[BostonBMW]

After looking into the 4HWW, it looks like Real Estate investing would be my ticket towards economic freedom. My parents have gifted me a property that they own, which I am currently working on rehabbing it for a sale/rental. I wanted to share some basic ideas about making Real Estate viable for anyone who might be interested:

- Geography: Make sure you look near your "home" location. Anything beyond an hours drive becomes cumbersome.

- Purchase Price: I am a strong believer in long term value investing, so applying those principles, I put in bids that will allow enough of a cashflow to cover all expenses (Mortgage, Interest, Taxes, Insurance, Maintenance etc). My goal is to break even if making the rental positive cash flow is not possible. These days I run my numbers on a 15 year Mortgage and compare it to the standard 30 yr term, why? because you're paying off more principle in the 15 yr deal. And regardless of the mortgage type, I pay on a bi-weekly basis to shave off additional interest payments. Furthermore, I have designated this first property as my primary residence (its a 2 unit with a basement), by building a small apartment in the basement, separate mailbox etc. This allows me to claim max tax deductions at the year end. I spend a lot of time thinking about financing because a weak situation can break you.

- Property Types: If you're starting out, I would recommend purchasing a single family to 2 family property at most. This will allow you to get in fairly easily and when you rent it, the hassles from tenants will be limited to 2 housing units. Sure you are taking on additional risk if your units sit empty, but we won't let that happen because..

- Types of tenants: Ideal types would be blue collar families or lower middle class folks who make enough money to pay rent on regular basis, yet not so much that they will move out after a year or two. You want long term tenants, vacancies mean lost $$.

- Escrow accounts: I am not talking about the escrow accounts that your bank has for you, but rather setting accounts for yourself to cover maintenance, mortgage payments. For me, having at least $5K in the bank for this purpose is a must. Everything that you think could go wrong in a house has gone wrong for me. I have spent entire paychecks trying to pay the building contractors, buying appliances etc. So trust me, you will need to have the cash in the bank to cover these expenses.

I really believe in the axiom that "see what everyone is doing and do the opposite" (Credit: James Caan), so I am working hard to make this rehab success. Based on my current calculations, I stand to be cashflow positive $300/month per unit or reap $40K in profits if all goes well. Since this property is located in PA (farther away than I'd like), I am already thinking of buying in New England, probably Connecticut or Rhode Island, so that I can check up on the place.

Also, I am taking an appraisal course, not for licensing/career reasons, but to learn the metrics of valuation for properties. With all the bad rep Real Estate has gotten recently, I don't think you can the Wild West of 00's anytime soon. I am glad that the speculators, armchair investors and other less serious folks have exited/are bleeding. You have to do your homework.

I am happy to help anyone in this forum to answer any questions. Far from an expert, yet have lived the hard knock (RE) life.

[hydrogonian]

Your thinking of buying another investment property in new england? I guess it depends on where your first property is in PA, but, in general, PA is far from New England.

I live in Southeastern PA, and New England is a 5 hour drive minimum, and more depending on where your going. Boston is 7 hours.

I would suggest that you crowd your properties together as much as possible. Even an hour apart would be almost too much for me. But you did make that point yourself.

I used to invest (and may again int he future, depending on where life takes me) and wrote a long book on the subject. The reason I don't anymore is because my business blew up brilliantly in a partnership dispute. Avoid partners at all costs. If you want to discuss anything, let me know.

It sounds like you have a good grasp on things though. Taking an appraisers course is a fantastic idea. If you don't know the value, then you have no idea what your buying. And contrary to the belief of most, you can trust the asking price to be zero indication of value.

Buying property is tough because of the auction nature of the market, and the resulting "winners curse" that says that the winner of a bidding war will always be taking a higher risk than any other investor was willing to take. This almost forces you to "value invest" and not try to get quick profits out of a property, as any quick profit strategy will likely be too high risk to work that consistently over time. The general investor market almost always pays too much for rehabs, and they often do it in shitty neighborhoods where inflation beating appreciation is not a foregone conclusion.

Good luck with your ventures.

