Author Topic: What to do with my rental?  (Read 10818 times)

Retireme32

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What to do with my rental?
« on: February 18, 2014, 12:43:16 PM »
Warning, this is long to give you the full story.  Here goes:

I bought a house in 2008.  I knew that I'd probably move and get married soon after so I made sure to buy a house with a basement rental such that I had 2 units to rent out (top and bottom).  I got this house before the super low interest rates so I paid 200,000 at 6% and I also have PMI on the house. 

I've been renting the house since fall of 2010 and I am still not breaking even for several reasons:
1.  I started off renting to friends to help myself get into landlord mode more easily - and I cut them a break on rent.  (But then they stayed way longer than I anticipated and right before that I had to deal with a bad tenant and I am in no hurry to experience that again anytime soon.)
2.  I stupidly offered utilities with rent so  I pay that as well.
3.   PMI is another $233 on top of the mortgage.

Everything included (mortgage, utilities, tax, PMI) I pay out of my own money $390 extra per month after I receive rent.
My plan was to pay off PMI (additional $1500/mo for the next 10 months) and redo the leases when current tenants move out (expecting that to be this July) and redo them to include increases of $150 per month plus take out utilities.

Then we did our taxes.  And we realized that the PMI and the taxes and utilities all count towards losses that we can write off against the rental income.  If I start to increase my rental income and actually make a profit - if I can't "hide" that then I will get taxed on it.  My husband thinks that I should maybe not get rid of these "write-offs" so that we can build up that PAL account  (passive activity loss) even if it means renting at a loss because he is looking at the long term of one day sellnig and being able to count a massive PAL account against Capital gains.  BUT - looking at this from an FI perspective (which he is not) I want to set this place up as a new source of passive income.

If i raise the rents, pay off PMI, and stop paying utilities, I am looking at the $390/month savings or no loss however you want to see that, PLUS an additional $360 in profit per month.  Do I not want profit each month? I've never heard anyone on any blog about rental property not want positive cash flow but I do see his point about the PAL.  the house is in good condition so I cant expect any significant maintenance issues to write off - nor do I really want that anyway. 

This house is in a great neighborhood of a college town - I know this area so well and I know it's going to continue to appreciate in value and always be rentable.   

Initially upon discovering FI and this blog I thought I might try to aggressively pay the entire mortgage off b/c then all my future rental incomes would be total profit and yes I'd get taxed but I'd also not have my current salary so my "taxable income" would  decrease.  I've heard the arguments about not worrying about paying off mortgage but I don't have one of those 3.5% interest rates so the argument is not as strong. 

And I'm sure a lot of people might say sell it - this is also on the table but again - I feel very strongly about this market compared to other areas -including the area we live in now and I'm not ready to give up on this one yet - especially considering the fact that in my mind the issues that are keeping me in negative cash flow are fixable and fixable soon!

So, I know that was a lot but I wanted to make sure you knew all the fact before you gave advice and I am looking for advice from a "trying to get to FI" perspective. 

Whew. Okay, now - what do you guys think?  (Thanks in advance!)

Guizmo

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Re: What to do with my rental?
« Reply #1 on: February 19, 2014, 12:42:07 PM »
I personally wouldn't be okay with losing money every month, unless I thought the property had a very good shot of appreciating crazy amounts to make up for the sunken costs. Even as a tax deduction, it doesn't make sense. Why lose $1 to save .25c on my taxes. (I'm assuming a rental loss is a tax deduction and not a credit, I could be wrong.) To be honest, I would sell the house ASAP or follow through on that plan to get it to be cash flowing those $360.

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Re: What to do with my rental?
« Reply #2 on: February 19, 2014, 01:43:34 PM »
Never let taxes control your profitability goals.

jba302

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Re: What to do with my rental?
« Reply #3 on: February 19, 2014, 02:46:39 PM »
You can depreciate the building to give yourself a tax shelter, that is a way to hide the money. It will lower your cost basis later on when you resell but if you need interim funds it's a way to do it. You can also use it to your advantage if you sell late in the game similar to a 401k tax deferral.

KingCoin

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Re: What to do with my rental?
« Reply #4 on: February 19, 2014, 04:31:53 PM »
What's the total fair market rent on the property? What do you think you could sell it for? Everything else is more or less details.

honobob

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Re: What to do with my rental?
« Reply #5 on: February 22, 2014, 12:42:15 PM »
  I paid 200,000 at 6% and I also have PMI on the house. 

