Investor from CA, Stress test my plan!!!

27 Replies

BiggerPockets experts!

I want to get your thoughts and 2 cents from a philosophical and risk perspective.  I am 42 years old and my wife is 39, we have 2 kids, age 9 and 5. 

GOAL: Insulate my mid-long (5-10 years) term strategy (have income producing real estate to pay for fixed living costs + 5K month cash flow for investing) even during a 2008 housing meltdown.

I know debt can magnify the creation of wealth, but it can also magnify potential destruction.  Investor psychology is unique to each individual, whether they are more aggressive or conservative; I find myself in the moderate-conservative camp throughout my investing career (yes, I have listened to Dave Ramsey since 2000).  I have invested in REITs with my paper assets, but this is the first time I am investing in real property for the purpose of cash flow. Here is my situation, and would love to hear from you as to the risks I need to be aware of that may take me away from my goals. Since this is rental income, I will not lose sleep at night for temporary declines of real estate value.

Real Estate Owned (Assets, income, debt):

1. Tracy, CA Home, value is 400K, rental income is 2100-2400/month range (signing property agreement next month, converting this to rental from prior primary residence); no debt, no mortgage.

2. Birmingham, AL (in contract), Purchase Price 115K (fully rehabbed turnkey), value is 137K, rental income range is Gross 1200/month, 90K mortgage.  This is in a B+ to A neighborhood, 3300 square feet home

3. Birmingham, AL (in contract), purchase price ("all in" rehabbed), 60K, ARV 87K, gross rent 850/month, B neighborhood, Cash buy, no mortgage

4. SOMA Condo, Global City, Philippines Vacation rental (via Airbnb), 2014 average per month 600/month, 150K value, no mortgage

Liabilities:

1. Primary Home in San Jose, B Neighborhood, 700K value, 510K mortgage, 3300/month PITI

2. Lifestyle expenses 3000/month (our enjoyment)

Paper Assets:

1. Investment assets 1.4M (Yearly contribution of 48K)

2. Checking/Liquid Investments: 100K

Income:

1. Earned income (Net, highest tax bracket), $18,000/month (this is also net of  annual monthly investments to my paper assets)

Based on this information, what risks should I be aware of adding real property to my investments? In context of 2008 collapse? Based on my numbers, would you be more conservative? Aggressive? How so?

Thank you for your input!!!

Rollan

Why do you waste your time and money with all that SFH stuff?

You have $1.5M investable money! Buy an apartment complex. That's $120K/year cash-on-cash (8%) tax free. Then you can double your principal it in 3-5 years if you go for a value-add deal.

Hah! I want to learn this business first! My goal is to trade or buy up to multi units and commercial. Thank you!

@Rollan Dizon

Sounds like your starting off with pretty good deals, congrats.  

Are you working with a turnkey company for your properties in Birmingham? How where you able to get turnkey properties with 15-25k equity going in?  It seems like many if not most TK properties come at market value.  

Originally posted by @Billy Maloney :

@Rollan Dizon

Sounds like your starting off with pretty good deals, congrats.  

Are you working with a turnkey company for your properties in Birmingham? How where you able to get turnkey properties with 15-25k equity going in?  It seems like many if not most TK properties come at market value.  

 Yes, the first couple of deals were excellent! I am getting them through cash flow savvy. I am considering another, but the latest round of deals were not as attractive...

Why is Birmingham, AL more attractive than other popular places? E.g., IN, FL, PA etc..

Bay area living cost is so high. But 1.4M investment asset is amazing. 

Originally posted by @Harry Zhou :

Why is Birmingham, AL more attractive than other popular places? E.g., IN, FL, PA etc..

Bay area living cost is so high. But 1.4M investment asset is amazing. 

 Hi Harry, with my first investments, I used a turnkey provider that I trust. Birmingham was the one that gave me a reasonable cap rate, properties that I visibly liked and gave me a little equity. I am trusting their research, though I have been looking at a ton numbers ghethest few weeks. I dont expect bay area appreciation, this is purely for cash flow. My goal is to have half of my wealth in income producing real property and the other half in paper assets.

@Rollan Dizon

I reached out to you via PM to get your thoughts on Cash Flow Savvy.  Hope we could connect.

