Snow balling VS 15 year notes on rentals
Real Estate Agent · South Ogden, UT · Member since 2016 · 15 posts · 13 votes
Snow balling VS 15 year notes on rentals
Most Popular Reply
Rental Property Investor · Miami, FL · Member since 2017 · 2k+ posts · 911 votes
8yPaden.
I think the best option would be to take the cash flow that you have now and use that cash flow to buy more properties until you have 10 loans. Then once you have 10 then you can start to pay off the property that has the lowest balance with the cash flow from all 10 properties. Pay that property off, which will then open up another loan line for you to use and finance another property.
68 Replies
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Thomas S. I am talking about spendable cash and limiting exposure to tenants and cap ex. suppose if the best you can do in the investing world is 5% or be a landlord then yes your summation I guess is best for those..
for me my cash is put out on value add new builds and we double our money in 9 months.. that's the kind of returns I like not drip income..
I can never win the landlord argument I understand that and most landlords can't do what I do anyway so its not a fair comparision.
this is what I personally like to do... and this is one of 30 I have going LOL.. different business for sure. but I like it.. this one the numbers are 160k for the lot bought 6 months ago for cash close when sold probably next 60 days profit about 200k.. net... yes I will have to pay tax .. but so what. - 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Edward B. where were you when about 200 plus families in La I had to foreclose on and take their investment property from them..
its a nightmare I am not saying no debt its not realistic until you get to a certain level but having free and clear assets is a choice and no one can take them from you..
I am a gambler anyway I gamble on appreciation every day.. and value add..
so maybe I am not the best to have this argument with.
but when I look at the truly wealthy friends I have and I mean truly wealthy not 7 figures but 8 figure to 9 figure net worths most of what they have is paid for it not all.. unless they are in big syndicated deals.. houses are paid for second houses... house s at the ski areas the lake front homes.. etc etc..
but I guess I am just more in the limit debt camp for long term liabilities.. I don't like them now for short term I usually have 5 to 10 million out at anyone time.. so I get that.. but its all paid off as inventory sells.. much like being a car dealer ... you only take on debt long enough to move the product.
- Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes8y
I don't know, but I wasn't invested in LA and leveraged to the hilt.
My point is that those people would have been fine regardless of whether their property had been paid off or if they had the money in a savings account to pay it off if necessary. Of course, I don't have my money in a savings account but there are liquid uncorrelated assets that you could be investing in vice having your money tied up in a property. The cliche "7 streams of income" comes to mind.
I look forward to the day when I have so much money that I can just pay cash for everything. I bet most of your friends didn't get their by paying cash for everything, though. Rather they did it through intelligent use of various types of leverage, including debt.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Edward B.:
I don't know, but I wasn't invested in LA and leveraged to the hilt.
My point is that those people would have been fine regardless of whether their property had been paid off or if they had the money in a savings account to pay it off if necessary. Of course, I don't have my money in a savings account but there are liquid uncorrelated assets that you could be investing in vice having your money tied up in a property. The cliche "7 streams of income" comes to mind.
I look forward to the day when I have so much money that I can just pay cash for everything. I bet most of your friends didn't get their by paying cash for everything, though. Rather they did it through intelligent use of various types of leverage, including debt.
the investors were in LA all the properties were scattered through out the mid west in the turn key markets and GA . I was the lender they were the borrowers and when things went bad their tenants stopped paying they could would pay for a few months then quit and then I took the asset.. lost of drama lots of marital discord .. was not pretty.. but I am not predicting those times again I am hoping that was once in a life time.. but folks that had free and clear assets even if they sat vacant they did not lose them.. that's my point..
no most of my friends that made it owned business or were presidents of companies that went public and got monster stock payouts.. remember I am from the Bay AREA... LOL.
one owned Garbage company that waste management bought for 65 million.. I frankly don't know any that did it with leverage on rentals.. but we do see some now that are getting their with syndications etc.. the other place were I have seen fortunes made in real estate is in Timber and in path of progress farmer bought the dirt outside of town town expands DR Horton pays 10 mil for their farm..I see those.. but someone who is staking rentals with only 20 or 25% equity and making a 100 a month or 200 month.. while I have clients that do well. make 20 to 30k a month and live a nice lifestyle .. they are not in the same league and they work their but off for it.
- Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes8y
Originally posted by @Jay Hinrichs:
Here's to the working man :)
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Edward B.:
Originally posted by @Jay Hinrichs:
Here's to the working man :)
yes if it was not for those folks I would be out of business... but as I said its their lifes work.. and its hard work be a big volume landlord.. its not mail box money.. one of my clietns that has 200 plus doors a month ago he was ready to mail it in.. totally burnt out.. I talked him off the ledge reminded him that we have worked together for a decade creating this portfolio and hang in there.. I funded them all.. LOL.. so I don't want to see my guys and gals burn out.
but I do like to talk both sides of the coin BP tends to be buy rentals and all is rosy..
- Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes8y
You know, I've noticed that about you. It's not a bad thing. And while I do not have anywhere near 200 doors I have certainly been in your friend's shoes on multiple occasions. Just sell everything and move to Thailand and live like a king or something. I imagine we all have at some time or another. But alas, I love this game and even though it drives me crazy sometimes, I can't stop playing it.
- Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes8y
If you're just starting out keep the loans, do a 1031 to get into bigger and more productive properties. Not discrediting the value of a paid off asset(s), but they have to match your long term plan. Plus, the condition should match, if the house is going to require significant repairs it's probably more efficient to save for those and pay them off vs dump it all into the note.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes8y
Originally posted by @Jay Hinrichs:
I frankly don't know any that did it with leverage on rentals.. but we do see some now that are getting their with syndications etc.. the other place were I have seen fortunes made in real estate is in Timber and in path of progress farmer bought the dirt outside of town town expands DR Horton pays 10 mil for their farm..I see those.. but someone who is staking rentals with only 20 or 25% equity and making a 100 a month or 200 month.. while I have clients that do well. make 20 to 30k a month and live a nice lifestyle .. they are not in the same league and they work their but off for it.
I think this point is well-made. Most-virtually all- people who do rentals, it was never meant to be a Warren Buffet avenue. Virtually no one is becoming 8 figure+ wealthy off of rental properties. You get to those levels from owning super profitable businesses, creating new technology, financing other ventures, etc. I'm fully aware that my little rental property company is just a replacement for my W2 income, and I'm cool with that. I make more than 100-200 per door but I don't have any delusions of grandeur at the rate and niche of what I'm doing - all I ever wanted to do with these rentals at the beginning was to give me a place to park some money that I saved, and eventually I noticed it could replace my M-F working income - given my age, a good thing, since it gives me freedom to retire earlier than I thought might have to work otherwise.
Anyway, my point is that people who see this as massive action, quitting their job at 23, etc, really should think it through. Owning rental property is a job - maybe easier and more flexible than M-F 9-5, but still a job, even if you farm it out to a PM. The people I know who have a lot of money, a lot of them have rental property but that wasn't the vehicle for getting a lot of money, just providing some principal protection at a reasonable rate of return.
Skyline Properties - Investor · Dallas, TX · Member since 2013 · 619 posts · 128 votes8y
Originally posted by @Jay Hinrichs:
Jay - where can I sign up for some of your no money down, no personal guarantees, no collateral loans? :) In all seriousness are you talking HML here?
- Greenfield, MA · Member since 2018 · 14 posts · 4 votes8y
@Paden Anderson I'm glad I saw your post! I just bought my first rental property in February and was wondering what I should be doing with the cash flow I am getting as well. I bought this as a foreclosure so I was able to get a deal on it and now only have about 50% LTV on this. I listen to a lot of Dave Ramsey's podcast so I like the idea of paid off assets and no more payments but I also understand the benefit of having properties leveraged so you have have cash freed up for opportunities. I do have a equity line right now for the rehab of this property and I think I am going to put all the CF towards paying this off first to open that back up and stop paying interest on it and then I will just start saving the CF for the next properties. Just my thought and as I said its my first time so if anyone would do it differently please share! My other question to you would be how are you thinking of holding your cash? Just in a checking/savings account or possibly in index funds or something like that?
