My Plan
I Have quite a bit of cash and would like to invest in rental houses. my goal is to own free and clear five 2 unit houses and use the cash flow as my primary income.
In my maket a 2 unit that costs arround $100,000 will rent for $1,000 per month. my plan is to buy two of these houses with outright then put a $30,000 down payment on a third. Using the cash flow from theses houses it will take 4 years to pay of my $70,000 loan
After the four years I will purchase a fourth house. with the cash flow from four houses I can pay off the fourth house quicker in lets say 3 years.
The same method for the fifth house but this time it should only take 2 years to pay off. Given this senario I will have reached my goal of finacial independance in under 10 years.
What do you guys think? Will it work? Any sugestions?
Have you done your homework on the expences. What happens if the renter doesn't pay you.
This plan is a very good start. Look at all your cost. Rentals require maintaince, managment, and supplies.
I love my rentals but I know what it cost me each month. I don't owe anything on one yet there are still bills. Just be as detailed as possible.....
I'm assuming 30% of the rent will go to expenses not including loan and interes payments.
The expenses include property tax, insurance, vacancies, repairs, advertising, etc...
If something goes wrong like I lose a couple of months rent on one unit then it will just take a little longer to reach my final goal of 5 houses free and clear.
Since I start with such a good base of cash flow from the 2 houses free and clear I will always be able to cover day to day expenses and the loan on the 3rd house. Correct?
The concept appears sound. The purchase prices of your first two or three properties is fairly certain because your plan calls for purchasing them now.
In five years, a 9% appreciation rate may make the purchase price of a similar property as much as 50% greater than it is today. Eight years from now, that same property may cost you twice as much as it would today.
As an alternative, consider putting 20% down on five properties now. Use your excess cash flow to pay off one property at a time. Run the numbers and see if you reach your free and clear targets and your cash flow goals with a smaller total investment. By buying more units now, you mitigate the cash flow impact when you have one or two vacant units.
You say financial independance. To each person this means a different thing. I know a man VERY well who lives very nicely on $1400 a month with a wife and one child. He has been financially independent for a long time.
If however you wish for say 15K per month to live on, it will of course be more difficult and probably take you a longer amount of time.
In my opinion the beauty of real estate as opposed to most other investments is the leverage.
In your plan if you used leverage instead of buying 2 houses outright, in 5 years you could still be financially independent but would have more money coming in and a bigger potential for larger profits.
Also if you are going to manage the properties yourself I would buy one building and see what renatal management is all about. I believe the reason so many people never get past their first rental building is because they fail miserably at managing it.
Good luck and keep us informed how things go.
Mike[ Edited by MrMike on Date 12/03/2003 ]
Dave T
Thanks for the reply. 9% appreciation is very high but I know it can happen and has been the norm in several hot markets recently. I used a steady 4% when doing my calculations. I also figured that I would be raising rents to keep pace with the rise in purchase costs associated with appreciation.
Puting 100,000 down and borrowing 400,000 is very risky. If I ever had an problem and somebody did'nt pay on time I would not be able to make the loan payments. Also so much more of my cash flow would be going to pay the interest that it would take much longer to pay down the principal then the 10 years.
Lastly I'm new to this and the idea of managing five buildings from day one is a very scary what if i make a mistake. by managing less buildings in the begining it gives me a chance to learn without being overwhelmed[ Edited by maida7 on Date 12/03/2003 ]
Putting down 200K and borrowing 400K is very risky you your opinon. This would be a LTV of only 66% which is quite safe in most real estate investors minds.
You may actually be at 50% LTV if you buy wisely which is VERY safe in my opinon.
This is good you know your risk level.
If you are going to manage the properties yourself I would buy one building and see what renatal management is all about. I believe the reason so many people never get past their first rental building is because they fail miserably at managing it. [ Edited by MrMike on Date 12/03/2003 ]
Dear Mike
Thanks for the reply. I have read several books about investing in real estate and they all talk about using leverage to increase your ROI. But these books never talk about how to pay down your loan so you can own a property free and clear and use the cash flow for your primary income. instead they advocate cashing out when your levereage is reduced and transfering your profits to a much bigger investment.
I belive leverage is a get rich quick technique for people with limited funds who need to build wealth. I already have some money and my number one goal is to generate cashflow to support my family buy owning property free and clear. Then I can quit my 9-5 job and count my profits.
How will leverage increase my cash flow if you are constantly paying the huge loans that come with it?
How will leverage help me own my properties free and clear if the whole idea of leverage is to have a very small % of equity?
Sounds like you have a great idea to invest. I understand that many factors are in play - not sure of your current employment. However, I would use as little of my own money as possible. With your "assets" you should have no problem getting a loan(s) - why not buy 10 properties using the power of leverage. You could get great cashflow and keep your cash available for future investments.
Dear Smills
lets see
10 properties 100,000 down
900,000 loans = take home cash flow after expenses 1,000.00 per month
or
1 properties 100,000 down
no loans = take home cash flow after expenses 700.00 per month
10 properties is alot more risk and 10 times the work for only slightly more money
Maida,
Our comments are brief and the presentation of your position was excellent.