I've been renting the house since fall of 2010 and I am still not breaking even for several reasons:
1.  I started off renting to friends to help myself get into landlord mode more easily - and I cut them a break on rent.  (But then they stayed way longer than I anticipated and right before that I had to deal with a bad tenant and I am in no hurry to experience that again anytime soon.)
2.  I stupidly offered utilities with rent so  I pay that as well.
3.   PMI is another $233 on top of the mortgage.
 

Then we did our taxes.  And we realized that the PMI and the taxes and utilities all count towards losses that we can write off against the rental income.  If I start to increase my rental income and actually make a profit - if I can't "hide" that then I will get taxed on it.  My husband thinks that I should maybe not get rid of these "write-offs" so that we can build up that PAL account  (passive activity loss) even if it means renting at a loss because he is looking at the long term of one day sellnig and being able to count a massive PAL account against Capital gains.  BUT - looking at this from an FI perspective (which he is not) I want to set this place up as a new source of passive income.

 

This house is in a great neighborhood of a college town - I know this area so well and I know it's going to continue to appreciate in value and always be rentable.   

 

 

Whew. Okay, now - what do you guys think?  (Thanks in advance!)

Cash flow DOES NOT equal profitability.  If you NEED the money you NEED the cash flow and may sacrifice profitability.  6% interest is not horrible.  Can you make more money on the dollars that you would use to eliminate the PMI?

Use the analysis below.  Probably the most important numbers are the anticipated rent growth and appreciation for PROFITABILITY. 

http://www.mortgage-investments.com/resources/online-calculators/10-year-investment-in-real-estate/

Retireme32

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Re: What to do with my rental?
« Reply #6 on: February 22, 2014, 04:20:51 PM »
Honobob,
okay, I spent some time with the calculator and it seems like my potential return on investment is higher than if I were to theoretically sale now and invest that money in the stock market but that total doesn't seem to change if I stop paying utilities and/or raise the rents to what I was thinking of doing. It just increases my after tax income along the way. And I do understand what you are saying about profitability vs. Cash flow but I guess  I was just hoping to increase both without hurting the other.

I also see what you're saying about the PMI, it's just a matter of feeling better about having less cash out of pocket taken from me in the present. But maybe I can just fix that with raising the rent a bit with my next lease. Thank you for the website, it was very helpful.

arebelspy

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Re: What to do with my rental?
« Reply #7 on: February 22, 2014, 05:46:14 PM »
What's the total fair market rent on the property? What do you think you could sell it for? Everything else is more or less details.

+1. Some fairly important details, but usually that's the first driver of the discussion.
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arebelspy

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Re: What to do with my rental?
« Reply #8 on: February 22, 2014, 05:50:25 PM »
Also I lol'd at honobob's site saying "CAP RATE Per Year (NOI/Initial Invest)" when it can be used for SFRs, a term he rails against using.  ;)

(And don't get me wrong bob, your way is technically correct, and one could make the excuse that the site can be used for commercial property, one might want to know the cap rate to compare it with other cap rates in their area, etc.. I get it.  It is just an example of the "casual" use of it as more or less synonymous with ROI, as we have tried to explain.)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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honobob

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Re: What to do with my rental?
« Reply #9 on: February 22, 2014, 07:59:11 PM »
Also I lol'd at honobob's site saying "CAP RATE Per Year (NOI/Initial Invest)" when it can be used for SFRs, a term he rails against using.  ;) 


 If you can find where "MY" site says 50% of gross rents=NOI then LOL.  Find any publication that defines NOI as 50% of gross rents.  My site uses actual numbers and categories to get to NOI.  For fun go back and enter a total of 50% of gross rents but change the amounts several times in each category.  Try 50% all in vacancy and collection first.  Then say 10% v/c and spread the 40% among the categories.  DIFFERENT result each time.  It does matter what the 50% is attributed to.  So even if net operating income of ALL properties would magically be 50% it matters how that 50% is allocated.  Plus just for comparison you'd want to know why one expense category was so high.  Is it a correctable expense?

I always said you could derive a cap rate on a single family property but questioned why you would go to the trouble?  If you don't know what cap rate the market is buying at you just have a "sweet 11%" cap but no clue.  Just because you're buying at 11% doesn't mean the market isn't buying at 15%.  Now if like in commercial properties there are publications that analyze market transactions for single family homes please show me. 