- Real Estate Agent · South Ogden, UT · Member since 2016 · 15 posts · 13 votes8y
Originally posted by @Thomas Richardson:
@Paden Anderson I'm glad I saw your post! I just bought my first rental property in February and was wondering what I should be doing with the cash flow I am getting as well. I bought this as a foreclosure so I was able to get a deal on it and now only have about 50% LTV on this. I listen to a lot of Dave Ramsey's podcast so I like the idea of paid off assets and no more payments but I also understand the benefit of having properties leveraged so you have have cash freed up for opportunities. I do have a equity line right now for the rehab of this property and I think I am going to put all the CF towards paying this off first to open that back up and stop paying interest on it and then I will just start saving the CF for the next properties. Just my thought and as I said its my first time so if anyone would do it differently please share! My other question to you would be how are you thinking of holding your cash? Just in a checking/savings account or possibly in index funds or something like that?
Hey Thomas, congrats on the purchase! I don't think that is a bad plan. You could also look into refinancing it after its fixed up and pulling out some of your costs so you have nothing in the deal? Especially if you are sitting at 50% LTV. My two properties are sitting around 70% LTV. We just have our cash in our checking/savings accounts. I should look into other avenues that are less risky but still liquid with some sort of return but havent seen anything that caught my eye. The stock market is way too inflated at this point in my opinion. Where do you others put your liquid cash?
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Paden Anderson:
Originally posted by @Thomas Richardson:
@Paden Anderson I'm glad I saw your post! I just bought my first rental property in February and was wondering what I should be doing with the cash flow I am getting as well. I bought this as a foreclosure so I was able to get a deal on it and now only have about 50% LTV on this. I listen to a lot of Dave Ramsey's podcast so I like the idea of paid off assets and no more payments but I also understand the benefit of having properties leveraged so you have have cash freed up for opportunities. I do have a equity line right now for the rehab of this property and I think I am going to put all the CF towards paying this off first to open that back up and stop paying interest on it and then I will just start saving the CF for the next properties. Just my thought and as I said its my first time so if anyone would do it differently please share! My other question to you would be how are you thinking of holding your cash? Just in a checking/savings account or possibly in index funds or something like that?
Hey Thomas, congrats on the purchase! I don't think that is a bad plan. You could also look into refinancing it after its fixed up and pulling out some of your costs so you have nothing in the deal? Especially if you are sitting at 50% LTV. My two properties are sitting around 70% LTV. We just have our cash in our checking/savings accounts. I should look into other avenues that are less risky but still liquid with some sort of return but havent seen anything that caught my eye. The stock market is way too inflated at this point in my opinion. Where do you others put your liquid cash?
most of my note investors came from the landlord game and tired of it.. .and many own rentals learn of notes and use their spare cash to start stacking up notes.. this gives them nice cash flow that comes in if rent is missed one month but no headaches of landlording.. although must pick notes carefully of course.. so that's an option if you have cash you can do short term lending for when you perceive it may be a buyers market again for rentals..
but frankly many that I have had over the years and I have been doing notes since the middle 80s they never look back.. when they get enough cash they buy another... also no recapture to worry about.. but no tax write-offs either. I find note investors to be busy professionals or more retired folks who want zero to do with a tenant or pm
- Rental Property Investor · Miami, FL · Member since 2017 · 2k+ posts · 911 votes8y
Originally posted by @Paden Anderson:
Thank you guys for your reply's. This was very helpful and informative. I like the idea of preparing to buy 10 properties and then doing the snow ball effect from there.
I will get the Millionaire Investor book and study it as those phases makes sense.
Thanks again guys. This was helpful!
