Hi BP Community! I'm very happy to be a part of BP. I'm new to the BP forums and have been catching up on the Podcasts, which are awesome. I'm 36 years old and just changed my career to real estate. I am working as a home inspector in north NJ and training to be an appraiser. I'm hoping to draw on the BP community's experiences to get started on investing and one day be experienced enough myself to pay it back and help others.
I'm wondering what experienced investors would do in my current position. After doing a lot of research, I am too excited to jump in, but I want to be smart about it and avoid being impulsive like my first purchase in 2008. I'm looking for a passive, low-risk income
EXPERIENCE: Very Little. I have a few properties that I bought as I moved around for my career, before any knowledge about real estate investing. My first unit is across the river from NYC in NJ, which I bought in 2008. And up to now still paying money into it every month, even with a tenant. I also have two units in China, which have appreciated about 300-400%, mostly because of a real estate friend who suggested them to me.
PRESENT: Once my NJ unit is paid off in 5 years, it will net me $1000/mo. The units in China now would sell for approximately 300k and 400k today, and appreciating.
I want to buy properties to Buy and Hold to secure a steady income and wholesale properties, either concurrently or after gaining some experience from Buy and Hold properties.
Thanks to everyone taking the time to read this post and thanks to everyone who has already contributed to this amazing community.
Welcome! Sounds to me like your first move should be to sell your NJ rental and invest the proceeds somewhere more profitable. Don't sink money into it for 5 more years if that equity could instead be sending money to you for the next 5 years.
Thanks. I have thought ability selling this also, but I would be taking a pretty big loss. And I don't 'need' the cash now. Do you recommend to sell even if I don't need to cash?
I won't address any prejudice and ignorant comments. To answer your question, my units are in a major city, recently ranked #5 city in China behind the Big Four: Beijing, Shanghai, Guangzhou, Shenzhen. There's a large international community there and the city is still growing. subways there just finished last year
@Herman Chen Hey Herman and welcome to Bigger Pockets! BP is one of the best online real estate investment websites. Not only does BP have free informative forums for you to learn and comment on, it also has free online courses, guides, and success stories from other real estate investors! You have come to the right place and I wish you all the best!
on your NJ property, how much is it worth, how much do you owe, and how much does it rent for?
My NJ property i paid $460k (worth about $440 today), I owe $110k, and rents for $2100/mo. All fees together add up to $11,000/yr
May I ask why are you holding on to a property in NJ that is losing money, do you think the price will go up?
How do you know it is worth that much?
Personally I would sell and get the $300,000 out of the NJ place and buy something you could get a positive return on
I guess I am holding on because I'm thinking of paying off the rest of the mortgage and then I can bet $1000/mo. I think it's worth that much cause I received a valuation. I also think it will appreciate, because it dropped a lot in value after I bought it and only this past three years has started to appreciate and almost return to the value I bought it at.
It's always hard to sell and take a loss because you have to admit defeat. But in reality, the price you paid for the property is completely meaningless and irrelevant (except for tax purposes, which are minor in this case).
The only question that matters is: could your $300,000 earn you a better return in this property, or somewhere else?
I think there may be some properties around $350,000 that can rent for $2800-$3100. You're right, it's hard to admit defeat
You are doing fine. The NJ property is close to breakeven. Just hold on until it's paid off. There is no need to sell.
I would sell one of the property in china. Buy some property in NJ, where you live.
Chinese property usually do not cash flow at all, even worse than CA. If it will continue to appreciate is a question.
You're right about the cash flow in China. I plan to sell one of my properties once I get my taxes in order, but that's a whole other issue. Thanks a lot for your input, I definitely will consider to keep it.
Looks like you are off to a great start. If it's me, I would sell my North Jersey property or refinance out and start making positive rental income. I imagine you purchased in the top of the Bubble. I could be wrong though who knows lol. Also, as far as your China properties.... keep them! The market over there is thriving in certain parts. If you don't need the money don't sell. Hold!!
Good luck and feel free to reach out if you want to go into buy and holds and ideas for your next move. If your ever looking to buy rentals or even do flips in the Philadelphia market feel free to reach out to me anytime. Our market is booming!
