Success Rate in Real Estate...Shockingly Low
Real Estate Professional · Atlanta GA · Member since 2015 · 615 posts · 225 votes
Success Rate in Real Estate...Shockingly Low
Most Popular Reply
NH · Member since 2016 · 56 posts · 73 votes
3yGood real estate investing should be boring. You're not constantly dealing with problem tenants, talking about high COC returns, doing stupidly risky and time consuming flips, etc.
Buy in a good area, make sure it cash flows, put solid tenants in there, then sit and wait for 10+ years.
Sadly I think people overcomplicate or over glamorize real estate investing. Any time I see those or hear those folks, I assume they'll be one of the ones who fail.
I learned this lesson after chasing high COC returns in Akron OH. I got burnt, but I learned and pivoted at a young age. Now I buy locally in good areas, and I've seen my net worth go from 200k -> 1mil in a few years by the time I hit 30, w/ a portfolio of 8 solid cash flowing units. I just wish I listened to the successful real estate investors sooner, and didn't chase solely cash flow right out of the gate.
203 Replies
- 3yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
Several of mine I’ve held for over a year have an 80-120% return on my down-payments when you factor in 5% appreciation, principal pay down and monthly cash flow combined. The example I used on a recent purchase this year is 126%. I’m not saying RE is easy. All I’m trying to point out is that it builds wealth quickly with leverage and patience to wait 3-5 years. That’s when I pull equity out of some of mine to scale up with no out of pocket money. It’s a strategy a lot of us use. I’ve bought 12 rentals with zero out of pocket cash by doing this with cash out refis.
Quote from @John Morgan:
25 year commercial loan with 5 years fixed. I only had to put 10% down and the lender threw in 20k for the rehab on top of the loan. So I was only out of pocket 25k which included closing costs. And my rehab went under budget at 14k.
I just text handymen to go fix things when they break, so self managing is easy and doesn’t take much time at all. Plus it saves me about 30-35k/year in PM fees.And I just signed a contract to buy two rentals in Arkansas that have sec 8 tenants in place today for only 25k per house. They were in really good condition too! With clean long term tenants. So there are still good cash flowing deals out there in 2023! I’ve bought 4 houses this year and can’t complain!
Do you mea a 203k loan?
- I have done a couple cash out refi's before but at a high investor interest rate. What rate are you getting?
Quote from @John Morgan:
Several of mine I’ve held for over a year have an 80-120% return on my down-payments when you factor in 5% appreciation, principal pay down and monthly cash flow combined. The example I used on a recent purchase this year is 126%. I’m not saying RE is easy. All I’m trying to point out is that it builds wealth quickly with leverage and patience to wait 3-5 years. That’s when I pull equity out of some of mine to scale up with no out of pocket money. It’s a strategy a lot of us use. I’ve bought 12 rentals with zero out of pocket cash by doing this with cash out refis.
- 3yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votesNo, commercial loan. 25 year am with 5 years fixed.
Quote from @K S.:
Quote from @John Morgan:
25 year commercial loan with 5 years fixed. I only had to put 10% down and the lender threw in 20k for the rehab on top of the loan. So I was only out of pocket 25k which included closing costs. And my rehab went under budget at 14k.
I just text handymen to go fix things when they break, so self managing is easy and doesn’t take much time at all. Plus it saves me about 30-35k/year in PM fees.And I just signed a contract to buy two rentals in Arkansas that have sec 8 tenants in place today for only 25k per house. They were in really good condition too! With clean long term tenants. So there are still good cash flowing deals out there in 2023! I’ve bought 4 houses this year and can’t complain!
Do you mea a 203k loan?
And the last two cash out refis I’ve done were 12 months ago and were commercial loans as well. My rates were 6.5% and 6.75-%. Quote from @John Morgan:
Several of mine I’ve held for over a year have an 80-120% return on my down-payments when you factor in 5% appreciation, principal pay down and monthly cash flow combined. The example I used on a recent purchase this year is 126%. I’m not saying RE is easy. All I’m trying to point out is that it builds wealth quickly with leverage and patience to wait 3-5 years. That’s when I pull equity out of some of mine to scale up with no out of pocket money. It’s a strategy a lot of us use. I’ve bought 12 rentals with zero out of pocket cash by doing this with cash out refis.
"How many legs does a dog have if you call his tail a leg? Four. Saying that a tail is a leg doesn't make it a leg."
Abraham Lincoln
And what I and others are saying, is, "That's not your return". Returns are calculated off cash generated by the asset, not paper gains.
Additionally the strategy you've employed has inherent risks associated with it that you seem to ignore because the massive appreciation and rent growth you area has seen have mostly mitigated mitigated those risks.
Having high LTV portfolio where you take all your equity and use that to get more levered assets is risky. It is the reason you've seen such good returns even once you correct for the funky math.
That's not a value judgement about your strategy, it has clearly worked for you and that's great, but it is a statement of facts that we all should agree on.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Bill F.:
Quote from @John Morgan:
Several of mine I’ve held for over a year have an 80-120% return on my down-payments when you factor in 5% appreciation, principal pay down and monthly cash flow combined. The example I used on a recent purchase this year is 126%. I’m not saying RE is easy. All I’m trying to point out is that it builds wealth quickly with leverage and patience to wait 3-5 years. That’s when I pull equity out of some of mine to scale up with no out of pocket money. It’s a strategy a lot of us use. I’ve bought 12 rentals with zero out of pocket cash by doing this with cash out refis.
"How many legs does a dog have if you call his tail a leg? Four. Saying that a tail is a leg doesn't make it a leg."
Abraham Lincoln
And what I and others are saying, is, "That's not your return". Returns are calculated off cash generated by the asset, not paper gains.
Additionally the strategy you've employed has inherent risks associated with it that you seem to ignore because the massive appreciation and rent growth you area has seen have mostly mitigated mitigated those risks.
Having high LTV portfolio where you take all your equity and use that to get more levered assets is risky. It is the reason you've seen such good returns even once you correct for the funky math.
That's not a value judgement about your strategy, it has clearly worked for you and that's great, but it is a statement of facts that we all should agree on.
A gain (profit) being a realized gain (cash) or unrealized (paper) does not change that it IS a gain, same for a loss. And one SHOULD calculate such to have an accurate analysis and vision of the full picture of performance.
And this applies for both a gain and loss, realized and unrealized.
I find most don't track or calculate unrealized gain/loss simply from difficulty in accurately pegging such, and the nature that such can fluctuate in certain manners. Although without doubt, debt pay-down via tenant payments is, 100%, a gain. Equity accrual is a gain. It's an unrealized gain.
As for leverage, 100% agree. Things look to be working out here for John, and I would argue a big factor to that is John, not a luck of the draw in the market. And as a STRONG word of caution to all, using leverage at such ratio's can very easily have vastly different impact's, including hugely negative one's.
Leverage is just that, an amplification. Meaning, it can amplify negative event's as well. Options investing on W.S. is the same thing, leverage investing. And it's well documented on W.S. that options trading is the #1 profit tool AND #1 loss tool. High leverage is NOT a toy to be ignorantly played with.
- Real Estate Agent · WA · Member since 2021 · 254 posts · 173 votes3y
Over what timeline?
Anyone who bought and held a house 50 years ago is smiling. But then again, the hundreds of cycles in between then have brought a lot of tears.
- 3yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votesInvesting in real estate is a risk. Investing in the stock market or other equities is a risk. If people aren’t willing to take a risk then they should park their $ in a savings account or hide it under a mattress. I’m willing to take a risk in RE and it has paid off. I have 2.2 million in good debt with mortgages on my rentals which some people think is a huge risk. The value of my properties is about 4.8 million. Could rents go down? Yes. Could the values of my houses go down for a few years in bad economic times? Yes. I’m willing to take that risk and ride it out. I could afford to drop rents 40% on all my properties and be ok. I can’t think of a time in history where people had to drop rent more than 20 or 30% due to demand, but I’m prepared to do it if necessary. Again, RE is a risk and I’m willing to take a little risk with leverage to gain financial freedom from my W2. My wife was able to retire 17 years early due to our RE cash flow so that has been a plus for us. I could probably afford to retire now due to our RE cashflow too, but I love my job.
Quote from @Bill F.:
Quote from @John Morgan:
Several of mine I’ve held for over a year have an 80-120% return on my down-payments when you factor in 5% appreciation, principal pay down and monthly cash flow combined. The example I used on a recent purchase this year is 126%. I’m not saying RE is easy. All I’m trying to point out is that it builds wealth quickly with leverage and patience to wait 3-5 years. That’s when I pull equity out of some of mine to scale up with no out of pocket money. It’s a strategy a lot of us use. I’ve bought 12 rentals with zero out of pocket cash by doing this with cash out refis.
