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Money System - What Are You Investing That's Getting 5% Return?

Discussion in 'Investing/Trading/Cryptocurrency/Altcoins' started by Bobby-H, Jul 29, 2015.

  1. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    In most markets, it's hard to find single family that's returning more than about 10-12% cash-on-cash, unless you're spending a lot of time/money doing your own marketing . Especially the primary and secondary markets. If you go to the tertiary markets, you can still find 10-cap deals on mid-sized multis (8-50 units), but you'll incur the management headaches that go along with that sized property.

    The only thing I've purchased in the past year that's generating 15% cash-on-cash is low-income multi-units -- the cash flow is great, but you have to have a strong management plan and a disciplined team in place to generate those returns passively. It takes a lot of work to get to ultimately get to passive returns.

    Once the downturn starts, there will be lots of opportunities to pick up better deals in a lot of markets...
     
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  2. EvanOkanagan
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    EvanOkanagan Gold Contributor FASTLANE INSIDER Speedway Pass Summit Attendee

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    Is the 6-7% gross return from purchasing these properties outright or leveraged?

    In my example I'm talking about buying these at 75-80% LTV. After the monthly cashflow and principal paydown on the mortgages, 15%+ (net) return has been fairly achievable. I live in British Columbia, Canada where the property values are quite high, so I could see this being even easier elsewhere.
     
  3. garyfritz
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    garyfritz Silver Contributor Read Millionaire Fastlane FASTLANE INSIDER Summit Attendee

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    That was from buying outright.

    When I looked at the numbers, I decided leverage doesn't help your return -- it just increases your exposure to the market so you make more cap gains when the market goes up. But given the likely downturn that @JScott's predicting (and I agree), increased exposure is not necessarily a good idea.

    And of course it also multiplies your management headaches with more units, for the same return.

    Taking my properties as an example: I have two houses that are both worth $330k-$350k. Both rent for $1800-$1900 (and a management company agreed that was about the max I could get for them). 12*$1900 / $350k = 6.5% gross. If I put an 80% loan onto the house at current rates of about 4.3% APR, that's roughly $1575 PI, leaving $1900-$1575 = $325 per month gross (before taxes & insurance, same as above). I'd have 20% = $70k cash down, so 12*325 / $70k = 5.6% gross. In this example my return actually went down a bit. Assuming rates go up, those number will look even worse.

    So I don't think running at 75-80% LTV helps you get that 15% return. I think you must have a different market than mine and/or you buy smarter than I can, so the rent you can charge is a much higher % of your purchase price. In my market, at least for single-family homes, 6-7% of purchase price is about all the rent you can get.

    Which, together with several minor disasters in the last 2-3 months (new roof, new furnace/AC, renters skipped out on last month's rent and left the place trashed, etc), is making me seriously reconsider how much real estate I want to hold. If my actual net is only going to be about 3%, I can get that and more with way less headaches. I have to decide if the tax benefits and future appreciation are worth it.
     
  4. CareCPA
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    CareCPA Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass

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    I think I found your problem. I don't know any real estate investor that would buy a $330-350k house that rents for $1800 or $1900 a month. There is no money to be made after accounting for insurance/taxes/repairs/etc. Are you gambling on appreciation?
    Why not sell and invest that money in something that actually brings a return?
     
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  5. EvanOkanagan
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    EvanOkanagan Gold Contributor FASTLANE INSIDER Speedway Pass Summit Attendee

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    You're just basing the return on the monthly cashflow though which isn't the whole picture. $1575 PI.... what would your principal paydown be each month? Say it's $575 of the 1575 (it'd likely be more).... 12*575+12*325= $10,800 annual net/70k = 15.4%.

    If we relate this to stocks, the cashflow is just the "dividend" that the investment spits off, and then on top of that paying down the principal every month which increases the amount an investor would net. This return isn't even factoring in long-term appreciation.

    If this were a long-term hold and added even a 2% annual appreciation (very low for long-term), that adds annually another $7000/70k= 10% additional. Even without appreciation though, in your example this beats the 15% ROI.
     
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  6. garyfritz
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    garyfritz Silver Contributor Read Millionaire Fastlane FASTLANE INSIDER Summit Attendee

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    I see your point. Turns out I botched my PI calculation somehow. For an 80% loan on a $350k house, that's a $280k loan with $70k down. Using 4.5% (probably optimistic) on a 30-yr loan, that's a PI payment of $1419. So my gross (just looking at the payment) is 1900 - 1419 = $481. 12*$481 / $70k = 8.2%. Better than I thought. (I'm not sure if I messed up the calculations before, or messed it up now, but when I looked at this before, changing the leverage didn't change the return.)

