Mortgage Rates - Too good to pass up?

[msbearkeley]

....or are we Real Estate addicts? Has anyone changed their RE strategy to take advantage of low RE prices and low mortgages?

Background
We are 14 months to quitting our FT jobs and another 12 months to fix up our waterfront property to sell (home sales exclusion and desire to live on the property a year before we cash out).

We ideally wanted out of rental properties and sell off all, but with markets so sour, we've figured out a way to pay off mortgages on rentals to avoid financial pressures and just live off of the rental income. BUT....now we are considering buying another rental! With the market so low and the mortgage rates so low, we could easily cashflow....but is it the right thing to do or are we just asking for more headaches, now that we finally are comfortable with our RE and actually are seriously planning to retire (like we originally planned for 2008!)

PROs -

• Pretty confident we will make money if we bought another rental - we know the area/rental market and houses are just so cheap!
• Rates are low....leverage would be good to offset income when we retire

CONs -

• Our preference was to get out of being landlords but just can't so it's going to be our retirement income...is the additional risk silly? (We've screwed up on some RE purchases before, so is this another one?)

 

[W2R]

Our preference was to get out of being landlords

I agree with that sentiment - - being a landlord is a job, and personally I don't want anything to do with it. So, I'm "passing up" the opportunity to do something I don't want to do.

I think it's your choice as to whether or not the opportunities balance out your desire to get out of being landlords or not. Only you know what would work best for you, IMO. For me this is no temptation.

 

[chinaco]

The government is doing all it can to encourage such behavior.

I do not know anything about your situation... but I think all of us are adapting to what is happening in real estate.

I do not run a rental business... so I do not have experience with it.

But... for a small operator that has good credit, the capital is there and prices are low!

I think there is a (personal) trade off besides the business risk... Time! Since it seems like you have or had a goal to exit the business and FIRE.

I would start by trying to figure out what kind of net profit I would need to get from the property to make it worth my investment and risk... and try to forecast the number of years it might take get to the return and exit (be sure to include exit costs).

I would do (realistic) projections (optimistic, expected, pessimistic).

Assuming it all works out... how many years will you need to own it and run it as a (successful) rental to achieve your profit goal?

 

[l2ridehd]

chinaco, your analysis is spot on. I currently have two rental properties and am looking to add a third. The ROI even at a pessimistic view is better then most any other current investment. It's a market and investment I know better then any other, it's an investment that has considerable leverage and it's no harder to manage three then two.

To me the real con's are lack of liquidity and the return only works out well longer term.

So my answer would be, if your plan is to keep your current rentals, you understand the market, willing to male the required time investment, you will find no better time to add to your portfolio.

 

[bearkeley]

Assuming it all works out... how many years will you need to own it and run it as a (successful) rental to achieve your profit goal?

That's actually what makes it so tempting! You can buy a house for 85k and rent it for 1300 easily (we have a house down the street that has rented for 1500 - 1600 for the past 8 years; max of 4 months vacancy). So....with the positive cashflow of about 1k / month, seems like a no brainer, right? We're managing it on our own now, but plan is to turn it over to a PM when we FIRE (we wanna be like Billy and Akeisha when we grow up)

But, the last time we purchased something that seemed to good to be true, it was (2006!)! Fortunately, we have gotten it to a pretty stable point by paying down the mortgage. Appreciate the quick feedback....always helpful to get the different perspectives and get the inspiration...or the smack on the head that we may need!

 

[Lsbcal]

I'd look at how much RE is represented in your portfolio. It's a good idea to have different asset classes and too much of a good thing is not a good thing.

 

[Nords]

....or are we Real Estate addicts? Has anyone changed their RE strategy to take advantage of low RE prices and low mortgages?

I think the question you should try to answer is "When do we have enough money?"

We've been looking at refinancing mortgage rates, but the savings are getting smaller and the payoffs are getting way longer. Meanwhile we're not spending what we have.

You were also planning to ER in 2008. I can certainly understand the reason for the delay, but it's also way too tempting to fall into "Just one more year" syndrome.

So... do you really need to take on one more responsibility? Or are you ready to spend your time following Billy & Akaisha around the globe?

 

[Lsbcal]

... Meanwhile we're not spending what we have.
...

