Purchase of Rental House

[mathjak107]

Problem with figuring real estate profits is everyone uses different numbers. they forget that if they put 10 or 20% down that the property probley cost them 2 to 3x the origional price by the time its paid off depending on the interest rate. they forget everyone gets the standard deduction and must start figuring after that point. they forget the renovations that need be done keeping a property long term, they forget they have to pay the depreciation back when sold.... they may forget its taxed as its an investment property. they forget all the real estate taxes every year ... they even forget that they cant deduct any of it if the amt hits.

im not saying people arent making money, i just think most dont when all is figured correctly. myself included in the rental i had for 20 years.. it really lagged my equity portfolio by over 3x

[calmloki]

Ayup.

YouTube - EDS Cat Herder

It's the American Dream.

[honobob]

Quote:

Originally Posted by JayOh Just curious, but I am assuming these buildings were flips given the fairly short time between sales. Do you know how much money went into them to update them? I know you're just using ballpark numbers but I have to imagine that the carrying cost for 1 year on a 1.2MM mortgage (plus insurance/tax), not to mention cost of upgrades is going to take a fairly big bite out of that $400k profit you quote on the first example. Just my 0.02

Not sure they're what most people would consider a flip. 188 Minna is new construction 2005 and only 1527sf 2/2 so not alot for upgrades. 999 Green is 1964 construction but again only 1681sf 2/2. No permits were pulled on either so 400K goes a long way for paint/carpet and appliances plus most people at that price range don't pay so much for other peoples decorating. So with maybe $100K expenses and a years use or rent of at least $48,000 then you're still up $350,000 on Green and $555,000 on the Minna property. What's the best anyone has made on a $3-400K investment in the last year and a half?

[honobob]

Quote:

Originally Posted by tryan rentals property is worth the time (because you're making $$ every month and long term appreciation).

Tryan, you left your long term appreciation $$'s out of your figgering! Of course it doesn't seem that you can compare Boston properties to SFBay with decades of 11% appreciation or Honolulu with decades of 9% appreciation.

Calmloki, did I see a pussy whip in that video?

[CRABBY JERRY]

Quote:

Originally Posted by mathjak107 amatuer rental real estate is only good until its not, then depending on laws in your area it can be a total disaster when you get that one tenant in 20 years thats an issue. laws in most states protect tenants not landlords in court. had a tenant that stiffed us on the rent and it took 6 months to get them out. as well as 8,000 in damage and renovations needed at that point. remember we are talking single family homes or apartments in co-ops or condos and your right, i would have faired much better in equities over the last 20 years , even here in new york city which was a hot market. house we had was 165,000 in 1987 worth 425,000 today. same amount in equities following the same newsletter i always have is well over 2 million . and no real estate taxes and major renovations, insurance , etc along the way. most people think they did well because they made a profit in single family residential rental real estate but have nothing to compare it to had they invested elsewhere. because the newsletter i follow was something i followed back then its easy to see a comparison the run up we just went thru clouds the real long term results of residential real estate. its like buying stocks and catching it lucky right before the biggest bull market but look at the long term returns and they are way way lower

What newsletter are you following?

[honobob]

Quote:

Originally Posted by mathjak107 im not saying people arent making money, i just think most dont when all is figured correctly. myself included in the rental i had for 20 years.. it really lagged my equity portfolio by over 3x

I think you need to look no further than Hellbbenders post. Like anything there will be 50% of the people doing better than the other 50%. I would say that at least the top 50% are aware of the costs you stated but you forgot to mention the increasing rents at current and future market values vs. the locked mortgage payments being diminished by inflation and in CA property taxes locked in at a low increase. Also after the mortgage is paid it's extra cash flow forever! I'll be pulling out $1,000,000 every 10 years of tax free money for my use and probably never have to pay back any depreciation because of 1031 exchanges. It's really not a question of doing it but more of a question of doing it correctly.IMHO

[mathjak107]

Quote:

Originally Posted by CRABBY JERRY What newsletter are you following?

FIDELITY INSIGHT

[mathjak107]

how many people sold their rental house and took the origional amount they paid but never figured in the 2 out of 3 dollars of mortgage interest and 2 out of 3 dollars of taxes, insurance and other costs they paid and subtracted that from the sale price also. i bet it looked nice and profitable before figuring that in.