We are not suggesting you forego the original approach, but the luxury to own investment property free and clear in our opinion has it's disadvantages. Borrowing money, measuring risk, and leveraging tax benefits to make money is the simple message. Using all the elements in your scenario the long term monthly cash flow for a rental unit with a mortgage @ 8%, and possible vacancy verses the short term ROI with cash on hand as possibly a "hard money funding source" @ 12% demonstrates the investment upswing available with a parallel risk equation. The benefit of cash on hand is ALSO cash flow. Lastly, somewhat fundamental, remember that just because you have a mortgage on a unit, your cash reserves remain available to "pay off" the balance if needed. As a real estate investor do not loose site of the fact that you can borrow money for a cheap price. Three years from now these same investment dollars may be out of reach.
Eric & Rosa
[addsig]
Maida,
Although you are correct about the small difference in monthly income on 10 properties as opposed to one, you are forgetting about the 2 greatest reasons to get into real estate.
Expense write-offs and Appreciation.
1. The Depreciation combined with the expenses of the 10 properties will be far greater than your income off of the properties so you will not only pay 0 taxes on the money, the taxes will be offset against your current income as well, making you money now.
2. assume the 4% appreciation that you mentioned before, would you rather have that 4% on 1 $100,000 property, or 10 $100,000 properties. That becomes a 40% return on your money.
You also should consider the tax benefits of being able to right off mortgage interest. If you own free and clear you don't get those benefits.
Maida7,
The risk of non-payment goes down once you build up a cash reserve. Since you seem to be cash strong , you could use some of the money you would have put into properties to start your reserve fund.
I believe I am a bit conservative on this one but I maintain cash reserves equal to about four months of total income from rentals. This risk is spread over multiple properties so it is highly unlikely that I will lose this much rental income all at once.
If you rework your plan with some leveraging (even with 20% down) you will find that the differences are dramatic after ten years.
Another possibilty that you might want to look at since you have cash is to by discounted properties (less than 70% of market value) and refi your cash back out. Then you can repeat ad nauseum and then you will have your cash and rental properties.
Regards,
Ed
These replys are great thanks alot.
I didn't understand what classimg is trying to say.
As for the benifit of apretiation. making Future assumtions about future appretiation is completly speculating. I have no interest in speculative investments. if my properties go up in value thats great but a deal must make sense without appretaition. This is even more important when investing in low income areas. I belive low income rentals give the best cap rate and make great investments for cash flow but are not guranteed to appretiate positively in the short term.
As for tax advantages. What is better paying a loan/expense to save on taxes or not paying the loan/expense at all?
Dear edmeyer
Yes investing with only 20% down would be dramiticly different. After 10 years I would have none of my houses payed off and my cash flow would not be enough for me to quit my regular job. I would not have reached my goal. Why is this better? Becuase I maximized my ROI? Thats nice when I'm looking at another 20 years of loan payments before I can realize my investments full cash flow potential.
Also I think a four month cushion is not nearly enough. You should have six months mimimum. What would happen if you lost your job and could not cover your day to day expenses like food and shelter?[ Edited by maida7 on Date 12/03/2003 ]
I gotta agree with most people so far, I think it's shortsighted not to speculate or to make non-speculative investments. Your risk/reward might be low, but you won't be financially independent- although as stated before that too is a relative term.
When you leverage your property your ability to grow is increased exponentially. It's a direct proportion. Personally, I always leverage my existing property, and keep cash reserves for the next good deal. I would be largely unhappy if at the end of my career, I had 4 properties.
In my opinion the beauty of self-reliance is haveing expendable income, don't lock yourself up financially with 2 properties. Buy a bmw, get a 60' yacht, go on a 3 month trip to thailand! and have it all paid for by your multitude of profit farms.
Just my 2cents
Dear gamando
What are these "profit farms"? with leveraged properties all your rental income goes to pay the loan. How are paying for the BMW? With another loan? sounds like your money will be all tied up in debts and liabilties.
By owning free and clear or investing with less leverage your money is not tied up. You can always sell or borrow on your equity. But if you start with leverage and loans you will always have loans and loan payments and when things go wrong or you underestimate your expenses you will be in forclosure and you can kiss that BMW goodbye!!!
Besides my goal is not to grow my net worth but to invest in assets and generate cash flow for my day to day expenses such as food and shelter.
If you don't feel confortable doing 10 - get a few to start see how it goes. Keep your cash in your pocket. I have 3 properties (more in the works) and each pulls 300+ (after expensises and the property manger fee) per unit and the morgages are all under 700. Not too bad cash flow for little of my own money. Keep in mind that there are 100% 95% and 90% loans available - if you know where to look.
with all investments you want to diversify. If you can buy two homes with 20% down on each keep both for a year. Get rental income for both over that time period and then sell one off. You now have cash in hand from the equity of the sold property and rental income still coming in from the other property. You also now have the ability to repeat this transaction with more money than you started with. Your plan is well thought out and would work but you can speed up your time to financial freedom by leveraging what you have.
Quote:
On 2003-12-03 16:39, jfoley wrote:
. Your plan is well thought out and would work but you can speed up your time to financial freedom by leveraging what you have.
I've read this in many books on real estate investing and everybody who has replied to my post has said that leverage is so important.
I challange you to prove it.
I have $230,000 to invest. I don't want to manage more than five doubles at any given time. Each double in my market costs $100,000 and rents for $1,000 per month. Expenses not including loans are 30% of the rent or $300/month.
