Real Estate as Investment

[JWV]

I know this has been touched on in other threads but would like to hear more from people who have used real estate to get to where they are today. I want to hear experiences.

We currently have the house we live in, a very buildable lot and a small cabin in Colorado (Creede). Our plan is to finish the cabin to make it rentable. We know this will not be a money-maker until we sell it. But we love the place, just hope it pays for itself. If we go in the hole we don't love it enough to keep it. We will build a house on the lot we own with a separate 'casita' that the boys will use until they move on and then we will rent that. We will keep our present house and rent it when the new place it finished. This house is near
Davis-Monthan AFB so many potential renters.

We enjoy 'fixing-up' and building. What are your experiences in this area?

Thanks, Judy

 

[Nords]

When you're ready to rent to the military, consider contacting the base's Housing Office. Try to get your ad to the people who locate rentals for busy senior officers. Emphasize that you want senior enlisted/officers who'll sign at least a one-year lease. (Your worst nightmare will be four O-3s or E-5s roommates with boyfriend/girlfriends.) If you're in a decent location then the Housing staff will keep you in mind for high-quality tenants with a minimum of effort.

Take a look at the instructions for IRS Schedule E to see if it's worth putting in the time to qualify as a real estate professional. I don't mean a realtor's license-- I mean the number of qualifying hours per year, doing the management yourself, and making the decisions. It greatly improves your deductions & loss allowances. Of course making a profit is always better, but this will help you ride out the down part of the cycle.

Oddly enough, one of our best home-repair resources has been a subscription to Family Handiman magazine. Reader's Digest's "customer service" & junk mail are a pain but the magazine keeps you abreast of time-saving techniques & tools. It's probably a deductible rental expense, too. If you really get into it then it's good to read anything in the "For Pros by Pros" series like "Plumbing a House" by Peter Hemp.

Take a look at your tool situation. If you're spending a lot of time on rental repairs/maintenance then it's worth buying separate professional-quality power tools to leverage your time. The cost is deductible (if not for personal use) and the best bargains are found at pawnshops. That's a pretty hands-on approach, though, and you might do better with contractors or services.

If you haven't done so already, get very familiar with your state/local codes for landlords & tenants and make sure your tenants have their own personal copy (so that they don't get creative). And if you haven't already, give these books a thorough read: (1) Investing in Real Estate, 4th edition or later, by Andrew McLean & Gary W. Eldred (who's taken over the new editions) and (2) Landlording by Leigh Robinson (7th edition or later). If you've never been a landlord before, either, then try renting the video "Pacific Heights" for a quick reality check...

We read the rental & sales ads every week and spend nearly every weekend at open houses. (Hey, it's a hobby!) We're not ready to buy with this inflated market, but it's the best way to monitor trends and to be ready to scoop up a bargain. You'll also quickly learn who the good realtors are and they'll start recognizing your face. Eventually you'll have a network of contacts who'll alert you to good opportunities.

 

[Craig]

Real estate has become one of the more dependable, and critical three legs in our three-legged stool (with SWR/retirement savings #2, and a discounted, "hope there's something there" SS benefits as #3 ... no pension, alas).

We had good luck years ago in buying fix-up's / foreclosures ... though I gather word got out long ago, and it is tougher now.

At this point we own three rentals ... all with no debt, so very stable, little downside (just real estate taxes and insurance).

Numbers are ... $595K invested, and a monthly net rental / cash return of $1,900 ... works out to just north of 3.8% cash on cash. Plus, we get appreciation on top of that ... the $595K investment has grown to around $650K. We'd have done much better to have split our cash and bought a number of rentals with more leverage, but my heart wasn't in it ... were looking for safety and stable income plus appreciation. No longer had the stomach for a bruising rental market.

Best deal we ever did was a foreclosure, 2 acres with a home, split the two acres into 2 lots, and made 8 times our money 11 years later. It's all about how many dwelling units you can put on the land ... the more you can subdivide, the greater the value bump. Or, buy a foreclosure or fixup, IF you find a good deal ... We Buy Ugly Houses, etc. have taken some of the profit out of the market, appears to me.

