All Forum Posts by: Adam Hershman

@Tyson Hartley & @Mitch H.

Generally the income qualification for the loan would be decided by the lending institution. In my experience it is very unlikely that a lender would take into account the rental income, unless they were already leased units. Some lenders, like Mitch said, will do a market report to determine what rent should be, but in my experience that is more used to judge the viability of the loan, not to raise the limit of what can be borrowed. Generally if you don't have tenants in place, and sometimes even if you do, don't count on your lending institution to include that income for purposes of approval. 

Adam

 This is exactly what I advocate against. The idea that you are not personally liable for debt. It feeds into the new bubble and it fed into the last one. Also remember that the reason the stock market dropped 38% in 2008 was almost exclusively due to RE transactions with no sense of risk, no sense of personal obligation, and no sense of indebtedness. This is why CMOs went so terribly sour so terribly quick, because people said "Oh no its fine, I can walk away because I'm underwater, sure I lose my down payment but oh well at least I don't have to pay the othert 80%." And their banks were giving them loans, when every sane brain cell in their heads said the borrower had no real ability to repay it other than the premise that RE always cash flows and always goes up. It's dangerous, it's irresponsible, and it has cost me a fair amount of money over the last 8 years in my home value, as well as market investments, so it's something I'm fairly passionate about.

My biggest point is that no one here seems to think in these terms. Everyone says they remember 2008, and I'm sure they do, but apparently they don't remember 2002-2007 when prices were skyrocketing and people were taking on multiple properties that they didn't fully understand or consider the risk involved with such large amounts of debt. Do you know why the mortgage process has become so cumbersome? Because banks have to now safeguard against borrows like that. They have to take on extra risk mitigation measures, because apparently to the American public, debt is the lenders risk that you won't pay them back.

In my opinion, those that default on debt when they have the reasonable ability to pay for it, are unethical, irresponsible and essentially dishonest. You put your name to something, and agreed to repay it, how you can see that as only the lenders risk is beyond me. Again I'll bring up the fact I wish companies could act this way. What if Apple decided to stop paying interest on those $122B+ debt obligations? Would you think it was fine? Would you think that individual investors took on too much risk by investing in a company that doesn't honor their legal obligation to pay the percentage of interest rate they issued the debt obligation? No, you would expect Apple to do their due diligence and have a strong cash position to cover any loses, that's part of what makes them a good company, their balance sheet isn't overflowing with debt, its calculated and risk managed debt. And again, Apple doesn't think they are worth their assets, they know they are worth their assets less liabilities, and yes, they do consider debt obligation THEIR liability, not the lenders, because if they don't pay back that debt obligation, it means they won't be in business for very long. 

What I'm trying to get at is that people need to stop thinking of RE as this magic asset that they can't lose on and behaves differently than any other investment, because that's what caused the first bubble, and it will sure as hell cause another one if everyone goes back to the same practices. Also I'd like to wait a bit longer for our next market crash, I mean are REI so greedy that can't give the market a decade to recover? Don't forget that this high leverage REI greed also cleaned out REIs themselves, I know where I live (Las Vegas) the housing market took a bigger dip than 38%.

I always advocate for having alternative assets like RE because it's diversification against the broader market and inflation. However I never advocate for taking on debt that can't reasonably be serviced, I think the problem here is too many people believe most RE properties can positive cash flow forever, they don't realistically review the opportunity and they don't take into account that debt obligation. When those things are done correctly, it works beautifully, and you can certainly become wealthy investing in RE, like most other things in life.

Unfortunately because of the Feds monetary policies over the last few years, they have essentially promoted a re-hash of 02-07, and there is no shortage of people on BP who promote the SAME ridiculously high leverage program as Gurus, and then turn around and bash those Gurus systems for being irresponsible. It's pure madness. The only good news is that everything should take a hit when interest rates start to rise, and hopefully that can slow the RE climb. In my local market, I've seen around a 20% increase in appraised value over the last year, and if history is any indicator, that means my house will be ridiculously overvalued in 5 years. Unfortunately I bought my primary residence in May of 2007, when it was also ridiculously overvalued, but I had sold my prior home which was ridiculously overvalued, so I'm not complaining but I'm also paying a mortgage that is ridiculous compared to the apprised price of my home now, and yet I still want the RE market to slow. You might think that sounds crazy, but again, this type of bubble is inherently more dangerous than say the .com bubble, because of the ridiculous size of the debt on these assets. Sure percentage wise the .com market decline was about 1% worse than the 2008 crash, but let's not forget that it also took a commitment from the Fed to spend $700B, and an actual spend of around $620B  to stabilize the economy. How much worse would things have been if there had been no response. You may ask why would the Fed have to become involved this time around? Well because of that MASSIVE debt I was talking about earlier, it wasn't just industry specific companies closing, it was the entire financial system, with massive debts to collect in these RE assets. Can you imagine if people had paid their mortgages through 2008 how much higher the housing market would have been and worse the crash would have been? 

I can understand trying to get to a place that you can strike a balance, and again I'm not saying leverage is bad. Leverage is very powerful when used correctly, but when it's not, it generally costs everyone else more than the person who defaults on the loan, and that seems inherently wrong to me.

Adam

@Tanya F.

I would approach the tenant and ask them to help pay for the repairs, although I'm not sure I would ask them to foot the $700 bill. Personally I don't know how you still have an AC system from the 70s, I'm in Las Vegas where if your AC makes it 10 years your lucky. If you were planning on replacing it anyway, and absorbing the entire cost yourself, I would think that you should be charging for the amount of time between now and the planned replacement date, not the cost to repair something you were already planning on replacing anyway. That's just my opinion though. Also I would make sure your local tenant landlord laws dont prohibit you from charging them over and above their pet deposit, just to cover all your bases.