This is why trying to use an incorrect method to get a NOI to then get a cap rate ends up with a crap rate.

honobob

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Re: What to do with my rental?
« Reply #10 on: February 22, 2014, 08:21:39 PM »
Honobob,
   I was just hoping to increase both without hurting the other.

I also see what you're saying about the PMI, it's just a matter of feeling better about having less cash out of pocket taken from me in the present. But maybe I can just fix that with raising the rent a bit with my next lease. Thank you for the website, it was very helpful.
retireme32  increasing the expenses against your income should not be a problem.  Do some upgrades that will increase market value more than rents or that will decrease maintenance expense down the road.  Get a better accountant if you're really having trouble with this. ;-)
« Last Edit: February 22, 2014, 08:27:23 PM by honobob »

arebelspy

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Re: What to do with my rental?
« Reply #11 on: March 01, 2014, 08:04:55 PM »
Also I lol'd at honobob's site saying "CAP RATE Per Year (NOI/Initial Invest)" when it can be used for SFRs, a term he rails against using.  ;) 


 If you can find where "MY" site says 50% of gross rents=NOI then LOL.  Find any publication that defines NOI as 50% of gross rents.  My site uses actual numbers and categories to get to NOI.  For fun go back and enter a total of 50% of gross rents but change the amounts several times in each category.  Try 50% all in vacancy and collection first.  Then say 10% v/c and spread the 40% among the categories.  DIFFERENT result each time.  It does matter what the 50% is attributed to.  So even if net operating income of ALL properties would magically be 50% it matters how that 50% is allocated.  Plus just for comparison you'd want to know why one expense category was so high.  Is it a correctable expense?

I always said you could derive a cap rate on a single family property but questioned why you would go to the trouble?  If you don't know what cap rate the market is buying at you just have a "sweet 11%" cap but no clue.  Just because you're buying at 11% doesn't mean the market isn't buying at 15%.  Now if like in commercial properties there are publications that analyze market transactions for single family homes please show me. 

This is why trying to use an incorrect method to get a NOI to then get a cap rate ends up with a crap rate.

Reread my post.  I'm not talking about the 50% rule, nor was it even mentioned, I'm talking about its use of the term "cap rate."

You rail against the 50% rule, yes, but you've also ranted about the use of "cap rate" when talking about residential (that no professional would use cap rate when talking about residential blah blah blah).

The fact that this site that you recommend uses cap rate and can apply to residential is what amused me.

Hope you understand now.  :)
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honobob

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Re: What to do with my rental?
« Reply #12 on: March 02, 2014, 09:05:37 AM »
Also I lol'd at honobob's site saying "CAP RATE Per Year (NOI/Initial Invest)" when it can be used for SFRs, a term he rails against using.  ;) 


 If you can find where "MY" site says 50% of gross rents=NOI then LOL.  Find any publication that defines NOI as 50% of gross rents.  My site uses actual numbers and categories to get to NOI.  For fun go back and enter a total of 50% of gross rents but change the amounts several times in each category.  Try 50% all in vacancy and collection first.  Then say 10% v/c and spread the 40% among the categories.  DIFFERENT result each time.  It does matter what the 50% is attributed to.  So even if net operating income of ALL properties would magically be 50% it matters how that 50% is allocated.  Plus just for comparison you'd want to know why one expense category was so high.  Is it a correctable expense?

I always said you could derive a cap rate on a single family property but questioned why you would go to the trouble?  If you don't know what cap rate the market is buying at you just have a "sweet 11%" cap but no clue.  Just because you're buying at 11% doesn't mean the market isn't buying at 15%.  Now if like in commercial properties there are publications that analyze market transactions for single family homes please show me. 

This is why trying to use an incorrect method to get a NOI to then get a cap rate ends up with a crap rate.

Reread my post.  I'm not talking about the 50% rule, nor was it even mentioned, I'm talking about its use of the term "cap rate."

You rail against the 50% rule, yes, but you've also ranted about the use of "cap rate" when talking about residential (that no professional would use cap rate when talking about residential blah blah blah).

The fact that this site that you recommend uses cap rate and can apply to residential is what amused me.

Hope you understand now.  :)
Please explain how "cap rate" is used and applied in context with residential real estate.  I've been doing this for over 40 years and the only time I've heard people talking about a residential "cap rate" has been on the internet.  I don't know any professionals that apply or use it.  It seems to be mentioned among people that don't understand the concept.  Again, yes you CAN mathematically calculate a cap rate but then EXACTLY how would you apply or use it?

arebelspy

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Re: What to do with my rental?
« Reply #13 on: March 02, 2014, 09:20:10 AM »
We've done this dance before.