I think real estate is a great way to make money, and after you do 2 or 3 deals, it all clicks. Probably will work with it more when I retire from a real job ... hopefully sooner than later.

Good luck.

 

[gratefuled]

The rental market's been very good to us too.

About three years ago we bought a three-decker in a Boston neighborhood for 20% down on $450K. We've had positive cash flow almost every month, we live in one of the units, and we're condo-ing the house out this spring so we can re-locate this summer.

The value bump from condoing is interesting; rough mark-to-market is that the house would sell for $600K stand-alone or $800K as condos. (This arbitrage is one of the big drivers of the Boston real-estate market.)

But we've earned that money, no question. A lot of nights and weekends in the shop or with a paintbrush in my hand, a lawsuit filed by an opportunistic jackass, the constant haggling with the city over lighting and permits and inspections and every other thing down to the part in my hair, midnight calls to fix broken toilets, etc.

So it's not easy money. There's this stereotype that says landlords are idle suckfish, but I wish I could bill by the hour like everybody else.

Ed

 

[gratefuled]

Oh, by the way...we took the opposite approach on debt from Craig. We wanted as much leverage as we could possibly get (short of paying monthly mortgage insurance) so we could arb cheap real estate rates against equities returns.

I've rolled short-term ARMs over about four times in those three years. I have a simpatico mortgage broker who doesn't charge me points or closing costs, and our rule was that every time the rate would walk down a quarter point, he'd start new paperwork. (I've sent him a lot of business and this his way of saying thanks.)

The strategy has worked; our equities returns have averaged 20% since we bought the house and our average interest rate has been well under that.

 

[Martha]

Our FI and my husbands ER was as a result of buying rental real estate. In our mid 30s we had very little savings and my husband was unhappy in his job. He saw a tri-plex for sale at a low price, kind of run down. We borrowed money from my 401(k) (a big no no, I know) and scraped up enough for a down payment. He worked very very hard to fix it up on the off season when he was laid off. The initial fix up meant no tenants for a while. There were tenants there when we bought the property and we had to make them move. One tenant from hell didnt want to go and we had to go through a long eviction process. I even had to do an eviction trial with my husband as client.

We were stretched for money big time. It took a number of months to get the work done and the apartments rented. He then bought the neighboring 4-plex. It was in better condition but needed updating. These two properties ended up being cash cows. He took the profits and my bonuses and bought more rental real estate. He ended up quiting his job and spent his time working on and managing his properties.

When buying a property, he would look carefully at expenses and carefully at what expenses had been deferred. Does it need a new roof? How is the furnace? How dated is the decor? Etc. He would then estimate what these total expenses should be, and if he was incuring debt, the cost of that debt. He would then look at income and whether rents could increase. He also had a good feel for vacancy rates in the local market and rental rates in the market. Then he made sure that the price he was paying made sense given his estimate of expenses, the need to cover principal and interest on mortgage debt, and put some money in his pocket. He tried to insure a good return on the cash we put into the property as a downpayment. He ended up doing very well. With real estate valuations increasing in the past few years, he decided he should sell out because people were willing to pay a premium based on their own belief of future appreciation.

Because my husband knows real estate, about a third of our money still is in real estate. We live a 4-plex we own, our last property. We invest in LLCs and limted partnerships as passive investors. However, we know the managing member/general partner well. Some of these passive investments have done great. We have been able to offset depreciation against other passive income. One of the properties we invested in 16 months ago is being sold and we are doubling our money. Some have not done quite as good, but they still pay out something and we get the depreciation.

It worked good for us. Now the key is not to lose it all in the stock and bond markets.

 

[John Galt]

While I was in Texas, I visited a friend who has a
cattle ranch there (picture Southfork without the swimming pool). They are Texas snowbirds
(like we aspire to be). They own a summer place here a little ways upstream from our home. This guy
is a millionaire (maybe multi) and it sounds like he
did it mostly with real estate. Just the real estate I have
seen
is worth over a million easily. I never made a million but
(as I posted before), I never took a loss worth
mentioning on anything in 30 years of active real estate investing, and I did
real well several times. True, it tends to be too
"hands on" for a lot of ERs (me included). IMHO
(with enough knowledge/experience) it's about as close to a
sure thing as there is out there.

