The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: clarkfan1979 on November 20, 2020, 07:29:45 AM
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There are many different ways to make money in real estate. I am not advocating that my path is the "only path" or the "best path". I am simply advocating that it is "a path" I really struggle when people say that they won't even look at a deal if it doesn't meet the 1% rule. I think that is really short-sighted. If you want cash flow to quit your job, fine. However, if you are looking to build wealth, the 1% rule is not a very good metric.
If you want to build wealth, you should be buying assets that are highly valued. Warren Buffet attributes his success to his partner Charlie Munger for helping him change his investing philosophy. Instead of trying to get a "great price" on a "fair company", Charlie taught me to focus on getting a "fair price" on a "great company".
I purchased a primary home in June 2018 for 603K. I put in 50K of repairs and 7K of furniture. My mortgage is $2675/month with a rate of 4.5%. It's now a rental that gets $4450/month in rent. After GE tax ($180), utilities ($120), vacancy ($225) and repairs ($250) I get around $1,000/month of cash flow. I do get $700/month in principal pay down, but this deal is still very short of the 1% rule. Most people would tell me that this rental sucks, right?
https://www.bizjournals.com/pacific/news/2020/11/06/median-home-price-on-kauai-jumps-45-sales-up-37.html
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There are many different ways to make money in real estate. I am not advocating that my path is the "only path" or the "best path". I am simply advocating that it is "a path" I really struggle when people say that they won't even look at a deal if it doesn't meet the 1% rule. I think that is really short-sighted. If you want cash flow to quit your job, fine. However, if you are looking to build wealth, the 1% rule is not a very good metric.
But just like you, they're likely not saying it's the "only path," they're just saying it's their path. There's some irony in saying you allow that there are other paths but saying that other paths are really short-sighted.
For me, a less than 1% rule house just isn't worth the risk compared to the equivalent or higher return you get in the stock market. Disclosure, I own zero rental houses and only commercial property. But I say the same thing for commercial properties - I would not buy one if it didn't significantly beat the return from the stock market and that return is difficult to reach without meeting the 1% rule.
I do agree that a good property is much better to own than a fair property but your return is typically lower. Not always of course!
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The thing is, the owner has zero control over appreciation. With a 1% property an owner can more or less know what their return will be and any appreciation is a bonus. Counting on an individual property to appreciate is a lot like picking an individual stock and hoping that its value climbs. It's just speculation whether the asset is a single stock or a single property.
Is 'buy a property and hope' a repeatable investment strategy, or is it just good luck on the part of the investor? The 1% rule is repeatable and if anything just acts as a multiplier if you do get lucky with appreciation.
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But you didn't originally buy that property to function exclusively as a rental -- you were planning to (and did) live in it as a primary residence.
Given the scarcity of good properties in HI, I would likely hang onto one like yours too, even if it doesn't meet the 1% rule. Especially if I thought there was any chance I might want to move back at some point.
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The thing is, the owner has zero control over appreciation. With a 1% property an owner can more or less know what their return will be and any appreciation is a bonus. Counting on an individual property to appreciate is a lot like picking an individual stock and hoping that its value climbs. It's just speculation whether the asset is a single stock or a single property.
I think this is akin to people who argue for buying stocks only at lower P/E ratios. In isolation, it's completely true and I completely agree.
All things being equal, a property that satisfies the 1% rule is going to be a superior investment to one which fails to satisfy the rule. Just like, all things being equal, a stock that trades at a P/E ratio of 10 is superior to one which trades at a P/E ratio of 30. But in both cases, the price:rent ratio or price:earnings ratio is telling you that all things are not going to be equal between the two investments.
If two properties rent for different proportions of their purchase price, it is because there are also other differences between them. A stock with a lower P/E ratio may have a big tranche of debt coming due, or be losing market share to a competitor, or facing headwinds from increasing labor or other input costs. A property which satisfies the 1% rule may be located in a region with a shrinking population (much of the industrial midwest) where the property may depreciate over time. Or the may be a lower end property where turnover is more common or more frequent/more expensive repairs are required.
That doesn't mean that all properties are equally good investments (I don't believe in the efficient market hypothesis when it comes to real estate). But it does mean people have to weigh trade offs related to the reasons some properties satisfy the 1% rule while others do not when they are deciding which properties make sense as investments and which ones do not.
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If you had followed the 1% rule you would simply be seeing higher cash flow than you are now, either $6000 in gross rent or a 30% cheaper purchase price. You went another way which is less profitable.
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It sucks ($250 a month is no way paying for your maintenance/Capex in HI, lol - especially if high end and furnished, you're including zero for management, etc) and it's also super risky. I have a feeling you haven't been through a big RE bust or major maintenance problem yet. It'll happen sooner or later.
You also left out property taxes, yes? I don't know what they are on Kauai (quick google says it might be ~9%!) but on Oahu they are *steep* for out of state owners.
But so far you're doing ok, though - good work. Come back and let us know how it's going in 20 years.
-W
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But you didn't originally buy that property to function exclusively as a rental -- you were planning to (and did) live in it as a primary residence.
Given the scarcity of good properties in HI, I would likely hang onto one like yours too, even if it doesn't meet the 1% rule. Especially if I thought there was any chance I might want to move back at some point.
Yes, you are correct that I originally purchased the house as a primary residence. However, 16 months ago (August 2019), I was faced with the decision to sell or rent. Because the house would sell for 800K or rent for $4450/month, the 1% fans would make a very strong argument to sell. I never asked for an opinion on MMM because I was pretty sure of the answer that I would get. Yes, my cash flow is not ideal, but I got 100K-150K of appreciation over the past 16 months.
Let's not forget that Hawaii has the lowest property taxes in the nation, which the 1% rule ignores. I am originally from Lake County, IL which averages 3% on property taxes. I can show you a deals in Lake County, IL that meet the 1% rule but cash flow less because the property taxes are so high.
If you had followed the 1% rule you would simply be seeing higher cash flow than you are now, either $6000 in gross rent or a 30% cheaper purchase price. You went another way which is less profitable.
If you limit yourself to 1% deals you are going to remove yourself from appreciation markets. If that's your comfort zone, fine. However, to say that profits are less in appreciation markets would be incorrect. It would make more sense to say that the appreciation was due to luck. However, pretending like the appreciation doesn't exist is ignoring reality.
Big picture, 1% deals are probably good for beginners. However, I think it's sad when beginners want to get started but they put it off for like 5 years because they keep on searching for a 1% deal that never happens. Be conservative on your first deal because you will make mistakes. However, you do not have to wait for a 1% deal to get started. I'm still waiting myself.
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Clarkfan,
We all know what you are trying to say, but your method or "proof" just isn't convincing.
Your total cost was 660k plus major time and effort. Isn't this also a main home plus an in-law? So essentially you are managing 2 doors as well. Then you pay for the utility, GE tax (something I had to google), vacancy (wayyyyy too low), and maintenance (low imo) and waltworks is right, where is the property tax and management fees? All for $4450/month is not something that a lot of us would jump on. Not only that, this was you primary, so you purchased it knowing it wouldn't make the best rental. But now you are patting yourself on the back because it just happened to appreciate?
With all of that said, I really like how maizefolk summarized it. Not all 1% or .5% or whatever are created equal. I am in the Bay Area and we don't have anything close to 1%. However, because all other carrying costs are so marginal compared to the purchase price, our math is different. And yes, appreciation is a reality here, but I still won't factor that in my future purchase(s).
Edit: If you don't like the 1% rule. What would be your "rule" in a sentence or two?
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Not all 1% or .5% or whatever are created equal. I am in the Bay Area and we don't have anything close to 1%. However, because all other carrying costs are so marginal compared to the purchase price, our math is different. And yes, appreciation is a reality here, but I still won't factor that in my future purchase(s).
This is something I'm be interested in learning more about because one can make an intuitive argument either way. In a market where the price of houses is 4x as high, does it really make sense that one needs to allow 4x as much for maintenance and upkeep of the house itself?
The argument for it being 4x as high in a city where the same house is worth 4x as much is that in the expensive market the people you are hiring to do repairs need to charge more to make their own rent. But on the other hand at least in a lot of other fields I know that the salary differential for the same job between, say, Detroit and San Francisco, is much less than the difference in rental rates or property values.
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There are many different ways to make money in real estate. I am not advocating that my path is the "only path" or the "best path". I am simply advocating that it is "a path" I really struggle when people say that they won't even look at a deal if it doesn't meet the 1% rule. I think that is really short-sighted. If you want cash flow to quit your job, fine. However, if you are looking to build wealth, the 1% rule is not a very good metric.
If you want to build wealth, you should be buying assets that are highly valued. Warren Buffet attributes his success to his partner Charlie Munger for helping him change his investing philosophy. Instead of trying to get a "great price" on a "fair company", Charlie taught me to focus on getting a "fair price" on a "great company".
I purchased a primary home in June 2018 for 603K. I put in 50K of repairs and 7K of furniture. My mortgage is $2675/month with a rate of 4.5%. It's now a rental that gets $4450/month in rent. After GE tax ($180), utilities ($120), vacancy ($225) and repairs ($250) I get around $1,000/month of cash flow. I do get $700/month in principal pay down, but this deal is still very short of the 1% rule. Most people would tell me that this rental sucks, right?
https://www.bizjournals.com/pacific/news/2020/11/06/median-home-price-on-kauai-jumps-45-sales-up-37.html
I looked into rentals quite a bit, as I owned 2 of them at one point. The 1% works great for lower capital cost properties with a much higher % of repair and vacancy costs, overall. Once you get into the land value of homes being very high, some of your gains can come from the gradual increase in home value over time, lowering the 1% rule. This means that you need to be prepared to sell and get out when the values spike, then get back in later when prices stagnate. At MMM we don't generally like market timing, and a rental is fairly high-work to sell.
I think that in most markets a person who looks for a long time can eventually find a property that will pay out well, if managed well. Sometimes they are very hard to find.
With high value property (land value is high), lower turn over with less vacancy and repairs, you can break even at around 0.5% or 0.6%... if you assume the home will increase at the rate of inflation or just above (average rate). BUT, that does not pay me anything extra for my time to get it rented, time for repairs, to do my taxes, etc.
Your rate of 0.67% is not bad at all.
Take a look:
Opportunity Cost: $660k invested (let's assume no mortgage) x 5% a year net of inflation (average stock market) = $33k/yr = $2,750/mo
Income: $4450/mo
Your costs monthly: $775 + Property tax of I assume $425/mo = $1200/mo
NET: $3250
Based on this, you are getting $500/mo extra for your business compared to the stock market, or 1% better than long term average returns.
That 1% will pay for the selling costs after 6 years. AND If you keep the property a longer time, then the resale costs as a % will be lower.
I note that your maintenance costs are very very very very low for a rental that is vacant one month every 2 years, on what I assume is a SFR or a SFR with a secondary suite. This $3k/yr is the bare minimum of repairs just for the house, with zero replacement costs, and the rental turn over costs (paint, occasional new carpet or appliance, advertising) would be in addition, not to mention any tax accounting or minor legal help you need to run your business even with decent tenants.
Also - my insurance on a rental is close to $100/mo for a larger home, which may be missing from your numbers. So, I would add in another $3000/yr minimum to your costs, likely more, for turn over maintenance costs, and insurance.
End of the day (using no mortgage, comparing to conservative stock market) -- you are netting at least $250 before tax on the rental, to pay for your labor, risk and talent.
You are saving the property management fee of at least $350/mo by managing it yourself. So if you had a management company, this rental certainly wouldn't pay, partly because they hire full trades to do all repairs and you will be replacing that toilet ball valve yourself in your scenario.
If your rental home value increases rapidly, especially if it increased faster than the stock market, you will "win" even more.
If you end up with a lot more vacancy than expected or a few major repair items, or need to sell the home, removing any real estate gains due to commission costs, you may or may not win.
If you move away for an extended time and need to hire a property manager, you will not win.
Thoughts?
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It sucks ($250 a month is no way paying for your maintenance/Capex in HI, lol - especially if high end and furnished, you're including zero for management, etc) and it's also super risky. I have a feeling you haven't been through a big RE bust or major maintenance problem yet. It'll happen sooner or later.
You also left out property taxes, yes? I don't know what they are on Kauai (quick google says it might be ~9%!) but on Oahu they are *steep* for out of state owners.
But so far you're doing ok, though - good work. Come back and let us know how it's going in 20 years.
-W
Hey Walt, you are way off on the property taxes. Hawaii has the lowest property taxes in the nation. Even for out of state owners they are less than 1%. I think you are confusing the sales tax on vacation rentals, which is probably around 9%. Please stop with the quick google search. It's not helping.
My current property taxes are $1526/year. In July 2021, I will be losing the owner occupied resident discount and they will be increasing to $5837/year. However, before that happens, I am going to refinance from 4.5% to 3.25% and my PI will go down by $400, so my final PITI will be $2635/month.
The house is not a high end rental. For Kauai, it's at the median. According to the article I just shared, the median house price for Kauai is now 985,000. My house is probably worth 900,000 to 950,000, so I'm slightly below the median. The upstairs rents for $2900/month and the downstairs rents for $1600/month. Comparable vacation rentals closer to the beach rent for $9,000/month. Vacation rental rent is lower now due to COVID-19. However, I imagine I will be increasing the rent for my long term rental in the near future.
I lived on Kauai for four years and have two good friends that help me with my maintenance. They charge the same as labor in Colorado. My hot water heater was leaking last month. My friend fixed it for me for $100. The part cost $15 and he charged me $85 for one hour of labor. I also spent one full year total rehabbing the house. Maintenance costs are going to be lower than average. The house has no central heat or central air conditioning. There are less things to go wrong.
Yes, I do self-manage. My last two tenants rented "sight unseen" based on photos from the internet. I currently have a waiting list of retired folks that want to rent my house for 6 months at a time. It's only two groups, but I am not even advertising. I am going to Kauai for 10 days in December with my wife and son for vacation. I will stop by the house on 3 separate days to do landscaping. Each day will be about 4 hours each. I do have long term plans to thin out the vegetation.
Yes, things can go wrong. That is why mortgage lenders force you to have 6 months of reserves in your checking account for each rental mortgage. For me, that minimum is $34,000. I think we currently have $42,000 in our checking.
I have been doing the landlord thing for 13 years. My numbers are below.
#1: May 2007: Purchase price of 182K+ 10K in repairs. Currently worth about 415K and rents for $2500/month. Appreciation of 6%/year.
#2 January 2012: Purchase price of 95K + 16k in repairs. Currently worth 250K and rents for $1850/month. Appreciation of 10%/year.
#3 June 2018: Purchase price of 603K + 50K in repairs + 7K in furniture. Currently worth 900K and rents for $4450/month. 36% over 2 years.
#4 November 2019 (Primary Residence): Purchase price of 280K and zero repairs. Currently worth 310K. 10% over 1 year.
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Not all 1% or .5% or whatever are created equal. I am in the Bay Area and we don't have anything close to 1%. However, because all other carrying costs are so marginal compared to the purchase price, our math is different. And yes, appreciation is a reality here, but I still won't factor that in my future purchase(s).
This is something I'm be interested in learning more about because one can make an intuitive argument either way. In a market where the price of houses is 4x as high, does it really make sense that one needs to allow 4x as much for maintenance and upkeep of the house itself?
