Investor · Fort Worth, TX · Member since 2016 · 20 posts · 17 votes
Hey Guys!
I wanted to share some knowledge I learned with you on this beautiful Saturday here in Fort Worth, Texas. I live only a couple blocks away from the TCU stadium and so I can hear when the big plays happen. This is a very electric atmosphere. Anyways, I have been into real estate investing for about 13 months. I have flipped 6 houses, built 3 houses and have 18 doors for rentals (just picked up another duplex). And I have been contemplating whether I am doing the right thing or not. But I found my solution through a mentor which is stated below. It was vague, but that was his intention.
So I had a guy on BP ask me a series of questions about my flipping and holding strategy and this was my final message in the DMs.
The last question he asked is if my strategy is short or long term?
"Long term. My strategy is all long term. You have heard before that real estate is not a get rich quick game. And the only way to truly become rich is through long term holdings. But, don't let that scare you, you get paid every month too!
The way I see it is this: If I flip a property and make 25k, I only make 25k, one time. But when I get a property for free (through financing), own 30% equity (free through financing), and charge a $1200 rent, I can make my money back in about 5 years. You do that 20 times in a year for 5 years, you have some serious cash flow and have enough earning power/assets to do anything you want. Ever.
This whole thought process started with one of my mentors, who is worth around $500m, asked me 6 months ago: "Beau, why are you selling your houses. Why would you want to give away net worth?"
And I thought about it. Best described in an example: say I make 25k off a 100k flip house. But through financing I can retain that house for FREE and have had a 30% equity, or 30k (increase your net worth). So technically, I am making LESS money up front selling the house (25k cash vs 30k net worth), and loosing infinite money down the road through rent and property increases.
The way to make your money back through retention is to slap a home equity line of credit on that house. Usually around 70-80% of your equity holding which would be 21-24k disposable money for business. So, what would you rather have? 25k profit up front OR 21-24k profit up front, a 30% equity stake and rent for many years to come?"
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
10y
Originally posted by @Account Closed:
And I thought about it. Best described in an example: say I make 25k off a 100k flip house. But through financing I can retain that house for FREE and have had a 30% equity, or 30k (increase your net worth). So technically, I am making LESS money up front selling the house (25k cash vs 30k net worth), and loosing infinite money down the road through rent and property increases.
Sounds like a guru pitch to me... The only way you're losing "infinite money" down the road on the flip is if you're throwing away that $25K in profits. If you invest that $25K in profits for -- let's say -- 10% compounded return, that $25K will be worth $40K in 5 years, $64K in 10 years and $168K in 20 years.
Of course, you have to factor in taxes and you have to be able to make 10% compounded returns (which hopefully most good real estate investors and business people can do)...but, the math is still pretty simple. If you need cash flow to sustain you as well, then just do the math for a longer compounding time.
Ultimately, there is more than one way to get rich/wealthy in this business. If your mentor is telling you otherwise, find a new mentor...
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
10y
Originally posted by @Account Closed:
So say in 7 years I have 100 rentals (I will be 31 years old in 7 years), 50 free and clear, and the rest with 30+% equity. All of the properties I have received great returns, steady through the years, and a huge net worth from my assets. Now, I sell all of my free and clears and make anywhere from $5-10mil. BUT I still own 50 other income producing assets with high(ish) equity.
First, where are you finding the money to buy 100 rentals? Either you have a lot of cash to put down as down-payments (unlikely given your age and this discussion) or you're leveraged at near 100% LTV.
If you're 100% leveraged, what happens if the market turns? If you ask some people who were in that position back in 2007-2009, what happens is that you go bankrupt. What is your hedge against that scenario? Do you have a hedge? Or are you just hoping that there is no real estate downturn in the next seven years -- unlikely given that real estate often cycles in about 10 year periods, and we're going on 10 years...
If your mentor is telling you that 100% leverage is a good strategy to build a large residential rental portfolio, I'm going to guess that he hasn't been doing this himself very long (at least not before 2008), and I'm going to suggest to you that he's giving you REALLY bad advice.
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
10y
Originally posted by @Account Closed:
When you are exclusively or heavily in the flip game, would you be able to hold you pockets to save $5-10mil? And how long would that take? And would you have income producing assets still pumping with that much cash on hand? I think everyone would say no.
I know lots of people who would say yes.
