RE - to sell or to hold?

[ZeroTo100]

Hey,

I own a town home in a middle to upper class neighborhood in NJ. Pretty much everyone in the development owns a Bentley, Benz, Maserati, and 1 guy owns ferrari etc..I purchased this place as a pre-construction deal at 414k back in late 2012. It's 3,000 sq ft and it's absolutely beautiful and pretty much brand new. I'm very good friends with the builder and everything from top-notch appliances to materials were used in my unit. I even secured the most desirable lot in the development - end unit tucked away in the back of the community.

Anyway, they're now selling around 525k (taxes are 11.5k per year) and I'm looking to move into a single family house (not a town home) as my boy is 1 year old now and the wife is tired of neighbors. Plus the taxes on the single family homes with much more property are about 9k a year which doesn't make sense to me.

I have enough capital to put down to purchase a new home without having to sell this but I truly believe the market for this townhouse has capped here. I don't see people paying 600k+ for a townhouse. Do I sell or rent it out? Rentals here are going for 3500 per month.

My mind is saying sell and take the 100k+ money and purchase a rental property with lower taxes. My heart is saying hold it and rent it as my rate is so low. Mind you, as these get older I feel like they may start to dip a little. Tough call...

Just looking for a little guidance from anyone in RE that's been in a similar situation.

Thanks,
Steve

 

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[ZeroTo100]

$3500/month on $414K purchase price, likely with a monthly condo fee, is not a great return. Assuming you could get at least 6% return in some other type of investment, I'd sell the townhouse and move the money to something better.

Association fee is 290

 

[Sauce]

Don't forget to factor in closing costs on your sale. In my market we average 8.5 percent, which is a big chunk.

I tend to agree with you, every market is different, but condos are a special type of real estate and when things crash they crash hard. Add to that the fact that you can get a special assessment at any time, I would exit now. Depending on your situation, you may be able to take the gain tax free.

 

[biophase]

Is this your primary residence? If so, how long have you lived there? If you are close to 2 years you may want to factor that into your selling equation.

 

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[ZeroTo100]

Is this your primary residence? If so, how long have you lived there? If you are close to 2 years you may want to factor that into your selling equation.

Hey Bio,

This is my primary residence. I do own other property but this is where I live. I bought this place almost 5 years ago and it was my first purchase - I was 28 and it was just my wife and I. At the time, I hated the idea of up keep and plowing snow so we thought it was a good play. Now we have a little one and things changed. The thing is, I have cash to purchase another home without having to sell this, however; because of the unit I have and the market we are in I don't see these pushing 600k. So this is the cap I believe (525k) and as they get older, they may come down.

With the equity I have in this townhouse, if I rented for $3500 pm I would cash flow around 500 bucks a month presuming I covered cable, utilities, etc. If I sold, I'd make about $100k minus closing.

Would you sell and take the money and roll it into a better investment? Or buy something new and rent the townhouse for as long as you can and wait the market out.

 

[biophase]

Hey Bio,

This is my primary residence. I do own other property but this is where I live. I bought this place almost 5 years ago and it was my first purchase - I was 28 and it was just my wife and I. At the time, I hated the idea of up keep and plowing snow so we thought it was a good play. Now we have a little one and things changed. The thing is, I have cash to purchase another home without having to sell this, however; because of the unit I have and the market we are in I don't see these pushing 600k. So this is the cap I believe (525k) and as they get older, they may come down.

With the equity I have in this townhouse, if I rented for $3500 pm I would cash flow around 500 bucks a month presuming I covered cable, utilities, etc. If I sold, I'd make about $100k minus closing.

Would you sell and take the money and roll it into a better investment? Or buy something new and rent the townhouse for as long as you can and wait the market out.

Since you've lived there over 2 years you can sell and profit tax free. Or you can rent for 3 years and then sell. But you must sell before the end of year 3 to keep the profit tax free.

So being that it's such a short timeframe. I'd probably sell and take profits.

I think a $3500 rental is too high. I would feel more comfortable with 2 $1700 rentals, or 3 $1200 rentals. Your customer pool is so much larger and you can get appreciation x3 homes vs one.

 

[Rickchise23]

Hey,

I own a town home in a middle to upper class neighborhood in NJ. Pretty much everyone in the development owns a Bentley, Benz, Maserati, and 1 guy owns ferrari etc..I purchased this place as a pre-construction deal at 414k back in late 2012. It's 3,000 sq ft and it's absolutely beautiful and pretty much brand new. I'm very good friends with the builder and everything from top-notch appliances to materials were used in my unit. I even secured the most desirable lot in the development - end unit tucked away in the back of the community.

Anyway, they're now selling around 525k (taxes are 11.5k per year) and I'm looking to move into a single family house (not a town home) as my boy is 1 year old now and the wife is tired of neighbors. Plus the taxes on the single family homes with much more property are about 9k a year which doesn't make sense to me.

I have enough capital to put down to purchase a new home without having to sell this but I truly believe the market for this townhouse has capped here. I don't see people paying 600k+ for a townhouse. Do I sell or rent it out? Rentals here are going for 3500 per month.