I give you 10 years time to amass investments that produce a yearly cash flow of $50,000 per year after expeses including loans. This is your challange!!!
Okay, I know that I am piling on here, but I agree with Dave T....why not put down a smaller downpayment on several properties rather than putting all your eggs in 1 or 2 baskets. The key here when purchasing real estate is to gain leverage. Use as little of your hard earned dollars as possible. I don't know about you but 100K is a lot of money to go into one or two houses. How long will it take to recoup these dollars? If I had to choose between equity and cash...cash would win every time. I'm not afraid to have several mortgage loan balances out there as long as my TB's are paying for it. I know I'm rambling a bit but just my 2 cents. Good Luck!!
Maida7,
Please allow me to make a few comments.
The Housing Price Index (rate of appreciation) in NC has been between 3 and 5 percent for the last 7 years. In Asheville the last year has seen a 6.8 % increase and over the last 5 years the increase has been 37.5%.
I will freely admit that past performance does not a future make. If it does continue ,so much the better. History is on the side of long term appreciation.
I am like you in that I look for cash flow. I will not buy a place unless it has positive cash flow. I always buy with terms where I can hold indefinitely (with reasonable rental assumptions). I am buying a place now in an area where I am not counting on any appreciation. I am buying at a discount and the cash flow will be great.
Appreciation or lack thereof does not make a RE investment speculative. Remember that you will not get a "margin call" from a lender if the value of the property goes down.
If you are concerned that all of the renters will disappear due to some economic blight, you may be more at risk owning outright than if you are with a leveraged purchase. If you have all of your money in a property and the disaster hits your cash flow goes to near zero and the value of the property takes a huge plunge as well. If you make a purchase with 20% down then you hand the property back to the bank and keep the 80% cash you didn't invest.
Appreciation alters my net worth but not my cash flow (at least in the near term). Without leveraging, my cash flow would be much less (with/without appreciation). In the long term appreciation allows me to trade for larger properties (tax deferred) which will drastically increase cash flow. During times (or locations) (when/where) there is no appreciation or very low appreciation then buying opportunities abound and I can increase cash flow by acquiring more discounted properties with cash.
This being said I do like elements in your plan. Owning some properties outright ( I do) offers very good safety most of the time. They can also be a source of short term cash for acquisitions. The fact that you have a plan deserves congratulations. So, congratulations!
Regards to you,
Ed
Maida7,
My last post was done before I read your response to me.
For my cash reserves, the amount I stated was in my investment account which services real estate only. My other liquid assets have me very well covered. The amount I have in my investment account is more conservative than what Diane Kennedy (an advisor and author for Robert Kiyosaki's Rich Dad, Poor Dad series) has. She keeps three months of expenses.
I also know that you posted your response before my last one, as well. I do not chase ROI, I chase cash flow. At today's interest rates (about 6.5%) an $80,000 loan has a debt service of $505.65 per month. If your expenses are 25% of gross income, your net operating income is $750/mo. With no mortgage this is your cash flow. If you buy outright you have invested $100,000 to give you $750/month cash flow. If you use your $100,000 to buy 5 of these, your net operating income is 5 times $750 which is $3750/month. Your debt service is 5 times $505.65 which is $2528.25 per month. This gives a cash flow of $1221.75/month. Now, let's be conservative and assume that the rent goes up only 10% over the next 10 years. This gives you a cash flow of $850/month if you own one property outright and a cashflow of $1721.75/month if you own 5 properties. This is better than 2 to 1 on cash flow for the same $100,000 investment.
In terms of your challenge, I have reached your challenge cash flow amount in less than 2 years. I certainly could not have done this without leverage. One of my friends has a net cash flow of $30,000 a month which he got to in four years.
Thank you for helping to provide a lively exchange.
Regards to you,
Ed
Maida,
The art of making assumptions during analysis of your property is not speculative in and of itself. Whether or not an assumption is speculative depends on how well you have educated yourself about this property and the market it is in. In other words, the more you learn, the more you decrease your risk exposure. Certainly, there is an irreducible risk level. But so much risk can be mitigated through education.
Concerning your plan. What is your end goal? I understand you want to be free of debt with an income that does not require employment in 10 years. Does it end there? Remember that, at the 10 year point and beyond, your income will only increase as the rents on your five properties increase. (Once those five properties are paid off, you are done for several years until you build up enough cash to buy another property outright) If this is acceptable, then you have a great plan. If you want a larger increase in income or have other goals that are not based on your "to live on" cash flow, then consider using at least some leverage to help your cause, both now and later.
Leverage gives you control over more properties (more cash machines). I think you are assuming that the leverage strategy leads to an endless cycle of debt. That does not have to be the case. When used wisely, leverage can give you control over a large amount of properites during your aquisition phase and then you could move to a payoff phase where you work to pay off each property quickly. There are endless strategies and which one is best is based on your end goals.
Concerning taxes vs debt. Vague but true, it depends on your goals. The tax benefits from a mortgage are great to offset other non-real estate income. A good accountant will help you and should be a part of your team now. I hope this helps.
adam
I missed a few posts and just caught up. I am curious why you are limiting yourelf to 5 properites? Do you want property mgt to be your 'job'? To be sure, a property mgt team will siphon off some cash flow, but the freedom you gain is tremendous in my opinion. You can make becoming a real estate investor your 'job' instead and you will not be limited to 5 properties.
