Real Estate Investor · Sunnyvale, CA · Member since 2014 · 65 posts · 20 votes
My wife and I want a different life...where we are not accountable to anyone but ourselves...who doesn't right?
If you click on my bio you will see our basic background and goals...short...I promise.
We are not beholden to any REI discipline and do have some skills.
We have a SFR in Las Vegas that is rented to a family member for cost...so no cash flow, but well kept and debt pay down and has approx $70k in equity and can be disposed of as necessary. We have a home in Silicon Valley with approx $200-250k in equity (depending on which RE Agent we speak with) and which we are willing to sell to help bankroll our business. In addition, we have approx. $250k in 401Ks we are willing to structure in a way that will allow us to get at...at least 50% or more (at least that is what we have read here). We would love to leave our jobs but are willing to stay to facilitate things. Our salaries are around $200k combined.
Tammy and I are in our mid/late 40s and our goal is to be able to have enough freedom to travel and take care of our families while we still have our health and are young enough to enjoy those experiences...whether that takes 5 yrs or 25 yrs.
We aren't strangers to hard work and are willing to do so to get started.
So if you were starting over and had these resources and the willingness to use them...what would you do??
Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
11y
@Joel G. I am in my 40's and just started seriously getting into REI recently, but I had been planning for a long time. When I say planning, it was not just reading books and listening to pod-casts. I started with "house hacking" and building up cash for a very long time. I used the appreciation in my primary residence and dove deep once I had the financial strength to make a meaningful purchase.
Replacing $200k of income is pretty large gap to fill. Not sure if you are considering NET or Gross income as the $200k target, but both are achievable. My intent is also to get to a point where I can travel and enjoy life. For me, that means not being active, but collecting passive income = buy and hold strategy. For others it might be a different strategy.
Cash flow is the key to reaching a passive REI business... This then leads to the debate of cash flow vs appreciation. In principle I think real estate investors all seek cash flow, but how we each get to that cash flow is really core of debate. For many it is to go out of state and look for cash flow right away. Personally, I believe the limitation of that strategy is that ability to accumulate assets is limited by your access to cash. Meaning you either need to either work your W2 or go looking for investors to build up cash to buy additional properties. I feel that by investing in a strong market, you can take advantage of both cash flow and appreciation and accumulate assets at a faster rate. The barrier to entry is much higher, but once you get past that barrier, I believe that appreciation can give you the cash freedom needed to purchase more properties.
Please note, I invest locally and trade my time for sweat equity in forcing appreciation. I don't do turn key purchases because I believe that the lost appreciation is too expensive. There are couple of threads on BP about the appreciation I have seen over the past 10 years along with my referencing strategy.
This is an active strategy for me so I really cannot say what I would have done different yet. Perhaps the only thing I would have liked to have done was taken the leap at a younger age. But there are many things that I wish I had done when I was younger...hahaha!
Real Estate Investor · Sunnyvale, CA · Member since 2014 · 65 posts · 20 votes
11y
Hi everyone!
Worked all weekend at the ER...thank you for all the great ideas and thoughts! Tammy and I have printed out everything and are going through all posts to cherry pick the ideas that we feel will best fit our business.
Expert opinions and ideas are hard to come by and I just wanted everyone to know how thankful we feel to have had all of yours!
When we get a full plan together we will post it and see what revisions everyone feels would be best!
Thank you again for your help!! And, of course, if there is anything Tammy and/or I can do to help in any of your projects...please let us know!
@Joel G. Hi Joel to answer your question regarding a system to identify Opportunities and Threats in order to write a business plan the Opportunities are based on the drivers in your selected area that drive prices upwards. For example properties that present as bargains based on local market metrics, proposed changes to local planning laws, land re zoning, changes to market confidence, changes to access to capital, proposed population increases, shifting demographics, the falling cost of money etc. These and other drivers can create opportunities.
Likewise the negative effects of those same drivers can create threats, In order to do the business plan effectively you would be wise to understand the key drivers in the markets you propose to operate in. Unfortunately there are no short cuts to understanding these factors. You would be wise to learn from local operators who enjoy success in the markets you wish to trade in and seek their guidance as to what drivers they monitor the most.
To give you some guide, I am at present, after more than 30 years in this business in Australia, looking to enter the market in the USA. Hence joining BP and I am having to do the same level of research and homework that you would have to do. My vast knowledge base and experience will count for very little if I do not understand the local drivers of any market I propose to enter. All markets are unique in some regard, but have common factors in many others. Making money in real estate is about understanding what it is that improves a property's value and they are not all necessarily to do with the individual property but more so to do with economies, international, national, statewide and local. The more you understand these things the better your business plan will be.
Furthermore, you started out asking what you should do with your assets and there are some good pieces of advice here about different ways to make money, however, they only apply if the method suggested fits within your business plan. I would suggest that once you have a detailed written business plan the types of deals you should do will become very self apparent. Once you have this clarity of vision you will see only those deals that will make financial sense to you and the confusion that many new investors find existing because of the vast majority of investment alternatives that exist will subside. The clearer your vision the easier it is to hit the target. The target being your financial goals. A sound, well thought out and researched business plan is one of the the keys to creating good vision in investment decision making.
