When should you invest in real estate?
Often you hear the term positive cash flow, which is good. It means you can pay for all the expenses of the building and still have money left over. Does this make a good investment?
No, matter of fact you should not even use this money. Any positive cash flow should be accumulated for maintenance or other expenses.
There is only one thing you should be doing with real estate...
Other urls found in this thread:
nask.co
efirstbank1031.com
twitter.com
Paying off the mortgage!
That is the most critical of any investment in real estate. Positive cash flow is good, but the investment is really in paying the place off with your incoming rent/lease money.
I'd disagree with this. Yes, debt free is the eventual end, but the cash flow should be used to acquire more properties and more debt first.
Now we need to do a little math.
How much can you invest every month?
This question and how much of a mortgage can you afford is very similar.
If I can put a $1000/month into the stock market, then for real estate to be worth it I really would want the same amount from my real estate investments. So I would want a $1000/month mortgage. Note: for simplicity state we are going to ignore interest and how much goes to principal for the moment.
$1000*12months*15yrs=$180,000
$180,000/0.8=$225,000
So in this case we are buying a $225,000 property with a 15yr mortgage and putting 20% down.
Note: pic related has an example of commissions and fees of a commercial mortgage product from Wells Fargo. We are ignoring that for simplicity. But in the end it just means more money down.
>Yes, debt free is the eventual end
No, we want more debt. We are only paying down the mortgage enough to get bigger mortgages from the bank. Stay tuned my friend! You are jumping ahead!
$45,000 plus commissions and fees is a lot of money to put down. But that is the cost of real estate. For most people it will take a long time to save that money. However you often need this time. You will need good habits and good credit plus stability to invest in real estate. You can't skip these steps. In the meantime most people should be investing in index funds. You can dabble in REITS, but not now because they will likely be hurt by raising interest rates.
Now a little word of warning. Just like the stock market the real estate scams out there are immense. Don't fall for the no money down meme or the buy your first property with multiple credit cards. Real Estate that is good is not cheap, however it is very much worth it. Most people will only ever buy one house at a time. The banks want you! They want someone to buy multiple properties and hold multiple mortgages.
There is an old saying that goes:
If you owe the bank $50,000 you got a problem, but if you owe the bank One Million, then the bank has a problem!
good thread senpai
Thanks
Have a gift!
nask.co
>nask.co
hmmm so what your saying is i should have invested in apple 10 years ago
"A young man asked an old rich man how he made his money. The old guy fingered his worsted wool vest and said, "Well, son, it was 1932. The depth of the Great Depression. I was down to my last nickel. I invested that nickel in an apple. I spent the entire day polishing the apple and, at the end of the day, I sold the apple for ten cents. The next morning, I invested those ten cents in two apples. I spent the entire day polishing them and sold them at 5 pm for 20 cents. I continued this system for a month, by the end of which I'd accumulated a fortune of $1.37. Then my wife's father died and left us two million dollars."
just pulling a funny senpai i got u
Do you like people? I wasn't a big fan of them of them before and after managing 200 apartments I bet that even if you are a people person you will hate every single one of them after a while.
Does this mean you have no hope in real estate? No, it just means that you should use a property management company or focus on commercial real estate (though the cash required usually is much more). Keep in mind that no matter what you choose that order is the most important. Having an enforced set of thorough rules goes a long way.
One last general tip before we get into strategy is that real estate is all about location, location, location. Your first property should be in a familiar area with a consistent and appreciating area. Higher the incomes and the higher the quality of the tenants and lease holders. Remember it is a building and we don't fall in love with buildings. We fall for the money they generate for us!
We will spend the rest of this thread on strategy.
Most people will tell you they want to die a millionaire!
Well I want to die millions of dollars in debt!
Why? Because that is how capitalism works. Debt is just as important as cash. There are even tax benefits to leasing and taking on lots of debt. It makes little sense, but that's the playbook we are operating out of.
You bought your first property!
>our $225k example
What next?
Nothing. Yep nothing. You need the property to succeed first. We are back to the "good habits" phase I mentioned. You need to make your mortgage and other payments on time. You need the bank to trust you (and secretly start to love you). You need the property to run smooth, have great maintenance, look appealing. Hell it should look the best on the street. Why? Because we need to take pride in our investment. Because we love the building? No, because we are going to shake its foundation until it gives up all its cash! To do that you need good tenants and good tenants will pay more the best looking property on the block!
>buying a house
>not living in your office to save capital
>not renting to be able to follow the money
Stay poor, noobs.
Maybe for Biz lesson 3 I'll take about that subject of where should you live. My favorite example was one guy who bought a motel. He only did it because he wanted to live in the area and a run down motel was cheaper than buying a house.
>good tenants will pay more *for* the best looking property on the block!
>I'll *talk* about that subject of where should you live
How long do we wait?
Likely two years.
>wat
Yes, you need at least two years to establish your property in the eyes of the bank. You also need the time to build up principal and hopefully some small amount of property appreciation. Plus the time to make the place nice and pretty for the assessment. Assessment? Yes, we are going to need an estimated bank value of the property to get our next loan or to sell the building or roll into a bigger investment.