The argument for it being 4x as high in a city where the same house is worth 4x as much is that in the expensive market the people you are hiring to do repairs need to charge more to make their own rent. But on the other hand at least in a lot of other fields I know that the salary differential for the same job between, say, Detroit and San Francisco, is much less than the difference in rental rates or property values.
It doesn't cost 4x as much to put a roof on in San Fran as it does in Iowa City, but it's probably double still just due to having to pay more for labor. There are also often more onerous/expensive permitting processes, taxes/fees, etc, etc for major repairs.
In HI, everything breaks/rots/gets a gecko in it and catches on fire pretty much constantly, so HI is it's own thing.
-W
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For reference, I bought a couple of primary residences, rented them until I sold them, and made out like a bandit too since 2008 or so. That doesn't mean I did a good job investing. It means I, just like OP, rode the crazy property appreciation wave of the last decade. IMO it's unlikely to continue that way, but who knows?
-W
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Oahu resident here.
I've been flip flopping between thinking the housing market is on the verge of collapse (every service worker laid off fleeing to the mainland once unemployment runs out), or on the verge of greatness (every mainlander with money suddenly wanting to work remotely from here).
But at least Oahu has some diversification in the form of military and some office jobs.
I'd be nervous having so much money at stake on a neighbor island that is entirely dependent on one industry.
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Clarkfan,
We all know what you are trying to say, but your method or "proof" just isn't convincing.
Your total cost was 660k plus major time and effort. Isn't this also a main home plus an in-law? So essentially you are managing 2 doors as well. Then you pay for the utility, GE tax (something I had to google), vacancy (wayyyyy too low), and maintenance (low imo) and waltworks is right, where is the property tax and management fees? All for $4450/month is not something that a lot of us would jump on. Not only that, this was you primary, so you purchased it knowing it wouldn't make the best rental. But now you are patting yourself on the back because it just happened to appreciate?
With all of that said, I really like how maizefolk summarized it. Not all 1% or .5% or whatever are created equal. I am in the Bay Area and we don't have anything close to 1%. However, because all other carrying costs are so marginal compared to the purchase price, our math is different. And yes, appreciation is a reality here, but I still won't factor that in my future purchase(s).
Edit: If you don't like the 1% rule. What would be your "rule" in a sentence or two?
lilbenny34
I think your analysis is fair, but I think we need to iron out a few details. I addressed some of your concerns in my previous post. However, I will post again.
1) Yes, the house was originally a primary that did require much time and effort. However, after all the work was done and I was moving, I had to make the decision to sell or rent. I made the very unpopular decision to rent it. For this, I am patting myself on the back. I have done very little work over the past 16 months, in which it was a rental. My other 2 rentals have a very similar pattern. If I sold 16 months ago, I would have lost 100K of potential gains.
2) My vacancy is correct. I have two college rentals with 0% vacancy. My first rental in 2007 has had zero days of vacancy over the past 13 years. The other college rental has had only one day of vacancy since August 2015 and that was because my cleaning lady didn't work on Sundays. For the Kauai rental, when I put an ad on zillow and craigslist, I will get about 30 emails within 24 hours because affordable housing is at incredibly low supply.
My rule is this, "Do not look for a great price on an average rental property, look for an average price on a great rental property." Did I mention that there were 9 offers on the Kauai house when I bought it? I was the 2nd highest offer. The first deal fell through and we go it. It was listed for 549K and we offered 603K. The median price for the neighborhood at the time was around 750K, so I was comfortable overbidding by 10%.
Since we are now in the weeds, the other thing that is driving the price up is that the federal government increased the lending limits for traditional financing. You can get a conventional loan up to 765,600 for Hawaii for 2020. With a purchase price of 957,000 and 20% down, you can get a loan of 765,600 at 2.75% for an owner occupied home. This would be a payment of 3,125/month for PI. A total of $1,371 would go toward principal on your first payment. You are paying $1,754 in interest. If you have a mother in law suite in the basement that pays you $1,600/month, you are left paying $154/month in interest.
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So you're speculating on appreciation instead of cashflow. Nothing new to see here. If that's how you want to run your RE business go right ahead. We've had a fantastic market for 11 years, hard not to make money under these circumstances . I wish you well on your journey.
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Everywhere will turn into Australia at this rate!
-W
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It doesn't cost 4x as much to put a roof on in San Fran as it does in Iowa City, but it's probably double still just due to having to pay more for labor. There are also often more onerous/expensive permitting processes, taxes/fees, etc, etc for major repairs.
In HI, everything breaks/rots/gets a gecko in it and catches on fire pretty much constantly, so HI is it's own thing.
-W
Makes sense. Thank you, waltworks.
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The thing is, the owner has zero control over appreciation. With a 1% property an owner can more or less know what their return will be and any appreciation is a bonus. Counting on an individual property to appreciate is a lot like picking an individual stock and hoping that its value climbs. It's just speculation whether the asset is a single stock or a single property.
I think this is akin to people who argue for buying stocks only at lower P/E ratios. In isolation, it's completely true and I completely agree.
All things being equal, a property that satisfies the 1% rule is going to be a superior investment to one which fails to satisfy the rule. Just like, all things being equal, a stock that trades at a P/E ratio of 10 is superior to one which trades at a P/E ratio of 30. But in both cases, the price:rent ratio or price:earnings ratio is telling you that all things are not going to be equal between the two investments.
If two properties rent for different proportions of their purchase price, it is because there are also other differences between them. A stock with a lower P/E ratio may have a big tranche of debt coming due, or be losing market share to a competitor, or facing headwinds from increasing labor or other input costs. A property which satisfies the 1% rule may be located in a region with a shrinking population (much of the industrial midwest) where the property may depreciate over time. Or the may be a lower end property where turnover is more common or more frequent/more expensive repairs are required.
That doesn't mean that all properties are equally good investments (I don't believe in the efficient market hypothesis when it comes to real estate). But it does mean people have to weigh trade offs related to the reasons some properties satisfy the 1% rule while others do not when they are deciding which properties make sense as investments and which ones do not.
Very thoughtful analysis. I really like comparison of real estate vs. stocks. Thank you for your contributions.
I'm a big fan of Ray Dalio and his philosophy on respectful disagreement. It's a very practical way to seek truth or what at least the consensus believes to be true. I've always operated in that manner but now someone else has validated my philosophy. In the past, the common explanation was "asshole" Well, I might still be an "asshole" but now I have more energy, purpose and direction.
I am not married to the idea of appreciation. I seek whatever is true. However, appreciation has been my reality over the past 13 years. I do not think it will last forever. However, based on the current economy of QE and low mortgage rates, I'm planning on riding the appreciation train for another 12-18 months. After that, I will re-evaluate.
Everywhere will turn into Australia at this rate!
-W
This is less thoughtful and not very helpful.
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You might want to read up on Australia and RE prices/gov't intervention in the market (which takes a somewhat different form there, just google "negative gearing" for a real mindf***), if you think that's not relevant to our situation now, or specifically to your appreciation play...
-W
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You might want to read up on Australia and RE prices/gov't intervention in the market (which takes a somewhat different form there, just google "negative gearing" for a real mindf***), if you think that's not relevant to our situation now, or specifically to your appreciation play...
-W
Real estate trends are always changing and I will try my best to change with it. I am not married to any specific idea forever. I still get plenty of cash flow. I just don't get enough for the 1% rule.
You have been telling me since 2015 that I am going to lose my houses to foreclosure and you are going to buy my houses from the bank for pennies on the dollar. Every year it's the same story.
Your response 99% of the time is, "Short of the 1% rule, not enough money for cap ex, you are managing yourself and just gave yourself a job." Yeah, that is how 90% of us get started.
I would like to provide encouragement for the newbies that want to get started. My advice to you is to be aware of the 1% rule but do not follow it blindly. The banks will force you to show 6 months of mortgage reserves in order to close. Do not spend that on repairs. I would actually do 12 months of reserves for your first deal (after repairs) and then 6 months for each additional rental. Make sure you have the correct insurance. That will take care of any potential major losses. You don't have to wait to hit the 1% rule to get started. That day might never come.
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I feel like you posted this before. So far you have correctly speculated on real estate. Nice work, you are now rich!
You (and I) correctly timed the real estate market. I dont think either of us discovered some new, and novel RE strategy. I would image you know your local market pretty well and have an advantage there. However that is not exactly fair coin it as a "rule" considering Hawaii is a one of a kind market with nothing else like it in the states.
https://forum.mrmoneymustache.com/real-estate-and-landlording/quality-over-quantity-and-why-the-1-rule-hurts-you-in-building-wealth/msg2444775/#msg2444775
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You might want to read up on Australia and RE prices/gov't intervention in the market (which takes a somewhat different form there, just google "negative gearing" for a real mindf***), if you think that's not relevant to our situation now, or specifically to your appreciation play...
-W
Real estate trends are always changing and I will try my best to change with it. I am not married to any specific idea forever. I still get plenty of cash flow. I just don't get enough for the 1% rule.
You have been telling me since 2015 that I am going to lose my houses to foreclosure and you are going to buy my houses from the bank for pennies on the dollar. Every year it's the same story.
Your response 99% of the time is, "Short of the 1% rule, not enough money for cap ex, you are managing yourself and just gave yourself a job." Yeah, that is how 90% of us get started.
I would like to provide encouragement for the newbies that want to get started. My advice to you is to be aware of the 1% rule but do not follow it blindly. The banks will force you to show 6 months of mortgage reserves in order to close. Do not spend that on repairs. I would actually do 12 months of reserves for your first deal (after repairs) and then 6 months for each additional rental. Make sure you have the correct insurance. That will take care of any potential major losses. You don't have to wait to hit the 1% rule to get started. That day might never come.
I think this is why Walt, and I, and others disagree with you. Past performance has nothing to do with future results.
Clark, as I said before, you won the game, nice job. You are now wealthy and can enjoy life. If you personally get caught leaning the wrong way on a deal you will likely be fine. You have the reserves and the experience to get through it. Its the newbies that cannot come back from such at thing.
If the Return/Price ratio remains where it is, then yes that day may never come for a RE investor. She would be better off investing in something else.
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You don't have to wait to hit the 1% rule to get started. That day might never come.
This is actually something I've wondered about. 1% rule properties existed in most times/markets during the "modern" (ie, Fannie/Freddie gov't subsidized mortgages) post-1930s era. They became really scarce in the last 5 years (and were also scarce from 2003-2008 or so), depending on your local market, though I can still find you a few in the upper midwest. In other words, the current situation is pretty unique, historically.
So the question is, will we see a regression to the mean, or is housing going to be *permanently* more expensive relative to incomes going forward? That would have some interesting consequences, for sure.
Then again, we've been through "this time is different" and "buy now or be priced out forever" before.
I'll just say I'm happy to have sold all my rentals, even if I forwent some appreciation money over the last few years. It makes me a little sick to my stomach to live in what is now, due to Covid madness, probably almost a $2 million house. This is not normal, at all. But that doesn't mean it won't be normal in the future, reality is weird.
IMO we'll eventually see housing go back to historically normal prices relative to incomes. When that will happen is anyone's guess, which is why I mentioned Australia.
-W
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I don’t see a compelling reason that houses should revert to historical multiples. The phenomenon isn’t confined to the US, it’s pretty much a trend across the developed world. In fact, some of the hot markets stateside look downright cheap compared to some other world metropolises. London, Hong Kong, etc.
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Here in Melbourne you could barely find a single home that has a monthly rent of 0.5% of its price, let alone 1%.
The fact that homes in the US can qualify for the 1% rule makes me think that their capital value is woefully underpriced (or maybe Australian homes are overpriced).
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Is it Groundhog Day? Are we rehashing this again with you? I’ve seen this show before, you always argue against the 1% rule because your 4 rentals made some decent money.
The 1% rule works because math. Speculating might work, or might not, because its trying to predict the future. None of us are soothsayers from Lily Dale with magic 8 balls and tarot cards.
So. It’s disingenuous to make the argument that you or anyone else can repeat success doing the exact same thing. Now, using the 1% rule, you are greatly increasing your chances that a property will be profitable. It’s not infallible. And I’m not saying it is. It’s just a damn formula for figuring out the value of a rental property so you don’t lose your ass paying too much.
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If you believe in appreciation over cash flow, you are probably better off flipping homes to turbocharge your returns. Sitting on a property for years, dealing with renters, gets you market appreciation. Flipping gets you that along the way plus extra from the improvements you make to each carefully selected flip. But be careful as a lot of flippers lose their shirts at some point. Hawaii is in trouble currently without tourists to support the economy. At some point that may push rents and home values down.
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I actually think we are having a great discussion, so thanks for that OP.
Maizefolk, I agree that a 1% discussion around the differences between cost of living (LCOL vs VHCOL) would be very beneficial. For example, if you have a 50K home that meets the 1% rule (500/month rent), but needs a new roof that costs 10K will would be deadly to the profitability long term. However, a 800k home (say 5000/month) that needs a new 25K roof hardly makes a dent and can be recouped with 5 months worth of rent. The same goes for siding, upgrades, and everything else. I would argue that maintenance costs will remain comparable while vacancy rates will be lower for HCOL areas.
Then you combine the reality that HCOL homes tend to appreciate more/faster in HCOL areas compared to LCOL (primarily due to lack of land space and demand), then the 800K home may end up being extremely profitable and the 50K home to be a loser. One final thing to mention is that the upside of a 50K house, even if it doubles is worth only 100K. Where as even a 25% increase in the 800k increases the value to 1 million (200K gain). So the overall upside of the homes are not even comparable. The flip side is also true that even a 50% decrease to the 50K house is peanuts, while a 25% decrease in value of the 800K is very significant.
This is why LCOL areas still have plenty of 1%+ homes while HCOL areas area around .3 to .5% yet still sell faster and have much more demand.
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Walt,
I think that is another important question of whether the house prices will ever return to the mean. I say mostly NO.
1. it's the internet age and information such as the 1% rule and biggerpockets have pretty much made it so that people are better able to evaluate properties. less dumb purchases = less profitability for the rest of us.
2. it's important to note that in VHCOL areas, something like only the top 1-2% of the population purchases the majority of homes. Those folks are only getting richer. As another poster said, US VHCOL areas are underpriced compared to other major global cities. Also, there is no more land in VCHOL areas. What this does raise the cost of HCOL to VHCOL (ie SF people fleeing to Seattle or Portland or Austin and increasing their prices). I don't think this trend will stop per se. Even a fucking global pandemic didn't slow it down so not sure what will?
3. However, the LCOL areas may return to the mean because population decline and wage stagnation. But these places are still relatively affordable so not really relevant to the discussion.
Let me know what you think!
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With all that being said OP, you should seriously reconsider selling your home lol.
If there is one state that could be drastically affected by COVID or any other downturn, I would argue it is your home. No major businesses, no major college, etc.
It looks like you will be taking a significant property tax hit as well and that's big. Your cash flow is close to nil at this point. I feel like you clearly got lucky (as did many of us) and selling at the current peak and putting the proceeds at Vanguard may be a wise decision.
This is coming from a buy and hold until you die crowd. I just feel that the location of your home is not as stable as other places and you are playing with a lot of money. I personally wouldn't feel comfortable holding that home forever. But if you can stomach a 50% cut to your home value, then sure why not, keep it (you've been lucky thus far, maybe it will become 2mil in the near future?).