    Of that $1419 payment, it starts at about $370 going to principal. So adding that principal paydown to my return, I'm at $481 + $370 = $851. 12*$851 / $70k = ... 14.6%. How 'bout dat. Hm.

    That's BEFORE any expenses, so it's nowhere near the 15% net @EvanOkanagan is getting, but it looks better than I expected. Knock off about $2500 for taxes & insurance and $2500 for a property manager, and you're at about about a 7.4% return before the occasional roof or furnace surprise, or paint or carpet. So I'm still looking at less than half the return Evan is getting.

    More importantly, a lot of that 7.4% is going into the loan balance. I only get about ($481*12 - $2500 - $2500) / $70k = 1.1% of income to actually live on. Which looks a lot worse than the (12*$1900 - $2500 - $2500) / $350k = 5.1% I'd get with no loan.

    Does that look right?

    Then you must not know any investors in northern Colorado. That's the way it works here. Several realtors, a management company, and several local investors confirm that. When rates were higher, you were doing well if you could get a new property to cashflow. So yes, you're pretty much gambling on appreciation, and eventually having your tenants pay off your mortgage. That's worked well for me so far, but.........

    Great question, which I haven't answered yet. If not real estate, or at least if not Northern Colorado real estate, then what? Given Evan's insight above, the return on the real estate is (or can be) a lot better than I realized. But principal paydown doesn't help you with retirement income. So I'll keep looking for that mystical "something."
     
    Last edited: Jul 16, 2018
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  7. CareCPA
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    CareCPA Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass

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    Don't overlook out-of-state investing. If I had spare capital, that's probably where I would be headed.

    Hopefully someone with more experience will chime in here, as it's daunting for a new person to search out of state for rentals. When the whole world is an option, how do you narrow it down and select a market?
     
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  8. sparechange
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    sparechange Gold Contributor Speedway Pass

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    get outta here #banhammer
     
  9. Jason "GrandK"
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    Jason "GrandK" Bronze Contributor Read Millionaire Fastlane I've Read UNSCRIPTED Speedway Pass

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    Are there specifics markets you are keeping a close watch on?
     
  10. unaided
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    unaided Contributor Read Millionaire Fastlane I've Read UNSCRIPTED Speedway Pass

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    Yes, your initial math doesn't account for vacancy (more like 10/12 months) or maintenance costs (much is on renter, but still can occur those bigger costs as you've found - roof, AC, etc).

    I personally figure (1% of purchase price) / 12 is what I would save minimally for maintenance.

    Also, it depends on your full cash situation, risk tolerance, and how your allocated (as does everything) but I often purposefully take higher deductibles on insurances or self-fund warranty & add those differences into "hedge accounts". So, for instance a $600 warranty cost, I will put back $50 a month rather than paying the company outright (unless I know the AC could go in the next 3 years), and after year 1 I have $600 sitting in that account....If a stove, washing machine, etc go out, chances are it's $600 or less fix. And, if 1 thing happens over 5 years, you have $3000K in an account to deal with it.

    When I also account my maintenance/vacancy hedges, I'm fairly protected from just about anything without having to liquidate anything or take out loans. It is risky in the first 2 years while you build up these accounts, but its' worth it in the freed up cashflow & if you have 5+ properties that are all feeding into these hedge accounts....Insurance companies ultimately profit 10-15% on your premiums and they have the best statistical calculators in the world....so I try to "self-insure" where I can. But you must be disciplined and hold this money in relatively liquid savings accounts!

    If you do this for all of your insurance types....you become hedged against a lot of risk and often open up cashflow that you can add to debt snowballs, investments, etc. My car insurance hedge helps my home maintenance hedge, and so forth.

    It effectively becomes your "6 month" emergency fund as it gets funded fully, and you can take even higher deductibles when it makes sense, etc. So I ultimately save 10-15% on those otherwise "fixed" costs that otherwise would be going to insurance companies. Plus, problems become stress free, and you can enjoy the process. I actually get delighted if our place needs a repair because I have the money in an account already. It's ridiculous how exact those insurance rate tables are - If I need a $500 repair, I usually have $550-575 in the account...the 50-75 difference is what the insurance company would normally be taking as profit :)
     
  11. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    No specific markets outside of the several that I already invest in. I'm not smart enough to be able to predict how the downturn will affect any specific market until it happens, so I'm just planning to wait and see what happens.

