Quote from @Eric Blair:
@James Hamling thanks for that awesome reply. So some follow up questions
1. Are you suggesting that people shouldn't hold rental property for more than 7 years?
2. If so, why would an investor want to bring down their amortization if they plan on selling within 7 years?
I ask because I have a property approaching 7 years but this property has a 2.75% rate and it's a cash flow cow. It's got $90k left until pay off but it has $70k equity built in
So like you said, I don't plan on living here for 30 years. I could see 5 years, maybe a few more unless I get some awesome job opportunity.
I am struggling with scaling. I can't figure out how to scale more than 2 properties without leaving my market. There are virtually zero multi family properties near me. There are a few in some very very rough areas but none anywhere decent. I would have to invest out of market and I just don't see how I can do that while working full time and low capital
1. I am suggesting that everyone new, novice or even most intermediate enter Investment Real Estate with an assumption of liquidating by year 7. Because evaluating for cap-x and maintenance is far simpler and easier in that lens, and the vast majority (97%+) do NOT correctly compute for cap-x beyond there and get themselves into issues of a "good investment" turning "bad" because there optics didn't have those factors and year 8, 10 etc a daisy-chain of cap-x starts landing without reserves pre-planned to cover.
2. My favorite method is retaining liquid capitol in reserves, and utilizing such in a bi-weekly mortgage payment method. Because this has not only a similar effect of getting a lower rate, but most often it's MORE impactful than what it could have with buying down a rate. AND it does this while keeping hold of the liquid capitol for added "just-in-case", call it a reserve for the reserve. And yes, I personally operate LAYERS of reserve accounts.
And all this is done with a kind of "best of both worlds" approach because it keeps the flexibility to move and pivot free of consequence for whatever liquidation schedule one uses.
If choose to sell and liquidate within the 7 years, it's just added equity, nothing lost vs if used the capitol to buy down a rate there is a pain-point there of loosing that.
If retain the property beyond that window for liquidation, ok, you just keep on keeping on per bi-weekly plan. FYI for those not doing an amortization schedule calculation to see what I am talking about, paying bi-weekly vs monthly results in shaving off 5+ years from a 30yr mortgage. That's a LOT of $. Take that savings, calculate it in and find what interest reduction it equals, the results will probably shock you.
Add in a "13th mnth payment" and now were talking 7+yrs shaved off the mortgage.
Because these payments are landing directly on principle vs to the banks pockets to buy a bit of a savings.
And as I keep hammering lately EQUITY is EVERYTHING.
For your scaling problem Eric, it sounds like your mono-channeling things, simply looking for the spread in sale price vs monetization. I get-it, that's not dumb, your being smart in that regard but it simply isn't a viable market cycle for that type of acquisition model.
Widen your lens.
Seller Financed buys is a VERY viable acquisition model. And with that rate and terms are fully negotiated. You can get in for much less down, get a much lower rate, now you have more affordability to enter and more affordability on the monthly.
And now imaging the possibilities when you combine that with value-add strategy.
For example, say it's a property that's aged, needs much updating and with that it's value is greatly increased. Seller has had it 20 odd years, owes next to nothing, or nothing. Ok, well what is a bank going to pay them for interest on that $ if you were to buy it cash? 1%? 2%? Negotiate a buy, on terms, at 4%, putting down just 5% or heck maybe even just $5k, all depends on scope of work. With the understanding of the work needed, and that your going to have this big expense day 1. So by them giving you that opportunity to retain the capitol to do these improvements, it's a win-win. It makes it a viable deal for you, there securitized because instead of down via cash which is taxed your doing it via equity.
Make your reno a term of it, xyz to be done within xyz time window.
Set a realistic balloon term to it all. Call it 5 yrs, or 3. I do minimum 3 and maximum 7.
These deals exist, a LOT of these deals exist.
Let's say market ARV is $350k, and they've tried selling and listing in the $320k+ range and it just isn't going because there is about $30k of reno, and buyers today don't like doing sweet equity anymore. They've gotten "low-balls" at $250k..... You can be the person who says $300k is fair BUT you need them to help you to get there. Max you can do is $300k but only if they work with you on it, so you can use your $ to do the reno and not burn it on down. So you have the time to do such, bring it to it's "Sunday Best".
When the mono-channel strategy isn't any longer viable, there is a choice. You can either (a) leave the market to go to a market that strategy IS still viable..... -OR- (b) change your strategy. Find the opportunity in the market. Get creative.
