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Old 02-23-2017, 07:27 PM   #21
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https://www.zillow.com/homes/for_sal...598_rect/9_zm/

Offer 30% below asking move on to next, Rents are roughly $1250 a 2 bedroom.

May take 20-30 places before you find the right one.
You don't understand this market at all. You don't offer less, you offer more.
Which is why your formula is off and why rental RE today in Denver is a fools game.
They will get 3-5 offers and sell around $200,000 or more. My wife is in RE she sees this everyday. Denver RE is on fire now.
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Old 02-23-2017, 07:32 PM   #22
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I would be hesitant to make your first venture in rental properties an out of state adventure. you will want to drive past (ie stalk) your first baby in a market you are at least a little familiar with.

The turnkey out of state is for when you are more comfortable with the whole process. IMO.
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Old 02-23-2017, 07:48 PM   #23
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You don't understand this market at all. You don't offer less, you offer more.
Which is why your formula is off and why rental RE today in Denver is a fools game.
They will get 3-5 offers and sell around $200,000 or more. My wife is in RE she sees this everyday. Denver RE is on fire now.
Don't claim to know Denver at all. Real Estate is an inefficient market at best, which is why you can usually make money in it. If it is on fire, if you buy today another sucker will pay more tomorrow, until it crashes.
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Old 02-23-2017, 07:51 PM   #24
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Don't claim to know Denver at all. Real Estate is an inefficient market at best, which is why you can usually make money in it. If it is on fire, if you buy today another sucker will pay more tomorrow, until it crashes.
Like I said up thread. The money was made buying 5-9 years ago... when no one would touch RE.
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Old 02-23-2017, 09:05 PM   #25
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Like I said up thread. The money was made buying 5-9 years ago... when no one would touch RE.

Absolutely right. I'm selling one rental now that's not been a top performer and if prices continue to go up, I may sell another I originally planned on keeping or the other marginal performer at the end of the lease. Going to use up stored depreciation from the early years to avoid paying tax on depreciation recapture and the capital gains. Pay off some mortgages and put away some cash for the next downturn.
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Old 02-23-2017, 09:21 PM   #26
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Going to use up stored depreciation from the early years to avoid paying tax on depreciation recapture and the capital gains.
How does that work?

Thanks,
b
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Old 02-23-2017, 09:53 PM   #27
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I have a rental property and I get $19k a year rent which is around $13k after expenses. I have no mortgage on it or my own home and I love the income now that I'm retired.
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Old 02-23-2017, 09:56 PM   #28
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.....Evaluating a good vs bad deal can be done on the back of an envelope, and lots of rules of thumbs can be applied.

1 months rent time 100 should be your purchase price or less. This way you have covered taxes and insurance.

10% net. If you paid all cash you should net a 10% return. rents-(taxes+insurance)=1/10 of the cash invested....
Ok, I don't get it. Let's say rent is $1,000/month. You would pay $100,000 for the property and receive $12,000 a year in rent.

Unless your expenses are only $2,000 a year, how do you net 10%? Surely, taxes, insurance, etc will be more than $2,000 a year... in many areas of the country property taxes alone are 2% of value.
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Old 02-23-2017, 10:32 PM   #29
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How does that work?

Thanks,
b
According to the CPA, these are carry over losses that can be used against gains and recaptured depreciation. If that's not the case, I need a new CPA.
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Old 02-23-2017, 10:53 PM   #30
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According to the CPA, these are carry over losses that can be used against gains and recaptured depreciation. If that's not the case, I need a new CPA.
OK, that works. I didn't make the connection. Thanks!
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Old 02-23-2017, 11:09 PM   #31
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The general rule on SFR's is a minimum of one percent of your all-in number per month in rent. Expenses, including reserves for capital improvements, plus property management and vacancy, run roughly 50 percent. So your minimum net from cash flow before mortgage payments should be six percent. If appreciation is a compounded 3 percent, overall, your return is around 9 percent. If you can increase the rent as a percentage of your cost or shave your expenses, you can hit double digits.

