RE Investments as part of portfolio

[VungTau]

Wondering if anyone has found a tool to help assess RE investments in terms of estimating whether portfolio will last through retirement. I am using FireCalc and FuturePath now but neither one seem to have a way to include the kind of RE investments I am in now.


The RE investments are a pooled mix of trust deeds, tax liens, collateralized loans and other vehicles. They return 8% per annum paid monthly and have performed flawlessly for the 4-5 years I have held them. I would love to include them in the calculations but not sure the best way to build them into the models to get an accurate picture of my overall plan.



Any thoughts out there?

 

[newellcr]

If you anticipate the future to look like the past, treat it like an annuity. Figure out if you are happy with putting a safety factor on it and stuff it in the calculator. 8% bulletproof is pretty nice. Lots of people would be thrilled with less so if they can get in and eat your lunch, they will, eventually, but that won't take your return to zero.



I am facing a similar situation with rentals.



Cheers,

 

[Another Reader]

Wondering if anyone has found a tool to help assess RE investments in terms of estimating whether portfolio will last through retirement. I am using FireCalc and FuturePath now but neither one seem to have a way to include the kind of RE investments I am in now.


The RE investments are a pooled mix of trust deeds, tax liens, collateralized loans and other vehicles. They return 8% per annum paid monthly and have performed flawlessly for the 4-5 years I have held them. I would love to include them in the calculations but not sure the best way to build them into the models to get an accurate picture of my overall plan.



Any thoughts out there?

To get 8 percent yields, you have taken on a lot of risk. The paper won't perform "flawlessly" in the next recession. I would consider these as high risk, speculative investments. At some point you will likely get out of them, possibly with a loss. I certainly would not include the income in any long term cash flow projection. I would treat them as an investment you intend to sell in the short term and reinvest elsewhere.

I own real estate, not paper derived from real estate. I am paying off all mortgages over 5 percent and stocking up on cash for the next sale. I count the real estate income in my cash flow at a conservative percentage of current cash flow. FIREcalc and all the other retirement calculators don't work for me because of the paper asset market assumptions.

 

[VungTau]

To get 8 percent yields, you have taken on a lot of risk. The paper won't perform "flawlessly" in the next recession. I would consider these as high risk, speculative investments. At some point you will likely get out of them, possibly with a loss. I certainly would not include the income in any long term cash flow projection. I would treat them as an investment you intend to sell in the short term and reinvest elsewhere.

I own real estate, not paper derived from real estate. I am paying off all mortgages over 5 percent and stocking up on cash for the next sale. I count the real estate income in my cash flow at a conservative percentage of current cash flow. FIREcalc and all the other retirement calculators don't work for me because of the paper asset market assumptions.

Its actually getting more difficult now too. According to the fund managers, because the RE market is so hot now it is challenging to find investments that meet their strict criteria so there haven't been many new projects coming in. Too much money chasing deals so it's hard to find acceptable returns.

 

[Another Reader]

Its actually getting more difficult now too. According to the fund managers, because the RE market is so hot now it is challenging to find investments that meet their strict criteria so there haven't been many new projects coming in. Too much money chasing deals so it's hard to find acceptable returns.

The message is clear. The cycle has peaked and the dumb money is chasing bad deals. Time to roll this fund up and distribute the money.

 

[l8_apex]

I'm not aware of a way to use any tools like firecalc for real estate.

As others have said, you'd be well served to put this in the category of "high risk". If the real estate market goes belly up, where are your investments on the list of "who gets paid back first"?

I'm not against real estate, it was roughly half of my early retirement approach. I built my own spreadsheet to track monthly/annual expenses and asset/net worth projections.

Also note that looking at the prior 4-5 years is extremely unlikely to be predictive of anything long term.

 

[calmloki]

We are kinda in the same boat. We own a fair amount of rental real estate free and clear, have sold property and are receiving monthly payments, and have made first position hard money loans. Rent provides more than enough for personal living expenses, but I don't really want to keep being a landlord. The contracts and loans I view as safe - if we had to foreclose the effective acquisition cost of the subject properties would be great. Problem is plugging values into firecalc. What I do is use the loan contract remaining value, the hard money loans at face value, and the rental real estate at 75% of the "true cash value" printed on our property tax statements every year. The TCV is low, but taxes/depreciation recapture and commissions/cost of sale are also low at 25% so maybe that balances out. I take the resulting cash value as if we were cashed out of everything and pull a number like 3% out of the air as what we could earn on the cash. Depending on mood that number can be higher or lower than the percentage figure I use for inflation.

Feels lonely when the norm for the early retirement group seems to be " I've a pension that will pay $3258/month, with cola, SS that will pay $$2517/month, with cola, stock investments will pay 6.3% and inflation will be 2.85%. I'm just pulling numbers out of the air and have nowhere near the confidence others seem to have. OTOH, the balance of pessimism and and desire to have money working that has served me well has worked so far, so I'll just stay out here looking in at the crowd.

 

[Spock]

At the risk of a thread hijack, what happens tax wise if you have to foreclose on one of the loans/properties? Say you loaned at 50% LTV... got the property back through foreclosure, and then sold it again at full value (minus commissions)...

 

[calmloki]

On a loan your basis is cost, that is, remaining loan amount + fees/lawyer expense. You don't get missing interest payments as an expense AIR.

If I sell a place and 2 years later have to foreclose my new basis is the amount I sold it for, but the kicker is I had/have to pay tax on the original sale price. If I resell at a profit greater than the original sale I pay tax on the profit, if less I assume I can show a loss. Such is my understanding, I'm sure there are wrinkles I'm not hep to.