[ Edited by hueyrescue on Date 12/03/2003 ][ Edited by hueyrescue on Date 12/03/2003 ]
Quote:
On 2003-12-03 19:33, edmeyer wrote:
One of my friends has a net cash flow of $30,000 a month which he got to in four years.
Thank you for helping to provide a lively exchange.
Regards to you,
Ed
Hello Ed,
This is VERY interesting to me. I would like to see how this was worked out. Perhaps another thread so we don't hijack this one.
I am sure it would be quite helpful to many people.
Thank you.
Mike
Maida7,
I think your plan is reasonable but it actually appears to have too much risk involved if your goal is low risk. As mentioned above, it is an unknown whether or not you will be able to afford the units in the future at current rates of appreciation. Also, although housing prices have increased since 2000, rental rates have not kept pace in general. There is also the issue of investing in strictly doubles which can depreciate(along with rents) in many areas. Everyone has a different idea of what would be excessive risk but I think you can never go wrong by diversifying. You might want to consider buying some low income single family homes. I actually have some that cash flow so well that if I took $230,000 and bought these outright they would easily cashflow the $50K right now that you are hoping for in 10 years. There are many other ways to diversify. If you did choose to invest in low income though you will need a property manager who is experienced with them. You have to know how to avoid vandalism during vacancies, how to collect rent, what low income tenants are really looking for, how to tell a low income house and neighborhood that will be profitable,etc.
Hey,
90%+ of the posts on this website are from people who have no plans, no money and no idea of the work/risks involved with Real estate, so it is incredibly refreshing to see someone like maida7. This is a great thread.
As far as your plan...I think it is very good. If you follow it, in 5, 10 or 15 years you will be a "happy chappy".
Could you be more "aggressive"? Of course. But I don't think that is what you are trying to achieve.
Are you "risk adverse"? No, you are not. Anyone is willing to invest $100k in to an area that they are unfamiliar with, is a risk taker.
I would like to recommend a slightly different plan.
Buy the first (or two or three) property with cash. You will be able to negotiate a better price. After the property is rented out and you are comfortable with being a landlord, you could do a cash out refinance to obtain money to purchase the next property. In this way, you still have the option of using leverage, but not the requirement.
Quote:
On 2003-12-03 19:33, edmeyer wrote:
Now, let's be conservative and assume that the rent goes up only 10% over the next 10 years. This gives you a cash flow of $850/month if you own one property outright and a cashflow of $1721.75/month if you own 5 properties. This is better than 2 to 1 on cash flow for the same $100,000 investment.
Regards to you,
Ed
Dear Ed:
look at my first post and follow my plan. After ten years I would own all 5 houses out right with a cash flow of $10,200 per month almost six times the $1,721.75 per month that you project.
So how is leverage better?
Quote:
On 2003-12-03 21:22, davmille wrote:
I actually have some that cash flow so well that if I took $230,000 and bought these outright they would easily cashflow the $50K right now that you are hoping for in 10 years.
Where are these houses, what part of the country?
Quote:
On 2003-12-03 19:53, hueyrescue wrote:
Maida,
Concerning your plan. What is your end goal? I understand you want to be free of debt with an income that does not require employment in 10 years. Does it end there?
There are endless strategies and which one is best is based on your end goals.
I'm not sure what I will do after I have reached my goal in 10 years. I assume I will quit my day job and do fix and flip projects to pruduce chunks of cash for the luxurys of life. But 10 years is a long time away and I will be a different person in 10 years with a different opinion of real estate investing so who knows.
You wrote that there are endless stratigies. You know my goals you know my plan. If you disagree show me a specific plan that will out perform mine.
Everybody is saying that using leverage is a powerfull force that will outperform my plan but nobody will give a specific scenario to back up their claims. Go ahead show me I'm wrong, take my challange.
Maida,
Numbers always look good from a high level, but alas, when we drill down through them, serious issues begin to surface. I have to make generalities, since I don’t have specifics about your state, so please forgive any small inaccuracy.
I will go through your numbers, as you have presented them and point out where I see a flaw in your logic. I am going to start with BEST-case scenario. That is 0% vacancy. Impossible for the long-term, but if you can’t get your plan to work in the best case scenario, they definitely won’t work in a more realistic scenario like 10-20% vacancy.
Starting Plan – Spend $230,000, Buy 3 twins, 2 paid for, 1 – 30K down and finance 70K. Total rent from 3 twins will be $3000 per month or $36,000 per year.
You say you are accounting for 30% towards expenses – that’s $10,800 per year.
Year 1- Before we look at possibilities, let’s look at what MUST be paid. I am going to assume you are managing the properties, so management fees won’t apply, let’s look at taxes, insurance and debt service.
Property 1 – value $100,000 – assume 2.5% (very low) for taxes, and insurance (property and liability) that’s $2,500
Property 2 - value $100,000 – assume 2.5% (very low) for taxes, and insurance (property and liability) that’s $2,500
Property 3 – Value $100,000 – debt 70,000 at 7% for 20 years (PITI $750/month) that’s $9,000.