What are some things that kill new real estate investors in the first couple of years? Assuming you actually collect the rent the next biggest thing is maintenance and I'm not talking a bad toilet. Suddenly a new roof! Like a wild Pokemon appeared. Obviously a roof isn't a surprise and you do have a roof fund, right user! What about a window fund and a hot water fund? Etc. Things that we know last so many years obviously have to be replaced. It is very simple. New hot water heater $1000 estimated to last 10yrs, well we need to put a $100 away this year. Next year it goes up to $1050, then we put away $105 for this year and the $5 to make up for last year. Suddenly after two years you have a good amount of money in the maintenance account. We may still have to get a loan, especially for a roof, but our maintenance fund will be a good chunk of change in two years. All of which goes to the roof and then gets replaced as soon as we can.
Speaking of wild Pokemon... If you have to scramble to get a loan for a roof, then you are a bad investor. Any real estate book out there will tell you to get a nice thorough property inspection before you buy. Guess what they put on that report? You guessed it: estimated roof age/life. Does this mean you have to buy a super expensive property because it has a younger roof and windows? No, but it does require a little effort. Note: that property with the new roof requires the same planning, but a bad investor wouldn't be putting money away for a roof after they just had a new roof put on.
How do I pay for a roof? Well if you did your homework you would know that you bought a roof that was about to fail. 2 years is pretty short in roof years. But let us say you bought a roof that was 20yrs old with an estimated 30yr life. Two years later you put money away for a roof on an accelerated schedule, but it wouldn't cover if the roof went right now. Obviously you would have good insurance that would cover you in a storm, but that is beyond the scope of this topic. At 25yrs the roof fails and needs replaced. In five years you have enough in the maintenance fund for three quarters of a roof. However that is the whole maintenance fund, not just what is allocated to the roof. The roof portion if half of the roof, because you thought it would last another 5 years. What do you do?
You need a line of credit. This goes back to being thorough, patient, having good credit and planning well. Obviously any day to day maintenance should be kept in the maintenance fund, otherwise drain it all and use the credit line for the difference. If another emergency happens you will have extra credit because of all your planning. Until then you will pay off that line of credit as quick as possible.
This was a property inspection from the same property showing all the commissions and fees. Note the 14yr roof age.
Thats fucking retarded. What are you on about?
Equity + appreciation (if it happens , obviousely you buy assuming their is none) + money from rents you save (50% rule) = your next deal
In a good market you can turn a 600k multi family into a 4.2 million dollar one in 5 years and the only out of pocket for you was 20% down on the first one plus due dilligence
>In a good market you can turn a 600k multi family into a 4.2 million dollar one in 5 years
This is an example of real estate lies. Don't believe them. If you do then just buy penny stocks, cause it is much easier then real estate.
Thats a horrible and stupid idea
Not all debt is bad , a knife can cut you or save you
So dont take amy of the money or equity to invest in other properties or sell them when they appreciate and just pay down the mortgage to own "free and clear"?
In a hypothetical market , invesring like this over 30 years you'd lose out on hige gains - like instead of a dozen properties and more than 100k a month in invome youd have like 3 single family homes
OP im afraid im gonna have to call bullshit. You dont actually know anything about real estate investing do you?
>you need at least two years to establish your property in the eyes of the bank
No. If it has 3 to 6 months of stabilized rents (above 85% occupancy) then its fine
Lets see your portfolio then mr buffet because you seem to be slapping together shotty roberty kyosaki advise with shit my grandparents think about RE
>Until then you will pay off that line of credit as quick as possible.
It is important to understand why. Obviously line of credits are higher interest than mortgages, but they are lower interest than most credit cards, giving them their place in the business world. Still just by making them higher interest than out mortgage gives them priority pay off. It also is harder to right off than mortgage interest with less benefits.
>It also is harder to right off than mortgage interest with less benefits.
if you used the credit card to buy thing that are classified as "business expenses" then you can write them off as "capital" or "operating" expenses - the credit card debt is easily "written off" I just did it.
where are you investing? do you have an accountant?
Okay I jumped ahead a little (to year 5) to show you how a good investor would deal with an early roof repair. A property that needs lots of repairs prior to any tenants moving in is probably something you don't want to deal with for a first property, but if you do, then expect to need more money down and to roll as much of those repairs into the mortgage as possible.
Let us go back to the 2yr mark. We have a good maintenance fund. We haven't taken any money out of the property and any positive cash flow improved the property or boosted the maintenance fund. We now have a steady track record on what to expect from our investment. I didn't mention it but I have to assume that most people will go residential and not commercial for their first property. When I say commercial I mean like strip mall or office, though the gov often says anything 4 units+ is considered commercial. In this case it doesn't really matter. Ultimately after two year of residential real estate you can decide if you want to move into commercial or stick with what you are doing with more units.
At this point you are going to like the property you bought. You may even love it. No! We do not love property, we love money! At the two year mark you likely do not have enough equity to sell the property and roll it (tax free) into a bigger investment. One thing you do have is collateral and a good payment history, with outstanding credit. Right user-chan?