 

[Offgrid Organic Farmer]

Wondering if anyone has found a tool to help assess RE investments in terms of estimating whether portfolio will last through retirement.

We bought a commercial /mixed use zoned building. It has two storefronts. The second floor and third floor were vacant. We gutted the second and third floors, and we have had it remodeled into eleven apartments and a very large office space. Both storefronts are leased to businesses and one apartment is under a lease.

There is a small hold up with the Fire Sprinkler system, the fix has been scheduled. As soon as that is fixed we will have our Certificate-of-Occupancy.

The city public housing office has been pestering me, they want to fill all these apartments. They have a waiting list. They say that as soon as I get the C-of-O, they can have all the apartments filled within the week.

The total cost to buy this property, and remodel it will be around $400k.

After all projected monthly and annual expenses [taxes, insurance, water, garbage, pest control, sprinkler inspections, alarm monitoring, etc] we expect to Net around $50k/year.

This should be close to 12% ROI every year for us.

 

[Spock]

We bought a commercial /mixed use zoned building. It has two storefronts. The second floor and third floor were vacant. We gutted the second and third floors, and we have had it remodeled into eleven apartments and a very large office space. Both storefronts are leased to businesses and one apartment is under a lease.

There is a small hold up with the Fire Sprinkler system, the fix has been scheduled. As soon as that is fixed we will have our Certificate-of-Occupancy.

The city public housing office has been pestering me, they want to fill all these apartments. They have a waiting list. They say that as soon as I get the C-of-O, they can have all the apartments filled within the week.

The total cost to buy this property, and remodel it will be around $400k.

After all projected monthly and annual expenses [taxes, insurance, water, garbage, pest control, sprinkler inspections, alarm monitoring, etc] we expect to Net around $50k/year.

This should be close to 12% ROI every year for us.

From my experience with section 8/public housing rentals, you better bank a BIG chunk of that 12% ROI for future repairs.

 

[Offgrid Organic Farmer]

From my experience with section 8/public housing rentals, you better bank a BIG chunk of that 12% ROI for future repairs.

I agree.

I have owned apartment complexes before, though I have never rented to section 8 tenants.

My insurance underwriter is also assuming that I will be filing claims every time a tenant leaves.

It never occurred to me that a landlord would do that.

 

[calmloki]

Have had 2-5 section 8 tenants in our places every month for the last 20 years or so. Hard pressed to say the damage they do has been noticeably more substantial than the other tenants. This is in small to medium sized Oregon towns, not inner city, so maybe that is different.

On topic: Vung Tau - so you hold paper? Is this with you as primary lien holder or are you a member of a group that holds the various instruments and pays group members some percentage of income?

 

[Winemaker]

Next month I will celebrate 20 years as a landlord; I have never been a Section 8 landlord nor do I plan to start. The relationship between a landlord and tenant is peculiar, but has to be business like. I don't need a stinkin' federal/state/local bureaucrat to muck it up. My longest tenant has been with me since 8/2001, and my last tenant joined me 1/2017, I have seven.

 

[VungTau]

I'm not aware of a way to use any tools like firecalc for real estate.

As others have said, you'd be well served to put this in the category of "high risk". If the real estate market goes belly up, where are your investments on the list of "who gets paid back first"?

I'm not against real estate, it was roughly half of my early retirement approach. I built my own spreadsheet to track monthly/annual expenses and asset/net worth projections.

Also note that looking at the prior 4-5 years is extremely unlikely to be predictive of anything long term.

Totally agree that 4-5 years doesn't mean much although the firm has decades doing RE and probably 15 yrs as fund mangers. I did a lot of due diligence and hope it was all valid.

 

[VungTau]

Have had 2-5 section 8 tenants in our places every month for the last 20 years or so. Hard pressed to say the damage they do has been noticeably more substantial than the other tenants. This is in small to medium sized Oregon towns, not inner city, so maybe that is different.

On topic: Vung Tau - so you hold paper? Is this with you as primary lien holder or are you a member of a group that holds the various instruments and pays group members some percentage of income?

I have 2 investments with this firm: one is a loan in which loanholders are near the top in the waterfall of payouts should the fund be wound down. Second is as an equity investor. Both are at 8% but equity shares in the profits too and is further down the waterfall. There's a lot more to it obviously but thats the gist of it.

 

[Letj]

We bought a commercial /mixed use zoned building. It has two storefronts. The second floor and third floor were vacant. We gutted the second and third floors, and we have had it remodeled into eleven apartments and a very large office space. Both storefronts are leased to businesses and one apartment is under a lease.



There is a small hold up with the Fire Sprinkler system, the fix has been scheduled. As soon as that is fixed we will have our Certificate-of-Occupancy.



The city public housing office has been pestering me, they want to fill all these apartments. They have a waiting list. They say that as soon as I get the C-of-O, they can have all the apartments filled within the week.



The total cost to buy this property, and remodel it will be around $400k.



After all projected monthly and annual expenses [taxes, insurance, water, garbage, pest control, sprinkler inspections, alarm monitoring, etc] we expect to Net around $50k/year.



This should be close to 12% ROI every year for us.

I have extensive experience renting to section 8 tenants and my advice is DO NOT DO IT if you have other good options. Sometimes a landlord doesn’t have a choice because of where they chose to buy properties and the only way to reliably collect rent is section 8. If that’s not the case in your area, please don’t do it. I have so many horror stories, they would fill a large book. The worst case scenarios you can imagine I’ve had to deal with it - abandoned animals, house covered in animal faeces, drug dealing and addicts, destruction of property, police activities, domestic violence you name it.