Rental income to FI RE earlier

[twaddle]

I thought I offered to in exchange for beach front property at 50% off.

Patience. Patience.

Here are some roll-backs in the area to whet your appetite while you're waiting:

Irvine Housing Blog

 

[honobob]

Patience. Patience.

I think they need to learn patience. They seem to be premature [-]eja[/-]sellers. Leverage and time grasshopper.

And how am I gonna learn ya if you keep getting your education from the street? First you have to compare actual sales price against actual sales price. Asking price is just a fun number to put out there. I know you know that alot of properties in California sell for hundreds of thousands more than the original asking price.

Here's one for you. I looked at a bay front condo 38 Bryant #906 listed at $475K that was a foreclosure!! Bought 3/3/2006 for $650,000. I comped it now and as of 3/3/2006. Probably should have sold for $450K then and should go for $475-500 now. So some smuck didn't use a Realtor that could have shown him he was overpaying so he lost his $130,000 down payment. Or did he? Smart guy probably did a 0 down and split the $200.000 with his partner, the seller, and stuck it to the mortgage investors. Maybe.........

But the real lesson here is that you cannot say the market has dropped $175,000 based on this info. You need to compare market sales price to market sales price. That's the lesson for today. Study leverage and next year we'll tackle elasticity of demand!

 

[twaddle]

Study leverage and next year we'll tackle elasticity of demand!

Speaking of elasticity of demand, how's your Vegas condo investment doing this year?

Low affordability + no more speculation + increasing foreclosures + tightening of mortgage underwriting = future demand gone bye-bye while supply goes up up up.

 

[honobob]

Speaking of elasticity of demand, how's your Vegas condo investment doing this year?

Low affordability + no more speculation + increasing foreclosures + tightening of mortgage underwriting = future demand gone bye-bye while supply goes up up up.

It's actually a single family detached and still doing quite well. Even before the Vegas boom the bank was quite comfortable with a 3% appreciation rate. Thats 3% yearly increase on the market value($300,000) not the $23,000 I have in it.
Here's another lesson. Before you buy a specific property ask yourself why this property will still have demand when everything around you enters the supply chain. It won't be the same for all areas or even all property types. In this instance location was first. I'm located approx 6 miles to downtown and about 8 to the strip. It was an infill in an established neighborhood. And it was in a small development of only one story homes and located at the best location per traffic and noise and view etc. It was also moderate in size, a 1500sf 3/2/2.

It seems that the properties that are in trouble are the "fantasy" neighborhoods that were being built out along the not quite built 215 freeway. Most of these are monster homes built out in the boondocks and were priced on a concept price. Most of these developments never were completed or allowed to mature and ended up with alot of speculators that filled them with any kind of tenant to get some cash flow which in turn drove the inflated values down probably past what they would have been if real home buyers had bought and occupied them.
Buyers that would be interested in my house would not be looking in these neighborhoods so their values have minimal effect on my property.

I think I've addressed every component of your equasion. Mortgage underwriting is the one thing I have little control of except that I would always be able to provide seller financing if necessary.

 

[twaddle]

I think I've addressed every component of your equasion.

Yes, you have, and I'm sold! If I understand you correctly, all I need to do is:

1) find a cash-flow positive SFR after PITI, maintenance, vacancies, etc

2) in an area with constrained supply and increasing demand

3) find problem-free tenants

4) let simmer

And I've tried. Really I have. I'm pretty sure I've got (2) and (4) nailed, but (1) is causing me real problems these days, and (3) seems like a game of Russian Roulette (and I've already taken a bullet).

 

[me_no_boss]

Hi Honobob,
I don't doubt that you bought those properties in Honolulu. Good for you and I mean it.
So it is simple, buy rentals only in good areas before prices go up.
I'd like to go region of Northern CA, the center of the market is collapsing.
If you bought prior 2004, it's all good.
After 2004, it's all tears.
Go to,
Sacramento Area Flippers In Trouble
for laughs.

 

[tryan]

One thing we can all agree on ... the days of paying full price and getting double digit annual appreciation are long gone. Need to buy below market (foreclosure, REOs, distressed seller ...) to make the numbers work today.

