My wife and I have three houses that we rent out. This journey started about 10 years ago. We have 15-year mortgages on these. The houses are worth about $800K (TX). We are very happy with how these houses appreciated; we put very little money down and were rewarded handsomely. Of course, this was no bed of roses: we put a lot of work into these - roof leaks, flooded floors, painting, clogged toilets, annoying tenants - you name it.
Today, we are contemplating selling one house and putting the profits into SP500. What makes us contemplate this is some back testing. For example: - The first house was purchased in 2013 for $145K. That house is now worth $280K. - If I was to invest $145K in SP500 in 2013, I would have about $500K
I know that the past is not the prologue, but I also know that historically housing trails the SP500. That said, in 2013, we were fresh out of grad school and did not have $145K to invest in the market. So, buying a house with 5% down was the only option. Today, we could sell one house or more and invest a larger sum for the long haul.
We have tenants moving out in the spring and we are considering selling. The house in question happens to be a house we lived in recently and we could sell it and not pay taxes on the sale. Do you think we should pull the trigger and put the money into the market? Thank you for your advice.
Relevant details:
- Household income about $250K, which means that we cannot deduct rental losses
- All houses have 15-year mortgages , which means that they do not cash flow well. We are either in the red or breaking even depending on luck in a given your. Tenants are paying off our mortgage.
- We could also sell, invest the money, and buy another rental (re-leverage)
I'm not a stock guy, so can't offer much insight there, but I don't you see you taking leverage into account.
You mentioned you put 5% down, since you couldn't afford to pay $145k cash. So, using your #'s provided and not accounting for costs, cashflow, etc, here's how it would've looked:
Stocks $145k invested to get $500k = 245% gain
Your House $7,250 invested to get $135k in equity = 1,762% gain
********************** Now, if you had $145k and split it into 20% or 25% down payments, this is what it would've looked like:
20% down $29k down, 5 houses, $135k equity each house = $675k gain, 366% gain
25% down $36,250 down, 4 houses, $135k equity each house = $540k gain, 272% gain
and of course you have costs, maintenance, etc., but you also have depreciation, equity paydown by tenants, tax benefits (1031 deferral), and you own a bundle of commodities as an inflation hedge, cashflow, etc, etc.
I would do a cash out refi on one or two and put them on 30 year loans. I did this last year on one with a 15 year loan with built up equity that was only breaking even. I put it on a 30 year loan and was able to pull out 133k cash. My new big mortgage actually stayed the same so that was cool. I bought 3 rental houses with the cash by putting 20% down on each. My total net cash flow after all my expenses on all these rentals combined was an extra 3k/month. So I recommend putting some of your equity to use and scale up. It didn’t cost me a cent out of pocket to acquire these 3 new properties.
I did another cash out refi on one in August. I got 168k back to play with. I bought 3 new rentals with the cash. When it was all said and done, my extra net cash flow was $2500/month on this cash out refi to scale up. And again, buying these 3 new houses didn't cost me a cent out of pocket either. I just figured out how to get a better return on my equity. So I would refi into 30 year loans to crush the cashflow vs the stock market. When you calculate 5% annual appreciation, your monthly cash flow and principal pay down on your mortgages, your return is closer to 80-120%. That's how much your net worth is going up with RE. And it's tax free. So I'd keep that money in RE and invest in the stock market on the side if you have a 401k or Roth IRA on your own. RE will balance out your investment portfolio well in the long run.
My wife and I have three houses that we rent out. This journey started about 10 years ago. We have 15-year mortgages on these. The houses are worth about $800K (TX). We are very happy with how these houses appreciated; we put very little money down and were rewarded handsomely. Of course, this was no bed of roses: we put a lot of work into these - roof leaks, flooded floors, painting, clogged toilets, annoying tenants - you name it.
Today, we are contemplating selling one house and putting the profits into SP500. What makes us contemplate this is some back testing. For example: - The first house was purchased in 2013 for $145K. That house is now worth $280K. - If I was to invest $145K in SP500 in 2013, I would have about $500K
I know that the past is not the prologue, but I also know that historically housing trails the SP500. That said, in 2013, we were fresh out of grad school and did not have $145K to invest in the market. So, buying a house with 5% down was the only option. Today, we could sell one house or more and invest a larger sum for the long haul.