PS, I do agree with your "rule" of not penny pinching and finding the awesome home at a decent price rather than a shitty home at the lowest price.
However, I do all the work myself lol so I want the best price for the shittiest house in the best location and I will make it shine :)
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Yes, this brings up one of my pet peeves, which dovetails nicely with OP's general investing theme - very cheap houses can meet the 1% rule and lose you a ton of money. Very expensive houses can fail to meet the rule and make money. Overhead does go up for a more expensive house, but it doesn't track the house value, or even close.
There are <$100k places in the mid-Atlantic that are 1.5% or even 2%... but property taxes are so high that you'll hemorrhage money. There are places like OP's (though I still think the maintenance on a furnished rental in HI is 2-3x what he's claiming) where a non-1% rule property will make money.
Of course, a very expensive house is like putting a ton of money into an individual stock. It can be destroyed in an uninsurable disaster, it can be in a location where the biggest company in town/tourist economy shuts down, etc, etc. You can buy a nice falling down mansion in Detroit for like $10k, in what was the hottest HCOL neighborhood in the USA 60 years ago. So there's significant risk involved with very expensive properties (or lots of cheap ones in one location).
That said, people often forget that the 1% rule is intended to help quickly eliminate bad deals. It's the *first step*, just intended to save time if you're looking at lots of potential places. You have to actually run all the numbers for each individual property to figure out if it will make money.
-W
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I actually think we are having a great discussion, so thanks for that OP.
Maizefolk, I agree that a 1% discussion around the differences between cost of living (LCOL vs VHCOL) would be very beneficial. For example, if you have a 50K home that meets the 1% rule (500/month rent), but needs a new roof that costs 10K will would be deadly to the profitability long term. However, a 800k home (say 5000/month) that needs a new 25K roof hardly makes a dent and can be recouped with 5 months worth of rent. The same goes for siding, upgrades, and everything else. I would argue that maintenance costs will remain comparable while vacancy rates will be lower for HCOL areas.
Then you combine the reality that HCOL homes tend to appreciate more/faster in HCOL areas compared to LCOL (primarily due to lack of land space and demand), then the 800K home may end up being extremely profitable and the 50K home to be a loser. One final thing to mention is that the upside of a 50K house, even if it doubles is worth only 100K. Where as even a 25% increase in the 800k increases the value to 1 million (200K gain). So the overall upside of the homes are not even comparable. The flip side is also true that even a 50% decrease to the 50K house is peanuts, while a 25% decrease in value of the 800K is very significant.
This is why LCOL areas still have plenty of 1%+ homes while HCOL areas area around .3 to .5% yet still sell faster and have much more demand.
This was basically my point, but you did a much better job of explaining it. I think we finally got to some thoughtful discussion at the end and willing to look at both sides.
I do agree with Walt's philosophy of "you just bought yourself a job" when you apply it to buying 10 houses at 50K each and rent for 500/month. However, when you buy one 500K rental in HCOL area, the management time is probably 10-20 hours/year.
I'm currently looking at recent sales in my Fort Collins, CO neighborhood. It looks like we have two outliers that look to be good deals. Most of the 4 bed/2 bath rentals sold for 400K to 450K over the summer. Fall and winter sales tend to dip and be more representative of desperate sellers.
Two homes sold recently in the 365K range and need about 10K worth of work, mostly cosmetic.
Purchase price: $365,000
Loan of 273,750 at 3.5%
Principle and Interest: $1,229 ($431 going to principal)
Taxes: $190
Insurance: $81
Total PITI: $1500/month
Rent: $2500/month
Even though this deal falls short of the 1% rule, I would do this deal all day long. Before this recent search, I didn't actually realize it was even possible to buy 4 bed/2 bath in my rental neighborhood under 400K that wasn't a tear down. I think I am going to start looking again.
Thank you everyone for your contributions. I promise to not post on this topic, until I purchase another "non 1% deal" Once that happens, I will post again to share my numbers. Thank you for listening. I will be here all week.
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You can get 3.5% on an investment property now? Holy crap!
If interest rates ever go back up, the market is completely F'd.
-W
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You can get 3.5% on an investment property now? Holy crap!
If interest rates ever go back up, the market is completely F'd.
-W
Yeah. And you can do better if you shop around. I’m trying to cash out refi some of my places now while this lasts. It’s nuts.
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My own house gained something like $500k of value in the last 8 months. It's awfully tempting GTFO and rent for a while. The house of cards has to collapse eventually.
Then again, I really don't want to move, even down the street.
-W
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With all that being said OP, you should seriously reconsider selling your home lol.
If there is one state that could be drastically affected by COVID or any other downturn, I would argue it is your home. No major businesses, no major college, etc.
It looks like you will be taking a significant property tax hit as well and that's big. Your cash flow is close to nil at this point. I feel like you clearly got lucky (as did many of us) and selling at the current peak and putting the proceeds at Vanguard may be a wise decision.
This is coming from a buy and hold until you die crowd. I just feel that the location of your home is not as stable as other places and you are playing with a lot of money. I personally wouldn't feel comfortable holding that home forever. But if you can stomach a 50% cut to your home value, then sure why not, keep it (you've been lucky thus far, maybe it will become 2mil in the near future?).
PS, I do agree with your "rule" of not penny pinching and finding the awesome home at a decent price rather than a shitty home at the lowest price.
However, I do all the work myself lol so I want the best price for the shittiest house in the best location and I will make it shine :)
Because I recently became aware that my sale price increased from 800K to 900K, I will make plans to increase the rent from $4,500/month to $5,000/month within the next 12 months. I know that doesn't make a huge difference, but I thought it was worth mentioning.
As a mental exercise, I will run a comparison analysis of selling and putting into Vanguard vs. letting it ride. I will assume $4,500/month in rent for this example.
Sell Price: $900,000
Deduct 7% for real estate transaction: $837,000
Current Mortgage Balance: $461,000
Capital Gains Tax (15%): $26,000
Remaining Balance: $350,000
Invested at Vanguard with a 7% return and 2% dividends = $31,500/year
If I keep the house, I get $12,000/year in cash flow and $8,500/year of principle pay down for a total of $20,500. At $900,000, if I got 1.22% appreciation/year that would get me $11,000 for a total return of $31,500/year.
As a result, it looks like the break even point is 1.22% appreciation/year.
Did I miss anything?
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Well, you left out the risk. Like I said, this is like having $400k in a single stock.
I guess we'll have to agree to disagree on the maintenance ($3k/year!), management (zero!), and vacancy (zero!), but using your assumptions on those, yes, your numbers make sense (with the caveat that your specific tax situation could matter a lot in both cases).
-W
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With all that being said OP, you should seriously reconsider selling your home lol.
If there is one state that could be drastically affected by COVID or any other downturn, I would argue it is your home. No major businesses, no major college, etc.
It looks like you will be taking a significant property tax hit as well and that's big. Your cash flow is close to nil at this point. I feel like you clearly got lucky (as did many of us) and selling at the current peak and putting the proceeds at Vanguard may be a wise decision.
This is coming from a buy and hold until you die crowd. I just feel that the location of your home is not as stable as other places and you are playing with a lot of money. I personally wouldn't feel comfortable holding that home forever. But if you can stomach a 50% cut to your home value, then sure why not, keep it (you've been lucky thus far, maybe it will become 2mil in the near future?).
PS, I do agree with your "rule" of not penny pinching and finding the awesome home at a decent price rather than a shitty home at the lowest price.
However, I do all the work myself lol so I want the best price for the shittiest house in the best location and I will make it shine :)
Because I recently became aware that my sale price increased from 800K to 900K, I will make plans to increase the rent from $4,500/month to $5,000/month within the next 12 months. I know that doesn't make a huge difference, but I thought it was worth mentioning.
As a mental exercise, I will run a comparison analysis of selling and putting into Vanguard vs. letting it ride. I will assume $4,500/month in rent for this example.
Sell Price: $900,000
Deduct 7% for real estate transaction: $837,000
Current Mortgage Balance: $461,000
Capital Gains Tax (15%): $26,000
Remaining Balance: $350,000
Invested at Vanguard with a 7% return and 2% dividends = $31,500/year
If I keep the house, I get $12,000/year in cash flow and $8,500/year of principle pay down for a total of $20,500. At $900,000, if I got 1.22% appreciation/year that would get me $11,000 for a total return of $31,500/year.
As a result, it looks like the break even point is 1.22% appreciation/year.
Did I miss anything?
Missed -- in many jurisdictions, you can't increase rent by 10% on existing tenants in a single year. Locally we had a max 0% last year and 1.4% this year cap. Only increase it more if they voluntarily move, but then you can be faced with 2wks to 1 month vacancy, too.
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clarkfan1979, here I kind of agree with waltworks.
You are comparing the return on your property if nothing goes wrong -- no more than an average of 18 days of vacancy per year, no major maintenance that exceeds the $3,000/year that you have budgeted -- to an average stock market return which includes both years where nothing goes wrong and years where everything goes horribly, terribly wrong. That 9% CAGR includes the years of the Great Depression and Great Recession which were also really bad years to be a landlord.
So I'd argue to be comparing apples to apples the stock market return needs to be higher and/or the profitability assumptions of the rental much more conservative than seems reasonable.
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Is the Kauai rental market able to support a $500 increase in rent on what sounds like a nice-but-not-particularly-luxurious rental? On Oahu the only rentals that do well right now are the luxury ones at 6-7k/month. Anything below appears to be softening.
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Valid points from both sides. My husband and I have benefitted from the high appreciation on our rental properties. However, we are dealing with eviction moratoriums due to covid and 3 of our tenants are behind on rent and we currently have a vacant unit (house) we have decided to sell because the house next door suddenly seems to be collecting trash and started parking their big arse truck on their front lawn as well as using the street parking space in front of our rental. We weren't making much on that property (definitely not meeting the 1% rule) and we are self-managing. Rentals are not for everyone (can cause headaches) but they can be great for building wealth when you dont have much of a stash and would benefit from rentals through leverage in areas with high appreciation (obviously not guaranteed).
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clarkfan1979, here I kind of agree with waltworks.
You are comparing the return on your property if nothing goes wrong -- no more than an average of 18 days of vacancy per year, no major maintenance that exceeds the $3,000/year that you have budgeted -- to an average stock market return which includes both years where nothing goes wrong and years where everything goes horribly, terribly wrong. That 9% CAGR includes the years of the Great Depression and Great Recession which were also really bad years to be a landlord.
So I'd argue to be comparing apples to apples the stock market return needs to be higher and/or the profitability assumptions of the rental much more conservative than seems reasonable.
@maizefolk This is very true.... but. the reality is that people make subjective evaluations of risk all the time, and it is understandable that clarkfan's approach or instinct about it is different from your viewpoint.
I do like the caution to ensure that the risk comparison is not "unicorns" on one side, and "boring reality" on the other... that is always a good concern to have and a good suggestion to double check one's assumptions with new eyes.
I personally would not compare to better returns on the stock market, but rather ensure I padded out a few more unexpected costs on the negative side to build a bigger cushion, and run a series of "what if" projections (I think I am an IRR nerd with an excel spreadsheet). Even with some padding, this rental's return, to me, seems to be on the balance point of "good investment" and "lots of work for marginal comparative return and elevated risk". Specifically, I think it has a 50/50 shot of succeeding well, especially in the short term where one can estimate future events a bit more clearly.
Once the on-site friends get tired of managing the fix-ups, even for a good hourly rate, (say because the future tenants are a bit hard on the property) and if Clarkfan does not end up managing it locally himself, there will be concerns and a lot more effort on clarkfan's plate. Independent contractors and managers would charge a fair bit more.
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That 9% CAGR includes the years of the Great Depression and Great Recession which were also really bad years to be a landlord.
The Great Recession actually wasn't bad at all for (residential) landlords. Rents never dropped in most areas. They increased in many! People lost their homes/went underwater - but then they went and rented a place. Sometimes the same place they were already living - I know people who bought foreclosures in Vegas and had the former owners as tenants from day 1.
That assumes you didn't buy a $800k place in 2005 that you rented for $2000 a month while you waited for appreciation and then got caught with your pants down, of course. But for people who used metrics like the 1% rule, the Great Recession was just peachy (and many of them bought more properties because suddenly great deals were everywhere).
-W
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Clarkfan,
1) Seems like your wealth is all real estate (I am assuming here). I feel safer diversifying into mutual funds. Others may disagree.
2) Capital gains tax - the longer you wait, the more taxes you will pay on the sell.
3) I think we can all agree that prices are inflated due to all time low rates. Do you feel this will continue? If it doesn't continue, then sales prices should decrease.
4) What is your end game? Is there a magic number at you would sell at? Do you feel this will be a great property to hold forever? If not, this seems like the perfect exit to sell high with minimal capital gains.
I would lean toward selling, but I can see why you would want to hold on to it.
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i have no skin in this game, and no experience but lots of interest,
Clark - if you can cash out 350k from HI and get 3 places in fort collins (a state where you appear to live) that cash flow $1 a month each, that seems like a no brainer (~$36,000/yr in a rapidly growing state/ college town), the appreciation in FOCO on a ~400k place should be better long term compared to a 900k place in HI, and much easier for a buyer to afford. if CO appreciation continues like it has over the last 10 years you should see multiple 100k gains over the next 10 years. and if not you will always have college kids to rent to.
my friends wife is a realtor/flipper in fort collins, she always finds a place to flip and turn a profit there
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You can get 3.5% on an investment property now? Holy crap!
If interest rates ever go back up, the market is completely F'd.
-W
Yeah. And you can do better if you shop around. I’m trying to cash out refi some of my places now while this lasts. It’s nuts.
Sent from my iPhone using Tapatalk
My interest rate on my $600k IP mortgage (on which I still owe about $400k) is 2.88% per year. I could probably get it down to 2.75% if I really bailed up my bank manager.
After our tax write off here in Australia (47% at top bracket) the effective interest rate is 1.5% per year.
Housing for us isn't even an investment per se, it's more like a safe store of money. That's what I use it for - it's like a vault. I think there will always be families willing to rent an established house in a good area close to schools.
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Here in Melbourne you could barely find a single home that has a monthly rent of 0.5% of its price, let alone 1%.
The fact that homes in the US can qualify for the 1% rule makes me think that their capital value is woefully underpriced (or maybe Australian homes are overpriced).
Similar here in the UK.
US housing does seem cheaper, at least the headline prices.
I think offsetting this at least partly are higher taxes (depending on the state), and US houses also use almost triple the amount of energy as UK homes so running costs will be significantly higher. Insurance seems high in the US too, maybe because many parts are affected by hurricanes etc. Here we can insure a home for as little as $150/year, whereas US average seems to be up around ten times that.
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Clarkfan,
1) Seems like your wealth is all real estate (I am assuming here). I feel safer diversifying into mutual funds. Others may disagree.
2) Capital gains tax - the longer you wait, the more taxes you will pay on the sell.
3) I think we can all agree that prices are inflated due to all time low rates. Do you feel this will continue? If it doesn't continue, then sales prices should decrease.
4) What is your end game? Is there a magic number at you would sell at? Do you feel this will be a great property to hold forever? If not, this seems like the perfect exit to sell high with minimal capital gains.