You're welcome Paden
- Realtor · Mountain View, CA · Member since 2017 · 120 posts · 108 votes8y
@Jay Hinrichs I think you and I are the only ones on this board who think that being highly leveraged is not as sound as owning outright. Maybe we are just the oldest ones here. I still get depressed about the people I knew who lost everything in the last crash. I worry about so many here buying rentals in marginal markets with 3.5% down. What happens when the tenants can't pay. We don't need a housing crash for investors to lose their investment. It can happen with an isolated geographical problem. Tainted water in flint, oil spill on the coast, massive fire in Sonoma, earthquakes, floods, etc. Over time real estate can lead to great wealth. But greed can lead to trouble.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Marcy Moyer:
@Jay Hinrichs I think you and I are the only ones on this board who think that being highly leveraged is not as sound as owning outright. Maybe we are just the oldest ones here. I still get depressed about the people I knew who lost everything in the last crash. I worry about so many here buying rentals in marginal markets with 3.5% down. What happens when the tenants can't pay. We don't need a housing crash for investors to lose their investment. It can happen with an isolated geographical problem. Tainted water in flint, oil spill on the coast, massive fire in Sonoma, earthquakes, floods, etc. Over time real estate can lead to great wealth. But greed can lead to trouble.
biggest risk Frankly that I see to Investors on BP today is anyone who buys from Morris invest.. based on the homes I drove by that out of area buyers have bought and the post on this site.. those are loser before you even start..
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
Originally posted by @Jay Hinrichs:
Originally posted by @Marcy Moyer:
@Jay Hinrichs I think you and I are the only ones on this board who think that being highly leveraged is not as sound as owning outright. Maybe we are just the oldest ones here. I still get depressed about the people I knew who lost everything in the last crash. I worry about so many here buying rentals in marginal markets with 3.5% down. What happens when the tenants can't pay. We don't need a housing crash for investors to lose their investment. It can happen with an isolated geographical problem. Tainted water in flint, oil spill on the coast, massive fire in Sonoma, earthquakes, floods, etc. Over time real estate can lead to great wealth. But greed can lead to trouble.
biggest risk Frankly that I see to Investors on BP today is anyone who buys from Morris invest.. based on the homes I drove by that out of area buyers have bought and the post on this site.. those are loser before you even start..
Funny story, I was listening to a Morris podcast recently and it made me think of you Jay. They were talking about self insurance and about how you can basically setup your own insurance company. The example they used was Morris setting up a liability policy for a situation where their reputation was destroyed and they got sued by investors. It was presented as a hypothetical situation, haha.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Joe Splitrock:
Originally posted by @Jay Hinrichs:
Originally posted by @Marcy Moyer:
@Jay Hinrichs I think you and I are the only ones on this board who think that being highly leveraged is not as sound as owning outright. Maybe we are just the oldest ones here. I still get depressed about the people I knew who lost everything in the last crash. I worry about so many here buying rentals in marginal markets with 3.5% down. What happens when the tenants can't pay. We don't need a housing crash for investors to lose their investment. It can happen with an isolated geographical problem. Tainted water in flint, oil spill on the coast, massive fire in Sonoma, earthquakes, floods, etc. Over time real estate can lead to great wealth. But greed can lead to trouble.
biggest risk Frankly that I see to Investors on BP today is anyone who buys from Morris invest.. based on the homes I drove by that out of area buyers have bought and the post on this site.. those are loser before you even start..
Funny story, I was listening to a Morris podcast recently and it made me think of you Jay. They were talking about self insurance and about how you can basically setup your own insurance company. The example they used was Morris setting up a liability policy for a situation where their reputation was destroyed and they got sued by investors. It was presented as a hypothetical situation, haha.
getting ahead of the inevitable.. I guess I missed the pod cast boat.. had no clue people even watched those things since I personally don't and never have not even my own.. LOL...
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
@Paden Anderson lots of great minds have already commented on this but I will give my thoughts.
First of all, it sounds like your strategy is to accelerate pay down of 30 year loans and at the same time purchase new properties with 30 year loans. That doesn't make a lot of sense. You are just paying down one debt and taking on another debt. The new debt is very likely at a higher interest rate. Every time you write a new loan, there are one time expenses (loan fees and appraisal).