Go read your last locked thread, where I quoted experts talking about it.

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honobob

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Re: What to do with my rental?
« Reply #14 on: March 02, 2014, 09:49:52 AM »
Locked because no one including you could/would answer the question.  Please tell all the real estate newbies exactly how you apply a cap rate to residential property.   Then let's have a civilized discussion of the merits.  I might learn something.  I've searched the forum and have not seen anyone come up with an explanation.   Why the evasiveness?
« Last Edit: March 02, 2014, 10:15:21 AM by honobob »

arebelspy

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Re: What to do with my rental?
« Reply #15 on: March 02, 2014, 09:59:03 AM »
It was indeed answered.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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honobob

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Re: What to do with my rental?
« Reply #16 on: March 02, 2014, 10:17:00 AM »
It was indeed answered.
I didn't see it anywhere.

LukeS

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Re: What to do with my rental?
« Reply #17 on: March 02, 2014, 02:26:52 PM »
hw do u use a residental crap rate?

Another Reader

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Re: What to do with my rental?
« Reply #18 on: March 02, 2014, 03:02:41 PM »
Residential crap rates have to do with how fast your tenants crap up your rental home.  The higher the crap rate, the faster your carpet and paint deteriorate and the more money you are going to put in the place.  I did not see a chapter in Honobob's book on the residential crap rate.  I presume that's because his tenants are perfect, and never damage anything.  After all, he invests in heaven, and only the best tenants get into heaven. 

honobob

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Re: What to do with my rental?
« Reply #19 on: March 02, 2014, 03:59:01 PM »
After all, he invests in heaven, and only the best tenants get into heaven.
If you weren't a regular church goer you'd be surprised how well that threat works.  But I'm invested in hell too.  Remember, I've had the Vegas property since 1994.  Different kind of threat there though.  Ain't nobody going to heaven there.  Devil emoticon.

honobob

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Re: What to do with my rental?
« Reply #20 on: March 02, 2014, 04:05:21 PM »
hw do u use a residental crap rate?
Raspy voice..  ."Luke, I'm your father"   or want to be.  That is too cool!

honobob

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Re: What to do with my rental?
« Reply #21 on: March 02, 2014, 10:27:16 PM »
We've done this dance before.

Go read your last locked thread, where I quoted experts talking about it.
Are you talking about the Ali Boone post?  She's a 2 year expert!?  And here are the comments correcting her post that she agrees to and are pretty much what I've been saying all along,
Ben Leybovich March 31, 2013 at 4:30 pm
CAP rate metric is used to peg a value to a piece of income-producing real estate based on its’ income as represented in the NOI. It is used exclusively in the multi-family commercial and industrial spaces. The value-setting mechanism in the SFR space is a function of the comparative market approach and not the income. Trying to utilize CAP rate analysis in the single family space is highly misleading and impractical. Hope this helps 
Frank Gallinelli March 31, 2013 at 3:53 pm
@Ben Leybovich raises a very good point here, and explained it very well. Cap rates are essentially a market-driven metric — a market cap rate represents the rate of return that investors in a particular location are actually achieving with a certain property type (office retail, etc.). As such, you really can’t describe a rate as being high or low universally. A 9% cap rate on a particular property might seem very high to an investor in midtown Manhattan, while the same rate could seem very low to someone in Upper Dry-Rot County.
I don’t want to invent any new terminology (we have enough already) but perhaps a way to wrap your mind around this is to start by recognizing that the market cap rate is, as I said, the rate of return other investors are actually achieving for a given property type in this location. Then, when looking at a particular property, calculate its cap rate and ask, “Is this property yielding a market cap rate, an above-market rate or a below-market rate?” I think describing a property as being above or below the market rate will tell you more than describing it as having a high or a low rate.