I would lean toward selling, but I can see why you would want to hold on to it.
I think most people on this MMM forum feel safer in mutual fund/index funds than real estate. I originally sold around $50,000 of stock in March 2007 to fund my first real estate deal in May 2007. During this time, it looks like the S & P 500 increased by 7.3%. Add another 2% for dividends and my $50,000 would now be worth $173,641.
Since May 2007 I have been using the profits from real estate to buy more real estate. My original $50,000 investment is now $755,000 of equity. If I sold everything, it would be $625,000 after real estate commission and closing costs. I would have some capital gains, but you could also make the same argument for stocks, so if I was to compare apples to apples it would be $173,631 (stocks) vs. $625,000 (real estate).
I think there is another 12-18 months left for real estate prices to increase based on low mortgage rates. After that, I would expect it to slow down and/or stop. If I did sell Kauai, it wouldn't be for another 12-18 months. However, the current plan is to hold on for ever.
Yes, I could sell Kauai and buy 3 additional rentals in Fort Collins, CO. However, my equity position would go from 40% to 27%. I personally like to stay around 40% equity based on metrics for the book "Millionaire Real Estate Investor" It would also be more work. However, it is a viable option that should be worth considering.
I am in contact with a mortgage broker for Kauai. He quoted me a refinance of 3.125% with no points. This is crazy low for an investment property. I will be pursuing this after my current re-finance of Fort Collins is over, which should be in 30-35 days.
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Clarkfan,
1) Seems like your wealth is all real estate (I am assuming here). I feel safer diversifying into mutual funds. Others may disagree.
2) Capital gains tax - the longer you wait, the more taxes you will pay on the sell.
3) I think we can all agree that prices are inflated due to all time low rates. Do you feel this will continue? If it doesn't continue, then sales prices should decrease.
4) What is your end game? Is there a magic number at you would sell at? Do you feel this will be a great property to hold forever? If not, this seems like the perfect exit to sell high with minimal capital gains.
I would lean toward selling, but I can see why you would want to hold on to it.
I think most people on this MMM forum feel safer in mutual fund/index funds than real estate. I originally sold around $50,000 of stock in March 2007 to fund my first real estate deal in May 2007. During this time, it looks like the S & P 500 increased by 7.3%. Add another 2% for dividends and my $50,000 would now be worth $173,641.
Since May 2007 I have been using the profits from real estate to buy more real estate. My original $50,000 investment is now $755,000 of equity. If I sold everything, it would be $625,000 after real estate commission and closing costs. I would have some capital gains, but you could also make the same argument for stocks, so if I was to compare apples to apples it would be $173,631 (stocks) vs. $625,000 (real estate).
If you're trying to have a fair comparison, it's tough to compare non-leveraged stock holding returns to leveraged real estate returns right? If you'd leveraged your stock to the same dollar amount as your real estate, what would the return have been?
I don't think you're arguing as much in favor of real estate as an asset class as you are arguing in favor of leverage as a tool.
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I really don’t understand the buy and hold strategy if you are looking at appreciation as your main strategy. Listen, you made money on paper. You don’t realize any of those gains UNLESS you sell. These aren’t stocks. You can’t liquidate 4% of your rental property a year. So keeping an appreciated house without an increase in rents is like having a piece of fancy artwork. Sure it’s worth something. But can you use it? Hell no! Actually, it’s worse! You pay taxes on the value of that real estate. Your costs increase with your paper wealth. Find me another asset class where that happens!
With literally any asset, it’s basically worthless unless you can trade it for cash. You can either get rents, dividends, interest, or you HAVE to have an exit strategy to sell. Sure, you can borrow against the equity, but that costs money (interest and fees) and is risky. You can lose your asset if you can’t pay the terms of the loan.
So great! If you speculated on appreciation and your assets increased a lot, that’s awesome! But you have to sell your asset!
If you get a property where rents move with value, and you buy a place for its’ rents, you get actual, usable money. You don’t have to sell your asset to realize gains. And if rents track value, your rents increase! Holy moly!
So, add another tally to the 1% rule works column.
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The famous Rothschild quote is worth remembering when it comes to appreciation plays (or, speculation):
“I never buy at the bottom and I always sell too soon.”
Lots of people would have done fine/been set for life in 2005 if they'd just taken their RE winnings off the table, but they just kept doubling down because they thought the old rules of price/income/debt/etc didn't apply anymore. I'm not sure we're quite at that stage yet this time around but we're on our way.
Like the OP, I made a ton of money in RE in the last decade. It was hard *not* to, even if you had no idea what you were doing. I'd be a little bit richer now if I'd held onto all my properties even longer, but I didn't/don't need to hit home runs to be FI, and I have no regrets having sold them.
I guess when it comes down to it, my real problem with the OP's thesis here is that he's presenting it as *advice* to would-be RE investors. Indeed, he ignored (or was unaware of) the 1% rule, and he's done great (assuming he sells the properties and realizes the gains at some point). But advocating the same thing now that worked in 2010 seems irresponsible at best, and roughly equivalent to saying that you bought Tesla, or Bitcoin, or some other speculative investment at that time, so new investors should do the same now.
It's important to recognize the role of luck in any situation, but our instinct is to give ourselves more credit than we probably deserve when things go well. I didn't know anything about RE investing in 2008 when my wife and I bought our first place, and wow, now we're rich. But that was fortune, not skill.
-W
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I appreciate the response Clarkfan,
Sounds like you are like me in that you plan to hold homes forever. As papa bear put it, then the 1% rule needs to be your religion (or at least getting close to it). This also means that you are most likely better off putting homes into "safer" neighborhoods because appreciation is irrelevant if you never sell and your only focus should be rent vs purchase price.
For the record, I said diversifying with mutual funds. My net worth is very real estate heavy due to appreciation, but my preference is to be 50/50 (stocks/real estate).
I also think you are misleading readers if you are claiming that you made 50k into 755k. You have certainly put more than money into real estate outside of the original 50K. This also includes work and time, but most importantly extreme luck that is not replicable today. There are people who will say they put 5 cents into bitcoin and now are millionaires. good for them, but that's just luck and they most likely can't do that again.
With that said, huge kudos for taking the risk and growing your net worth with homes. I'm in the same boat as you. I too believe that I can make more money (and faster) with homes than stocks, but I fully acknowledge that it is more risky and requires 1000% more work and time.
I'm curious now, do you own any stocks?
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You can get 3.5% on an investment property now? Holy crap!
If interest rates ever go back up, the market is completely F'd.
-W
Yeah. And you can do better if you shop around. I’m trying to cash out refi some of my places now while this lasts. It’s nuts.
Sent from my iPhone using Tapatalk
We're getting quotes at 3%, on our rentals, but the fees are insane! I think we're going to wait and see what the New Year brings.
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You can get 3.5% on an investment property now? Holy crap!
If interest rates ever go back up, the market is completely F'd.
-W
Yeah. And you can do better if you shop around. I’m trying to cash out refi some of my places now while this lasts. It’s nuts.
Sent from my iPhone using Tapatalk
We're getting quotes at 3%, on our rentals, but the fees are insane! I think we're going to wait and see what the New Year brings.
Yeah, to be clear - I meant, can you get ~3.5% without paying through the nose for points.
You can get crazy low rates if you pay enough money, that's always true.
-W
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The famous Rothschild quote is worth remembering when it comes to appreciation plays (or, speculation):
“I never buy at the bottom and I always sell too soon.”
Lots of people would have done fine/been set for life in 2005 if they'd just taken their RE winnings off the table, but they just kept doubling down because they thought the old rules of price/income/debt/etc didn't apply anymore. I'm not sure we're quite at that stage yet this time around but we're on our way.
Like the OP, I made a ton of money in RE in the last decade. It was hard *not* to, even if you had no idea what you were doing. I'd be a little bit richer now if I'd held onto all my properties even longer, but I didn't/don't need to hit home runs to be FI, and I have no regrets having sold them.
I guess when it comes down to it, my real problem with the OP's thesis here is that he's presenting it as *advice* to would-be RE investors. Indeed, he ignored (or was unaware of) the 1% rule, and he's done great (assuming he sells the properties and realizes the gains at some point). But advocating the same thing now that worked in 2010 seems irresponsible at best, and roughly equivalent to saying that you bought Tesla, or Bitcoin, or some other speculative investment at that time, so new investors should do the same now.
It's important to recognize the role of luck in any situation, but our instinct is to give ourselves more credit than we probably deserve when things go well. I didn't know anything about RE investing in 2008 when my wife and I bought our first place, and wow, now we're rich. But that was fortune, not skill.
-W
Wholeheartedly agree. Anyone who invested in real estate in '09-'10 made money and huge returns. Has been that way for over a decade. OP's advice is definitely not for would-be RE investors. New investors are best off thoroughly understanding the costs associated with owning property. Another problem which others have clearly pointed out in this thread is that OP is vastly under estimating/under reporting rental expenses. E.g. CapEx, property management and maintenance. Why people claim self managing rentals equates to a $0 expense is beyond me. Time is never worth $0.
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I have cash flow. I just don't get enough cash flow for 1%. My current cash flow after mortgage is $3,200. After vacancy, repairs and some utilities it's $2,200/month. After I am done refinancing everything in 3 months, my cash flow will bump up to $2,500/month. This also accounts for my property taxes increasing for Kauai by $360/month in July 2021.
For my 3 rentals, they were originally owner-occupied homes. Yes, with each purchase there was a fairly intensive 6 month rehab. I lived in each house for 1-4 years and fixed everything. Because I fixed everything when I lived there and made repairs with the intent of it being a rental, this is why cap ex and repairs are lower than normal.
Two are college rentals with 0% vacancy. Sorry, this is true.
Yes, I spend around 100 hours/year on self-managing my rentals. My two college rentals are around 20 hours/year each. However, the Kauai rental is 60 hours/year because I have to do landscaping. I do have long term plans to thin out the vegetation.
I spend around 1,100 hours/year at my day job and another 100 hours/year for my rentals. Overall, I don't work that much.
For the past 5 years, my wife and I spend about $500-$1000/month of our rental cash flow on living expenses. If we didn't do this our real estate returns would actually be much higher.
Overall, I think this should be less about me and more about the theoretical strategy. I think others have done much better than me in real estate. Below is a youtube video of someone that I recently found. Her path seems to be very similar to mine. She went from zero to 2 million in about 15 years, mostly with leveraged real estate. She talks more about buying in good areas with appreciation and less about cash flow.
https://www.youtube.com/watch?v=QEDD5uDP6yQ
https://www.youtube.com/watch?v=QEDD5uDP6yQ
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Ok, so 100 hours a year is, at a professional/missing time with your family wage, $10k. So if your cash flow per month is $2k, you're netting $12k/year on like, what, $500k-$1million of RE equity?
That is not buying you that much time with your family compared to boring-ass index funds which would throw off more money, take zero time, and be less risky.
-W
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I have cash flow. I just don't get enough cash flow for 1%. My current cash flow after mortgage is $3,200. After vacancy, repairs and some utilities it's $2,200/month. After I am done refinancing everything in 3 months, my cash flow will bump up to $2,500/month. This also accounts for my property taxes increasing for Kauai by $360/month in July 2021.
For my 3 rentals, they were originally owner-occupied homes. Yes, with each purchase there was a fairly intensive 6 month rehab. I lived in each house for 1-4 years and fixed everything. Because I fixed everything when I lived there and made repairs with the intent of it being a rental, this is why cap ex and repairs are lower than normal.
Two are college rentals with 0% vacancy. Sorry, this is true.
Yes, I spend around 100 hours/year on self-managing my rentals. My two college rentals are around 20 hours/year each. However, the Kauai rental is 60 hours/year because I have to do landscaping. I do have long term plans to thin out the vegetation.
I spend around 1,100 hours/year at my day job and another 100 hours/year for my rentals. Overall, I don't work that much.
For the past 5 years, my wife and I spend about $500-$1000/month of our rental cash flow on living expenses. If we didn't do this our real estate returns would actually be much higher.
Overall, I think this should be less about me and more about the theoretical strategy. I think others have done much better than me in real estate. Below is a youtube video of someone that I recently found. Her path seems to be very similar to mine. She went from zero to 2 million in about 15 years, mostly with leveraged real estate. She talks more about buying in good areas with appreciation and less about cash flow.
https://www.youtube.com/watch?v=QEDD5uDP6yQ
https://www.youtube.com/watch?v=QEDD5uDP6yQ
I have college rentals. While they are always “occupied” and rent 8 months in advance, I can still have less than full rent payment. Never had anyone skip out on the last month when they were seniors AND have damage? Deposit won’t cover everything.
Or like right now, I’ve got a place where the tenants are all moving out because they can’t stand each other, blaming getting covid on each other, scrambling to find subleases. I fully expect to miss out on a few hundred in rent. Sure. It’s technically 0 vacancy, but 100% rent collection is basically impossible over a number of units and lots of time. 9/10 years are no problem! 1/10 and I’m going to be at 80-90% rent. Count that as vacancy or reduced rent, whatever you want to call it. But it ain’t 100%.
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Clarkfan,
First, I need a sincere apology from you for posting that stupid youtube link. It's about this 40 year old who owns 4 properties (first property bought in 2005 btw) with a combined worth of barely 1 million, but with about 750k in mortgages. She also has 200k in stocks. that is nowhere near 0 to 2 million in 15 years. I hope she's your wife or friend that you just wanted to plug and not someone you take advice from. Shame on me for clicking.
Second of all, I understand that you want to discuss the concept and not your personal holdings, but the more details you provide, the less attractive your real estate holdings are. You are attempting to paint this very rosy, easy, hands off picture of real estate (and a cash cow) and it's simply not true.
It sounds like your total cash flow for all of your properties is 2200/month! That's with self-managing and your 0 vacancy and very very low repairs/maintenance estimates. On 3 properties worth 1.5 million? Clark, this is exactly why people are preaching the 1%. If you would have stuck to better purchases, you would be cash flowing 15,000/month. You also haven't answered why you are so focused on appreciation if you don't want to sell. It does nothing for you. The bottomline is 2200 cashflow (without any major vacancies or repairs) on homes valued at 1.5 million.
I'm on your side and trying to support your concepts, but you gotta give me something to work with.
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I have cash flow. I just don't get enough cash flow for 1%. My current cash flow after mortgage is $3,200. After vacancy, repairs and some utilities it's $2,200/month. After I am done refinancing everything in 3 months, my cash flow will bump up to $2,500/month. This also accounts for my property taxes increasing for Kauai by $360/month in July 2021.
For my 3 rentals, they were originally owner-occupied homes. Yes, with each purchase there was a fairly intensive 6 month rehab. I lived in each house for 1-4 years and fixed everything. Because I fixed everything when I lived there and made repairs with the intent of it being a rental, this is why cap ex and repairs are lower than normal.
Two are college rentals with 0% vacancy. Sorry, this is true.
Yes, I spend around 100 hours/year on self-managing my rentals. My two college rentals are around 20 hours/year each. However, the Kauai rental is 60 hours/year because I have to do landscaping. I do have long term plans to thin out the vegetation.
I spend around 1,100 hours/year at my day job and another 100 hours/year for my rentals. Overall, I don't work that much.
For the past 5 years, my wife and I spend about $500-$1000/month of our rental cash flow on living expenses. If we didn't do this our real estate returns would actually be much higher.
