30 With a New Hobby in Real Estate

[rgarling]

The point he is making on #2 is that real estate bargains exist, and if you are in a position to take advantage of them you can make a lot of $. In other words, the real estate market is not as efficient as the stock market.

 

[srlimoges]

OKKKKKK.... just a point or two on your posts...

You CAN buy more 'paper' as you call it than $100,000. It is called purchasing on margin.... if you want to make the gamble and do it with the right stocks you can probably get about $300,000 invested.

Didn't really know about this - it wasn't mentioned in the debate and haven't heard much about it. Is it difficult to do? Or are the drawbacks really bad?

You will be hard pressed to get 20X in RE. I would think 10X is close to the upper limit (without some owner financing or other kind of deals that are under the radar). So, max $1,000,000.... but more than likely $500K to $700K.

I've learned that banks will leverage the heck out of real estate. Even if you but only 10% down, you can get that 10% back with a HEL or HELOC or even a refinance.

Your next sentance makes no sense... if you purchased $1 mill in RE... it is worth $1 mill... now, it might go up and down from there over time... but it is not $500K or $1.5 mill then...

Like the post above this (sorry forgot your forum name) I agree with him/her on this. I've heard of many desparate sellers willing to take under market price to get out of the property...because their relocating, they can't afford the property (short sale), they just want out of real estate. I guess this would be similar to the papers market.[/QUOTE]

What if there is a natural disaster, such as hurricane, tornado, flooding, wind damage, fire etc. etc.... for sure you are not getting any income from them plus you have to hope that you have enough insurance to cover the disaster.

Renters insurance would take care of this instance.

Now, I am not saying RE is bad... just that there are a lot of risks that most people do not consider. People think that the leverage is good... but forget that it also works on the downside and can wipe you out faster than you think. RE is also not liquid. RE also requires you to get tenants, deal with them and also deal with the taxes. I would much rather not spend the time and energy doing this JOB. I get paid very well doing the job I have.

Agreed that leverage is good if your thorough, a risk taker, and have a little luck.

 

[srlimoges]

The point he is making on #2 is that real estate bargains exist, and if you are in a position to take advantage of them you can make a lot of $. In other words, the real estate market is not as efficient as the stock market.

Thanks for clarifying. (the words sound good in the head but don't translate well in writing)

 

[ERD50]

In other words, the real estate market is not as efficient as the stock market.

Possibly. But again, that is not an "all gravy" situation. Just like leverage, it can work for you or against you.

You may find that the market is inefficient (in a direction you don't like) when you need to sell. Ooops!

The number one lesson in investing (of any type) is go in with your eyes open, critique the investment. I'm seeing a lot of white-washing here.

-ERD50

 

[haha]

I found a real estate vs paper investing debate yesterday. The argument was for real estate so bias existed, but it provided valid information on why real estate could be vehicle to retire faster.

1.) If you had $100,000, how much paper assets can you buy? Exactly $100,000. Thats how much money was used to purchase the paper.

Wrong. Have you never heard of margin?

If you had $100,000 how much real estate can you buy? Maybe $500,000, maybe $1,000,000, maybe more. Leverage can buy 10x or 20x more than you actually invest.

Wrong again. Go talk to your banker about 90 or 95% loans on investment property.

2.) How much are $100,000 of paper assets worth when you bought them. Again exactly $100,000. Thats what the paper was worth when purchased at that particular time.

How much is the $1,000,000 of real estate worth that was purchased with $100,000? Could be $750,000. Or could be $1,500,000. I don't know what this is called, but through my own investing, know that it definately exists and is ready to be taken advantage of with proper research.

This could be correct, but the same holds for securities. If you are a better analyst or more prescient than the next guy, you buy $s with half$s. Either depends on skill.

3.) How can you increase the value of the $100,000 in paper? Maybe write a letter to the company CEO? I don't know.

How can you increase the value of the of the $1,500,000? We could spend all day discussing this.

This is true, but if you are the guy who can do this, best to get at it and don't waste any more time on internet bs.

Ha

 

[brewer12345]

Hahahaha, this is laughably ignorant. Amazing.

 

[Texas Proud]

The point he is making on #2 is that real estate bargains exist, and if you are in a position to take advantage of them you can make a lot of $. In other words, the real estate market is not as efficient as the stock market.

Agreed.... but usually the ones who make money doing this know a lot about RE... an example is the people who buy ugly houses... my mother sold her really ugly house to one of them... I asked about him making money on her house...

First... the house is in a bad part of town... negative... the foundation has a huge crack running from one side to the other... with a separation of up to three inches. So it is in two sections, one about 1/3 the other the rest. The 1/3 section is a bit lower than the other. My mom spent about $10K to get it level 20 plus years ago... but it continues to move. The sheetrock in the house was cracked and twisted... in every room. The kitchen was a project that my dad started but never finished... he died almost 30 years ago. it does not look good. Where there is carpet, it is shag!!! The roof was changed about 20 years ago, but looks like crap.