We have tenants moving out in the spring and we are considering selling. The house in question happens to be a house we lived in recently and we could sell it and not pay taxes on the sale. Do you think we should pull the trigger and put the money into the market? Thank you for your advice.
Relevant details:
- Household income about $250K, which means that we cannot deduct rental losses
- All houses have 15-year mortgages , which means that they do not cash flow well. We are either in the red or breaking even depending on luck in a given your. Tenants are paying off our mortgage.
- We could also sell, invest the money, and buy another rental (re-leverage)
Your missing the point, the very point that got you into this advantageous situation.
You would never have $500k today in the S&P, because you never had that $ to put into the S&P in the first place, you had a lot less, right, 5% of the total correct. So, to be accurate, if did S&P route you'd have 5% of that $500k, or $25k today right? You tell me, how "great" would $25k look today vs what you have?
Look, it's not fair to look at whole dollar into REI vs whole dollar into the S&P, because that is cutting out a MAJOR "secret sauce" to REI which is LEVERAGE. Now, in the stock market one can also use leverage BUT, it costs a whole lot more then Real Estate, even at todays rates. Many brokerages charge 9%+ for margin accounts AND they can call you short if things go down, start selling off your positions. In Real Estate, there is no margin calls, no forced selling, on just holds and rides out any storm, right.
But again, it's the amplification power of PROPER leverage.
$500k today can buy you "as much as" $1m in stocks, right. That's getting to a dangerous leverage point by all measure in stocks, a very dangerous point because the stock market has "flash-crash"'s all the time, things move on emotion and there is entire industry built to profit on such moves and they WANT those moves.
In Real Estate, $500k can, conservatively, buy you control of $2m. Double, literally double. AND at a "safe" leverage point. Free of margin calls.
To simplify things here as there seems to be much confusion on the topic. Real Estate is where one invests to MAKE wealth, the stock market is where one goes to put wealth on cruise control, as in slowly take it OUT. Unless your an active trader, the stock market is NOT where one goes to GROW wealth.
And I get it, one can argue "but, but, but, if your last name is Hilton and you throw $10m into the market, wow, look at those div's". Yeah, nothing changes, it's still NOT growing wealth, it's just that your using #'s so big, that the tiny return is so much MORE then your life expenses, we can do the exact same in Real Estate and be way more. That $10m would buy you up-to $40,000,000.00 in real estate, just 5% of that is $2,000,000.00 ANNUALLY!
The math is clear, Real Estate beats the S&P when you do a complete comparison. ONLY when you REMOVE on of the R.E. factors can the S&P compete with R.E., that should tell you something right there.
three houses that we rent out. This journey started about 10 years ago. We have 15-year mortgages on these. The houses are worth about $800K (TX). We are very happy with how these houses appreciated; we put very little money down and were rewarded handsomely
Today, we are contemplating selling one house and putting the profits into SP500. What makes us contemplate this is some back testing. For example: - The first house was purchased in 2013 for $145K. That house is now worth $280K. - If I was to invest $145K in SP500 in 2013, I would have about $500K
I have mutual funds and stocks also, but to compare, we need to start with the dollars invested into the house, not it's PP.
You didn't put $145k into the 2013 house so you can't pretend you put $145k into the SP500. The comparison should be the total dollars invested , including DP, borrowing costs and hours and indigestion to source and acquire the house.
In the end, we chose to reduce RE and redeploy a lot into hand picked stocks and ETFs this summer as they went on sale. It was a no brainer as RE was peaking and stock market dipping.
I'm not against divesting from RE, just start with true numbers when comparing returns👍
I agree with your plan and I actually going to that route as well, reason is becoz index and bond is way way way too cheap right now so it has room to expand. Real estate not so much, but it wouldnt crash either too.
A 10% return in REI is much better than a 20% return in the Stock Market. Using percentages to make decisions regarding REI is at best misleading,...and most likely a lie
In the end, we chose to reduce RE and redeploy a lot into hand picked stocks and ETFs this summer as they went on sale. It was a no brainer as RE was peaking and stock market dipping.