"How many legs does a dog have if you call his tail a leg? Four. Saying that a tail is a leg doesn't make it a leg."
Abraham Lincoln
And what I and others are saying, is, "That's not your return". Returns are calculated off cash generated by the asset, not paper gains.
Additionally the strategy you've employed has inherent risks associated with it that you seem to ignore because the massive appreciation and rent growth you area has seen have mostly mitigated mitigated those risks.
Having high LTV portfolio where you take all your equity and use that to get more levered assets is risky. It is the reason you've seen such good returns even once you correct for the funky math.
That's not a value judgement about your strategy, it has clearly worked for you and that's great, but it is a statement of facts that we all should agree on.
You say my gains are only paper gains. I disagree and have harvested the equity by acquiring more cash flowing properties that will appreciate nicely over the next 5-10 years. For example, I bought a property for 57k cash (from money I got from a 401k loan and HELOC). A year or so later I sold it and did a 1031 exchange to by a SFR. Then pulled out the equity from it a few years later (133k after closing fees from a cash out refi) to buy 3 more cash flowing rentals. So all in all, I ended up with 4 houses that give me a net cash flow of $3300/month after all my expenses. I used that cash flow to pay back my original 401k loan and HELOC so it’s infinite cash flow from here on out. You and Abraham Lincoln say “That’s not your return.Returns are calculated off cash generated by the asset, not paper gains.” Well this $3300/month is generated off my assets. This isn’t paper gains like you assume i have. And this doesn’t include the equity I have in these 4 properties I basically got for 57k out of pocket. 500k+ in equity I have in these 4 houses now due to appreciation. Or the principal pay down my tenants are paying off each month with their rent. Or the 5% appreciation I’m getting off these every year which is approximately 60k/year since they’re all 4 worth about 1.2 mil combined. Am I feeling that 60k appreciation right this second? No. But in a few years when I do another cash out refi to tap into that equity on another cash out refi to buy more cash flowing properties, I’ll feel it. Math doesn’t lie with real estate. And in 10-20 years I’m betting real estate prices and rent will be up nicely. But I could be wrong. But I’m willing to take a risk on it with leverage vs parking my cash under a mattress or savings account earning only 4% a year. I can give you several other examples where I’ve pulled out equity on a rental to buy more cash flowing properties. I did one just a year ago as well. I pulled out 168k from one and bought 3 more cash flowing properties. So my net cash flow went from only $1,100/month on a paid off property to $3300/month, a gain of an extra $2200/month for me. You say “That’s not my return” but I disagree. I picked up 3 more houses for free with zero out of pocket cash and receive an extra $2200/month by recycling that equity. I feel like that’s a pretty good return off my assets. Quote from @James Hamling:
Quote from @Bill F.:
Quote from @John Morgan:
Several of mine I’ve held for over a year have an 80-120% return on my down-payments when you factor in 5% appreciation, principal pay down and monthly cash flow combined. The example I used on a recent purchase this year is 126%. I’m not saying RE is easy. All I’m trying to point out is that it builds wealth quickly with leverage and patience to wait 3-5 years. That’s when I pull equity out of some of mine to scale up with no out of pocket money. It’s a strategy a lot of us use. I’ve bought 12 rentals with zero out of pocket cash by doing this with cash out refis.
"How many legs does a dog have if you call his tail a leg? Four. Saying that a tail is a leg doesn't make it a leg."
Abraham Lincoln
And what I and others are saying, is, "That's not your return". Returns are calculated off cash generated by the asset, not paper gains.
Additionally the strategy you've employed has inherent risks associated with it that you seem to ignore because the massive appreciation and rent growth you area has seen have mostly mitigated mitigated those risks.
Having high LTV portfolio where you take all your equity and use that to get more levered assets is risky. It is the reason you've seen such good returns even once you correct for the funky math.
That's not a value judgement about your strategy, it has clearly worked for you and that's great, but it is a statement of facts that we all should agree on.
A gain (profit) being a realized gain (cash) or unrealized (paper) does not change that it IS a gain, same for a loss. And one SHOULD calculate such to have an accurate analysis and vision of the full picture of performance.
And this applies for both a gain and loss, realized and unrealized.
I find most don't track or calculate unrealized gain/loss simply from difficulty in accurately pegging such, and the nature that such can fluctuate in certain manners. Although without doubt, debt pay-down via tenant payments is, 100%, a gain. Equity accrual is a gain. It's an unrealized gain.
As for leverage, 100% agree. Things look to be working out here for John, and I would argue a big factor to that is John, not a luck of the draw in the market. And as a STRONG word of caution to all, using leverage at such ratio's can very easily have vastly different impact's, including hugely negative one's.
Leverage is just that, an amplification. Meaning, it can amplify negative event's as well. Options investing on W.S. is the same thing, leverage investing. And it's well documented on W.S. that options trading is the #1 profit tool AND #1 loss tool. High leverage is NOT a toy to be ignorantly played with.
I only calculate realized gains in my returns because at the end of the day we all need it. I took a year off work and lived off my real estate income in 2019 so my risk is low. You can't do that with paper gains i.e. appreciation or principal pay down.
But 33% although a lot, is really $700 bucks. John traded safety for net wealth via leverage which is the way to go for pure net wealth building. But I bought a few homes with cash in my 20s because I hated mortgages and although my net wealth is less, I took a year off work and lived off the cash. I certainly prefer Johns method but I would prefer to put much more down, avoid PMI and hire a property manager. Even at break even, you're building net wealth faster than the seldom cash buyer. And I believe that is what a remote buyer would be able to do in this scenario. In fact, they show you an example of leverage vs cash buyers in the book "HOLD" which I suggest anyone starting out to read.
One risk factor is squeezing the $2500 out of tenants probably because the government will pay it but I heard too many horror stories in a Section 8 book to want to go there.- Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes3yThis is a good point. The definition of a real estate investor is pretty loose. Just owning a home might not make you a real estate investor, but it's the way to go for long term wealth. And if someone collects two or three rentals over the course of 20 years, well, that's not what I think of as a "real estate investor" but it should set them up for a comfy retirement and that's at least a good amount of "success"
Quote from @Ran Iarovich:
Over what timeline?
Anyone who bought and held a house 50 years ago is smiling. But then again, the hundreds of cycles in between then have brought a lot of tears.
- Real Estate Professional · Atlanta GA · Member since 2015 · 615 posts · 225 votes3y
Quote from @Ran Iarovich:
Over what timeline?
Anyone who bought and held a house 50 years ago is smiling. But then again, the hundreds of cycles in between then have brought a lot of tears.
Point well taken. But for those of us still standing that says a lot.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @K S.:
Quote from @James Hamling:
Quote from @Bill F.:
Quote from @John Morgan:
Several of mine I’ve held for over a year have an 80-120% return on my down-payments when you factor in 5% appreciation, principal pay down and monthly cash flow combined. The example I used on a recent purchase this year is 126%. I’m not saying RE is easy. All I’m trying to point out is that it builds wealth quickly with leverage and patience to wait 3-5 years. That’s when I pull equity out of some of mine to scale up with no out of pocket money. It’s a strategy a lot of us use. I’ve bought 12 rentals with zero out of pocket cash by doing this with cash out refis.
"How many legs does a dog have if you call his tail a leg? Four. Saying that a tail is a leg doesn't make it a leg."
Abraham Lincoln
And what I and others are saying, is, "That's not your return". Returns are calculated off cash generated by the asset, not paper gains.
Additionally the strategy you've employed has inherent risks associated with it that you seem to ignore because the massive appreciation and rent growth you area has seen have mostly mitigated mitigated those risks.
Having high LTV portfolio where you take all your equity and use that to get more levered assets is risky. It is the reason you've seen such good returns even once you correct for the funky math.
That's not a value judgement about your strategy, it has clearly worked for you and that's great, but it is a statement of facts that we all should agree on.
A gain (profit) being a realized gain (cash) or unrealized (paper) does not change that it IS a gain, same for a loss. And one SHOULD calculate such to have an accurate analysis and vision of the full picture of performance.
And this applies for both a gain and loss, realized and unrealized.
I find most don't track or calculate unrealized gain/loss simply from difficulty in accurately pegging such, and the nature that such can fluctuate in certain manners. Although without doubt, debt pay-down via tenant payments is, 100%, a gain. Equity accrual is a gain. It's an unrealized gain.
As for leverage, 100% agree. Things look to be working out here for John, and I would argue a big factor to that is John, not a luck of the draw in the market. And as a STRONG word of caution to all, using leverage at such ratio's can very easily have vastly different impact's, including hugely negative one's.
