000.  Or some combination of the above.  No cash reserves means the property is in weak hands.   It doesn't take that much to lose the property - I have seen it happen.

Suggest you look at Bawldguy's blog.  Jeff won't even consider a client unless that person has substantial cash reserves.  And he knows from personal experience how important this is.

arebelspy

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Re: Is this a good plan?
« Reply #8 on: July 05, 2013, 08:20:12 AM »
I'm a big believer in cash reserves.  There's a reason for the 50 percent rule of thumb. 

Agreed!

Most of the time the 50% rule will be more like the 20-30% rule (more or less, depending on your property management costs, taxes, insurance, etc).. save the excess every month for those vacancies, giant repair items, etc.

Don't just collect the profits and spend it, but have large reserves and then rebuild them ASAP when (not if) you have to tap them.

I think any responsible landlord (and pretty much anyone who's been doing it more than a few years) will tell you that.
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 three kids.
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FrugalZony

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Re: Is this a good plan?
« Reply #9 on: July 05, 2013, 09:30:43 AM »
I wrote a post, buried somewhere on the forums, about how buying 4 houses putting 25% down is much better than buying 1 in cash for 100k.

Idk where it is, but MMM made a post that quoted a big block of it.  Read strategy 2 here, the italics was from my post: http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/

Post if you have any questions, but if you're decent at math you should be able to follow it pretty easily.

Best of luck!
thanks for the link, I had read that on in the early stages, but it was good to reread!
While our initial strategy was similar to yours, as in build a 4 house portfolio over time with 25-30% down on each
this just doesn't seem to work in our market
I refuse to overbid just to get a property and the majority of successful bids in our price range and the areas of town we are looking at
are cash, so it's hard
Our realtor looses patience I guess...
I am actually considering getting a real estate licence so I can let myself in on my schedule whenever I see something interesting
and don't have to beg someone to open the door for me on his.

arebelspy

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Re: Is this a good plan?
« Reply #10 on: July 05, 2013, 09:36:54 AM »
I am actually considering getting a real estate licence so I can let myself in on my schedule whenever I see something interesting
and don't have to beg someone to open the door for me on his.

Sight unseen offers, contingent on inspection.

Only inspect the ones that get accepted at an acceptable price.  If more repairs are needed than expected, renegotiate.
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 three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Another Reader

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Re: Is this a good plan?
« Reply #11 on: July 05, 2013, 10:31:28 AM »
FrugalZony:

Having a real estate license in of itself does not get you in the door.  You have to be sponsored by a broker, and they will charge you varying fees and want you to produce sales for their trouble.

I recall you live in Phoenix.  You are wasting your time looking on the MLS for cash-flowing rentals.  Regular sellers are well advised on market value by the listing agents.  The few short sales that pop up with low prices are either pre-sold to the listing agent's friend or are bid up and pounced on by a pack of dogs.  $100k?  Maybe an older home in a marginal part of Phoenix.  Even Buckeye is over $100k for the smallest houses that rent for $700, if you can find a tenant.

Thinking of directly marketing to potential sellers, real estate guru style?  I get 5 to 10 pieces of mail trying to steal my properties every week.  It all goes to the recycling bin, mostly un-opened.

This is NOT the time to buy rentals in Phoenix.  Rents are shaky, competition for tenants is intense, operating expenses are rising, and tenant quality is rapidly deteriorating as the folks that short-sold or were foreclosed on get back in the financing game.

FrugalZony

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Re: Is this a good plan?
« Reply #12 on: July 05, 2013, 05:25:46 PM »
I am actually considering getting a real estate licence so I can let myself in on my schedule whenever I see something interesting
and don't have to beg someone to open the door for me on his.

Sight unseen offers, contingent on inspection.

Only inspect the ones that get accepted at an acceptable price.  If more repairs are needed than expected, renegotiate.
So you mean you don't even look at them, unless an offer is accepted?
I'd be interested to hear more, but to me that's a scary thought.

FrugalZony

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Re: Is this a good plan?
« Reply #13 on: July 05, 2013, 05:30:41 PM »
FrugalZony:

Having a real estate license in of itself does not get you in the door.  You have to be sponsored by a broker, and they will charge you varying fees and want you to produce sales for their trouble.

I recall you live in Phoenix.  You are wasting your time looking on the MLS for cash-flowing rentals.  Regular sellers are well advised on market value by the listing agents.  The few short sales that pop up with low prices are either pre-sold to the listing agent's friend or are bid up and pounced on by a pack of dogs.  $100k?  Maybe an older home in a marginal part of Phoenix.  Even Buckeye is over $100k for the smallest houses that rent for $700, if you can find a tenant.

Thinking of directly marketing to potential sellers, real estate guru style?  I get 5 to 10 pieces of mail trying to steal my properties every week.  It all goes to the recycling bin, mostly un-opened.