 

[honobob]

Yes, you have, and I'm sold! If I understand you correctly, all I need to do is:

1) find a cash-flow positive SFR after PITI, maintenance, vacancies, etc

2) in an area with constrained supply and increasing demand

3) find problem-free tenants

4) let simmer

And I've tried. Really I have. I'm pretty sure I've got (2) and (4) nailed, but (1) is causing me real problems these days, and (3) seems like a game of Russian Roulette (and I've already taken a bullet).

1.) No, probably won't find that in a high appreciating area and doesn't have to be SFR, $1.2M of my portfolio is Condo. Suck it up and deal with the negative cash flow because your research has shown a high probability for rental increases to flip that and the appreciation more than outweighs the NCF. Shortly this property will subsidize # 2 property Snowball..snowball...If you did 2 right you won't have vacancies.

2.) You still have to buy in the top % in this area. If you buy in the bottom half expect your results to be in the bottom half.

3.) The problem is you not the property if you did the proper 2.) Why would anyone jepardize losing one of the top rentals in the area?? Usually in Hono I've always had 20+people wanting my Diamond Head properties. In the 80's there was a slump and I even panicked when I only had 10 candidates of whom I thought 4-5 were good. Deep Breath. I got 4 more qualified people than I have rentals. Problem solved. My 6 year tenant realized the competition was tight and invited me to dinner that nite. They knew they were good candidates but they also knew there were other good candidates. They pay on the last day of the previous month. My year+ tenant on my other DH property pays 2 days before the month ends!! Oh, and number 2 pick took my number 1 picks old place that they were vacating cause it was number 2 desirable place in the area available #2#2#2.



I may be an idiot savant on tenant screening but I think it is an ability anyone can develope. I never do Credit checks. I think its a crutch people use to rationalize their choice. Good Credit equals good tenant?/ Doubt it. I deal with the person without preconceived notions. When I used to hire in the hospitality industry years ago there was always competition among the managers over who hired the best people. Back then it was hard to hire day workers. i interviewed alot of young people who were on "independent study" so they could work during the day. I figured these people were smart if the school let them make their own hours. I would still put them thru my interview hoops and hired quite a few of them and they were all successful. Not being from CA I didn't know about the program and it wasn't til years later that a teacher friend told me that "independent study" kids were the losers who didn't come to school anyway. Would have screwed my good hire average if I'd hired on that notion. Same goes with tenants.

4.) Simmer...simmer... cause the markets always hot at the top.

 

[twaddle]

1.) No, probably won't find that in a high appreciating area and doesn't have to be SFR, $1.2M of my portfolio is Condo. Suck it up and deal with the negative cash flow because your research has shown a high probability for rental increases to flip that and the appreciation more than outweighs the NCF. Shortly this property will subsidize # 2 property Snowball..snowball...If you did 2 right you won't have vacancies.

You mean that, unlike you, I'll have to pay more than the down payment? Ugh. You're already making this seem much less appealing to me.

So, all I need to do is convince myself that the rate of appreciation going forward will be similar to the historic rates, right? Man, that's a tough one.

Let's see. Cap rates for the highly desirable rentals you're talking about are what these days? 4%? 5%?

Cost of "leverage" capital is 7%. Taxes, another 1%. And you say I can't buy an SFR, so that means condos with asssociation fees of another 1%?

So, I need to bleed 4-5% per year until rent inflation catches me up to break-even and then pray that appreciation makes it all worthwhile at some point?

That seems like a lot of red ink to bleed. And I don't know about prices in your area, but unless appreciation is essentially 0% over the next decade or so, I don't see how normal W2 Joes will be able to afford them. So, we're back to supply and demand again. I expect equilibrium to be reestablished, but we ain't there yet....

 

[chinaco]

1. $2,000 down now worth $400,000 1978
2. $5,000 down now worth $600,000 1986
3. 23,000 down now worth $300,000 1994
4. $40,000 down now worth $400,000 2003
5. $54,000 down now worth $400,000 2004
$124,000 investment for $2,100,000 Present Market Value


I only buy properties that I would live in. ... I'll take 100% financing anyday at the right terms.