    I've tried to build relationships with other investors in most of the big markets around the country, which allows me to keep tabs on what's going on in different areas, but right now, I'm really just sitting back and waiting at this point to see where things go.
     
  12. unaided
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    unaided Contributor Read Millionaire Fastlane I've Read UNSCRIPTED Speedway Pass

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    Many investors seem to be sitting back and waiting. My wife is with one of the top luxury real estate groups in Scottsdale and the word from their meetings is that inventory is low because people are staying in their current properties so they keep their favorable interest rates.

    You still see some price incline because you also have those who already planned on buying rushing to lock in rates now before they raise again.

    So you're starting to get that picture of low inventory, some "not as smart" money overpaying for properties, when the current buyers run out & interest rates tick up another .25-.5%+, that's when you'll start to see the declines.

    Most predictions point to 2019-2020 for the decline where these things will peak.

    On your comment, it seems like this might be the case a little bit in the other markets, where ETF investors keep dollar cost averaging on relatively high prices, other people are just holding positions and stacking up cash/conservative investments and waiting for the deals to come over the next 3-5 years.

    Fair assumption based on your comments?
     
  13. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    We may be looking to buy a personal residence in Scottsdale pretty soon...let me know when the market turns and there are some good deals! :)

    It seems to me that there are a lot of investors who are in cash today and just waiting for deals. Especially those doing larger projects with longer time frames -- they tend to be more concerned about starting new projects that won't see an exit for a couple years.
     
  14. unaided
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    unaided Contributor Read Millionaire Fastlane I've Read UNSCRIPTED Speedway Pass

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    Well, I personally think that when it comes to AZ real estate that things are going to be more of a lateral market.

    We live in a townhome that we paid 250, and is worth 300, at the peak of the market in 2006ish, it sold for $400,000 in today's dollars, so there can still be some upswing. We looked at homes where I had valued at $610,000 in the next 5 years, and they were going for $550,000, so there's not smoking deals, but I think that everyone buying now will just be kinda lateral and you'll get closet deals in 3-5 years just based on homes not keeping up with inflation pressure.

    We might see a 10% reactionary dip, but we have such a huge demographic of boomers wanting to move here. We have the mass exodus from high-tax states like Illinois, Michigan, California, and even states like NJ. Those are pretty strong tailwinds even with rising rates, and the tail-end of the debt cycle. But I do think that we'll see some overpaying in the next year or two just with those committed buyers grabbing up before rates rise further....things will drop 10-15% and kinda stay lateral with where they are today. That's just my feel for now. It's not sexy enough for us to upgrade to a $550K home, we'd rather wait 3 years, and pay $550K for the same home then and I can reinvest in my online business, and build some non-sexy "5% income" in paper markets /debt repayment with more liquidity than a brick and mortar home.

    Have you looked into 4 seasons investing as per Ray Dalio....he's big in TIPS (~15%), commodities (~15%), bonds (~40%), international (10%), emerging markets (5%) and only has like ~15% in US stocks/real estate. My "vision" is to have half of each allocation in individual entities, and half in ETF's, and that gives me kinda half of the stocks doing 3%, half the stocks doing 7%, evens out to 5%. It hedges against some of the ETF risk brewing (everyone passive investing without analyzing individual companies).

    When I have the privilege of selling some options, that's how I'll get higher returns.

    When you take the dividend rate on that allocation, you honestly get right at 5% if you account for some REITs, MLPs, in your stock/real estate mix or Emerging market bonds as part of that portfolio.

    For me, I see TIPS doing well (everyone talks rates, but they forget that usually rates increase to slow down rising inflation, plus to pull out of recessions they make debt cheap and start QE'ing things). I think bonds are still good if you have the right time horizon for the money. I like energy stocks which have been in kind of a restructuring mode so some hidden value there. Even utilities can be sexy.

    I've liked CSCO a bit for the whole cloud security play, if they do a 5% drop or so I might consider getting in with them although Amazon is looking to compete now with them. I believe they're around a 3.5% dividend but have some strong appreciation potential for more growth play.

    Sin stocks can do well with dividends going into recession-like time periods. International stocks/emerging can give you some rate hedges - and the new/pending tariffs might drive some buy-in prices down for good companies - turn 3% dividends into stable 5% dividends with appreciation potential.

    Those are my thoughts for now.
     
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  15. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    I'm a control freak and don't like investing in any asset class where I don't feel like I have the ability to impact the investment. Specifically, I don't like paper investments (stocks, bonds), I don't like currencies and I'm not a huge fan of collectibles (except for those that give me other benefits).