So, the guy buys from us just shy of $30K. He said it would cost him $30K to $40K to get it fixed up, taking at least 3 months. He expected he could sell it in the mid $80s when done. Now, I doubt he could get that, but he does it for a living so who am I to say.

He has the knowledge, he has the crew, he has the funding, he can survive a downturn and he makes good money...

 

[calmloki]

Yeah, location, but a good manager - one who has what we call an owner mentality - can make a big difference in positive cash flow. Our vacancy rate is about a quarter of the reported rates for our areas and low vacancy has a huge impact on earnings. I'll attribute our low vacancy to being the owner and having a hard time giving up managing.

There is an old story about two ranchers - one fails, the other succeeds. The only difference is that the successful rancher walks his property every day. One day he might nail up a bit of drooping wire fence, another he might pull up some poisonous Tansy Ragwort, the third he notices a cow about ready to drop and moves her into a closer pasture for observation. Walk the property.

Will also note that the highest salary I ever earned working for someone else was $15,500/year. Real estate has been very very good to us. It is illiquid, but the rents we receive beat the heck out of savings bonds - even after paying a manager - so we'll struggle along taking the rent until the market turns up again.

 

[ziggy29]

If you had $100,000 how much real estate can you buy? Maybe $500,000, maybe $1,000,000, maybe more. Leverage can buy 10x or 20x more than you actually invest.

Since the bubble popped it's become much harder to finance real estate with less than 20% down.

And that is for owner-occupied properties. It wasn't easy to find commercial/investment property loans with only 5-10% down *before* the bubble popped, let alone since.

 

[calmloki]

Agreed.... but usually the ones who make money doing this know a lot about RE... an example is the people who buy ugly houses... my mother sold her really ugly house to one of them... I asked about him making money on her house...

First... the house is in a bad part of town... negative... the foundation has a huge crack running from one side to the other... with a separation of up to three inches. So it is in two sections, one about 1/3 the other the rest. The 1/3 section is a bit lower than the other. My mom spent about $10K to get it level 20 plus years ago... but it continues to move. The sheetrock in the house was cracked and twisted... in every room. The kitchen was a project that my dad started but never finished... he died almost 30 years ago. it does not look good. Where there is carpet, it is shag!!! The roof was changed about 20 years ago, but looks like crap.

So, the guy buys from us just shy of $30K. He said it would cost him $30K to $40K to get it fixed up, taking at least 3 months. He expected he could sell it in the mid $80s when done. Now, I doubt he could get that, but he does it for a living so who am I to say.

He has the knowledge, he has the crew, he has the funding, he can survive a downturn and he makes good money...

We have three loans out to a local company that sniffs out short sales and negotiates minimal purchase prices. They then get in and slam out repairs and pretty them up, throw in a few boxes worth of staging (baskets of plastic ivy, crossed tennis rackets in one bedroom, a big teddy bear in another, 2-3 pictures/room...), and market clean good looking homes at low prices. We've loaned them money - a bit less than their purchase prices - at a decent amount of interest. Idea is that the loans will be ~3-6 months duration. I admire their business plan - they might have $15k worth of their own time and money invested and are looking at $30k profit above that. Smart go getters.

 

[calmloki]

Since the bubble popped it's become much harder to finance real estate with less than 20% down.

And that is for owner-occupied properties. It wasn't easy to find commercial/investment property loans with only 5-10% down *before* the bubble popped, let alone since.

Think NWlandlady said recently that Seattle banks were looking at 40% down for investment property under a million$.

 

[srlimoges]

Think NWlandlady said recently that Seattle banks were looking at 40% down for investment property under a million$.

Denver CO appears looser. It's easy(ier) to get a 20% down investment conventional loan with typical debt to income ratios (up to 50% I think). If the 20% down is funded with a HEL or HELOC it's 0% down!

 

[srlimoges]

I've lightly research about trading on margin. Correct me if I'm wrong, it's like borrowing on future potential, right? I read that if the stock loses value that you owe the margin back to the lender immediately. Is that correct?

If so, buying on margin appears very risky.

 

[brewer12345]

Investing on margin is risky. Engaging in highly leveraged real estate speculation is risky. Trading Venezuelan beaver cheese futures is risky.

I suggest you get some texts on corporate finance, real estate finance, and portfolio management. And by texts, I do not mean anything hawked by Robert Kiyosaki or his ilk. Educate yourself or you will be sorry.

 

[Texas Proud]

I've lightly research about trading on margin. Correct me if I'm wrong, it's like borrowing on future potential, right? I read that if the stock loses value that you owe the margin back to the lender immediately. Is that correct?

If so, buying on margin appears very risky.

Margin buying of stock is like margin buying of the RE in your version...

You own some stock... you borrow money on that stock to buy more stock... you can usually get up to 3X the value of your stock. If the value of your whole portfolio goes down, then you do not have enough equity to cover the loan and it is called quickly... the big downside... now, if you can come up with the money to pay the losses.... you continue on...