Out of curiosity, why not?

 

[l2ridehd]

bearkeley, where can you (what city/town) buy a home for 85K and rent it for $1300 a month? I want two or three.

That says a $17000 investment (20% down) will provide positive cash flow of about 5K a year after payments on a 15 year mortgage and taxes and all expenses, which is a 25% plus ROI in year 1 on your original investment and in 15 years you own an asset worth 117K at 2% annual appreciation plus yearly tax write offs. And once you build a couple year cash reserve you could pay the mortgage off in less time and use the rent to increase your income.

I own a couple rental properties and with that type ROI, it's a no brain-er.

 

[OrcasIslandBound]

I believe that investing in a real estate rental that has positive cash flow from the "get go" right now is primarily a risk of continued downturn in the economy.

If things get a whole lot worse, say 3-5 European countries default on their bonds, and our own stock market tanks, and then if our unemployment goes up to 15% for the next 10 years, I would expect rents to decrease and property values to decrease. People that are highly leveraged are the first to get hit again in this scenario, IE those whose rentals made sense to buy with little down + quickly generated positive cash flow will default first. I'm not sure if the laws are changing to require those folks to "throw in" additional money from other sources to back up their investments to keep taxpayers from having to cover these losses, but morally they should. This is the only downside that I can see, other than a bit of time to take care of the rental.

 

[calmloki]

Our strategy was to sell a place per year over about a ten year span, starting around my age 59. Thought was that we would sell the further away and more problematic first, ending up with rentals just a couple miles from home at the end. We did manage to sell a two house parcel at a nice fat price really easily (mostly the value was in the land) and then a single family house for an ok price, but with a lot of work and a year of marketing. Since then our exit plan hasn't worked out as expected - we have places that bring in a tidy amount of rent, we price them so people can make a profit as landlords, but everyone is looking for the screaming deal from a distressed seller. Given that we aren't in any distress we aren't selling.

Result is that each year we add a bit more to the pile and have a year less retirement time to consider funding. Or maybe we are retired - it's more difficult to determine when you are your own boss. We did engage a manager, which takes a large toll on the profits and means that the tenants aren't always treated just as I would treat them (in some cases not a bad thing). When we are around the rentals I find a lot of maintenance and improvements that need doing - fresh eyes.

So yeah, rental real estate is great and a couple renters is about the same work as ten - and then you realize you can have one roof cover ten renters and you move into multiples - but the exit takes a fair bit of unwinding. Not like putting a sell order in in the morning and looking at your new bank balance after three days.

Oh - and I keep looking at property for sale by, you guessed it, distressed sellers. Really hard to keep the wallet in the pants, but it seems like funding other buyers of those distressed properties is a better plan for us - the interest earned is fat and we may end up owning more property anyway - by default!

 

[chinaco]

.. So....with the positive cashflow of about 1k / month, seems like a no brainer, right?...

This could just be your enthusiasm speaking... or perhaps speaking more directly to your specific situations.... but few passive investments or businesses investments are no brainers.

But I do catch your general point.

The devil is always in the details... one of which is the stage someone is at in accumulation or even decumulation... and their situation, experience, and other life goals.

It seems to me that this type of business investment requires time to make it work... unless one get's lucky and housing prices miraculously pop (on the upside) in a few years.

However, my POV might be different if I were 35 and working toward FIRE instead of 55 and solidly FIREd!

I do not want to be tethered to a business. I am working toward positioning myself for more travel. To make it work would require effort and impose certain constraints that I would not be willing to make.

 

[W2R]

Meanwhile we're not spending what we have.

Out of curiosity, why not?

Nords can speak for himself, but here's my take on it. Why should he spend an afternoon shopping at the mall or spending online, if he would really rather spend that time surfing? Makes sense to me, anyway.

"Pray for surf", as we used to say back in the day.

 

[Lsbcal]

That would be a good reason to not spend -- too busy having fun. In our house DW would have no problem spending the surplus .