Total cost – $14,000 (already higher than your 30% or $10,800 and we haven’t included vacancy, advertising, repairs, utilities)
This equates to $36,000 -$14,000 = $22,000.
What about closing costs on the 3 properties, 3 appraisals, document work, title insurance, loan origination on the one, probably close to $4,000
Leaves us $18,000
Now go into those expenses we didn’t calculate vac, ad, repairs - $5,000 would be low
Leaves us $13,000
And let’s not forget what the tax-man gets, could hurt worse.
Loan balance after year 1 - $68,000 (use amortization schedule)
This would take at least 5 more really good years to pay off (since no closing costs after year 1) if you promise to never spend one dime of the income, probably more like 7.
We also need to look at property 4, where’s the down payment coming from? Refi on 1 of the properties? 100% loan? There’s costs with all of that as well.
Your plan looks more like a 15 to 20-year plan.
Dear mcl8190
You are wrong. let me explain
These properties have expenses of 30% of the rent. These expenses include vacancys, advertising, repairs, insurance, taxes, etc... Everything but closing costs, loans and interest payments are included in the 30%. the colsing costs are included in the price of the property. So go back do the numbers after all expenses and loan payments my cash flow will be enough to pay of the 70,000 loan in 4 years.
If you don't like my plan, show me another way, take my challange. Please include details and numbers so I can really follow your ideas
Quote:
On 2003-12-04 09:08, maida7 wrote:
Dear Ed:
look at my first post and follow my plan. After ten years I would own all 5 houses out right with a cash flow of $10,200 per month almost six times the $1,721.75 per month that you project.
So how is leverage better?
Because your plan as you put forth will not work.
There is no way you will be able to pay off those mortgages as you have laid your plan out. There just is not enough money coming out of the rentals.
This is why people leverage.
If not then in my opinon you could just dollar cost average your money in to the stock which covers ALL the stocks on the DOW. You will have no management issues and no leverage. Your return historically would be approx what you are currently looking to get with the real estate plan and very little leverage.
Dear Mike
You say it won't work prove it.
rents from three houses = 36,000 per year
expenses including vacancys, repairs, insurance, taxes, etc.. = 12,000 per year
loan payments = 6,000 per year
annual cash flow = 18,000
4 years of cash flow = 72,000
This is how I will pay off the 70,000 loan in 4 years.
With 3 houses free and clear the 4th house will be paid off quicker. and so on
If you still don't like it provide an alternative plan using the same parameters. Take my challage!
Lots of good advice being given to you here. If you don't want to believe it and you think you have it all figured out - then just do it! Best of luck
Dear smills
I do want to listen but nobody will give a specific plan. Please be more specific with your ideas. Give me some numbers and details to back it up. using the same parameters show me how leverage will provide better results. Take my challange.
Please
Quote:
On 2003-12-04 11:16, maida7 wrote:
Dear mcl8190
You are wrong. let me explain
These properties have expenses of 30% of the rent. These expenses include vacancys, advertising, repairs, insurance, taxes, etc... Everything but closing costs, loans and interest payments are included in the 30%. the colsing costs are included in the price of the property. So go back do the numbers after all expenses and loan payments my cash flow will be enough to pay of the 70,000 loan in 4 years.
If you don't like my plan, show me another way, take my challange. Please include details and numbers so I can really follow your ideas
I love the blanket "you are wrong" statements.
Look at your numbers 30% for tax, insurance, repair, vacancy.
I showed you how the low end tax and ins would be $2500 per property thats $7500. $10,800 - $7500 = $3300 for all other contingencies. out of your 6 units, if only one is vacant for 3 months, you will lose$1500, how about advertising the place for sale $500 per month for 3 months = $1500. That leaves you with $800 for all repairs, utils, whatever. What if you had 2 vacancies, horrors....
Come on now.
And doing it your way, you stilll have a $5000 per year debt service to pay.
And since we are only expecting this low amount of expenses, and we have no interest expense, we add depreciation and we will still end up with profit at the end of the year. What's your tax bracket. Probably around 38% +. Factor that into your number before you can use it to pay the mortgage.
It's not a bad plan, but your numbers are off, they are too low and your time schedule is too short.
15 to 20 years is what this would take.
You were wrong
While crunching numbers are very important when making large purchases such as real estate. Let me ask you a question. Why only 5 units? Is it fear of being in debt? don't want the burdon of managing that many units? I would say you are limiting yourself for future growth and income. If you could get today cashflow of 300 per unit today with 10-20% down and over the next 5 years aquire 20 units with the same cashflow. Your monthly income in 10 years will be pretty high. Don't sweat the debt. and don't think small.
Dear mcl8190
I'm sorry I was so rough. Thanks for the splash of cold water. you made some excellent points about taxes. Maybe I have underestimated my expenses. Maybe I need more cash to meet my goals in 10 years.
If you disagree and don't think my plan will work, provide an alternative. using the same parameters try to outperform my plan. Take the challange
Quote:
On 2003-12-04 12:13, maida7 wrote:
Dear mcl8190
I'm sorry I was so rough. Thanks for the splash of cold water. you made some excellent points about taxes. Maybe I have underestimated my expenses. Maybe I need more cash to meet my goals in 10 years.
If you disagree and don't think my plan will work, provide an alternative. using the same parameters try to outperform my plan. Take the challange
You are going to believe what you want to believe.