You own a home... you borrow money on that home (zero down with HELOC as you say)... you go and buy another home... then do it again and again... if the value of the houses go down... you have now gone negative... (really... I don't think you can have a portfolio of houses with no money down.... so you do have some kind of equity there)... the note is not called right away as long as you can come up with the money to pay the mortgage payments... that means you have to have tenants paying you at a level that covers the mortgage and all repairs etc. If you can... then you might be able to ride it out hoping the RE comes back to positive... if not, they come and take away all you own...


As you can see... both are using leverage... both leverage plays are 'risky'.. you just have to know what your risk is....

 

[ERD50]

If so, buying on margin appears very risky.

Correct. I didn't recommend it, I was just pointing out that your source was wrong. It can be done.

You can get 100x leverage with options, have (theoretical) unlimited upside, and never risk more than the amount you invested. Five minutes on the computer, and then take a nap. This is why it is allowed in IRAs - you can't go negative.

But I don't recommend that either. I guess it works for Taleb.

-ERD50

 

[NW Landlady]

Denver CO appears looser. It's easy(ier) to get a 20% down investment conventional loan with typical debt to income ratios (up to 50% I think). If the 20% down is funded with a HEL or HELOC it's 0% down!

SR - I think we may be talking apples & oranges. 20% down on a single family residence rented to others is pretty standard, although there is a limit to how many FNMA/Freddie Mac will allow (usually only 4 such loans). The multifamily/commercial loans have different parameters entirely & are a completely separate market of lenders. Usually they fund properties with 5 or more units. There are not many lenders in this niche & while I used to be able to go 20-25% down on multis, the market has evidently changed for commercial lending & 40% down is more typical. At least that is what I am told by the Commercial Real Estate Brokers (which is completely separate group of realtors from Residential Real Estate Agents). Any who, just a point of clarification.

 

[Titus]

Thanks, I already have a full time job, a long commute, and a family that includes two small children: I do not need a second job (landlording). My investments do not require me to borrow money nor do they call me up and complain that the toilet is stopped up.

There are plenty of people who have done well with RE, but its not for me. Maybe after I ESR I will dabble, but it would have to be a "gimme" property.

This is a HUGE and GREAT point. I've done some RE, but I definitely think twice before jumping in again. Retirement to me, is not the same as being an entrepreneur. Either you're working or you're not.

 

[Joshua]

Retirement to me, is not the same as being an entrepreneur. Either you're working or you're not.

I can see where you're coming from with that one, Titus. There are definitely different ways to run a real estate investment operation, but it's always going to be a little more hands-on than other options. Also, I would think anyway, that it would require a person to be more tied down to a given geographical area. I mean, you can hardly keep an eye on your investments if they're in another state, now, can you?

Though... even that's not a given. I worked with a Captain who was stationed in Germany but had multiple properties back state-side. How did he do it? He rented them via the Section 8 program. The government sent him monthly checks, ensured the property was kept up, and he never had to worry about tenants. I guess it's all in the approach!

I would have to have something stable like that before I could do much with RE, given that I'm going to be moving every couple of years for the near future.

Josh

 

[Titus]

what region you are in makes a huge difference to the style, viability, and risk of real estate. 2 years ago I would not have dreamed of renting a home in the Seattle area as rents were only about 3-5% of home value. if you finance the house, you're profits are gone between maintenance, taxes, and interest. If you pay cash for the house, then why would you invest it into something that will only yield a 2-3% ROI with a $250k min investment and so much work involved?

at the time, though... much of texas was more appealing. You could rent a house for 9%+ in areas close to nice urban centers such as Austin. (I'm talking about renting a house for $9k/year on an initial purchase of $100k as an example). You could do well enough down there to outsource the land management to a local company.

today everything is upside down though.

 

[73ss454]

Everything runs in cycles, sometimes you're up and sometimes you're down. You just have to be around long enough to realize it.

 

[Titus]

sure, but buying into an expensive real estate region that doesn't even cash flow is like buying a stock with an extremly high p/e. You might make some money, but you could do better elsewhere.

 

[srlimoges]

In my opinion the worst real estate investment strategy is buying for appreciation only. Buying property in a popular area like you noted is an example of that. As an investor you have the least control and most risk when depending on market trends of property values.

To reiterate what you said, the safest real estate investment strategy is to diversify your risk by focussing on several streams of wealth building like cash flow, fixing and flipping, and appreciation.

My version of incorperating all these strategies into one property is through lease purchasing.

 

[srlimoges]

Just a status - I just purchased a fourth investment property, and now cashflow $1050 per month from real estate using rent-to-own. One more investment property will cover the expenses of living (minus healthcare, which my corporate employer pays for).

I hope to purchase a fifth investment property in late spring.

 

[myself]

WTG!

Just a status - I just purchased a fourth investment property, and now cashflow $1050 per month from real estate using rent-to-own. One more investment property will cover the expenses of living (minus healthcare, which my corporate employer pays for).

I hope to purchase a fifth investment property in late spring.