I wouldn't want a property giving me  1/2 a percent rent to sales price ratio. Essentially you have "dead equity" and a state of California that can be tenant friendly with your 400k property.

If your paper investments are with REIT's their returns cycle heavily. They took a bath years ago and now in the up cycle  many have done well in the last few years. There has been talk about the REIT's model not being sustainable and another round of expected earnings to start moving to the neutral or loss category in the future again.

With that information some investors are selling off and moving into hard assets and cashing out the gains over the previous years.

Your other properties you are buying are at about 1% to sales price ratio. I just do not buy at those levels but long term maybe it works for you.  

Originally posted by @Joel Owens :

I wouldn't want a property giving me  1/2 a percent rent to sales price ratio. Essentially you have "dead equity" and a state of California that can be tenant friendly with your 400k property.

If your paper investments are with REIT's their returns cycle heavily. They took a bath years ago and now in the up cycle  many have done well in the last few years. There has been talk about the REIT's model not being sustainable and another round of expected earnings to start moving to the neutral or loss category in the future again.

With that information some investors are selling off and moving into hard assets and cashing out the gains over the previous years.

Your other properties you are buying are at about 1% to sales price ratio. I just do not buy at those levels but long term maybe it works for you.  

 Joel, thanks, I know! California sucks for cash flow. My angle is for appreciation with the Tracy property long term while getting some cash flow. My paper assets is a well diversified stock, bond, energy, alternative investment portfolio that has been very consistent in returns. I only see the 1.5+ ratios in tougher neighborhoods, I have been leaning towards better neighborhoods, sacrificing a little cash flow for stability. Thanks for your input!

I take more issue with you buying a 3,300 sq ft rental house that rents for 1,200/month.  Maintenance will be a nightmare.  I like my rentals 900-1,500 sq ft.  

Beyond that, I like your approach starting slow and trading up to bigger assets.

Good luck. 

@Rollan Dizon

I would be a little more aggressive and take advantage of the low interest rates and leverage up. Who knows if rates will ever be this low again. I would try to lock in 15yr fixed mortgages for the properties you own free and clear and take that money and buy a few multi-families. I think you can handle an additional 5 properties easily with the amount of reserves you have to handle vacancies or CapEx. But be selective and buy quality over quantity. I would put down 50% ARV and leverage the other 50%. I would also consider buying commercial properties and in other parts of the country to diversify.

I think the 2 biggest risk of being a real estate investor is being over leverage and being sue by a tenant. Since you have plenty of reserves and your portfolio is still relatively small, I wouldn't worry about that. I would make sure you have adequate insurance and hold your properties in an LLC to protect your assets.

Best of Luck to you.

John

@rollan 

@Rollan Dizon congrats on the foundation that's been established. Just curious, how did you pick Birmingham, AL as a place to invest? 

@John Tu Nguyen :

@Rollan Dizon

I would be a little more aggressive and take advantage of the low interest rates and leverage up. Who knows if rates will ever be this low again. I would try to lock in 15yr fixed mortgages for the properties you own free and clear and take that money and buy a few multi-families. I think you can handle an additional 5 properties easily with the amount of reserves you have to handle vacancies or CapEx. But be selective and buy quality over quantity. I would put down 50% ARV and leverage the other 50%. I would also consider buying commercial properties and in other parts of the country to diversify.

I think the 2 biggest risk of being a real estate investor is being over leverage and being sue by a tenant. Since you have plenty of reserves and your portfolio is still relatively small, I wouldn't worry about that. I would make sure you have adequate insurance and hold your properties in an LLC to protect your assets.

Best of Luck to you.

John

John- thank you for your thoughts! I know if there was time to use leverage, now is prime time. Going forward, after I gain confidence that I can cash flow these first 2 SFH, i am in the camp of 50% ARV/Leverage, as I think that will allow me to sleep at night. I like to manage risk (its a big part of my focus), but I do know we get these rare opportunities to amplify returns. I am looking at multi units next, so I can have some exposure and understand how those work.

Originally posted by @Joe Fairless :

@rollan 

@Rollan Dizoncongrats on the foundation that's been established. Just curious, how did you pick Birmingham, AL as a place to invest? 

