If the math works...

7 Replies

I’m curious to hear opinions on buying right now in a high market environment. The way I see it, if the math works (for me that means netting $200/mo on an SFH after setting aside money for capex/maint costs) then you should be okay to buy, assuming youre goal is buy and hold for long term/consitent cash flow. But what am I missing? Where will I get burned when asset prices suddenly come back down to earth a bit?

Ned Gorges
You are correct, if the property cash flows and your looking to hold for the long term then now is not a bad time to buy as interest rates are still low (but rising). My buy and holds I currently am looking to hold for 15 years (which I also have 15 year notes on them) as they still cash flow and that is when I will have children in college.

People tell me all the time I should not of gotten 15 year term. My point is that no two investors are the same- we all come from different situations and have different goals so there is no one size fits all scheme as to investing in real estate. Good deals can still be found and long term holds typically increase overall long term net worth

Originally posted by @Chris Seveney :

Ned Gorges
You are correct, if the property cash flows and your looking to hold for the long term then now is not a bad time to buy as interest rates are still low (but rising). My buy and holds I currently am looking to hold for 15 years (which I also have 15 year notes on them) as they still cash flow and that is when I will have children in college.

People tell me all the time I should not of gotten 15 year term. My point is that no two investors are the same- we all come from different situations and have different goals so there is no one size fits all scheme as to investing in real estate. Good deals can still be found and long term holds typically increase overall long term net worth

just like the reason you buy notes is for cash flow.. max cash flow on rentals without killing your self having to buy huge amounts happens when you have no debt.. I am a big proponent of no debt on rentals..and of course if the VAST Minority of those on BP in the max leverage refi till you die crowd .. to me rentals get good once they are paid for.. you have max cash flow and monster balance sheet with no worries of making payments.

Ned Gorges Your best bet is to stress test your pro-forma. What if rents drop 10%? 20%? At some point you’ll hit breakeven from a cash-flow perspective. And then you have to factor in location/desirability. During the big ol’ crash you had a lot of empty stuff in the Inland Empire while a lot of Orange County just dropped their rent (with various levels of severity). A “dropping rent” downside is WAY different than a “vacancy” downside. So goes my theory anyway...

Unlike @Jay Hinrichs I love debt on my investment properties. But that isn’t because I’m trying to go 80/20 LTV or have “no money in the deal!” It’s just because I get to deduct the mortgage interest. Depreciation (for me) doesn’t fully offset NOI so I want/need that extra deduction or I’m paying Uncle Sam and Auntie California. I don’t want to pay 46ish percent...

Now at some point (~15 years from now) I’m going to care a lot less about mortgage interest because other income sources (read: j-o-b) will dry up if early retirement is on the table. So that will materially change my marginal tax rate so I won’t care nearly as much about the mortgage interest deduction.

By the way, if the government does change code my perspective on debt is going to change...rather dramatically.

@Andrew Johnson   what about that nasty recapture at the end of all of this.. or is this buy and never sell type of thing and give to the kiddo's ?

If the math works ....yes

The problem is that many, possibly most, investors use very creative math and can make almost anything appear to be a good investment....from their perspective. Hence different investment philosophies.

This is evident in the two sides of the argument between leverage and all cash (equity). Extremely creative math considering both can and are very successful investment approaches when done properly with little difference (again when done properly) except in the regards to return on investment.

The individual is the primary difference not the method.

@Jay Hinrichs For me, when I buy, it’s a “buy-until-you-die” expectation. I won’t say life won’t throw variables at me, my ideas won’t change, my strategy won’t change, but that’s my plan at purchase. I’m not a “by X to give cash-flow of Y so I can buy what I really want later”.

It also helps me focus and not get seduced by rust-belt cash-on-cash returns. I don’t want to be saddled with that market, some $50K property, etc. for the next 50 years. Property manager or not, it just sounds awful for me.

So, unlike 98% of the people here, I’ll buy the property I like in the location I like at a lower cap-rate if it gives me a greater confidence (for whatever reason) that it’s a buy-until-you-die scenario.

Side note, there’s also a spousal dynamic here. She has ZERO desire engage in flipping or 1031ing to bigger/better. For her she loves the “dividend money” increasing the bank account and it will be a cold day in hell before she wants to give more marginal income to the govt :)

Additional side note, I’d never encourage or discourage someone to use my strategy. Everyone likes to throw up pro-formas as an abstract with far too little regard to strategy, tax implications, or spousal buy-in.

@Andrew Johnson   this reminds me of my old partners wife in the timber business.. she was so cynical. we would have a monster month.. make like 500k NET and she would just say.. its just numbers on paper LOL.. unless it was cash in HER bank account it did not count..

she ended up in Maui.. living on those numbers on paper we created logging in the northwest.. LOL

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