[honobob]

Quote:

Originally Posted by mathjak107 how many people sold their rental house and took the origional amount they paid but never figured in the 2 out of 3 dollars of mortgage interest and 2 out of 3 dollars of taxes, insurance and other costs they paid and subtracted that from the sale price also. i bet it looked nice and profitable before figuring that in.

Why not make it a poll? Of course I've never sold so I couldn't vote but I bet the number is high among the serious investors. Of course when you look at my $35,000 purchase financed at 9% 15 year $33,000 = $334.71 X 180 = $60,248 Of course I collected roughly $130,800 (thank you blessed tenants) over those 15 years and have not paid another mortgage dollar for the last 15 years but have collected increasing market rents since netting about $180,000. And I could sell TODAY for $400,000. Let's see 180K net rents last 15 years plus 130,800 rents first 15 years plus $400K value is $710,800 minus $60K mortgage payments gives me $650,000 minus $50K misc gives me $600,000 on a $2,000 investment!!! But why would I sell when my good tenant has been in there for going on 8 years and I'm appreciating at 9% ($36,000+) a year. AND, I have a reasonably firm "Your Poop, Your Problem" policy (YPYPP)Calmloki take note although I realize you own all the pipes so maybe not so easy to enforce. And I'm doing this 3500 miles away! YMMV

[hellbender]

Quote:

Originally Posted by mathjak107 how many people sold their rental house and took the origional amount they paid but never figured in the 2 out of 3 dollars of mortgage interest and 2 out of 3 dollars of taxes, insurance and other costs they paid and subtracted that from the sale price also. i bet it looked nice and profitable before figuring that in.

I can't speak for others but I kept a running calculation of the Internal Rate of Return (IRR) on each of my real estate investments. Since each deal was structured to be cash flow neutral, the IRR calcuulation yielded a very accurate result. The methodology is presented here:

Ira M. Freed, CPA - Return on Investment Analysis
Caution! Lot's of math.

I usually discovered that my AFTER-TAX IRR ranged from 17-25% Good enuf.

Bottom line: It's darned difficult not to do well in the long run by buying appreciating assets with only modest amounts of your own funds and then letting someone else pay for it.

[calmloki]

Quote:

Originally Posted by hellbender ... Bottom line: It's darned difficult not to do well in the long run by buying appreciating assets with only modest amounts of your own funds and then letting someone else pay for it.

+1

Now if i could just convince myself to let the tenants deal with their own problems (drain was working when you moved in - YPYP per Honobob) life would be good. instead i spent 7 hours this sunday dealing with a toilet leak (and the electrical & drywall issues therefrom) that manifested above the ceiling light on the 10 1/2' ceiling of the kitchen of the apartment below. While doing that i did get a tenant at another building to buy and install his own toilet when the tank mysteriously broke. I'll pay the $99.99 for it (Home Depot, American Standard elongated complete w/ seat - good deal) - happy not to have to move or install it.

[thefed]

Quote:

Originally Posted by want2wander Hello, I have a house in mind. It should rent for close to piti - it's in a good school district.

So where's the money to be made? Are you hoping for appreciation? Appreciation should be a kicker, not THE reason you buy an investment property. Buy one that WILL cashflow after placing aside reserves for maintenance.

[honobob]

Quote:

Originally Posted by thefed So where's the money to be made? Are you hoping for appreciation? Appreciation should be a kicker, not THE reason you buy an investment property. Buy one that WILL cashflow after placing aside reserves for maintenance.

thefed under your purchase guidelines not one of the purchases I referenced would have been made. Hell, none of the sales in the Bay Area or Honolulu would have been made under your guidelines. And yet these people made hundreds of thousands of dollars in a short time. Your guidelines obviously don't work in these areas. I'm not so sure they work in any metropolitan area.

If you can understand the forces of supply and demand and know your market you can reasonably predict future appreciation rates. Most businesses predict future events and plan accordingly. Appreciation does not come as a surprise to a knowledgeable investor. See below.

[Westernskies]

MAYBE- but only if you took a hands-off approach and hired a professional property manager-

Tried it on my own (twice- I am a slow learner...)
Becoming involved in how others live is not a good thing...and being the guy (or gal) responsible for the roof over their head, you will whether you like it or not. I have a thousand stories, none of them positive.

The day I sold the last rental house was one of the best days of my life- it felt like I had just been released from a forced labor camp.

