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RE - to sell or to hold?

ZeroTo100

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And in my opinion, you shouldn't. If you look at most markets around the country, over the past 100 years or so, appreciation of residential real estate has pretty much tracked inflation. You can always cherry-pick time frames and say that appreciation is averaging 5%, 10% or more -- but over the long-term, investing in residential real estate for appreciation turns out to just be a hedge.

Using "Real Deal Denver's" own market, take a look at inflation-adjusted Denver prices over the past 15 years -- in many locations, prices are still down in that 15 year period. Here's an article to illustrate the point:

Your House May Actually Be Worth Less Than It Cost 15 Years Ago

But, even if home values beat inflation, that doesn't mean that debt arbitrage is without the effort/risk. There are several reasons why -- especially those who aren't savvy investors -- should steer clear of debt arbitrage:

- Effort. Unless you're putting the money in the stock market, there will be effort associated with the arbitrage. Let's say you're borrowing at today's rates (about 4.5%) and you find a decent residential rental that's generating 8% cash-on-cash returns -- that's a 3.5% arbitrage gain. But, that requires you to find the deal, potentially get it renovated, put property management into place, manage your property managers, etc. For a non-investor, that's a decent amount of work for 3.5% arbitrage gain.

- Risk. No investment is risk free. Let's say you get that 8% cash-on-cash rental above. What happens if market rents decrease or if you have some really bad tenants that trash the place and you have to evict? When you own a lot of units, these things average out, and your variance around that 8% is small. But, across just one or a couple units, there's risk. And for non-savvy investors, that risk is higher than for savvy investors. Decide to put your money in the stock market instead? Pretty sure there is risk there as well.

I'm not saying that you can't make money off this arbitrage, but you have to ask yourself if the time, effort and risk you put in is worth the pay off. I do this for a living (I own 50+ units and have done 400+ flips) and I choose to pay for my house in cash, because I like the idea of being debt-free on my non-cash-flowing assets (like my house).

Not saying that Real Deal Denver is wrong -- purely from a math perspective he is right -- but, there are other factors in the real world besides math, and you should take them all into consideration.

MOST IMPORTANT POINT: If you're going to go after debt arbitrage, do NOT focus on appreciation. Focus on cash flow, and make sure that -- even if there is zero appreciation -- the arbitrage opportunity makes sense.

This makes a lot of sense to me. I appreciate your feedback brother! I LOVE the idea of being debt free on my “non-cash-flow” assets too! Actually, I’d prefer to be debt free on on both but I guess if I had to choose, it would probably be on my rental. The reason being is it would reduce the risk a bit. I know I’ll always pay my mortgage but I’m not sure my tenant always will.
 
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Paul Weese

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When I'm purchasing my property, the leverage I use is related to the interest rate every time. An ARM is a good choice given that we normally live in our homes about 7 years before moving. With an ARM, how far will interest rates rise over that time? 3-5% is possible, and if you've got good credit, you'll get the best rates. I've done well with ARMs.

When considering if an area has come to a top, the two questions I always ask is: Are there new jobs coming into the area? and Is there enough housing already/How is the current inventory getting change pressure? These tell if an area has stopped increasing in value.

And real estate brokers are difficult. When you find a good one, stick with them and spread the word.
 

ZeroTo100

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Here's an article I wrote several years back about leverage...

---------------------------------------
While many of my readers flip houses for a living, I hear time and again how they plan to transition into holding rentals at some point as well (and some already do). Not to mention, I’m starting to focus a bit more on long-term buy-and-hold projects also. With that in mind, I wanted to talk a bit about an important buy-and-hold topic — leverage — why it’s good (and bad) and when you might want to consider it for your rental projects.

Let’s start with…

What is Leverage?
In a nutshell, leverage is borrowing or making use of other people’s money to (hopefully) increase the returns you get on your investments. A loan is the most common form of leverage in real estate — you use some of your own money (your down-payment) to buy a property and you borrow money for the rest of the cost. Depending on various things, borrowing some or all of the money for the purchase may increase (or decrease) the ROI of the investment.

Here’s an example:

Let’s say you buy a property for $100,000 and you spend all your own cash to acquire it (no loan). Let’s also say that the property generates $1,200 per month in rent, with half of it going to expenses. At the end of every month, you earn an average of $600 in cash flow (profit); this translates to $7,200 per year in cash flow (profit). A simple ROI calculation of dividing the profit into the investment amount ($7,200 / $100,000) tells us that our ROI on this property is 7.2%.

Now, what if we bought the same property with a typical loan, where we put down 20% ($20,000) and borrowed 80% ($80,000) for 30 years at 4% interest. Plug the info into a mortgage calculator and you’ll see that our monthly payment would be $405. Going back to our numbers above, we’d now have to subtract the $405 per month in mortgage from the $600 you were earning, leaving you with $195 per month in cash flow (profit). That equates to $2,340 per year in cash flow (profit).

As you can see, our annual profit has decreased a good bit, but so has our total investment into the deal — from $100,000 of our own money to just $20,000. Our ROI now looks like this: $2,340 / $20,000 = 11.7%. We’ve increased our ROI from 7.2% to 11.7% just by borrowing money!

Positive Leverage vs. Negative Leverage
In the example above, because the borrowed money (the leverage) has increased our ROI on the property, we call it “positive leverage.”

Now, what if we have the same scenario as above, but instead of borrowing the $80,000 at 4.5% interest for 30 years, we instead have to pay 7% interest on the money? Plugging the numbers into our mortgage calculator again, we get a monthly mortgage payment of $532. Using the same example as our original, we subtract the $532 in mortgage from the $600 per month we were earning, and we see that in this scenario, our cash flow (profit) drops to $68 per month, or $816 per year.