JG

 

[John Galt]

A true story.

I once bought a "package" that included a manufacturing plant, 2 retail storefronts,
an apartment, and 120 acres of land and invested -0-
dollars of my own money. Thus, my leverage factor was
infinity. Sold them off piece by piece by piece. Worked out real well, but if I hadn't been so busy with other
things at the time, I could have done a lot better.

JG

 

[P.S.]

Have bought (a few) and sold (once).

One property is just across the border of D.C. Received new tax assessor's bill a week ago and am thinking of selling.

Husband loves to fix up homes and is good at it too. I'm like the water boy- bringing fresh squeezed juices, making appreciative noises, painting/sanding/gardenwork. Currently fixing up cape cod across the street (this is good for our house value too), remodeling second floor (converting attic floor to real 2 bd/1ba), changing attic stairs to full stairs with bannister turn, etc.

Here are some of my concepts:

1. try to get good tenants . Have had good experience with busy D.C. professionals who spend all their time on working/commuting, their money on rent/commuting/Starbucks, and not much of either left for partying .

2. raised in a "debt is bad" family, so am of the pay off mortgage ASAP mentality. Better yet, pay cash and save closing costs (this means you can close on a house and just pay hundreds of dollars.) But for those really expensive properties...hey gratefuled: who's your mortgage broker?

3. once the geographic/metropolitan area decided on, buy a property that just meets your/your renter's needs (not necessarily wants) in the best neighborhood you can afford. Seems that values in good neighborhoods rise proportionally higher than the general area.

4. save up the expensive remodeling purchases for one big purchase using a 10% off coupon from Lowe's or Home Depot. These can be found in the USPS moving pamphlet, 1 per address. So make parents, relatives accomplices. Also, Home Depot gives 10% off when you open an account; an account for every member of the family is not unimaginable.

5. Landlording book by Leigh Robinson, just got it a couple of weeks ago and have just started reading, but highly rec. thus far.

6. good insurance with a high deductible.

 

[BUM]

I think there is a common theme in this thread. Wether your real estate investment is professionally managed or not it needs watching and often direct involvement...sometimes in unpleasentries. If you have a bunch of rents coming in from a multiplex or several properties it may be worth the time and trouble. But if its a single unit or a single family house...sell it now or sit on it and sell it later dont even think of renting it in the meantime.

BUM

 

[John Galt]

Hello BUM. I see your point, but sometimes it can work
out well, even if you have just one single unit.
When I was active in real estate I avoided that situation. However, it all depends......................

JG

 

[Martha]

I think there is a common theme in this thread. Wether your real estate investment is professionally managed or not it needs watching and often direct involvement...sometimes in unpleasentries. If you have a bunch of rents coming in from a multiplex or several properties it may be worth the time and trouble. But if its a single unit or a single family house...sell it now or sit on it and sell it later dont even think of renting it in the meantime.

BUM

I live in a college town. A popular strategy in the last few years is for out of town parents to buy a house near the college and put their kid in it along with a pile of other students. They get a homestead property tax break because their kid live in the house, and make a ton of rent off the other students.

The neighbors are up in arms about the decline in their neighborhoods due to out of control students. I'll also bet that the house looks pretty ratty by the time the parents want to sell it when their kid is done with school.

 

[Nords]

A popular strategy in the last few years is for out of town parents to buy a house near the college and put their kid in it along with a pile of other students.  They get a homestead property tax break because their kid live in the house, and make a ton of rent off the other students.  

The neighbors are up in arms about the decline in their neighborhoods due to out of control students.  I'll also bet that the house looks pretty ratty by the time the parents want to sell it when their kid is done with school.

I knew kids could be good for something, but I never thought about a second homeowner's exemption!

If our kid decided to live off-campus then we'd try this type of investment. But we'd require her to be the property manager and we'd make sure that the arrangement funded her IRA.