My mind is saying sell and take the 100k+ money and purchase a rental property with lower taxes. My heart is saying hold it and rent it as my rate is so low. Mind you, as these get older I feel like they may start to dip a little. Tough call...

Just looking for a little guidance from anyone in RE that's been in a similar situation.

Thanks,
Steve

I agree with Bio and Jscott. The townhome just doesn't sound like an appealing rental property. I would sell and take advantage of the fact that you can take the tax free profit. If you want to reinvest in real estate I'd consider a duplex with 2 bed 1 bath units or a single family home 3 bed 2 bath that doesn't need much more than paint and carpet to rent out and start seeing a return on your investment. Just keep in mind some of the best rental properties aren't always the prettiest ones you will find. Focus on location, a strong rental area and be sure that things like the roof, foundation, plumbing, electrical systems will not need to be replaced for 10+ years. Remember that one big repair bill can dramatically decrease your ROI so ensure the property's system are up to date and do not appear to need replacing.

 

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[GlobalWealth]

Hey Bio,

This is my primary residence. I do own other property but this is where I live. I bought this place almost 5 years ago and it was my first purchase - I was 28 and it was just my wife and I. At the time, I hated the idea of up keep and plowing snow so we thought it was a good play. Now we have a little one and things changed. The thing is, I have cash to purchase another home without having to sell this, however; because of the unit I have and the market we are in I don't see these pushing 600k. So this is the cap I believe (525k) and as they get older, they may come down.

With the equity I have in this townhouse, if I rented for $3500 pm I would cash flow around 500 bucks a month presuming I covered cable, utilities, etc. If I sold, I'd make about $100k minus closing.

Would you sell and take the money and roll it into a better investment? Or buy something new and rent the townhouse for as long as you can and wait the market out.

Your property tax is almost $1000/m so you would have a hard cost of around $1200/m between tax and hoa. That leaves you with $2300/m gross. That is only a 6% roi, not great.

Considering your mortgage, as you say you would have a ncy (net cash yield) of $500/m, that is a 1.4% cash return on original investment.

If you can walk with $100k in cash, you can easily earn better than 1.4% on your cash and remain fully liquid.

I'd say selling is a no-brainer.

 

[ZeroTo100]

I appreciate all the tips. I want to be smart with this decision which is why it was so important for me to ask the community. My 5 year plan has RE acquisitions (rentals) in it (1 per year) and I been stressing all weekend about it...I've never done any rentals before and this would have been my first rental which is why I wanted to ask if it made sense. I didn't want to just let it go either unless it didn't make sense to rent.

Truthfully, what makes the most sense to me aside from the numbers is the simple fact that these units are renting for a lot of money. $3500 a month is a lot and the pool of renters as bio stated for this price range diminishes for the simple fact that people in this range usually could just go buy there own.

Here are some more accurate numbers

I pay a bi-weekly Mortgage at $1209 w/taxes included so 2418 per month (950 taxes + 1468 Mortgage)

HOA fees are $290

Sewer $145

Cable $170

Utilities between $25-$100 depending on season

So if I included cable, utilities, etc my total expenses would be $3125.

Rentals go for $3500 per month - $3125 I would clear about $375 per month cash plus the principle on the $1468 that's going towards the mortgage. Mortgage rate is 3.5%

List price was $414k

Current selling prices are $525k

If I sold I'd clear about $240k with my initial down payment, my principle paid over the past 4 or so years, and the current value.

I am leaning towards selling, regrouping my soldiers (money), and look for another RE market to get into.

 

[MidwestLandlord]

In 2010 I bought a condo that was built in 2007. Luxury condo, so a top-shelf build.

In years 2012-2013 my repair costs went up dramatically.

Appliances, faucets, light switches, furnace/AC thermostat, small leak in the in-floor heating, flaking tile grout, cabinet handles stripping out, closet door handles doing the same, kitchen drawers with bad slides, etc.

Lot's of little crap that started to age all at the same time. Adds up FAST.

Keep that in mind, as your unit is about to hit that 5-7 year old mark where repair expenses go up.

Don't use prior repair expenses on a new(ish) unit as an indication of future expenses ESPECIALLY since a tenant is harder on the property than you would be.

 

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[MidwestLandlord]

Another thing,

That's about the age you start getting hit with HOA special assessments too, as the exterior of the building starts aging as well.

The building I'm in shifted a bit at that time, and there were some leaky windows on one side that needed replaced. That was my first experience with an assessment. Good times.

 

[GlobalWealth]

I appreciate all the tips. I want to be smart with this decision which is why it was so important for me to ask the community. My 5 year plan has RE acquisitions (rentals) in it (1 per year) and I been stressing all weekend about it...I've never done any rentals before and this would have been my first rental which is why I wanted to ask if it made sense. I didn't want to just let it go either unless it didn't make sense to rent.

Truthfully, what makes the most sense to me aside from the numbers is the simple fact that these units are renting for a lot of money. $3500 a month is a lot and the pool of renters as bio stated for this price range diminishes for the simple fact that people in this range usually could just go buy there own.