Leverage is just that, an amplification. Meaning, it can amplify negative event's as well. Options investing on W.S. is the same thing, leverage investing. And it's well documented on W.S. that options trading is the #1 profit tool AND #1 loss tool. High leverage is NOT a toy to be ignorantly played with.
I only calculate realized gains in my returns because at the end of the day we all need it. I took a year off work and lived off my real estate income in 2019 so my risk is low. You can't do that with paper gains i.e. appreciation or principal pay down.
But 33% although a lot, is really $700 bucks. John traded safety for net wealth via leverage which is the way to go for pure net wealth building. But I bought a few homes with cash in my 20s because I hated mortgages and although my net wealth is less, I took a year off work and lived off the cash. I certainly prefer Johns method but I would prefer to put much more down, avoid PMI and hire a property manager. Even at break even, you're building net wealth faster than the seldom cash buyer. And I believe that is what a remote buyer would be able to do in this scenario. In fact, they show you an example of leverage vs cash buyers in the book "HOLD" which I suggest anyone starting out to read.
One risk factor is squeezing the $2500 out of tenants probably because the government will pay it but I heard too many horror stories in a Section 8 book to want to go there.The way I understand it from John's post's is that he has been utilizing a 3-pt action Strategy:
1) Acquiring vi a Modified-Flip Strategy; Property that's needs work thus creating "discount" potential, and using finance that is designed to encompass such. Than, does the improvements, thus building equity, and there in creating that margin in property alleviating leverage pt. So acquiring at 90% leverage is not necessarily post-reno 90% leverage. After that equity creating it may be 70/60% leverage. We don't know as John has not shared this data.
2) Sec8 Landlording. As i share with people; my best tenants ever were all sec8, and my worst tenant's ever were all sec8. It's a world it's own, and yes the bad's can be epically bad, but make no mistake it's also a wildly profitable segment of REI for those who have figured it out and built the right system for it. Near 0% vacancy rates can be the norm, as in vacancy rate calculations sub 1%. And much higher cash-flow rates are the norm. Again, many caveat's to properly operate, a poor operator will be destroyed, but a good one can be wildly rewarded.
3) Tapping unrealized gains, to realize them, to redeploy into providing additional income producing results, better known as "Pyramiding". As I share/instruct with my client's this is where there life changes, once they hit point to start Pyramiding, it's the ultimate compound returns metric. And where a person learns those "paper returns" are of uber importance, because they just bought one another property.
This is my understanding of John's experience and strategy.
- 3yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votesI just crunched numbers on 3 examples of what some of you are saying “paper gains” don’t mean much. I tap into that equity which got there from appreciation and principal pay down most of you don’t seem to care about.
Quote from @James Hamling:
Quote from @K S.:
Quote from @James Hamling:
Quote from @Bill F.:
Quote from @John Morgan:
Several of mine I’ve held for over a year have an 80-120% return on my down-payments when you factor in 5% appreciation, principal pay down and monthly cash flow combined. The example I used on a recent purchase this year is 126%. I’m not saying RE is easy. All I’m trying to point out is that it builds wealth quickly with leverage and patience to wait 3-5 years. That’s when I pull equity out of some of mine to scale up with no out of pocket money. It’s a strategy a lot of us use. I’ve bought 12 rentals with zero out of pocket cash by doing this with cash out refis.
"How many legs does a dog have if you call his tail a leg? Four. Saying that a tail is a leg doesn't make it a leg."
Abraham Lincoln
And what I and others are saying, is, "That's not your return". Returns are calculated off cash generated by the asset, not paper gains.
Additionally the strategy you've employed has inherent risks associated with it that you seem to ignore because the massive appreciation and rent growth you area has seen have mostly mitigated mitigated those risks.
Having high LTV portfolio where you take all your equity and use that to get more levered assets is risky. It is the reason you've seen such good returns even once you correct for the funky math.
That's not a value judgement about your strategy, it has clearly worked for you and that's great, but it is a statement of facts that we all should agree on.
A gain (profit) being a realized gain (cash) or unrealized (paper) does not change that it IS a gain, same for a loss. And one SHOULD calculate such to have an accurate analysis and vision of the full picture of performance.
And this applies for both a gain and loss, realized and unrealized.
I find most don't track or calculate unrealized gain/loss simply from difficulty in accurately pegging such, and the nature that such can fluctuate in certain manners. Although without doubt, debt pay-down via tenant payments is, 100%, a gain. Equity accrual is a gain. It's an unrealized gain.
As for leverage, 100% agree. Things look to be working out here for John, and I would argue a big factor to that is John, not a luck of the draw in the market. And as a STRONG word of caution to all, using leverage at such ratio's can very easily have vastly different impact's, including hugely negative one's.
Leverage is just that, an amplification. Meaning, it can amplify negative event's as well. Options investing on W.S. is the same thing, leverage investing. And it's well documented on W.S. that options trading is the #1 profit tool AND #1 loss tool. High leverage is NOT a toy to be ignorantly played with.
I only calculate realized gains in my returns because at the end of the day we all need it. I took a year off work and lived off my real estate income in 2019 so my risk is low. You can't do that with paper gains i.e. appreciation or principal pay down.
But 33% although a lot, is really $700 bucks. John traded safety for net wealth via leverage which is the way to go for pure net wealth building. But I bought a few homes with cash in my 20s because I hated mortgages and although my net wealth is less, I took a year off work and lived off the cash. I certainly prefer Johns method but I would prefer to put much more down, avoid PMI and hire a property manager. Even at break even, you're building net wealth faster than the seldom cash buyer. And I believe that is what a remote buyer would be able to do in this scenario. In fact, they show you an example of leverage vs cash buyers in the book "HOLD" which I suggest anyone starting out to read.
One risk factor is squeezing the $2500 out of tenants probably because the government will pay it but I heard too many horror stories in a Section 8 book to want to go there.The way I understand it from John's post's is that he has been utilizing a 3-pt action Strategy:
1) Acquiring vi a Modified-Flip Strategy; Property that's needs work thus creating "discount" potential, and using finance that is designed to encompass such. Than, does the improvements, thus building equity, and there in creating that margin in property alleviating leverage pt. So acquiring at 90% leverage is not necessarily post-reno 90% leverage. After that equity creating it may be 70/60% leverage. We don't know as John has not shared this data.
2) Sec8 Landlording. As i share with people; my best tenants ever were all sec8, and my worst tenant's ever were all sec8. It's a world it's own, and yes the bad's can be epically bad, but make no mistake it's also a wildly profitable segment of REI for those who have figured it out and built the right system for it. Near 0% vacancy rates can be the norm, as in vacancy rate calculations sub 1%. And much higher cash-flow rates are the norm. Again, many caveat's to properly operate, a poor operator will be destroyed, but a good one can be wildly rewarded.
3) Tapping unrealized gains, to realize them, to redeploy into providing additional income producing results, better known as "Pyramiding". As I share/instruct with my client's this is where there life changes, once they hit point to start Pyramiding, it's the ultimate compound returns metric. And where a person learns those "paper returns" are of uber importance, because they just bought one another property.
This is my understanding of John's experience and strategy.
example #1. I paid 57k cash for a house 7 years ago that only cash flowed me $3,600/year. Lol. I sold it and did a 1031 exchange to buy a house that would produce more. Then did a cash out refi on that house 3 years ago (pulled out 133k cash) to buy 3 more houses with zero out of pocket money on the 3 new ones. My yearly cash flow on them combined is 35k/year. Not bad considering I was only making $3,600/year. And I got these 3 extra houses for free. And my total equity in these houses is 474k. Not bad for only paying 57k cash for my original one with a 401k loan and HELOC. Most of you say that equity and principal pay down means nothing, but I disagree. I’ll tap into that in a few years if/when I decide to scale up and buy more cash flowing rentals.
Example # 2. I paid 48k cash for a house with a 401k loan. I spent 50k on a rehab so all in for 100k. I was only making $14,400/year off it a year ago. So I decided to do a cash out refi and pull out 168k cash to buy 3 more rentals with the cash. My cash flow now is 45k/year of these 4 houses. Not a bad increase in cash flow for not paying a penny more out of pocket to acquire 3 more houses for free from the equity. And I now have 302k equity in these 4 houses. And remember I was all in for 48k cash purchase and a 50k rehab for all this.
example #3 of another cash out refi to harvest the equity some of you says means nothing. I did a cash out refi and pulled out 144k after closing costs and bought 3 more houses. My cash flow was originally $9,600/year off my original house. Not bad, but I wanted to harvest the equity to make more $ and scale up. Now I’m making 32k/year in cash flow from my original house plus the 3 I got for free from my cash out refi. And now have 753k in equity between these 4 houses I bought off the MLS. My tenants are paying off my mortgages with principal pay down which many of you say is a “paper gain” and isn’t doing anything for me. I disagree because I’ll tap into that equity in a few years and repeat while others complain about how paper gains don’t mean anything.
