Purchase of Rental House

[honobob]

thats the point , real estate is a full time deal with multi family dwellings to be successful at it. merely buying a single family home and going into the part time rental business will probley not be worth it long term compared to other nusance free investments in fact statistically it has not .

Mathjak107, I spend maybe 8-12 hours a year dealing with my rentals. My single family required an investment of $5,000 and is now worth $600,000 (in the SFBay area) and has provided me housing at a fraction of what it would cost me to rent and has provided tens of thousands in cash when I've refinanced at no extra cost. That's thousands a year that I can diversify into other investments or more real estate or heck, for a toy.

Not to say that that is true for all markets of the country but at least in Honolulu/SFBay/even Vegas I have made more money than I have made in the stock market. Making 8-12% on my money in the market cannot come close to my real estate returns. Am I doing something wrong? Can you give me an example of where an average bob can duplicate my $5,000 investment in 1986? I'd really like to know. Thanks!

 

[kcowan]

...Our AGI has been over $150k for years, we owe $227k on our home and one rental house, everything else is free and clear. Real estate works for us - like the feeling that what we do affects our income, don't really think the same can be said for the stock market - it goes up and down by whim or whether Brittany shaved her head.

Congratulations. You are the epitomy of The American Dream! I trust it will continue to work for you.

 

[want2wander]

Thank you all for the great advice, and there's a lot to consider. Investments sound interesting, but I have not had great luck. In 1998 I rolled over a 401K into an IRA at CS. They helped to pick a fund - anyway, it has not done much in 10 years. I need to look at a new fund now. If I had purchased a rental house 10 years ago, it would be worth MUCH MUCH MORE than that IRA now.
At least I think it would have. I live in the SF Bay area, and even though prices are down now, the house woud still be worth much more than it was 10 years ago. (at least the area I am looking in)

How do I figure out which fund or funds to invest in. I have read some of the books that are recommended on this site, but I'm still not sure what to do.

Another thought is this, we have a very large house now with a lot of equity. We also have another property in the Sierra Foothills. I am thinking if I buy a rental house, I am also buying something that I would want to live in later. If we sell our big house in the Bay Area and move to the foothills in the next couple of years, but then need or want to move back to the Bay Area, we could always move into the small rental house and make it our residence.

Once you sell/move out the Bay Area and property starts going up, it's hard to get back in.

The question is, what is a good equity fund that is better than Bay Area Real Estate? I have a friend who talks about A total stock index fund in Vanguard.

Love to hear all the thoughts and advice.

 

[mathjak107]

Mathjak107, I spend maybe 8-12 hours a year dealing with my rentals. My single family required an investment of $5,000 and is now worth $600,000 (in the SFBay area) and has provided me housing at a fraction of what it would cost me to rent and has provided tens of thousands in cash when I've refinanced at no extra cost. That's thousands a year that I can diversify into other investments or more real estate or heck, for a toy.

Not to say that that is true for all markets of the country but at least in Honolulu/SFBay/even Vegas I have made more money than I have made in the stock market. Making 8-12% on my money in the market cannot come close to my real estate returns. Am I doing something wrong? Can you give me an example of where an average bob can duplicate my $5,000 investment in 1986? I'd really like to know. Thanks!

never confuse a bull market in something with genius. it can be devastating most of the time. probley for every sucess story there are loads of horror stories , especially now that the bull market in real estate is over

 

[FIREd]

My wife and I investigated the possibility of buying an investment property in our home town a few years ago. In the end though we chose to invest in REITS instead for several reasons:

1) REITS are more diversified: If you buy an investment property and you can't find a tenant for a couple of month, your income from that property goes to zero for those few months (yet your expenses stay the same). A REIT usually own many properties and even if one of them is vacant, they are still collecting rents from other properties. Plus some REITs also have a geographical diversification component which was important for us.

2) REITS are liquid. You can sell your REIT right now and get cold hard cash in a few days. With an investment property, it could take months before it sells and you get your money back.

3) REITS are portable. What if you have to move out of the SF area? Now not only you have to sell your house, but you also have to sell the rental property (unless you are willing to manage the property from a distance). In a good RE market it could add aggravation. In a bad RE market, it would just add insult to injury. With a REIT you can move halfway across the world and take your REIT (and its income) with you.

4) REITS are hands off. No finding and screening tenants, no repair works, no paying property taxes and insurance...

5) REITs have no negative impact on your monthly cash flow. When you buy a REIT, you don't need to take a mortgage, you don't add new monthly bills to your budget. The cash is going only one way: in (in the form of dividends). When you buy an investment property you have to worry about how to pay for those new outflows (taxes, insurance, mortgage...) and you have to make sure that the income you receive from that property covers those outflows.

BUT, I think that if you do everything right you would probably make a bit more money by investing in an investment property. The most important aspect for me would be to buy it outright (no mortgage) to minimize monthly outflows. The property we looked at cost $60K and could be rented for about $600 a month. That's $7200 a year gross (or an annual yield of 12%, which is impressive. Taxes and insurance would have amounted to about $1000 a year, so ex-maintenance, it would have been a $6200 yearly income (or a yield of just over 10%. FYI My REIT is currently paying about 5.2%). Off course any major repair or paying interests on a mortgage could slash that income quite a bit further...