Here are some more accurate numbers

I pay a bi-weekly Mortgage at $1209 w/taxes included so 2418 per month (950 taxes + 1468 Mortgage)

HOA fees are $290

Sewer $145

Cable $170

Utilities between $25-$100 depending on season

So if I included cable, utilities, etc my total expenses would be $3125.

Rentals go for $3500 per month - $3125 I would clear about $375 per month cash plus the principle on the $1468 that's going towards the mortgage. Mortgage rate is 3.5%

List price was $414k

Current selling prices are $525k

If I sold I'd clear about $240k with my initial down payment, my principle paid over the past 4 or so years, and the current value.

I am leaning towards selling, regrouping my soldiers (money), and look for another RE market to get into.

So your ncy is only about 1%. You can get better than that in UST. Sell.

Sent from my VTR-L29 using Tapatalk

 

[Fortune5ive]

You can find these same cars in the hood. Lol. Welcome to Nj.

 

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[biophase]

Here are some more accurate numbers

I pay a bi-weekly Mortgage at $1209 w/taxes included so 2418 per month (950 taxes + 1468 Mortgage)

HOA fees are $290

Sewer $145

Cable $170

Utilities between $25-$100 depending on season

So if I included cable, utilities, etc my total expenses would be $3125.

Rentals go for $3500 per month - $3125 I would clear about $375 per month cash plus the principle on the $1468 that's going towards the mortgage. Mortgage rate is 3.5%

List price was $414k

Current selling prices are $525k

If I sold I'd clear about $240k with my initial down payment, my principle paid over the past 4 or so years, and the current value.

I am leaning towards selling, regrouping my soldiers (money), and look for another RE market to get into.

If you rent long term, the tenants will pay for utilities and cable, so this shouldn't be included in your cashflow calculations.

When you calculate your profit, you should talk about profits, not about what you will clear. It's not really valid as part of the $240k is money that you put up front for a down payment.

Did you also include the 6% realtor fees and about $2500-$5000 in closing costs that you will have to pay?

 

[biophase]

You've forgotten about maintenance, capex, turnover costs, rent-loss/vacancy...and then any costs associated with a problem tenant (eviction costs, damage, etc). These things will almost certainly average close to or more than $375/month...

Sell it.

And since you've been in there for 5 years.. it's likely that within the next 5 years that one of these things will break.

Water heater
Fridge
AC/heat unit
Washer/Dryer

And it will need new carpeting

 

[Envision]

Hey Bio,

This is my primary residence. I do own other property but this is where I live. I bought this place almost 5 years ago and it was my first purchase - I was 28 and it was just my wife and I. At the time, I hated the idea of up keep and plowing snow so we thought it was a good play. Now we have a little one and things changed. The thing is, I have cash to purchase another home without having to sell this, however; because of the unit I have and the market we are in I don't see these pushing 600k. So this is the cap I believe (525k) and as they get older, they may come down.

With the equity I have in this townhouse, if I rented for $3500 pm I would cash flow around 500 bucks a month presuming I covered cable, utilities, etc. If I sold, I'd make about $100k minus closing.

Would you sell and take the money and roll it into a better investment? Or buy something new and rent the townhouse for as long as you can and wait the market out.

Think about how long you are going to have to cash flow on this one property to profit 100k. Can you move the money into a better REI investment assuming you can sell? An apartment building? if thats where your interests are..

 

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[ZeroTo100]

If you rent long term, the tenants will pay for utilities and cable, so this shouldn't be included in your cashflow calculations.

When you calculate your profit, you should talk about profits, not about what you will clear. It's not really valid as part of the $240k is money that you put up front for a down payment.

Did you also include the 6% realtor fees and about $2500-$5000 in closing costs that you will have to pay?

I think I put down about 70k at the time plus what I've been paying into it the last 4 and a half years. The value of the place has gone up around 100k. I agree though, things will start to go bad and all signs point to sell.

What I don't get is why we don't consider the rental money paid towards the principle as part of profit. If it rented at $3500 and $1400 of that goes towards the mortgage why isn't that considered some profit if some of that is paying principle. If I didn't calculate utilities, it would look something like $3500 - $2708 (mortgage,taxes,hoa) it would bring in about $792 per month + whatever was paid towards principle.

I think the risk lies in things going bad, the pool of renters at this price range, and the fact that I'm loosing out on better opportunity.

I really do appreciate everyone's help here that has experience in this.

I'm leaning towards selling and listing it next month.

 

[MidwestLandlord]

What I don't get is why we don't consider the rental money paid towards the principle as part of profit. If it rented at $3500 and $1400 of that goes towards the mortgage why isn't that considered some profit if some of that is paying principle. If I didn't calculate utilities, it would look something like $3500 - $2708 (mortgage,taxes,hoa) it would bring in about $792 per month + whatever was paid towards principle.

Principal payment is equity in an asset, and shows on the balance sheet, NOT the income statement.

Principal paydown is NOT profit.

ONLY the interest portion of the loan goes on the income statement, as an expense.

You are building equity, but NOT profit when the cash goes to the loan on the asset.

