Help structuring my investing career...I'm at a crossroad.

[thefed]

I really admire most of you here, and take most of your advice to heart. Let me know what you think...

Here's the situation:

I'm 22 and own two houses. I owe 115k on a 140k primary residence. I also own a 45-50k property outright. It has been recently rehabbed and is rented at 500/month to a good friend. I have a 40k line of credit available on the investment property, and cant decide what to do.

I want (I WILL) retire at the age of 45....so I have 23 years to go.

SHOULD I:

1) Hang on to the investment property and let the rent bring me in a cashflow of 250/month. Use my 40k Line Of Credit secured by this property to buy another rehab like this one. (The negative here is that the home isn't in the best area. Im a bit hesitant to rent it out to someone other than my friend....it seems like it would be trouble. It may be stereotyping,but thats how i feel. Then again, this level house is almost the only kind that provides me with a 250/month cashflow). This scenario makes me think I would continue on this same path for a while. Buy,rehab,rent, borrow, repeat. It would/should help me build up a stable of rental properties and cashflow.


2) Sell the property, likely netting a 15-20k profit, and move on to another rehab. This would reduce holding costs of the next home as I would be paying all cash instead of borrowing against a LOC. IT could take 6 months to a year to sell the home in my market.



I like the idea of leverage. But I also like the idea of maximizing profit on each deal (little/no holding costs).

I think by typing this out, I've answered my question....but your feedback is welcome.

[brewer12345]

So the rented house flows cash, right? What's the impetus to sell? Is it a hassle? You bought in Akron IIRC. There is a chance that some day (maybe) things will turn around with the local economy and te house will be worth more. In the meantime it spews cash and you can borrow against it. I don't think I;d be in a rush to sell, personally.

I also would not let the equity burn a hole in my pocket if I were you. If you find another attractive deal, great, but don't rush it. That's the best way to blow yourself up.

[thefed]

Quote:

Originally Posted by brewer12345 So the rented house flows cash, right? What's the impetus to sell? Is it a hassle? You bought in Akron IIRC. There is a chance that some day (maybe) things will turn around with the local economy and te house will be worth more. In the meantime it spews cash and you can borrow against it. I don't think I;d be in a rush to sell, personally. I also would not let the equity burn a hole in my pocket if I were you. If you find another attractive deal, great, but don't rush it. That's the best way to blow yourself up.

Thanks brewer...thats the way I'm leaning. Its not a hassle now, but I do want to continue on to another deal (i have one in mind...might make an offer this week). And debt, regardless of what sort, is never appealing to me.

[bwtucker83]

This is how i look at it. You could have the 250 cas flow now if you want it, but now is not when you want it. You want cash flow when you retire. The more money you have at 45 to retire on the more cash flow you can get. It is not the the amount of money you have but the amount of money you control. I would take the profit from the house and double it by doing another rehab (if that is what you are good at, and know how to do).
Or if I were in your shoes(which i'm in a similiar situation) I would find an undervalued apartment building, buy it on smokin terms, maximize rents and sale it for a sweet gain. I'm actually looking for partners to invest with in apartments right now. I've got my eye on some sweet deals but I have a feeling I will need more capital to get them (really besides the point). I have no doubt that the easiest way to double your money(on a yearly basis) is through apartments. I would not worry about the cash flow, I would take profits and move onto the next deal. That is my two cents. At least you have the option, sounds like your on the right path.

Brad

[justin]

How many friends you got willing to live in the ghetto and pay you rent?

My FIL got sucked into the landlord business and bought 10 rentals in the slums. On paper, they should have cash flowed.

Problems were:

Tenants constantly late w/ rent.
Vacancy rate was ~60% when trying to rent at $400-500/unit
Tenants always stole or destroyed property when they vacated the unit
Dated housing required constant repair/maintenance
Type of tenants were messy and ordinary wear-n-tear was extremely high
Many times a 2 BR unit would house 5-8 folks - more wear-n-tear

FIL's a carpenter and jack-of-all-trades, so he did all the maintenance/repair work himself, but it was a constant job every weekend and many weeknights after his 9-5.