@herman chen I was always under the impression only Chinese citizens are allowed to purchase residential real estate in mainland china, is that true?
I'm curious to know how the us tax rules treat properties overseas. Do the same rules apply as if the property is in the US? Are foreign taxes deductible? Can you 1031 those oversea properties and use the gains to purchase stateside?
@Jesse Thanks for the suggestion. Paying it off and refinancing it to where I can get break even cashflow and using that money to purchase more properties is a great idea. I may end up doing that. You're right about the China properties. They are red hot right now. Although outside the major cities, there is a huge bubble about to burst. There are just way too many apartments, some at 800x-1000x the price 5 years ago, and empty.
I would love to expand out to Philadelphia. Some of my inlaws are there and would be an excuse to drive south once in a while.
@Sung Those are great questions, and I will soon find out. I only just moved back and my [new] accountant is just sorting that out now. US, or foreign citizens, are allowed to purchase ONE home per city. So if you live in Beijing, you can only buy one apartment in Beijing. This rule does not apply to Chinese citizens, so they can buy multiple units.
From what I understand from some friends (US Citizens) who have sold their properties overseas, there is no 'need' to declare overseas assets now. Only need to declare it when you sell it, and since the US doesn't know the original purchase price, they depend on the seller to declare that. And the difference in profit is taxed as income.
Anyone on BP know for certain?
@Herman Chen Welcome to BP! I'll agree with most posters here (and kudos on just letting some not-so-helpful comments just roll off your back, no need to waste energy there). If it were me, I would be looking to 1031 out of that NJ property. Yes it's hard to admit defeat, but if seeing negative cash flow now, and likely will for the next five years, how many years of $1000 a month will it take before you recoup all that loss and actually start making money? Too many.
If it were me, I'd 1031 that NJ prop and roll the value into a couple solid B/B+ rentals in other markets. If you go west and/or south, you can get some great investment props at a fraction of the price you paid for the NJ one. Here in Birmingham, you can get a great cash flow prop for $100k and get a ~20% ROI in the first year (assuming 20% down).
If you have the debt bandwidth, you could potentially take on additional loans and use the equity from the sale as down payments, giving you a tidy little portfolio pretty quickly. Assuming you sell for $300k, of which $100k goes to pay off your debt, you could use the remaining $200k in equity for down payments of approx $25k each (25% down can get you better interest rates), giving you 8 cash flow properties which would be paid for by tenants by the time you really need the income (retirement) and provide moderate rental income in the meantime.
You'd have to be able and willing to take on that much debt, of course, (so your debt-to-income ratio, annual income, credit score, etc will all impact this). If you don't want that many loans hanging over you, you could also split the difference, using $100k in equity to buy one prop outright, and then using the remaining $100k of equity as down payments on 4-5 properties, resulting in a smaller portfolio but less total debt. Either way, the upside is that tenants would basically pay for 75-80% of your cash flow properties over time, and you'd be able to diversify quite nicely.
I won't go into it here, but if you want to exchange into multiple properties, there are some important rules about identification of replacement props you should get comfy with, namely the standard 3 Property rule, the 200% rule, and the 95% exception. A simple google will let you know what's what, or here's a link explaining it all clearly: http://www.exeter1031.com/article_identification_r...
If you want to go that direction, of course, remember that the properties you exchange into must be worth at least as much as the NJ property, and you must roll over at least as much equity. So if you sell the NJ prop for $300k, with the above mentioned $100k debt/$200k equity split. Your new props would need to have:
- $200k of equity and $100k of debt if you want to exchange for the same total value OR
- If you don't want any debt, $300k in equity (you pay off your current loan and then put in $100k of your own cash to offset that gain), OR
- If you want to take on more debt to expand your portfolio, at least $200k in equity an $100k+ in debt
Basically you can have less debt in the new props as long as you replace that value with equity (so the total value remains the same), but you can never have less equity in the new props than you have in your NJ prop. If you want to exchange up in value, you can add additional debt and/or equity to the deal. If you take any cash from the deal, or take a reduction in debt that isn't offset by out-of-pocket cash added in, then you'll pay taxes on that 'boot'.