This is NOT the time to buy rentals in Phoenix.  Rents are shaky, competition for tenants is intense, operating expenses are rising, and tenant quality is rapidly deteriorating as the folks that short-sold or were foreclosed on get back in the financing game.

Hi,
thanks for  your insight! We realize we are late to the game. Our comfort level just wasn't there when the time was right.
I appreciate this insight though, this definitely gives me something to think about and will share what you said with hubster
and see where else we could put that money we set aside for that down payment.

I am not sure what you are saying about the junk mail, retail guru part, though. Sorry. Would you care to clarify.
Thanks!

FrugalZony:

Having a real estate license in of itself does not get you in the door.  You have to be sponsored by a broker, and they will charge you varying fees and want you to produce sales for their trouble.

Thanks for this comment as well. I had not considered this.

@Frugal373 sorry for hijacking your thread, hope these discussions are useful for you too ;)
« Last Edit: July 05, 2013, 05:34:29 PM by FrugalZony »

Another Reader

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Re: Is this a good plan?
« Reply #14 on: July 05, 2013, 05:49:44 PM »
Some folks frustrated by not finding "deals" on the MLS take an expensive "investing class" from some so-called real estate guru who advises the students to try direct marketing to absentee owners.  Buy a list of absentee owners, who, of course, really just want to be rid of their properties.  They are out of town and not in touch with current values, so that's where the money is made.  This almost never works.

FrugalZony

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Re: Is this a good plan?
« Reply #15 on: July 05, 2013, 10:19:18 PM »
Thanks for clarifying! Learn something new every day ;)

Also you are stressing the MLS as not a good source. Is there a good one, I am missing?
We were quite good with HUD properties, when we started 18 months ago, but even those
are now in MLS and most info I researched back then on minimum bids based on net to hud,
does not apply anymore

Another Reader

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Re: Is this a good plan?
« Reply #16 on: July 05, 2013, 10:30:41 PM »
Phoenix is a fast moving, efficient market.  Mispricing on the low side is corrected immediately.  Flippers are getting priced out of foreclosures and short sales because of the competition.  If there is a market of discounted properties, I'm not aware of it.

fiveoclockshadow

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Re: Is this a good plan?
« Reply #17 on: July 06, 2013, 07:02:30 AM »
We realize we are late to the game. Our comfort level just wasn't there when the time was right.

This is a huge red flag right there.  You are chasing the market and you likely have the mindset that you always inadvertently will.  Market chasers are cursed with losing most of the time and having lower longer term returns than steady investors.  This is the psychology that most all of us suffer from to one degree or another and it costs big time.  First it is fear of loss preventing you from buying low and then it is fear of missing out that causes you to buy high.  Fear has no place in investing, but all of us are subject to it.

I'm going to suggest you heed the concerns about the Phoenix market being posted here.  Give real estate a skip, at least for now.  Your local market isn't conducive to it and you might not have the mindset best suited to it either.

Instead get that money into something better suited to your locality and personal style.  Market chasers at heart are best served by picking a few index funds, strictly contributing and re-balancing them regardless of what the market is doing or the talking heads are saying on TV.  This by rote discipline is a winning strategy on its own, but even more so by design it prevents market chasing and investment timing.  Based just on that quote above I think that is the strategy that will give you the best long term return and peace of mind.  And that would put you in the category that nearly all investors are in - in general we are all fear based market chasers and the only question is the degree. 

A limited number of folks can control their fears very well and as a result they *might* get a slightly higher return with a different strategy than index investing.  That's what some are doing here, taking "advantage" of a very low interest rate (this is actually a market timing move, there is no guarantee rates will increase a lot or that real estate increases or that rents increase or that equities won't increase significantly more) and the fairly extreme leverage allowed in real estate investments (thus increasing risk but hoping for more return based on market timing the bottom of the real estate market).  That can be a winning move, but the investment lacks diversity, has lots of leverage, has high transaction costs and low liquidity.  All four of those things make it an extremely bad investment for anyone chasing markets or subject to fear and doubt.  Each of those four factors amplify any bad decision based on fear (and either kind of fear, fear of loss or fear of missing out on a gain).  It sounds to me like the level headed folks familiar with your market are telling you it isn't a particularly great move (i.e. you have no need to fear missing out).

So tread with caution!

And best of luck!  The great news is you've got a lot of savings to invest - always a good thing!
« Last Edit: July 06, 2013, 07:04:39 AM by fiveoclockshadow »

Daleth

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Re: Is this a good plan?
« Reply #18 on: July 06, 2013, 12:28:14 PM »
I am actually considering getting a real estate licence so I can let myself in on my schedule whenever I see something interesting
and don't have to beg someone to open the door for me on his.

Sight unseen offers, contingent on inspection.

Only inspect the ones that get accepted at an acceptable price.  If more repairs are needed than expected, renegotiate.

Good strategy. We've also beaten other bidders by making offers (after thoroughly looking at the house ourselves) with no inspection contingency or a very bare-bones one (i.e., the only contingency being the one or two things we had questions about when we looked at the house). Obviously don't do that unless you're handy and familiar enough with home systems to effectively inspect the place yourself.