I did another cash out and bought 3 more on another house that had equity built up from appreciation and principal pay down from my tenants that were just “paper gains” that some of you say doesn’t mean much. I disagree and these three extra houses I bought 6 years ago cash flow me an extra 2k/month and I have about 500k equity in them now which I may tap into to buy more cash flowing properties.
some say I’m taking too big of a risk. Maybe I am but I feel like I have more control of my RE vs my stocks in the stock market. Lol. I owe 2.6 million on loans now which most will probably tell me is over leveraged and too risky. But the total values of my 19 rentals is 4.9 mil so I’m about 50% leveraged. I could still afford to drop rents by 40% if the economy craters. But I invest in C+ class properties and these always do well in bad times due to a higher demand when people lose jobs or take pay cuts. So I doubt rent will drop 40% or more. I’ve never heard of this happening in the history of the housing market but I could be wrong. But it’s a risk I’m willing to take vs parking my savings under a mattress or savings account earning only 4 or 5% while inflation stays high indefinitely.
These first 2 examples of cash out refis were done in the last 2 years so they’re fairly current. But they will look much better in 5-10 years. Im patient and look long term with RE. But when people tell me principal pay down, 5% appreciation and monthly cash flow numbers don’t mean much when combined (80-100% on most of my properties), I disagree and will back it up with actual deals I’ve done and will continue to do. And most of these deals I’ve done are from buying turnkey or fairly turnkey properties off the MLS. I go for the base hits in working class hoods that do well after 3-5 years. Some have done good from the start, but I’m not hustling or have connections to great deals. Just an ordinary investor fumbling through RE using leverage and OPM to build wealth. I went from a Dave Ramsey guy to a Robert Kiyosaki guy. Lol - Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes3y
The biggest problem with this thread is defining "success" in real estate.
I just saw a house in San Diego that sold for $2 million. It was last sold in 2012 for under $500,000. Just over a decade to make $1.5 million! Meanwhile, another investor buys 30 single-family homes in Kansas, renovates them, places good renters, and each one increases $25,000 in value, earning him $750,000. Who's more successful? Depends on what you are measuring.
I wish BP would conduct an anonymous survey each year. Suggested questions:
- How many BP users own at least one investment property (not inherited)? How long did it take you to achieve this
- How many BP users own more than four investment properties (not doors)? How long did it take you to achieve this?
- What was your NET profit last year? This would have to be clearly defined because some people don't report accurately.
- How many investors are financially free? How long did it take you to achieve this?
- How many investors have a net worth of at least $1 million? How long did it take you to achieve this?
- How many investors have a net worth greater than $2 million? How long did it take you to achieve this?
The DIY Landlord Book4.7243 Reviews - Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @John Morgan:
I just crunched numbers on 3 examples of what some of you are saying “paper gains” don’t mean much. I tap into that equity which got there from appreciation and principal pay down most of you don’t seem to care about.Quote from @James Hamling:
Quote from @K S.:
Quote from @James Hamling:
Quote from @Bill F.:
Quote from @John Morgan:
Several of mine I’ve held for over a year have an 80-120% return on my down-payments when you factor in 5% appreciation, principal pay down and monthly cash flow combined. The example I used on a recent purchase this year is 126%. I’m not saying RE is easy. All I’m trying to point out is that it builds wealth quickly with leverage and patience to wait 3-5 years. That’s when I pull equity out of some of mine to scale up with no out of pocket money. It’s a strategy a lot of us use. I’ve bought 12 rentals with zero out of pocket cash by doing this with cash out refis.
"How many legs does a dog have if you call his tail a leg? Four. Saying that a tail is a leg doesn't make it a leg."
Abraham Lincoln
And what I and others are saying, is, "That's not your return". Returns are calculated off cash generated by the asset, not paper gains.
Additionally the strategy you've employed has inherent risks associated with it that you seem to ignore because the massive appreciation and rent growth you area has seen have mostly mitigated mitigated those risks.
Having high LTV portfolio where you take all your equity and use that to get more levered assets is risky. It is the reason you've seen such good returns even once you correct for the funky math.
That's not a value judgement about your strategy, it has clearly worked for you and that's great, but it is a statement of facts that we all should agree on.
A gain (profit) being a realized gain (cash) or unrealized (paper) does not change that it IS a gain, same for a loss. And one SHOULD calculate such to have an accurate analysis and vision of the full picture of performance.
And this applies for both a gain and loss, realized and unrealized.
I find most don't track or calculate unrealized gain/loss simply from difficulty in accurately pegging such, and the nature that such can fluctuate in certain manners. Although without doubt, debt pay-down via tenant payments is, 100%, a gain. Equity accrual is a gain. It's an unrealized gain.
As for leverage, 100% agree. Things look to be working out here for John, and I would argue a big factor to that is John, not a luck of the draw in the market. And as a STRONG word of caution to all, using leverage at such ratio's can very easily have vastly different impact's, including hugely negative one's.
Leverage is just that, an amplification. Meaning, it can amplify negative event's as well. Options investing on W.S. is the same thing, leverage investing. And it's well documented on W.S. that options trading is the #1 profit tool AND #1 loss tool. High leverage is NOT a toy to be ignorantly played with.
I only calculate realized gains in my returns because at the end of the day we all need it. I took a year off work and lived off my real estate income in 2019 so my risk is low. You can't do that with paper gains i.e. appreciation or principal pay down.
But 33% although a lot, is really $700 bucks. John traded safety for net wealth via leverage which is the way to go for pure net wealth building. But I bought a few homes with cash in my 20s because I hated mortgages and although my net wealth is less, I took a year off work and lived off the cash. I certainly prefer Johns method but I would prefer to put much more down, avoid PMI and hire a property manager. Even at break even, you're building net wealth faster than the seldom cash buyer. And I believe that is what a remote buyer would be able to do in this scenario. In fact, they show you an example of leverage vs cash buyers in the book "HOLD" which I suggest anyone starting out to read.
One risk factor is squeezing the $2500 out of tenants probably because the government will pay it but I heard too many horror stories in a Section 8 book to want to go there.The way I understand it from John's post's is that he has been utilizing a 3-pt action Strategy:
1) Acquiring vi a Modified-Flip Strategy; Property that's needs work thus creating "discount" potential, and using finance that is designed to encompass such. Than, does the improvements, thus building equity, and there in creating that margin in property alleviating leverage pt. So acquiring at 90% leverage is not necessarily post-reno 90% leverage. After that equity creating it may be 70/60% leverage. We don't know as John has not shared this data.
2) Sec8 Landlording. As i share with people; my best tenants ever were all sec8, and my worst tenant's ever were all sec8. It's a world it's own, and yes the bad's can be epically bad, but make no mistake it's also a wildly profitable segment of REI for those who have figured it out and built the right system for it. Near 0% vacancy rates can be the norm, as in vacancy rate calculations sub 1%. And much higher cash-flow rates are the norm. Again, many caveat's to properly operate, a poor operator will be destroyed, but a good one can be wildly rewarded.
3) Tapping unrealized gains, to realize them, to redeploy into providing additional income producing results, better known as "Pyramiding". As I share/instruct with my client's this is where there life changes, once they hit point to start Pyramiding, it's the ultimate compound returns metric. And where a person learns those "paper returns" are of uber importance, because they just bought one another property.
This is my understanding of John's experience and strategy.
example #1. I paid 57k cash for a house 7 years ago that only cash flowed me $3,600/year. Lol. I sold it and did a 1031 exchange to buy a house that would produce more. Then did a cash out refi on that house 3 years ago (pulled out 133k cash) to buy 3 more houses with zero out of pocket money on the 3 new ones. My yearly cash flow on them combined is 35k/year. Not bad considering I was only making $3,600/year. And I got these 3 extra houses for free. And my total equity in these houses is 474k. Not bad for only paying 57k cash for my original one with a 401k loan and HELOC. Most of you say that equity and principal pay down means nothing, but I disagree. I’ll tap into that in a few years if/when I decide to scale up and buy more cash flowing rentals.