Keep in mind that the recent surge in people who are looking to rent today are those same folks who just lost their homes due to foreclosure- they couldn't make good financial decisions or their mortgage payments and just walked away- now they are looking to rent a home from YOU- where they have no equity stake, no financial investment, and no long-term interest in the maintenance or upkeep. You can't ruin their credit if they default on their rental agreement or tear the place up; it is already shot. Their security deposit won't begin to cover the aggravation of repairs, renovations, and re-renting the property.

I say run, don't walk away from being a landlord.

Good luck.

[free4now]

If I were to get into the rental market it would be as a job, with a multi-dwelling unit. Nothing wrong with that if it's your thing, and in fact it does offer one tax saving that hasn't been mentioned: Unlike working for someone else, when you work for yourself you can avoid income taxes and payroll taxes. That's one reason I like doing repairs myself... a $70 pro repair visit may require me to earn $90 to cover my taxes, and the repairperson may only yield $50-60 after he's paid his taxes, or $30-40 after his overhead. It's hard to stomach paying $90 of my money so someone can take home $30-40... better to just do it myself.

[mathjak107]

after 20 years in new york city (not manhattan) with a rental, putting 20% down when i bought the property after subtracting out all expenses and backing out that bogus depreciation number the property was negative about 100 a month or so. every rent increase was met with higher taxes and expenses. finally sold it for double what we paid but after subtracting out the 100 a month which by the way was a positive number with the depreciation figured in but once we paid the recapure back on it when sold the return wasnt worth the grief.

keep in mind i had quite a few tenants in 20 years,. all were good until one wasnt. that 1 expierience makes me never want to go thru that again.

[tryan]

Quote:

Tryan, you left your long term appreciation $$'s out of your figgering!

When the average owner owns for 7 years, calculating future appreciation is pure fantasy. I've seen 12 year stretches were $$ was LOST and 12 year stretches were values TRIPLED.

The people who bought at the last peak (2005/2006) will not be happy 7 or even 10 years away. Don't need any spreadsheets to prove this one.

[honobob]

Quote:

Originally Posted by tryan When the average owner owns for 7 years, calculating future appreciation is pure fantasy. I've seen 12 year stretches were $$ was LOST and 12 year stretches were values TRIPLED. The people who bought at the last peak (2005/2006) will not be happy 7 or even 10 years away. Don't need any spreadsheets to prove this one.

Tryan Am I on your ignore list or do you not read other peoples posts? The sales I referenced were in 2006 and I would like to think they were OK maybe even a little happy when they got their 27-29% gain in 12-18 months. But I'm thinking you'd find a way to be glum about an extra $350,000-$550,000. I also think you're confusing owner-occupied properties that turn on average about 7 years. If you have other evidence for investment properties I'd like to see it. If you are in a market that depreciates for twelve years and then triples in twelve years then it would not be prudent to invest unless you were in for at least 24 years. Why do you pick bad markets and then complain when they perform like they historically have? Did you think YOU were the part of the equasion that was missing?

Anyway the OP is talking about the Bay Area which has experienced double digit appreciation for at least the last 22 years so I don't believe you trying to convince her to use your Boston market techniques here will do her any good when they didn't do you any good. Spread the pain?

Also, how is it that you can predict the market everywhere for the next 7-10 years but weren't able to predict 12 years of down market in your own home town? I would reread Hellbenders first post.


And get a mirror.


Originally Posted by Kougar2
We bought 1550 sq ft house in SF east bay in 1997 for $215,000. We sold out in Dec 2006 for $660,000.
WOW 9 years of over 13% annual appreciation. FANTASY

[CuppaJoe]

Quote:

Originally Posted by honobob Want2wander Here's your answer, 999 Green Street in San Francisco (2 bedroom condo) Sold 2/2007 for $1,500,000 and resold one year later, 2/2008 for $1,900,000. A 27% increase in one year!! $300,000 down and walk away one year later with $700,000. Genius. I forgot I promised Wab at least two comps. 188 Minna Street 30F Sold 6/2006 $1,925,000 (2 bedroom condo) Resold 12/2007 for $2,480,000. A 29% increase in 18 months! "especially now that the bull market in real estate is over" Perhaps spoken a little prematurely.

If ever there was a premium property, 999 Green is it. Whoever buys has George Schultz and Charlotte (S. F. society) for neighbors. 188 Minna, not bad. Location Location Location.

[CRABBY JERRY]

Quote:

Originally Posted by mathjak107 FIDELITY INSIGHT

Thanks. I use that also. Did you also use Fundsnet Insight and if you did, What did you do when he closed it down. Sorry to post it on this thread. I should have P.M.d you.