I'm not against divesting from RE, just start with true numbers when comparing returns👍
we think the same. As inflation is higher than cap rate, I'm start deleveraging from my rental that is in stuck position and putting the proceed towards Interval Private Fund , index and syndication.
Having direct rental with IRR of 6% is meh to me. However, I may purchase a home this year too since I see the discount in a few homes is pretty significant.
There's possibility of making easy 100k for the next two three years even with negative cash flow.
I have more data on CRE but I guess I shall not share LOL it's kinda scary, seems like residential would be okay/not too bad.
The problem with direct RE investment for the next 5 year is the following.
How do you make money when inflation is 4-5-6%; cap-rate is 4-5%; 30YFRM is 5-6%. This is a market that's very stuck or at best would have slow growth/flatline for quite some time. I even talked to CRE broker and they shared the same sentiment. Rent growth is practically null for few years and they expect the cap rate to stabilize, so something has to give in, either the interest rate going down, or the cap rate moves slightly higher (fall in price --but I hope it doesn't happen LOL).
If in 2025, the inflation goes back to the 2-3% range, then it started making sense to leverage in RE.
This is where index investment becomes more interesting as valuation is cheap and the economy is diversified enough. I can't get the awesomeness of oil investment when I purchase RE.
The problem with direct RE investment for the next 5 year is the following.
How do you make money when inflation is 4-5-6%; cap-rate is 4-5%; 30YFRM is 5-6%. This is a market that's very stuck or at best would have slow growth/flatline for quite some time. I even talked to CRE broker and they shared the same sentiment. Rent growth is practically null for few years and they expect the cap rate to stabilize, so something has to give in, either the interest rate going down, or the cap rate moves slightly higher (fall in price --but I hope it doesn't happen LOL).
If in 2025, the inflation goes back to the 2-3% range, then it started making sense to leverage in RE.
This is where index investment becomes more interesting as valuation is cheap and the economy is diversified enough. I can't get the awesomeness of oil investment when I purchase RE.
Rental rates are absolutely NOT going to sit flat for the next few years, that is a very INCORRECT take on rental rates.
At this exact moment, feeling the inflation "squeeze" it is a knee-jerk reaction to say "how can people afford to pay more?". That is a statement of TIME, not of condition. At this exact moment in time, this is true in many places, yet in MANY places rental rates are still on a rocket-ship up. It is very market specific at this exact moment in time.
BUT...... oh the "but's".
As WAGE INFLATION happens, which YES it is happening right NOW, this is the beginning of wage inflation. As wages inflate up, this will give margin for rental rates to equally elevate up. This will without doubt 100% happen on National level when talking the next 36-48 months. 100% certainty.
So to say rental rates will sit flat for coming YEARS, is a very ignorant statement, acting in total tunnel vision of any/all factors at play.
For example; Say housing DOES drop a significant degree via some huge recession. That makes MORE renters and in that higher rents via demand/supply curve. Say there is NO recession, this is only possible via a STRONG economy AND a strong economy has liquidity and pressure forcing WAGE INFLATION, and with more income rents equally elevate given ascending affordability.
All roads lead to HIGHER rental rates over the 36-48mnth vision. The only thing that changes is underlying catalyst and support matrix.
This is all possible via the front-loading of this economic cycle of significant net unit shortage and low production volume in relation to such. Short of waving a wand to either create 3 million units from thin air, or eliminate 12-odd-million people over-night, there is no "release" of this pressure.
Welcome to the new-norm. Everything is pricing up AND keep in mind many analysts are saying the general public has to get ready to accept as much as 85% of income going directly to cost of living expenses. Food, shelter, and the necessities of life.
There is a reason they say a Renter Nation.
As for a 4-5 cap, DON'T buy a 4-5 cap, that's foolish in any market cycle UNLESS it's a value-add play or something with strong appreciation via forced equity like path-of-progress investing etc..
The problem with direct RE investment for the next 5 year is the following.