As for how long, it depends on your volume and your average profits. My first 50 deals are detailed on my website with the nitty-gritty financial details -- we made over $1M on those first 50. We've done nearly 200 more since then (some partnerships and some equity deals that were smaller) and have had several other real estate income streams over the years (licensed agent, staging, etc).
And please don't say that I'm an exception -- I'm far from the most successful flipper I know. In fact, there are several on this site that have done many times the deals I've done and have generated many times the profits I've generated. Personally, I know several flippers who have hit the numbers you mention above -- and again some much more than that.
As far as having income producing assets, as I've said many times in this thread, all the serious flippers I know take their profits and roll it either into more flips or into income producing assets. So, the answer is yes.
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
10y
Originally posted by @Account Closed:
I could flip if I wanted, but I rather throw a LOC on it and lever up. Get my money back for other investments, get rental income, gain property increases. .... Equity and LOC sound much better to me most of the time.
Again, spoken like someone who hasn't yet been through a full real estate cycle. Come back in a couple years and tell us how that's working out for you...
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
10y
Originally posted by @Account Closed:
For flipping, you can bust your *** and make 7-figs a year. But what if you don't work the next year? What's your income then if your asset holdings are small. If it takes me an average of 2-3 weeks to fix and rent my houses. Double that for finishing touches to flip. Putting me around 17-20 house a year with my crew. Income producing.
I can't believe I have to say this for the sixth time in this thread, but here's the answer to your, "But what if you don't work the next year? What's your income then if your asset holdings are small."
If I work one year and make 7-figures (your scenario that you just mentioned), I now have at least $600K after taxes (more if I'm smart about my tax shelters) to plow into other investments. Typically, those other investments for me are generating 12-13% per year in nearly passive income.
So, if I'm smart, flipping for one year and making 7-figures allows me to sit back and collect about $70-90K per year for the rest of my life -- nearly passively. And if I can reinvest that income back into my portfolio -- assuming the worst case numbers of $70K per year and 12% returns -- that $1M is $10M in just seven years.
How much income are you making after that first year with 20 fully leveraged houses?
And how much debt do you have?
And how much risk do you have being fully leveraged?
Again, I'm not saying buy-and-hold isn't a great strategy. It's an awesome strategy! I own a bunch of rentals myself. But, there's a difference between smart buy-and-hold portfolio that uses positive leverage in reasonable amounts and a buy-and-hold portfolio that relies on 100% leverage at the PEAK of the real estate cycle.
In other words, buy-and-hold is good. What you're doing is a recipe for disaster.
That said, perhaps I have no idea what I'm talking about and in a couple years, you'll come back here and prove me wrong...
Beau is describing one strategy...buy and hold. J Scott is describing the same strategy but it is buy one asset (sell) and hold a different passive asset (plus a separate incremental flipping strategy).
Beau is also relying on 100% leverage to scale quickly with high risk. I'm relying on compounding effects to scale moderately with low to moderate risk.
I'm a big gambler, but even I wouldn't gamble like Beau is...
I'm locked in my LOC's for 7 years. And I live in Ft Worth, TX. Housing shortage is a real thing here. And rental properties are even more scarce. 400k people moving here this year along with the first installment of employees following their industry (Amazon, Toyota, Facebook, etc). Do I think that will come to a complete stop? No. Do I think I might have some trouble in the next 12-18 months with the market where it is? No. Will I have trouble when the market tanks? No. Will my bank pull my note? No. Will my tenants stop paying? No. You know what I will do when the market tanks? Raise rents.
And your acting like I am incompetent of basic real estate knowledge. Everybody knows about the cycle and where we are. And you don't think I have a plan and investor money to buy up all the cheap houses in the next year or two when the market crashes/corrects? You are sadly mistaken.
Residential Real Estate Broker · Hurst, TX · Member since 2015 · 40 posts · 22 votes
10y
Man, tough crowd for a fairly new investor that is taking massive action and excited about what he's doing. Happy for your early success Beau, keep it up. Looks like you have a good handle on our local market and are planning ahead. Our investment strategy and goals seem to be very similar in this market.
Real Estate Agent · Clearwater, FL · Member since 2015 · 176 posts · 148 votes
10y
It's late, so I'm going to sum up in my own way.
Milk and eggs, or steak and fried chicken?
Nothing wrong with either choice. But the smart money is on having enough cows and chickens to keep the milk & eggs coming while you eat your steak and fried chicken.
