dummie investor?

[devo]

This is for all you math wizards out there. I was a music major, so take that for what it's worth...I need your help.

I keep hearing that I'm better off in the stock market than in RE.

About 18 months ago I decided to jump into RE investing. Just a toe in really, but I bought a single family home in a market distant from my own. Being in california, I just couldn't find a way to start with a negative cash flow of 2k. I borrowed about 30k from my primary residence (still at a 50% LTV...you know how rediculous it has gotten out here). I bought a home for 150k, 2 years new. I owe about 120k on that new first. Now of course, I wasn't real smart about it. I bought it at retail...I couldn't handle the thought of chasing distressed owners. Current value is comping out around 175k. It's not in one of those explosive markets, generally been slow, methodical appreciation (got real lucky last year, I guess, but I'm not planning for that to continue). By my numbers, accounting for 10% vacancy, 10% management, and 1% annually for repairs ( I haven't actually had any yet). I'm taking a cash flow paper loss that I figure to be between 3-400/month.

Thanks for hanging in there. Here's my question. Am i wasting my time/energy/money? I do plan to hold on for the long term. If I sold, it would be to 1031 into something else. The monthly loss is money that I'd be investing anyway. Considering that a tennant is paying most of my mortgage and I'm building equity, how would this investment fare against a reasonably balanced portfolio of the same 30k and 400/month invested in the market? Even if you assume 3% market apprec. and 3% rent increases annually, either I'm not savvy enough with numbers (I'm not!), or this thing still comes out nice for me.

Again, I understand all the RE gurus..."make money on the buy". I know I didn't, but is this really a terrible deal?!?

What say you...tryan, arif... and you other re investors.

I'd appreciate the input.

devo

[Ed_The_Gypsy]

devo, my only problem with real estate in general is that it is not very liquid.

Still, if I could count on a job in one place indefinitely, I would consider active investment in RE. We have learned from personal experience that it is best to live near our RE investment, so it would be hard to get geographic diversity. Also, our local market might be a good place for us to work, but maybe not for RE returns.

We do have exposure to RE in our Vanguard REIT index fund, which has been very good to us and is very liquid, of course.

Ed

[simple girl]

Well, I'm a novice RE investor, too - but wanted to offer this calculator that might be helpful??

http://www.goodmortgage.com/Calc_inv...t_property.htm

You may also want to post on mr.landlord.com. FYI, some can be harsh in their feedback...but they are seasoned RE investors there...

[Sam]

Devo,

I don't invest in residential RE. I do own my home. My calculation says that I'm better off not owing my own home, let alone owing one for rental.

My calculation says that the property has to appreciate at least 4.5% annually (1.5% over inflation) in order for me to break even in the long term (15 or more years). 6% if it's a rental property. So, if you can find a market where anticipated appreciation is high, then I think you're ok. I have been in Houston since 1991, and RE appreciation barely beats inflation. It's not a winning situation here.

[modhatter]

Well, look at it this way. If you were to invest $30,000 in the stock market for 30 years and receive an average of 8% return, it would grow to $301,879. (not counting inflation) Now if you keep the house and run a negative of $350 a month for thirty years, you will lose $126,000.

There fore in order for the investment to make sense your house at the end of 30 years would have to be worth more than the following. Your tenants will be paying off your $120,ooo mortgage during that time. (though you can count on making the payment yourself without rent probably at least once a year)

$301,879
126,000 (loss)
_________
$427,000

Your house would have to appreciate at least 4% a year to make any sense. Also consider this is not a passive investment. It requires a lot of work. It is probably more secure than stocks (provided you have the cash to cover your mortgage should you have to wait for a tenant)

The other liklihood is that as time goes on your rents will go up. Your expenses and taxes will also go up, but usually not quite as much. If you are handy and can do the repairs yourself all the better. If not, you will be bled to death in costs from contractors.
_Years_______
1 104.00% 150,000
2 104.00% 156000
3 104.00% 162240
4 104.00% 168729.6
5 104.00% 175478.784
6 104.00% 182497.9354
7 104.00% 189797.8528
8 104.00% 197389.7669
9 104.00% 205285.3576
10 104.00% 213496.7719
11 104.00% 222036.6427
12 104.00% 230918.1084
13 104.00% 240154.8328
14 104.00% 249761.0261
15 104.00% 259751.4671
16 104.00% 270141.5258
17 104.00% 280947.1869
318 104.00% 292185.0743
19 104.00% 303872.4773
20 104.00% 316027.3764
21 104.00% 328668.4715
22 104.00% 341815.2103
23 104.00% 355487.8187
24 104.00% 369707.3315
25 104.00% 384495.6247
26 104.00% 399875.4497
27 104.00% 415870.4677
28 104.00% 432505.2864
29 104.00% 449805.4979
30 104.00% 467797.7178

[devo]

Ed,

Agreed, not liquid...that's part of what I like about real estate and I think part of the real truth about how people are making big money here. It's very slow, very emotional, and ultimately inefficient. As long as your in for the long haul, I think it's good. I'm not looking to get rich at it...until I'm 55. I'm hoping to very slowly and methodically build up a dozen or so properties. If by the time I'm 55, I have 5k (today's dollars) in positive flow, all my other investments pensions and so on will be gravy. I've got 20 or so years to get it done. I'm a teacher, so I'll do my due diligence over the summers. It's my own little summer hobby job.

Mod, thanks for running the numbers. The only thing I can see where my numbers diverge from yours is that I'm hopeful that rents will catch up in the next five to ten years where I'm not negative anymore. Maybe a small detail, but I think one that makes a dent fairly quickly.

Thanks again for the help guys/gals, I'll look into the landlord site as well...thanks!
d

[Craig]

We're doing the same, little by little. The 1031 option is a very nice feature of real estate, as is the opportunity to move into our rental homes, convert them to principal residences over time, and thereby have the option to sell them with little or no taxable gain in the future. The illiquidity of real estate can be a challenge when one is otherwise illiquid, but these taxation options are a great, and often overlooked benefit to this class.

[tryan]

My guess is that the stock market will "beat" any negative cash flow RE. Your accepting a monthly lost in RE - at least for the next ~5 years - while Mr. Market has an upward bias.

But it sounds like you want to set your self up in RE for the long haul ... soooo the question is can we get the cash at least break even until rents/inflation "catch-up". I'll assume taxes and insurance are in the mortgage payment and covered by the rents. 10% vacancy seems high .... I run around 5-6% vacant. But the maintenance seems low (1%) .... who's taking care of the lawn/snow? Might want to consider dumping the manager when his/her tenant leaves. Just a few things to try for the near term.

I would wait until this one is generating a positive cash flow before buying another. Subsidizing a dozen people's housing is a tough way to FIRE.