Edit:

Gross Rents (Income) - Property Taxes (Expense) - Insurance Premiums (Expense) - Repairs & Maintenance (Expense) - Property Management Fees (Expense) - Interest (Expense) - Depreciation (Expense) = Net Profit, or Taxable Income (link)

 

[ZeroTo100]

Just listed - $525k

Just wanted to thank you guys for all the help - @biophase @JScott @MidwestLandlord @GlobalWealth

Thought really hard about renting it but I think it's time to let it go. Association fees just went from 290 to 315. I'm the only one listed in the development and I think I have the best lot.

Let me know if you're interested in seeing the listing - I'd love to show it to you.

Thanks guys,
Stevie

 

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[ZeroTo100]

Hey guys, just wanted to share the GREAT NEWS. I FINALLY SOLD! Also, the wife is pregnant. YEY!

I bought this place when I was 27. I had busted my butt for a long time producing events, working full time, selling stuff online, grinding and hustling. This was the first home I ever owned! So, for all you young people out there (I'm 34 now, don't let me out pace you lol), it can be done!

I Paid 414k in 2012. Sold for 500K today - just got out of attorney review.

Smart choices I made
- I took a 7 year ARM when I bought this property was knowing that I wasn't going to be here that long. I got the lowest rate at the time (3.25) and paid bi-weekly. This really made a difference in the amount of equity i'm clearing on the sale.

- I chose a lot tucked all the way in the back away from the main highway. I got full asking price.

- Images helped my sale

Things I learned and pain points developed for future business ideas

- RE Agents are the worst! Dealing with real estate agents and what I went through along the way have made me so frustrated that I'm actually thinking about starting a business in this area. Let's just say that you want an agent that you can trust, that will protect your best interest at all times - buy side and sell side. But because I've experienced these pain paints only means that others have too - except i'm an entrepreneur.

NOW THE FUN PART BEGINS LOL.

I have liquidity and I'm looking to purchase a new home to live in, in the NJ area ( in Monmouth County) and everything is like 600k and up. I'm probably looking at something around 615 to 630. I'm also looking to buy a rental property outright for cash flow. Let's just say that my wife is looking to leave wall street in the next 2 years and raise the kids. Shell work part time but we need to make a cash flow purchase - either an apartment or a business.

I'm trying to decide on what type of down payment I should put down on the new home I plan to live in, in terms of %.

Is it smarter to put least down but still be able to make the payment and keep the cash on hand for future investments?

Or

Put more cash down, bring the payment down to where it's a breeze to pay?

The cash flow property I was looking at are selling around 180k-200k, taxes are pretty low (4100) and they rent for around $1700 a month. I can probably buy one outright.

The home I'm looking to buy is selling for 630k but I want to try and get it for 615k with around 35 to 40 % down. Is this too much down? She wants a 40k pool put in too but ill probably use that to drown myself in lol.F*VK THE POOL LOL.

Anyway, thanks again guys.

I appreciate all the advice and opinions on the forum. I can't wait to get back to hustling soon because moving sucks! It's stressful and its time consuming.

Thanks Fellas

 

[Real Deal Denver]

Hey guys, just wanted to share the GREAT NEWS. I FINALLY SOLD! Also, the wife is pregnant. YEY!

I bought this place when I was 27. I had busted my butt for a long time producing events, working full time, selling stuff online, grinding and hustling. This was the first home I ever owned! So, for all you young people out there (I'm 34 now, don't let me out pace you lol), it can be done!

I Paid 414k in 2012. Sold for 500K today - just got out of attorney review.

Smart choices I made
- I took a 7 year ARM when I bought this property was knowing that I wasn't going to be here that long. I got the lowest rate at the time (3.25) and paid bi-weekly. This really made a difference in the amount of equity i'm clearing on the sale.

- I chose a lot tucked all the way in the back away from the main highway. I got full asking price.

- Images helped my sale

Things I learned and pain points developed for future business ideas

- RE Agents are the worst! Dealing with real estate agents and what I went through along the way have made me so frustrated that I'm actually thinking about starting a business in this area. Let's just say that you want an agent that you can trust, that will protect your best interest at all times - buy side and sell side. But because I've experienced these pain paints only means that others have too - except i'm an entrepreneur.

NOW THE FUN PART BEGINS LOL.

I have liquidity and I'm looking to purchase a new home to live in, in the NJ area ( in Monmouth County) and everything is like 600k and up. I'm probably looking at something around 615 to 630. I'm also looking to buy a rental property outright for cash flow. Let's just say that my wife is looking to leave wall street in the next 2 years and raise the kids. Shell work part time but we need to make a cash flow purchase - either an apartment or a business.

I'm trying to decide on what type of down payment I should put down on the new home I plan to live in, in terms of %.

Is it smarter to put least down but still be able to make the payment and keep the cash on hand for future investments?

Or

Put more cash down, bring the payment down to where it's a breeze to pay?

The cash flow property I was looking at are selling around 180k-200k, taxes are pretty low (4100) and they rent for around $1700 a month. I can probably buy one outright.

The home I'm looking to buy is selling for 630k but I want to try and get it for 615k with around 35 to 40 % down. Is this too much down? She wants a 40k pool put in too but ill probably use that to drown myself in lol.F*VK THE POOL LOL.