How do you make money when inflation is 4-5-6%; cap-rate is 4-5%; 30YFRM is 5-6%. This is a market that's very stuck or at best would have slow growth/flatline for quite some time. I even talked to CRE broker and they shared the same sentiment. Rent growth is practically null for few years and they expect the cap rate to stabilize, so something has to give in, either the interest rate going down, or the cap rate moves slightly higher (fall in price --but I hope it doesn't happen LOL).
If in 2025, the inflation goes back to the 2-3% range, then it started making sense to leverage in RE.
This is where index investment becomes more interesting as valuation is cheap and the economy is diversified enough. I can't get the awesomeness of oil investment when I purchase RE.
Rental rates are absolutely NOT going to sit flat for the next few years, that is a very INCORRECT take on rental rates.
At this exact moment, feeling the inflation "squeeze" it is a knee-jerk reaction to say "how can people afford to pay more?". That is a statement of TIME, not of condition. At this exact moment in time, this is true in many places, yet in MANY places rental rates are still on a rocket-ship up. It is very market specific at this exact moment in time.
BUT...... oh the "but's".
As WAGE INFLATION happens, which YES it is happening right NOW, this is the beginning of wage inflation. As wages inflate up, this will give margin for rental rates to equally elevate up. This will without doubt 100% happen on National level when talking the next 36-48 months. 100% certainty.
So to say rental rates will sit flat for coming YEARS, is a very ignorant statement, acting in total tunnel vision of any/all factors at play.
For example; Say housing DOES drop a significant degree via some huge recession. That makes MORE renters and in that higher rents via demand/supply curve. Say there is NO recession, this is only possible via a STRONG economy AND a strong economy has liquidity and pressure forcing WAGE INFLATION, and with more income rents equally elevate given ascending affordability.
All roads lead to HIGHER rental rates over the 36-48mnth vision. The only thing that changes is underlying catalyst and support matrix.
This is all possible via the front-loading of this economic cycle of significant net unit shortage and low production volume in relation to such. Short of waving a wand to either create 3 million units from thin air, or eliminate 12-odd-million people over-night, there is no "release" of this pressure.
Welcome to the new-norm. Everything is pricing up AND keep in mind many analysts are saying the general public has to get ready to accept as much as 85% of income going directly to cost of living expenses. Food, shelter, and the necessities of life.
There is a reason they say a Renter Nation.
As for a 4-5 cap, DON'T buy a 4-5 cap, that's foolish in any market cycle UNLESS it's a value-add play or something with strong appreciation via forced equity like path-of-progress investing etc..
So my question to you is this. Lets define what is known variable first:
- Q1 2023 we will have the highest FFR - Q2 2023 FFR is following Q1 2023 FFR - Q4 2023, inflation is hopefully going to be 5%, this is per Fed data/analysis - rent growth is reducing now but at some point it will be flat and rebound.
Question: - it seems buying in Q1 or Q2 2023 could be fantastic opportunity to buy real estate - what I do not understand is, at which cycle approx. rent is going to increase
I have more data now that at which CRE project is going to collapse (DSCR < 1.0), makes me wonder, what's the trajectory of rental growth if some sector within CRE collapsing.
Situation in US right now, MF cap rate is 5%, while lodging is 8% ; residential is between 5-7%. Lodging and Airbnb makes sense now :P haha
I agree with your plan and I actually going to that route as well, reason is becoz index and bond is way way way too cheap right now so it has room to expand. Real estate not so much, but it wouldnt crash either too.
A 10% return in REI is much better than a 20% return in the Stock Market. Using percentages to make decisions regarding REI is at best misleading,...and most likely a lie
I agree with your plan and I actually going to that route as well, reason is becoz index and bond is way way way too cheap right now so it has room to expand. Real estate not so much, but it wouldnt crash either too.
A 10% return in REI is much better than a 20% return in the Stock Market. Using percentages to make decisions regarding REI is at best misleading,...and most likely a lie
that I agree to certain points.....
What points are uncertain?
1. the repair cost dude........The hidden untangible cost that kept coming at me LOL LOL,
also another thing: 2. when rental price goes down, I can not hedge it. With portfolio of investment I can hedge it so I am not losing money LOL
That's a great return! But if you want to make even more money, consider investing in other index funds, stocks or ETFs that have higher growth potential. You might be able to find some stocks with consistent annual returns of 20-30% over the past 5 years - far above the historical averages for the S&P 500! Don't be afraid to take calculated risks - that's the key to success in the stock market. Be sure to do your own research and talk to a financial advisor if you need help determining the right investments for you. Good luck!