If you have limited experience in writing a business plan I would strongly suggest hiring an accountant or business adviser with the experience you lack to help. The money invested will be repaid many times over by having a clear path to follow and one that shows very clear financial objectives and strategies.
Hope this helps.
Enjoy the journey!
Thank you so much for your input...it will be so helpful as we move forward and develop our business plan!!
Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
11y
Hi Joel,
To answer your question "what percentage of our net worth would be considered safe to invest. In other words...If we have $400k available to invest...what amount could we invest that would give us the greatest chance to succeed, yet still be considered not over leveraged?"
Warren Buffett is indisputable the greatest investor of all time. This is what he has to say about diversification. "Diversification is protection against ignorance. It makes little sense if you know what you are doing." I’m heavily weighted in real estate. Does that mean I know what I am doing? Not really.
To give yourself a chance to succeed, learn as much as you can. Network with other investors and see which strategy fits your circumstance and helps meet your goals. As they say...your network = your net worth. Also, take action is much more important than learn continually without putting it into practice. How do you know you’re over-leveraged? When you can’t sleep like a baby at night.
My strategy has been buying properties at 70% to 80% FMV. Rehab them nicely and rent them for top dollars. After the properties have been seasoned, I'd refinance, pull out the equity and move onto the next deals. Does it sound like I leverage to the hilt? Maybe, I'm currently at 43% LTV and looking for ways to deleverage to 25%.
How am I able to consistently get deals? I’d say reputation. Keep your promise. Don’t be a pain in the rear to deal with. Do what you say you will do, and you’re the first one, who agents will call when they have a deal. Of course, this takes time.
By the way, don’t be greedy and stretch yourself too thin. There have been times when I got more deals than money. I have passed them to family members, friends or take on a partner. There is nothing wrong with taking on a partner. 50% of something is apparently better than 100% of nothing. Syndication is also an option to make some high yields, but that’s another topic.
Feel free to use me as your sounding board whenever you need a second opinion.
Real Estate Investor · Sunnyvale, CA · Member since 2014 · 65 posts · 20 votes
11y
Originally posted by @Account Closed:
Hi Joel,
To answer your question "what percentage of our net worth would be considered safe to invest. In other words...If we have $400k available to invest...what amount could we invest that would give us the greatest chance to succeed, yet still be considered not over leveraged?"
Warren Buffett is indisputable the greatest investor of all time. This is what he has to say about diversification. "Diversification is protection against ignorance. It makes little sense if you know what you are doing." I’m heavily weighted in real estate. Does that mean I know what I am doing? Not really.
To give yourself a chance to succeed, learn as much as you can. Network with other investors and see which strategy fits your circumstance and helps meet your goals. As they say...your network = your net worth. Also, take action is much more important than learn continually without putting it into practice. How do you know you’re over-leveraged? When you can’t sleep like a baby at night.
My strategy has been buying properties at 70% to 80% FMV. Rehab them nicely and rent them for top dollars. After the properties have been seasoned, I'd refinance, pull out the equity and move onto the next deals. Does it sound like I leverage to the hilt? Maybe, I'm currently at 43% LTV and looking for ways to deleverage to 25%.
How am I able to consistently get deals? I’d say reputation. Keep your promise. Don’t be a pain in the rear to deal with. Do what you say you will do, and you’re the first one, who agents will call when they have a deal. Of course, this takes time.
By the way, don’t be greedy and stretch yourself too thin. There have been times when I got more deals than money. I have passed them to family members, friends or take on a partner. There is nothing wrong with taking on a partner. 50% of something is apparently better than 100% of nothing. Syndication is also an option to make some high yields, but that’s another topic.
Feel free to use me as your sounding board whenever you need a second opinion.
What a wonderful post Minh!
It is very evident why you are such a success! The time that you have graciously spent responding to this and other posts shows what a giving person you are and we believe is the attitude and mindset for achieving a truly happy and balanced life...thank you!
Professional Property Investor · Brisbane, Queensland · Member since 2015 · 165 posts · 160 votes
11y
@Arlen Chou Hi Arlen you mentioned in one of your posts that..."As the property appreciates, I refinance again to get more cash out. I am paying interest, but rates are low. The best part of this strategy for me is that money I am getting out is tax free!"
I would suggest that this is not true. The money you access is a loan against what, on paper, is increased equity. It is not tax free money you are creating it is debt. Whilst this strategy has merit in some markets it can prove to be very dangerous. Let me give you an example.
You say that you are paying interest and rates are low, so the strategy appears to work. Imagine if you will that interest rates rise, as they do, and as a result of the rise in interest rates property values fall due to a whole range of economic reasons. You would find yourself with a rising cost of money, interest, and falling values. In other words you would be losing the equity your created and it will be costing you money to do so.