Anyway, thanks again guys.

I appreciate all the advice and opinions on the forum. I can't wait to get back to hustling soon because moving sucks! It's stressful and its time consuming.

Thanks Fellas

Your property tax is almost $1000/m so you would have a hard cost of around $1200/m between tax and hoa. That leaves you with $2300/m gross. That is only a 6% roi, not great.

What interest rate can you get? 4.5% is typical around here.

If 6% ROI sucks, why would you put your capital into something to save paying 4.5%?

I'm in the real estate biz, so my advice is to buy the most real estate you can get for the least money you can put into it, in the best location/market you can find. There is a huge difference between cheap and good location. Don't be blinded by prices.

If all goes well, cash out after you've lived there at least 2 years (out of the last 5) and keep your gains tax free. Rinse and repeat.

Congrats on the baby!

 

[ZeroTo100]

What interest rate can you get? 4.5% is typical around here.

If 6% ROI sucks, why would you put your capital into something to save paying 4.5%?

I'm in the real estate biz, so my advice is to buy the most real estate you can get for the least money you can put into it, in the best location/market you can find. There is a huge difference between cheap and good location. Don't be blinded by prices.

If all goes well, cash out after you've lived there at least 2 years (out of the last 5) and keep your gains tax free. Rinse and repeat.

Congrats on the baby!

Thanks bud.

So my plan is 2 purchases. 1 strictly to move my family in - could be there 5,10,15 years. This is going to be the place we call “home.”

I’m considering putting an offer in. 615k with 40% down, interest rate is 3.75 percent on a 7 year ARM or 4% on a 10 year ARM. Taxes are around 10,400.

The second purchase is still undecided. This purchase will most likely be paid in full or close. I know a few people who own in the development next to the one I live in now and they strictly rent them out. Close to trains, commute to the city, etc. They sell for around 180K with taxes at 4400. I am only considering buying something like this for cash flow so that the wife could work a little closer to home part time. Just something that cuts down my monthly bills a little. This property I’m not looking to mortgage, just buy it outright, clean it up, and rent it out for the monthly income. I’ve never been a landlord so I’m not even sure if I should do this or if I should just buy a business locally for her to run. Things are moving fast with her maternity leave coming up in Nov, so this purchase is purely for cash flow.

What do you think?

 

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[Real Deal Denver]

I’m considering putting an offer in. 615k with 40% down, interest rate is 3.75 percent on a 7 year ARM or 4% on a 10 year ARM. Taxes are around 10,400.

The second purchase is still undecided. This purchase will most likely be paid in full or close. I know a few people who own in the development next to the one I live in now and they strictly rent them out. Close to trains, commute to the city, etc. They sell for around 180K with taxes at 4400. I am only considering buying something like this for cash flow so that the wife could work a little closer to home part time. Just something that cuts down my monthly bills a little. This property I’m not looking to mortgage, just buy it outright, clean it up, and rent it out for the monthly income.

Why so much down? You can get by with 20% down if you go with a conventional loan. I sure hope you're a veteran - then you can go with nothing down. FHA is 3.5% down. Conserve your cash.

Ideally, if you can buy something to rent and pay it off completely, then you have great cash flow coming in. That's a far better deal than saving 4% on your loan for your residence.

Case in point. Fasten your seat belt. I'm just finishing an appraisal for a proposed duplex today in downtown Denver. This is going to be new construction, and the construction costs are coming in at about $880,000. They already own the land, which is a crappy little house they will be bulldozing. Half of a duplex in their market area are selling for $800,000 all day long. I have no problem proving that. Their property, as a full duplex, will appraise somewhere around $1,500,000 or more. They will be damn close to being a millionaire in equity on this one deal alone. Were they lucky? No - they were smart because they bought a crappy little house in a very good market area. They rented it, so it didn't cost them anything while they owned it. Forced savings, if you will. Now, they're making their move. And what a move it is. You only have to do something like this once or twice to be a multimillionaire. Of course, it's not that simple - but you get the point.

If they really wanted to do this smart, they would have lived in the crappy little house, then they would not have to pay taxes on the gains when they sold. I know of several people that do this repeatedly, and pocket money as they go. Eventually they get to the point where they can pay cash for the house they buy. But why should they? That brings me back to your situation. Why not buy a house to live in - AND another one, or two, to rent - and repeat the cycle?

Make your dollars WORK for you. You're in an ideal situation right now to make that move. I also realize that you have a family, and there is certainly more to life than money. But then again - I always say - why choose? I want it all baby!

I think you need a very good real estate agent to put this down on paper and look at the numbers. The bad news is, finding a good agent is not easy. But they are out there. Don't settle for Mr. Flashy Smile, or Suzie High Heels. Get someone that really knows what they're doing. Get references, and get some info before you make a decision. This should not be difficult. I could easily do this for you if you were in my market.

Everyone has problems. I sure wish I had yours! You have nowhere to go but UP! Whatever you choose, you can't lose. Just do what is best for you - don't sweat it - and enjoy life. These are the good old days you will look back on. You're living them right now!