Perhaps you have been successful at this technique. I suspect that for every person that is successful, there are many that are not.

It is a form of investing, and it is leverage. The reason you can do so is that the property is collateral for the loan. Real estate is one of the few areas one can do this. The other is owning a businesses. For most people that do the realestate thing (being a landlord), it is a small business.

If one has nothing (and no great paying job)... no money down and being a landlord can be a way to success, but I suspect few have the skill, savvy, and discipline to make it work for the long-term. Just like other endeavors in life.

 

[twaddle]

Here's a useful spreadsheet for the would-be landlord:

http://www.mortgage-investments.com/Real_estate_and_mortgage_downloads/10YEAR.XLS

It calculates cash flow and RoE over a 10 year period based on your assumptions about rental inflation, appreciation, etc.

Properties in my area would have negative cash flow over the entire 10 year period. Bummer.

 

[tryan]

Suck it up and deal with the negative cash flow because your research has shown a high probability for rental increases to flip that and the appreciation more than outweighs the NCF. Shortly this property will subsidize # 2 property Snowball..snowball...

Tried this in the late 80's: paid full price, little/no money down, negative cash flow. Locked myself into a 12 year hell-hole (north of Boston). Prices tanked, economy went into a recession ('91-93), rents tanked, and mortgage rates dropped. The negative cashflow nearly tripled on every unit because your neighbor bought much cheaper than you did and could over equal/better units at a lower rent. Also a recession strangled wages driving rents even lower. Couldn't re-fi to lower rates because I was upside down on the mortgage. Would have needed a 5 figure check just to get right side-up. Soooo I "sucked-it-up" for TWELVE YEARS. Finally sold in the late 90's; wrote checks at 3 closings as a SELLER. Learned ALOT ... I'll never buy into a negative cash flow again.

Point being, it can snow-ball the other way too.

 

[thefed]

i didnt read this whole thread, but here's my .02


first, whoever mentioned 5% vacancy must be lucky. in MANY INVESTING BOOKS, AS WELL AS MY EXPERIENCE, EXPECT MORE THAN 5% VACANCY.

Best bet right now, imho,is to get a foreclosure that needs work, put in some sweat equity, and go from tere. this will help insure you have apos cashflow. if you really bu right, use the equity in one to buy the next. i bought 3 this way, and they all cash flow

SCREEN SCREEN SCREEN. one more month going by un-rented isnt half-bad if you consider the alternatives (google landlord horror stories) lol

 

[honobob]

Quote:
Originally Posted by tryan
Soooo I "sucked-it-up" for TWELVE YEARS. Finally sold in the late 90's; wrote checks at 3 closings as a SELLER. Learned ALOT ... I'll never buy into a negative cash flow again.

Point being, it can snow-ball the other way too.

What would the deal look like if you'd held and sold at what you consider the recent "peak"? I would imagine a very different result.

Did you buy the wrong location, product, price, mismanage it or was the failure entirely the result of external forces that were completely unforseen?

From your description you would have went negative even if you started positive because of rent decreases. I've never reduced rents in 25 years. The fact that you bought with neg cash flow didn't cause the failure yet that is what you're condeming. Other than being able to refi to a lower rate what difference would it have made if you'd had 50% equity? Now if you were overleveraged then I would agree that THAT was the problem, not the financing.

The people I see fail generally are people who buy "deals" without asking why it is a deal and how that will effect future income.

 

[Martha]

I've had two bad trashings this year.
The first was a sect8 tenant that was a partial pay.She and her kids collected $3200.per month through SSI (still considered non collectable as that is not earned income).

I'm a bleeding heart and spouse and I used to be landlords. I know there are bad tenants and I know there are bad landlords.

I am questioning the 3200 a month in SSI. Was the whole family disabled? Seems unlikely. The maximum SSI payment where both a husband and wife are disabled is $934 for 2007. I don't want people to get the impression people are getting rich off of SSI. Disabled parents with children can get something like 100 or 200 (don't recall the exact number) a month extra for each child.