Example # 2. I paid 48k cash for a house with a 401k loan. I spent 50k on a rehab so all in for 100k. I was only making $14,400/year off it a year ago. So I decided to do a cash out refi and pull out 168k cash to buy 3 more rentals with the cash. My cash flow now is 45k/year of these 4 houses. Not a bad increase in cash flow for not paying a penny more out of pocket to acquire 3 more houses for free from the equity. And I now have 302k equity in these 4 houses. And remember I was all in for 48k cash purchase and a 50k rehab for all this.
example #3 of another cash out refi to harvest the equity some of you says means nothing. I did a cash out refi and pulled out 144k after closing costs and bought 3 more houses. My cash flow was originally $9,600/year off my original house. Not bad, but I wanted to harvest the equity to make more $ and scale up. Now I’m making 32k/year in cash flow from my original house plus the 3 I got for free from my cash out refi. And now have 753k in equity between these 4 houses I bought off the MLS. My tenants are paying off my mortgages with principal pay down which many of you say is a “paper gain” and isn’t doing anything for me. I disagree because I’ll tap into that equity in a few years and repeat while others complain about how paper gains don’t mean anything.
I did another cash out and bought 3 more on another house that had equity built up from appreciation and principal pay down from my tenants that were just “paper gains” that some of you say doesn’t mean much. I disagree and these three extra houses I bought 6 years ago cash flow me an extra 2k/month and I have about 500k equity in them now which I may tap into to buy more cash flowing properties.
some say I’m taking too big of a risk. Maybe I am but I feel like I have more control of my RE vs my stocks in the stock market. Lol. I owe 2.6 million on loans now which most will probably tell me is over leveraged and too risky. But the total values of my 19 rentals is 4.9 mil so I’m about 50% leveraged. I could still afford to drop rents by 40% if the economy craters. But I invest in C+ class properties and these always do well in bad times due to a higher demand when people lose jobs or take pay cuts. So I doubt rent will drop 40% or more. I’ve never heard of this happening in the history of the housing market but I could be wrong. But it’s a risk I’m willing to take vs parking my savings under a mattress or savings account earning only 4 or 5% while inflation stays high indefinitely.
These first 2 examples of cash out refis were done in the last 2 years so they’re fairly current. But they will look much better in 5-10 years. Im patient and look long term with RE. But when people tell me principal pay down, 5% appreciation and monthly cash flow numbers don’t mean much when combined (80-100% on most of my properties), I disagree and will back it up with actual deals I’ve done and will continue to do. And most of these deals I’ve done are from buying turnkey or fairly turnkey properties off the MLS. I go for the base hits in working class hoods that do well after 3-5 years. Some have done good from the start, but I’m not hustling or have connections to great deals. Just an ordinary investor fumbling through RE using leverage and OPM to build wealth. I went from a Dave Ramsey guy to a Robert Kiyosaki guy. LolKudo's to you John, your a perfect example of the "Get-Rich-Slow" program in action. Proof that it does not require grand-slam deals at acquisition, that one does not need some "secret source" of deals, because the MATH, the math is in your favor and all one has to do is comprehend this and make appropriate utilization of the math.
This is also a great example of why I preach to my new investors that they will, 100% NEED to be looking at near future actions for either sale or refi of some sort, to tap unrealized gains, to realize such as liquid capital, to leverage UP. Pyramiding, actionable compounding of gains, is necessary in portfolio building.
And it is this compounding of returns that builds significant cash-flow. Cash-flow alone, I have never seen make anyone wealthy. It's via scaling cash-flow production that makes one wealthy, and John clearly has full comprehension of this.
For those sitting the sidelines wondering how ones does it, from 0-too "hero" I think John's story here is a great case study.
Now at 50% leverage, that is far from "risky" in my book. Nicely insulated, with plenty of unrealized gains to tap if needed, when needed, we call that a "war chest". Nicely done John, nicely done indeed.
I think it would be helpful for the "noobs" on BP if John would be willing to consolidate this together into a BP post itself. Wha-da-ya-say John? Fear and emotion is running rampant and facilitated by a mob of arm-chair quarterbacks, would be great to hold a light in the darkness for those feeling it's just not possible for them today.
- 3yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votesThanks James. I probably come across a little defensive after people tell me my paper gains don’t mean much when I consider them in my overall strategy and ROI. My paper gains of appreciation and principal pay down is a huge part of my strategy to scale up with no out of pocket cash. I’m ok waiting 3-5 years for my base hits to produce and score runs. As well as my appreciation to build up so I can harvest that equity to scale up. And I’m not trying to flex with my numbers. I just want to show those who take shots at my approach how the math with leverage works. I’ve been able to scale up and buy 12 houses for free from my paper gains by doing cash out refis. And I’m still able to make the numbers work in today’s environment. I’ve bought 10 houses in the last 18 months including one last month and closing on two more this week. Some people say you can’t make money in todays environment with higher interest rates. I disagree and keep doing it. Some of my new properties might only make me $300/month when I first buy, but I’m patient and willing to wait for market rent to increase and appreciation to do its thing. I’ll tap that equity in 3-5 years if it makes sense and buy more cash flowing properties for free.
Quote from @James Hamling:
Quote from @John Morgan:
I just crunched numbers on 3 examples of what some of you are saying “paper gains” don’t mean much. I tap into that equity which got there from appreciation and principal pay down most of you don’t seem to care about.Quote from @James Hamling:
Quote from @K S.:
Quote from @James Hamling:
Quote from @Bill F.:
Quote from @John Morgan:
Several of mine I’ve held for over a year have an 80-120% return on my down-payments when you factor in 5% appreciation, principal pay down and monthly cash flow combined. The example I used on a recent purchase this year is 126%. I’m not saying RE is easy. All I’m trying to point out is that it builds wealth quickly with leverage and patience to wait 3-5 years. That’s when I pull equity out of some of mine to scale up with no out of pocket money. It’s a strategy a lot of us use. I’ve bought 12 rentals with zero out of pocket cash by doing this with cash out refis.
"How many legs does a dog have if you call his tail a leg? Four. Saying that a tail is a leg doesn't make it a leg."
Abraham Lincoln
And what I and others are saying, is, "That's not your return". Returns are calculated off cash generated by the asset, not paper gains.
Additionally the strategy you've employed has inherent risks associated with it that you seem to ignore because the massive appreciation and rent growth you area has seen have mostly mitigated mitigated those risks.
Having high LTV portfolio where you take all your equity and use that to get more levered assets is risky. It is the reason you've seen such good returns even once you correct for the funky math.
That's not a value judgement about your strategy, it has clearly worked for you and that's great, but it is a statement of facts that we all should agree on.
A gain (profit) being a realized gain (cash) or unrealized (paper) does not change that it IS a gain, same for a loss. And one SHOULD calculate such to have an accurate analysis and vision of the full picture of performance.
And this applies for both a gain and loss, realized and unrealized.
I find most don't track or calculate unrealized gain/loss simply from difficulty in accurately pegging such, and the nature that such can fluctuate in certain manners. Although without doubt, debt pay-down via tenant payments is, 100%, a gain. Equity accrual is a gain. It's an unrealized gain.
As for leverage, 100% agree. Things look to be working out here for John, and I would argue a big factor to that is John, not a luck of the draw in the market. And as a STRONG word of caution to all, using leverage at such ratio's can very easily have vastly different impact's, including hugely negative one's.
Leverage is just that, an amplification. Meaning, it can amplify negative event's as well. Options investing on W.S. is the same thing, leverage investing. And it's well documented on W.S. that options trading is the #1 profit tool AND #1 loss tool. High leverage is NOT a toy to be ignorantly played with.
I only calculate realized gains in my returns because at the end of the day we all need it. I took a year off work and lived off my real estate income in 2019 so my risk is low. You can't do that with paper gains i.e. appreciation or principal pay down.
But 33% although a lot, is really $700 bucks. John traded safety for net wealth via leverage which is the way to go for pure net wealth building. But I bought a few homes with cash in my 20s because I hated mortgages and although my net wealth is less, I took a year off work and lived off the cash. I certainly prefer Johns method but I would prefer to put much more down, avoid PMI and hire a property manager. Even at break even, you're building net wealth faster than the seldom cash buyer. And I believe that is what a remote buyer would be able to do in this scenario. In fact, they show you an example of leverage vs cash buyers in the book "HOLD" which I suggest anyone starting out to read.
One risk factor is squeezing the $2500 out of tenants probably because the government will pay it but I heard too many horror stories in a Section 8 book to want to go there.The way I understand it from John's post's is that he has been utilizing a 3-pt action Strategy:
1) Acquiring vi a Modified-Flip Strategy; Property that's needs work thus creating "discount" potential, and using finance that is designed to encompass such. Than, does the improvements, thus building equity, and there in creating that margin in property alleviating leverage pt. So acquiring at 90% leverage is not necessarily post-reno 90% leverage. After that equity creating it may be 70/60% leverage. We don't know as John has not shared this data.