Equity created on paper is just that. On paper, it is not real until you realise it in cash. Imagine your property today is valued at $100,000.00 and you have a debt of $70,000.00 so your equity on paper is $30,000.00. This is before the costs of realising it are taken into consideration, i.e. selling costs, advertising costs, legal fees etc. However, in 6 months time the valuation on your property is now $110,000.00 so your paper equity is $40,000.00. great news, you are richer! But let's fast forward another 2 years and the market has fallen and your property is now valued at $80,000.00. Whoops, your equity is now only $10,000.00 and you have a problem. The bank will want their mortgage brought back to a 70% LVR, or $56,000.00 to stay compliant with their policy. You now need to find $14,000.00 cash to put onto the mortgage to bring it into line. Where will this come from. your own cash, your past equity, past borrowings? or will you need to sell the property to pay the debt off. Now you have an even bigger problem. I am sure you can see where this is going.
Your strategy is good provided the market is good to you. Unfortunately it is not always that way, so for those who are new to property investing please be sure and grasp a full understanding of what happens to leveraged deals when markets go down, and they do, often. using leverage to create wealth is a good strategy provided you understand the rules of the game. You may want to consider taking your profits at the appropriate time, i.e. turning your equity into cash, and then reinvesting into other equity creating opportunities rather than cash flow generating ones. If your average cash on cash return is say 30%, but could well be more, from doing a rehab, and your average cash investment was say $30,000.00 your potential pre tax profit would be circa $9,000.00. If this same property provided a positive pre tax cash flow of $200.00 per month you would need to hold this property event free for a period of 45 months to make the same gain. During this 45 months you are exposed to the market and all its variables. Personally, I would rather take my profit and move on. In fact in the same 45 month period I could possibly turn my money over 7 times based on a 6 month turn cycle. I could possibly generate 7 x $9,000.00 or $63,000.00 in the same time.
It is worth noting here that even though I would be trading over the same period of time I would not have the same exposure because I am never in the market for more than 6 months at a time. If the market started to fall I could sit on the sidelines for a while safe in the knowledge that I have taken my profits as cash and not watch them disappear in a puff of smoke. For people like @Joel G. who are starting out it is prudent to really understand these different strategies before making a move. The more we understand about our own skills, motivations and risk profile the more chance we have of winning at this game. Arlen, you are no doubt very successful in what you do, but I would not like to see newbies think that borrowed money is tax free cash. Good luck to us all.
However, the post is asking about what "you would do", it is not about recommendations on what to do.
I just stated what I would do in that position and I believe I gave fair warning in a later post, when I agreed with @Account Closed, about over leveraging.
I have no idea what investing in real estate in Australia is like, but the historical 30 year appreciation rate in SF Bay Area is very well documented. This is the same market that @Joel G. currently resides. I have recently posted 2 specific examples of the appreciation gain that I have personally experienced over the past decade. We are not talking about tens or even a few hundred thousand dollars of appreciation on a single building... I won't go into detail on those data points as they have been discussed recently in other posts. But to quickly emphasis the point, a purchase I made 2 years ago has essentially doubled in appraised value. By pulling all of my money back out as a cash out refi, I have the buildings essentially free of my investment dollars.
Sure there maybe another crash. Is it possible to lose the $700k of appreciation that I have seen in 2 years? Sure it is possible. Is that likely given the 30 years of data showing a steady up hill climb... probably not. Additionally, the rental buildings I hold throw off NET cash every month. So in the strategy I employ, the loan is being paid off by tenants, I get NET cash on a monthly basis, I got all of money out, plus I got additional money out that is tax free to me. If the market crashes and my building value goes to ZERO, I still have all of my money out and unless people suddenly decided to abandon the Bay Area, I would have renters paying my mortgage. I don't understand what there is not to like about that...
When I state the above, the first thing people ask is "do you really think that this appreciation in the SF Bay Area can continue"... my answer is yes! I just did it on a purchase this past February. Within the few months I have held the property, it has appreciated substantially.
But again, thanks for the warning. But to clarify, I was just saying what I would do in the SF Bay Area... NOT what I would recommend to do as a general practice over the nearly 3M square miles that make up the United States or any other country...
I am sure you have a very good grasp of your market and no doubt manage your leverage accordingly. I am not suggesting that you cannot make money out of this strategy, clearly you can. However, you say that the post is asking "what you would do" as opposed to "what to do". Is this really different when someone is new to the business and is seeking ideas and no doubt some form of guidance? I agree that your post is in no way given as advice for Joel's specific case, but I think care about statements like tax free money is a little risky.
Investing in Australia is little different to the USA. Money is made when you buy property provided you can identify what to buy, and when to sell...if you ever do sell that is. And just like Australia the USA market has ups and downs. In the SF Bay area between 2008-2011 the property market in general fell 27%. That is more than enough of a fall to wipe out an investor who has the wrong amount of leverage. Whilst this would not wipe out anyone who has $700K of appreciation, subject to their gearing level, it means that for those three years the asset has not performed and therefore cost you money in lost opportunities elsewhere.