As expected with the higher interest rate mortgage, our annual profit has dropped even more. And if we run our ROI calculation — dividing our $816 profit into our $20,000 investment, we determine that our ROI has dropped to 4.1%. In this case, borrowing money has decreased our ROI — when that happens, we call that, “negative leverage.”

Real estate is wonderful in that it’s one of the few types of investments where you can actually use leverage; but by the same token, improper use of leverage can be very risky for real estate investors. The first risk is mentioned above — finding yourself in a negative leverage situation — but there are other risks as well…

Leverage Risks
In addition to negative leverage, there are three big risks when using leverage:

  1. Leverage generally adds additional costs to your investment each month — the mortgage payment. When you purchase for all cash (no loan), if a tenant moves out the house is vacant, the monthly cost to keep the property is relatively low — taxes (which are typically not paid each month), insurance (also not paid each month) and perhaps utilities. If it takes three months to get a new tenant into the property, the out-of-pocket costs won’t be fun, but they likely won’t bankrupt you. On the other hand, if you have a $400 or $500 mortgage payment each month — like in the examples above — that adds significant out-of-pocket costs when a unit is empty…or worse yet, when you have a tenant who isn’t paying and you’re going through an eviction. Having cash reserves can mitigate this situation, of course, but it’s still not fun.
  2. Leverage can destroy liquidity. Here’s what I mean by that: Imagine a situation where you need some quick cash. For example, you have an emergency expense, your child is about to go to college, you have medical bills, you need a new car, etc. And let’s say that you own a house and want to sell the house to get that cash. If you paid all cash for a property, you could sell it regardless of whether the market has increased, decreased or stayed the same since your purchase. You might have to take a loss, but you can still sell. Now, imagine you had a loan on the property for 80% of the value, and imagine that the market value has dropped 30% since your purchase (this happened in many places back in 2007-2008) — you now owe more on the loan than you can sell the house for! If you don’t have extra cash sitting around to pay the difference between what you owe and what you can sell the house for, you can’t sell the house.
  3. Leverage can cause bankruptcy. There are several different types of loans — fully amortizing vs. balloon and fixed-rate vs. adjustable rate are a couple big differentiators. A fully amortizing loan is one where, at the end of your payments, you owe nothing more to the lender and the house is yours, free and clear; a balloon loan is one where, at some time in the future, your have agreed to pay off the loan with a large lump sum. A fixed rate loan is one where the interest rate stays the same throughout the life of the loan; an adjustable rate loan is one where the interest rate may change (up or down) at some point(s) in the future. If you have a fully-amortizing fixed-rate loan (one where the interest rate stays the same for the life of the loan and then you own the house), there is little risk — you know how much you’ll owe every month until the day the house is paid off. But, if you have a balloon loan and/or an adjustable rate loan, there will come a time in the future when you’ll either owe a big chunk of cash (balloon payment) or your interest rate may increase, making your monthly mortgage payment higher. In either/both of these situations, if you’re not prepared, you may find yourself in financial trouble. If the market has gone up, you always have the option to sell the house and get out of the loan; but if the value of the house has decreased to the point where you owe more than the house is worth, you could find yourself facing foreclosure…or worse yet, bankruptcy.
Now that you know the benefits and risks of leverage, it’s probably worth spending a few minutes discussing to what extent leverage can actually help you increase your returns — knowing how much leverage can (and can’t) help you will go a long way towards determining when — and how — leverage you should use.

The Value of Leverage
The value of leverage can best be demonstrated using a graph that depicts when and by how much ROI increases as leverage increases. In order to build that graph, we need an example property to work with. I’m going to assume a rental property that generates 2% of its cost in monthly rent and where all costs (expenses + rent loss + capex) are 50% of that gross income. For example, a $100,000 property with $2,000 per month in rent that generates $1,000 in cash flow after all costs.

For an all cash purchase we can figure out the return pretty easily — the property generates 2% of the purchase price in rent per month, but half goes to all the costs. That leaves 1% of the purchase price per month in profit. Multiply by 12 months, and that’s 12% of the purchase price per year in profit. In our example above, that’s $12,000 in profit per year on a $100,000 property. As you can probably figure out, that’s a 12% ROI. And remember, this is with an all cash purchase.

The graph below indicates how — as leverage increases — the ROI increases. We look at the leverage impact using two common types of loans — a conventional loan (blue line) and a portfolio loan (green line) — with leverage amount indicated on the X-axis and it’s resulting ROI indicated on the Y-axis:


normal_1420679429-chart.png


Here are some takeaways from this graph:

  • Below 60% leverage, ROI is basically flat, without much opportunity for leverage to impact ROI, regardless of type of loan.
  • Between 60-80% leverage, amortization/rate of the loan (the conventional loan has the longer amortization and lower rate) will determine whether you can start to increase your ROI or not.
  • Above 80%, any positive leverage will greatly increase your ROI, but the amortization/rate will play a HUGE role in the extent of the increase.
The key takeaway is that, for lower amounts of leverage, conventional versus portfolio loans make no difference — and, in fact, leverage doesn’t make much of a difference at all. For medium amounts of leverage (60-80%), there is a big difference in CoC based on type of loan chosen. And for larger amounts of leverage, both loan choices are good, but conventional terms/rates are very beneficial.

So, now that you have most of the big pieces of the puzzle, the question is: Should you use leverage for your deals? Or should you purchase with all cash?

Should You Use Leverage
Whether or not to use leverage is a very personal question — meaning each investor needs to ask himself what his goals are, what his level of comfort is with risk, etc. Personally, I like to use leverage because it increases my returns, but I like to use leverage conservatively to avoid the big risks that go along with it’s use.

