Investor · Kansas City, MO · Member since 2014 · 42 posts · 10 votes
I'm struggling to know when I'm ready to make my next move and purchase more real estate. I currently own two properties. It has been almost one year (August 1st) since I purchased my first property. I then purchased my second property in a tight cash flow/high appreciation area. My first property has brought me a 34% net return in year one. It has been extremely successful for me. I purchased the second property 7 months ago. Between the two properties I cash flow around $1,000 per month.
I've found another property that I feel confident will bring me a similar return as the first (same city, about 3 blocks away, similar price, similar SF, same Bedroom, more baths), but I'm not sure I should buy 3 properties within 1.1 years as it will make me leveraged to the tune of about $550,000. I have sufficient funds to purchase the property, but struggle with knowing whether or not I'm growing things too fast. Here is a quick snapshot into some of my situation:
$8,000 emergency fund for my two properties that I'm trying to grow to $15,000-$20,000
$25,000 in liquid-able assets aside from my emergency fund
To purchase this property I would need around $13,000
Please let me know your thoughts/experiences. I'm concerned I may be buying at a high point. The property is located in Utah which has seen strong economic growth in the past few years.
Kansas City, MO · Member since 2015 · 609 posts · 321 votes
8y
If I read it right, you have reasonable access to $33k for emergencies. Then you need to use $13k for the down payment. So $20k in reserves for 3 single family units, correct?
Rental Property Investor · Tyler, TX · Member since 2018 · 32 posts · 23 votes
8y
@Bill Brandt lol, probably wouldn’t be the same price in Vegas, but then you might get more rent. We get $1150 for the 3brs and $950 for the 2br’s..my husband drew the plans.
Rental Property Investor · Palmdale, CA · Member since 2016 · 122 posts · 88 votes
8y
@Bill Brandt, what are you thoughts about the Vegas market? Do you think it will continue to grow? I bought a house in Vegas a year ago and the purchase price has increased more than $50K. Not sure if l have to wait for prices to go down before l jump in.
@Bill Brandt, what are you thoughts about the Vegas market? Do you think it will continue to grow? I bought a house in Vegas a year ago and the purchase price has increased more than $50K. Not sure if l have to wait for prices to go down before l jump in.
I think we have another 15-20% before we hit 2008 prices. That’s a psychological barrier, not really a relevant factor but we’ll see how people react. Most markets blew through their 2008 prices long ago so it should be expected, not newsworthy.
Valley is less than 20 x 20 miles. Most people I know in Vegas think 10 miles is a long drive, so vegas real estate is even “more local” than most. They’re only building 10,000 new homes /year while we have 2 million people and a net gain of over 60,000 people per year. We’re still very cheap based on payments, 70% of those new houses are priced over $300k and are farther from town and usually don’t come landscaped so that should justify a good price jump. We’re getting More and more retirees from California and New York, yes I think they are “wrecking” Vegas, but mostly with their “we need more laws and taxes” attitude than anything else.
I have 12 houses in town and I would sell 1-2 if I could find a bigger/better deal but I just don’t see it. I don’t think out of towers take in to account how new and low maintenance our housing stock is. 20 years is an old house. I don’t know anyone that has painted their house in the 20 years we’ve lived here. Or bought a new roof, heck even repaired a roof outside of a few loose tiles. You pry buy a water heater ever 6-8 years (because no one buys 12 year warranty version, and even with the warranty you gotta pay labor, so you save maybe half) you buy a new ac unit every 15-20 years ($200 repair every 5 years)
I looked up 2017 and I spent $11,300 on 12 houses between 2000-2400sf, between 10-20 years old, that are worth $250-$350k. And that includes mostly appliances. (Refrigerators and laundry units don’t seem to last as long out here, pry the hard water, lucky to get 6-10 years out of them.) So less than $1,000/mo. For 12 houses, Less than $1,000/house per year. Less than 7% of rent. Less than 1/3rd of a percent of value.
Sorry if you were just looking for a yes there’s room left to grow but I love when I get a detailed answer to my questions form BP members so I try to return their help in full. I love talking real estate, and if I only owned my MN homes I wouldn’t even think of things like not having to paint or re-roof.
Please ask away if you have more questions or theories you want to propose about future prices. I want to learn and I’m far from an expert. I’m just an experienced intermediate. Is your vegas property your only rental or have you just not updated your profile and you live here now?
Ps. Didn’t mention the $10 billion in hotel and convention center building over the next couple years as those things come and go. Some cities would find An expansion of $10 billion for a town of 2 million to be a lot. :-).
Contractor · Canton, GA · Member since 2015 · 107 posts · 81 votes
8y
I’d suggest add an owner finance deal, an option , or a lease option deal for a quick buy and flip .if you can make one of these deals . Even making 5,000-7,000 on a low or no money down can take away some of the heat in a rental market.