SSI Payment Amounts

 

[tryan]

What would the deal look like if you'd held and sold at what you consider the recent "peak"? I would imagine a very different result.

Did you buy the wrong location, product, price, mismanage it or was the failure entirely the result of external forces that were completely unforseen?

From your description you would have went negative even if you started positive because of rent decreases. I've never reduced rents in 25 years. The fact that you bought with neg cash flow didn't cause the failure yet that is what you're condeming. Other than being able to refi to a lower rate what difference would it have made if you'd had 50% equity? Now if you were overleveraged then I would agree that THAT was the problem, not the financing.

The people I see fail generally are people who buy "deals" without asking why it is a deal and how that will effect future income.

Hind-sight being 20/20, I rode into the perfect storm: bought within months of the peak, interest rates on rentals were 10% (or worst), used 100% financing (liquidity too high) ... then the music STOPPED and I had no chair. Economy skids to a stop (i.e recession). Foreclosures flooded the market. Rents were cut by 30%. MA lead laws forced landlords to spend thousands in de-leading or risk a discrimination suit. Of course where there's chaos there's opportunity ... bought a dozen more units for pennys on the dollar via HUD/RTC auction and REOs. The positive cash flow on the "new" purchases help carry the problem properties. Twelve years later the buildings were starving for repairs (one needed a roof - 12K!) so dumping when we could made sense. Throwing good $$ chasing bad did not make sense.

The next 10 years prices tripled. My crystal ball was pretty foggy at the time. Also had a partner who was pushing to get OUT. Certainly for the negative cash flow units DCA all those years into a mutual fund would have saved alot of sweat, blood and tear.

 

[outtarentals]

We used rental income to retire at 40 - if you can call managing your own rentals retiring. I should mention that we thrived on it - found it exciting, just loved it and would do it all over again. But we started nearly 30 years ago when a single family house cost 30 - 40K (now 10- 15 times that) and you could put down 20% and the rent pretty much covered the PITI and you did your own maintenance. Then you'd wait patiently for them to start producing some positive cash flow while you were still working. Gradually you could build up a stable of little workhorse properties and pay them off. After a number of years, perhaps do some 1031 exchanges or live in one for 2 years and take the homeowners exemption. (500K for a couple).

But that was then. Starting today would be a much bigger challenge and would require more creativity though maybe it can still be done if one is very patient. Perhaps start off with a (cosmetic) fixer duplex or triplex in a fairly decent area. We found it was counterproductive to become too attached to a property - you need to be able to move when the time is right and buy & sell without a backward glance.
We didn't put too many expensive high maintenance items in a rental. We used vinyl floor tiles (some look like ceramic tile and much cheaper to replace) and basic carpeting - but we let them have a small to med pet so they didn't mind. Everything worked, was up to code, and was clean, but we didn't provide built in microwaves or garage door openers etc. Told them they could put in their own, and take it with them when they left. Often we rented very slightly below market and rented quickly. After several years we became good at figuring the right price. We did careful screening but many times used our gut feelings and always used a check-in - check out sheet and sometimes photos.
A couple of rules we never broke - still to this day. A tenant had to have paid ALL the first months rent plus the security deposit in CASH before they moved in. The rent is due 1st of the month and late by midnight of the 3rd with a $25 - $50 late fee after that and $5 a day from then on. I tell them (nicely) that this is my livlihood and I need the rent, so I will call an attorney after day 5 if they haven't called me to explain why they're late. The threat seems to work - I haven't had to call the attorney for many years, though I've occasionally worked with good tenants through a rough patch to let them stay in a rental. They know I would turn it over to the attorney if they ignored me.

We found the best tenants for us were slightly marginal. The really bad ones we rejected, and the really good ones didn't work out too well because they quickly moved on and bought their own house. At one point most of our tenants had declared bankrupcy and were rebuilding their credit. We always kept up to date with basic landlord tenant law.
This may be too much information - As others have already said - don't become a landlord unless you enjoy the challenge! It will be interesting to hear where you go froim here.

 

[Eyerishgold]

I appreciate all the responses so far and I hope to hear what more people have to say on the subject.