Retireme32

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Re: What to do with my rental?
« Reply #22 on: March 04, 2014, 04:05:04 PM »
Honobob,

okay so no using cap rates on SFR. Fine. Got it. And no using cash flow to define whether or not my house is profitable. But, I was looking to use this house in the long run to creates passive stream of income to substitute part of my monthly income upon FI so that  not all of my monthly expenses were paid for by stock withdrawals. Is there anything wrong with that plan? I guess what I hear you saying is that I'm more interested in cash flow than profitability and I'm still saying why can't we look at maximizing both? If I redo my leases to not include utilities and raise the rent I can stop coming out of pocket each month to keep this house afloat and I can start bringing in $200-400 cash per month. I'll Have less to claim in taxes towards going against my future capital gains tax if/when I sell but as someone else here pointed out, I will be able to depreciate the value of the house over the years. So that's something. So I go back to my original question and assuming I understand now the difference between cash flow and profitability - what's wrong with my plan?

honobob

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Re: What to do with my rental?
« Reply #23 on: March 04, 2014, 04:56:03 PM »
Honobob,

okay so no using cap rates on SFR. Fine. Got it. And no using cash flow to define whether or not my house is profitable. But, I was looking to use this house in the long run to creates passive stream of income to substitute part of my monthly income upon FI so that  not all of my monthly expenses were paid for by stock withdrawals. Is there anything wrong with that plan?
1.  No cap rates on SFR.  CHECK
2.  Cash flow does not equal profitability.  CHECK
3.  Higher long term rent growth.
4.  Appreciation RULES! 

If you have the rent growth then when you want the money it will come ROLLING in. 
If you have the appreciation you can spend on that money.  As rents increase borrow as much as the higher rents will allow and pocket the money. 

I started early, 25, and my $2,000 down resulted in an increase in market value from $35,000 to $125,000 in less than 2 years.  I was still cash flow negative and could have cashed out for about $80,000+ but what would I do with the money?  I could have made WAY more money but I would have been OVERleveraged.  In hindsight it would have worked out for me but...but.. if it hadn't I'd been screwed like a lot of greedy people have been.  In just a few years, because of 6-7% rent growth I HAD cash flow that I diverted to another non cash flowing property that soon cash flowed and put the cash from the first two properties towards the next NON cash flowing property and so on.  At any time I could have cashed out or just started spending the cash flow.  I had a professional career that paid Bay Area salary so the negative cash flow was returned to me in tax relief. 

Now I'm ER and FI.  I have money rolling in from my earlier NON cash flowing properties and my rents are increasing 6-7% a year and my equity is in the lovely, lovely millions and appreciating 9-11% a year.  I don't care what the stock market is doing because my properties have NEVER been worth less that I've paid for them and my rents have NEVER decreased.  Might have stayed flat for a couple of years.

Use the analysis that I provided.  Enter 1% increments in the rent growth and appreciation.  You'll see that 1% in real estate is worth WAY more than 1% in stocks. 

So, yeah, your plan is good if you have the rent growth and appreciation.  Do the math!  ALL the math.


arebelspy

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Re: What to do with my rental?
« Reply #24 on: March 04, 2014, 05:06:03 PM »
My apologies on that long derailment in your thread Retireme32.

Getting back on topic...

This, still:
What's the total fair market rent on the property? What do you think you could sell it for? Everything else is more or less details.

+1. Some fairly important details, but usually that's the first driver of the discussion.
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Retireme32

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Re: What to do with my rental?
« Reply #25 on: March 04, 2014, 07:21:39 PM »
Honobob,

Thank you for your help. One more question, what do you use to prove that your property has increased in market 2? Are you using things like zillow? Recent in the neighborhood? Tax assessment? Neighborhood growth rates?

arebelspy

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Re: What to do with my rental?
« Reply #26 on: March 05, 2014, 07:27:01 AM »
Honobob,

Thank you for your help. One more question, what do you use to prove that your property has increased in market 2? Are you using things like zillow? Recent in the neighborhood? Tax assessment? Neighborhood growth rates?

Honobob has, unfortunately, been banned from the forums for repeated violation of the rules.

But I know he has, in the past, recommended http://www.neighborhoodscout.com/ as a resource. (Though I'm personally not a fan of that site, I will toss it out there.)

My answer to that would be: When you have your finger on the pulse of a market, you'll know when it's going up, down, sideways, etc.  You'll see what's becoming available on the MLS, how asking prices per sqft are changing per neighborhood, how much inventory is available, how many sales there are, what the distressed property discount is, etc. etc.

You won't need a site to tell you a single number that is most likely very wrong, you'll run comps and look at the market to see how your property's value has changed.