 

[ZeroTo100]

Why so much down? You can get by with 20% down if you go with a conventional loan. I sure hope you're a veteran - then you can go with nothing down. FHA is 3.5% down. Conserve your cash.

Ideally, if you can buy something to rent and pay it off completely, then you have great cash flow coming in. That's a far better deal than saving 4% on your loan for your residence.

Case in point. Fasten your seat belt. I'm just finishing an appraisal for a proposed duplex today in downtown Denver. This is going to be new construction, and the construction costs are coming in at about $880,000. They already own the land, which is a crappy little house they will be bulldozing. Half of a duplex in their market area are selling for $800,000 all day long. I have no problem proving that. Their property, as a full duplex, will appraise somewhere around $1,500,000 or more. They will be damn close to being a millionaire in equity on this one deal alone. Were they lucky? No - they were smart because they bought a crappy little house in a very good market area. They rented it, so it didn't cost them anything while they owned it. Forced savings, if you will. Now, they're making their move. And what a move it is. You only have to do something like this once or twice to be a multimillionaire. Of course, it's not that simple - but you get the point.

If they really wanted to do this smart, they would have lived in the crappy little house, then they would not have to pay taxes on the gains when they sold. I know of several people that do this repeatedly, and pocket money as they go. Eventually they get to the point where they can pay cash for the house they buy. But why should they? That brings me back to your situation. Why not buy a house to live in - AND another one, or two, to rent - and repeat the cycle?

Make your dollars WORK for you. You're in an ideal situation right now to make that move. I also realize that you have a family, and there is certainly more to life than money. But then again - I always say - why choose? I want it all baby!

I think you need a very good real estate agent to put this down on paper and look at the numbers. The bad news is, finding a good agent is not easy. But they are out there. Don't settle for Mr. Flashy Smile, or Suzie High Heels. Get someone that really knows what they're doing. Get references, and get some info before you make a decision. This should not be difficult. I could easily do this for you if you were in my market.

Everyone has problems. I sure wish I had yours! You have nowhere to go but UP! Whatever you choose, you can't lose. Just do what is best for you - don't sweat it - and enjoy life. These are the good old days you will look back on. You're living them right now!

I appreciate it brother - I really do. I'm at that point in my life where I'm 34, I have a few hundred thousand on the sidelines, I'm retiring in a couple years from the job, I have the family so now I just want to make the right choices. I've always been a business guy but I've never been a RE guy - doesn't mean I can't be I guess lol. I always liked the idea of keeping the bills down.

What did you mean by saving 4%? You lost me there lol.

Can I shoot you over some numbers?

 

[Real Deal Denver]

Ok - get ready. This is major info you need to put into your DNA for the rest of your life.

We're going to talk about two concepts here. This will be greatly simplified, but you need to know the basic theories.

First - the cost of money. Cash is the lifeblood of every business. If you are a wizard at managing cash, the odds are greatly in your favor that you will be successful. The most common failure of business is bad cash flow. It is also KEY in your personal success.

You want to keep the bills down - most people do. Debt is a bad thing. Wrong. Without debt, a LOT of people wouldn't go to school to further their careers - wouldn't own a home - wouldn't have a nice car. Debt is - or can be, rather - a powerful tool. The question is - is the debt WORTH what you will get in return? For 90%+ of the people, yes. Try to save for a house to pay it off without getting a loan from the bank. Good luck. Hope you live very long, cause it will take a very long time to do it.

But, let's say you've managed to save $100,000 somehow. And you can get a loan for 4%? The 4% is the cost of money - what it costs you to get money. If you have a business of any kind, a 4% return on your investment is not good. Most investors expect at least double that.

So if that return is not good - then you must be getting a good deal on that low interest rate, and the bank is getting screwed. Basically - yes. But the bank is also using that same concept to make their money. They borrow the money at, say, 1%, so they are making a killing - using someone else's money. They just stand in the middle and collect 3% profit on their loan. It's not really a lot, but they make it up in volume.

Do you want to pay off a loan that only costs you 4%? Why? You can use that money to invest in something else that will make you more money than 4% - hopefully. You could lose, of course too. If it was easy, everyone would be doing it.

That's not to say it couldn't be easy. Now that we know about how "low" the cost of the loan you are getting is, let's talk leverage.

Let's say you could get 10% return on your money in the stock market. How much stock could you buy for $50,000? $50,000. A 10% return would get you $5,000 profit. Not bad - not earth shattering, but not bad. Now, instead of investing in stocks, you pay off your home mortgage a little bit. That $10,000 you put into your home, would be $400, simple interest savings if you were paying a 4% loan. It's not quite that simple - but for this discussion, it will be. How exciting is that? Um, it's not. That's $400 for a whole year, which is about $33 a month. Get that super size meal next time you're at McDonalds!

$5,000 versus $400. No comparison.

Hold your horsies. Now, let's talk real estate. With $50,000 as a 25% down payment (if it's not your residence, it costs more) - you could buy a home for about $200,000. That's not likely in most areas, but let's keep this simple. Let's say that home goes up 5% in appreciation in a year. 5% of $200,000 is $10,000. Double what you made in your good returns in the stock market. 5% appreciation is very common in my market. Of course, there are no guarantees. EVERYTHING has risk.

