Age 27, Heavy in Real Esate, What Next?

[schmitty0066]

Hi everyone, first time posting here, just wanted to gain any insights and opinions about my current portfolio/situation. I'm very heavy into real estate at the moment, and am simply looking for feedback for a next move. More real estate? Pay down debt? Build a larger cushion? Have a bit of fun?



I am not a troll, this is genuinely my portfolio, so I've placed a timeline below as well, but this is currently where I'm at:


Current portfolio / Income.
-$10,000 Cash
-$32,000 Roth IRA (it went up 60% in 2013), held in dividend stocks.

-$65,000 House ($53k note @ 3.875% 5 yr arm)

-$1.5 million commercial property(assessed) (I own 33%, so $500k in value, with current note of $172k, for my portion) 0 cashflow per month, but most likely $1,000 a month in the near future as we've repositioned it.

-$416k 8 condos (assessed), $324k note, $1,000 a month cashflow.
-Photo booth business, own outright (bought for $6k), produces anywhere from $10k to $30k a year depending how hard I work at it.
-Primary Job - $3,000 a month net
-Websites I own - $200 a month (mostly adsense and amazon income)



Monthly income currently between all my sources is roughly anywhere from $5k-$6k a month


Living expenses are roughly $1k a month, I live very small and focus on investing as much as I can.

Living Expenses Monthly
-Health Insurance - $73 (high deductible, but this will triple in a year thanks to Obamacare)
-Auto Insurance - $50 (02 Bonneville with no loan, paid for in 2010)
-Internet - $40
-Food - $240 (price matching at Wal-Mart helps)
-Entertainment - $200
-Gym - $10
-Websites - $10
-Utilities - $100
-Property Tax - $100
-Mortgage - $250 ($53k @ 3.875% 5 yr arm)
-Home Insurance - $28
-Gas - $100


My living expenses are still roughly $1,200 a month, which means at this point I can sock away roughly $50k a year if I really want to step it up. Also, my principle paydown between my house, commercial property, and 8 condos is approximately $16,000 a year, and a 3% appreciation rate on the total assessed value (my portion of $981k) of the commercial building, eight condos, and my house would be $29,400 (assuming they grow with inflation).


For anyone interested, this is the timeline of how I got there:



Graduated college in May 2008. May 2008 until May 2011 lived very small, did a bit of travel, paid off student loans (10k) and car (6k) placed about $10k in Roth IRA. From 2008 to May 2011 I only lived off bartending income, which was roughly $30k / year.



May 2011 started full time job making $36k / yr net with no benefits. Still bartended on the weekends and lived solely off bartending income (about $1,500 a month). Was able to save $3k a month.



November 2011 purchased house for $37k, foreclosure in liveable condition, 2 br, 1 ba, 800sq ft, with a small garage. Assessed at $65k Put $10k down, and spent the next year, paying off said house. October 2012 House was paid for! I did this by saving 100% of my full time income, and working weekends bartending to pay my basic living expenses. The house is still slowly being renovated, but I do all the work myself which saves a ton.



May 2013 had another $20k saved up, so bought a 1/3 partnership in a bank owned industrial / office building. The building was listed at $975,000, but it was a tough market and we negotiated down to $575,000. Property is assessed at $1.5 million, and appraised at $2 million. We put 10% down into the property (the other two buyers have very strong balance sheets and the bank who foreclosed on the property also provided financing to get the deal done), and then had to stick a bit more money, about $10k into improvements. Property currently is at break even at half occupancy, with several tenants in the mix in the near future to provide positive cashflow.


February 2013, found a photo booth business for sale via craigslist from an owner going out of town. Purchased for approximately $6k, and it makes anywhere from $10k-$30k per year depending how many weekends I want to give up.


November 2013, found 8 condos for sale via craigslist from an owner who had originally developed the 14 unit complex in 1981. I offered the owner 10% down ($36k), with 4% 20 year land contract for each condo priced at $45k, and assessed at $50k. Positive cashflow of $1k a month approximately. I have no idea why the owner agreed to such good financing, but he had them paid for, is in his late seventies, and seemed to just want to get rid of them. We sealed the deal last month in Feb 2014.