[Whoremonger]

I would not touch property with a fuckin barge pole at the moment

House sales are plummeting and they estimate almost 1 in 4 mortgages will be in negative equity within the next few months. Unemployment lines are going no where and defaulting on mortgages has reached such epic proportions that banks have stopped foreclosing simply because they no longer want the asset on their books.

I would rather consider living in the place they have given you, and use that cash you save in rent to start a business of some sort. Property is a great investment, just not for the next 4-5 years

[BostonBMW]

Hydro,


Your thinking of buying another investment property in new england? I guess it depends on where your first property is in PA, but, in general, PA is far from New England.

Agreed. I would prefer to sell the place in PA, but might end up renting out if the cash flow is strong. I am Boston based so NE is my region of choice for future investments.


I live in Southeastern PA, and New England is a 5 hour drive minimum, and more depending on where your going. Boston is 7 hours.


I am definitely concerned about that. Since I am putting in some dollars to rehab the place in PA, I would like to maximize the return on that investment. The whole driving back and forth does not work for me, so I would probably end up hiring a manager. The property is in Northeast PA, but still the drive times are not reasonable at all.

I would suggest that you crowd your properties together as much as possible. Even an hour apart would be almost too much for me. But you did make that point yourself.


Agreed! I mean this property is not something that I brought myself - its more of a hand me down from the parents, so I definitely didn't have a choice in the matter. I'd like to keep it within an hours drive. I am a little wary of bunching the investment properties in one section of the city or one town because it might be risky (in the long term) because neighborhoods gentrify or become ghettoized over a 10-15 year period.

I used to invest (and may again int he future, depending on where life takes me) and wrote a long book on the subject. The reason I don't anymore is because my business blew up brilliantly in a partnership dispute. Avoid partners at all costs. If you want to discuss anything, let me know.


Wow, sounds like an amazing ride though. I will definitely keep you in mind with questions or issues as they come up. I am still getting acclimated with this deal - rehabbing takes a lot of time, patience, and money. I am definitely going to stay away from fix-up situations for the next few deals.


It sounds like you have a good grasp on things though. Taking an appraisers course is a fantastic idea. If you don't know the value, then you have no idea what your buying. And contrary to the belief of most, you can trust the asking price to be zero indication of value.

Buying property is tough because of the auction nature of the market, and the resulting "winners curse" that says that the winner of a bidding war will always be taking a higher risk than any other investor was willing to take. This almost forces you to "value invest" and not try to get quick profits out of a property, as any quick profit strategy will likely be too high risk to work that consistently over time. The general investor market almost always pays too much for rehabs, and they often do it in shitty neighborhoods where inflation beating appreciation is not a foregone conclusion.

Good luck with your ventures.


Brilliant. So I am assuming that most of my offers will be shot down? Just based on my crude Financial Models, some of the properties that I looked into need price reductions in the 10-25% range, I don't think too many sellers will be happy with lower offers. On the other hand, I have to do what's best for me - which is buying a property at the price where cash flow meets the debt service/cost of ownership obligations. It will definitely be a long road ahead.

[BostonBMW]

(07-05-2010 09:42 AM)Whoremonger Wrote:  

I would not touch property with a fuckin barge pole at the moment

House sales are plummeting and they estimate almost 1 in 4 mortgages will be in negative equity within the next few months. Unemployment lines are going no where and defaulting on mortgages has reached such epic proportions that banks have stopped foreclosing simply because they no longer want the asset on their books.

I would rather consider living in the place they have given you, and use that cash you save in rent to start a business of some sort. Property is a great investment, just not for the next 4-5 years

Whoremonger,

I follow your points but I don't agree.

- If I am buying at the price which will support the mortgage payments, taxes, insurance, etc., what difference does it make whether people are defaulting on their mortgages, unemployment is growing etc? If anything I see more renters entering the market. Also since I would be buying and holding over 10-15+ year term, even if prices decline in the short run, I don't intend to be selling/flipping these properties.

I can't live in that house, because my job, social circle is up in Boston. At best I could use one of the units as vacation home.