You could save all your cash and purchase future properties with cash. That avoids writing new loans and keeps your low interest loans you already have. The disadvantage of this is that it will take you longer to acquire properties in the beginning. Leverage is a shortcut to acquisition and speeds your wealthy accumulation.
Third option is what I would do. Save all your cash for down payments and acquire new properties with 30 year loans. If you feel this is risky, just keep healthy cash reserve for a rainy day. I would acquire enough properties to meet your financial independence goals, then work towards paying off the loans.
All these strategies work, but I have learned is your biggest advantage in real estate is time. The sooner you can acquire the better. The reason is because of the inflationary nature of money. Over time, money loses value. That means a dollar today is worth less than a dollar ten years ago. Here is why that is good. The dollars you use today to pay back a loan from 10 years ago are worth less. At the same time, rents have increased due to the dollar value decreasing. So rents and cash flow go up over time and you are paying the bank back with dollars that are worth less. At the same time, you are able to claim the interest as a business expense, so it reduces your taxable income.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Joe Splitrock:
@Paden Anderson lots of great minds have already commented on this but I will give my thoughts.
First of all, it sounds like your strategy is to accelerate pay down of 30 year loans and at the same time purchase new properties with 30 year loans. That doesn't make a lot of sense. You are just paying down one debt and taking on another debt. The new debt is very likely at a higher interest rate. Every time you write a new loan, there are one time expenses (loan fees and appraisal).
You could save all your cash and purchase future properties with cash. That avoids writing new loans and keeps your low interest loans you already have. The disadvantage of this is that it will take you longer to acquire properties in the beginning. Leverage is a shortcut to acquisition and speeds your wealthy accumulation.
Third option is what I would do. Save all your cash for down payments and acquire new properties with 30 year loans. If you feel this is risky, just keep healthy cash reserve for a rainy day. I would acquire enough properties to meet your financial independence goals, then work towards paying off the loans.
All these strategies work, but I have learned is your biggest advantage in real estate is time. The sooner you can acquire the better. The reason is because of the inflationary nature of money. Over time, money loses value. That means a dollar today is worth less than a dollar ten years ago. Here is why that is good. The dollars you use today to pay back a loan from 10 years ago are worth less. At the same time, rents have increased due to the dollar value decreasing. So rents and cash flow go up over time and you are paying the bank back with dollars that are worth less. At the same time, you are able to claim the interest as a business expense, so it reduces your taxable income.
to me being in the building trenchs any increase in rent is just sucked up in higher cost to maintain the asset over time.. and what you pay to put a roof on your home when needed 15 years ago now its that much more.
so cap ex even though your saving for it.. the actual cost of it goes up as well.. Heck my lumber packages this year have gone up 30% in 9 months .. I was paying 18k for a lumber package on one home just paid for another of the same design and it was 25k ish..
so in 10 years when rentals need cap ex.. if your saving for cap ex at todays cost its going to be much more in 10 years.. this is why I think people really underestimate the on going cost of owning fixed assets.. as opposed to those being the bank they let the borrower worry about all that.. and note buyers are only in the asset at 50 to 65% of Todays values.. the owner is in it at 100% better equity protection.. so that's something to think about for those sitting on the side lines.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
Originally posted by @Jay Hinrichs:
Originally posted by @Joe Splitrock:
@Paden Anderson lots of great minds have already commented on this but I will give my thoughts.
First of all, it sounds like your strategy is to accelerate pay down of 30 year loans and at the same time purchase new properties with 30 year loans. That doesn't make a lot of sense. You are just paying down one debt and taking on another debt. The new debt is very likely at a higher interest rate. Every time you write a new loan, there are one time expenses (loan fees and appraisal).
You could save all your cash and purchase future properties with cash. That avoids writing new loans and keeps your low interest loans you already have. The disadvantage of this is that it will take you longer to acquire properties in the beginning. Leverage is a shortcut to acquisition and speeds your wealthy accumulation.
Third option is what I would do. Save all your cash for down payments and acquire new properties with 30 year loans. If you feel this is risky, just keep healthy cash reserve for a rainy day. I would acquire enough properties to meet your financial independence goals, then work towards paying off the loans.