We've only bought a place in cash once, and that was only because it was a shell (totally demoed inside) that no bank would touch. And also because that place only cost $36k. I have trouble imagining a scenario where I would willingly part with $100k+ in cash and get only one house in return. Using loans to buy works fine in our market and our price point; I have friends who pay cash because the houses they're buying only cost $30k, and that makes a ton of sense too. The main difference between their properties and ours is that ours don't require a ton of work to be ready to rent--this couple of friends has a lot of free time to do work themselves; we don't, so we generally buy places that don't need too much. The other difference is theirs are in worse neighborhoods so they get somewhat more marginal tenants. Again, that's something they can deal with because they have a lot of free time. You have to find the strategy that matches your personal situation; there's no one-size-fits-all in real estate investing.

FrugalZony

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Re: Is this a good plan?
« Reply #19 on: July 08, 2013, 12:12:54 AM »
Thanks for the words of caution and yes, we are starting to realize maybe real estate is not a good option at this point.
We are actually not really chasing for fear of missing out. We just flat out refuse to pay whatever, just to get a property.
If I was afraid to loosed out, that's what I would do, but I won't.

The reason my comfort level was not there 18 months ago, was that we had a big mortgage on a primary residence (that
was still going down in value) and a lot of incertainties at work, which is why I was reluctant to burden us with another mortgage.
It had somewhat to do with the market, but much more with our personal situation at the time.

I
We realize we are late to the game. Our comfort level just wasn't there when the time was right.

This is a huge red flag right there.  You are chasing the market and you likely have the mindset that you always inadvertently will.  Market chasers are cursed with losing most of the time and having lower longer term returns than steady investors.  This is the psychology that most all of us suffer from to one degree or another and it costs big time.  First it is fear of loss preventing you from buying low and then it is fear of missing out that causes you to buy high.  Fear has no place in investing, but all of us are subject to it.

I'm going to suggest you heed the concerns about the Phoenix market being posted here.  Give real estate a skip, at least for now.  Your local market isn't conducive to it and you might not have the mindset best suited to it either.

Instead get that money into something better suited to your locality and personal style.  Market chasers at heart are best served by picking a few index funds, strictly contributing and re-balancing them regardless of what the market is doing or the talking heads are saying on TV.  This by rote discipline is a winning strategy on its own, but even more so by design it prevents market chasing and investment timing.  Based just on that quote above I think that is the strategy that will give you the best long term return and peace of mind.  And that would put you in the category that nearly all investors are in - in general we are all fear based market chasers and the only question is the degree. 

A limited number of folks can control their fears very well and as a result they *might* get a slightly higher return with a different strategy than index investing.  That's what some are doing here, taking "advantage" of a very low interest rate (this is actually a market timing move, there is no guarantee rates will increase a lot or that real estate increases or that rents increase or that equities won't increase significantly more) and the fairly extreme leverage allowed in real estate investments (thus increasing risk but hoping for more return based on market timing the bottom of the real estate market).  That can be a winning move, but the investment lacks diversity, has lots of leverage, has high transaction costs and low liquidity.  All four of those things make it an extremely bad investment for anyone chasing markets or subject to fear and doubt.  Each of those four factors amplify any bad decision based on fear (and either kind of fear, fear of loss or fear of missing out on a gain).  It sounds to me like the level headed folks familiar with your market are telling you it isn't a particularly great move (i.e. you have no need to fear missing out).

So tread with caution!

And best of luck!  The great news is you've got a lot of savings to invest - always a good thing!

arebelspy

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Re: Is this a good plan?
« Reply #20 on: July 08, 2013, 12:11:11 PM »
I am actually considering getting a real estate licence so I can let myself in on my schedule whenever I see something interesting
and don't have to beg someone to open the door for me on his.

Sight unseen offers, contingent on inspection.

Only inspect the ones that get accepted at an acceptable price.  If more repairs are needed than expected, renegotiate.
So you mean you don't even look at them, unless an offer is accepted?
I'd be interested to hear more, but to me that's a scary thought.

That's correct.  It's not scary at all, because as soon as you inspect it you can cancel if there's major problems, or ask for a lower price (and cancel if they say no).  I prefer this method for purchasing my nicer buy and holds.

Daleth's other idea to offer cash and waive inspections and contingencies (after having already inspected it prior to the offer) is great as well.  I prefer this method for purchasing my rehab flips.
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 three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

fiveoclockshadow

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Re: Is this a good plan?
« Reply #21 on: July 08, 2013, 12:56:56 PM »
The reason my comfort level was not there 18 months ago, was that we had a big mortgage on a primary residence (that
was still going down in value) and a lot of incertainties at work, which is why I was reluctant to burden us with another mortgage.
It had somewhat to do with the market, but much more with our personal situation at the time.

Ah!  Very sensible then.  My bad assuming what the hesitation was.