Your challenge was accepted and your idea was shown to have more holes than a piece of Swiss Cheese.
At first you seemed interested in honest answers not that does not seem to be so.
Go off and do your plan it is PERFECT good luck and let us know how it goes buddy.
Quote:
On 2003-12-04 11:51, mcl8190 wrote:
Quote:
On 2003-12-04 11:16, maida7 wrote:
Dear mcl8190
You are wrong. let me explain
These properties have expenses of 30% of the rent. These expenses include vacancys, advertising, repairs, insurance, taxes, etc... Everything but closing costs, loans and interest payments are included in the 30%. the colsing costs are included in the price of the property. So go back do the numbers after all expenses and loan payments my cash flow will be enough to pay of the 70,000 loan in 4 years.
If you don't like my plan, show me another way, take my challange. Please include details and numbers so I can really follow your ideas
I love the blanket "you are wrong" statements.
Look at your numbers 30% for tax, insurance, repair, vacancy.
I showed you how the low end tax and ins would be $2500 per property thats $7500. $10,800 - $7500 = $3300 for all other contingencies. out of your 6 units, if only one is vacant for 3 months, you will lose$1500, how about advertising the place for sale $500 per month for 3 months = $1500. That leaves you with $800 for all repairs, utils, whatever. What if you had 2 vacancies, horrors....
Come on now.
And doing it your way, you stilll have a $5000 per year debt service to pay.
And since we are only expecting this low amount of expenses, and we have no interest expense, we add depreciation and we will still end up with profit at the end of the year. What's your tax bracket. Probably around 38% +. Factor that into your number before you can use it to pay the mortgage.
It's not a bad plan, but your numbers are off, they are too low and your time schedule is too short.
15 to 20 years is what this would take.
You were wrong
Exactly correct.
maida7
you obviously don't like the replies you have been given. Now you say you challenge again.
You have been told repeatedly the SAME thing from various members. You choose not to accept this as reality so instead of trying to goad us into helping you go off and make a new plan.
Once you have done this I advise you to come back here and make a new post and ask for more advice but don't come here and expect others to do your work.
[ Edited by MrMike on Date 12/04/2003 ]
Maida7,
I'm a fellow NC resident and my properties are in NC. I don't want to give the specific town, but that really isn't important. I have seen properties like these in VA, NC, and SC so I suppose you could find low income properties that cash flow this well in most states. Asheville might be an exception since it is growing so rapidly. Many people simply look at the cash flow they can get from low income without really getting to know the market. I think it is the most rewarding area of real estate but it is like most other investments. Greater returns involve greater risks. Fortunately, with low income rentals you have the opportunity to eliminate most risk if you really know your market. That's why I would suggest a good property manager who has experience in this area. Another key to success is becoming very knowledgeable about construction. Since you would not be buying new properties you have to be very careful about what you are getting from a maintenance standpoint.
[ Edited by WheelerDealer on Date 12/04/2003 ]
Maida7 - I don't know if this has been covered, there is just too much to read
First off I think your plan as stated is excellent and no matter what happens you are going to be sitting pretty.
through for me!
The good news is that with the amount of cash you have and the cost of houses combined with the level of rents you have a better way to go.
With that said, here is my personal plan but adapted to your situation time wise of 10 years instead of 15.
The key is that you want the houses paid for in 10 years. With my plan, at the end of that time you have 5 rents coming in at $1350 a month. Cash flow of $6750 a month, plus you have $810,000 in equity.
I would buy the houses with a combination of downpayment and financing with 30 year notes. (Giving you the very best interest rates)
The amount down would simply be the amount needed to allow the rental payments to pay all the PITI plus the amount needed to accelerate the 30 year note by paying extra to principal to retire it in 10 years.
For example $100,000 house that rents for $1000 a month. Out of that $1000 rent subtract your taxes and all other expenses.
Let's say you end up with $600 a month.
$45,000 down on each house leaves you a $55,000 30 year mortgage @ 7 % with payments of $365 a month. (You are clearing $600 a month in rent right?) Apply the remaining $235 each month to the principal and the mortgage is retired in 10 years. (You will have to adjust these numbers a bit either up or down a little bit depending on what you acutally do, and what you decide you really are going to subtract from that $1000 rent.)
With $230,000 you can buy 5 houses right now for $100,000 each. Putting $45,000 down and having 5 mortgages of $55,000 each. Your rents are $1000 a month. $400 goes to your expenses (taxes, insurance rainy day fund) the remaining $600 goes to pay the mortgage ($365 a month payment plus $235 toward principal)
You own each house free and clear at the end of 10 years.
Benefits are -
1) You get to take advantage of the low interest rates now.
2) Financial Safety - You have very flexible options should anything go wrong.
A. You only have to make $325 a month payments on each house. If something crazy happens you can just make the normal payments for awhile.
B. You have $45,0000 in equity in each house. You could tap it or refiance the whole amount at any time. (Plus more as they appreciate)
3) All 5 of your houses are appreciating starting now instead of staggered. 5% for the next 10 years = $62,000 per house for a total of $310,000 appreciation in 10 years.
4) Rents start going up the next year but your mortgage payments stay the same for the next 10 years!!!!!!!!!! Which means you can use the extra profit to pay the loans off even faster, or put in in your rainy day funds to do some updating.