Markets grow relative to the value of the dollar over time. The illusion could be the real value of an asset relative to its buying power. Numbers on paper are great, but cash is king. Provided your realisable net worth is growing faster than the cost of living then you are on the right track. If not, then you are going backwards. You may be right that the market will keep growing, but I would suggest that it will not do so without a correction at some time and that is when you need to be very careful not to lose the gains you made. All markets are cyclical.
I appreciate that you have made other comments on this matter and I am sure that those of us who read them all gain something of value from them. Thanks for engaging me in this discussion. it is great to learn and I am always open to understanding how others achieve their success. As I said, my only real concern was the statement about debt being tax free money.
Great examples. Let’s take a look at two scenarios. Would you rather
1) own a $1MM building free and clear and net $70k/year of cash flow, or
2) have a $1MM loan on the building at 4.25% interest, 30-year fixed. You only net $11k/year in cash flow while your tenants are servicing the mortgage and paying down $17k principal annually. You still have your $1MM CASH sitting in your bank account.
When you go and borrow money, who looks better to a lender? @J. Martin might be able to give us his 2 cents on this since that’s his day job.
David, there are a million ways to make a million dollars. You just showed us a couple of ways. @Arlen Chou’s strategy is preserving capital while having the tenants buying him the building. That’s investing. In my opinion, your strategy is work, not investing. There is no right or wrong answer. One just has to pick a strategy that suits his situation best.
I understand where you’re coming from with your interest rate argument because you don’t have 30-year fixed mortgages in Australia. Unfortunately, the argument is flawed. Please show us a time in our history where interest rates went up and property values fell? In fact, real estate tripled in value from 1970 – 1980 when interest rates went from 7% to 18%. Based on my limited experience, interest rate movements are typically an effect, not a cause.
Here is another flaw in your argument about whether the equity is real or not. A free & clear building and a building with a $1MM mortgage go up or down in value REGARDLESS of their equity. If your property doubled in value, You have a building worth $2MM while Arlen has a building with $1MM in equity and $1MM in the bank totaling $2MM. If your property value got cut in half, you have a building worth $500k while Arlen still has $1MM sitting in his bank and an underwater building, which is still being pay down by his tenants. If desired, Arlen can use his money to buy two $500k buildings so his cash flow would more than double yours.
Having liquidity gives you more options. Buying properties below fair market value give you options. Why would you want to limit your options by tying up your equity? It’s worth repeating that your building goes up or down in value regardless of its equity. Whether one wants to pay-off his building has more to do with his risk tolerance. I hope my rambling makes sense to the readers. :>)
Investor · Bay Area, CA · Member since 2014 · 207 posts · 190 votes
11y
Yup, that's what happened during 2008-2011, investors who already took money out before the credit crunch were able to pick up additional properties at fire sale price. Deals were chasing money, now money is chasing deals :)
Professional Property Investor · Brisbane, Queensland · Member since 2015 · 165 posts · 160 votes
11y
@Account Closed Hi Min
The overall point of my post was to bring to everyone's attention that money taken via a loan against equity is debt. Having said that and since you have posed two scenarios I will take the opportunity of commenting on them for you. So here goes.
1) Simply buying a property for $1 Mill cash would not be something I would do unless I knew I could add value to it immediately or I had knowledge of an increase in its value that is not dependent on the market simply moving upwards. There are some people however who would because they do not like to have debt. As you said one's appetite to risk will determine their investment strategy.
2) Why do people always use "if I had $1 Mill cash I would ...." What if you only had $10,000.00 cash, then what? Is the time and effort you need to put in to manage a property, take the risk, reduce your capacity to do other deals by taking on debt, have tenancy issues, get taken advantage of by unscrupulous property managers etc all worth it? I did not suggest that Arlan's strategy was wrong. Conserving capital and using leverage are sound strategies for all investors to use. What I am saying to you and to Arlan is that markets fall as well as rise. I personally do not want to have my money tied up in a falling market. This causes lost opportunities. It is known in investing as economic cost. That means what is the best alternative for the use of the funds. That is the cost of being in a falling market.
Anyone who goes to a lender with $1 Million of cash assets looks good to their banker. What if I had $1 Million of Berkshire Hathaway shares for which I borrowed $1 Million and I still had my $1 Million in cash. Would the bank like me or you better? The answer is dependent on what your bank manager sees as lees risky, your property or my Berkshire shares. Your point is moot.
You say my strategy is working. I said to buy a property under FMV, rehab and then sell at some time in the near future. This you call work. Arlan buys a property at under FMV, rehabs it and then rents it out. How is this not work? We are doing the same thing with one difference. I look to realise my profit at some time in the near future, Arlan looks to hold for the long term and use his increased equity to increase his indebtedness to do more deals. Assuming we both did the same amount of work in getting our properties up to standard, then Arlan has to keep working n his to keep it rentable, collect the rent, deal with rental managers, tenants, contractors and do annual tax returns and ongoing monthly accounting and administration. I sell and I'm done. Who is working now?