The problem with direct RE investment for the next 5 year is the following.
How do you make money when inflation is 4-5-6%; cap-rate is 4-5%; 30YFRM is 5-6%. This is a market that's very stuck or at best would have slow growth/flatline for quite some time. I even talked to CRE broker and they shared the same sentiment. Rent growth is practically null for few years and they expect the cap rate to stabilize, so something has to give in, either the interest rate going down, or the cap rate moves slightly higher (fall in price --but I hope it doesn't happen LOL).
If in 2025, the inflation goes back to the 2-3% range, then it started making sense to leverage in RE.
This is where index investment becomes more interesting as valuation is cheap and the economy is diversified enough. I can't get the awesomeness of oil investment when I purchase RE.
Rental rates are absolutely NOT going to sit flat for the next few years, that is a very INCORRECT take on rental rates.
At this exact moment, feeling the inflation "squeeze" it is a knee-jerk reaction to say "how can people afford to pay more?". That is a statement of TIME, not of condition. At this exact moment in time, this is true in many places, yet in MANY places rental rates are still on a rocket-ship up. It is very market specific at this exact moment in time.
BUT...... oh the "but's".
As WAGE INFLATION happens, which YES it is happening right NOW, this is the beginning of wage inflation. As wages inflate up, this will give margin for rental rates to equally elevate up. This will without doubt 100% happen on National level when talking the next 36-48 months. 100% certainty.
So to say rental rates will sit flat for coming YEARS, is a very ignorant statement, acting in total tunnel vision of any/all factors at play.
For example; Say housing DOES drop a significant degree via some huge recession. That makes MORE renters and in that higher rents via demand/supply curve. Say there is NO recession, this is only possible via a STRONG economy AND a strong economy has liquidity and pressure forcing WAGE INFLATION, and with more income rents equally elevate given ascending affordability.
All roads lead to HIGHER rental rates over the 36-48mnth vision. The only thing that changes is underlying catalyst and support matrix.
This is all possible via the front-loading of this economic cycle of significant net unit shortage and low production volume in relation to such. Short of waving a wand to either create 3 million units from thin air, or eliminate 12-odd-million people over-night, there is no "release" of this pressure.
Welcome to the new-norm. Everything is pricing up AND keep in mind many analysts are saying the general public has to get ready to accept as much as 85% of income going directly to cost of living expenses. Food, shelter, and the necessities of life.
There is a reason they say a Renter Nation.
As for a 4-5 cap, DON'T buy a 4-5 cap, that's foolish in any market cycle UNLESS it's a value-add play or something with strong appreciation via forced equity like path-of-progress investing etc..
So my question to you is this. Lets define what is known variable first:
- Q1 2023 we will have the highest FFR - Q2 2023 FFR is following Q1 2023 FFR - Q4 2023, inflation is hopefully going to be 5%, this is per Fed data/analysis - rent growth is reducing now but at some point it will be flat and rebound.
Question: - it seems buying in Q1 or Q2 2023 could be fantastic opportunity to buy real estate - what I do not understand is, at which cycle approx. rent is going to increase
I have more data now that at which CRE project is going to collapse (DSCR < 1.0), makes me wonder, what's the trajectory of rental growth if some sector within CRE collapsing.
Situation in US right now, MF cap rate is 5%, while lodging is 8% ; residential is between 5-7%. Lodging and Airbnb makes sense now :P haha
So, generally speaking Carlos we have in major part been seeing eye-2-eye in a lot of this and also, the market movements have been a lot faster then what we both forecasted.
I believe this "fast-track" may continue.
I think it's very possible that in Q1 '23' we see BOTH a bottoming out for inflation, AND the substantial set-in start of wage inflation. This would set a stage for Q2 '23' having significant wage inflation, much hotter economy then forecasted and in that, what Fed would like. Which over Q1 Fed probably stepped back in QT indicating all was working so let off too point of 25 bp increase and then 0. BUT with a HOT Q2 Fed stomps back on that QT launching 75bp or even, in extreme situation, 100 or 125 increase.