5) There are even more benefits you will net due to taxes and such but most of those involve complicated depreciations involving your accountant.
In all actuallity this plan would probably do more than you want if all goes average you will end up free and clear in about 8.5 years! Plus if appreciation is more than 5% you probably end up with at least $1,000,000 in equity. [ Edited by The-Rehabinator on Date 12/04/2003 ]
Dear Rehabinator
You are the man!! Thanks alot. Your ideas make alot of sense. Your plan has many advantages that mine did not. like the tax benifits of the loans and getting in early to take advantage of any posible appretiation. Well done!!!
Thanks.
Rehabinator,
You just answered the challenge.
Thank you all.
That plan is my personal plan also, but I'm working on it one house at a time, trying to amass the amount needed so that they are all paid for and flowing cash to me so I can retire.
That is the funny thing, when people talk about someone winning the lottery for a million bucks clearing $500k, they always say, what would you do? Could you retire on it? Most people say they couldn't it simply isn't enough money.
For me just give me $300k and I will be retired in 10 years.
maida7, I don't know what you will be doing when you retire, but I'm buying a blue water 40 foot sail boat and sailing the tropics for a couple of years while each month $5000 bucks gets deposited in my checking account!
Here's to success and all of us ending up farting through silk!
[ Edited by The-Rehabinator on Date 12/04/2003 ]
One last thought that I have seen work for others.
Often you can negotiate a short payoff with a lender even when your note is in good standing.
If you have a note of 100K and ask for a discount on an early payoff I have seen 10-15% discounts.
I have had notes change hands 3 times in 3 years between lenders. The only one I have had the ever holds my notes longer is chase manhattan.
These guys are selling at a discount each time so why shouldn't you cash in on it?
Randall
It is worth a thought
The-Rehabinator made an excellent case for using leverage to increase your returns. You certainly should be able to retire in 10 years (although I doubt as well as you expect)but I would still be cautious about your expectations. Even when the units are paid off you will still have the 30% expenses that you had. Also, doubles have a higher vacancy rate than houses. Finally, I will mention again that rents have been soft across most of the nation since 2000. Many economists are expecting a correction in housing prices. There is a book out now that is supposed to do an excellent analysis of housing prices relative to historic norms. I think it is called something like " The coming crash in the housing market". Also, I think I mentioned it earlier but doubles generally don't appreciate like houses and in most areas they depreciate. The fact that you can make such a large down payment certainly should help you to weather any of these potential problems though.
Excellent topic and replies; a real learning experience about different investment philosophies! Thanks...
I am very impressed, well thought out pro and con.
Frankly I think you are all wasting a lot of time on small items. What you have just shown belongs in the accumulation of some multiples. Go up to 40 or 60 units. start in the not too desirable areas and when filled and working utilize them as part of your downstroke as you move across town into the better areas.
I gathered slums at a time when there was great hostility to the Absentee Landlords and in reaction to very bad management by very large management companies a war was on.
Upon solving the problem and filling the units with paying tenants etc. etc. these units could be utilized as partial trades for more desirable properties. Of course in some it was necessary to take a management contract for six months as a condition of sale. What we were doing is leaving a high leveraged positon to obtain a much more conservative balance. Funny thing is that most of the high leveraged slumms did not appreciate and the good properties did like about 200% and the rents while not as high made big advances.
Maida and the rest, watch the market and watch the times, when you see a change developing respond to it and drop all your plans and respond and move on big time. It is not one or the other you can hold many types. Long on leverage or come down tight.
Cheers Lucius
Just thought I'd weigh in here. Number 1 there is no wrong answer. Investments are chosen by their owners for their specific plans with their own risk threshold. Your plan is pretty simple tobeat because you are not using leverage, you are using absolutes, such as a 2 unit goes for 100k and brings in 1k per month. If you are paying cash and can close in 7 days and pay market, in my humble opinion, you are a fool. I can also beat your return simply because of where I live. In the midwest, rural area that I reside, a lower income duplex is approx 30k-50k which will bring in 600-900 mo. a goodn will run 75k and bring in 1k. I have 1 that I paid 25k and it brings in 900 mo. I see in you a fearful investor. That is not good or bad, it is just my observation. You are fearful of liabilities on the balance sheet. Do you have gold in your portfolio? However, properly managed debt is not bad. Good debt is debt that pays for itself. Here is what I am in the middle of, and I have read so many great posts in this thread that I can't remember your exact cashflow, time, and equity goals, so you tel me if I win or not. I started about 2 1/2 years ago. I bought a house that I Land contracted when I bought my current residence. I gave them a 30 year mortgage @ 750.00 per month. My loan will be paid for in 15. I took in trade from them a MH for $4500.00 that nets me $300.00 mo. free and clear. I bought a car lot that I use for my day to day income... no money down, lots of debt for the credit line. Approx 300k that I turn 2m in sales annually approx 200k gross profit per year. Couple of duplexes, a triplex, 3 SFR, that after debt service, cashflow at $2000.00 per month, and will be paid for in 15 years, and I am closing on a 22 unit MH park in Jan.
0 out of pocket,$1,000.00 per month pos cashflow (I know kinda weak) that will be paid for in 10 years.