 

[SVHoper]

Yes I am another one who likes real estate and view it as a bond replacement during accumulation phase - just in process of buying 4th since May 2009. My reasoning sounds similar to yours - if they flow enough cash to pay for themselves, so we own them in 15 years - can't go too far wrong. This last one is less of a good investment decision and more just locking in our "final" home - has a bit more land than our current home, to cope with future RV, high walkability, moving out of a stellar school district that we will no longer use and a 30 year interest rate (even at investor rates) lower than on our current home. Though I also expect this to appreciate well over 20-30 year period... not making any more land within walking distance of downtown.

I figured I had at least 1 year of low interest rates and 2 years until we can move (school district) but found what we wanted in the first month of looking - so taking the plunge.

Intent is to own all houses at retirement (15 years for spouse) - may keep mortgage on principal residence. Excluding principal residence, real estate equity is about the same as total stock portfolio.

Issues that I see:
* Management of properties when I no longer can or want to.
* Estate planning issues - nice to give kids a stepped up basis, but division of estate between 3 kids may be a trustee headache.
* Just started to look at trusts
* A bit higher leverage than comfortable until I sell one property. Then should be OK unless there is another crisis.
* Would need to sell at least one property if we had a personal catastrophe.
* I need to manage the transitions (capital gains) of principal residence to investment property and vice versa
* Probably would generate less cash than equivalent in bonds
* Stock market being low makes this a harder decision than when it was high... but hoping leverage in Real Estate (and capital gain ) will make it OK
* As I get closer to retirement I plan to reconsider ratio of real estate to bonds and may exchange the most troublesome (lower income tenants) property for bonds.

 

[Lsbcal]

Yes I am another one who likes real estate and view it as a bond replacement during accumulation phase ...

I'm guessing you are talking about RE in or around Silicon Valley which has been pretty hot for decades with occasional cool spells. I'd be very careful about that "bond replacement" assumption. In no way is leveraged RE an equivalent to investment grade and above bonds. And what about the earthquake insurance?

BTW, I lived in that area for 25 years.

 

[Aiming_4_55]

I wrestle with the opportunity... buy more rental property? upgrade principal residence? re-fi for lower interest rate? This is after max out of TIRA and Roth. Then the next question is the Roth worth it at my current tax bracket.... or just pay off the rental mortgage and be debt free completely except for monthly expenses.

For me, I'm staying flexible and highly selective, if I buy another rental property, it'll have to have solid return (10%+ cap), good location, close to home (within 10 miles), newer building, etc to name a few.

Then on the flip side... will the stock market run away in a few years for easy $$. Unfortunately, I don't see it either ways, so I stay openminded.

 

[arebelspy]

I'm with the buyers right now. Though for me it's more a matter of home prices too cheap to pass up than interest rates being too good to pass up.

If it cash flows enough, a property manager can deal with the headaches, if you don't want to.

No rush though, I think prices (and interest rates) will be low for a few years, at least, so you have time to find a good deal.

 

[calmloki]

BTW - for the multiple unit landlords among us - I have re-keyed all our locks so a single master opens all locks - MUCH handier to carry one key rather than a box full. The Kwikset tool and pin set cost under a $100 and was well worth the money, as I could change keys on apartments fairly easily. Still, it takes a flat place to work, good light, the removal of the lock set from the door and maybe 15-30 minutes. Sure quicker than going to Homer Depot and waiting for their key guy to do the work and charge $15 to re-key - and they don't have the skills to do master keying.

Kwikset has something new that looks well worth the money: Smart key. After mounting a Smart key lock you can re-key to a different key in seconds without removing the lockset. For $30 they sell a deadbolt with a hidden cylinder for a manager's master key as well as an exposed tenant keyway (Kwikset Key Control).

Very cool - here's a video of (Vinnie?) someone installing and using a Smartkey with key control and re-keying the lock. There is a tool that costs $15 or so that allows you to re-key even if the key that opens the lock went away with the tenant and you don't have a spare - does take pulling the lock though.

With this style lock you can give a key to someone - carpet guy for instance - then re-key back to something else or to the old code in a matter of moments. I'll be trying this out on our place down south, as most of those locks are Smartkey - I had re-keyed a normal old-style Kwikset for the gate to match the house but plan to change it to the more easily re-set Smart key. May start going this route as we run out through our existing deadbolt stash for the rentals as well.