Your assertion about Australian mortgages is incorrect. We do have 30 year term mortgages in Australia. If you mean 30 year fixed interest rate mortgages then I would suggest that interest rates change in fixed rate mortgages. No bank could possibly hope to survive by offering fixed interest over such a long period of time. Interest rate are set by banks as a margin over their cost of funds. The cost of funds change with economic conditions so banks must change their rates to stay in business.
Your request to show you a time when interest rates went up and property values fell is very naive to say the least. What do you think causes property to fall? Rising interest rates cause loan repayments to rise, this in turn places pressure on affordability and debt serving can become a problem In this instance people will sell or even be forced to sell due to their lack of ability to repay, due to interest rate rises, or lack of growth in their investment value. The more people that suffer this the more property comes onto the market. This causes an over supply of stock which drives property down in value. This is nothing more than basic economic theory. Surely you understand this?
The period you mention of property prices increasing when there were very high interest rates of up to 18% and rising prices is caused by the very high level of inflation, not just interest rates, coupled to limited supply necessary to meet demand. You might want to study economics a little more to grasp this concept. Interest rates are one part of a much bigger picture that affects investment decisions.
As far as your comment that..."Based on my limited experience, interest rate movements are typically an effect, not a cause." I am not sure what you are trying to say here so I will pass on commenting. If you would like to clarify your thoughts I would be happy to comment. In simple terms interest rates are tools used by governments to hep manage economies.
As for the flaw in my argument regarding whether equity is real or not. Equity on paper is just that, equity on paper and the only way you can pay your bills when your equity is on paper is through debt. You must borrow to pay bills if all your equity is on paper. If your equity is in cash you can use that cash to pay your bills. In order to realise your equity you incur costs which reduce your equity in real terms. Many investors make the mistake of becoming asset rich and cash poor. Yo keep looking at this perfect world of having $1 Million in cash in the bank. This is not real for most people. Cash is king for so many reasons.
One more thought I have is that Arlan mentioned, and you seem to agree with him, that over the past two years he has made a lot of equity, $700 K and that the market will continue to rise. I would like to ask what would have happened had you and he started investing your millions in 2008. What would your assets look like in 2011? Please don't try to tell me that the market always rises. Think GFC. It was real and wiped out many wise and experienced investors, not just in my country but in yours.
On a positive note I do agree with you that having liquidity gives you more options, buying below market value makes sense and individual risk aversion drives investment decisions. Or at least that is what my 30 years of experience has taught me.
I hope my ramblings have been of benefit to you. I wish you well in your endeavours and hope that these opportunities to openly look at how different people see things differently is of as much benefit to others as it is to me.
Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
11y
@David Nolan although you comments generally speaking are valid, they are still only generalities. General comments given out for mass consumption is substantially more detrimental to the effective learning of individuals than specific case studies framed within a defined geography and time span.
My comments were geared for a specific post about a specific market. At no time did I say that it would work in all markets in the US or any other country. REI IS local and strategies for success should be based upon the specific market.
If I was to expand to other markets, I would endeavor to learn from investors who are already successful in THAT specific market. Trying to blindly apply my current strategy in another region would be a sophomoric attempt, most likely leading to failure. Just in case you have missed it, the theme of this post is SPECIFICS.
Like @Account Closed, I live and invest in the SPECIFIC market that the OP currently resides.
I would suggest that in the future, if you are going to attack a persons strategy, you should qualify your basis of knowledge in THAT SPECIFIC market?
I am no where as experience as @Account Closed or yourself but one thing I noticed in your most recent post was that you like to realize the your profit sooner and cash out and that is one strategy which I consider more closer to a flip (depending on how long you hold the property) or shot term buy and hold.
But what about investors that want to do long term buy and hold. I do see buying properties and selling them and buying them again as more work than buying and holding the properties long term. That is one specific reason we decided to invest in only "A" or "B" area as possible as these would be good investments to hold for 20 or more years if we wanted to.
Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
11y
@David Nolan can you clarify the meaning of your statement about fixed rate mortgages?
"Your assertion about Australian mortgages is incorrect. We do have 30 year term mortgages in Australia. If you mean 30 year fixed interest rate mortgages then I would suggest that interest rates change in fixed rate mortgages." How would rates change in a fixed rate mortgage? My 30 year fixed rate mortgage is a little over 4%, I expect my monthly payments would be the same for the term of that loan. If the rates changed, my payments would change, would they not? Please explain how there would be a change without a change in the terms of the loan?
Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
11y
@David Nolan I thought I would put some more SPECIFICS to your comments about what would happen to investments back in 2008, as I stated previously I had written about steady appreciation in the Bay Area in other posts, but here it is in a nut shell:
1) 1997 Purchased 2 bed 2.5 bath row home $298,500 sold in 2004 $616,000
2) 2000 Purchased 3 bed 2.5 bath zero lot single family home $699,000 sold in 2006 $838,000
3) 2003 Purchased 3 bed 2 bath single family home for $1,095,000, added 1000 sqft for $500,000 in 2004, refinancing appraisal done this month for $3,200,000.