It also sounds like, since you've ignored the "what's it cost and what's it rent for" question three times, that you know it doesn't make sense financially, and you're trying to justify it making sense via appreciation.  I'd caution against that, but either way, best of luck.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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Mazzinator

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Re: What to do with my rental?
« Reply #27 on: March 05, 2014, 11:44:22 AM »
Quote
Honobob has, unfortunately, been banned from the forums for repeated violation of the rules.

Praise the Lord ;-)

Another Reader

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Re: What to do with my rental?
« Reply #28 on: March 05, 2014, 12:03:18 PM »
You banned Honobob??

Then it would not be fair to refute the following with the facts:

 "I don't care what the stock market is doing because my properties have NEVER been worth less that I've paid for them and my rents have NEVER decreased."

Even in San Francisco and Honolulu, rents and values go down.  And they have done so on multiple occasions in the last 30 years.  The drops are less severe and last for shorter periods, but they do happen.

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Re: What to do with my rental?
« Reply #29 on: March 05, 2014, 12:25:55 PM »
On a serious note.. (And disclaimer, i'm NOT an expert, still learning myself) But, even though i don't live in Honolulu, I do live on the same island. And i can tell you the market out here is much different than say middle america.

For example, even in my hood the houses still are not selling at their ~2008 peak...like $200k less!! They are now selling by bidding wars at ~$50k higher than asking price and rents are less than .5% not to mention the $700/mn HOA.

I'm not trying to pick on anyone, just to make note that each market is different and it is best to base your decision on YOUR market... Which brings us all back to this...

Quote
Quote from: arebelspy on February 22, 2014, 05:46:14 pm
Quote from: KingCoin on February 19, 2014, 04:31:53 pm
What's the total fair market rent on the property? What do you think you could sell it for? Everything else is more or less details.

+1. Some fairly important details, but usually that's the first driver of the discussion.

ETA: also consider the 1031 exchange to avoid taxes..something to at least look into.

Quote
In effect, you can change the form of your investment without (as the IRS sees it) cashing out or recognizing a capital gain. That allows your investment to continue to grow tax deferred. There’s no limit on how many times or how frequently you can do a 1031. You can roll over the gain from one piece of investment real estate to another to another and another. Although you may have a profit on each swap, you avoid tax until you actually sell for cash many years later. Then you’ll hopefully pay only one tax, and that at a long-term capital gain rate (currently 15%).
« Last Edit: March 05, 2014, 12:28:39 PM by Mazzinator »

arebelspy

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Re: What to do with my rental?
« Reply #30 on: March 05, 2014, 01:05:17 PM »
You banned Honobob??

I wouldn't say I personally did, but Honobob was banned by the moderation team after multiple warnings spanning several months and continued violation of site rules.  Hopefully nothing more needs to be said about that.

While I won't comment personally, I don't think Mazzinator is alone in his or her sentiment.

Nevertheless, honobob's assertion on his personal property values could be correct, if he bought at a low, it went up, and even on the downswings never went below what he paid.  His claim that his rents have never decreased is much more unlikely, but I suppose possible.

Still, just because his may have never done that, it's sort of disingenuous to use that as an example, as obviously all of those properties won't be like that - as AR points out, rents and values can go down.
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Re: What to do with my rental?
« Reply #31 on: March 05, 2014, 04:25:13 PM »
I'm sad to see bob banned because he represented a different, yet still valid and profitable, investing style.  And I think his opinion was valuable to new investors because it shows that there is more than one way to buy and hold.  And that rules of thumb (1%, 2%, 50%, etc) need to be put into context when evaluating a property.

As for his claims of increasing rent and prices, my anecdotal experience supports all of it.  No vacancy.  High rent growth (10% annual past 2 years).  Great appreciation (15% per year).  Sure, the gravy train may slow down at some point. And yes, price decline is possible (~5-10% during the most recent bubble).  But long term, I think this is a very profitable way to invest if supported by fundamentals (population growth, etc).

Personally, I'm grateful he was on this forum because when I learned about rules of thumb, my properties did not meet them.  I considered selling.  Luckily I was cash flowing decently so I paused.  But then I met a few other local investors who confirmed bob's points, and they have made millions by holding a few properties long term (and selling or still holding).  Since I bought I'm cash flowing very well now, and looking forward to the next turnover so I can choose how much to raise the rent.  Another 12-15% will certainly be possible.

My sub market is different than his, but we are on the same islands and I suspect the characteristics of our markets are different than most of America.  But certainly there are pockets that are similar, and I would hate for new investors to ignore this investing style in search of pure cash flow markets.  I would hate for them to read any of Ali boone's articles and just go buy a turnkey if they live in an expensive area.