This is all very simplified, but it makes the point. But you already know that - that's how you got your windfall to start with.

I like real estate because I am in control. Or, as much as I can be, anyway.

The only reason you can get those returns on real estate is leverage. That's a concept that turns people into millionaires.

Do you really want to "save" that $400 a year? Remember, that if - and we hope if - the values of your real estate are going up, the balance you owe is going down at the same time. There are many other things to consider as well. Google "why is real estate a good investment?"

There you have it. You have to really write these things down and play them out to see what you really have in the end. As we can see here, paying down your mortgage isn't such a big deal after all.

And debt, if used the right way, can be a powerful tool. Your spare change in your coffee cup on your dresser isn't going to launch you into wealth!

I'm typing while I work - so although this is long, you needed to hear every word. Don't feel bad if this is new to you. It was/is to everyone at some point. The point is, as I said before - you're in a great position no matter what you do. I just want you to really "see" how things really are before you make a move.

 

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[ZeroTo100]

Ok - get ready. This is major info you need to put into your DNA for the rest of your life.

We're going to talk about two concepts here. This will be greatly simplified, but you need to know the basic theories.

First - the cost of money. Cash is the lifeblood of every business. If you are a wizard at managing cash, the odds are greatly in your favor that you will be successful. The most common failure of business is bad cash flow. It is also KEY in your personal success.

You want to keep the bills down - most people do. Debt is a bad thing. Wrong. Without debt, a LOT of people wouldn't go to school to further their careers - wouldn't own a home - wouldn't have a nice car. Debt is - or can be, rather - a powerful tool. The question is - is the debt WORTH what you will get in return? For 90%+ of the people, yes. Try to save for a house to pay it off without getting a loan from the bank. Good luck. Hope you live very long, cause it will take a very long time to do it.

But, let's say you've managed to save $100,000 somehow. And you can get a loan for 4%? The 4% is the cost of money - what it costs you to get money. If you have a business of any kind, a 4% return on your investment is not good. Most investors expect at least double that.

So if that return is not good - then you must be getting a good deal on that low interest rate, and the bank is getting screwed. Basically - yes. But the bank is also using that same concept to make their money. They borrow the money at, say, 1%, so they are making a killing - using someone else's money. They just stand in the middle and collect 3% profit on their loan. It's not really a lot, but they make it up in volume.

Do you want to pay off a loan that only costs you 4%? Why? You can use that money to invest in something else that will make you more money than 4% - hopefully. You could lose, of course too. If it was easy, everyone would be doing it.

That's not to say it couldn't be easy. Now that we know about how "low" the cost of the loan you are getting is, let's talk leverage.

Let's say you could get 10% return on your money in the stock market. How much stock could you buy for $50,000? $50,000. A 10% return would get you $5,000 profit. Not bad - not earth shattering, but not bad. Now, instead of investing in stocks, you pay off your home mortgage a little bit. That $10,000 you put into your home, would be $400, simple interest savings if you were paying a 4% loan. It's not quite that simple - but for this discussion, it will be. How exciting is that? Um, it's not. That's $400 for a whole year, which is about $33 a month. Get that super size meal next time you're at McDonalds!

$5,000 versus $400. No comparison.

Hold your horsies. Now, let's talk real estate. With $50,000 as a 25% down payment (if it's not your residence, it costs more) - you could buy a home for about $200,000. That's not likely in most areas, but let's keep this simple. Let's say that home goes up 5% in appreciation in a year. 5% of $200,000 is $10,000. Double what you made in your good returns in the stock market. 5% appreciation is very common in my market. Of course, there are no guarantees. EVERYTHING has risk.

This is all very simplified, but it makes the point. But you already know that - that's how you got your windfall to start with.

I like real estate because I am in control. Or, as much as I can be, anyway.

The only reason you can get those returns on real estate is leverage. That's a concept that turns people into millionaires.

Do you really want to "save" that $400 a year? Remember, that if - and we hope if - the values of your real estate are going up, the balance you owe is going down at the same time. There are many other things to consider as well. Google "why is real estate a good investment?"

There you have it. You have to really write these things down and play them out to see what you really have in the end. As we can see here, paying down your mortgage isn't such a big deal after all.

And debt, if used the right way, can be a powerful tool. Your spare change in your coffee cup on your dresser isn't going to launch you into wealth!

I'm typing while I work - so although this is long, you needed to hear every word. Don't feel bad if this is new to you. It was/is to everyone at some point. The point is, as I said before - you're in a great position no matter what you do. I just want you to really "see" how things really are before you make a move.

This is awesome! Never really thought about the cost to borrow money vs the value of appreciation.

Think I’ll keep the cash on hand and look for cash flow vehicles - RE, Businesses that are returning more than the cost I’m paying to borrow.

I just have to be able to make the bills.