Sometimes you'll get a few hens in exchange for a steak dinner. Sometimes you'll need to trade hens for heifers.
Lean times come and go. Plan for those.
And, of course, don't put all your eggs in one basket.
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
Good stuff, and agree there are investment life cycles to be considered and exceptions ... I for one prefer to seek out the exceptions (left coastal as opposed to your tweener coast lake or river) and accept the long term maintenance and upgrades in return for the sustainable appreciation rather than the transactional drag and hassle of dancing in and out of "inventory" every 8-12 years or less (if you're J.) like you're running some sort of used car lot ... please tell me how that is sub-optimal :)
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
10y
Leverage in the right properties and markets can have acceptable risk during a downturn. During the crash, many investors' portfolios in linear or job growth markets had 5%...maybe 10% market value declines and the rents and vacancy did not skip a beat...some rents went up due to increased demand.
I for one prefer to seek out the exceptions (left coastal as opposed to your tweener coast lake or river) and accept the long term maintenance and upgrades in return for the sustainable appreciation rather than the transactional drag and hassle of dancing in and out of "inventory" every 8-12 years or less (if you're J.) like you're running some sort of used car lot ... please tell me how that is sub-optimal :)
The biggest risk I see in high-priced places like California is the three-standard deviation type events that can cause great investment pains. For example, what happens if you're heavily invested in Silicon Valley and the tech sector has a shift out of that area? Or if you're heavily invested in SoCal and there is a major earthquake that drives large groups of people out of the area?
These aren't likely events (low probability) but are very high impact if/when they do occur. If they don't occur in your lifetime, all is good. If they do, it can bankrupt you.
Everyone has a different utility function for risk, so this is always going to be a personal decision...
Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes
10y
Beau, I'm sorry but something is not right with your example there. A rehab of $6.5K? I have had make ready's that cost as much as that. (Fortunately, not too often.) That number is so small that there are only two possible scenarios. (1) You have found a pristine duplex that the owner was willing to just give away 30% of the equity or (2) You are deferring tons of cap ex and repairs and just kicking the proverbial can down the road. My (and most people's experience) is that pristine properties don't generally come at that much of a discount. Moreover, most banks want to see more than just $6k in repairs before they agree you've increased the value by almost $50k. (I know because I called most banks this spring in Tarrant County.) If you are at full leverage and deferring repairs and cap ex, then I would submit your strategy is even more risky than how @J Scott (correctly) perceives it.
I for one prefer to seek out the exceptions (left coastal as opposed to your tweener coast lake or river) and accept the long term maintenance and upgrades in return for the sustainable appreciation rather than the transactional drag and hassle of dancing in and out of "inventory" every 8-12 years or less (if you're J.) like you're running some sort of used car lot ... please tell me how that is sub-optimal :)
The biggest risk I see in high-priced places like California is the three-standard deviation type events that can cause great investment pains. For example, what happens if you're heavily invested in Silicon Valley and the tech sector has a shift out of that area? Or if you're heavily invested in SoCal and there is a major earthquake that drives large groups of people out of the area?
These aren't likely events (low probability) but are very high impact if/when they do occur. If they don't occur in your lifetime, all is good. If they do, it can bankrupt you.
Everyone has a different utility function for risk, so this is always going to be a personal decision...
You are correct sir ... if there is a huge Earthquake and my properties fall into the ocean, I'm going to have a bad day LOL :) Similar to you, though, it is not my only income stream (though it is a core and my favorite one) and at the end of the day worse case is any natural disaster that doesn't kill me can't take away my REI skills ... I used them to build a nice portfolio once and I can do it again. Worse case, so can you, so can Bill, so can Jay (and sounds like he has), and hopefully so can Beau 'cause I agree with you J that with all that leverage he may need to if he doesn't consider your warning and needs to learn that lesson from the school of hard knocks. Beau, I know J's comments may seem harsh, but I think they are spot on and far kinder than learning the really hard way, you should give it serious consideration while the market is still hot and you have the opportunity to shore up your financial position. Or not ... you're choice ... but I think if you choose not to the market may end up deciding for you ...