2) Sec8 Landlording. As i share with people; my best tenants ever were all sec8, and my worst tenant's ever were all sec8. It's a world it's own, and yes the bad's can be epically bad, but make no mistake it's also a wildly profitable segment of REI for those who have figured it out and built the right system for it. Near 0% vacancy rates can be the norm, as in vacancy rate calculations sub 1%. And much higher cash-flow rates are the norm. Again, many caveat's to properly operate, a poor operator will be destroyed, but a good one can be wildly rewarded.
3) Tapping unrealized gains, to realize them, to redeploy into providing additional income producing results, better known as "Pyramiding". As I share/instruct with my client's this is where there life changes, once they hit point to start Pyramiding, it's the ultimate compound returns metric. And where a person learns those "paper returns" are of uber importance, because they just bought one another property.
This is my understanding of John's experience and strategy.
example #1. I paid 57k cash for a house 7 years ago that only cash flowed me $3,600/year. Lol. I sold it and did a 1031 exchange to buy a house that would produce more. Then did a cash out refi on that house 3 years ago (pulled out 133k cash) to buy 3 more houses with zero out of pocket money on the 3 new ones. My yearly cash flow on them combined is 35k/year. Not bad considering I was only making $3,600/year. And I got these 3 extra houses for free. And my total equity in these houses is 474k. Not bad for only paying 57k cash for my original one with a 401k loan and HELOC. Most of you say that equity and principal pay down means nothing, but I disagree. I’ll tap into that in a few years if/when I decide to scale up and buy more cash flowing rentals.
Example # 2. I paid 48k cash for a house with a 401k loan. I spent 50k on a rehab so all in for 100k. I was only making $14,400/year off it a year ago. So I decided to do a cash out refi and pull out 168k cash to buy 3 more rentals with the cash. My cash flow now is 45k/year of these 4 houses. Not a bad increase in cash flow for not paying a penny more out of pocket to acquire 3 more houses for free from the equity. And I now have 302k equity in these 4 houses. And remember I was all in for 48k cash purchase and a 50k rehab for all this.
example #3 of another cash out refi to harvest the equity some of you says means nothing. I did a cash out refi and pulled out 144k after closing costs and bought 3 more houses. My cash flow was originally $9,600/year off my original house. Not bad, but I wanted to harvest the equity to make more $ and scale up. Now I’m making 32k/year in cash flow from my original house plus the 3 I got for free from my cash out refi. And now have 753k in equity between these 4 houses I bought off the MLS. My tenants are paying off my mortgages with principal pay down which many of you say is a “paper gain” and isn’t doing anything for me. I disagree because I’ll tap into that equity in a few years and repeat while others complain about how paper gains don’t mean anything.
I did another cash out and bought 3 more on another house that had equity built up from appreciation and principal pay down from my tenants that were just “paper gains” that some of you say doesn’t mean much. I disagree and these three extra houses I bought 6 years ago cash flow me an extra 2k/month and I have about 500k equity in them now which I may tap into to buy more cash flowing properties.
some say I’m taking too big of a risk. Maybe I am but I feel like I have more control of my RE vs my stocks in the stock market. Lol. I owe 2.6 million on loans now which most will probably tell me is over leveraged and too risky. But the total values of my 19 rentals is 4.9 mil so I’m about 50% leveraged. I could still afford to drop rents by 40% if the economy craters. But I invest in C+ class properties and these always do well in bad times due to a higher demand when people lose jobs or take pay cuts. So I doubt rent will drop 40% or more. I’ve never heard of this happening in the history of the housing market but I could be wrong. But it’s a risk I’m willing to take vs parking my savings under a mattress or savings account earning only 4 or 5% while inflation stays high indefinitely.
These first 2 examples of cash out refis were done in the last 2 years so they’re fairly current. But they will look much better in 5-10 years. Im patient and look long term with RE. But when people tell me principal pay down, 5% appreciation and monthly cash flow numbers don’t mean much when combined (80-100% on most of my properties), I disagree and will back it up with actual deals I’ve done and will continue to do. And most of these deals I’ve done are from buying turnkey or fairly turnkey properties off the MLS. I go for the base hits in working class hoods that do well after 3-5 years. Some have done good from the start, but I’m not hustling or have connections to great deals. Just an ordinary investor fumbling through RE using leverage and OPM to build wealth. I went from a Dave Ramsey guy to a Robert Kiyosaki guy. LolKudo's to you John, your a perfect example of the "Get-Rich-Slow" program in action. Proof that it does not require grand-slam deals at acquisition, that one does not need some "secret source" of deals, because the MATH, the math is in your favor and all one has to do is comprehend this and make appropriate utilization of the math.
This is also a great example of why I preach to my new investors that they will, 100% NEED to be looking at near future actions for either sale or refi of some sort, to tap unrealized gains, to realize such as liquid capital, to leverage UP. Pyramiding, actionable compounding of gains, is necessary in portfolio building.
And it is this compounding of returns that builds significant cash-flow. Cash-flow alone, I have never seen make anyone wealthy. It's via scaling cash-flow production that makes one wealthy, and John clearly has full comprehension of this.
For those sitting the sidelines wondering how ones does it, from 0-too "hero" I think John's story here is a great case study.
Now at 50% leverage, that is far from "risky" in my book. Nicely insulated, with plenty of unrealized gains to tap if needed, when needed, we call that a "war chest". Nicely done John, nicely done indeed.
I think it would be helpful for the "noobs" on BP if John would be willing to consolidate this together into a BP post itself. Wha-da-ya-say John? Fear and emotion is running rampant and facilitated by a mob of arm-chair quarterbacks, would be great to hold a light in the darkness for those feeling it's just not possible for them today.
- That's really good like I had mentioned previously but there's a reason why one has to verify claims because we didn't know at first that it was section 8 in C- neighborhoods where the gov pays above market rates and of course you're renovating, adding a room I believe and by virtue of being within driving distance, you're able to make it work. I understand now but at first, it's like just some bro saying it's easy, buy free houses and cashflow 3600/month, but when you dig deeper It makes more sense.
Quote from @John Morgan:
Thanks James. I probably come across a little defensive after people tell me my paper gains don’t mean much when I consider them in my overall strategy and ROI. My paper gains of appreciation and principal pay down is a huge part of my strategy to scale up with no out of pocket cash. I’m ok waiting 3-5 years for my base hits to produce and score runs. As well as my appreciation to build up so I can harvest that equity to scale up. And I’m not trying to flex with my numbers. I just want to show those who take shots at my approach how the math with leverage works. I’ve been able to scale up and buy 12 houses for free from my paper gains by doing cash out refis. And I’m still able to make the numbers work in today’s environment. I’ve bought 10 houses in the last 18 months including one last month and closing on two more this week. Some people say you can’t make money in todays environment with higher interest rates. I disagree and keep doing it. Some of my new properties might only make me $300/month when I first buy, but I’m patient and willing to wait for market rent to increase and appreciation to do its thing. I’ll tap that equity in 3-5 years if it makes sense and buy more cash flowing properties for free.Quote from @James Hamling:
Quote from @John Morgan:
I just crunched numbers on 3 examples of what some of you are saying “paper gains” don’t mean much. I tap into that equity which got there from appreciation and principal pay down most of you don’t seem to care about.Quote from @James Hamling:
Quote from @K S.:
Quote from @James Hamling:
Quote from @Bill F.:
Quote from @John Morgan:
Several of mine I’ve held for over a year have an 80-120% return on my down-payments when you factor in 5% appreciation, principal pay down and monthly cash flow combined. The example I used on a recent purchase this year is 126%. I’m not saying RE is easy. All I’m trying to point out is that it builds wealth quickly with leverage and patience to wait 3-5 years. That’s when I pull equity out of some of mine to scale up with no out of pocket money. It’s a strategy a lot of us use. I’ve bought 12 rentals with zero out of pocket cash by doing this with cash out refis.
"How many legs does a dog have if you call his tail a leg? Four. Saying that a tail is a leg doesn't make it a leg."
Abraham Lincoln
And what I and others are saying, is, "That's not your return". Returns are calculated off cash generated by the asset, not paper gains.
Additionally the strategy you've employed has inherent risks associated with it that you seem to ignore because the massive appreciation and rent growth you area has seen have mostly mitigated mitigated those risks.
Having high LTV portfolio where you take all your equity and use that to get more levered assets is risky. It is the reason you've seen such good returns even once you correct for the funky math.