By conservatively, I mean that:

  • I always ensure that I have adequate cash reserves.
  • I try to keep my leverage to about 70-80% of what I paid for the property (this way, I get the benefits of leverage, but the market can drop 20-30% and I’m still “safe”.
  • I try to use loans that have the longest amortization period and lowest interest rate possible.
  • I try to avoid using balloon loans and adjustable rate loans, and if I do, I try to ensure I have a plan in place for when the balloon payment is due and/or if the interest rate increases.
Those are my personal views on using leverage. I know other people who never use leverage and always pay cash. I know others who will leverage up to 100% of the purchase price (putting in no money of their own, if possible). None of these strategies is inherently right or wrong; it’s just a question of what’s right or wrong for each individual investor.

Hopefully this gives you enough information to help you make informed decisions on how YOU plan to use (or not use) leverage for your real estate investments.

This is extremely helpful!

Truly appreciate the contribution brother!
 

biophase

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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.

Personally I like ARMs, but then again, I can pay off my loan if the rates increase. I started with a 5/1 ARM 13 years ago. It started at 6%, then went up to 8.75%, came down to 3.125% and is now at 4.25%. At the time of my loan, I could have gotten a 30yr fixed at 7%. I know I came out ahead because the majority of the loan rate has been in the mid 3's.

At that time, everyone was telling me to lock in a 30yr fixed. They've never been that low before. etc...

Again, as long as you understand what you are doing you will be fine. Don't assume you can refi to a lower or fixed rate when it jumps. Assume that it could go to 10%, figure out if you can afford it or what you would do in that situation. Run the scenarios and assess the risk. That's all it really comes down to.
 
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biophase

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This makes a lot of sense to me. I appreciate your feedback brother! I LOVE the idea of being debt free on my “non-cash-flow” assets too! Actually, I’d prefer to be debt free on on both but I guess if I had to choose, it would probably be on my rental. The reason being is it would reduce the risk a bit. I know I’ll always pay my mortgage but I’m not sure my tenant always will.

Let me just say that each free and clear property becomes a perpetual cashflow machine for life. Yes, it will require repair and have vacancies, but it's pretty much at ATM no matter what the market does.

If you put $200k into a property today and get 4% return, that's $667 a month. With misc expenses and vacancies, let's say it's $0-$500/mo... for life (unless rents drop $500). In any case, this is equivalent to a funding a new $25,000 car forever. Or going on a $2000 vacation every 4 months...

Get a couple of these under your belt and you relieve alot of stress in your life. :)
 

ZeroTo100

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Personally I like ARMs, but then again, I can pay off my loan if the rates increase. I started with a 5/1 ARM 13 years ago. It started at 6%, then went up to 8.75%, came down to 3.125% and is now at 4.25%. At the time of my loan, I could have gotten a 30yr fixed at 7%. I know I came out ahead because the majority of the loan rate has been in the mid 3's.

At that time, everyone was telling me to lock in a 30yr fixed. They've never been that low before. etc...

Again, as long as you understand what you are doing you will be fine. Don't assume you can refi to a lower or fixed rate when it jumps. Assume that it could go to 10%, figure out if you can afford it or what you would do in that situation. Run the scenarios and assess the risk. That's all it really comes down to.

Yeah, that’s kind of what I did the first time. I took a 10 year arm at 3.5 and locked in. I sold 6 years later. It was a good decision at the time knowing that my plan was to eventually sell and get out before 10. Plus, it was a townhouse and they generally turn over quick over here. Now I’m buying an actual house lol. I feel like this all has to be perfect - location, down payment, knowing where I’m going to be (I’m 34 retiring in a couple years). I guess now that my situation has changed, that’s something I have to think about. I appreciate it my man!
 

ZeroTo100

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Let me just say that each free and clear property becomes a perpetual cashflow machine for life. Yes, it will require repair and have vacancies, but it's pretty much at ATM no matter what the market does.

If you put $200k into a property today and get 4% return, that's $667 a month. With misc expenses and vacancies, let's say it's $0-$500/mo... for life (unless rents drop $500). In any case, this is equivalent to a funding a new $25,000 car forever. Or going on a $2000 vacation every 4 months...

Get a couple of these under your belt and you relieve alot of stress in your life. :)

You’re a legend!!!
 
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biophase

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Yeah, that’s kind of what I did the first time. I took a 10 year arm at 3.5 and locked in. I sold 6 years later. It was a good decision at the time knowing that my plan was to eventually sell and get out before 10. Plus, it was a townhouse and they generally turn over quick over here. Now I’m buying an actual house lol. I feel like this all has to be perfect - location, down payment, knowing where I’m going to be (I’m 34 retiring in a couple years). I guess now that my situation has changed, that’s something I have to think about. I appreciate it my man!

Another thing about ARMs is that the percentage movement is usually capped at 2% per year (read your loan docs).

So if you get a 3.5% rate 10/yr, the most it can be year 11 is 5.5% and at year 12 is 7.5%. So you can even assume you have a 12 year loan that you can predict the rates. And lastly, who knows where you will be in 10-12 years. Hopefully successful enough that this loan doesn't even mean anything. :)
 

Real Deal Denver

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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.

Notice that I said equity there. They could cash out and have close to a mill when it's all said and done. I'm putting together a plan to do this myself. I can't fund a deal like this, but I can make a deal with someone that can - but they don't, because they don't have the details. THIS is why I'm in this business. I get to see the way the market really works - behind the scenes.

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.

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.

Gary - if you net 6%, you're doing something wrong.

Bio - If you pay a PM (property management company) to manage things, in my area they charge 10% of the rent for their services. Talk about gutting your profits! I have a friend that is a property manager, and he makes big bucks off those 10% fees. If you managed yourself, your profits could be 15% or more?

Using "Real Deal Denver's" own market, take a look at inflation-adjusted Denver prices over the past 15 years -- in many locations, prices are still down in that 15 year period.