All these strategies work, but I have learned is your biggest advantage in real estate is time. The sooner you can acquire the better. The reason is because of the inflationary nature of money. Over time, money loses value. That means a dollar today is worth less than a dollar ten years ago. Here is why that is good. The dollars you use today to pay back a loan from 10 years ago are worth less. At the same time, rents have increased due to the dollar value decreasing. So rents and cash flow go up over time and you are paying the bank back with dollars that are worth less. At the same time, you are able to claim the interest as a business expense, so it reduces your taxable income.
to me being in the building trenchs any increase in rent is just sucked up in higher cost to maintain the asset over time.. and what you pay to put a roof on your home when needed 15 years ago now its that much more.
so cap ex even though your saving for it.. the actual cost of it goes up as well.. Heck my lumber packages this year have gone up 30% in 9 months .. I was paying 18k for a lumber package on one home just paid for another of the same design and it was 25k ish..
so in 10 years when rentals need cap ex.. if your saving for cap ex at todays cost its going to be much more in 10 years.. this is why I think people really underestimate the on going cost of owning fixed assets.. as opposed to those being the bank they let the borrower worry about all that.. and note buyers are only in the asset at 50 to 65% of Todays values.. the owner is in it at 100% better equity protection.. so that's something to think about for those sitting on the side lines.
Fair point. I have a pretty good run rate with rental properties so I am starting to understand the real numbers behind CAPEX. I have owned my oldest property for 15 years. Built in 1980, so when I purchased the property it was 23 years old. The house inspector told me at the time that it would need a new roof and new HVAC in the next couple years. HVAC was done about 5 years ago and the roof it still original. It looks old, but isn't leaking. It is on my list to do this year. I replaced the water heater last year, but I am sure the new one won't last 37 years. When it went vacant last fall, I did a true rehab on the property. I replaced the bath fixtures, counter tops, all new flooring, paint, etc. Assuming 5% of rents collected were set aside for CAPEX that would be around $10,000 over 15 years. Actual CAPEX including future roof will be around $25,000 which works out to 12.5%. Now some of that CAPEX was elective to improve the property and increase rents, but still I can assure everyone that CAPEX is very real and is probably is over 10% of rents over time. Of course it depends on the condition of a property when you purchase it.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Joe Splitrock:
Originally posted by @Jay Hinrichs:
Originally posted by @Joe Splitrock:
@Paden Anderson lots of great minds have already commented on this but I will give my thoughts.
First of all, it sounds like your strategy is to accelerate pay down of 30 year loans and at the same time purchase new properties with 30 year loans. That doesn't make a lot of sense. You are just paying down one debt and taking on another debt. The new debt is very likely at a higher interest rate. Every time you write a new loan, there are one time expenses (loan fees and appraisal).
You could save all your cash and purchase future properties with cash. That avoids writing new loans and keeps your low interest loans you already have. The disadvantage of this is that it will take you longer to acquire properties in the beginning. Leverage is a shortcut to acquisition and speeds your wealthy accumulation.
Third option is what I would do. Save all your cash for down payments and acquire new properties with 30 year loans. If you feel this is risky, just keep healthy cash reserve for a rainy day. I would acquire enough properties to meet your financial independence goals, then work towards paying off the loans.
All these strategies work, but I have learned is your biggest advantage in real estate is time. The sooner you can acquire the better. The reason is because of the inflationary nature of money. Over time, money loses value. That means a dollar today is worth less than a dollar ten years ago. Here is why that is good. The dollars you use today to pay back a loan from 10 years ago are worth less. At the same time, rents have increased due to the dollar value decreasing. So rents and cash flow go up over time and you are paying the bank back with dollars that are worth less. At the same time, you are able to claim the interest as a business expense, so it reduces your taxable income.
to me being in the building trenchs any increase in rent is just sucked up in higher cost to maintain the asset over time.. and what you pay to put a roof on your home when needed 15 years ago now its that much more.
so cap ex even though your saving for it.. the actual cost of it goes up as well.. Heck my lumber packages this year have gone up 30% in 9 months .. I was paying 18k for a lumber package on one home just paid for another of the same design and it was 25k ish..
so in 10 years when rentals need cap ex.. if your saving for cap ex at todays cost its going to be much more in 10 years.. this is why I think people really underestimate the on going cost of owning fixed assets.. as opposed to those being the bank they let the borrower worry about all that.. and note buyers are only in the asset at 50 to 65% of Todays values.. the owner is in it at 100% better equity protection.. so that's something to think about for those sitting on the side lines.