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y
@J Scott OH what short memories we have.. not sure were you were cira 1989.. I know where I was I was watching the world series between Oakland and SF in my office in San Mateo when all of a sudden my puter monitor flew off my desk and we had a very big shake.. couple that with the war and by 1990 many parts of the bay area even such hallowed ground as SF Los Altos hills etc etc saw price drops in the 30 to 50% range.. and it stayed flat like that until about 97 to 98 then made new highs in 2000 prior to the dot com bubble .... so it was about 10 years to recoup... equities and stabilize a region.. so your thought process is not that wild of thinking... and its not that is a low probability its a certainty that there will be a quake in socal and SF Bay area no doubt about that.. just don't know when.. they seem to be spaced out in N cal about 80 years.. so looking at 2060 is for the next big loma Prieta type event.. So cal more frequent.. Alhtough with the new bay bridge it should be able to stand up .. whereas the old one a we know lost part of the driving deck and the 880 Oakland freeway pancaked killing scores.
Investor · Detroit, MI · Member since 2012 · 119 posts · 64 votes
10y
Great thread. I see value in both flipping and holding. Personally I hold.
I really think it depends on the market. In my market I can still find good houses for 30K (on the MLS believe it or not). I put 5-10K in rehab and cash out refi on the appraised value in six months. Then I get all or most of my money back and still make a lot of money off the top renting it.
The last house I bought for 31K and did a 12K rehab. It appraised for 55K, which was lower then I hoped, but most of my cash came back. It currently rents for $925. Escrowed mortgage payment is $362. I manage it myself. Everything in the house is basically brand new, so I don't expect too much maintenance for awhile. If you say $200 a month in maintenance/misc expenses, I'm still making 300-400 bucks and I have most of cash invested back in my bank account.
You are correct sir ... if there is a huge Earthquake and my properties fall into the ocean, I'm going to have a bad day LOL :) Similar to you, though, it is not my only income stream (though it is a core and my favorite one) and at the end of the day worse case is any natural disaster that doesn't kill me can't take away my REI skills ... I used them to build a nice portfolio once and I can do it again.
Absolutely. And I certainly didn't mean to imply that I think those areas are bad investments. On the contrary, they tend to be great investments. Just pointing out that there are risks in all aspects of investing, and the risk profile of investing in high-priced areas tend to be a bit different than the risks of other types of buy-and-hold.
Investor · san antonio, TX · Member since 2016 · 133 posts · 43 votes
10y
the 25k you get from flipping the house now would be better spent putting down on a property with a higher rent to price ratio than keeping it in a property with a lower rent:price. you would save on the selling commission and the cost of a 1031 exchange though, but whats that compared to years of better returns.
Great thread. I see value in both flipping and holding. Personally I hold.
I really think it depends on the market. In my market I can still find good houses for 30K (on the MLS believe it or not). I put 5-10K in rehab and cash out refi on the appraised value in six months. Then I get all or most of my money back and still make a lot of money off the top renting it.
The last house I bought for 31K and did a 12K rehab. It appraised for 55K, which was lower then I hoped, but most of my cash came back. It currently rents for $925. Escrowed mortgage payment is $362. I manage it myself. Everything in the house is basically brand new, so I don't expect too much maintenance for awhile. If you say $200 a month in maintenance/misc expenses, I'm still making 300-400 bucks and I have most of cash invested back in my bank account.
925 on a 55k house? holy crap, is that normal for your market?
Great thread. I see value in both flipping and holding. Personally I hold.
I really think it depends on the market. In my market I can still find good houses for 30K (on the MLS believe it or not). I put 5-10K in rehab and cash out refi on the appraised value in six months. Then I get all or most of my money back and still make a lot of money off the top renting it.
The last house I bought for 31K and did a 12K rehab. It appraised for 55K, which was lower then I hoped, but most of my cash came back. It currently rents for $925. Escrowed mortgage payment is $362. I manage it myself. Everything in the house is basically brand new, so I don't expect too much maintenance for awhile. If you say $200 a month in maintenance/misc expenses, I'm still making 300-400 bucks and I have most of cash invested back in my bank account.
925 on a 55k house? holy crap, is that normal for your market?
In the area I invest it is. I could have probably gotten 1K, but I wanted to rent it quickly. I currently have one in works for 35K. Only needs 4-5K in rehab (I do most of this myself though so my prices are a little lower) and it will rent for $950.
It definitely is harder to find deals like this now though in my area, but I found this on the MLS. I just offer low and I buy cash so they accepted.