Kwikset : Smart Security : Master Keying Alternative

Landlording.TV » Blog Archive » The Ultimate Landlord Lock: Kwikset Key Control Deadbolt w/ SmartKey

 

[slazenger]

....or are we Real Estate addicts? Has anyone changed their RE strategy to take advantage of low RE prices and low mortgages?

I'm not sure where you are located, but in general, the outlook on the housing market is grim. What good is a low rate, if the value of the house drops to half?

I'd recommend defense in this scary economic climate.

 

[Nords]

Nords can speak for himself, but here's my take on it. Why should he spend an afternoon shopping at the mall or spending online, if he would really rather spend that time surfing? Makes sense to me, anyway.
"Pray for surf", as we used to say back in the day.

That would be a good reason to not spend -- too busy having fun. In our house DW would have no problem spending the surplus .

Sorry, catching up on missed posts.

We live an extraordinarily frugal lifestyle... more like Amy Dacyczyn than "Millionaire Next Door". Part of it is being dual military-- we've both spent years living under conditions that would have federal convicts rioting in protest. (When your standards are "Oboy, fresh fruit!" and "Yay, no 12-hour midwatch tonight!" then it doesn't take much spending to make you happy.) Another part of it is the things that bring us value tend to be cheap: surfboard wax, family time, bandwidth, library books, volunteering, writing. (We buy 27" CRT TVs off Craigslist. We don't own gaming machines or high-end computers or HDTV. We have standard cable and cheap DSL. Our TiVos are two generations behind the latest tech. We grudgingly own pay-as-you-go cell phones but rarely use them. Spouse bought an $80 Nook off Craigslist several months ago and hasn't even paid for a single download yet.) A final part of that is living a green/sustainable life. We actually enjoy composting, vermiposting, recycling, and reducing our consumption. It's a challenge to find a good piece of used furniture on Craigslist instead of paying retail. And either piece of furniture is far better than what we lived with in the Navy.

When we retired in 2002, our mortgage payments were 40% higher than today. All of those refinancings have really loosened up our cashflow. Spouse's parents also unexpectedly vacated our rental home in 2006 after "retiring" there in 2001, which let us jack up the rent (and catch up on long-overdue maintenance). Our ER plans didn't depend on those happy surprises.

After over nine years of ER we're beginning to think that we have "enough". What happens, though, is that we save up for projected expenses. We regularly grow a car-replacement fund. When we moved into this house 11 years ago we knew we needed to start saving for a familyroom renovation. A few years after moving in we also knew we'd need to start saving for stamped concrete over the lanai/sidewalk's bad FuturaStone. We save the income on our rental property for upgrades between tenants. We fence most of these savings off from our ER portfolio and spend them when the time is right.

2008 turned out to be a great contractor market for stamped concrete. And now that our pet bunny has passed on, we've been spending all of our familyroom renovation fund (and then some). Last month we also finally gave up on our '97 Nissan Altima and ended up replacing it with our second Prius, a 2005. So it's been a busy year, but the ER portfolio hasn't really seen much change.

So although we could scrape a few more bucks out of the bottom of the barrel with yet another mortgage refi, we think we've done enough...

 

[msbearkeley]

Sorry, catching up on missed posts.

We live an extraordinarily frugal lifestyle... So although we could scrape a few more bucks out of the bottom of the barrel with yet another mortgage refi, we think we've done enough...

We certainly are enjoying our fancy Playstation 3, but we enjoy the frugal lifestyle as well (cost to play 19 hours of one video game = a nite out at the movies!). So I guess we want to be like you when we grow up! ;-)

We're hoping to earn enough cash over the next year as a cushion to our projected rental income, but it really looks like a 20k investment in another property will allow us to earn it all back in a couple of years given the projected cashflow on another property, so I think we're going to do it! We are also toying with refinancing our rental mortgage (it's upside down, unfortunately, so it will require another 70k in cash to pay down) but debating if cash on hand is better than paying down the mortgage....again...rates seems to be too good to pass up! Are we crazy?

Here's what my lender is saying...

With 25% down, we would be at 4.375% with no points or if you have a house that is free and clear, you can use TD bank and get a line of credit at prime - .50% or 2.75% and only $99 in closing costs

 

[Nords]

Are we crazy?

I think that 99% of landlords have only one exit strategy: probate.