    I pretty much stick with direct investments into companies, real estate and intellectual property -- three asset classes where I have good insight into the asset I'm purchasing and where my decisions and input will have an impact on asset performance.
     
  16. Jason "GrandK"
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    Jason "GrandK" Bronze Contributor Read Millionaire Fastlane I've Read UNSCRIPTED Speedway Pass

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    Have you ever considered cash value life insurance, not as an investment but more as a "safe bucket" to hold assets in a tax favored account?
     
  17. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    I can get better (non-guaranteed) returns through my other investments. And the guarantee from the whole life policy doesn't overcome the difference in returns, in my opinion.

    Just my take, based on my analysis and my situation.
     
  18. Jason "GrandK"
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    Jason "GrandK" Bronze Contributor Read Millionaire Fastlane I've Read UNSCRIPTED Speedway Pass

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    Got it. Other investments being real estate or other alternative investments?
     
  19. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    Yup...
     
  20. Jason "GrandK"
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    Jason "GrandK" Bronze Contributor Read Millionaire Fastlane I've Read UNSCRIPTED Speedway Pass

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    I was fishing. Care to elaborate on what "companies, real estate and intellectual property" you focus on?
     
  21. MJ DeMarco
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    MJ DeMarco Raving Lunatic Staff Member Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    Admin Post
    You ain't kidding. I can't believe some of the trash that people want $3M for. Sorry, your Toll Brothers tract house ain't worth $2.95M just because it's in N. Scottsdale.

    Good luck, I've been riding that boat for 5 years. Inventory is so low that it keeps driving prices up, even on the mediocre sh*t.
     
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  22. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    The bulk of my investments are real estate, simply because that's the industry that I've been most entrenched in the past decade or so. These days, I'm just being opportunistic -- we've bought a bunch of single and multi-family rentals and I'm a silent/passive partner in some other investments. I wish that 10 years ago I would have just focused on buy-and-hold instead of flipping -- that's what I'll be focused on when the market turns this time.

    As for businesses, I invest in a few small tech companies. I invested in a friend's company a few years ago, and he exited with a sale to a big tech company. I've taken the profits from that investment and spread it across some other companies -- mostly entrepreneurs I previously worked with in silicon valley. These are all high-risk investments, but if one or two of them pays off, it could be lucrative.

    And in terms of intellectual property, this is something I've just recently ventured into. I'll have more to say in a couple months when we figure out what we're doing... :)
     
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  23. unaided
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    unaided Contributor Read Millionaire Fastlane I've Read UNSCRIPTED Speedway Pass

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    Lol, my wife and I were looking at a Toll Brother's neighborhood in Desert Ridge area just two days prior to your reply. She had a laugh about that when I forwarded your reply. (I got her to read Unscripted, so she's a fan!)

    We are doing very well financially and we feel a bit in home-buying purgatory. You have the 250K condo with 300+/month HOA. Then you have the 300-400K patio home/townhome with 300+/mo HOA.

    Then you jump in the same square footage of a patio home/town home "up" to $450-600K 1800-2300 sq ft "starter home" that needs $30K of updating - we're just not doing it. We're prepared to sit it out, or sell when we get to 2 year mark of our place - take out gains, sit on cash and rent a slightly bigger space until we find the right deal.

    I don't think you'd lose your shirt at current prices, but I'd rather sit on cash and throw some in bonds until things chill out.

    Realtors need to maintain their listings too - so many have been in rough shape for showings - within just 1-2 weeks of being on the market. That's what happens when the owners are in Chicago for the summer and a 3rd-career friend realtor is passively coat-tailing a commission off their listing.

    Yeah, not paying $550K (+$30K of work) for a $400K starter home.
     
  24. JunkBoxJoey_JBJ
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    JunkBoxJoey_JBJ When you see this, say something clever. Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER

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    QUESTION: @JScott @mjdemarco

    If you already have a TERM Life Insurance policy and no house, no children, no car payment (i.e. renting to keep saving)...

    Would you convert over to a WHOLE policy to at least have some form of Dividends coming in?

    Best options or suggestions? Meeting with advisor next week (appointment already confirmed) but looking for insight here first.

    Thank you
     
  25. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    If you already have a life insurance policy that you're happy with, why not take the premiums you'd be paying into a whole life policy to generate dividends and instead put that cash into an asset that generates higher returns?

    Now, if you can get higher returns from the whole life policy, then perhaps that's a better option. But, I'm fairly certain that you can get higher returns in other asset classes.
     
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