I don't have an in-depth knowledge of the Chinese market (but congrats on that appreciation anyway!) so I would defer to others on that. My understanding is that you can use a 1031 exchange for foreign properties, but you have to exchange foreign or foreign, US for US (though you can switch states etc). But maybe @Bill Exeter or @Dave Foster could chime in with some expert knowledge on overseas exchanges? If the market outlook for China is good, and you're not losing money, then HOLD, but if, as you say, you see a bit of a bubble forming, it would be good to know your options sooner rather than later.
Sounds like you're in a pretty good spot (other than that negative flow NJ prop) and you're in the right place to get all the info you need to develop a plan. You've got options - good luck!
@Herman Chen , welcome to BP! As you can see from the posts people, here are always willing to help and provide constructive feedback.
When I read your post I immediately asked myself how could you use this situation to your advantage. @Jesse Sobel 's suggestion is certainly the best course of action in my mind. I would also suggest if possible, you find ways to cut your expenses. Determine your 'needs' instead of your 'wants'. Take the extra money you save by eliminating some of your 'wants' and pay down the principal. Instead of paying off the loan in 5 years, set a goal to pay it off in 2.5 years.
As investors we like to focus on the cash flow but sometimes we have to take a step back and really assess the uniqueness of a situation. There are four areas of focus to a buy and hold strategy: Purchase for appreciation and no cash flow; Purchase for appreciation and cash flow (this is what we all want...do this as much as possible); Purchase but receive no appreciation and little to no cash flow (worse case...don't ever do this); Purchase but no appreciation and cash flow.
From your posts it sounds like you are in the situation where you are getting appreciation but no cash flow. But once the debt is satisfied you will start to cash flow. This would put you in the best buy and hold strategy bucket. Ok, you didn't make your money going in, but I think it is possible you can make your money going out. Do your research, determine your property's appreciation rate. In 5 years if appreciates enough that you can walk away with $10,000 or $20,000 in equity, would that be a win for you? Your NOI is $1000 cash flow per month...sounds pretty good to me. But does this amount meet your investing goals?
I would suggest that you define your investing criteria and determine what type of investor you want to be. For example, if your goal is to build wealth then buy and hold for the long-term is the way to go. Pay down debt and increase equity while cash flowing. You may not cash flow much or at all in the beginning but as you pay down your mortgage debt your cash flow will rise. Maximizing your equity creates personal net worth. Is your purpose for investing to receive cash. If yes, then you should probably be using a buy and sell strategy, such as flipping. I think once you answer these questions you will be better able to assess if this situation is truly a defeat or a mistake that has taught you some valuable lessons that you will use to improve your investing education and skills.
Good Luck, and by the way we have all made at least one big mistake. If someone tells you they have not, run. Everything they are doing is probably one big mistake.
@Paulette Midgette WOW, you nailed it right on - determine your property's appreciation rate - That's exactly what I need to do. I think if I borrow a couple thousand from BoMom, I can pay off my mortgage by end of November. Then at least I can positive cash flow while deciding what to do about the property. I like that unit because of it's location, but at the current rate, numbers-wise it makes sense to sell. Thanks for your suggestion to check the appreciation rate, and your post. I think that will make all the difference.
@Clayton Mobley Thanks for the detailed post. It's puts into perspective how much I still need to learn. I plan to pay off my debt to my NJ property by end of November to 'stop the leak' and then 1031 that and/or sell one China property to finance other purchases. I will take on a certain amount of loan to acquire more properties.
I'm set on selling the first of my China property cause in China you can't 'own' any property or land. When you buy it, you essentially purchase it for 50 years (now some are 70), after-which, if China doesn't want the land back, you are able to repurchase it from them at what price they deem. I purchased my first property there in 2005 so pretty soon it will be on the downhill.
And thanks for the three rules you mentioned. I'll definitely check them out!
@Herman Chen figure out what your return on equity is. I can guess it's pretty low.
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