[Caramel Communist]

(07-06-2010 01:08 PM)BostonBMW Wrote:  

(07-05-2010 09:42 AM)Whoremonger Wrote:  

I would not touch property with a fuckin barge pole at the moment

House sales are plummeting and they estimate almost 1 in 4 mortgages will be in negative equity within the next few months. Unemployment lines are going no where and defaulting on mortgages has reached such epic proportions that banks have stopped foreclosing simply because they no longer want the asset on their books.

I would rather consider living in the place they have given you, and use that cash you save in rent to start a business of some sort. Property is a great investment, just not for the next 4-5 years

Whoremonger,

I follow your points but I don't agree.

- If I am buying at the price which will support the mortgage payments, taxes, insurance, etc., what difference does it make whether people are defaulting on their mortgages, unemployment is growing etc? If anything I see more renters entering the market. Also since I would be buying and holding over 10-15+ year term, even if prices decline in the short run, I don't intend to be selling/flipping these properties.

I can't live in that house, because my job, social circle is up in Boston. At best I could use one of the units as vacation home.

good info.....totally agree...real estate is long term...it wasn't till all the dumb fucks-robert kioyosaki types/crooked ass real estate investors/real estate agents/appraisers/banks/builders/city governments made the game short term and fucked up the economy...smart real estate investment s long term..i'm talking 20-30 years you hold the property....

[playa_with_a_passport]

The RE gravy train has left the station for quite some time now.The good thing is that you are keeping your expectations modest. I have a friend that he brought a two family house in Allentown, PA for like 100k. almost 7 years ago. The rent roll covers the mortage plus a $200 profit. His goal is for the house is to be payed off in 10 more years so he can pocket the rent as pure profit.

I am working right now on buying a 2 family house with a finished basement. I plan on living on the basement and renting the upper floors. I won't become a millionare doing this but at least ill live rent free and own a house after 30 years.

[hydrogonian]

(07-06-2010 01:03 PM)BostonBMW Wrote:  

Brilliant. So I am assuming that most of my offers will be shot down? Just based on my crude Financial Models, some of the properties that I looked into need price reductions in the 10-25% range, I don't think too many sellers will be happy with lower offers. On the other hand, I have to do what's best for me - which is buying a property at the price where cash flow meets the debt service/cost of ownership obligations. It will definitely be a long road ahead.

Exactly. If you are making the right offers, most will be shot down. If too many are accepted, your probably offering too much for the properties. A good ratio to keep in mind (for an open market property on the MLS for instance), on average, would probably be 30 offers for every one acceptance. This means that you have to constantly be making offers to get properties.

There is a downfall to this strategy, however. The downfall is that you have to be ready to close on as many offers as get accepted. Not doing so will cause the RE community to ignore your future offers. Therefore, you probably need a hard money guy ready to back your investments, or a money partner.

But if your offers are low enough, than its unlikely that too many will get accepted. To avoid multiple offers being accepted at once, you can make offers slowly and wait until each one is accepted or rejected. This is a much slower way to do things, given the 30:1 ratio, but its safer.

Try to get an edge in a strategy that limits the exposure of properties to other investors. This will prevent the price for properties from being run up by the market, and your lower offers are more likely to get accepted.

The OTHER strategy which I like, especially for long term, is to not worry too much about getting a super low price on the property. Instead, by the best property that you can afford in the best neighborhood that you can afford (really, the property with the best appreciation potential), and then let time and the market make your money for you through appreciation.

I saw a show with Donald Trump once in which he was discussing his property acquisition strategies. He said that he always looked for deals in distressed property. However, he then stated that, ironically, his best performing deals were always the properties that he paid too much for. That is, he was willing to pay a premium for properties that were premium, but also had a great shot at gaining value. Most of the time, it worked out for him. Keep in mind that these properties were large commercial properties or premium pieces of land. You can realize gains inr residential property too though, if you know what your doing. look for great school districts that have a limited mount of space in which to build new homes.

[gringoed]

"After looking into the 4HWW, it looks like Real Estate investing would be my ticket towards economic freedom."