Every investor should be educated on different investing style, and decide which to pursue based on their goals. 

Yes, there were some confrontational threads with bob and others.  Hopefully that is not why he was banned.

arebelspy

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Re: What to do with my rental?
« Reply #32 on: March 05, 2014, 05:01:33 PM »
Yes, there were some confrontational threads with bob and others.  Hopefully that is not why he was banned.

It is not.  I too appreciated his viewpoint, even if I didn't always (rarely, in fact) agreed with it.  In fact it was because of the differing viewpoint he offered that he was given more chances than he probably should have been. 

There is nothing in the forum rules that you have to agree with anyone.   :)
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Re: What to do with my rental?
« Reply #33 on: March 05, 2014, 05:16:01 PM »
I don't disagree that it is possible to invest successfully that way.  I know a number of people that own residential property in San Francisco and the Bay Area that have done very well over time.  Time being 10 or 20 years or more.  But the key is "over time" and being smart enough to stay on top of the political folks that want to redistribute your success.  The Bay Area market is now largely dominated by Asian investors buoyed by the competition from newly minted tech millionaires.  As I have said many times, that mindset is multi-generational, cash flow for the children and grandchildren, not necessarily for today.  Prices here reflect that mindset. 

Prices and rents do go down.  Real estate is cyclical.  The cycles vary among markets.  Prices in Hawaii have also been depressed several times in the last 30 or 40 years.  When Japan imploded, that took prices down.  When things went bad on the mainland, prices went down.  It's not "different this time."

IIRC, Honobob has taken losses on properties.  It's his rah-rah cheerleader attitude that says real estate values and rents always go up and ignores the perils that disturbs me.  If a new investor blindly follows his lead, they could find themselves in a world of hurt.  A civil, rational conversation about the differing approaches to investing could have been helpful to people.  Sadly, Honobob's attitude prevented that conversation from happening.

Retireme32

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Re: What to do with my rental?
« Reply #34 on: March 21, 2014, 02:01:04 PM »
Honobob,

Thank you for your help. One more question, what do you use to prove that your property has increased in market 2? Are you using things like zillow? Recent in the neighborhood? Tax assessment? Neighborhood growth rates?

Honobob has, unfortunately, been banned from the forums for repeated violation of the rules.

But I know he has, in the past, recommended http://www.neighborhoodscout.com/ as a resource. (Though I'm personally not a fan of that site, I will toss it out there.)

My answer to that would be: When you have your finger on the pulse of a market, you'll know when it's going up, down, sideways, etc.  You'll see what's becoming available on the MLS, how asking prices per sqft are changing per neighborhood, how much inventory is available, how many sales there are, what the distressed property discount is, etc. etc.

You won't need a site to tell you a single number that is most likely very wrong, you'll run comps and look at the market to see how your property's value has changed.

It also sounds like, since you've ignored the "what's it cost and what's it rent for" question three times, that you know it doesn't make sense financially, and you're trying to justify it making sense via appreciation.  I'd caution against that, but either way, best of luck.  :)


Hello again,

Sorry I never meant to ignore the question but I think  I lost it in the mix of all the sidebar conversation in this thread.  My mortgage is $1675 (including taxes, PMI, home insurance).  My rent is $1550 and I include utilities so right now I'm renting at a loss of $140 per month.  This is largely due to the fact that I rented to friends initially b/c I wanted a "light" start to landlording so I've never tested my house on the true rental market - that is about to happen right now.  I am fairly certain though that I can charge about $300+ more than I currently do. 

SDREMNGR

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Re: What to do with my rental?
« Reply #35 on: March 26, 2014, 09:23:18 PM »
Get higher rent for yourself.  Paying taxes on excess rent is NEVER a bad thing.  It means you are making money.  I don't think your husband understands that accruing losses doesn't make any sense vs. actually making a profit.

For SFR or any home with a separate meter or billing (trash, water, electricity), have the tenants pay.  When your current lease is up or if they are on MTM, raise rents to near market.  If your "friends" balk at it, ask them when was the last time they gave you presents worth hundreds of dollars each month like you are for them.  You may feel bad but you should never have mixed friends with landlording.  I come in to save do it yourself owners all the time when tenant situations go bad.  Do yourself a favor and raise rents to just below market rent and you will always have good tenants who stay longer on average.