Investor · Pueblo West, CO · Member since 2014 · 310 posts · 213 votes
8y
Leverage is a percentage of what you owe on the properties compared to what the properties are worth. The OP needs to include this information to answer the question. It's the most important piece of info. It's odd that it has not been mentioned yet.
According to the Millionaire Real Estate Investor the average millionaire with real estate has 40% equity. My goal is to be 40% to 50% equity. Once I get above 50%, I start to think of refinancing a property to get me back down to 40%.
Last year I was at 65% equity with two rental properties. Many investors would conclude that is too much equity or "dead money".
I decided to do a cash-out re-fi on one property and I timed it perfectly to get the lowest rate possible in September 2017. This took my equity down to 45% and gave me money to purchase another property. I put 20% on a primary home with a basement rental unit. This took my total equity to 35%. After the rehab is done in about 6 months, my equity position should be back up to 40%.
Rental Property Investor · Palmdale, CA · Member since 2016 · 122 posts · 88 votes
8y
@Eric Adobo, yes it went up $50k and it's a rental property. I live in California, but have my rentals in Vegas. I'm seriously planning to buy another rental, but not sure if l have to wait for prices to go down before making an offer.
@Bill B., thanks for the comprehensive information provided on the Vegas market. I truly appreciate your time. Please note that l have a lot more to discuss with you, but will do it offline. We'll chat later.
Rental Property Investor · Golden, CO · Member since 2017 · 19 posts · 57 votes
8y
I think about this or lot! From the variety of answers, it's clear that it is personally subjective (as it should be) based on personal income, current cash flow from your portfolio and the historical track record of the region (the Great Recession provides us an excellent model). In my opinion, the worst outcome is having to sell a property when it is at a cyclical lowpoint. I suggest that you put together your own, personalized stress test for such a scenario. Here's the sequence I used to build out my worst case scenario:
1) Look at historical performance, which should be region-specific and is publicly available data. Some areas are more cyclical than others. My area has seen two major pullbacks in real estate prices - the late 80s and 2008-2011, that were 13% and 22% (blended across the region), respectively. Ultimately, I'm not too concerned with short term price fluctuations - it's about having the liquidity to survive a 3-5 year recession and the associated declines in rents. In my region, rents actually did NOT decrease during that time, but I still build in an assumption that they would decline in lockstep with the pricing to err on the side of caution. I use a 20% multi-year decline in rents as my stress test. In my area, such a decline in rents specifically has no real historical precedent, so I feel comfortable using that figure. Your number will probably be different.
2) Apply that to your current cash flow model, and combine it with some negative outcomes. Add some larger capex items (a roof, heating system, maybe a multi-month eviction). Make it kind of ugly and scary and at the far end of what you think could happen if you had some really bad luck.
3) I think your personal income should come into the equation to a certain extent. How stable is your employment, and are both members of the family employed? Dual income or single? What is the worst case scenario that can happen here? If you're living off the cash flow, it's a much different picture. How long does the scenario chew into your cash reserves? For example, I know that if for some "worst case" reason my portfolio was to start costing me several hundred dollars per month rather than making me a few thousand, I know with a degree of certainty how long that can go on and how long I'd be willing to subsidize it with my own income.
It's part of the reason there are so many answers to this question...my only suggestion to you would be to play out some of the out there, scary scenarios (in a quantifiable way!!) and see how you do not only with regard to the new property but also with your current portfolio. I'm actually not particularly pessimistic about the future at all, but I sleep a whole lot better having my portfolio ready for some pretty terrible theoretical outcomes.
You'll want to calculate your debt to assets ratio on your real estate portfolio to see if you're overleveraged. You do it by adding up all your outstanding debt balances related to real estate (mortgages, credit card, etc.) and divide it over the fair market value of the real estate portfolio (including cash dedicated to the portfolio). This should get you the percentage of the total portfolio that is indebted. Example: $90,000 in total debt on $100,000 in total real estate portfolio equals 90% debt to assets ratio.
From my experience talking with REIT wholesalers, 70% is considered the maximum prudent leverage in the institutional space, while 50% is generally considered prudent leverage. I've found that 80%-100%+ leverage is common amongst individual real estate investors, but is generally considered very imprudent by institutional standards.
The ultimate decision on whether or not you're overleveraged and what to do about it is your own, of course.
Investor · Los Angeles, CA · Member since 2012 · 1k+ posts · 500 votes
8y
Seems like low cash reserves IMO. If tenants stop paying, AC's break, roof replacement, etc, you could enter a sticky situation. If you feel you could stay afloat if things went wrong then I'd move forward.
I agree that you should really be pushing to buy significantly below market value if you are concerned we may be topping sooner than later. I'm a firm believer that you make your money when you buy real estate. Buying into a rental with substantial equity is more if not equally as important as cash flow.