 

[garyfritz]

I'm in the real estate biz, so my advice is to buy the most real estate you can get for the least money you can put into it,

This always confuses me. I have some rentals that are 100% paid for. I net about 6% on them (when I don't have to do something like replace the roof, which I'm paying $5500 for today, LOL). I've considered putting a mortgage on one and using the cash to buy other properties. But if I net 6% on properties and pay 4.5-5% interest, plus start paying a management company to handle all those properties, I'm basically at breakeven. I haven't improved my cashflow at all. All I've done is taken on a lot more risk and a lot more tenant headaches to increase my exposure to the market. ***IF*** the market goes up, that's a good thing. If it goes down, that's a bad thing. But especially given the rocky state of the economy these days, and the likelihood of a recession (we are LONG overdue), I'm not convinced increasing my exposure is a good idea.

Am I missing something? Or am I just more cautious / conservative than you are? Given that about 90% of my net worth is already in real estate, I don't feel like increasing that is wise. Diversification protects you against disasters in any one area.

 

[biophase]

This always confuses me. I have some rentals that are 100% paid for. I net about 6% on them (when I don't have to do something like replace the roof, which I'm paying $5500 for today, LOL). I've considered putting a mortgage on one and using the cash to buy other properties. But if I net 6% on properties and pay 4.5-5% interest, plus start paying a management company to handle all those properties, I'm basically at breakeven. I haven't improved my cashflow at all. All I've done is taken on a lot more risk and a lot more tenant headaches to increase my exposure to the market. ***IF*** the market goes up, that's a good thing. If it goes down, that's a bad thing. But especially given the rocky state of the economy these days, and the likelihood of a recession (we are LONG overdue), I'm not convinced increasing my exposure is a good idea.

Am I missing something? Or am I just more cautious / conservative than you are? Given that about 90% of my net worth is already in real estate, I don't feel like increasing that is wise. Diversification protects you against disasters in any one area.

I think this really depends on your goals. I used to purchase REI with 20% down. But now I purchase cash. It's really a growth vs preservation thing.

So back in 2005 I would buy a place for $150k, putting down $30k. If that place appreciated to $200k, I made $50k on $30k and that was awesome!! This was when I was making less than $100k at my job. Of course $50k is great!

But now my main moneymaker is ecommerce and quite honestly, a property going from $150k to $200k does nothing for me. I just want things to be easy and simple. So I pay cash and hand it over to a PM. Every property cashflows this way, lol. No calculations needed. I make about 5-6% return.

Let's say I have $1m in REI free and clear, that's $50k cashflow a year and $100k appreciation (10%) a year. It's not bad. The $50k a year more than covers all repairs, vacancies and maintenance. I never have to put a dime into this REI nest egg. And the cool thing is that every 3-4 years I can buy another house, cash. This is my self fulfilling investment fund.

Yes, I could have $5m in REI and virtually no cashflow and $500k appreciation a year. But then I'd had to put my own money into it for repairs, vacancy, etc... It's just not something that I want to do during this time of my life.

I think a balance would be to have $2.5M in REI where half are paid off and half have loans. I'll probably end up here soon as I want to get into Airbnb investing soon. I just need to qualify for a loan again.

 

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[ljean]

I've been selling any property that comes up vacant recently. The market has been silly-hot and my return on equity is only around 5%. I will have to pay a lot of gains taxes next year, but I'd rather have that cash in the bank vs. subject to market risk, tenant risk, repair risk, etc.

 

[ZeroTo100]

I think this really depends on your goals. I used to purchase REI with 20% down. But now I purchase cash. It's really a growth vs preservation thing.

So back in 2005 I would buy a place for $150k, putting down $30k. If that place appreciated to $200k, I made $50k on $30k and that was awesome!! This was when I was making less than $100k at my job. Of course $50k is great!

But now my main moneymaker is ecommerce and quite honestly, a property going from $150k to $200k does nothing for me. I just want things to be easy and simple. So I pay cash and hand it over to a PM. Every property cashflows this way, lol. No calculations needed. I make about 5-6% return.

Let's say I have $1m in REI free and clear, that's $50k cashflow a year and $100k appreciation (10%) a year. It's not bad. The $50k a year more than covers all repairs, vacancies and maintenance. I never have to put a dime into this REI nest egg. And the cool thing is that every 3-4 years I can buy another house, cash. This is my self fulfilling investment fund.

Yes, I could have $5m in REI and virtually no cashflow and $500k appreciation a year. But then I'd had to put my own money into it for repairs, vacancy, etc... It's just not something that I want to do during this time of my life.

I think a balance would be to have $2.5M in REI where half are paid off and half have loans. I'll probably end up here soon as I want to get into Airbnb investing soon. I just need to qualify for a loan again.

This was kind of where I was going with it. I have enough to buy a 200k cash flow property (zero mortgage but it pays me regardless of appreciation) and still put down a decent chunk of change (40%) on the house we will be living in for the next 5,7,10 years. Homes in are area are not cheap - looking at the 600-700k range. It’s insane! Taxes are 1k a month (smh). Like you, I like peace of mind. I just really wasn’t sure if I should put that much down (40%) or keep the cash on hand for future investments.

What are your thoughts on fixed vs ARM? Not sure how long I’ll be living here either but probably would be around 10 years.