I'm locked in my LOC's for 7 years. And I live in Ft Worth, TX. Housing shortage is a real thing here. And rental properties are even more scarce. 400k people moving here this year along with the first installment of employees following their industry (Amazon, Toyota, Facebook, etc). Do I think that will come to a complete stop? No. Do I think I might have some trouble in the next 12-18 months with the market where it is? No. Will I have trouble when the market tanks? No. Will my bank pull my note? No. Will my tenants stop paying? No. You know what I will do when the market tanks? Raise rents.
And your acting like I am incompetent of basic real estate knowledge. Everybody knows about the cycle and where we are. And you don't think I have a plan and investor money to buy up all the cheap houses in the next year or two when the market crashes/corrects? You are sadly mistaken.
Give it a break @J...stop being a troll
I know where I am and I know the risk involved.
"Housing shortage is a real thing here. And rental properties are even more scarce." -Wrong. It is a real thing and rental properties are scarce.... NOW. Supply and demand. When there is scarcity builders will build inventory until there is an equilibrium. Then there will an event (recession, natural disaster, regional issues, etc) and there will be glut of rentals.
"400k people moving here this year along with the first installment of employees following their industry (Amazon, Toyota, Facebook, etc). Do I think that will come to a complete stop?"Wrong- just plain wrong. I don't know where you get your 400k a year figure but it is demonstrable false by 3x times. Fact check this. While your at it, why don't you google the term "boom town" and see what comes up. I recall people talking about 2,000 new residence coming to Vegas every week in the early 2000's. How did the buy-and-hold crowd that was 100% levered do from 2007-2012?
"Do I think I might have some trouble in the next 12-18 months with the market where it is? No. Will I have trouble when the market tanks? No"If you truly don't think that you might have "some trouble" in the next 12-18 months you are reckless as you are foolish. How did real estate investors do after 9/11? Across the country and specifically in NY? Can't happen in Dallas you say? The people of Oklahoma City in '93 might disagree with you. But that is an extreme example (for an extreme statement on your part). Do you claim to know how the market and our economy will react to a President Trump? Regardless of your political beliefs, to think that a presidential election in less than 50 days might not have some volatility in the overall markets is head-in-the-sand kind of thinking.
Will my tenants stop paying? No. You know what I will do when the market tanks? Raise rents. -Wrong. When the market tanks people will be out of work and not be able to pay you your rent. They will move in together, delay moving out of their parent's house, move back into their parent's house, become homeless or move to other (cheaper) locations. Please, PLEASE ask anyone who has been a landlord through ANY downturn and ask them how much they had to lower rents when the market tanks. I had to lower my rents an average of 25%. When you are 100% levered, that means you will now being coming out of your pocket big time. The fact that you think you get to actually RAISE rents when the market tanks tells me you will not be long for this investing world and have no clue how markets, economics or real estate works.
"And your acting like I am incompetent of basic real estate knowledge." First off, incompetence is a function of execution, knowledge is a function of experience. You have done a few deals the last year. Congrats. Warren Buffet says you only know who is swimming naked when the tide goes out. You haven't done enough yet to demonstrate that you are competent. You certainly haven't been in the game (or life) long enough to have real life knowledge. You know who does... @jscott. You should listen to the guy - even if you don't agree with him. He is trying to help you.
"Everybody knows about the cycle and where we are. And you don't think I have a plan and investor money to buy up all the cheap houses in the next year or two when the market crashes/corrects? You are sadly mistaken." So Nostradamus, where exactly are we in the "cycle?" Since everyone knows, right? So why are you buying buy and holds right now if you think there will be a "market crashes/corrects" in the next "year or two?" That seems pretty "incompetent of basic real estate knowledge" to not have your powder dry and be 100% levered if this is your expecation. You talk of having investor money lined up? Ha! See who can/is willing to finance a guy going broke because he is losing $200/month/door on his 100 units because tenants aren't paying rent and you have had to reduce your rent prices by 20%. That investor money comes quick, and dries up even quicker. You will find this out. Oh, and if you think there is a market crash coming in the next 1-2 years, then why did you say about 4 sentences ago? "Do I think I might have some trouble in the next 12-18 months with the market where it is? No."
@Jscott is a HUGE asset to this community and has over 16k posts over the last 8 years. He has probably forgotten more about RE than you will learn this year in all your deals. I know you were looking for an "atta boy" for being so successful at such a young age, and I was about to applaud you for that and your tenacity. But then you called a respected member of the community a troll when you didn't get a universal proclamation of how amazing you are.