4) Late 2012 Purchased 4 plex, all 1/1 units for $840,000 appraised this month for cash out refinancing for $1,500,000. Current gross yearly rents $87,000.
Current equity in #3 and #4, over 50%.
Were there ups and downs during the time I owned the properties... sure. But does it really matter with a buy and hold strategy? According to these few actual transactions, the answer is no. Admittedly, my data points are only a micro percent of the total market movement in the SF Bay Area over nearly 2 decades. They should not be taken as statistically accurate data sampling to be applied over all markets or even to the SF Bay Area. However, I posted these SPECIFIC examples, here and in previous posts, for people who invest in the SF Bay Area to use as real data points to make more informed decisions. If you have specifics knowledge about this particular market, outside of what you find on google, please share them with us.
To Joel's original question, "what would you do if you were him?" Given that Joel has residential properties in both Las Vegas and the Bay Area, and that some (in other posts) are providing convincing evidence that we are near the top of the residential market in the Bay Area, and that Joel has intentions to move back to Texas.... What would you do to take advantage of the hot markets and facilitate the move to Texas?
Should he sell both places and 1031 the proceeds into investments in the Texas residential market? (currently also very hot but still some deals if you have cash and can move fast)
Should he sell and move the money into another market? Commercial? NNN properties? Large multi-residential?
Should he roll his 401K into a IRA and buy a property through that to help speed up his retirement savings?
Thoughts??
And on a selfish note, what would you do if you were me? Desire to move from Texas to SF peninsula area. 200-300K equity in San Mateo homes and 50K equity in Houston home. Also about the same 401K and Joel.
Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
11y
@Michael Delpier I really don't know the REI environment in Texas. I have an office in the North Dallas, in a place called Richardson. We are moving farther out to Allen at the end of the year. Additionally, I spend a few weeks a year visiting customers in Austin.
I had been very tempted to purchase property in both markets over the past 10 years. However, the property tax rate in the state concerns me. But more concerning to me is the vast expanse of Texas. In the North Dallas area, they just keep building farther from Dallas proper and property prices keep going up! At least in the Bay Area there are geographic barriers to further expansion. Additionally, the surrounding hills control also heavily dictate the micro climates of the region. Allen, Plano, Wiley, Richardson, Dallas are all hot in the summer... I am sure there are underlying economic reasons for the expansion that more knowledgeable local investors can share. But for me the little time I spent in the area just did not provide enough information for me to make an investment. I personally enjoy Austin because of the vibe of the city. But even with that, I just don't know enough about the market to make any comments or recommendations worth stating.
Personally, I don't know if selling in the Bay Area to reinvest in Texas would make sense. From the fact that you held on your San Mateo home, you are probably of the same mind. Again, this is just a personal opinion and not a blanket recommendation. The reason I say this is that both markets are hot right now. Basically you trade one hot market for another. But from my limited understanding, Texas has higher property taxes, but no income tax. CA has prop 13 so taxes are pretty much fixed as long as you hold the property. Between a good 30 year fixed rate mortgage and prop 13, you are in a pretty good position if you are long term buy/hold investor. I think I would cash flow and leverage on the properties I hold in CA and POTENTIALLY invest in my new local region. But the key to this would be a good PM. The only reason I say potentially, is that I am not seasoned enough to deal with long distance properties and my personal tendency is to invest within a given driving range of my office. If I were to learn enough about long distance investing, my answer would potentially change.
With 30 year fixed rate mortgages so low right now, I am personally staying focused on MFR's just to lock rates. Commercial loans are usually for shorter terms and therefore the cost of future money is a little more questionable. But this is also an area that is outside of my wheel house. With that being said, I do hope to get into commercial residential property in the future, I just need to learn more...
As for a recommendation in getting back into the BA with the resources you have, I would look in the East Bay. Unlike what many people say, the BA is not just a cash only buying market. My first purchase in Oakland has seller financing, and the property that I just went into with a partner is a standard financed deal.
Just keep in mind what @Account Closed had said, don't over leverage.
Professional Property Investor · Brisbane, Queensland · Member since 2015 · 165 posts · 160 votes
11y
@Arlen Chou It appears that wires are being crossed here. I am not a resident in the USA so I can not give, nor have I attempted to give SPECIFIC information regarding what to invest in. I am in the process of looking at the USA market to invest individually and as such I am on BP to learn about the markets, how things work. I am fully aware of ones need to research a market before acting.
I did not attack anyone's strategy as you say. My last post was about correcting Minh's suggestions that my points were flawed. If anyone attacked someone's strategy I would suggest it was Minh, but I did not take it as an attack, more a postulating of an alternative theory. There is nothing wrong with this concept of open discussion regarding different views.
My original post to the OP was to write a detailed business plan and be sure to understand the drivers in the market. I did not attempt to advise him, or anyone else where to invest. I do not have your experience in YOUR market so it would be remiss of me to even try to advise. However, my comments are valid in all instances because they are fundamentally correct.