Overall, I think this should be less about me and more about the theoretical strategy. I think others have done much better than me in real estate. Below is a youtube video of someone that I recently found. Her path seems to be very similar to mine. She went from zero to 2 million in about 15 years, mostly with leveraged real estate. She talks more about buying in good areas with appreciation and less about cash flow.
https://www.youtube.com/watch?v=QEDD5uDP6yQ
https://www.youtube.com/watch?v=QEDD5uDP6yQ
I have college rentals. While they are always “occupied” and rent 8 months in advance, I can still have less than full rent payment. Never had anyone skip out on the last month when they were seniors AND have damage? Deposit won’t cover everything.
Or like right now, I’ve got a place where the tenants are all moving out because they can’t stand each other, blaming getting covid on each other, scrambling to find subleases. I fully expect to miss out on a few hundred in rent. Sure. It’s technically 0 vacancy, but 100% rent collection is basically impossible over a number of units and lots of time. 9/10 years are no problem! 1/10 and I’m going to be at 80-90% rent. Count that as vacancy or reduced rent, whatever you want to call it. But it ain’t 100%.
Sent from my iPhone using Tapatalk
I have one college rental in Fort Collins since 2007 and it has zero days vacancy during this time. I collect first months rent, last months rent and deposit before they move in. Could something happen in the future? Sure. However, so far it's been 0% vacancy over 13.5 years.
My other college rental is in Fort Myers, FL and it has 1 day of vacancy since August 2015.
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Clarkfan,
First, I need a sincere apology from you for posting that stupid youtube link. It's about this 40 year old who owns 4 properties (first property bought in 2005 btw) with a combined worth of barely 1 million, but with about 750k in mortgages. She also has 200k in stocks. that is nowhere near 0 to 2 million in 15 years. I hope she's your wife or friend that you just wanted to plug and not someone you take advice from. Shame on me for clicking.
Second of all, I understand that you want to discuss the concept and not your personal holdings, but the more details you provide, the less attractive your real estate holdings are. You are attempting to paint this very rosy, easy, hands off picture of real estate (and a cash cow) and it's simply not true.
It sounds like your total cash flow for all of your properties is 2200/month! That's with self-managing and your 0 vacancy and very very low repairs/maintenance estimates. On 3 properties worth 1.5 million? Clark, this is exactly why people are preaching the 1%. If you would have stuck to better purchases, you would be cash flowing 15,000/month. You also haven't answered why you are so focused on appreciation if you don't want to sell. It does nothing for you. The bottomline is 2200 cashflow (without any major vacancies or repairs) on homes valued at 1.5 million.
I'm on your side and trying to support your concepts, but you gotta give me something to work with.
Show me how I get to 15,000/month in cash flow in 13 years with an initial investment of $50,000. Also, at year 8 start deducting $750/month for living expenses.
I'm all ears.
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I have cash flow. I just don't get enough cash flow for 1%. My current cash flow after mortgage is $3,200. After vacancy, repairs and some utilities it's $2,200/month. After I am done refinancing everything in 3 months, my cash flow will bump up to $2,500/month. This also accounts for my property taxes increasing for Kauai by $360/month in July 2021.
For my 3 rentals, they were originally owner-occupied homes. Yes, with each purchase there was a fairly intensive 6 month rehab. I lived in each house for 1-4 years and fixed everything. Because I fixed everything when I lived there and made repairs with the intent of it being a rental, this is why cap ex and repairs are lower than normal.
Two are college rentals with 0% vacancy. Sorry, this is true.
Yes, I spend around 100 hours/year on self-managing my rentals. My two college rentals are around 20 hours/year each. However, the Kauai rental is 60 hours/year because I have to do landscaping. I do have long term plans to thin out the vegetation.
I spend around 1,100 hours/year at my day job and another 100 hours/year for my rentals. Overall, I don't work that much.
For the past 5 years, my wife and I spend about $500-$1000/month of our rental cash flow on living expenses. If we didn't do this our real estate returns would actually be much higher.
Overall, I think this should be less about me and more about the theoretical strategy. I think others have done much better than me in real estate. Below is a youtube video of someone that I recently found. Her path seems to be very similar to mine. She went from zero to 2 million in about 15 years, mostly with leveraged real estate. She talks more about buying in good areas with appreciation and less about cash flow.
https://www.youtube.com/watch?v=QEDD5uDP6yQ
https://www.youtube.com/watch?v=QEDD5uDP6yQ
I have college rentals. While they are always “occupied” and rent 8 months in advance, I can still have less than full rent payment. Never had anyone skip out on the last month when they were seniors AND have damage? Deposit won’t cover everything.
Or like right now, I’ve got a place where the tenants are all moving out because they can’t stand each other, blaming getting covid on each other, scrambling to find subleases. I fully expect to miss out on a few hundred in rent. Sure. It’s technically 0 vacancy, but 100% rent collection is basically impossible over a number of units and lots of time. 9/10 years are no problem! 1/10 and I’m going to be at 80-90% rent. Count that as vacancy or reduced rent, whatever you want to call it. But it ain’t 100%.
Sent from my iPhone using Tapatalk
I have one college rental in Fort Collins since 2007 and it has zero days vacancy during this time. I collect first months rent, last months rent and deposit before they move in. Could something happen in the future? Sure. However, so far it's been 0% vacancy over 13.5 years.
My other college rental is in Fort Myers, FL and it has 1 day of vacancy since August 2015.
Yeah, I’m going on 14 years with 3 units. It’s like 99% filled. But something will happen, sometime. This is my year, may take a decent hit. Covid excuses on 2 units. One is slow pay, mostly paid. The other, all in, but up and moved out. Good luck for me collecting on the rest of their money! In the court of public opinion, I lose this battle. So, cut ties and re rent short term lease. Hopefully at or close to full amount, but that’s not a certainty, especially as the university sent everyone home.
Sent from my iPhone using Tapatalk
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OP, did you say you’re going to increase the rent by $500/month in the next year, while we’re going through a pandemic? :-(
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Show me how I get to 15,000/month in cash flow in 13 years with an initial investment of $50,000. Also, at year 8 start deducting $750/month for living expenses.
I'm all ears.
Go find some of @arebelspy's old threads/story. He started around the same time and with no more resources but bought for cash flow. Similar timing/luck... much much more money. I'm pretty sure he's at over over $15k/mo in cash flow, or was at least. He may have sold all the places by now.
Edit: They were getting around $90/year in cash flow in 2015, apparently. Not sure since then, but that was only 7 years (starting in 2008), not 13, so certainly you could get there if you kept looking for opportunities and/or paid off some mortgages.
Here he is:
https://www.businessinsider.com/teachers-early-retirement-traveling-the-world-2017-1
-W
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With all that being said OP, you should seriously reconsider selling your home lol.
If there is one state that could be drastically affected by COVID or any other downturn, I would argue it is your home. No major businesses, no major college, etc.
It looks like you will be taking a significant property tax hit as well and that's big. Your cash flow is close to nil at this point. I feel like you clearly got lucky (as did many of us) and selling at the current peak and putting the proceeds at Vanguard may be a wise decision.
This is coming from a buy and hold until you die crowd. I just feel that the location of your home is not as stable as other places and you are playing with a lot of money. I personally wouldn't feel comfortable holding that home forever. But if you can stomach a 50% cut to your home value, then sure why not, keep it (you've been lucky thus far, maybe it will become 2mil in the near future?).
PS, I do agree with your "rule" of not penny pinching and finding the awesome home at a decent price rather than a shitty home at the lowest price.
However, I do all the work myself lol so I want the best price for the shittiest house in the best location and I will make it shine :)
Because I recently became aware that my sale price increased from 800K to 900K, I will make plans to increase the rent from $4,500/month to $5,000/month within the next 12 months. I know that doesn't make a huge difference, but I thought it was worth mentioning.
As a mental exercise, I will run a comparison analysis of selling and putting into Vanguard vs. letting it ride. I will assume $4,500/month in rent for this example.
Sell Price: $900,000
Deduct 7% for real estate transaction: $837,000
Current Mortgage Balance: $461,000
Capital Gains Tax (15%): $26,000
Remaining Balance: $350,000
Invested at Vanguard with a 7% return and 2% dividends = $31,500/year
If I keep the house, I get $12,000/year in cash flow and $8,500/year of principle pay down for a total of $20,500. At $900,000, if I got 1.22% appreciation/year that would get me $11,000 for a total return of $31,500/year.
As a result, it looks like the break even point is 1.22% appreciation/year.
Did I miss anything?
Shouldn't be any capital gains if it was your primary residence.
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I have read those threads and listened to his interviews. I even had a few exchanges with him on this forum on this topic in the past.
He used excess W-2 income to buy more rentals. Based on what I remember they were making 75K, living on 35K and using the difference to buy more rentals. As a result, he is not a good example of what you are claiming.
You are claiming 15,000/month, after 13 years with with an initial investment of $50,000. If it's so simple, show me the math. I imagine it's going to get real difficult if you hold yourself to the same assumptions that you are holding me.
I also think equity position is extremely important to minimize risk. For some reason people here think if you get a 1% deal, equity position doesn't matter. In my opinion, it matters very much. If you have a rental that goes bad and you rent is zero and you need to sell, cash flow no longer matters. At that point, equity matters.
Below is a ballpark of my equity position over the years. I'm also including my current personal residence, which is around 30%. My rentals have an equity position of 43%. Combined, it's around 40%.
2007: 20%
2008: 30%
2009: 31%
2010: 32%
2011: 33%
2012: 36%
2013: 41%
2014: 47%
2015: 56%
2016: 63%
2017: 70%
2018: 41%
2019: 37%
2020: 40%
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Dude, you got lucky. Your strategy was bad but it worked due to luck. Just own it. Would you/could you repeat this, starting now? Of course not. So it's not even interesting to discuss.
For reference:
Joe explains: "Eventually we ended up with 15 properties, but only four with mortgages. $13,000-plus in gross rents each month, less $2,000 per month in mortgages."
Dude was FI years ago, with way less income, starting with zilch just like you. Because he bought for cash flow. Even with zero appreciation, he'd have ended up FI. With appreciation he's got higher NW I'd guess, and his wife isn't working part time at Target (which, ok, maybe she likes?)
-W
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Dude, you got lucky. Your strategy was bad but it worked due to luck. Just own it. Would you/could you repeat this, starting now? Of course not. So it's not even interesting to discuss.
For reference:
Joe explains: "Eventually we ended up with 15 properties, but only four with mortgages. $13,000-plus in gross rents each month, less $2,000 per month in mortgages."
Dude was FI years ago, with way less income, starting with zilch just like you. Because he bought for cash flow. Even with zero appreciation, he'd have ended up FI. With appreciation he's got higher NW I'd guess, and his wife isn't working part time at Target (which, ok, maybe she likes?)
-W
Show me the math.
This is the foundational argument of the entire discussion.
I showed you my returns, now show me yours.
If you can't support your argument with math, your contributions are meaningless.
I'm waiting...
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Dude, you got lucky. Your strategy was bad but it worked due to luck. Just own it. Would you/could you repeat this, starting now? Of course not. So it's not even interesting to discuss.
For reference:
Joe explains: "Eventually we ended up with 15 properties, but only four with mortgages. $13,000-plus in gross rents each month, less $2,000 per month in mortgages."
Dude was FI years ago, with way less income, starting with zilch just like you. Because he bought for cash flow. Even with zero appreciation, he'd have ended up FI. With appreciation he's got higher NW I'd guess, and his wife isn't working part time at Target (which, ok, maybe she likes?)
-W
Show me the math.
This is the foundational argument of the entire discussion.
I showed you my returns, now show me yours.
If you can't support your argument with math, your contributions are meaningless.
I'm waiting...
They're not my returns, and I don't know details beyond 15 doors and the other numbers in the article. You can probably dig around for @arebelspy posts from back in the day (or maybe he'll chime in). I'm not going to, because I'm not making outrageous claims. 15, 1-2% properties purchased in the 2008-2010 timeframe is a freaking money volcano at this point - the places in Vegas you could get were like $50-100k and rented for $1500 *back then*.
Look, your thesis is, as I understand it:
-I ignored the 1% rule
-I made money
-Therefore the 1% rule is dumb
But your conclusion doesn't follow at all. You can do lots of things that require skill/follow particular rules through luck (ie, winning money during a night of poker as a total uninterested/naive beginner, which I've done) but that doesn't mean that following rules or developing skill is dumb. It means you got lucky.
-W
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Are you looking for a dick measuring contest? You made money. No one doubts that. You made money because
1) basically everyone who bought real estate during those times made some money.
2) you probably bought some less than perfect places that were below market rate
3) you did repairs and capital improvements to increase value.
There’s nothing wrong with what you did. BUT saying your way is repeatable, right now, in current conditions is irresponsible.
And you’re arguing, originally, that because you made money on steps 1-3 above, the 1% rule isn’t valuable, useful, or even worthwhile to look at. But anyone who bought at your time with a 1% rule property made out like kings too.
Thing is, I’m netting 50% more on one double than you are with all your properties. That’s my best possible place, and there’s not a chance in hell I can repeat that today. It was a 1.5% in a 1% area property because it was a distressed sale. I made capital improvements. Doubled rent. The whole area kept going up and rentals are now selling in the .75% range. I would have doubled my money doing absolutely nothing!
Things that have been more repeatable (at least through end of 2018) were buying 1% rule properties, making capital improvements, and doubling rents. Still close to a market value 1% rule area even now, maybe .9% at the moment. But that? It’s repeatable.
There’s more than one way to skin a cat. You like slow flips that you then rent out for low cash flow. Not my cup of tea. If I’m flipping a place and the rents suck, I’m selling that shit and moving on.
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Man y'all are plowing it on lol.
There's no way to put it Clarkfan, $2200 cashflow with your 3 rentals after 13 years while self managing is nothing to brag about. The only thing you have is appreciation and please don't take credit for that as we all know you (and I) benefitted from the once in a lifetime recession plus longest bull ever.
You still haven't answered, do you have any 401k/IRA/brokerage?
But whatever, we are way off course.
EDIT: even with your appreciation, without selling, means absolutely nothing. We still don't know what your end game is here. Keep a rental valued at 900K for a cashflow of 1000/month that's just not good enough imo?
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Clarkfan,
First, I need a sincere apology from you for posting that stupid youtube link. It's about this 40 year old who owns 4 properties (first property bought in 2005 btw) with a combined worth of barely 1 million, but with about 750k in mortgages. She also has 200k in stocks. that is nowhere near 0 to 2 million in 15 years. I hope she's your wife or friend that you just wanted to plug and not someone you take advice from. Shame on me for clicking.
Second of all, I understand that you want to discuss the concept and not your personal holdings, but the more details you provide, the less attractive your real estate holdings are. You are attempting to paint this very rosy, easy, hands off picture of real estate (and a cash cow) and it's simply not true.
It sounds like your total cash flow for all of your properties is 2200/month! That's with self-managing and your 0 vacancy and very very low repairs/maintenance estimates. On 3 properties worth 1.5 million? Clark, this is exactly why people are preaching the 1%. If you would have stuck to better purchases, you would be cash flowing 15,000/month. You also haven't answered why you are so focused on appreciation if you don't want to sell. It does nothing for you. The bottomline is 2200 cashflow (without any major vacancies or repairs) on homes valued at 1.5 million.