Bottom line, he was constantly pouring time and money into these "investments" until he sold out and barely broke even (ignoring all his additional capital contributions).

This was in Raleigh, NC, not some bubble area.

Just be aware that 1 unit may be easy, but when you multiply it by many, it can get hard, especially if you're targeting the bottom end of the socioeconomic ladder. Just IMHO.

[Arif]

thefed,
Right now you have your training wheels on (with your friend as a tenant). I would buy another rental and rent it to the public, deal with all the headaches and then decide. Right now you've only experienced the good part of rentals. Let me know how you feel when a drug dealer takes over your units and installs cameras to keep an eye on the place while he does his deals (true story). If your goal is to retire at 45 AND you can stomach the business I would keep buying homes like the one you have.
So let's say you need $1 million to retire and by buying rentals you amass $1.5 million in equity you could sell it all and pay the taxes (about $500k in depr. recapture, cap. gains, state tax, etc) then move it into something less management intensive. So basically you overshoot your networth goal in order to pay the taxes.
By the way it took my wife and I four years to reach what I like to call semi-FI. Our networth increased primarily from the real estate deals (not bubble areas)we were buying rather than saving although we were LBOM. Our plan also included moving to Panama so add a few more years to your plan if that is not an option. I think if you continue on the path that you're on, you'll be able to retire in way less than 23 years.



Just want you to be aware there is no free meal.

Also, I would ditch those LOC and lock in your rate with a second mortgage. Wachovia does second mortgages on rentals upto 90% state income. Might be an option in the future.

[califdreamer]

First of all, good for you for having two pieces of real estate at age 22. You are waaaay ahead of where I was.

I agree with the earlier piece of advice about going for equity growth instead of immediate cash flow. I would consider selling the rental house and re-leveraging into a fourplex (or something similar). Keep growing your equity. At some point you can hand over a lot of the day-to-day to a prop mgr as you get into a large enough number of units.

Study the market you'll be investing in. Does it look like it has potential for rent increases and appreciation? Consider looking out-of-area if your backyard doesn't measure up.

In a nutshell, consider:

1. forgoing cash flow for equity growth
2. buying multi-units instead of SFRs
3. if local, learning a lot by managing yourself in the early years
4. down the road when you reach critical mass handing over to prop mgt company

Nothing wrong with accumulating rehabbed SFRs, of course. Just not my bailiwick.

Good luck and congrats on your success to date.

[thefed]

I think I'm confused...I think.


I understand it's too easy with a friend renting, BUT since it's so easy, why sell THAT property? 250-300 cash flow for a year or 2 is super.

But the next one, probably a SFH in the area, will be on the market immediately, probably for a slightly smaller gain than I COULD expect, but to get rid of it in less than 6 months, what the heck.

Multi units seem like they make sense as far as having ONE roof, one location etc etc. Of course, to get one in a decent neighborhood will be lots more $$$.

Thanks for the input guys, I now have some more ideas....

[cute fuzzy bunny]

Wait until you have a fight with the friend/renter...

Its a simple calculation. Over the next 5, 10 years will you see better overall cashflow/investment return by keeping the property or by selling it and putting the proceeds elsewhere?

If the property itself is not expected to appreciate in value, then its really a no-brainer.

[thefed]

Quote:

Originally Posted by Cute Fuzzy Bunny Wait until you have a fight with the friend/renter... Its a simple calculation. Over the next 5, 10 years will you see better overall cashflow/investment return by keeping the property or by selling it and putting the proceeds elsewhere? If the property itself is not expected to appreciate in value, then its really a no-brainer.

Im not so sure about a 'no brainer'.