Fair point. I have a pretty good run rate with rental properties so I am starting to understand the real numbers behind CAPEX. I have owned my oldest property for 15 years. Built in 1980, so when I purchased the property it was 23 years old. The house inspector told me at the time that it would need a new roof and new HVAC in the next couple years. HVAC was done about 5 years ago and the roof it still original. It looks old, but isn't leaking. It is on my list to do this year. I replaced the water heater last year, but I am sure the new one won't last 37 years. When it went vacant last fall, I did a true rehab on the property. I replaced the bath fixtures, counter tops, all new flooring, paint, etc. Assuming 5% of rents collected were set aside for CAPEX that would be around $10,000 over 15 years. Actual CAPEX including future roof will be around $25,000 which works out to 12.5%. Now some of that CAPEX was elective to improve the property and increase rents, but still I can assure everyone that CAPEX is very real and is probably is over 10% of rents over time. Of course it depends on the condition of a property when you purchase it.
My personal experience too and this is for those that do not plan on owning them forever and willing them to your kids or next of kin at a stepped up basis.
but for those like me that were thinking hey I will own these 7 to 10 years take the write offs then sell retail..
I did all that sold retail but what I was not thinking about is that a 10 to 14 year old home even though I bought them brand new.. to sell retail what was acceptable when I bought them tile counter tops black appliances etc etc
now retail buyers standard is granite stainless new paint 3 colors floors perfect etc etc.
so it was costing me 20 to 25k per home to do a retail up grade to sell them for retail prices.. along with cap ex ( which in my case was minimal) since these were only 10 to 14 years old.. but then roofs being replaced because of hail that cost deductible.. and so on and so forth.. the cost of owning and keeping these nice is just more than you can raise rents in most markets.. that's my experience I got top rents in the day but they never went up much during the 10 to 14 years of ownership.. just like I see modest type rentals that rent for 700 to 900 those rents have stayed pretty constant for the last 20 years .. and prices to fix stuff has gone way up.. So for me personally my expiernce with rentals I determined a nice Note at 9% at the end of the day was a better investment for me.. plus I hate tenants.. LOL
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes8y
Originally posted by @Jay Hinrichs:
Originally posted by @Joe Splitrock:
@Paden Anderson lots of great minds have already commented on this but I will give my thoughts.
First of all, it sounds like your strategy is to accelerate pay down of 30 year loans and at the same time purchase new properties with 30 year loans. That doesn't make a lot of sense. You are just paying down one debt and taking on another debt. The new debt is very likely at a higher interest rate. Every time you write a new loan, there are one time expenses (loan fees and appraisal).
You could save all your cash and purchase future properties with cash. That avoids writing new loans and keeps your low interest loans you already have. The disadvantage of this is that it will take you longer to acquire properties in the beginning. Leverage is a shortcut to acquisition and speeds your wealthy accumulation.
Third option is what I would do. Save all your cash for down payments and acquire new properties with 30 year loans. If you feel this is risky, just keep healthy cash reserve for a rainy day. I would acquire enough properties to meet your financial independence goals, then work towards paying off the loans.