Good call. RE is really powerful to make you economically free, such that finding only one good deal can make you set for life.

I'm almost done constructing a small apartment building that will gross $6k/m in rent, with expenses about $2500/m. A net of $42k/year passive is enough for most people to live the lifestyle of their dreams.

[hydrogonian]

(07-09-2010 12:45 PM)gringoed Wrote:  

I'm almost done constructing a small apartment building that will gross $6k/m in rent, with expenses about $2500/m. A net of $42k/year passive is enough for most people to live the lifestyle of their dreams.

Great work. Thats exactly what I aspire to do if I ever got into REI again. Congrats.

Do you mind sharing the details?

What part of the country?

How many units?

What are your total (or projected) costs for the project? Inclusive of Land, Development, and Bureaucracy/Permits?

What market are you targeting (low income, middle, or high end)?

How difficult was it to find a site, and then break through all of the red tape needed to develop?

How did you finance everything (what did you need to show the bank to take a risk on you for the construction loan?)

This is definitely the type of project that most interests me. Your not paying another developer or previous owner to within a cunt hair of profitability. When you buy a building, the previous owner or developer knows what you will make (if they aren't lying and overstating profits to begin with), and will make you pay to the point where the cap rate is as low as possibly acceptable. When you build, although you take higher initial risk, you are paying market rate for development costs and all of the cash flow profit is yours to keep.

Anything that you could share would be great for those of us interested in REI.

[Whoremonger]

(07-06-2010 01:08 PM)BostonBMW Wrote:  

(07-05-2010 09:42 AM)Whoremonger Wrote:  

I would not touch property with a fuckin barge pole at the moment

House sales are plummeting and they estimate almost 1 in 4 mortgages will be in negative equity within the next few months. Unemployment lines are going no where and defaulting on mortgages has reached such epic proportions that banks have stopped foreclosing simply because they no longer want the asset on their books.

I would rather consider living in the place they have given you, and use that cash you save in rent to start a business of some sort. Property is a great investment, just not for the next 4-5 years

Whoremonger,

I follow your points but I don't agree.

- If I am buying at the price which will support the mortgage payments, taxes, insurance, etc., what difference does it make whether people are defaulting on their mortgages, unemployment is growing etc? If anything I see more renters entering the market. Also since I would be buying and holding over 10-15+ year term, even if prices decline in the short run, I don't intend to be selling/flipping these properties.

I can't live in that house, because my job, social circle is up in Boston. At best I could use one of the units as vacation home.

When capital assets (houses) depreciate at values much higher than inflation(like they are currently doing), and you have borrowed money to secure those assets AT INTEREST, your holding costs rocket and your returns diminish.

What that basically means is that you are going to see whatever yields you have decimated by inflation and equity which is tied up in an asset you cant dump.

Basic fundamentals bud when it comes to property and borrowed money/equity loans to see MODEST returns:

1) If rental yields are low and holding costs are high, you need steady capital growth at rates higher than inflation.

2) If rental yields are high and costs are low, you need capital values to track or be just ticking under inflation to maintain those yields and your returns. If capital values increase in this period, you make an absolute killing

The market has not bottomed. It is going to get much worse, which means that you will see no rises in capital values and inflation will eat away at your yields.

However, if you can find the kind of properties where your rental yields are going to be 20%-25% and your capital outlay is going to be a reasonable percentage of the equity you have in your home, then it is worthwhile.

Just my 2 cents bud. Everyones situation is different

[hydrogonian]

You have to also remember though that real estate markets can be largely local, meaning that not every market within the nation is in bad shape.

You just can't ride the national buying frenzy like any monkey could have done 6 years ago. An investor has to actually know how to better analyze each individual market. Granted, markets that aren't negatively affected by the situation are much more rare than not. But there are still markets to invest in (usually markets in places where the economy is expanding but new REI development is not, or in places where another market factor is being improved upon, like a school district). Also, there are methods to invest that play the other side of a bad buying market.

[gringoed]

I'd be happy to help, just PM me.