 

[BUM]

If our kid decided to live off-campus then we'd try this type of investment. But we'd require her to be the property manager and we'd make sure that the arrangement funded her IRA.

Disclaimer: CHP (Cocktail Hour Post) Yeah right. A kid + property manager + blue sky financial incentive (to most kids a buck means in-my-hand not in some "bogus futuristic maybe-money dad") + go to college = doom... IMHO If you're not careful the little darling may be moving back home after a semester or two. Obviously its all up to the kid. An intelligent responsible, mature, forward thinking , kid might just pull it off. Most just want 2 - 3 hots and a cot out of the dorm with no strings attached. Glad thats all behind us.

BUM

 

[ER@40]

Seems like there's Property Arbitrage to be had if you have the money or are a risk taker. Some States have appreciated well over 20% a year in the last few years (CA), while other areas are more stagnant (Midwest)
Anyone considering this? Check out :-

www.ofheo.gov/media/pdf/4q04hpi.pdf

Obviously the caveat here is with the Fed uping rates access to cheap money may over for this cycle anway.

 

[Mr._johngalt]

Hello retire@40! That's the way I would go if I had the
time, energy, youth.

JG

 

[ER@40]

Need to do more research.
Perhaps get hold of historical property prices and Fed rake hikes. Try and gauge the pace of knock-on effects - of Fed's increases dampening residential housing markets.

 

[ER@40]

Thanks for the welcome MRGALT2U.
So I don't misquote later, MRGALT2U = John Galt in another guise? Or are there two John Galts'?

 

[cute fuzzy bunny]

Oh...theres only one john galt

 

[Mr._johngalt]

True!

 

[ER@40]

Anyone know of good real-estate books that cover subtleties and variations between States?

i.e. Is California the only state with little or no property tax?

 

[tryan]

For all those who think RE prices can't go down ... I'll post my "tale"

I bought 9 units north of Boston at the exact wrong time (late 80's) and slowly watched them flip upside down thru the early 90's. Oweing more the property was worth was half the problem ... rents also plumeted because new owners bought for less than than thier neighbor. My once 200/mo positive cash flow turned into a 5-6 hundred/month negative.

Banks - taking a beating - stopped lending to investors. RTC auctions flooded the market, selling RE at a dime on the dollar. Having seen the "top", I knew this was the "bottom" so I begged/borrowed from relatives and attended RTC auctions. When the RTC autions dried up I went to banks for REOs. In all I bought another 14 units. Most I paid was 32k ... least was 5k.

In the end it took 12 years for my original 9 units to turn right-side-up. Even still, I wrote checks as a seller at 3 of my first 4 closings. The other 14 units did extrodinarily well (still carrying many of these).

Couple lessons from all this: 1) don't let the mortgage consume more than 50% of the rents 2) don't be afraid to take some profits off the table.

 

[Mr._johngalt]

Interesting story tryan! Guess there is just no sure thing

I was trying to think of my worst real estate deal ever.
I never had a real disaster, but I was a very fussy buyer.
Mainly I had to buy so cheap that hardly anything could
really cause sleepless nights. Takes a lot of legwork to find those deals, but I digress...................

I would say my worst deal was a personal residence I bought in 1980. It was new and I paid too much just because
we really liked it and I got easy builder fiancing. Then,
we decided to move after 2 years. Prices had declined
to the extent that I was upside down. Rather than
write a check to the buyer, I just stopped making my payments on the land contract. After a few months with no cash flow the contract holder was more than ready to cut a deal.

JG

 

[wildcat]

JG -

Buy so low there isn't much risk....ahh the old margin of safety rule. Ben Graham 101 applied to real estate.

 

[tryan]

Rather than
write a check to the buyer, I just stopped making my payments on the land contract. After a few months with no cash flow the contract holder was more than ready to cut a deal.


Nice move! I tried this game of chicken with one bank ... stopped making mortgage payments for 3 months and tried to "negotiate" better terms. They trashed my credit, then I paid in full. Guess I blinked first! Would have been easier with a private note holder. Live n'learn!