All these strategies work, but I have learned is your biggest advantage in real estate is time. The sooner you can acquire the better. The reason is because of the inflationary nature of money. Over time, money loses value. That means a dollar today is worth less than a dollar ten years ago. Here is why that is good. The dollars you use today to pay back a loan from 10 years ago are worth less. At the same time, rents have increased due to the dollar value decreasing. So rents and cash flow go up over time and you are paying the bank back with dollars that are worth less. At the same time, you are able to claim the interest as a business expense, so it reduces your taxable income.
to me being in the building trenchs any increase in rent is just sucked up in higher cost to maintain the asset over time.. and what you pay to put a roof on your home when needed 15 years ago now its that much more.
so cap ex even though your saving for it.. the actual cost of it goes up as well.. Heck my lumber packages this year have gone up 30% in 9 months .. I was paying 18k for a lumber package on one home just paid for another of the same design and it was 25k ish..
so in 10 years when rentals need cap ex.. if your saving for cap ex at todays cost its going to be much more in 10 years.. this is why I think people really underestimate the on going cost of owning fixed assets.. as opposed to those being the bank they let the borrower worry about all that.. and note buyers are only in the asset at 50 to 65% of Todays values.. the owner is in it at 100% better equity protection.. so that's something to think about for those sitting on the side lines.
This is a fair point but at the same time that money set aside for future capex, if smart, is being invested somewhere at better returns than the rate of inflation. Not just sitting in a bucket being degraded. Maybe you can't guard against everything, but done properly your capex reserves - which, for me, is just all the extra money put aside since I live on way less than I bring in - is invested in index funds, or maybe other real estate, or something else, that is outstripping those inflation numbers. Some things cost a lot more but other things end up virtually flat.
Skyline Properties - 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @JD Martin:
Originally posted by @Jay Hinrichs:
Originally posted by @Joe Splitrock:
@Paden Anderson lots of great minds have already commented on this but I will give my thoughts.
First of all, it sounds like your strategy is to accelerate pay down of 30 year loans and at the same time purchase new properties with 30 year loans. That doesn't make a lot of sense. You are just paying down one debt and taking on another debt. The new debt is very likely at a higher interest rate. Every time you write a new loan, there are one time expenses (loan fees and appraisal).
You could save all your cash and purchase future properties with cash. That avoids writing new loans and keeps your low interest loans you already have. The disadvantage of this is that it will take you longer to acquire properties in the beginning. Leverage is a shortcut to acquisition and speeds your wealthy accumulation.
Third option is what I would do. Save all your cash for down payments and acquire new properties with 30 year loans. If you feel this is risky, just keep healthy cash reserve for a rainy day. I would acquire enough properties to meet your financial independence goals, then work towards paying off the loans.
All these strategies work, but I have learned is your biggest advantage in real estate is time. The sooner you can acquire the better. The reason is because of the inflationary nature of money. Over time, money loses value. That means a dollar today is worth less than a dollar ten years ago. Here is why that is good. The dollars you use today to pay back a loan from 10 years ago are worth less. At the same time, rents have increased due to the dollar value decreasing. So rents and cash flow go up over time and you are paying the bank back with dollars that are worth less. At the same time, you are able to claim the interest as a business expense, so it reduces your taxable income.
to me being in the building trenchs any increase in rent is just sucked up in higher cost to maintain the asset over time.. and what you pay to put a roof on your home when needed 15 years ago now its that much more.
so cap ex even though your saving for it.. the actual cost of it goes up as well.. Heck my lumber packages this year have gone up 30% in 9 months .. I was paying 18k for a lumber package on one home just paid for another of the same design and it was 25k ish..
so in 10 years when rentals need cap ex.. if your saving for cap ex at todays cost its going to be much more in 10 years.. this is why I think people really underestimate the on going cost of owning fixed assets.. as opposed to those being the bank they let the borrower worry about all that.. and note buyers are only in the asset at 50 to 65% of Todays values.. the owner is in it at 100% better equity protection.. so that's something to think about for those sitting on the side lines.
This is a fair point but at the same time that money set aside for future capex, if smart, is being invested somewhere at better returns than the rate of inflation. Not just sitting in a bucket being degraded. Maybe you can't guard against everything, but done properly your capex reserves - which, for me, is just all the extra money put aside since I live on way less than I bring in - is invested in index funds, or maybe other real estate, or something else, that is outstripping those inflation numbers. Some things cost a lot more but other things end up virtually flat.
problem is average investor is not like you they spend their money when they have extra LOL
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