That's not a value judgement about your strategy, it has clearly worked for you and that's great, but it is a statement of facts that we all should agree on.
A gain (profit) being a realized gain (cash) or unrealized (paper) does not change that it IS a gain, same for a loss. And one SHOULD calculate such to have an accurate analysis and vision of the full picture of performance.
And this applies for both a gain and loss, realized and unrealized.
I find most don't track or calculate unrealized gain/loss simply from difficulty in accurately pegging such, and the nature that such can fluctuate in certain manners. Although without doubt, debt pay-down via tenant payments is, 100%, a gain. Equity accrual is a gain. It's an unrealized gain.
As for leverage, 100% agree. Things look to be working out here for John, and I would argue a big factor to that is John, not a luck of the draw in the market. And as a STRONG word of caution to all, using leverage at such ratio's can very easily have vastly different impact's, including hugely negative one's.
Leverage is just that, an amplification. Meaning, it can amplify negative event's as well. Options investing on W.S. is the same thing, leverage investing. And it's well documented on W.S. that options trading is the #1 profit tool AND #1 loss tool. High leverage is NOT a toy to be ignorantly played with.
I only calculate realized gains in my returns because at the end of the day we all need it. I took a year off work and lived off my real estate income in 2019 so my risk is low. You can't do that with paper gains i.e. appreciation or principal pay down.
But 33% although a lot, is really $700 bucks. John traded safety for net wealth via leverage which is the way to go for pure net wealth building. But I bought a few homes with cash in my 20s because I hated mortgages and although my net wealth is less, I took a year off work and lived off the cash. I certainly prefer Johns method but I would prefer to put much more down, avoid PMI and hire a property manager. Even at break even, you're building net wealth faster than the seldom cash buyer. And I believe that is what a remote buyer would be able to do in this scenario. In fact, they show you an example of leverage vs cash buyers in the book "HOLD" which I suggest anyone starting out to read.
One risk factor is squeezing the $2500 out of tenants probably because the government will pay it but I heard too many horror stories in a Section 8 book to want to go there.The way I understand it from John's post's is that he has been utilizing a 3-pt action Strategy:
1) Acquiring vi a Modified-Flip Strategy; Property that's needs work thus creating "discount" potential, and using finance that is designed to encompass such. Than, does the improvements, thus building equity, and there in creating that margin in property alleviating leverage pt. So acquiring at 90% leverage is not necessarily post-reno 90% leverage. After that equity creating it may be 70/60% leverage. We don't know as John has not shared this data.
2) Sec8 Landlording. As i share with people; my best tenants ever were all sec8, and my worst tenant's ever were all sec8. It's a world it's own, and yes the bad's can be epically bad, but make no mistake it's also a wildly profitable segment of REI for those who have figured it out and built the right system for it. Near 0% vacancy rates can be the norm, as in vacancy rate calculations sub 1%. And much higher cash-flow rates are the norm. Again, many caveat's to properly operate, a poor operator will be destroyed, but a good one can be wildly rewarded.
3) Tapping unrealized gains, to realize them, to redeploy into providing additional income producing results, better known as "Pyramiding". As I share/instruct with my client's this is where there life changes, once they hit point to start Pyramiding, it's the ultimate compound returns metric. And where a person learns those "paper returns" are of uber importance, because they just bought one another property.
This is my understanding of John's experience and strategy.
example #1. I paid 57k cash for a house 7 years ago that only cash flowed me $3,600/year. Lol. I sold it and did a 1031 exchange to buy a house that would produce more. Then did a cash out refi on that house 3 years ago (pulled out 133k cash) to buy 3 more houses with zero out of pocket money on the 3 new ones. My yearly cash flow on them combined is 35k/year. Not bad considering I was only making $3,600/year. And I got these 3 extra houses for free. And my total equity in these houses is 474k. Not bad for only paying 57k cash for my original one with a 401k loan and HELOC. Most of you say that equity and principal pay down means nothing, but I disagree. I’ll tap into that in a few years if/when I decide to scale up and buy more cash flowing rentals.
Example # 2. I paid 48k cash for a house with a 401k loan. I spent 50k on a rehab so all in for 100k. I was only making $14,400/year off it a year ago. So I decided to do a cash out refi and pull out 168k cash to buy 3 more rentals with the cash. My cash flow now is 45k/year of these 4 houses. Not a bad increase in cash flow for not paying a penny more out of pocket to acquire 3 more houses for free from the equity. And I now have 302k equity in these 4 houses. And remember I was all in for 48k cash purchase and a 50k rehab for all this.
example #3 of another cash out refi to harvest the equity some of you says means nothing. I did a cash out refi and pulled out 144k after closing costs and bought 3 more houses. My cash flow was originally $9,600/year off my original house. Not bad, but I wanted to harvest the equity to make more $ and scale up. Now I’m making 32k/year in cash flow from my original house plus the 3 I got for free from my cash out refi. And now have 753k in equity between these 4 houses I bought off the MLS. My tenants are paying off my mortgages with principal pay down which many of you say is a “paper gain” and isn’t doing anything for me. I disagree because I’ll tap into that equity in a few years and repeat while others complain about how paper gains don’t mean anything.
I did another cash out and bought 3 more on another house that had equity built up from appreciation and principal pay down from my tenants that were just “paper gains” that some of you say doesn’t mean much. I disagree and these three extra houses I bought 6 years ago cash flow me an extra 2k/month and I have about 500k equity in them now which I may tap into to buy more cash flowing properties.
some say I’m taking too big of a risk. Maybe I am but I feel like I have more control of my RE vs my stocks in the stock market. Lol. I owe 2.6 million on loans now which most will probably tell me is over leveraged and too risky. But the total values of my 19 rentals is 4.9 mil so I’m about 50% leveraged. I could still afford to drop rents by 40% if the economy craters. But I invest in C+ class properties and these always do well in bad times due to a higher demand when people lose jobs or take pay cuts. So I doubt rent will drop 40% or more. I’ve never heard of this happening in the history of the housing market but I could be wrong. But it’s a risk I’m willing to take vs parking my savings under a mattress or savings account earning only 4 or 5% while inflation stays high indefinitely.
These first 2 examples of cash out refis were done in the last 2 years so they’re fairly current. But they will look much better in 5-10 years. Im patient and look long term with RE. But when people tell me principal pay down, 5% appreciation and monthly cash flow numbers don’t mean much when combined (80-100% on most of my properties), I disagree and will back it up with actual deals I’ve done and will continue to do. And most of these deals I’ve done are from buying turnkey or fairly turnkey properties off the MLS. I go for the base hits in working class hoods that do well after 3-5 years. Some have done good from the start, but I’m not hustling or have connections to great deals. Just an ordinary investor fumbling through RE using leverage and OPM to build wealth. I went from a Dave Ramsey guy to a Robert Kiyosaki guy. LolKudo's to you John, your a perfect example of the "Get-Rich-Slow" program in action. Proof that it does not require grand-slam deals at acquisition, that one does not need some "secret source" of deals, because the MATH, the math is in your favor and all one has to do is comprehend this and make appropriate utilization of the math.
This is also a great example of why I preach to my new investors that they will, 100% NEED to be looking at near future actions for either sale or refi of some sort, to tap unrealized gains, to realize such as liquid capital, to leverage UP. Pyramiding, actionable compounding of gains, is necessary in portfolio building.
And it is this compounding of returns that builds significant cash-flow. Cash-flow alone, I have never seen make anyone wealthy. It's via scaling cash-flow production that makes one wealthy, and John clearly has full comprehension of this.
For those sitting the sidelines wondering how ones does it, from 0-too "hero" I think John's story here is a great case study.
Now at 50% leverage, that is far from "risky" in my book. Nicely insulated, with plenty of unrealized gains to tap if needed, when needed, we call that a "war chest". Nicely done John, nicely done indeed.
I think it would be helpful for the "noobs" on BP if John would be willing to consolidate this together into a BP post itself. Wha-da-ya-say John? Fear and emotion is running rampant and facilitated by a mob of arm-chair quarterbacks, would be great to hold a light in the darkness for those feeling it's just not possible for them today.
- Memphis, TN · Member since 2021 · 82 posts · 37 votes3y
@Peter Vekselman most real estate investing in general especially in single family homes, is going to be more of that long term safe steady investment play. Of course that does depend on how many properties you're able to acquire at once and how quickly you can pay them off.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Peter Vekselman:
If you had to guess, what is the success rate in real estate investing? Success being defined by someone being able to live above average lifestyle strictly based upon their earnings in real estate.
Probably a bit late in pages to present this but....
I'd love to hear for ALL READING THIS, what was your expectation of "Success in REI" BEFORE you completed deal #1?