Not in the Denver area. Below is a typical avg sales price graph I do to see where a specific property type is actually tracking over the prior 12 months. This is not the average market - this is for one property style. Do you think prices will go up over 10% this year? Already have, and we're not even in the busy season yet. They could easily hit 20%. This is typical in many, but not all, markets that I analyze.

Market Apprec Graph 12 mos.JPG

I'm not saying that you can't make money off this arbitrage, but you have to ask yourself if the time, effort and risk you put in is worth the pay off. I do this for a living (I own 50+ units and have done 400+ flips) and I choose to pay for my house in cash, because I like the idea of being debt-free on my non-cash-flowing assets (like my house).

^^^ THIS is where I want to be! Nobody is going to take away these properties through bankruptcy, a merger, or flat out lying about company profits - the way working for a franchise, or buying stocks in a company, can. The dead bodies on the side of the road resulting from hard working honest people being stabbed in the back, through no fault of their own, is legendary. How many franchises closed up? How many people were lied to about stocks. One company in my line of work is issuing STOCK to pay bills. They have no cash to operate on and meet expenses. Hell yeah - I want to put my future in the hands of someone else. No. Thank you.

Real estate is wonderful in that it’s one of the few types of investments where you can actually use leverage; but by the same token, improper use of leverage can be very risky for real estate investors.

Leverage can destroy liquidity. Here’s what I mean by that: Imagine a situation where you need some quick cash.

Leverage is the tool that *can* turn people into millionairres. This is one of the main things that makes real estate so desireable. Play the game right - live in the property and sell when you can keep you gains - don't pay a management company 10% of your profits - and buy in quality locations in a strong market (see graph above) and you are *very likely* going to do well. Of course, things can go bad as well. I lived 2008 - real estate is my business. I am not an investor like others here. My world exploded. So I know how bad things can be. What to do? Pack it up and move on. I didn't because I was established and managed to survive - but don't lose sleep over how bad things could be - this has already happened. Life can be that way sometimes. We're all going to die too - but I don't spend time worrying about it.

Multiply by 12 months, and that’s 12% of the purchase price per year in profit. In our example above, that’s $12,000 in profit per year on a $100,000 property. As you can probably figure out, that’s a 12% ROI. And remember, this is with an all cash purchase.

UNTIL the property is paid off. Then your equity is 90% or more - and will rise above and beyond that as the market appreciates. You could get 300% or more equity. Try that with stocks. And along the way, rents are going to increase hopefully too. (California is a prime example of "automatic millionaires" being made left and right)

Whether or not to use leverage is a very personal question — meaning each investor needs to ask himself what his goals are, what his level of comfort is with risk, etc. Personally, I like to use leverage because it increases my returns, but I like to use leverage conservatively to avoid the big risks that go along with it’s use.

I put this in here because it bears repeating. JScott is a master at this biz. Every single word he says should be analyzed. People like this are hard to find.

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%.

Silly hot? Try 20% market appreciation on for size. See the graph above.

Actually, I’d prefer to be debt free on on both but I guess if I had to choose, it would probably be on my rental.

And here - is the best reason for getting your rental:

Let me just say that each free and clear property becomes a perpetual cashflow machine for life. Yes, it will require repair and have vacancies, but it's pretty much at ATM no matter what the market does.

Taa Daa! ATM for life. Not as good as winning Publisher's Clearing House payments for life, of course. That's on my list too...

If you put $200k into a property today and get 4% return, that's $667 a month. With misc expenses and vacancies, let's say it's $0-$500/mo... for life (unless rents drop $500). In any case, this is equivalent to a funding a new $25,000 car forever. Or going on a $2000 vacation every 4 months...

I like how the r's just roll off Bio's tongue when he says Forrrever. He also uses one of my favorite words a lot: vacation.

I learned a long time ago, if I couldn't beat them, I was going to join them.
 
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biophase

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Notice that I said equity there. They could cash out and have close to a mill when it's all said and done. I'm putting together a plan to do this myself. I can't fund a deal like this, but I can make a deal with someone that can - but they don't, because they don't have the details. THIS is why I'm in this business. I get to see the way the market really works - behind the scenes.

Based on your numbers in your scenario I don't see how your numbers pan out. If you put $880 into a build and it appraises at $1.5M, the most equity you can have is $620k? And that's assuming they paid $0 for the land. I bet they are closer to $400k equity than $1m?? I don't get it.

Bio - If you pay a PM (property management company) to manage things, in my area they charge 10% of the rent for their services. Talk about gutting your profits! I have a friend that is a property manager, and he makes big bucks off those 10% fees. If you managed yourself, your profits could be 15% or more?

That's funny because I always thought the opposite. I've always felt bad for them that I'm paying them 10% to handle a whole bunch of crap. My last PM got me 2 quotes for painting, 2 for carpeting, hired a cleaner and replaced one window. He just sent me quotes and I picked out the carpet color, paint color, etc... and he managed it all. All for $100/mo. I'd take that deal all day long.

I guess it's a good thing that I think it's a great idea and he does too. :)

I've used the same PM for 13 years, and I get a direct deposit each month and a nice report that I hand directly to my CPA at tax time. That's the extent of my real estate investing time (minus repair decisions), which is probably why I keep buying more and more. :)

Not in the Denver area. Below is a typical avg sales price graph I do to see where a specific property type is actually tracking over the prior 12 months. This is not the average market - this is for one property style. Do you think prices will go up over 10% this year? Already have, and we're not even in the busy season yet. They could easily hit 20%. This is typical in many, but not all, markets that I analyze.

You can't really just post a graph of 2017. That's not a real representation of a real RE market. Come on, post a graph from 2003 at least cover 15 years.
 