Adam

Additionally you could skip the LLC, and purchase the property 50/50 IRA and personal money as tenants in common. You can not use any part of the property for personal gain, and must strictly segment income and capital gains back to the respective owners, but there is no reason you can't do it.

Adam

Hey @Brennan Doherty

Believe me the search function is pretty easy, and if you skip using it regularly, be prepared for some rather snarky commentary on why you should use it.

That being said, I assure you I found these threads using the search in less time than it took you to write your post, just dump in Car Advertising or Mobile Advertising. Heck one of them even asks for feedback on design. I think you'll find them helpful

http://www.biggerpockets.com/forums/87/topics/9260...

http://www.biggerpockets.com/forums/61/topics/1851...

http://www.biggerpockets.com/forums/87/topics/1002...

Adam

Sure, I don't think Apple would be very successful without the debt issues they offered, it allowed them to finance their buyback program, as well as continue to pay dividends to shareholders without having to access overseas capital, which would be taxed upon returning to the US. That is a global business, and again, no one would increase the value of Apple because they took out a loan, it's called a balance sheet, a + in one column and a - in the other nets 0. I'm just saying it cracks me up that people see a 8% return in their 401k and a 10% return on RE investments, and its like the debt obligation on the RE is completely forgotten, despite the fact that you would probably go in debt for more than the total value of your 401k for that RE. 

It's like 2005 in here, no risk, tenants will pay rent, and your house will get more valuable, so who cares about going into debt to buy it.

I'm not advocating for or against RE investments, they are an alternative asset class, and realistically I think most people should have around 20-25% of their portfolio in alternatives. If you choose that to be real estate, great, I'm sure you will be very successful in it, but you shouldn't discount the risk of debt, personally I'd rather take an 8% return borrowing no money than a 10% return borrowing $50,000. All else being equal, the extra return is rarely worth the risk for me, especially when you consider that you could easily achieve the same return if you spent 1/3 the time on your whole portfolio as you would on RE investments specifically.  

I mean does anyone remember this exact scenario, people buying multiple houses that they can't reasonably afford to support with their primary income, I seem to remember those mortgages getting packaged into tranches of CMOs and then sold to investors, and when the defaults started happening because loans were being made to people who had no reasonable way to repay the debt and people realized how toxic these products were, they offloaded them. Let me make this clear...EVERYONE offloaded them. You might remember it had a small impact on our economy back around 07-08, but don't worry everyone knows that old saying, "History never repeats itself." 

Oh wait....

 Hey Anthony, 

Short answer is yes. Re-finance is simply acquiring a loan to pay off a previous loan, generally this is done to reduce rate. For example if you pay off 1 credit card with a new credit card with a lower rate, you are re-financing your credit card debt. The same would be true if you took out a personal loan from a bank to pay off credit cards, you are simply finding another source of financing to pay off the prior debt.

If you're looking for the process for your specific situation, I am literally no help at all, haha! The good news is there are tons of very helpful people here on BP and I'm sure one of them will be along shortly to explain it.

Good luck!

 What's really funny is those RE investors who are $800,000 in debt, but have property worth $1,000,000 so they think they're millionaires. Wouldn't it be great if companies were valued that way!

Breaking News:

IBM just borrowed 200 billion dollars from the Chinese government, so they are the most undervalued company in the world because everyone knows they're now worth $358B right...yeah that seems right, they only created wealth out of thin air.

Remember folks, if you borrow $100 from your bank, it doesn't make you $100 richer. It means if you only have $100 in your pocket, you're broke. 

 So yes, super embarrassing, I skimmed your post after reading the first sentence. I have a tendency to do that with things I find silly. And we could go back and forth on how those number change, it doesn't matter because your still in massive amounts of debt, and your discounting the performance of traditional assets, but clearly I'm wrong, and uneducated, and your correct and have it all figured out. 

Although...You might have heard of this guy, his name is Robert Shiller. He's not really well known, but you may have heard about the Case Shiller Index? Or perhaps his book called "Irrational Exuberance" in which he detailed the bubble of 2000. it was released in mark 2000, the same month the .com bubble burst and the market tanked. Seems like this is the guy! He knows what you know, RE is king! There is no way that a guy who wrote a whole book titled after an Alan Greenspan quote about irrational investment in the stock market despite crazy financial valuations would ever advocate a 401k over RE right?

"It would perhaps be smarter, if wealth accumulation is your goal, to rent and put money in the stock market, which has historically shown much higher returns than the housing market," Robert J. Shiller at a Standard and Poors Conference December 2014.

Oh crap he won a Nobel Prize too? For what you might ask? Empirical Analysis of Asset Prices? Well that seems like all around malarkey...

But wait, there's more...

Would you think the NY Times would say the S&P 500 is a better investment than RE? Well ok, sure maybe now in 2015 or after the crash. 

Well how about at the height of the market, August 2005, they wrote this article titled:

In the long run, sleep at home and invest in the stock market.

http://www.nytimes.com/2005/08/19/realestate/19rea...

Don't worry though, I wouldn't put too much weight in the opinions of the most respected financial and econonmic professionals on the planet, investment properties by a long shot right...

I think the disconnect here is that RE is not the only available investment for self-directed IRAs. I would bet my entire retirement savings that Mr Romney's IRA isn't holding 700 rental doors. Mark Zuckerburg, Elon Musk, and Bill Gates all have massive SDIRAs, What are the chances that 3 tech moguls are killing the RE market right now?

Most of these scenarios of giant IRAs are due to the massive success of a company, not of the RE market. Venture Capital and Angel investing is how these accounts got so large, not RE.

Again this goes back to my stance, well diversified mix of traditional and alternative assets (that doesn't necessarily mean real property).

Adam