For myself, and maybe I am a bit of an anomaly, I had dueling expectations/hopes for "success". I started in flipping, for me it was "DON'T LOOSE $" on deal #1. I just wanted to get-in, go through the process, get #1 under the belt, learn the learnings and if walked net-0 I was ok. Because I viewed success as "getting-in" and to improve in process and profit with every successive one I did. Like an ignorant fool i didn't think about long-game, about passive returns, I had tunnel vision on what I was doing, "A" flip, and "the next one" and didn't really think of sustainability in operations until way, way later. And as i sat at IRS office (seriously, I went there) writing Uncle Sam the biggest check I'd ever written in my life, that's when I thought about passive side of things and my definition of success changed.
My definition of success in REI has constantly evolved. It started as putting together to be able to do 1, than it changed to getting 1, than to not loosing my shirt on that 1, than on to a "next one" in pipeline, and so on and so fourth. I never had a singular set universal definition of what global "success" was. Not sure I do today. I have todays success, this weeks, this quarters, years, seasons, business, venture etc..
- The average rate of home inflation in the past 50 years has been 4.26% according to the US Bureau of Labor Statistics. So you may not be smiling once you factor in average home CAP expenses and maintenance with a house in the 50-100 year range assuming it's still standing. You may have multiple cash outs for renovations and repairs. The neighborhood may have went to **** in that time as well and you yourself may be dead. Not everything is guaranteed to be rosy just because you held.
Quote from @Ran Iarovich:
Over what timeline?
Anyone who bought and held a house 50 years ago is smiling. But then again, the hundreds of cycles in between then have brought a lot of tears.
- 3yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votesWhy were you in the IRS office? To pay gains off RE?
Quote from @James Hamling:
Quote from @Peter Vekselman:
If you had to guess, what is the success rate in real estate investing? Success being defined by someone being able to live above average lifestyle strictly based upon their earnings in real estate.
Probably a bit late in pages to present this but....
I'd love to hear for ALL READING THIS, what was your expectation of "Success in REI" BEFORE you completed deal #1?
For myself, and maybe I am a bit of an anomaly, I had dueling expectations/hopes for "success". I started in flipping, for me it was "DON'T LOOSE $" on deal #1. I just wanted to get-in, go through the process, get #1 under the belt, learn the learnings and if walked net-0 I was ok. Because I viewed success as "getting-in" and to improve in process and profit with every successive one I did. Like an ignorant fool i didn't think about long-game, about passive returns, I had tunnel vision on what I was doing, "A" flip, and "the next one" and didn't really think of sustainability in operations until way, way later. And as i sat at IRS office (seriously, I went there) writing Uncle Sam the biggest check I'd ever written in my life, that's when I thought about passive side of things and my definition of success changed.
My definition of success in REI has constantly evolved. It started as putting together to be able to do 1, than it changed to getting 1, than to not loosing my shirt on that 1, than on to a "next one" in pipeline, and so on and so fourth. I never had a singular set universal definition of what global "success" was. Not sure I do today. I have todays success, this weeks, this quarters, years, seasons, business, venture etc..
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @John Morgan:
Why were you in the IRS office? To pay gains off RE?Quote from @James Hamling:
Quote from @Peter Vekselman:
If you had to guess, what is the success rate in real estate investing? Success being defined by someone being able to live above average lifestyle strictly based upon their earnings in real estate.
Probably a bit late in pages to present this but....
I'd love to hear for ALL READING THIS, what was your expectation of "Success in REI" BEFORE you completed deal #1?
For myself, and maybe I am a bit of an anomaly, I had dueling expectations/hopes for "success". I started in flipping, for me it was "DON'T LOOSE $" on deal #1. I just wanted to get-in, go through the process, get #1 under the belt, learn the learnings and if walked net-0 I was ok. Because I viewed success as "getting-in" and to improve in process and profit with every successive one I did. Like an ignorant fool i didn't think about long-game, about passive returns, I had tunnel vision on what I was doing, "A" flip, and "the next one" and didn't really think of sustainability in operations until way, way later. And as i sat at IRS office (seriously, I went there) writing Uncle Sam the biggest check I'd ever written in my life, that's when I thought about passive side of things and my definition of success changed.
My definition of success in REI has constantly evolved. It started as putting together to be able to do 1, than it changed to getting 1, than to not loosing my shirt on that 1, than on to a "next one" in pipeline, and so on and so fourth. I never had a singular set universal definition of what global "success" was. Not sure I do today. I have todays success, this weeks, this quarters, years, seasons, business, venture etc..
Yeah, my CPA thought me nut's too.
But I am a "grinder", I figure things out. And when I got that bill, holly-cow I fell off my chair. See, I was ignorant of how the tax's would land doing flip after flip after flip. I, like a moron, thought it would be just like my Remodeling Company tax's, and boy-oh-boy was I wrong.
So when i pressed my CPA on do i get a high-5 for this "donation" to the nation, maybe a coffee mug, a shirt, something, anything, he said "nothing, not even a thanks, and you just send it in, there is no interaction, ever" which lead down a rabbit hole argument of there's gotta be offices, with people, actual human beings one can interact with.
It wasn't easy, it was so much harder to locate the dang IRS office and get an appointment to sit face-2-face with a human being than anything I've ever done in REI, but I did it.
And, since Uncle Sam didn't care, I went ahead and made my own shirt for Uncle Sam thanking me for the "donation", lol, yeah no joke. Ok, yeah it was a joke, but I did it, and I wore it to my apt..
Turns out, it's true, IRS agent don't have a sense of humor, lol.
But know what, writing a 6 figure check like that, I had to do something to ease the sting a little and so in a way it's like I got the full experience for it.
I was going to bring a briefcase of cash, until my CPA explained he'd next be bailing me out of jail for my antics. So it was a cashiers check.
And yeah, like super-secret tucked away offices, armed guards as you come in, you'd think there guarding plutonium how it all was.
But yeah, that's when I learned why the LT Landlords would congratulate my flipping with a little giggle, they knew Uncle Sammy was coming for the shake-down.
So some of my advice isn't because I did it right myself, it's the best advice, the "hey, don't do what I did, and here's why" advice.
I shoulda kept half those places. I'd be retired years ago if I had. - Real Estate Professional · Atlanta GA · Member since 2015 · 615 posts · 225 votes3y
Quote from @Cade Edwards:
@Peter Vekselman most real estate investing in general especially in single family homes, is going to be more of that long term safe steady investment play. Of course that does depend on how many properties you're able to acquire at once and how quickly you can pay them off.
there is definitely ways of going slower and definitely ways of going faster in this business. and there is way of being successful at both. obviously the faster way takes a lot more risk. but has a huge upside if done correctly.
- Real Estate Agent · WA · Member since 2021 · 254 posts · 173 votes3yThat is true but there is a bigger picture than taking an average. Having an average means that there is a binomial distribution of really really bad investments and really really good ones on both ends and then some average so and so ~4.26% in the middle. For example, in the Eastside part of Washington where I live the average appreciation is between 8%-10%. If you are on this forum then you are probably also on the right side. You also have to take into account tax depreciation, write-offs, rental income, leverage, and risk hedging - it doesn't stop and end at that 4.26%.
Quote from @K S.:
The average rate of home inflation in the past 50 years has been 4.26% according to the US Bureau of Labor Statistics. So you may not be smiling once you factor in average home CAP expenses and maintenance with a house in the 50-100 year range assuming it's still standing. You may have multiple cash outs for renovations and repairs. The neighborhood may have went to **** in that time as well and you yourself may be dead. Not everything is guaranteed to be rosy just because you held.Quote from @Ran Iarovich:
Over what timeline?
Anyone who bought and held a house 50 years ago is smiling. But then again, the hundreds of cycles in between then have brought a lot of tears.
- Real Estate Agent · WA · Member since 2021 · 254 posts · 173 votes3y
Quote from @K S.:
The average rate of home inflation in the past 50 years has been 4.26% according to the US Bureau of Labor Statistics. So you may not be smiling once you factor in average home CAP expenses and maintenance with a house in the 50-100 year range assuming it's still standing. You may have multiple cash outs for renovations and repairs. The neighborhood may have went to **** in that time as well and you yourself may be dead. Not everything is guaranteed to be rosy just because you held.Quote from @Ran Iarovich:
Over what timeline?
Anyone who bought and held a house 50 years ago is smiling. But then again, the hundreds of cycles in between then have brought a lot of tears.
Though you are right. Not everything is rosy and you can't ever truly have a "riskless" investment with real estate. With that being said, we are all taking a risk here in the same way we take a risk when we drive on the road
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