 

[kcowan]

I think most people are attracted to RE because they think they understand it and it is one of their few sources of leverage.

 

[calmloki]

Congratulations. You are the epitomy of The American Dream! I trust it will continue to work for you.

God willin' and the creeks don't rise. To a great extent we are trying to transition out of the rentals and into private mortgage loans - I'd like to end up with a third or so in private loans, a third in the market, and the remainder in CDs - ok, maybe keep a 9-unit 2 1/2 miles away in the college town because I like college kids - especially the ones who want to live in our units across the street from the police station!
Haven't put much effort into selling yet and am not being asked to sell as we had been 18 months ago, but rents are going up, so that's nice.
Any neophytes to real estate management: 5% of gross rent for vacancy and 5% for repair cost is a fair rule of thumb to use in your planning. Also, if tax laws stay the same selling is going to hurt - Unca Sam is going to want his cut on all that depreciation that you took.

Slosh back a mango marguerita for me down in PV - had a good time down there watching the sunsets several years ago. Mixed feelings moment: on the beach up in Sayulita and got a call from a tenant with toilet problems - we had bought cell phones that worked in Mexico before our trip and i was able to get the problem fixed from the beach.

 

[FIREd]

I think most people are attracted to RE because they think they understand it and it is one of their few sources of leverage.

Plus they think it is a "safe" investment...

 

[calmloki]

Plus they think it is a "safe" investment...

Yes they do if:
They pay off the place and only need to worry about property taxes and insurance (in Oregon you can go three years without paying the tax before running into danger).
They get a huge loan for diddly down, or borrow a wad of cash on an inflated value and either walk away from the place with cash in hand or let the gubermint ride to their rescue.

Have several stocks that can't be sold for enough to cover the broker sale cost. One of them used to be Rath Packing - you all remember the lunchmeat products with the Indian head on them?

 

[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.

 

[honobob]

Today is a good day to buy real estate

And for you multi-unit investors and my buddy, well maybe only in my head, Mr. American Dream himself, Calmloki.

518 Vallejo Street Sold 2/2008 for $1,450,000 a 1908 2 unit 1900sf property. Thats $725,000 per unit or $725 a sf. No resale but just down the street at 506 Vallejo Street there was a sale in 8/2006 of a three unit 1908 building consisting of 3435sf for $1,275,000 or $425,000 a unit or $371 a sf!!

Calmloki, don't you enjoy the smell of fresh loam over stinky rotten baloney?


And a single family resale from 3/1998. 815 39th Ave. sold for $324,000 and resold 2/2008 for $870,000. That's a 10.3% appreciation rate for 10 years. Pretty close to Honobob's 11% appreciation rate over 22 years.

 

[calmloki]

And for you multi-unit investors and my buddy, well maybe only in my head, Mr. American Dream himself, Calmloki.

518 Vallejo Street Sold 2/2008 for $1,450,000 a 1908 2 unit 1900sf property. Thats $725,000 per unit or $725 a sf. No resale but just down the street at 506 Vallejo Street there was a sale in 8/2006 of a three unit 1908 building consisting of 3435sf for $1,275,000 or $425,000 a unit or $371 a sf!!

Calmloki, don't you enjoy the smell of fresh loam over stinky rotten baloney?


And a single family resale from 3/1998. 815 39th Ave. sold for $324,000 and resold 2/2008 for $870,000. That's a 10.3% appreciation rate for 10 years. Pretty close to Honobob's 11% appreciation rate over 22 years.

Bob, we are both property investors but working different ends of the spectrum - we have a 7-unit i'd be happy to sell for $350k - OTOH, it cost $65K back in 2/89. I just can't imagine the kind of income one has to generate to feel like a $870k house is appropriate. Stuck back in the old "house = 3*earnings" metric (our home is more like 1.4*earnings).

 

[honobob]

Bob, we are both property investors but working different ends of the spectrum -

And both doing quite well I might add. Just goes to show you that if you work with what you're comfortable with you can make it work for you.

Income to home price? When you're generating almost $55,000 appreciation a year you really don't need to look at income too much. It is a different mindset but then so is sushi.

 

[JayOh]

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.

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

 

[tryan]

It should rent for close to piti

If you're looking at a negative cashflow every month ... look at DCA into Vanguards total stock market index. You'll happier without the tenants and richer without the monthly drain and the risk of further declines. If you can get a positive cashflow ... rentals property is worth the time (because you're making $$ every month and long term appreciation).

Here's the nitty griity on the 23 units I had over the last 20 years (all numbers are a percentage of gross rents): taxes 12%; insurance 2%; maintenance 15%; vacancy 5%; water/sewer 2%. So with NO MORTGAGE .... 36% of the rent is GONE. Pay the mortgage with HALF (50%) the rents and you get a 14% PROFIT. Hire a property manager for 15% and you're looking at a loss every month. I like SFH ... maintenance is a bit higher but turnover is minimal.

Yes multis are more profitable but managing the tenants is like herding cats.

 

[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]

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]

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]

newsletter

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]

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]

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]

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]

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.