BUT, that Fed reaction is just that, RE-active not PRO-active. So inflation already happened, it hit, wage inflation hit, and so will follow next wave of CPI inflation etc., and with that rent's.
This set's the stage of a Q3 that steps back again, more fear and panic as emotional knee-jerk reactions, a Q4 that is made softer, and THUS a yo-yo cycle is born of binge-purge inflation realization.
At some point Fed is going to have to accept reality of the NEW CP basis, and just let-go and let things level. I see this as an eventuality, probably setting rates somewhere in the 6 neighborhood, which is a good base level, it is, those who know economics and finance know 6 is a "good norm" of things. And let things was out to maybe finally find some stability and less roller-coaster economic actions.
But make no doubt, this is a 2 steps up, 1 down, 3 up, 2 down, type of thing.
So far as timing acquisition, it's a fools errand, just a sit always has been. To "wait" for "best time to buy" will again be a regret because as has stood true for decades upon decades, the "best" time to buy was YESTERDAY. So people should STOP trying to time things for a "bottom" and just follow sound analysis, do what makes sense, walk from what doesn't. It's just that simple. AND find the opportunities in the market of the moment.
I have said this before, I am doing amazing deals TODAY, I did amazing deals last week, month, quarter, year, years..... The ONLY thing that changes is WHAT and HOW. WHAT's a good deal in THIS economic time, HOW do I dig those up and HOW I monetize them. I NEVER walk off the field, step up in the stands and plunk down on a seat playing the Eeyore game of crying how everything sucks so I'm just gonna sit and let the world pass by until it's absolutely perfect in the 1 simple way I want it to be....... That's a SPECTATOR, I am NOT a spectator, I MAKE goals, goals win games but they don't do it themself, a person must get out and play the field and take shots!
You miss 100% of the shots you DON'T take!
Failure, like success, is the RESULT of a choice. The choice to DO, or not-do, there is no try.
I agree with your plan and I actually going to that route as well, reason is becoz index and bond is way way way too cheap right now so it has room to expand. Real estate not so much, but it wouldnt crash either too.
A 10% return in REI is much better than a 20% return in the Stock Market. Using percentages to make decisions regarding REI is at best misleading,...and most likely a lie
that I agree to certain points.....
What points are uncertain?
1. the repair cost dude........The hidden untangible cost that kept coming at me LOL LOL,
also another thing: 2. when rental price goes down, I can not hedge it. With portfolio of investment I can hedge it so I am not losing money LOL
1 - Repair costs are minor items compared to the gains from appreciation and added cash flow when you move the equity forward...before big repair costs hit. 2 - Why would rental prices go down? If you have a lease, the rents stay the same.
If you start with the same amount of cash, and you invest in either the stock market of RE, you are automatically ahead with RE at that start.
I agree with your plan and I actually going to that route as well, reason is becoz index and bond is way way way too cheap right now so it has room to expand. Real estate not so much, but it wouldnt crash either too.
A 10% return in REI is much better than a 20% return in the Stock Market. Using percentages to make decisions regarding REI is at best misleading,...and most likely a lie
that I agree to certain points.....
What points are uncertain?
1. the repair cost dude........The hidden untangible cost that kept coming at me LOL LOL,
also another thing: 2. when rental price goes down, I can not hedge it. With portfolio of investment I can hedge it so I am not losing money LOL
How do you "hedge" declines in stock investing? Your saying playing options?
Yeah, Options investing is the #1 way to LOOSE money! Not my opinion, this is historical data and well known fact. It's is the #1 most volatile, dangerous, AND the #1 way the MOST amount of investment capital has ever been lost, ever, bar-none.
And what is this talk of rents going down? Down by what? Down why?
The only way a person reaps any substantial DECLINE of rents is via DECLINE of the property itself, better known as "slum-lording". OR, one used a unrealistic rental rate basis in first place. THAT is not a decline of rents, it's a return to Normalized rents vs the before OVER-market rents achieved.
It is completely unrealistic to paint a future where all consumer goods go UP by 20%, home prices go up, food up, everything UP but by some magic rents go DOWN. Put some math to this please, to show a justification.