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Real Deal Denver

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Based on your numbers in your scenario I don't see how your numbers pan out. If you put $880 into a build and it appraises at $1.5M, the most equity you can have is $620k? And that's assuming they paid $0 for the land. I bet they are closer to $400k equity than $1m?? I don't get it.

Oooops - you're right. I am so immersed in this, I left out some very important information. That is correct for this property - however... Just 1/2 mile north there is an exclusive market area where they are getting $400-$500K MORE for the same properties. It's very clicky here - addresses mean everything - even if it's the exact same property.

That's the property I analyzed for potential development, but the one I stated was a different one - in a lower priced area. Although far from being undesirable, of course.

And I did find the land. $425,000 - and the property on the same block is for sale for a bit over $2 mill. The profits are there for the taking, but only a select few do this as it is inside information that is not easy to come by.

That's funny because I always thought the opposite. I've always felt bad for them that I'm paying them 10% to handle a whole bunch of crap. My last PM got me 2 quotes for painting, 2 for carpeting, hired a cleaner and replaced one window. He just sent me quotes and I picked out the carpet color, paint color, etc... and he managed it all. All for $100/mo. I'd take that deal all day long.

GLAD to hear this - as this gig would be much more profitable than what I'm doing now. I may just start that up this year. It's so damn easy to automate and scale too. My friend put one person in charge of collecting rent for ten properties, and gave him a discount for doing that. No more babysitting! He also priced his rentals to give everyone a discount if they paid early. Not really - it was just marketing, but everyone likes a discount. Worked great.

I think I have to call him and get the inside scoop for this biz. He has the latest greatest software to handle it all. 50 a month at $100 (which is based on LOW rent - it would actually be more like $140 a month - but let's keep it simple.)

50 x $100 = $5K a month for a part time biz. When it reaches 100 a month, I step out and get a manager. Damn!

Double Damn! Thanks for the insight to this Bio. Drinks are on me!

You can't really just post a graph of 2017. That's not a real representation of a real RE market. Come on, post a graph from 2003 at least cover 15 years.

You're right. As I explain below...

Of course, things can go bad as well. I lived 2008 - real estate is my business. I am not an investor like others here. My world exploded. So I know how bad things can be. What to do?

Yeah, I survived the great recession at ground zero. Wouldn't wish that on anyone.

Sure things can go bad. But rents didn't go down. Prices sure did. And when that happened the smart investors rushed in and scooped up as many properties as they could. Today, they're making an absolute killing selling OR renting them.

Did anyone actually think that the entire country would perish? This would be the end of the USA? Some did. I knew it would bounce back, even if we had to resort to drastic measures like Puerto Rico, Venezuela, Argentina, Greece - all on the edge, or going into, bankruptcy. It can happen. Look at California even!

That's the Warren Buffet philosophy - when stocks he believes in plummet, he views that as them going on fire sale and buys more. Scary, I know. That's not the way most people think, but for the ones that did in 2008, it paid off extremely well for them.

It takes guts, sure, to be in real estate. Things can go bad. But even if the worst case scenerio came along - a tornado lifts the house off and no trace of it is found - you still have a hole in the ground. Insurance will build you a new home. Sure - if the entire economy collapses, and people are roaming the streets willing to kill for food - well, the rules have all changed now. No more investment worries. Survival is the new game.

Everything has risk. I'd never own gold or diamonds - nobody needs them. People do need a place to live though.

I love the back and forth with you Bio, as I highly respect your opinions.

Wish I would have known you 20 years earlier. Well, all I can do is play catch up. Your insight helps a lot in that, so I appreciate your feedback.

You're so much more reasonable than Kak and - hey wait a minute - kids are on my lawn - I'll be right back...
 
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Gary - if you net 6%, you're doing something wrong.
I would love to understand what I SHOULD be doing.

I'm buying single-family homes in my local market (northern Colorado). Here are a few examples:
  • In 2016 I bought (100% cash) a 2050 sq ft, 4br 4ba house on a nice quiet street. Paid $297k, which was a good price for the market. Tried listing it at $1800 and didn't get any good prospects. Lowered it to $1700 and got a great renter. So I don't think I could have gotten much more rent. I told my renter at the time that she was getting a bargain (she agreed) and that I would raise the rents in a year.

    So that was 12 * $1700 = 6.9% gross. Knock off about $2500 for tax & ins and it nets just over 6% before any "oopses." This was a bad year for oopses -- I just dropped $5500 into a new roof, long story how I screwed up on that one. I think $500/yr is a reasonable estimate most years, and that's still right around 6%.

    Just renewed the lease with the renter and raised the rate to $1900. She had no complaint. So now my return on my original $297k is up to about (12 * 1900 - $2500 - $500) / 279k = 6.7%. Zillow claims the house has gone up $50k (17%) since I bought it 18 months ago. So even with the boosted rent, my return on the current value of the asset is actually only about 5.7%.

    I don't know how I could have gotten much more than 6% on this.

  • Last August I bought a 2170 sq ft 5br 3ba house for $300k. 2 of the bedrooms are "handyman specials" in a partially-finished basement, but it backs up to a huge green space. I priced it at $1700 and again found a lot of resistance at that level. I ended up picking 3 young guys. They had good jobs and lots of cash on hand so I let their lack of rental history slide -- mistake. They've paid late every single month and caused problems with the HOA. I'm kicking them out at the end of the month. I looked for replacement renters for about 3 weeks and again found resistance at around $1700. (I got zero interest at $1900.) So again, I could not have done much more than 6%.
What should I be doing differently? Are single-family homes the wrong place to invest, or what?

This is a very big deal to me -- I'm 61 and my rentals are going to fund my retirement. I have 2 properties (not including the 2nd one above, which I bought & manage for my mother) that net about $2500/mo. Sooner than I would like, I'll inherit two properties from my mom, and those also net about $2500. So I won't starve but I won't be wintering in Tahiti either. If I could double my return to 12%, that would take me from "not starving" to "fairly comfortable," but I don't know how. No other investments have worked any better for me.