The numbers change if you are in a low or high appreciation market, where the appreciation trend is likely to continue. Low appreciation requires a higher portion of your return from cash flow to reach your target return. Markets where appreciation historically exceeds inflation encourages investors to accept lower returns from the initial cash flow. Rent and value increases are needed and expected to make up for the anemic or non-existent initial cash flow.

ETA: That's unleveraged. If your leverage is positive, your cash on cash return is higher.
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Old 02-23-2017, 11:20 PM   #32
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Ok, I don't get it. Let's say rent is $1,000/month. You would pay $100,000 for the property and receive $12,000 a year in rent.

Unless your expenses are only $2,000 a year, how do you net 10%? Surely, taxes, insurance, etc will be more than $2,000 a year... in many areas of the country property taxes alone are 2% of value.
Your down payment for a $100,000 building is $30,000, assuming 70% financing. If you can net $3,000 that's 10%, but I would never accept that low of a cash on cash return considering the risk. The property must have positive cashflow, and you might even have a lower taxable income (or loss) and actually put money in your pocket. Many SFHs do not show a taxable income.
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Old 02-23-2017, 11:31 PM   #33
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Ok, I don't get it. Let's say rent is $1,000/month. You would pay $100,000 for the property and receive $12,000 a year in rent.



Unless your expenses are only $2,000 a year, how do you net 10%? Surely, taxes, insurance, etc will be more than $2,000 a year... in many areas of the country property taxes alone are 2% of value.


I think he's saying if you can only rent a 100k property for 1k a month, don't do the deal.

Around here 100k is the very bottom of the market for a decent townhouse in a stable neighborhood. The rent would be at least 1300 with taxes and insurance about 3500 that's 12% return but will get trimmed by repairs/maintenance. This is consistent with the 10x rule of thumb. It's getting harder to find places that are not condos. If there's a condo fee it's very tough to justify at the lower end of the market. This is my casual observation after looking into the local market.

Three siblings have many rentals among them and they all swear by single family units (detached/duplex) but I think the business case is different for them.
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Old 02-24-2017, 03:48 AM   #34
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Also live in Bay Area. Bought my rentals many years ago. Location, Location,
and Location. Now paid for. Good rents and appreciation. However,real estate is not a straight line. It does go up and down.

Have 2 friends who did the same as your friend. Sold/traded, local Bay
area rentals for out of state. Reasoning. Can buy multiple units, diversify
the rents, used property mangers.

Short version: Big mistake. Paying property managers very expensive.
Repairs, costly. (if local, you could do yourself).
Tenant turnover, high. (if you manage your own rentals
you are more careful). (property manager's have no
incentive, to try and find long term tenants).

One friend, said, never again. The other, I have not talked to recently.

My thoughts also...
Dad tried "out of state management"...he had numerous problems. I like being nearby, and able to talk to repair people, etc.
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Old 02-24-2017, 03:59 AM   #35
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Gain in value is a bonus. Having someone else pay the mortgage until free and clear is the real value. Then the cash really flows.
+1.

In most Midwest (rustbelt) markets, appreciation is a very slow growing bonus (2-3% annually, maybe...).

To answer another post regarding returns....in this same Midwest market, we see about 7% return on appraised values of paid off single family homes. Of course, the tax advantages are not taken into consideration.

BTW, when the housing market crashed, rental incomes remained level. The underlying reduced "appraised value" made no difference to cash flow. IMHO it was very easy to stay "fully invested" and not panic sell when the rents just kept coming!
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Old 02-24-2017, 09:25 AM   #36
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Here in San Diego I had to overpay to get something near me, according to this formula. $345k for $2400/month rent. But with 25% down and super low interest rates the P+I of the mortgage is under $1300 so it's always been a little cash flow positive. We took the chance as we knew the area extremely well, and felt a 1500 sq foot 3 bed 2 bath 2 car garage place zoned for a 10/10 rated school had good appreciation potential, plus the beach and a university were 10 minutes in either direction. But now, almost four years later these homes are pushing $500k while the rents have only budged a bit. Chinese investors have been coming in all cash for years, offshoring their wealth and making the market loopy. I don't see rentals working here right now as an investment.
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Old 02-24-2017, 10:45 AM   #37
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According to the CPA, these are carry over losses that can be used against gains and recaptured depreciation. If that's not the case, I need a new CPA.
I prefer investments that do not result in losses, even if you get to carry them forward... if your losses net with gains, how is that a great investment?
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Old 02-24-2017, 10:59 AM   #38
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I think he's saying if you can only rent a 100k property for 1k a month, don't do the deal.