I'm struggling to know when I'm ready to make my next move and purchase more real estate. I currently own two properties. It has been almost one year (August 1st) since I purchased my first property. I then purchased my second property in a tight cash flow/high appreciation area. My first property has brought me a 34% net return in year one. It has been extremely successful for me. I purchased the second property 7 months ago. Between the two properties I cash flow around $1,000 per month.
I've found another property that I feel confident will bring me a similar return as the first (same city, about 3 blocks away, similar price, similar SF, same Bedroom, more baths), but I'm not sure I should buy 3 properties within 1.1 years as it will make me leveraged to the tune of about $550,000. I have sufficient funds to purchase the property, but struggle with knowing whether or not I'm growing things too fast. Here is a quick snapshot into some of my situation:
$8,000 emergency fund for my two properties that I'm trying to grow to $15,000-$20,000
$25,000 in liquid-able assets aside from my emergency fund
To purchase this property I would need around $13,000
Please let me know your thoughts/experiences. I'm concerned I may be buying at a high point. The property is located in Utah which has seen strong economic growth in the past few years.
Thanks in advance!
A lot more info is needed.
What percent of equity do you have in your existing properties? stability of the renter base? have you had to release any of your properties yet? What is the condition of the properties? Do you have any AC units or roofs that need to be replaced?
If something went wrong, what is your exit strategy? Could you sell one or more of you current properties tomorrow?
What kind of shape are you in if you lose your job and have a tenant move out? Do you have a job that pays you enough to cover your real estate expenses if something goes badly for a month or two.
What is the local economy like where you invest? is it a one company/industry town? Or are they in a large growing metro area?
Also what is your risk tolerance? Some investors like to own paid for real estate, some want to leverage up as much as possible.
As an example, this summer within a 2 week period after putting a house under contract, we had tenants move out that gave us full notice. we got a 3 day notice to vacate from another tenant (an inherited tenant), and then found out my step daughter wanted to quit school and that potentially was going to leave another of our rentals vacant. And on the house that was going vacant, we decided we needed to do an impromptu rehab. (full kitchen rehab), having some room to absorb those unexpected expenses is a big deal.
Vandalia, MI · Member since 2018 · 569 posts · 264 votes
8y
I would not look at it as if you are over leveraged, the bank will tell you that great information if they can not or do not wish to lend to you anymore. There are those who open many more doors. in 1.1 year.
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
8y
The type of debt and the ratio to asset value is key to me.
If your debt is hard money, private, commercial with balloons, calls and rate adjusts? Obviously you need a super low LTV and major reserves.
If talking about fixed 30yr resi debt, I was comfortable with about 80% LTV early on. I'm much lower than that now because I focused and paid off all of my higher rate and riskier loans like I mentioned above.
People would freak if I told them I had over $2M in debt. They didn't know/didn't ask whether it was spread out against much more in value or not in cf assets. But these were w-2 sheeple, so what do ya expect LOL
The absolute dollars of debt only matters as much as the type of debt and ratio to value pledged and whether they cf or not. These days I like 70% LTV max, personally.
The type of debt and the ratio to asset value is key to me.
If your debt is hard money, private, commercial with balloons, calls and rate adjusts? Obviously you need a super low LTV and major reserves.
If talking about fixed 30yr resi debt, I was comfortable with about 80% LTV early on. I'm much lower than that now because I focused and paid off all of my higher rate and riskier loans like I mentioned above.
People would freak if I told them I had over $2M in debt. They didn't know/didn't ask whether it was spread out against much more in value or not in cf assets. But these were w-2 sheeple, so what do ya expect LOL
The absolute dollars of debt only matters as much as the type of debt and ratio to value pledged and whether they cf or not. These days I like 70% LTV max, personally.
I have two rentals and just purchased a primary home with a basement rental unit. The most common question or piece of advice is why I didn't sell my two rentals to be mortgage free on my primary home. This advice or question usually comes from people who are not very good with money or any sort of debt. They are obsessed with being mortgage free. Mortgages stress them out because they don't know how to handle them responsibly.
No, I'm not mortgage free. However, my rental cash flow pays for my primary residence (mortgage, taxes and insurance) and an extra $300/month. I use $0 of my W-2 income to pay for my personal housing. Isn't that the same as being mortgage free or better?
By keeping the rentals I also get principle pay-down ($525/month), appreciation (???) and tax advantages ($2000/year). For appreciation, my first rental doubled in value in 10 years. The second rental doubled in value in 4 years. While you can't count on it going forward, it was nice that it happened.
Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
8y
IMO if your total portfolio LTV is over 75% you're swimming naked because you cannot refi in an emergency. If you do not have 6 months of reserves per property (like banks require) you are swimming naked in an emergency.
Look at each property and see what the NOI looks like if rents drop, 10,20,30,40,50%. That's how you know where your emergency point is.
A lot of clowns in real estate (this website included) swim naked. I have seen people with 4-5m worth of real estate selling property at a fire sale because they're in trouble and didn't assess downside risk.