I definitely will purchase a piece of rental property in the next year or so. I think it'll be a single family home to start and when I get a bit more comfortable playing landlord, I'll move into a 2 or 3 flat. But, before I do anything, I need to do a lot more research. I think, if done correctly, rental income can provide a big chunk of my overall income in RE.

 

[raysk]

It was a single mom and five kids.
Each kid received SSI for one or the other of the alphabet syndromes that there are today.She also received sect8 as SSI is not considered earned income.

 

[emi guy]

multi for FIRE

I am not FIREd yet but hope to be one day.

I purchased some rentals (two fourplexes) three years ago and things have gone well. I was patient, looking for good properties in good locations that were, in my opinion, mismanaged. After a long wait, I found two units owned by the same individual. I approached him and asked if he was interested in selling. Sounded so easy to him that he said yes. I correctly identified the rents as way below market and was able to raise rents during the past three years to a point where I am in a positive cash flow situation.
Expect to put in the time, though. I think of it as a [-]Second[/-] third job.

In my case, I mow the lawns, rehab the rentals during vacancies and do the minor repairs. Since I work a full time job, I hire out the big repairs (roof, plumbing, window replacement etc).

I'm hoping that this property will act as additional income in the future or possibly appreciate enough that it could be sold off.

I've also thought of moving into one of my units when the time comes. It would be a lot cheaper than living in my primary residence, although less private.

Something else to ponder, that I never considered, is the risk involved in rentals. I often think that my rentals could be putting all that I work so hard for at risk of law suits, should something bad happen and a tenant sues me. Just something to thing of.

I would also like to read others ideas of the best way to utilize rentals during retirement.

 

[chinaco]

...
We found the best tenants for us were slightly marginal. The really bad ones we rejected, and the really good ones didn't work out too well because they quickly moved on and bought their own house. At one point most of our tenants had declared bankrupcy and were rebuilding their credit. We always kept up to date with basic landlord tenant law.
This may be too much information - As others have already said - don't become a landlord unless you enjoy the challenge! It will be interesting to hear where you go froim here.

I am not a landlord... but well put and Great Comments. Once you weed out the so called bad tenants (which is key to success), the marginal ones probably have occasional problems.

Zero tolerance with exceptions on a case by case basis is probably the only way to manage it.

Besides, for many people, once they fall behind, they cannot catch back up since they are living paycheck to paycheck.

 

[emi guy]

marginal tenants

What I've found that works is to insist that my "marginal" tenants pay their rent by automatic, monthy transfers from their account to mine. In this way, they have less discretion on which day to pay the rent as it is automatically handled by the bank. Secondly, if they do not have sufficient balances in their account, they create problems at the bank and with me (late fees). I spell this requirement out in their lease so if they cancel the auto-withdraw at the bank, they violate the terms of the lease.
It's worked well for me so far.

 

[tightasadrum]

liability issues

I am not FIREd yet but hope to be one day.



Something else to ponder, that I never considered, is the risk involved in rentals. I often think that my rentals could be putting all that I work so hard for at risk of law suits, should something bad happen and a tenant sues me. Just something to thing of.

I would also like to read others ideas of the best way to utilize rentals during retirement.

Liability issues stalk us all in this country, especially those with substantial assets. Two alternatives I've used as a landlord.

1. LLC - The Limited Liability Company is fairly easy to set up with a real estate attorney offers some protection from lawsuits that originate from the property it is written for. Downside: the paperwork required. You'll have to maintain separate records for the property, which is probably a good practice anyway, but more work.

2. Umbrella liability insurance policy- These are relatively inexpensive, maybe $100 /year for $1MM. But as assets get larger, the predators get hungry.

 

[tryan]

Problem with the umbrella policy is that no insurance company will touch you if you have 6+ units. Been there, tried that.

Initially, just keep the liability rider available on most fire policies ... add a commercial liability policy only if necessary (cost prohibitive).

But, we can all agree, going bare - uncovered - is a fools game.

 

[Eyerishgold]

I found this article today.

Top Tips: Try your hand as a landlord - Aug. 27, 2007