All Forum Posts by: Aaron Lancaster

I've often heard it said on the BP podcasts that if the deal works, then you should buy it regardless of what you think might happen in the real estate market. Of course it's very difficult to find good deals these days, but if you find a deal that meets your buying criteria then there's likely not a good reason not to buy it, unless you don't have sufficient reserves to handle any surprises that come up shortly after purchasing.

I did notice this was posted 4 years ago when I responded. I was simply interested in the topic because it's something I've thought a lot about. While I don't expect an impending depression (likely no one could accurately predict the timing of one), I am just interested in being prepared against the remote possibility that we could experience a depression at some point in our lifetimes. Your chances of surviving such an event probably depends on how leveraged you are and whether you have sufficient reserves to make it through.

When investing in real estate, you should do well in times of economic expansion/prosperity and moderate to high inflation. It will likely do poorly in a recession, deflation or hyperinflation, and will do very badly in a depression like we had in the 1930s. A real estate investor who bought a property on the eve of the Great Depression wouldn't have recovered the full value of their investment until about 4 decades later. While it's unlikely we'll have another event like this in our lifetimes, it could happen and so it would be good to hedge against it.

I think you just have to decide how balanced of an investment portfolio do you want to have. If real estate takes up too heavy a weighting in your portfolio, then you'll be hurt more in a recession, deflation, hyperinflation, or depression. When using leverage, real estate can easily take up a significant portion of your portfolio so you become very exposed to these economic risks.

Personally, I've decided to use moderate leverage to build my real estate portfolio while I have an earned income with the goal of ultimately owning my properties free and clear. Owning them free and clear will significantly reduce the risks that economic environments could present. I keep a full year's worth of gross rent in reserves because I'm just risk-averse by nature. I also keep the total amount of all my insurance deductibles for each property in reserves in case emergency comes up. My "reserves" are actually invested in equal parts cash, long-term Treasury bonds, the total work stock market, and gold, which is a very defensive asset allocation that should theoretically hold its value and likely grow in just about any economic environment.

@Patrick Davis, I would agree with you that mortgaged, cash flowing real estate would do well during high inflation. In fact, the risk adjusted return (return per unit of risk, typically measured in standard deviation) would probably be significantly higher than that of holding gold. However, my main thought process was where do you invest your money while you save up for your next real estate deal? For me, taking a somewhat neutral position by holding all of the major asset classes (stocks, government bonds, cash, and gold) held in equal weightings has been working well for me. I'm just curious what others are doing.

@Ryan Blackstone - Nice! Are the ones you bought both duplexes? Are the units 2 or 3 bedroom? 

Nice to meet you, Jennifer.I always enjoy meeting other NWA investors. The property is a duplex and each side is just over 1,300 sq ft. Its 2 bed / 2 bath and is currently renting for $995 on one side and $895 on the other.

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

Purchase price: $247,000
Cash invested: $61,750

Our 2nd rental property and 1st multi-family.

@Bob Romano - I think I'm leaning to go this route. I'd be curious, do you just coordinate to have the annual chimney swept and then just have the tenant combine the cost with rent for one month out of the year? Or do you just trust the tenant to do the annual sweeps? If the latter, how do you know whether or not they're sweeping the chimney every year?

@Nathan Gesner - That's a good point. I don't know whether or not I could increase rent by that much by having it functional but it's something to think about and research.

@Bruce Woodruff - $1,500 is what I've been quoted by a local inspection company, but I do believe that the ongoing maintenance, inspections, cleaning, etc... would end up being a big expense that I'm not sure I'm willing to take on. The electric fireplace is a good idea, although, if I went that route, I'd be tempted to still pay to get the fireplace functional just in case the tenant, for some stupid reason, decides to remove the electric fireplace and use the wood burning one behind it. Is it fairly easy to install an electric fireplace, and does it require plugging the chimney flue before installing? (I'm a noob when it comes to chimneys! Can you tell?)

I purchased a duplex earlier this year in a B-class neighborhood. There is a wood burning fireplace in each unit, but after having them inspected, neither are safe to use and need a total of about $1,500 to bring them up to code. I'd like to simply tell the current tenants they're not functional and that they're not allowed to use them. However, there's always the risk that they will use them anyways without my knowledge.

Nearly every other duplex on the street has a wood burning fireplace, so I'd prefer not to cap it / block it off in case I ever want to sell it.

 Should I go ahead and spend the money to make them functional and then still tell them (and put in future leases) that they're not be used? Or should I just leave them as is and tell them not to use them?

That worked, thanks Steve!