 Joe- Thank you for your feedback; it was tough work to get some stability in my family's finances, I feel good where we are, its now to turn on the "offense".  I chose Birmingham primarily through the turnkey operator I use.  After analyzing a few deals from different parts of the mid west, it offered the most decent cap rates, cash on cash, and still left me with a little equity in the deal.  I will look up your podcast, i listen to about 4-5 hours of podcasts a day.  Thanks!

This post has been removed.

@Rollan Dizon

 Way to go man, you have great diversification and balance. You seem like the poster child for the people who are least in need of going to the dentist are the one who go and the ones who don't need to do. Congratulations, you don't need a stress test.

I would suggest purchasing a great deal versus any old opportunity.

Avoid individuals who are over charging for their properties and maybe consider the Virginia / Indiana or Ohio markets. 

Multi-family, SFR, and duplexes in the areas you feel comfortable investing.

@mark shaffar

Thanks Mark! Made a ton of mistakes before, thank goodness I was able to recover. I do wish I could have invested for cash flow 10 years ago! Instead, squandered it on cars and "showy" crap...

Cheers to successful real estate investing!

@Rollan,

Your numbers look excellent.  I'm assuming your $100K is your emergency fund.  If so, aside from your $3K / monthly expenses - what are all of your monthly expenses for living in your house and maintaining your rentals?  

I ask from a similar moderate-conservative standpoint.  I agree that low rates and leverage should be taken advantage of too.  My question is - with regards to your stress test - do you have a satisfactory personal emergency fund and business emergency fund?  This question also stems from the stand point of separating the financials.  Treat this like a business now rather than later. 

Other than that -- with regard to you moving forward to multi-families, consider 2, 3 and 4 units if you want to move slow. I have SFH and a triplex - the work is the same. On some of the podcasts that point is made even on the larger scale and I believe it.

I hope that helps.

Originally posted by @Michael Roy :

@Rollan,

Your numbers look excellent.  I'm assuming your $100K is your emergency fund.  If so, aside from your $3K / monthly expenses - what are all of your monthly expenses for living in your house and maintaining your rentals?  

I ask from a similar moderate-conservative standpoint.  I agree that low rates and leverage should be taken advantage of too.  My question is - with regards to your stress test - do you have a satisfactory personal emergency fund and business emergency fund?  This question also stems from the stand point of separating the financials.  Treat this like a business now rather than later. 

Other than that -- with regard to you moving forward to multi-families, consider 2, 3 and 4 units if you want to move slow. I have SFH and a triplex - the work is the same. On some of the podcasts that point is made even on the larger scale and I believe it.

I hope that helps.

Mike, great thoughts. I am having my attorney draft my LLC, and I am moving towards creating separate accounts for personal and business once I get my EIN. I agree that is a prudent thing to do. I can't wait for my 2 first investments to cash flow and give me confidence to go with multi units.

@Rollan Dizon

Getting your asset protection in place is your number 1 priority right now.

Good Insurance, and a good legal structure separating your personal and business assets. You've done a great job building a good net worth don't risk it to an ambulance chasing lawyer. Make sure you take into consideration California's minimum tax on each entity, $800 last I knew.

Sell the house in Tracy, 1031 into a small apartment in one of the several Central Valley towns that provide cash flow that rivals what you see in the south and Midwest but has a higher ceiling. I am a Dave Ramsey fan (and ELP) but have a slightly different opinion on debt when talking about a multi family property. Even at the bottom of the crash in 2008/2009... Class B apartment complexes in Northern Ca were full and rents were stable or rising. If anything the tenant pool improved dramatically. Since you appear to have a good income you can plow extra income from that property to pay off the note like a debt snowball. In 5-7 years you could have a paid for apartment complex within 90 miles of your house rather than having a bunch of sfr's halfway across the country.

@Rollan Dizon

  since no one mentioned it... I would consider diversifying into lending as well. short term debt deals that pay 10 to 15%... you could hook up with a good RE broker in CA and make nice passive income without the TTT  hassles.  Be in and out of deals so you maintain good yield but also very good liquidity so you can pounce on a screaming deal if it presents itself

I also second the thought about a  3300 sq ft home for a rental... your capex and turn over costs when tenant leaves will be much higher and your cash flow will drop quite a bit.

I like B ham I do a lot of business there.  as an aside

@Rollan Dizon ,and @Michael Roy ,

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