I have had exactly 0% of properties with declining rents, and were talking a VERY big pool of properties. Yes, I have seen some rental RATES go down, from insanity levels that were not realistic or sustainable too a realistic point, but keep in mind these levels are still double digit increases vs 24/36 months ago. So it's only 22% more vs 32%, I DON'T call that a decrease, less increase is still increase.
And again, difference between rental RATES and REALIZED rents, there is a big difference between the two. All my REALIZED rents are still amazing.
If looking at a, for example, LA place and saying can only get $3,200 now vs $4,200 18 months ago, I have to ask how real was that $4,200 ever? And what was it 18 months before that? $2,400? yeah. Sorry but expecting 12+cap via MLS, with 0 inputs, it's so very unrealistic.
This goes to the conditioning, the market of last few years was INSANELY easy, this is now more normalized. Which is classical consolidation. We are in a market/industry consolidation. Yes, those of poor operational capacity will get "washed-out" and that's a good thing, it's a cleansing thing.
....when you move the equity forward...before big repair costs hit.
3-5-7 plan! I wonder more recently if I need to put together a pamphlet on this because I am shocked how many don't pay attention or engage in this. At least novices, every "pro" client does this as key fundamental to there strategy.
@Marek Kucharski You original concept was flawed, so the comparison is not relevant. Stick with RE if you can handle it...if your area doesn't CF enough, buy somewhere else...
....when you move the equity forward...before big repair costs hit.
3-5-7 plan! I wonder more recently if I need to put together a pamphlet on this because I am shocked how many don't pay attention or engage in this. At least novices, every "pro" client does this as key fundamental to there strategy.
....when you move the equity forward...before big repair costs hit.
3-5-7 plan! I wonder more recently if I need to put together a pamphlet on this because I am shocked how many don't pay attention or engage in this. At least novices, every "pro" client does this as key fundamental to there strategy.
My wife and I have three houses that we rent out. This journey started about 10 years ago. We have 15-year mortgages on these. The houses are worth about $800K (TX). We are very happy with how these houses appreciated; we put very little money down and were rewarded handsomely. Of course, this was no bed of roses: we put a lot of work into these - roof leaks, flooded floors, painting, clogged toilets, annoying tenants - you name it.
Today, we are contemplating selling one house and putting the profits into SP500. What makes us contemplate this is some back testing. For example: - The first house was purchased in 2013 for $145K. That house is now worth $280K. - If I was to invest $145K in SP500 in 2013, I would have about $500K
I know that the past is not the prologue, but I also know that historically housing trails the SP500. That said, in 2013, we were fresh out of grad school and did not have $145K to invest in the market. So, buying a house with 5% down was the only option. Today, we could sell one house or more and invest a larger sum for the long haul.
We have tenants moving out in the spring and we are considering selling. The house in question happens to be a house we lived in recently and we could sell it and not pay taxes on the sale. Do you think we should pull the trigger and put the money into the market? Thank you for your advice.
Relevant details:
- Household income about $250K, which means that we cannot deduct rental losses
- All houses have 15-year mortgages , which means that they do not cash flow well. We are either in the red or breaking even depending on luck in a given your. Tenants are paying off our mortgage.
- We could also sell, invest the money, and buy another rental (re-leverage)
You're initial assumptions are way off (math), and just gets worse from there.
Assumption #1 = "If I was to invest $145K in SP500 in 2013, I would have about $500K" Fact #1 = If you invested $145k in RE in 2013, it would be worth $725k in 2013.
Assumption #2 - "All houses have 15-year mortgages , which means that they do not cash flow well" Fact #2 - The poor cash flow was more likely due to the 15 years mortgage than anything else. Why would you do a 15 year mortgage when you could have gone with a 30 year mortgage, with a lower monthly payment? You said yourself, "...Tenants are paying off our mortgage".
....when you move the equity forward...before big repair costs hit.
3-5-7 plan! I wonder more recently if I need to put together a pamphlet on this because I am shocked how many don't pay attention or engage in this. At least novices, every "pro" client does this as key fundamental to there strategy.
Nope...the 1073741824 Rule.