Correct me if im wrong. It makes more sense to borrow/ get more debt to purchase more cashflow. Eventually the ROI should be able to cover the mortgages easily. This is assuming you invest in the right real estate
Yes it makes sense, but as I have been addressing there is more to it. You need great credit for the low interest rates and you need stability and success for the bigger investments. While more does generally equal more cash flow I think it more like a line like buy low sell high. A good point, but meaningless because it can't help you know when to buy.
Except if you focus on marketing (getting deal flow0 instead of pissing around for years "building up trust" with banks and "waiting for your credit score to ride" you can just wholesale the deals / bird dog them to other investors for quick cash or bring other people into the deals to cover down payments
No OP i'm sorry but you're sissified ADD real estate plan is a boondoggle
the maintenance fees are accounted for by saving half of the income you recieve, its a rule of thumb called the "50% rule"
You also shouldn't be worrying too much about suddenly needing a new roof 2 years in because theirs a thing called "due dilligence" where the property gets inspected before you finalize the deal
You're writing this post like a shady late night real estate guru who failed his GED test too
im listening...
how much equity do u typically need to be able to sell?
like someone posted earlier. Shouldn't the time to buy always be sooner rather than later. Assuming the investment is relatively sound. Any discounted price by waiting will come up short compared to the higher interest rate for a property that produced income at an earlier time.
After two years with any luck our property may be worth $69,000 after the mortgage. That's our $45k down plus mortgage payments and maybe a little appreciation both totaling about $24k. The last number is going to depend on improvements and how the bank sees them.
What is the best strategy at this point?
I don't know.
How about options?
>sell the property cause you can't stand this stuff
>sell the property to roll into something bigger (again you don't have much yet)
>buy a second property with money you have personally been saving up
>try to get a new mortgage recognizing your new equity and appreciation from improvements and the neighborhood
I myself like the option of personally buying a second property with money you have been saving up. Why? Well this actually is a retirement plan for some people. Slowly buy some houses, pay off their mortgages and 15yrs down the road sell them outright and retire. It is a good plan depending on your age and position. 2 or 3 real estate properties can turn a common 401k workers retirement from common to great.
I also like the plan for another reason. By personally buying a second property of similar price to the first it will allow you to later sell them both and roll into a much bigger investment. Actually given your great credit the second property will likely be even more money than the first at no added cost to you because of lower interest rates!
the guy has no idea what he's talking about
leverage can help you pay your newly acquired debt off
>sell them outright
Unless you're flipping for straight cash, you should never do this. There's ways of not getting fucked by taxes.
>how much equity do u typically need to be able to sell?
This is really going to depend n your goals. How long was the property up for sale before you bought it and how much were your commissions, fees, and taxes? One year and you will lose money. Two and you may recover everything. Really you should plan on holding for at least 5 years if you plan on staying in real estate. Though some investments in the right area may be worth holding forever.
If real estate was constant yes, but generally a good property appreciation might maybe be 4% a year and likely less than that given the countries wage growth and low inflation. Also keep in mind that people don't often list a property for sale at a logical price, but what they want or what other houses have gone for. Someone has to list it for a little higher than their neighbor for property appreciation to even happen in the first place.
I only suggested to sell if you can't stand real estate. At two years the tax is going to be negligible because you are basically breaking even. You do get to pocket the maintenance fund though!
Okay as with the last quick topic I can't develop your plan or strategy for you.
After 2yrs of the first property I would sell it only if I can get a good price and I had a second much bigger property worth buying. I would put the proceeds in a holding account. Note: you basically need a real estate lawyer to do these tax free 1031 exchanges. Then I would add to it the money I saved in those 2yrs to the investment. In the end it would probably be a 100k down on a 500k property. Next property would roll that into a million dollar investment.
All the points of Veeky Forumssensei has made have been pretty good.
Certain strategies are highly location and population dependent.
I'd disagree with him on the point where you want the highest and best rents in the area. I'd aim for median to around one standard deviation up. Provided that median is at least average for the country.
Why? Bigger market and the shortest vacancy times.
Also. Once you go too high up the food chain. People get more sophisticated. As a real estate owner with equity you are a target for lawsuits and these people can and will use lawyers to play hardball.
Now onto stability. If you're building a portfolio over time. One full Truncheon of properties has usually reached a metric called the stability multiplier. Say the average insurance deductible on your properties is $5k.
The portfolio has reached stability when the monthly cashflow from all the properties has reached $5k.
So if the average monthly cashflow is $200 a truncheon will be 20 properties.
Last point for real estate and its a pretty important one. Transfer Cost. Because you're going from cash to asset and back to cash. Transfer costs go from 2%-10% in one transfer. Too soon and transfers eat your gains, unless they were built in on purchase.
You don't necessarily "need"a lawyer for a 1031 exchange but the real "qualified Intermediary" will be pretty much at that level
efirstbank1031.com
I try, thanks!
Yeah I've never done a 1031 exchange, besides reading about them and doing CPA exam studying on them. Hope to do one eventually!
The 200 apartments that I managed were in a real white trash area. People were pathetic. I'd like some sophistication.
Next Biz Lesson will be on living options!