Oh and I'm managing these properties myself. If I hire a PM company, so I don't have to chase around dealing with 4 different properties, that knocks my return down to about 5.0 - 5.25%.
 
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ljean

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$300,000 houses do not make good rentals.
 

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$300,000 houses do not make good rentals.
How so? Are you assuming a $300k house is a mansion, a typical house, or a shack?

What DOES make a good rental?

Those aren't called "Oopses"... Those are called "Expenses."
They sure are!! :)

Fortunately large expenses like that are rare. I'm not likely to need an non-insurance-covered roof again. Of course, that roof ate up 11 years of my $500 estimate.

In about 35 house-years of renting, I've had VERY few vacancies. Almost zero. (Except for the separate apartment in the basement of my house, but that's mostly because I'm very selective about the people I will take there.) But it certainly can happen.

That's sobering that you expect only 3-4% cash-on-cash long-term. I definitely need to find other income streams for my declining years.
 
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ljean

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The monthly rent to price ratio needs to be around or over 1% to have a chance of making a decent cash flow return.
 
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CareCPA

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They sure are!! :)

Fortunately large expenses like that are rare. I'm not likely to need an non-insurance-covered roof again. Of course, that roof ate up 11 years of my $500 estimate.

...

No, but you'll have a roof one year, an air conditioner another year, a water heater another year, painting, flooring, appliances, tubs, toilets, vanities, cabinets, countertops, etc etc. Your $500 a year reserve is incredibly low.
One of my rentals just had to have the toilet removed and augered - $250. It doesn't take much effort to go through $500.
 

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I've been following this thread, as I really need to get into the REI game. It just feels like the wrong time to me at this point.

This thread has a wealth of information! Thank you @JScott, @biophase and all the others who have really shined the spotlight on the behind the scenes data!
 

Real Deal Denver

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@Real Deal Denver how much are those duplexes renting for? I don't care what your net worth is if you are cash flow negative, that's a recipe for disaster and more speculation than investing.
I just finished a rental analysis for this, in fact. I have to find three similar properties that are for rent and/or rented. It's damn hard to find three properties of this caliber but I got lucky and did.

The rents are: $3,000, $4,000, and $4,500. Quite a spread.

I know to you or I this looks like speculation - and I sure would never rent something like this out. Who would pay those rents? Sell it, take the money and run.

But people do. They even pay this rent for a "loft" in downtown. A loft is one big room that has the kitchen, living room all combined, with maybe two bedrooms, and a bath - all in one big square, usually in a mid-rise building with skyline views of the city. These are hot sellers - very much in demand.

I wouldn't rent one, and I sure wouldn't buy one either.

But there is a class of people that live privileged lives, and don't live "normal" lives. They are much closer to celebrity life style. Never eat at home - it's a big paycheck career, then drinks and dinner with friends, then the health club (usually in the same building), then to sleep. Weekends they jet off to some getaway for a few days.

Other than their money, fabulous life style, good looks, and great personalities, they are just like everyone else...
 
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garyfritz

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Thanks for the insights @JScott!

It's all about the numbers, not the house. Assuming 50% of your gross income goes to expenses, rent loss and capex, that means that a $300,000 house that rents for 1% per month ($3000/month) should expect to net about .5% per month ($1500), which results in a 6% cash-on-cash return.
Then I don't know if that's possible in this market. Like I said, I think I'm near the maximum rent I could get for these properties. I could hold out for the perfect renter and get maybe $200 more, but it might cost me a month or three of vacancies (and lots of time burned showing the properties, etc) to do that. One vacant month would take 9 months of $200-more-rent to pay back the lost month.

Personally, I like to see 10% cash-on-cash return, so I'd be looking for closer to 1.5% of the value (in this example, $4500/month) in gross rents, plus some leverage in terms of low-interest debt.
Now, you're probably thinking that $4500/month in rent is a lot, but that's why levijean pointed out above that most $300,000 houses don't make good rentals. Most of my single family rentals are in the $80-100K range, with rents in the $1300-1500/month range. This results in 10-12% cash-on-cash returns (unleveraged) or about 15% cash-on-cash (leveraged).
Are those free-standing houses, or condos, or what?

In this market, you can't touch a house for anywhere near $80k. Zillow shows 740 homes for sale in my town. Only 16 of them are under $100k, and they're all sketchy-looking trailers. There are only 14 free-standing homes in the $100k-$200k range.

You could certainly make a business of buying and renting trailers, but I suspect your expenses, repairs, tenant headaches, etc are all a lot worse. Do you really come out ahead? Whereas if you rent a nice house to a stable family, you're a lot less likely to have a tenant cooking meth or whatever. You're also a lot less likely to get into an eviction situation, tenants damaging the house, etc. My tenants often improve the house themselves -- updating the paint, things like that.

I have no idea what trailers rent for here, but I'd bet it's nowhere near 1.5% gross.

I'm not doubting anything you're saying. I know you have vastly more experience at this than I do. I'm just trying to understand if I'm doing something wrong, or if this is just the way the rental market works in my area. Given my experience with this area, I can't even imagine getting 1.5% of value. That's at least double what the market will bear in my single-family-home range. So am I doing something wrong in my area, or is it just not possible to do that in my area? I'm not sure.

And if it's not possible here, I should figure out if I can do better elsewhere. Remote rental ownership sounds like a nightmare, but with a good property manager it should be fairly painless...? (I think I hear derisive laughter...)