Just bragging up your net worth now? Lol.
LOL, no. Only my accountant and God knows my net worth, and once a year God only gets a copy of the summary sheet.
That number sequence represents what every decision you make in REI must be based on.
Why not sell one and reinvest it in another property worth 5 times what you pay for it. With 15 year mortgages and holding for 10 years, you have probably lost more money than you could ever gain in SP500
@Marek Kucharski - The major advantage to real estate is low-cost leverage. I'm not a stock guy, but good luck buying stock for 20-cents on the dollar. Your current house is NOT cash flowing, and that is a get-out situation, particularly since you cannot deduct the losses! Consider selling this asset to get out of a tough situation, take advantage of your cap-gains exemption, and re-invest, again for 20-cents on the dollar.
My wife and I have three houses that we rent out. This journey started about 10 years ago. We have 15-year mortgages on these. The houses are worth about $800K (TX). We are very happy with how these houses appreciated; we put very little money down and were rewarded handsomely. Of course, this was no bed of roses: we put a lot of work into these - roof leaks, flooded floors, painting, clogged toilets, annoying tenants - you name it.
Today, we are contemplating selling one house and putting the profits into SP500. What makes us contemplate this is some back testing. For example: - The first house was purchased in 2013 for $145K. That house is now worth $280K. - If I was to invest $145K in SP500 in 2013, I would have about $500K
I know that the past is not the prologue, but I also know that historically housing trails the SP500. That said, in 2013, we were fresh out of grad school and did not have $145K to invest in the market. So, buying a house with 5% down was the only option. Today, we could sell one house or more and invest a larger sum for the long haul.
We have tenants moving out in the spring and we are considering selling. The house in question happens to be a house we lived in recently and we could sell it and not pay taxes on the sale. Do you think we should pull the trigger and put the money into the market? Thank you for your advice.
Relevant details:
- Household income about $250K, which means that we cannot deduct rental losses
- All houses have 15-year mortgages , which means that they do not cash flow well. We are either in the red or breaking even depending on luck in a given your. Tenants are paying off our mortgage.
- We could also sell, invest the money, and buy another rental (re-leverage)
You're initial assumptions are way off (math), and just gets worse from there.
Assumption #1 = "If I was to invest $145K in SP500 in 2013, I would have about $500K" Fact #1 = If you invested $145k in RE in 2013, it would be worth $725k in 2013.
Assumption #2 - "All houses have 15-year mortgages , which means that they do not cash flow well" Fact #2 - The poor cash flow was more likely due to the 15 years mortgage than anything else. Why would you do a 15 year mortgage when you could have gone with a 30 year mortgage, with a lower monthly payment? You said yourself, "...Tenants are paying off our mortgage".
Perhaps I did not phrase things clearly enough. I am fully aware of the fact that I did not have $145K in 2013 and I know that in 2013 RE was the correct choice. No question about that. But the point is that now I would have a larger amount to invest if I sold the house.
As for the 15-year mortgage, this was a conscious choice as I wanted $ to go to principal. If I count the principal being paid-off, perhaps the cashflow is not that bad. With a 30-year mortgage, I would be paying off interest in the first decade or so.
Lastly, some of you suggested that I purchase another property. (This is what my wife prefers.) It seems to me that with, now, much higher rates, making the math work is MUCH more difficult. Am I wrong on this?
If you are CF negative then you are speculating the price of the home will keep going up to make your profit or at least the next 5yrs. The other problem is how much money you are putting in for payments, and expenses. Over the last 15yrs it will probably take you a couple of years once the house is paid off to make up for those losses.
If you can sell and not pay any taxes, you lived in the house 2 of the last 5 years it maybe a good option to sell. In terms of reinvesting the money this whole year has been a risk-off environment. I would sit on the money at least over the next 6months before making a decision. Housing transactions are crashing and home prices have been falling since May. Stocks your looking at projections of S&P at 3,000-3,400. The bond market is projecting the FED pivot but if you look over history after the pivot assets fall in value.
Long story short if you can get your money out of the house there will be some big opportunities over the next year or 2. Be patient and make sure this time you invest for CF. If you buy stocks buy companies that pay solid dividends.