I'm on your side and trying to support your concepts, but you gotta give me something to work with.
"If you would have stuck to better purchases, you would be cash flowing 15,000/month"
Please explain to me how I get to 15,000/month of cash flow in 13.5 years based on an initial investment of $50,000. After year 8, start deducting $750/month of cash flow for living expenses. You are making very strong claims that I could have done better with sticking with the 1% rule. As a result, I am simply asking that you support it with math.
I never made any claims about stocks, so I do not understand why you feel entitled for an answer regarding stocks. We are not talking about stocks. But fine, we have around 140K of index funds in retirement accounts.
I also didn't buy real estate in 2009-2010 as everyone is claiming. I bought in 2007, 2012, 2018 and 2019. My first purchase was May 2007. Based on national trends, this is technically the worst time to purchase a house because it was right before everything collapsed.
Part of the reason why my cash flow is low is because I did two major cash-out re-fi's to buy more real estate. For example, my original mortgage for Fort Collins was $950/month, then slowly increased to $1050 with increases in taxes. I did a cash out re-fi and pulled out 148K and my payment went up to $1650/month. However, I used the money to buy Kauai which increased from 660K to 900K in 2.5 years. I don't understand how this is a bad decision.
I have been on here since 2014 sharing my story. In 2017 my net worth hit 500K and I was asking for ideas on how to get to one million. I suggested real estate and many here shouted from the rooftops that it couldn't be done. I was told the party was over. Now in 2020 our net worth is 925K and people are telling me that I made a mistake. I should have bought better properties more consistent with the 1% rule.
Yes, we are in agreement that we made money. However, we are not in agreement that I would have done better by sticking with the 1% rule. This is what I am arguing against. Show me how I get to 755K of real estate equity in 13.5 years with an initial investment of 50K and then start deducting $750/month for living expenses at year 8. Our current cash position of 42,000 is a direct result of a cash-out re-fi on a rental in 2019. We took out 107K out of the Florida house. We used 60K to buy our primary house and we had 47K of cash left over.
From my perspective, this has been frustrating because no one will support the 1% with math for wealth generation. Until someone does that, I think we will continue to go in circles.
One more thing. I do not remember specifically who said what. But when arebelspy was doing his thing in 2014, the majority of people on MMM were not supportive of his plan. I'm not sure if those people are still here or left. Six years ago he was considered to be a reckless idiot gambling with real estate in Vegas. Now in 2020, he is considered to be a genius. I think I was one of the few that was supportive of what he was doing because I was doing something similar in Florida at the same time.
I am here to learn. I am listening. Teach me.
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Hopefully newbies will read this thread critically and learn something, that's all I have left to say. I don't think anyone's mind has been/will be changed.
Good luck going forward, OP.
-W
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Was tagged (thanks!), read thread. Just a couple comments.
He used excess W-2 income to buy more rentals.
Correct.
Based on what I remember they were making 75K, living on 35K and using the difference to buy more rentals.
We earned more (mostly via side gigs) and spent less, but conceptually that's basically it. Spend less than we earn, plow the rest into rental real estate.
We definitely are not an example of "make initial investment and never add any"; by the time we FIRE'd in June 2015 we had invested ~300k across ~6 years, it had grown to over 1MM and were cash flowing more than enough to cover expenses.
At that point, IIRC, we were at about 80% equity position (20% LTV), having massively deleveraged for FIRE income security. In the years since we've seen appreciation and done some 1031s into a few more properties.
You are claiming 15,000/month, after 13 years with with an initial investment of $50,000.
I didn't quite see that claim (specifically regarding the initial investment), though I did see the claim of if you had bought 1% properties that's what your cash flow would be. Too many assumptions to say what is correct or not about that statement (for one assuming a 1% property's rents rise in relation to its value).
I'm wondering where the 50k initial investment number came from. Did you initially invest 50k, and never invest any more, which turned into those 3 rentals worth 1.5MM?
I have no opinion on your personal investment story, other than to say congrats, seems like you did well! I agree that others should be cautious trying to follow the same path, but they should also be cautious trying to follow my path, or anyone's. Best to learn many different ideas and figure out what they think is best. Plenty in this thread for them to digest on both sides.
Would you/could you repeat this, starting now?
This, to me, is the key question, and one I've thought about a fair amount for my own situation.
I think large parts of my path could be repeatable, but other parts could not (or couldn't be counted on, and who knows how or if they'd happen, e.g. certain appreciation that wasn't counted on but was fortunate).
That question though, that's the ultimate one when evaluating one's investing history.
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Clarkfan,
First, I need a sincere apology from you for posting that stupid youtube link. It's about this 40 year old who owns 4 properties (first property bought in 2005 btw) with a combined worth of barely 1 million, but with about 750k in mortgages. She also has 200k in stocks. that is nowhere near 0 to 2 million in 15 years. I hope she's your wife or friend that you just wanted to plug and not someone you take advice from. Shame on me for clicking.
Second of all, I understand that you want to discuss the concept and not your personal holdings, but the more details you provide, the less attractive your real estate holdings are. You are attempting to paint this very rosy, easy, hands off picture of real estate (and a cash cow) and it's simply not true.
It sounds like your total cash flow for all of your properties is 2200/month! That's with self-managing and your 0 vacancy and very very low repairs/maintenance estimates. On 3 properties worth 1.5 million? Clark, this is exactly why people are preaching the 1%. If you would have stuck to better purchases, you would be cash flowing 15,000/month. You also haven't answered why you are so focused on appreciation if you don't want to sell. It does nothing for you. The bottomline is 2200 cashflow (without any major vacancies or repairs) on homes valued at 1.5 million.
I'm on your side and trying to support your concepts, but you gotta give me something to work with.
"If you would have stuck to better purchases, you would be cash flowing 15,000/month"
Please explain to me how I get to 15,000/month of cash flow in 13.5 years based on an initial investment of $50,000. After year 8, start deducting $750/month of cash flow for living expenses. You are making very strong claims that I could have done better with sticking with the 1% rule. As a result, I am simply asking that you support it with math.
I never made any claims about stocks, so I do not understand why you feel entitled for an answer regarding stocks. We are not talking about stocks. But fine, we have around 140K of index funds in retirement accounts.
I also didn't buy real estate in 2009-2010 as everyone is claiming. I bought in 2007, 2012, 2018 and 2019. My first purchase was May 2007. Based on national trends, this is technically the worst time to purchase a house because it was right before everything collapsed.
Part of the reason why my cash flow is low is because I did two major cash-out re-fi's to buy more real estate. For example, my original mortgage for Fort Collins was $950/month, then slowly increased to $1050 with increases in taxes. I did a cash out re-fi and pulled out 148K and my payment went up to $1650/month. However, I used the money to buy Kauai which increased from 660K to 900K in 2.5 years. I don't understand how this is a bad decision.
I have been on here since 2014 sharing my story. In 2017 my net worth hit 500K and I was asking for ideas on how to get to one million. I suggested real estate and many here shouted from the rooftops that it couldn't be done. I was told the party was over. Now in 2020 our net worth is 925K and people are telling me that I made a mistake. I should have bought better properties more consistent with the 1% rule.
Yes, we are in agreement that we made money. However, we are not in agreement that I would have done better by sticking with the 1% rule. This is what I am arguing against. Show me how I get to 755K of real estate equity in 13.5 years with an initial investment of 50K and then start deducting $750/month for living expenses at year 8. Our current cash position of 42,000 is a direct result of a cash-out re-fi on a rental in 2019. We took out 107K out of the Florida house. We used 60K to buy our primary house and we had 47K of cash left over.
From my perspective, this has been frustrating because no one will support the 1% with math for wealth generation. Until someone does that, I think we will continue to go in circles.
One more thing. I do not remember specifically who said what. But when arebelspy was doing his thing in 2014, the majority of people on MMM were not supportive of his plan. I'm not sure if those people are still here or left. Six years ago he was considered to be a reckless idiot gambling with real estate in Vegas. Now in 2020, he is considered to be a genius. I think I was one of the few that was supportive of what he was doing because I was doing something similar in Florida at the same time.
I am here to learn. I am listening. Teach me.
I purchased a primary home in June 2018 for 603K. I put in 50K of repairs and 7K of furniture. My mortgage is $2675/month with a rate of 4.5%. It's now a rental that gets $4450/month in rent. After GE tax ($180), utilities ($120), vacancy ($225) and repairs ($250) I get around $1,000/month of cash flow. I do get $700/month in principal pay down, but this deal is still very short of the 1% rule. Most people would tell me that this rental sucks, right?
Rent: $4450
Mortgage: $2675
Expenses: $775
Cashflow: $1000/month
Down payment (20% of $603k): $120,600
Closing costs: $5,000
Improvements: $57,000
Cash invested: $182,600
Cash on cash return: 6.5%
Rent: $6700 (1% rule)
Mortgage: $2675
Expenses: $775
Cashflow: $3,250
Down payment (20% of $603k): $120,600
Closing costs: $5,000
Improvements: $57,000
Cash invested: $182,600
Cash on cash return: 21%
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Clarkfan, I appreciate your response. I really do. We do seem to be going in circles.
The cash out refinances definitely helps explain why your cashflow is lower. With that new information. I would say you have done a fine job.
1. Obviously I'm asking about stocks because having 100% of your net worth in real estate would be concerning to me.
2. All we are saying is that if you would have bought another home in Florida or Colorado or even Kauai that was closer to the 1% rule, you would have had the same exact appreciation, but with higher cashflow. You seem to think that the homes you purchased were somehow magical and the best possible ones. No, all they have in common is that they appreciated (but so did every single other home in those areas) and you were able to cash out refi. This will not continue forever.
3. You keep refusing to answer what your end goal is and this is big imo. Appreciation on paper is a nice psychological boost, but if you aren't going to sell, then it means nothing. All that matters is cashflow. Curious, are you looking to buy more?
4. And yes, I believe like arebelspy, there are others who stocked up during the downturn with 1%+ homes that now cashflow 10K plus.
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I've appreciated this thread a lot. Most of the time I've thought about buying rentals, I just can't help but think that the added return just isn't worth the work. Especially for the prices that most real estate is at now.
However, I have thought that maybe I would strategically like to own a rental or two in areas that I would enjoy living at. (Something either like a 6 months on; 6 months off kind of deal). At least that way I could consider the work/ smaller return I get on the property more of a luxury rather than trying to find a property that is a 100% investment purpose.
Every time I think about buying rental property, I just can't overcome the additional labor and risk. Then again, I'm more of the MMM route of making a good salary where I'll be FIRE at around 9 years of total work with no need to be a property manager afterwards. Perhaps I could've done it faster if I played my cards better or didn't make a dumb investment or two early on. But all-in-all I can't complain to only being done after 10 years.
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I've appreciated this thread a lot. Most of the time I've thought about buying rentals, I just can't help but think that the added return just isn't worth the work. Especially for the prices that most real estate is at now.
However, I have thought that maybe I would strategically like to own a rental or two in areas that I would enjoy living at. (Something either like a 6 months on; 6 months off kind of deal). At least that way I could consider the work/ smaller return I get on the property more of a luxury rather than trying to find a property that is a 100% investment purpose.
Every time I think about buying rental property, I just can't overcome the additional labor and risk. Then again, I'm more of the MMM route of making a good salary where I'll be FIRE at around 9 years of total work with no need to be a property manager afterwards. Perhaps I could've done it faster if I played my cards better or didn't make a dumb investment or two early on. But all-in-all I can't complain to only being done after 10 years.
I think your post regarding lifestyle is a huge consideration. Yes, for VTSAX, it's all about the numbers. However, for rentals there are many other things to consider besides return. These rentals have the opportunity to positively and/or negatively impact your life beyond the returns and those things should be considered and weighted. Below are some pros and cons.
One, I really enjoyed live-in flips that that were slow (6 months) and mostly cosmetic. I like the convenience of working on your own house. You don't have to travel anywhere. Additionally, for a live-in flip, I would not enjoy living in a construction zone. Full disclosure, for the Kauai house, I did gut the basement mother in law suite down to the studs. It was a construction zone. However, this was completely separate from our living space, so it didn't negatively influence our lifestyle, in my opinion.
Two, when you live in the house for 1-4 years and then convert it to a rental, you fix as much as possible before it becomes a rental. If you fix everything, repairs are going to be very minimal for the next 5-10 years as a rental. You get rentals with less headaches, in my opinion.
Three, I fly to Florida twice a year to see my parents. On each trip, I typically do 1-2 days of landscaping and updates, 4 hours each day. I think the winter trip typically has more value than the summer trip. Both are fun, but we really enjoy getting a few days of warm weather in December/January, now that we are back in Colorado full-time.
Four, I fly to Kauai 2-3 times a year to surf with my friends. I typically do 3 days of landscaping and updates, 4 hours each day.
Five, I drive to Fort Collins, CO about 3-4 times a year for repairs and updates. The house was built in 1967. Based on it's age, it does have more stuff that breaks. However, the juice has always been worth the squeeze. The rental demand for this house is off the charts. It's about half a mile from Colorado State University (35,000 students). Small homes on big lots are getting demolished and replaced with apartments. Single family homes near campus get premium rent because of high demand and low supply. It's a 3 hour drive from my house, but only 45 minutes from additional family, so I plan my trips to Fort Collins when we are visiting family. It is very common for my wife and son to join me in Fort Collins after I'm done at the house. We typically go to a park and then a brewery. My son took his first steps in the grass at New Belgium Brewery in Fort Collins, CO on a perfect summer afternoon after I got done with some minor repairs at the rental house. It was one of the best days of my life and it included 2-3 hours of work at a rental.
I purchased a primary home in June 2018 for 603K. I put in 50K of repairs and 7K of furniture. My mortgage is $2675/month with a rate of 4.5%. It's now a rental that gets $4450/month in rent. After GE tax ($180), utilities ($120), vacancy ($225) and repairs ($250) I get around $1,000/month of cash flow. I do get $700/month in principal pay down, but this deal is still very short of the 1% rule. Most people would tell me that this rental sucks, right?
Rent: $4450
Mortgage: $2675
Expenses: $775
Cashflow: $1000/month
Down payment (20% of $603k): $120,600
Closing costs: $5,000
Improvements: $57,000
Cash invested: $182,600
Cash on cash return: 6.5%
Rent: $6700 (1% rule)
Mortgage: $2675
Expenses: $775
Cashflow: $3,250
Down payment (20% of $603k): $120,600
Closing costs: $5,000
Improvements: $57,000
Cash invested: $182,600
Cash on cash return: 21%
[/quote]
This is really helpful. I was really struggling with the math. Thank you for providing. This definitely solves everything.
Clarkfan, I appreciate your response. I really do. We do seem to be going in circles.
The cash out refinances definitely helps explain why your cashflow is lower. With that new information. I would say you have done a fine job.
1. Obviously I'm asking about stocks because having 100% of your net worth in real estate would be concerning to me.
2. All we are saying is that if you would have bought another home in Florida or Colorado or even Kauai that was closer to the 1% rule, you would have had the same exact appreciation, but with higher cashflow. You seem to think that the homes you purchased were somehow magical and the best possible ones. No, all they have in common is that they appreciated (but so did every single other home in those areas) and you were able to cash out refi. This will not continue forever.