Around here 100k is the very bottom of the market for a decent townhouse in a stable neighborhood. The rent would be at least 1300 with taxes and insurance about 3500 that's 12% return but will get trimmed by repairs/maintenance. This is consistent with the 10x rule of thumb. It's getting harder to find places that are not condos. If there's a condo fee it's very tough to justify at the lower end of the market. This is my casual observation after looking into the local market.

Three siblings have many rentals among them and they all swear by single family units (detached/duplex) but I think the business case is different for them.
What he actually said was:

Quote:
1 months rent time 100 should be your purchase price or less. This way you have covered taxes and insurance.

10% net. If you paid all cash you should net a 10% return. rents-(taxes+insurance)=1/10 of the cash invested.
So for him if a property rented for $1,000/month he would be willing to pay up to $100,000 for it. If that was the case, it would be unlikely that rents-(taxes+insurance) would be $10,000 a year.

I'm curious as to how many properties he actually owns. I suspect the number is closer to zero than to one.

My dad owned several residential rentals and ultimately found they were more of hassle than they were worth and sold them. He had a commercial rental property that is easy peasy, generates incredible returns and he kept and I manage for my mother since his passing.
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Diversification through rental property?
Old 02-24-2017, 11:43 AM   #39
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Diversification through rental property?

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Originally Posted by pb4uski View Post
What he actually said was:







So for him if a property rented for $1,000/month he would be willing to pay up to $100,000 for it. If that was the case, it would be unlikely that rents-(taxes+insurance) would be $10,000 a year.



I'm curious as to how many properties he actually owns. I suspect the number is closer to zero than to one.



My dad owned several residential rentals and ultimately found they were more of hassle than they were worth and sold them. He had a commercial rental property that is easy peasy, generates incredible returns and he kept and I manage for my mother since his passing.


A lot depends on expresses, mainly taxes and interest rate. When I bought my rental SFH properties, home prices were 9-12 times monthly rent, cap rates were 6-8% and leveraged cash-on-cash returns after taxes were 7-10%. Now the home prices are 15-16 times monthly rents in my area, so no deals. As Warren Buffett says, you make money when you buy an investment. It is very true especially for the rental properties.


PS: Due to crazy appreciation on SFH in recent years, my asset allocation is very heavy with real estate. I tendv to focus on cashflow returns for all my investments so I am staying put for now. But if the crazy valuations goes on for one more year then I am going to start unloading my rental properties.
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Old 02-24-2017, 12:53 PM   #40
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I prefer investments that do not result in losses, even if you get to carry them forward... if your losses net with gains, how is that a great investment?
A tax loss does not necessarily translate to bad investment in the rental property world. In fact, it is perfectly normal for a rental property with a positive monthly cash flow to have losses when you file your taxes.

Most of the losses associated with profitable rental properties are non-cash expenses related to depreciation. From a tax accounting perspective, these non-cash expenses shield rental income from taxation; for a rental property purchased with a mortgage, it is not unusual to have a positive cash flow after all cash expenses are paid. Depreciation charges (which are non-cash expenses) can cause a rental property with positive monthly cash flow actually have a loss from a tax perspective. Unless you are full-time real estate person (NOT an investor with another career outside of real estate), these "passive activity losses" may be limited when you file your taxes each year. Any unused passive active losses accrue until you sell the property.

However, there is no free lunch, so when you sell a rental property, IRS rules require to pay up and pay the taxes that were "deferred" due to depreciation. Any accrued passive activity losses can be used to offset the depreciation recapture tax.
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