Look at it this way. As it is, renting for 500/mo to a friend (could charge 550 or more), I should clear 275/month (after paying myself back). That's 3300/yr. In 6 years, my only expense would be taxes at 80/month (if I apply the 3300/yr to my cash outlay....and pay myself back). I wont/shouldnt have too many major repairs, as everythign major has been handled (roof,sheetrock,electric,plumbing,hot water,furnace,damp basment,windows).

Then, I'd clear about 425/month....or 5k/yr.

So in 6 years, I could clear 40k, pay taxes on 10k, and have 30k. How could I make my 30k earn 5k/yr?

[cute fuzzy bunny]

Thats not a no-brainer?

By the way, dont fool yourself on the "no major repairs"...theres always something else that can go wrong...

[thefed]

Quote:

Originally Posted by Cute Fuzzy Bunny Thats not a no-brainer? By the way, dont fool yourself on the "no major repairs"...theres always something else that can go wrong...

i think looking at it that way is a no brainer, but you suggest that if it wont appreciate in value, its a no brainer. did you mean that if it wont appreciate in value, i should keep it? because i read it the other way...

[tryan]

I like #1 ... you've demonstrated the ability to identify decent flips, so stay with it. But you need to hold the property for at least a year to think about selling (otherwise you'll be taxed as ordinary income).

If you must sell before year - or when your renter gets tired of the neighborhood - do a 1031 exchange to keep the proceeds tax deferred.

Do this a few times and you'll be looking at much better neighborhoods!

Good Luck!

[cute fuzzy bunny]

Quote:

Originally Posted by thefed i think looking at it that way is a no brainer, but you suggest that if it wont appreciate in value, its a no brainer. did you mean that if it wont appreciate in value, i should keep it? because i read it the other way...

Ok then, you've fully thought the whole thing out!

Heres my bill.

But seriously...

I think you'll find your cash flow is going to be impaired by some small to medium sized items that will nibble at the fine return you're seeing. Maybe you and the friend have a falling out, he moves out, you cant get a renter for 3 months. New renter bashes 20 holes in the walls and lights the couch on fire. You're covered by insurance but its another 3 months while you get the repairs done before you can get a new tenant in. Some dirtbag moves in, their kid cuts themselves on something sharp thats leftover from a repair that you did and they sue you for $10k.

Hey...that sounds familar...oh yeah, its exactly what happened to my wifes ex father in law on one of his rental units in the last couple of years!

If I were you, I'd continue what it appears you've got a knack for (maybe a temporary knack), find 'em, fix 'em and take your profit. But perhaps you might look to a multi dwelling unit and eventually roll yourself up into a small building or a piece of land with 6-8 small rentals on it. Something central and manageable that you can then tap for cash flow. Then stand on that for a while and see how it goes.

[thefed]

thank you both for the input....

i gotta go pull out the thinkin' cap....

[astromeria]

Nibbling at the margins, it looks like your equity in the primary residence is a bit less than 20%. If you're paying PMI, shouldn't you slap some money onto your mortgage holder to get rid of it? (Or have the rules changed and 20% equity isn't required to avoid PMI?)

[thefed]

Quote:

Originally Posted by astromeria Nibbling at the margins, it looks like your equity in the primary residence is a bit less than 20%. If you're paying PMI, shouldn't you slap some money onto your mortgage holder to get rid of it? (Or have the rules changed and 20% equity isn't required to avoid PMI?)

I actually never had PMI to begin with. I had 2 loans....commonly referred to as an 80/20 to avoid it. Then I refi'd last year at 5.5% for 15 yrs. THEN I took out a HELOC for 15k which I partially used for the house I just bought, and partially for my newest business venture (air duct cleaning).

[astromeria]

Ah, you young whippersnappers and your newfangled loan deals I never had anything more interesting than at least 20% down and 15 or 30 years fixed.

[cute fuzzy bunny]

Waaahh...when I was a kid, we were lucky to have a 30 year 80% mortgage...and if we got it, we were HAPPY. Many a day we spent walking in waist deep snow to the bank, uphill...both ways...just to have a LOOK at the new 30 year mortgage rates...