As for what is market rent, I'd say it is the rent amount you can get with a good credited tenant, within 1 month.   If people are not calling then it's too high.  If people see it and don't apply then it's too high.  If 100 people call on the first day of your ad, then it's too low.  You will get a feel for just how much improvements you should make for your particular neighborhood and home to maximize rent but not over improve.
« Last Edit: March 26, 2014, 09:27:14 PM by SDREMNGR »

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Re: What to do with my rental?
« Reply #36 on: March 30, 2014, 02:21:02 PM »
I just stumbled across the news:
You banned Honobob??

I wouldn't say I personally did, but Honobob was banned by the moderation team after multiple warnings spanning several months and continued violation of site rules.  Hopefully nothing more needs to be said about that.

While I won't comment personally, I don't think Mazzinator is alone in his or her sentiment.
... and one more thing needs to be said:  Mahalo nui loa!

I'm sad to see bob banned because he represented a different, yet still valid and profitable, investing style.  And I think his opinion was valuable to new investors because it shows that there is more than one way to buy and hold.  And that rules of thumb (1%, 2%, 50%, etc) need to be put into context when evaluating a property.

As for his claims of increasing rent and prices, my anecdotal experience supports all of it.  No vacancy.  High rent growth (10% annual past 2 years).  Great appreciation (15% per year).  Sure, the gravy train may slow down at some point. And yes, price decline is possible (~5-10% during the most recent bubble).  But long term, I think this is a very profitable way to invest if supported by fundamentals (population growth, etc).

Personally, I'm grateful he was on this forum because when I learned about rules of thumb, my properties did not meet them.  I considered selling.  Luckily I was cash flowing decently so I paused.  But then I met a few other local investors who confirmed bob's points, and they have made millions by holding a few properties long term (and selling or still holding).  Since I bought I'm cash flowing very well now, and looking forward to the next turnover so I can choose how much to raise the rent.  Another 12-15% will certainly be possible.

My sub market is different than his, but we are on the same islands and I suspect the characteristics of our markets are different than most of America.  But certainly there are pockets that are similar, and I would hate for new investors to ignore this investing style in search of pure cash flow markets.  I would hate for them to read any of Ali boone's articles and just go buy a turnkey if they live in an expensive area.

Every investor should be educated on different investing style, and decide which to pursue based on their goals. 

Yes, there were some confrontational threads with bob and others.  Hopefully that is not why he was banned.
I've been dealing with his schtick for a number of years (including banning him at Early-Retirement.org).  While your real estate experience (so far) has anecdotal support from other local investors, Bob has major credibility issues with his data-mining and selective reporting.  You've apparently also avoided his personal (offline) attention, so you're able to maintain a much more objective perspective. 

Getting back on topic, I'd be interested to hear how your investors remember the Oahu landlording years of 1995-2000.  Very painful.  Our 25-year price appreciation has matched the rate of inflation, and right now it's getting a few standard deviations above that long-term average...

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Re: What to do with my rental?
« Reply #37 on: April 01, 2014, 12:52:10 PM »
Geez, that explains why Hono keeps "disappearing" everytime I find him .... oh well.

Nords

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Re: What to do with my rental?
« Reply #38 on: April 01, 2014, 05:18:03 PM »
Geez, that explains why Hono keeps "disappearing" everytime I find him .... oh well.
Try HawaiiThreads.com...

waltworks

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Re: What to do with my rental?
« Reply #39 on: April 03, 2014, 08:38:41 AM »
You need to look into the 50% rule. You are losing WAY more money than you think, because all sorts of big-ticket items are slowly wearing out (HVAC, roof, plumbing, etc) - and you'll eventually need to fix/replace them. I'd estimate (without knowing more particulars) that your total losses are more like $800/month.

That doesn't necessarily mean you need to dump the house, but you'll need some serious appreciation to get out of a $10k/year negative cash flow.

-W


Hello again,

Sorry I never meant to ignore the question but I think  I lost it in the mix of all the sidebar conversation in this thread.  My mortgage is $1675 (including taxes, PMI, home insurance).  My rent is $1550 and I include utilities so right now I'm renting at a loss of $140 per month.  This is largely due to the fact that I rented to friends initially b/c I wanted a "light" start to landlording so I've never tested my house on the true rental market - that is about to happen right now.  I am fairly certain though that I can charge about $300+ more than I currently do.