I commend you on your success and I am sure many people on BP would learn from you. My question would be how much would you have made had you sold your properties before the market fell and re purchased them when they hit the bottom of the market? What I am saying is that if you hold property during a falling market you are losing money in regards to not being able to invest in better assets during that time. Re purchasing is then possible when the assets are less valuable thereby increasing your real growth. This is what I am suggesting would make you more money.
Learning about investing is not just market specific. The fundamentals of investing are universal and if you only want to learn about investing in one market and not in general then I would suggest that your learning will be limited. Your inference that I cannot add to one persons learning because it is not my market is ridiculous to say the least. But if that is how you see it then that is fine by me. I am not here trying to teach you or anyone else what to learn or how to do it. I am simply here to learn myself and to do this I appreciate open discussion about ideas and concepts that are appropriate. Your comments about tax free income when it is in fact debt is false. Minh's comments that rising interest rates never cause property values to fall is false. They may not be intentionally misleading but they are misleading to people who do not know differently. That is all I am noting here. the errors in the fundamental strategies and false beliefs are dangerous to novice investors.
I am looking forward to investing in the USA market at the appropriate time and who knows, it may even be in the SF Bay area and I know that, if that is so, then I will have learned from you something about your local market, so for that I thank you.
Professional Property Investor · Brisbane, Queensland · Member since 2015 · 165 posts · 160 votes
11y
@Radhika M. Hi Radhika, I can clarify my comments for you. The old saying of you make money when you buy means you need to know where the profit is in your deal and how you are going to realise it. One of the key components of this is to understand where in the property cycle your investment sits. Buying at the bottom of the cycle and selling at the top of the cycle is what I want to achieve, if it is at all possible.
When you buy a property you should know where it is positioned in the current cycle. if you know this then you can estimate how long it would take, given the current set of market drivers to reach the top of the cycle, or to a high point where you are prepared to sell. Once the property reaches that point you sell. Why, because from the high point the market will now go down to the next low, wherever that is. You could then re purchase the property at its new low and do the same thing again.
You are right about the extra work of buying and selling. But do you want to own assets that are falling in value? I don't. I would rather my money was working for me all the time and not just some of the time and if that means I have to do some work to make that happen then so be it.
This could be seen as flipping but the time horizon for each deal is different. For example. If I bought a bargain in a market that was near its peak and did a rehab. Based on the market cycle being close to the peak I would flip it. If, on the other hand the same property was close to the bottom of it's cycle, then I would hold the property until it reached my pre-set trigger point. This could be 4 or 5 years. Most cycles take 7 to 8 years to do one full turn. However, you need to understand the cycle for the area you are investing in and also the individual market within that area. So, if I think the market has 4 or 5 years of upside I will hold the property for that period of time. Once the trigger point is reached I will sell and take my cash gain. As I mentioned I can buy back into that market once it has corrected itself and gone down to the next low point in the cycle.
The individual holding times for deals is determined at the outset when I buy it. I know what I want to do with the property and I budget accordingly. Simply holding for ever is leaving me open to the market forces that go up and down. I do not want to hold property that is going down in value. It is potentially too risky based on individual leverage ratios.
Many people buy and hold and traditionally over the long term they grow in value. There is nothing wrong with this strategy if that is what you want to do. If you are getting richer then that is a good thing, but personally I prefer the challenge of finding good deals and making more money and not just sitting on my assets. It's is very much an individual personal preference.
Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
11y
@David Nolan Discussions of would have, could have, should have are of no material value because they have no tangible impact. Its kind of like asking a person where would their wealth be if they had invested in Apple when it was a dollar per share. It is totally irrelevant to any meaningful discussion because it only exists in the imagination.
The only thing that matters is true action and the specific results of those actions. You are correct in that investing is not ONLY market specific. However, I would argue that SPECIFIC market knowledge is what differentiates winners and and those who do not...
Regarding your point about debt, on a balance sheet i show debt. There is no question about this. However, to only focus on that is myopic. The cash that is pulled out of a property is in fact debt on a balance sheet, but it arrives into my bank account free of any tax. However, you over simplify your comments when you don't consider who is servicing that debt. The tenants pay the debt, not me. I have all of my money back out.
The bases of your argument on "what if" the market were to crash and I lost all of my value and my property would be underwater or "what if" I had timed the market to buy at the lows and sell at the highs. Generally speaking, that is a valid point. But frankly speaking, I have yet to meet anybody who has been able to do this on a regular basis in the SF Bay Area or anywhere else. My effort in posting real transactions over nearly 20 years, covering REI cycles, was to add to fact based credibility to a long term buy and hold strategy specific to the SF Bay Area. All investment is inherently dangerous and each investor should do the best they can to become knowledgeable so they can make educated decisions.
Speaking of being educated, I am still waiting for your response to my question about your view on fixed rate mortgages, changing over time. I truly don't understand how that could happen and very much want to have a better understanding of your view on this point.
I do thank you for agreeing with me that you are not in the market in question and that you have no specific details to share. I wish you the very best in investing in the US and when you do make the move, please share your experiences so that we may all follow your journey. If that journey should bring you to the SF Bay Area, please reach out so we can share a pint and trade REI stories.