3. You keep refusing to answer what your end goal is and this is big imo. Appreciation on paper is a nice psychological boost, but if you aren't going to sell, then it means nothing. All that matters is cashflow. Curious, are you looking to buy more?
4. And yes, I believe like arebelspy, there are others who stocked up during the downturn with 1%+ homes that now cashflow 10K plus.
1. Yes, stocks matter to overall portfolio, but I don't think they are relevant when comparing different types of real estate.
2. No one is perfect and you can always do better. About 5 years ago, I looked at the comps for my Fort Collins house based on tax records. I bought at 182K. Out of 50-100 sales, I only found one other person who bought lower than me and it was at 177K. I'm pretty confident that I bought in the top 10% of best deals. Yes, I could have maybe gotten a tiny bit closer to a 1% deal, but I was still pretty far away from 1% deal because my 182K house only rented for $1300/month at the time. A 1% deal for a single family home hasn't existed in that neighborhood for 20 years. There were times were you could get close to a 1% deal with a condo/apartment in that neighborhood. However, those have appreciated less and with HOA fees, it kills your cash flow.
To get to the 1% rule, you would have to go to a different neighborhood and those neighborhoods have less appreciation. I agree that the neighborhood appreciated the same. I can actually buy 1% rentals today in my home county (Pueblo County). I can buy something with 60-70K cash, put in 10-20K worth of work and rent for 700-900/month. However, these homes do not appreciate because they are in high crime areas with bad schools. This would be a major hit to my lifestyle.
One more thing regarding my Fort Collins house that is relevant. My lot size is 12,007 sq. ft. You can subdivide the lot at 12,000 sq. ft. Only about 5% of the lots in that neighborhood are greater than 12,000 sq. ft. In about 10-15 years I am going to knock down the house and build two. I'm not sure how you calculate that in your numbers, but I think it's relevant.
3. I avoided answering many questions on this thread because I thought we were going into circles. I thought it was better to try to stay focused on one debate at a time. I am probably not going to do a good job of answering your question, but this is my best attempt. In 2007, my original plan for an "end goal" was 4 rentals at 250K each that each cash flowed $500/month. I would use the money for retirement and international travel. I was going to buy one rental every 7 years with cash flow and be done by age 50. Due to larger appreciation and lower interest rates, I deviated from the plan and did cash-out re-fi's. I got to my goal of 4 rentals and $2000/month of cash flow about 10 years earlier than I thought. Technically, I have achieved my end goal. I pretty much have my perfect life and I am not looking for any major changes. The only thing I am lusting after right now is getting a vacation rental in the mountains. I love to snowboard and I think a vacation rental near Breckenridge would be fun. However, I am not willing to accept headaches. As a result, I will probably be super conservative and wait until I have more than enough money to pull it off.
4. Yes, arebelspy just said he put 300K of his W2 income into his rentals. My original investment was 50K. It would make sense for his cash flow to be higher because he allocated 6 times as much capital.
I'm sure many of you make more money than us at your W2 jobs and would prefer to put it into VTSAX. This probably makes rentals less appealing to you. However, I make 52K /year and my wife makes 13K/year, so our combined W2 income is 65K/year. I am not complaining. When you add the rentals (cash flow, appreciation, principle pay down and tax advantages), we have more than enough. I am just saying that this makes more sense for us. We also have the time to do it. I work 1,100 hours/year and my wife works 780 hours/year.
I will admit that the 1% rule has it's place. Looking back, I could have done a better job of acknowledging it's value before I attacked it. However, I personally think we put too much emphasis on it at times and that is why I am pushing back. It's relevant, but it's not the only way. I don't want to guide newbies into bad neighbors to achieve the 1% rule. Is that really the end goal? Yes, some people might do very well with bad neighborhoods. I could see that being a niche. However, you would have to have some major systems in place to deal with the problems that come up.
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Deleted previous post because it's too harsh. I'll restate.
In your shoes, OP, I'd put some (or all) of that equity to work to make your life more awesome and let you and your spouse work less and spend more time with family, as you've mentioned is a goal. You are betting everything on RE, which has worked great so far...but might not going forward. I'd take a hard look at your situation before continuing that strategy. I followed almost an identical trajectory (started from zero NW in 2008 or so, only made it above grad student/postdoc salaries in the last 5 years, invested in RE - as well as stocks) - but I sold the RE when it had appreciated beyond what made sense as an investment. Now I'm comfortably FI.
You have won the money game, so if you're not living the life you want, look hard at how you can make your money work better for you.
-W
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Ouch. I am fans of both of you and have quite enjoyed this discussion, but the
quoted comment above is unduly harsh, IMO. In fact, I'm not going to quote it after all, in hopes you'll reconsider, @waltworks .
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Ouch. I am fans of both of you and have quite enjoyed this discussion, but the quoted comment above is unduly harsh, IMO. In fact, I'm not going to quote it after all, in hopes you'll reconsider, @waltworks .
Thanks Dicey. Appreciate the nudge.
-W
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All I can take away from this is; 13 years of investing, ~$1 million in RE equity, wife works at Target to make ends meet.
SMH.
-W
13.5 years of real estate investing, 755K of RE equity, wife works at Target because she likes it*. Wife quit her high stress full-time job in 2015 because she didn't like it and we had enough rental income to support our lifestyle.
I think Walts comment was fair. I can see the concern about the comment, but I didn't take it that way. I think my position does warrant additional clarification. In an attempt to be fully transparent, I was on this forum in September 2019 with a temporary low cash problem.
*We had recently moved from Hawaii and lived in Pueblo for 2 months and my wife wanted to buy a specific house that she 100% loved. Our current rent was $800/month but the rental some issues with cigarette odor coming from the floor. I think the owners tried to hide it with floor cleaner when we looked at the rental. I wanted to wait a year to get our reserves back up before we bought another house. We were low on cash at the time (15K) because we just got done rehabbing the Kauai house. We asked the landlord if we could get out of the lease due to the smoke and they can keep our deposit. They agreed.
My wife wanted to re-fi the Florida house to come up with the down payment to purchase the new primary home. This would increase the payment by $500. Then our house payment would be $1275, which is $475/month higher. Add another $125/month for repairs and another $100 for higher utilities. This house purchase would reduce our cash flow by $1200/month. I flat out told my wife that if she wanted to buy this house she needs to (A) decrease her fun money spending from $1000/month to 500/month or (B) add $500/month of income. She only had to do this for 12 months, while we got our reserves back up. Because she likes Target so much, she decided to get a job at Target, instead of decreasing her spending. Our son was 2 years old at the time. She also thought it would be good for her mental health to get some adult time away from our son.
Well, it didn't take 12 months to get our reserves back up. It was more like 3-6 months. One of the biggest reasons was because the Fort Myers house appraised higher than we thought. After our reserves were back up, I told her that she doesn't have to honor the original agreement of 12 months. She can quit at anytime. However, she likes Target more than staying at home, so she continues to work at Target. However, about one month ago, Target got a new store manager and it has been less fun. She doesn't have any direct contact with the store manager, but he has been less accommodating with her weekly schedule and vacation time. She got the time off, but he gave her a hard time about it. She might quit in the next 1-2 months, but it's up to her.
Maybe these details don't matter, but this is my attempt to be fully transparent.
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Clark,
I appreciate your level headed comments. I appreciate your patience with us nosy folks.
one more question:
How did you turn the 50K initial investment into the rest of the properties. If your first one was 2007, then it must have took a dive the year after and remained low for a long time. You also would have had to put some cash into the property to fix it up as you were cashflow negative at the start (or at best neutral). Then you bought again in 2012 (a cheaper house so I could see how it would be a small down payment), I'm assuming you bought it by cash out refinancing the CO home. but then in 2018 you bought a very expensive house compared to your income and even with a cash out refi from your 2nd home, I don't see how that would be sufficient (i could be way off). Then finally, you bought your current home by cash out refinancing the 2nd home, so did you do it twice? Just trying to follow. You keep saying that you made 50K into 4 properties so I would like to see how that occurred (not saying you aren't being truthful)
I also don't think people have given you enough credit for our 2018 purchase. That seems to be a huge part of your profit (and net worth) and you purchased that in 2018 when I and most others would not have pulled the trigger. On the flip side, we are saying that you may want to strongly consider selling to de-leverage yourself and enjoy your winnings, you already won, don't push your luck too far. If I'm reading this correctly, your household income is basically 50k and you have $6000+ worth of PITI payments not including property tax, maintenance, etc.? That's pretty leveraged despite your positive cashflow. I'm sure the stress last year with the shortage of funds wasn't fun considering you are rich on paper. I do agree with Walt that you can have a less stressful life and have more freedom if you deleveraged a bit. I'm still not sure how you travel to hawaii and florida x2 year plus snowboard and surf on that income unless you are living above your means or secretly richer than you are letting us on. But feel free to not answer the last part as I know we are too off topic at this point.
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Clark,
I appreciate your level headed comments. I appreciate your patience with us nosy folks.
one more question:
How did you turn the 50K initial investment into the rest of the properties. If your first one was 2007, then it must have took a dive the year after and remained low for a long time. You also would have had to put some cash into the property to fix it up as you were cashflow negative at the start (or at best neutral). Then you bought again in 2012 (a cheaper house so I could see how it would be a small down payment), I'm assuming you bought it by cash out refinancing the CO home. but then in 2018 you bought a very expensive house compared to your income and even with a cash out refi from your 2nd home, I don't see how that would be sufficient (i could be way off). Then finally, you bought your current home by cash out refinancing the 2nd home, so did you do it twice? Just trying to follow. You keep saying that you made 50K into 4 properties so I would like to see how that occurred (not saying you aren't being truthful)
I also don't think people have given you enough credit for our 2018 purchase. That seems to be a huge part of your profit (and net worth) and you purchased that in 2018 when I and most others would not have pulled the trigger. On the flip side, we are saying that you may want to strongly consider selling to de-leverage yourself and enjoy your winnings, you already won, don't push your luck too far. If I'm reading this correctly, your household income is basically 50k and you have $6000+ worth of PITI payments not including property tax, maintenance, etc.? That's pretty leveraged despite your positive cashflow. I'm sure the stress last year with the shortage of funds wasn't fun considering you are rich on paper. I do agree with Walt that you can have a less stressful life and have more freedom if you deleveraged a bit. I'm still not sure how you travel to hawaii and florida x2 year plus snowboard and surf on that income unless you are living above your means or secretly richer than you are letting us on. But feel free to not answer the last part as I know we are too off topic at this point.
I agree with your comments regarding diversifying going forward. I am currently in the process of buying more index funds with my rental cash flow. However, I was defending myself for my previous behavior.
For the next 6 months, my focus is on refinancing all my properties to get lower rates. My payments are going to drop by $860/month. My Kauai property taxes will increase by $360/month, so it's a net gain of $500 of cash flow. I think my monthly principle pay down is going to increase from $1600/month to $2,250/month across the 4 properties.
I bought rental #1 in May 2007 as a primary residence and I got 3 roommates. The 20% down payment and closing costs were around $40,000. I spent around $10,000 over the next 4 years on repairs, for a total initial investment of $50,000.
The original mortgage was $1040/month based on a 6% loan. I refinanced in June 2009 into 4.75% and the payment dropped to $950/month. I collected $350/month per room for a total of $1050/month. I lived in the 4th bedroom for free. I actually paid myself rent of $350/month and applied it to the mortgage, so I had an extra $350/month going toward principle. When I did a straight re-fi in 2009, I think I got a refund check for like $10,000. I kept that in the bank and continued to make extra mortgage payments
In reality, I moved to Florida with $10,000 in the bank, mostly from the refinance. The math is messy because I lived in the house. If I didn't live in the house, I think it would be reasonable to argue for more profit. The average mortgage payment was $1,000/month and total rent collected (including myself) was $1400. This is a cash flow of $400/month for 50 months ($20,000). Vacancy was zero, but repairs were not zero. I spent $10,000 on repairs over the 50 months that I lived there.
I bought rental #2 in Florida for $95,000 with 5% down in 2012. For 2012, I had $10,000 from the Fort Collins refinance + another $3,600 in cash flow. I needed $9,000 to close and $4500 on immediate repairs, so that's $13,500.
I spent another $11,500 on repairs for Florida over the next 3 years. My cash flow from Fort Collins was $4200 (2013), $7,200 (2014) and $10,200 (2015). This totals $21,600 to pay for the $11,500 in repairs, so I have a surplus of $10,000. I increased the rent from $1450 to $1900 in August 2014 with new tenants. I didn't raise the rent in 2012 and 2013 and it was a huge mistake.
We moved to Kauai in 2015. From 2015 to 2018, I was averaging a cash flow of 1,150/month for Fort Collins and 950/month for Florida. This totaled $2100/month. My wife quit full-time work and we started to draw around $750/month of rental income for living expenses. We have our $10,000 excess from Florida + 16K/year in cash flow over 3 years for a total of $58,000.
We did a cash-out re-fi on Fort Collins and pulled out $148,000. This totals $206,000. We spent $183,000 on the Kauai house and we are left with $23,000.
In 2019, we moved back to Colorado. We did a cash out re-fi on Florida and pulled out 107K. We needed 62K to close on our current primary home. (107) + (23) - (62) = 68K. My current equity position is 755K. However, after this math, I have an extra 68K. That is currently in cash and stocks. My total net gain from real estate is 755 + 68 = 823. This also does not account for the $750/month of rental cash flow that we spent on living expenses for the past 5.5 years which is around 50K.
I apologize. This is really fucking messy. However, I don't want to spent any additional time on it.
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Our current income is 52K for me + 13K for my wife and 27K for rental income for a total of 92K. However, our rental income should go up another 6K in about 6 months after I get done with all the refinances.
I am super thankful for this MMM website and forum because it has really helped me achieve my lifestyle goals, on the cheap. Most of these ideas are from MMM himself, so I cannot take personal credit.
1) Job: Teaching community college is awesome. My friends that teach at 4-year Universities might laugh at me because I have less social status, but I think I have a much better overall lifestyle. Based on my contract, I work 40 hours a week for 32 weeks for a total of $1,280 hours/year. I've been doing this for a few years, so I average 1100 hours/year. I am contractually obligated to be on campus 30 hours/week for 32 weeks, so the lowest I can get is 960 hours/year. I contribute 13% of my salary into a 401a retirement account. My employer contributes 13.15%.
My son get free tuition at any of the 13 Colorado Community colleges until he is 25 years old. Many of the community colleges now offer 4-year degrees and I think 4 of them have dorms if he wants to live there. I will probably still do about 50K into a 529K, but I think that will be for grad school if my son wants to go. I am not offering him any support for undergrad because it's free. He can get a part-time job for his living expenses or live at home.
The local K-12 schools are not open on Fridays. They are only open M-Th. Dad doesn't teach on Fridays. I am hoping for many fishing, hiking and snowboarding adventures with my son on Fridays. He is only 3 right now, so we stay pretty close to home. However, I am very much looking forward to the next couple years.
2) Primary Housing: I am currently refinancing into a 2.875% mortgage. My loan is 227,000. My PI is 942 + 115 for taxes and 95 for insurance for a total PITI of $1152/month. Utilities are also super low for a 2,500 sq. ft. house. My gas bill for heat was $48/month in the dead of winter.