Instead of finding additional streams of income, I would focus on streams of income with better returns. If you're happy with 3-4% long-term, wait a couple years and CDs will again be generating those returns long-term.
No I'm not happy with 3-4%! I wasn't happy with 6%. In my futures/forex trading I used to routinely produce 50%/yr or more. For several reasons I can't do that any more, but I'm trying to find a strategy that will produce something better (a LOT better) than CD returns.
 

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I would love to understand what I SHOULD be doing.

I'm buying single-family homes in my local market (northern Colorado). Here are a few examples:
  • In 2016 I bought (100% cash) a 2050 sq ft, 4br 4ba house on a nice quiet street. Paid $297k, which was a good price for the market. Tried listing it at $1800 and didn't get any good prospects. Lowered it to $1700 and got a great renter. So I don't think I could have gotten much more rent. I told my renter at the time that she was getting a bargain (she agreed) and that I would raise the rents in a year.

    So that was 12 * $1700 = 6.9% gross. Knock off about $2500 for tax & ins and it nets just over 6% before any "oopses." This was a bad year for oopses -- I just dropped $5500 into a new roof, long story how I screwed up on that one. I think $500/yr is a reasonable estimate most years, and that's still right around 6%.

    Just renewed the lease with the renter and raised the rate to $1900. She had no complaint. So now my return on my original $297k is up to about (12 * 1900 - $2500 - $500) / 279k = 6.7%. Zillow claims the house has gone up $50k (17%) since I bought it 18 months ago. So even with the boosted rent, my return on the current value of the asset is actually only about 5.7%.

    I don't know how I could have gotten much more than 6% on this.

  • Last August I bought a 2170 sq ft 5br 3ba house for $300k. 2 of the bedrooms are "handyman specials" in a partially-finished basement, but it backs up to a huge green space. I priced it at $1700 and again found a lot of resistance at that level. I ended up picking 3 young guys. They had good jobs and lots of cash on hand so I let their lack of rental history slide -- mistake. They've paid late every single month and caused problems with the HOA. I'm kicking them out at the end of the month. I looked for replacement renters for about 3 weeks and again found resistance at around $1700. (I got zero interest at $1900.) So again, I could not have done much more than 6%.
What should I be doing differently? Are single-family homes the wrong place to invest, or what?

This is a very big deal to me -- I'm 61 and my rentals are going to fund my retirement. I have 2 properties (not including the 2nd one above, which I bought & manage for my mother) that net about $2500/mo. Sooner than I would like, I'll inherit two properties from my mom, and those also net about $2500. So I won't starve but I won't be wintering in Tahiti either. If I could double my return to 12%, that would take me from "not starving" to "fairly comfortable," but I don't know how. No other investments have worked any better for me.

Oh and I'm managing these properties myself. If I hire a PM company, so I don't have to chase around dealing with 4 different properties, that knocks my return down to about 5.0 - 5.25%.

You're doing everything right, for where you are - with the added insight that JScott provided, of course.

But you're not in a hot market. You paid cash for a $300K home? I just finished a land analysis in the downtown Denver area where four properties sold for $452K, $420K, $525K and they are going to be demolished. They are buying 6,250 sf lots to build on. One lot sold for $575K - a little bit more because it is bare land already. These are all in older, established "classic" neighborhoods. I'm not condoning or advocating for this - I think these people have more money than common sense. But they REALLY want these locations - and it's not just a few people that want them - it's a certain "class" of people. They are certainly above the class of people I associate with. More power to them if they can pay the freight!

That's what this market is. Crazy. People pay big bucks to live here.

Other markets are more laid back - typical. Probably 90% of them fall into that category. I think you might be in that 90% group. You can make money, but it's going to be a steady process. Nothing like a hot market.

That's my best guess - not knowing any details about your market. If you want to make the big money, you have to go where the big fish are. The people here throw OUT homes that cost more than many people pay for homes.

BTW, I just learned that the people that are in the process of building this super modern duplex already have another one that they built previously. Doing one of these is a feat beyond most people. Two?

That's life. But it's certainly not my life. I'm working to get there though...
 
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I just finished a rental analysis for this, in fact. I have to find three similar properties that are for rent and/or rented. It's damn hard to find three properties of this caliber but I got lucky and did.

The rents are: $3,000, $4,000, and $4,500. Quite a spread.

I know to you or I this looks like speculation - and I sure would never rent something like this out. Who would pay those rents? Sell it, take the money and run.

But people do. They even pay this rent for a "loft" in downtown. A loft is one big room that has the kitchen, living room all combined, with maybe two bedrooms, and a bath - all in one big square, usually in a mid-rise building with skyline views of the city. These are hot sellers - very much in demand.

I wouldn't rent one, and I sure wouldn't buy one either.

But there is a class of people that live privileged lives, and don't live "normal" lives. They are much closer to celebrity life style. Never eat at home - it's a big paycheck career, then drinks and dinner with friends, then the health club (usually in the same building), then to sleep. Weekends they jet off to some getaway for a few days.

Other than their money, fabulous life style, good looks, and great personalities, they are just like everyone else...

In my mind projects like these are a very concerning sign of the times.

When hard times inevitably come, these will be the first to go vacant.

Also, most folks that can afford that kind of rent, will be making $150k plus and are more likely homeowners that could be buying a $600k plus house. Is Denver becoming that metropolitan? Seems like in the great wide west it is much cheaper and easier to build out than up.

This is a market demographic that I just don't get, I guess I will stick to what I know...
 
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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?
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?
If you are going to buy a rental, why not a duplex, or better -- up to 4 units? You could live in one unit and the tenants can make the payments for you. Then you could use the mortgage money that you were planning on paying toward housing, to build a nest egg.
 

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I made a long post and deleted it because my mortgage calculator spreadsheet was all screwed up, but the gist of the post is that you can mess with the ROI of a single property. So ROI doesn't mean much to me for a specific property.