I financed the condos and some improvements to the commercial property by taking out a note on my house of $53k (see living expenses above).




What would your next step be? Create a larger cushion? Take a risk?

 

[brewer12345]

You are clearly risk tolerant and a successful entrepreneur. That said, you have a lot of exposure to real estate and you are considerably leveraged. If things get ugly in the property markets, you would be stressed to say the least. You would also be unable to go bottom fishing again.

If I were in your shoes, I would spend some time building up a pile of cash to guard against trouble, and I would work on paying down debt. Get the primary residence free and clear first since it is the most easily leveraged asset in the future should you need cash. After that is accomplished, I would look to find more real estate deals and diversify into other asset classes. You also want to watch for signs he property markets are peaking so that you unload at the top if possible.

 

[MooreBonds]

You are clearly risk tolerant and a successful entrepreneur. That said, you have a lot of exposure to real estate and you are considerably leveraged. If things get ugly in the property markets, you would be stressed to say the least. You would also be unable to go bottom fishing again.

+100!

Given your debt load and income, I would be nervous with that much interest expense (plus other related expenses for owning real estate) compared to your income. If you had a full-time job bringing in $100k/year, you could shoulder the debt load for a while without severe consequences...but given your commercial property plus residential financing, I'd be very nervous.


You say that the condos were "assessed" at $50k and you bought at $45k. Sometimes, the real estate assessments are spot-on, and other times they can be a little under- or over-valued. What are truly comparable units going for in that area?

Personally, I would have wanted a bigger discount than that, given that you were buying all 8 in one fell swoop. Plus, if you had to list and sell them, you'd be out real estate agents' commission, plus playing the waiting game for all of them to sell one at a time. But when you say the condos are throwing off $1k/month in free cash flow, is that per condo, or (what I'm assuming) $1k TOTAL for all condos combined? If just $1k total, that's barely over 3% cash flow from their market value.

You mention the condos were built in 1981 - that's 33 years ago. What condition are they in? When were they last remodeled? What do you have budgeted for remodeling of the condos in, say, 5-10 years? Or for major equipment replacement? That would be a big capital cost, not to mention various building code updates you'd likely have to incorporate. That could easily come up to a major expense, even if you do a good chunk of the work yourself. If they're only yielding 3% cash flow yield now, just one vacancy and one significant repair (plumbing) could take out a large chunk of an entire year's cash flow, even without budgeting for any furnace/AC/water heater replacements.

You've done a great job of looking for investments and growing your income, and I can relate somewhat to your eagerness in finding business opportunities in accumulating wealth - just be careful to consider future potential cash outlays for that real estate. Apart from growing a very healthy cash cushion, given your situation, I would put any new investments into equities.

 

[schmitty0066]

If I were in your shoes, I would spend some time building up a pile of cash to guard against trouble, and I would work on paying down debt. Get the primary residence free and clear first since it is the most easily leveraged asset in the future should you need cash. After that is accomplished, I would look to find more real estate deals and diversify into other asset classes. You also want to watch for signs he property markets are peaking so that you unload at the top if possible.

I was thinking similar in terms of building up a bigger cash position for a year, of about $40-$50k, which is roughly a year of all expenses covered for all properties and expenses if I received zero rent and had no income coming in.

Thank you for the response!

 

[schmitty0066]

Hi MooreBonds, thank you for your response! I'll try to rebuttal the best I can. I see where one would be nervous with the amount of real estate financing, but I see risk as essential and since both properties have a significant equity cushion, by buying well below market value, they can sustain much higher than market vacancy rates before becoming "alligators" needing to be fed.

You say that the condos were "assessed" at $50k and you bought at $45k. Sometimes, the real estate assessments are spot-on, and other times they can be a little under- or over-valued. What are truly comparable units going for in that area?