Thanks for taking the time to explain more about what you do. I do understand that it makes sense to buy in the bottom and selling in the top. To time the market that way you have to be really know your market and need to study it. And as investors we are should do it but it is very hard to time the top and bottom.
Even if I time the market correctly there are couple factors that come into play you have to consider when selling at the top and buying in the bottom. One is income tax considerations on the profit and the other is property tax consideration. On the property tax consideration in California where the discussion is happening about property tax don't increase drastically over time with property price increase. So by keeping a property you bough 10 or so years keeps your expenses low.
If you have retirement funds from a former employer, you may want to consider looking into using the rollover as business startup (ROBS) strategy which will allow you to fund a real-estate operating company. This arrangement will also allow you draw a salary. See following link for more information.
@David Nolan I think your strategy and ideas work better in a Texas market than a SF Bay Area market.
The SF area is very unique. It has geographic features that drive some of the local prices due to microclimates and location. It also has Prop 13 which limits the property tax to 1.1% of the purchase price. It also limits the ability to have that value re-evaluated and can only be done on either the sale or a significant addition to the property. With this in mind, it is a market that rewards the long term hold. If you look at the historical appreciation, it is very favorable and significantly rewards buyers. In this market you buy as big as possible and hold it as long as possable.
The Texas market is quite different. The taxes are 2.5%-4.5% of the sale price and is re-evaluated every year based on that years comps. It does not reward buy&ahold investors. You need to play the market cycles here. There are no real geographic features that make one area better. There are no zoning laws, so your neghbirhiod can change significantly. This can be good or bad, but usually bad because of the next point. Most people want a new house and older homes are undesirable. The build quality is very low. Appreciateion is very low. So it does not make sense to remodel. Just fix what breaks. House values are based on school quality.
These are my in educated observations so please dispute if they are wrong. Just trying to add some perspective as to why there may be different approaches to investing in these markets.
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
11y
@Michael Delpier WRT your perspectives on the SF/Bay Area vs. TX markets, you nailed it!
You asked for advise: as @Account Closed is apt to say, don't kill the golden goose! The Bay Area property that you own is your current leverage potential and your retirement and financial legacy. The Bay Area is a very challenging market to enter- nowadays you often need a couple hundred G's saved up to buy anything. And that's if you're lucky and can get a loan, as you're competing with the all cash buyers! Plus you have your cash flow, low tax base locked in, and you know the ins and outs of your specific property and tenant base.
As for your Texas home, I dunno, if it's in a class A neighborhood....maybe worth keeping as a rental?? If you can sell/cash out of it, maybe that's safer. Take the money! As for San Mateo, you were able to get in, so don't do anything dumb and trade it in for TX rentals, for gods sake :) (don't take the tough love personally ;)
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Couple of other comments germane to this thread.
WRT the Arlen and Nolan show, I don't want to get into it, but just want to clarify fact on the 30 year loans available in the USA. 30 year loans, where the interest rate is fixed, hence your payment amount each month is fixed for the entire 30 years, are commonly available. Of course, no bank in their right mind would offer such product, but here it's backed by the federal government. So it's the USA government that is making the guarantee. Banks pass those loans on to government agencies like Fannie and Freddie Mac to back up. I'm pretty sure that only America offers these, as I haven't heard of these terms being available in any other county (but I could be wrong. Chime in if you know differently.)
Radhika may have less experience in RE investing, but apparently she has been getting good advise. She nailed it wrt long term buy and hold here. With prop 13 holding down taxes, and 30 year fixed rate notes, as well as land scarcity, investing here has been one of the greatest wealth creation vehicles in history! Couple that with what @Account Closed talked about wrt inflation (how it catches up to RE values), and the returns have been outsized.
My main concern going forward is that there is a sh!t storm brewing between the haves and have nots in CA. Being in San Francisco, where we have had some of the most outsized RE returns, coupled with rent control/tenant displacement and social and sharing economy tech firm's stronghold here, we are at the vanguard of this social phenomena. So far it's all manageable IMO and the economic climate has been mostly ho hum, plus/minus. Oil is down, stocks up/down, rates low, slow growth, dry weather, money chasing returns...blah, blah, blah. The real issue is when we will have to eventually print more money to offset the huge fed deficit. That will lead to inflation. And maybe housing prices will go down temporarily as rates increase, but they will follow inflation. And those with low 30 year loans, equity, and a low tax base will be set, and others will be screwed royally.
Think 20 years from now. With that potential inflation run, a million dollar house may be a joke around here. And that could push politicians over the edge wrt prop 13, rent control, and serious housing subsidies for the have nots. If this scenario, or one similar plays out, we could be in for some interesting times in CA. Of course those of us getting in now will be set. But the advantages we have may not be there in the future. Inspite of the current wealth disparity now, things are still manageable. But all you need is a black swan event like inflation and the sh!t will hit the fan wrt the inherent advantages that exist today for CA investors. Food for thought.