For example, given a $300k house that rents for $1900. You change the ROI simply by adjusting your down payment percentage and by changing your loan rate. But this doesn't change the fact that you got a $1900 rental for $300k.

As others mentioned the 1% rule, if this home were getting $3000/mo at $300k, it would surely be a great purchase. But as the neighborhoods get better and the prices go up, it's nearly impossible to get 1%.

Personally I'm not looking for 1%. I'm at more like 0.75%, and this reflects the neighborhoods that my properties are in. So if I find a $120k property and it rents for $900, I know that it can breakeven cashflow at 20% down and give me 5-6% return paying all cash.

And for me today, breakeven with 20% down is actually ok with me. I know I'm building equity over the long term.

I also know that rents will likely increase over time. So over time my ROI on these properties go up. Having been in this for 13 years now, I've seen some rents go up alot and some barely, but they all go up.

For example, my $140k prop rented at $875/mo 13 years ago, rents for $1100 today. I had another prop start at $1400 and is now at $1900.

But to @garyfritz it sounds like you need cashflow and you want more than 5% on $300k. So maybe you look at getting 3 $100k places that have better rent to price ratios. Like a $100k place that rents for $900.
 

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For example, my $140k prop rented at $875/mo 13 years ago, rents for $1100 today. I had another prop start at $1400 and is now at $1900.

But to @garyfritz it sounds like you need cashflow and you want more than 5% on $300k. So maybe you look at getting 3 $100k places that have better rent to price ratios. Like a $100k place that rents for $900.

As Bio points out - the rents go up. And up.

And it can get even better.

Here's a wrinkle that newcomers like me use, because I need all the advantage that I can get.

Get a place with a finished basement with a separate outside entry. Rent it for under market rates per floor. Combined, the total rents will be greater than market rents. The upside is that the under market rates keep your tenants happy, and if a tenant leaves, you still have 50% income coming in.

You would think these properties would be hard to find, but they're not. And, surprisingly to me, they usually sit on the market a while. You pay the same as a normal ranch, but your rental income can increase by 50%, with the extra security of keeping tenants. You have to make sure zoning allows this.

I've seen several old properties (1930 two stories) that were chopped up to use the basement, first floor, second floor, and a finished attic all as separate rental units - and then they even finish the garage too and rent that out! These things are cash cow pigs. That's one and a half steps better than a cash cow, for any newcomers.

For $1.50 more, I'll tell you an even better way to skin this pig. But I won't now - I'll let you think it over. What can be better than that? Oh, it's there...
 
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garyfritz

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Personally I'm not looking for 1%. I'm at more like 0.75%, and this reflects the neighborhoods that my properties are in. So if I find a $120k property and it rents for $900, I know that it can breakeven cashflow at 20% down and give me 5-6% return paying all cash.

And for me today, breakeven with 20% down is actually ok with me. I know I'm building equity over the long term.
Yup, that's exactly where I am. I didn't do 20% down but I could always put a mortgage on the house and pull out equity if I find a good enough opportunity. And for that particular house my equity has gone up 17% in 18 months. Can't complain about that.
 

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Thanks for the insights @JScott!

No I'm not happy with 3-4%! I wasn't happy with 6%. In my futures/forex trading I used to routinely produce 50%/yr or more. For several reasons I can't do that any more, but I'm trying to find a strategy that will produce something better (a LOT better) than CD returns.
Im getting in forex, looking at the day trading side, i know its a long hard road to learning a completely different skill but do you have any begginer tips as such?
 

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Im getting in forex, looking at the day trading side, i know its a long hard road to learning a completely different skill but do you have any begginer tips as such?
Sorry, no. After several decades of developing and building trading approaches that made 30-60% per year, I now have no idea how to trade profitably. The game has gotten MUCH MUCH harder in the last 20 years. I don't know how to play any more.

Some people still trade successfully, but using discretionary skills that I never developed and don't know how to. My skill set was different and it doesn't work any more. So it's still possible, but I'm the wrong one to ask.
 
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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.
 

ZeroTo100

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Feb 2, 2016
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New York City / New Jersey
What’s up Fellas,

Big shout out to all the RE legends in this thread - you already know who you are!

Just wanted to give an update, bought a new place in New Jersey a few months ago (hence why I been somewhat MIA). Why I love the area, we have our own little city - bars, restaurants, Shopping, Navesink river, etc. So much to do. Great schools too!

I gutted the entire house, put 45k into it but I did all the work myself - blood, sweat, and tears! The kid from Queens came a long way lol. I don’t think I would ever do this again BTW. However, I learned a lot and now that this phase of my life is done, we are shopping beach houses in Long Beach Island to buy for investment. I’ll get into that in a moment.

On this property, I took another ARM - 10 year 3.875 no points. I put down $205k. The house was fairly young - built in 98.

NY/NJ RE is stupid expensive especially if you’re in a hot area like this one. I included some pictures. It’s amazing the things you will learn on YouTube. I also called in a lot of favors as well, It def pays to know people.

I put 3 1/4 white oak floors in, new kitchen, 1 new bathroom, 1/2 bathroom, updated fireplace, painted, had a new basement carpet installed, and 24 high hats installed. There’s probably a few other things but those were the big ticket items. This was pretty much where the 45k went. I’m going to live here for 5-7 years and I’m out!

If I wanted to sell today, I can probably get $730. Not to bad for a few months of work.

Anyway, we are in the market for a beach house. However, we are looking to partner up with one of my buddies and each take 1 week during the summer and rent the property out the rest of the summer. Something about the idea of not getting stuck with a non paying tenant really excites me. I like the 1 week rental thing. The area we are looking at is Long Beach Island, NJ. They generally rent every week during summer months between 5k-8k a week and sell for 750-1.4m. We would like to be somewhere in the 850-900 range with around 250-300k down between the two of us.
 

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