The assessed value was after the city just decreased their assessed value for the next tax year from $60k (2013), to $50k (2014). I realize assessed isn't the best yardstick, so I also use comparables, and price per square foot. Comparables in the area are selling at $65k, and I know the other owners in the complex have paid approximately $60k for theirs in the 2002-2006 period (which is about the same point my real estate market is in, in terms of valuation in terms of price per square foot). My market is also trending upwards at a steady 3% per year in this particular neighborhood and is in a VERY conservative market that was not hit in the same way a city like Vegas was. The neighborhood these condos are in is also stable, fairly desirable with good schools, and is not a "war zone" type rental.

Price per square foot I paid for these units was $46, and the cost to build would be roughly $72. I also take into account cap rates as a yardstick for determining value, and this property had a 10%+ cap rate, which means buy, especially in my market.

Personally, I would have wanted a bigger discount than that, given that you were buying all 8 in one fell swoop. Plus, if you had to list and sell them, you'd be out real estate agents' commission, plus playing the waiting game for all of them to sell one at a time. But when you say the condos are throwing off $1k/month in free cash flow, is that per condo, or (what I'm assuming) $1k TOTAL for all condos combined? If just $1k total, that's barely over 3% cash flow from their market value.

You mention the condos were built in 1981 - that's 33 years ago. What condition are they in? When were they last remodeled? What do you have budgeted for remodeling of the condos in, say, 5-10 years? Or for major equipment replacement? That would be a big capital cost, not to mention various building code updates you'd likely have to incorporate. That could easily come up to a major expense, even if you do a good chunk of the work yourself. If they're only yielding 3% cash flow yield now, just one vacancy and one significant repair (plumbing) could take out a large chunk of an entire year's cash flow, even without budgeting for any furnace/AC/water heater replacements.

The condos themselves are two story townhome style with full poured basements and are 1,000 sq ft each, not including basement area. Each unit has electric heat and an individual water heater. Any major repair could be fixed for under $1,000 as I can do these myself (water heater = $500, electric heater $1,000). Any renovations would be basically carpeting, paint, appliances, or doors so I don't see how anything besides a large event (which insurance would cover), could really eat that much into cash flow. The buildings are brick exterior, in great shape, and any roof or exterior maintenance is covered by the condo association fund, which I pay $60 per unit each month and is not part of the cash flow I mentioned above (see numbers below). Any updates or renovations would not require code updating, as I'm quite familiar with construction.

The units cash flow $1,000+ in total for all 8, each month. Each condo averages about $600 a month in rental income so my yearly outlays for the property look like this:

Gross Income - $57,000 (this was verified by the seller with two years previous tax income proof)
Land Contract - $23,556 ($10,000+ of this is principal payments)
Taxes - $7,616
Insurance - $1,446
Condos Fees - $5,760(these cover exterior maintenance, lawn care, snow plowing, trash, and roofs in a slush fund)

Net Income - $18,622*

*I realize this doesn't take into account vacancy (which runs 3.5% in my market, repairs (which a bad year would be about $5k), or my time to run the place. If you take vacancy, and bad year for repairs (in my opinion), the cash flow would be closer to $10,000.

The amount of free cash flow I have would allow me to essentially have a vacancy rate of 25% and still break even.

If free cash flow was $10,000 that's a cash on cash return of 27% ($36,000 invested). At $18,000 net income a cash on cash return would be 50%. It's hard to get that type of return with stocks over the long haul, which is why I shy away from equities.

You may be wondering about income taxes, but I'll most likely use the free cash flow from this property to fund a solo 401k to avoid income tax hit and invest more for retirement.

A great tool I use when analyzing property is the investment property calculator found here:
Investment Property Calculator - Calculate Investment Property Return, Rental Property Investment--AARP

You've done a great job of looking for investments and growing your income, and I can relate somewhat to your eagerness in finding business opportunities in accumulating wealth - just be careful to consider future potential cash outlays for that real estate. Apart from growing a very healthy cash cushion, given your situation, I would put any new investments into equities.

Thank you for your words of caution and taking the time to respond. Like the previous poster mentioned, and yourself, I think I'll build a larger cash position to offset any expenses and focus a bit more on conservative equities for the next couple years. The Roth IRA I have can also provide tax free cash as I can pull out the principal (approximately $10,000) without any tax hit, so my "cash" position is essentially $20k, and growing at about $4k per month.