3) Cars: I drive a 2007 Pontiac Vibe that I bought for $2,750. It's actually the same car as the Toyota Matrix. MMM puts them into the same category, but the Pontiac Vibe is much cheaper. Probably 60 cents on the dollar b/c of the name. Insurance is $37/month. I average 32 mpg per tank (80% highway).
4) Credit Card Points: From 2015 to 2019, we primarily used the Alaska Credit Card to fly back and forth between Denver and Kauai. We would take 3 trips/year (6 flights total). It should cost us $4800/year, but with the $99 companion fare and points, it cost us $1800. We saved $3000/year with this card.
5) Southwest Card: I got the companion fare in April 2019. We ended up with $185,000 points. All three of us are flying to Kauai round trip November 30 - December 10th. It cost 46,000 in points for all 3 of us.
6) Kauai trips: We normally stay with friends, but due to COVID-19 we booked an airbnb.com for $1300 for 10 nights. We will still hang out with our friends, but we will mostly do outdoor activities together from a distance. I bought a 2003 Honda Oddessey for $3,000 last January. I keep it stored in the backyard of our rental. Our 10-day trip is going to cost around $1500.
We have a 7-day trip planned for March for spring break with friends. We are splitting a 2-bedroom. For 7 nights, it's $690 for each couple. We used points for one-way. I actually paid $818 for the return flight for 3 of us. However, I think I can re-book for around $500-$600 total and get a credit for the difference.
We also have plans to stay at our rental house on Kauai in between tenants.
7) Snowboarding: I live 2 hours and 15 minutes from Breckenridge. It costs me about $18.00 in gas per trip. The season pass cost me $700. If I get 30 days, I will spend $540 on gas and $700 on the pass for a total of $1240. My gas bill would normally be less because I would ride share with friends to the mountains. However, due to COVID-19, we are not doing that. I still meet up with friends on the mountain and hang out from a distance, but we don't drive in the car together.
I am 41 years old and the drive is starting to bother me. It never did before. I really want to buy a vacation rental in the mountains, but I need to be smart about it. I want to rent it during peak times and use it during off-peak. I think I should try to split the purchase with another ski friend or maybe two of them, so we can share the vacancy days. If we have 40% vacancy that would be 146 days. I could probably use the rental for 50 days of vacancy for personal use, but not 146 days.
I used to ride A-Basin until the first week of June every year and sometimes as late as 4th of July. I've done that twice. A-Basin broke away from Vail Resorts, so they are no longer included on the pass. Breckenridge is now committing to staying open later in the year. In 2018, the last day was June 9th and I was there.
I have friends on Kauai that ski 35 days/year. They go to Tahoe for 5 trips and ski 7 days straight and fly back. It's weird that my Kauai friends get more days on the mountain than me. They might not get their 35 days this year with COVID-19. They didn't get it last year.
8) Golf: I want to get a season pass next summer for $550/year for my local course. They actually still charge you $14 for each round after the season pass to walk. If I get 30 rounds of golf, it will cost me $970/year. I wanted to pull the trigger on this last year, but I chickened out. Will next year be different? We will see...
9) Taxes: With our relatively low income, real estate deductions and one son, I think we will pay around 3% in federal tax in 2020. Our property taxes are $1380/year on a house worth $310,000. The schools are good, but the roads suck. I can deal with that. Local sales tax is 4% on consumer goods, and 0% for groceries.
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I think, interestingly, that sort of sums it up, when a 4.5 hour car trip is something you think costs $18. That tracks with how you analyze your rentals pretty closely, in that, in my world, it ignores long term costs/maintenance/opportunity cost.
Congrats on living the life you want, best of luck going forward.
-W
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Clark,
I enjoyed your write ups and thanks for sharing an insight into your frugal living as well as explaining how you bought your properties.
I live frugally as well so can definitely relate with the basic car, travel points, and more. You're lucky you aren't in Cali, everything has been shutdown since March and I'm not hopeful that I will get to snowboard this year. I will most likely visit Hawaii this spring break for a much needed vacation with the family. Hopefully resume international travel this summer.
I would love to be a teacher for the time off, a very underrated profession. I'm jealous. I do have and enjoy a 4 day work week, but even that is not enough time off for me.
I think Walt said it best, but you seem to be oversimplifying your finances (A LOT). In no universe is 4 hour trip $18. If you had an excel sheet of every dollar in vs out, it would most likely paint a very different financial picture.
For starters, spending 40k on your first home and living with 3 roommates is not positive cashflow. That is just having a side hustle of living with roommates and charging them rent. Even by your own account, your roommates paid for the mortgage, but that doesn't include the 10K improvements, property taxes, insurance, utilities etc. This means that you were pumping in extra money (of your own) into the house from the very get go. You did the same at every other house you bought and I could continue to give you examples, but I don't think that's helpful/necessary. But the point is, I do feel that you are not trying to be deceptive, it's just that you don't track your dollars very closely. FYI there's nothing wrong with that. I wish I could be less OCD about my money.
Simply put, if you are claiming that you haven't put a penny into all 4 of your homes since the original 50k and that you had positive cash flow every year, plus your full time job, your wife's on and off income, plus low taxes, plus living frugally for a full 13 years....then there is no way in hell you would have been in a financial pinch when you moved back to Colorado (in 2018?). It also sounds like you are actually subsidizing your own life expenses through the cash out refis. If you were cashflow positive and working full time, then each new purchase should have come from your own savings, instead it required a cashout refi every time (or as you say a 10k refund for a refinance. lol no one gets paid 10k to refinance, I can guarantee you that your loan increased in that same amount plus the cost of refi).
It sounds like you met your financial/real estate goal 10 years ahead of time (huge kudos), but don't have a current plan now/going forward except for riding the appreciation wave. Maybe it's time for you to sit down and figure out what you want to accomplish in the next 10 years. I do support you diversifying into mutual funds.
With all that said, I think you have a lot of things figured out and I applaud you.
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Summary: Large amounts of leverage (5% down multiple times, cash out refis to continually get that 5% down for the next) + time (appreciation) = wealth. Properties that were not great numbers initially eventually become decent a decade or so later.
It's certainly one path, and one a lot of people take. It takes very little capital, just good credit, and very little work (you're only buying a small number of properties) and can use leverage and time to create wealth.
Could it be done better or more efficiently by someone putting in the time and effort to become a (semi?) professional and get better deals? Certainly.
Can you get wealthy over time by taking cheap money from the bank on a solid (perhaps even boring) rental and holding it for a decade? Yep.
I think if the average person put 5% down on a house that was breakeven (assuming they did actually count all maintenance/repairs/capex/etc. correctly) and held it for a decade+ with a fixed, low rate mortgage, they'd see rents rise, while their P&I remained fixed and even if appreciation was low (say, at inflation, no higher), they'd still see large equity growth due to the magnification of leverage on that appreciation. If they did that 3-4 times, 10+ years later they'd have a decent net worth and okay cash flow.
And certainly people who know better could say to them "you could have done so much better" or even "you still could be doing so much better," and they'd be right. But also, they could be like most people and do nothing. It's the overwhelmingness and fear that keeps a lot of people out of rental real estate, and if a simple path of buying on the MLS with bank money and counting on long term appreciation and small cash flow is the one that works for you, then great.
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Clark,
I enjoyed your write ups and thanks for sharing an insight into your frugal living as well as explaining how you bought your properties.
I live frugally as well so can definitely relate with the basic car, travel points, and more. You're lucky you aren't in Cali, everything has been shutdown since March and I'm not hopeful that I will get to snowboard this year. I will most likely visit Hawaii this spring break for a much needed vacation with the family. Hopefully resume international travel this summer.
I would love to be a teacher for the time off, a very underrated profession. I'm jealous. I do have and enjoy a 4 day work week, but even that is not enough time off for me.
I think Walt said it best, but you seem to be oversimplifying your finances (A LOT). In no universe is 4 hour trip $18. If you had an excel sheet of every dollar in vs out, it would most likely paint a very different financial picture.
For starters, spending 40k on your first home and living with 3 roommates is not positive cashflow. That is just having a side hustle of living with roommates and charging them rent. Even by your own account, your roommates paid for the mortgage, but that doesn't include the 10K improvements, property taxes, insurance, utilities etc. This means that you were pumping in extra money (of your own) into the house from the very get go. You did the same at every other house you bought and I could continue to give you examples, but I don't think that's helpful/necessary. But the point is, I do feel that you are not trying to be deceptive, it's just that you don't track your dollars very closely. FYI there's nothing wrong with that. I wish I could be less OCD about my money.
Simply put, if you are claiming that you haven't put a penny into all 4 of your homes since the original 50k and that you had positive cash flow every year, plus your full time job, your wife's on and off income, plus low taxes, plus living frugally for a full 13 years....then there is no way in hell you would have been in a financial pinch when you moved back to Colorado (in 2018?). It also sounds like you are actually subsidizing your own life expenses through the cash out refis. If you were cashflow positive and working full time, then each new purchase should have come from your own savings, instead it required a cashout refi every time (or as you say a 10k refund for a refinance. lol no one gets paid 10k to refinance, I can guarantee you that your loan increased in that same amount plus the cost of refi).
It sounds like you met your financial/real estate goal 10 years ahead of time (huge kudos), but don't have a current plan now/going forward except for riding the appreciation wave. Maybe it's time for you to sit down and figure out what you want to accomplish in the next 10 years. I do support you diversifying into mutual funds.
With all that said, I think you have a lot of things figured out and I applaud you.
The question was how do you afford your lifestyle, right? I answered it to the best of my knowledge. When I drive to Breckenridge, it costs $18 in gas. You did not ask me what are the total direct and indirect costs of driving a car. If you asked me a different question, I would get you a different answer. My main point is that I live close enough that I don't pay for lodging. However, the drive is starting to become less fun.
I agree that I might focus on the positives too much. I am a hardcore optimist. I know that this can be annoying sometimes. In an effort to talk about the dark side of real estate, I can give you two examples that were not fun.
One, in July 2019, I accepted a job to move from Hawaii back to Colorado to be closer to my wife's family. I was hired extremely late in the hiring cycle. I had 3 weeks to move and start a new job. Normal is 3 months. The part that made it less fun was that I still had a few house projects on the list. I like doing house projects, but it was not a leisurely pace. I did as much as I could during those 3 weeks and I paid someone to finish everything. It wasn't super stressful because I knew I could always pay someone to finish it and we had the money. However, labor in Hawaii is expensive and I wanted to do as much of it by myself as I could to reduce the cost.
Two, it was a stressful 60 days when my wife wanted to re-fi the Florida house and purchase our current primary home. After the appraisal came in higher than we thought, we had plenty of money to pull it off. However, it was just alot of paperwork and time. I just started a new job and I was probably working 50 hours/week. New textbooks, new software to learn, new office to set up, new campus... Add the re-fi and purchase on top of it and I was working 60-70 hours/week for about 60 days. Looking back, I think it was worth it. However, those 60 days were not fun.
For the most part, I think you have an accurate understanding of what I did. Before, I think there was some miscommunication. I don't really have any interest in arguing over the logistics of how you or anyone else categorizes everything.
As long as the readers understand and get something out of it, I'm happy.
I've been to Breckenridge twice this past week and I leave for Kauai for 10 days on Monday. Life is good.
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Summary: Large amounts of leverage (5% down multiple times, cash out refis to continually get that 5% down for the next) + time (appreciation) = wealth. Properties that were not great numbers initially eventually become decent a decade or so later.
It's certainly one path, and one a lot of people take. It takes very little capital, just good credit, and very little work (you're only buying a small number of properties) and can use leverage and time to create wealth.
Could it be done better or more efficiently by someone putting in the time and effort to become a (semi?) professional and get better deals? Certainly.
Can you get wealthy over time by taking cheap money from the bank on a solid (perhaps even boring) rental and holding it for a decade? Yep.
I think if the average person put 5% down on a house that was breakeven (assuming they did actually count all maintenance/repairs/capex/etc. correctly) and held it for a decade+ with a fixed, low rate mortgage, they'd see rents rise, while their P&I remained fixed and even if appreciation was low (say, at inflation, no higher), they'd still see large equity growth due to the magnification of leverage on that appreciation. If they did that 3-4 times, 10+ years later they'd have a decent net worth and okay cash flow.
And certainly people who know better could say to them "you could have done so much better" or even "you still could be doing so much better," and they'd be right. But also, they could be like most people and do nothing. It's the overwhelmingness and fear that keeps a lot of people out of rental real estate, and if a simple path of buying on the MLS with bank money and counting on long term appreciation and small cash flow is the one that works for you, then great.
100% agree. Because you said it, the readers might give it more attention.
Let's not forget how much fear was in the world in 2009 and 2010. That is something that is very difficult to go back and measure. Anyone buying rentals during this scary time was most likely not getting support from their family and friends. They were going against the grain and could see the bigger picture.
Most people are too scared to do anything. That's fine. I'm not judging. However, I really do not want any advice from those who are too scared to take action. That really isn't helpful. If you have done a deal, please share your experience so we can all learn from it.
I have a Ph.D. in Applied Social Psychology, which is basically Behavioral Economics. During my 7 years of grad school, I have read hundreds of research articles on how humans rationally and irrationally assess risk. Based on this knowledge, I definitely have more wins than losses. I am also willing to take more "risk" in the eyes of the average person, which gets me a higher return. However, for the average human, risk is mostly subjective, so in my opinion, I get higher returns without taking additional risk.
It is very possible to quantify risk. However, when I am competing against other people to buy an asset, I go for the asset that has tons of irrational risk to get it for a cheaper price. These are basically ugly houses that need new flooring, paint and appliances. My Pontiac Vibe would also count as getting a deal because people irrationally assess risk.
Someone else mentioned "risk" as being subjective. Thank you for that comment. I really wanted to run with it, but we were already pretty far off topic.
I think I am going to put a rental portfolio binder together over the summer for my rentals. I am going to compare my returns to national metrics and more local neighborhood metrics. This should be a good measuring stick for how I have done. I am going to try to use the binder to get partners for a vacation rental in the mountains. If anyone has any advice, let me know. I have never done this before.
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Summary: Large amounts of leverage (5% down multiple times, cash out refis to continually get that 5% down for the next) + time (appreciation) = wealth. Properties that were not great numbers initially eventually become decent a decade or so later.
It's certainly one path, and one a lot of people take. It takes very little capital, just good credit, and very little work (you're only buying a small number of properties) and can use leverage and time to create wealth
. . . .
Thanks for posting this! My wife and I have been going back and forth as to whether our current house (Former hoarder house in the south Denver area we bought off market) should become a flip or a rental. Once I put a roof on it the maintenance should be minimal. We already have more appreciation than money we have put into the house, and the numbers keep looking "ok but not amazing" - we are happy with the very little work and our inital low down payment.
Your post was the first in a while that actually nudged me noticeably. This house will not make us FI, but it should be a net benefit and an OK hedge with very low initial capital needed (considering the rent we would have to pay otherwise)
You have certainly done a lot better than us in the years since I met you in Longmont, but we are OK, focused on market equities, but have rode the current RE wave. Our current house doesn't look like an amazing deal, but once you consider that we put 0% down on our first house and rolled over that appreciation each move, it looks OK to me. If nothing else, I don't expect this rental to LOSE money overall.