Now to break it down I have approx1.1M in assets with approx 765k in debt. currently have 3k pos cashflow which by 15 years will = 540k plus 1.1m in assets if there is 0 appreciation plus 9700 in todays money cashflow, and no debt. One last comment on leverage. These properties were all bought with a total of $7500.00 cash out of pocket, and $4500 of that was to pay off the MH. I can't remember if I included that amount in the refi.
Did I win?
Good Luck,
Shawn(OH)
Madia7,
After being here a while you will learn which posters have actually done what they suggest and which ones are merely regurgitating what they have read, what their freinds have done or what they PLAN on doing.
Choose whose advice you listen to WISELY it may not necessarily be the ones who agree with you.
BTW to me Lucius has been there and done that MANY times over and is a TREMENDOUS asset to this board.
I think perhaps the key you may be overlooking is the downside scenario to not using leverage. if you have 2 houses owned free and clear, vacancy will hurt a lot more than someone with a little less cashflow spread out over 10 properties. I do agree to start small until you are comfortable being a landlord.
i completely agree with leverage!!!
i own 6 houses and have a mtg debt of $600k and my rents are about $6k per month and my expenses are about $5k per month and i didn't put any money down!!! this was very risky but i kept my $100k in the bank to do that. and since i did 100% financing the interest rate sucked and if i am making a profit with a bad interest rate then refinancing would bring in additional money to pay the mtgs down faster.
go with the leverage!
maybe not as severe as my situation but go with the leverage!
Quote:
On 2003-12-03 17:04, maida7 wrote:
I have $230,000 to invest. I don't want to manage more than five doubles at any given time. Each double in my market costs $100,000 and rents for $1,000 per month. Expenses not including loans are 30% of the rent or $300/month.
I give you 10 years time to amass investments that produce a yearly cash flow of $50,000 per year after expeses including loans. This is your challange!!!
Here's what I would do:
Take your $230,000 to a bank and become good friends with a banker (I like BoA Premier Banking myself). Now, go and buy your five doubles by putting 25% down. I'd use an ARM today which you should be able to get for around 4% if you pay some points. With points and closing costs you should be able to buy each property for around $30k out of pocket. This means that you'll spend roughly $150k of your $230k so you can keep $80k in a money market account in case something turns ugly.
When all is said and done you should have about $350/month in cashflow for each property, and even if this turns out to be too ambitious you have a safe nest egg to fall back on in case of emergency. So, with five properties you should have about $1750/month income right off the bat.
Now, pick one of your properties and make a prepayment of $1250/month in addition to your normal mortgage. You'll pay off this property in a little less than 4 years. For each of your other properties pay $50/month as a prepayment. Your ARM's will be re-amortized each year and your payment will decrease which is a hedge against potentially rising interest rates. But, since you got such a good interest rate to start with you will be fine. Don't use an ARM if you aren't going to prepay.
Once you've paid off the first property it's revenue will increase to about $700/mo, and assuming that you've increased rents a bit over the last four years you could assume that you're now making about $1600 from the other four. Now pick another property and start paying $2000/month to it and $100/mo to the other three. It will take you about two more years to pay off your second property. You are now finishing year six and should be able to come really close to paying off the other three in four more years.
So at the end of ten years using this method you could assume that you'll have a cashflow of about $3500/month after expenses, and you'll have close to $600k in equity between your five houses. You'll have achieved your goal but you won't be independently wealthy by any means.
If you asked my opinion you'd be much better off by buying more properties and leveraging yourself further.
If you and I both started with the same amount of cash and agreed to liquidate everything at the end of 10 years I'm quite sure that I could far surpass this little scenario that I made up here. But, I was trying to answer your challenge and not say 'this is how I'd do it'.
My honest advice would be to get a college finance textbook and read it cover to cover a few times. After that you might think differently. I recommend 'Real Estate Finance and Investments' which you can find on Amazon if you are interested. I think this would very logically and scientifically explain the concept of leverage.
This scenario was interesting, and I appreciate you sticking to your guys and challenging people to defend themselves. One point I would make is that at the end of this ten year period you are sort of 'out of business' because you aren't going to be earning any more equity (except through appreciation) and you won't have much of a tax shelter (except for depreciation) so your real earning potential will seriously plateau. If we extended this game to 20 years and you enjoyed your retirement from 10-20 and I continued to manage my cashflow from 10-20 then I'm pretty sure I'd have a lot more cashflow and equity to show for it year after year after year.
Regards,
John
It seems that I have read about this "plan: before. Have you just finished Robert Allen's nothing down for the '90's?
Because he outlines basically the same kind of plan.
It sounds like you have already been convinced of the benefits of using leverage. Let me add a few more. First, I think your situation is rather unique since you live in Ashville, and I suppose you will be investing there. Obviously, there is limited real estate because of the surrounding mountains, and this has also become an attractive retirement location. This should make it very likely that prices in your area will continue to climb, and there should be a steady demand for rentals. Second,the more units you have the lower the cost will be to maintain them per unit. This not only applies to lower management fees, but lower insurance, and the cost of equipment you buy is spread out more, etc. Third, statistically, the more units you have the closer your vacancy rate wil approximate the local vacancy rate and hopefully be better if you are managing things well. When you only have 3 or 4 properties, it is possible to have a situation where all tenants move out at close to the same time and put can put you in a bind.