All Forum Posts by: Ben Zimmerman

@Joe G. Maybe other agencies are different, but I am a military recruiter and we run credit checks on all of our applicants. The report that comes back isn't the same format as if you were to pull your own credit report that list a monthly breakdown as you posted.  Instead all we get are items like 30/60/90 day lates, collections and charge off amounts etc.  We don't see each individual monthly payment.  The account is either in good standing or it is not, that is all we see.

 They pay the loan off in 5-10 years, by paying additional money each month towards the principal.  Just because someone is on Youtube, doesn't mean they know what they are doing.  In fact, quite often it is the exact opposite since they are more interested in channel views so they make more money from advertisements.  Therefor any "Shock" video is a goldmine for them, in this case "How to pay off a 30yr mortgage without paying any extra".  I mean it suckered you into watching their video didn't it?

Lets be honest, if you could actually pay off a mortgage in 5-10 years without paying any extra money, then this wouldn't be some super duper secret that some random Youtuber discovered while making a home video in his basement, it would be common knowledge in a multi trillion dollar industry.

I've watched dozens of these videos, and each time I'm appalled by the general lack of knowledge that each poster exhibits.  They claim that it pays down the mortgage faster, and they show a bunch of random math to make everything look legit, and since most viewers suck at math, and want to naturally believe whatever the guy is saying, they simply accept all of what he is saying as being factual.  But in all of their random math calculations, they cleverly omit the most important item....How much TOTAL are you paying each month.  

They want you to quickly repay this 10-20k heloc loan that you took out, so that as soon as you pay off the heloc, you can immediately "chunk" again and redo the heloc and eliminate an extra 20k from the mortgage balance.  

The problem is that now not only are you still making your fixed monthly mortgage payment, but you are also trying to eliminate an EXTRA 20K every 6 months or so.  So basically you are paying an extra 3500/month or so towards your house.  It doesn't take a genius to know that if you make 3500 monthly payments ON TOP OF YOUR EXISTING MORTGAGE that your loan will get paid down very rapidly.  But by disguising the math between your bank account and your heloc, it confuses the viewer and they loose track of this simple fact; they are paying significantly more towards the house each month.  And in these situations, since you are carrying a balance on your heloc from month to month, and that interest rate is higher than your mortgage rate, the heloc is actually HURTING you, and slowing down your progress.  But by making it so complicated, you don't even realize that it is hurting you.

While a heloc process "can" technically save a little time (1-2 years off a 30yr loan), it isn't worth the risk involved and it doesn't work the way any of these Youtubers want you to do it.

If you were to do my method (which I don't recommend) you should NEVER take out more on your heloc than you can repay each month.  Trading 20k at 5% interest on your mortgage for 20k on a heloc at a higher % rate is stupid if you let that balance sit in your heloc month after month.  At this point people who don't know basic math like to chime in and say silly things like, "But what about simple vs compound interest?"  Do the math first, and then come back and comment.

A heloc can work in part because some people forgo an emergency fund, so instead of keeping a few grand in a savings account somewhere for a rainy day earning 0.01% interest, they can immediately put this extra money towards the principal of the mortgage, and if they get in financial trouble they can temporarily borrow against the heloc.  This pays the loan down faster if everything works out perfectly.  In this manner they are trading a few k earning 0.01% interest, in favor of putting that money immediately towards the principal where this money will effectively save them 5%.  

In addition, lets assume if you earn 5k/month from your W2 job, then you would set up your direct deposit to pay into your heloc instead of your bank account.  So the first month you would empty your bank account and spend all of your money towards the loan balance.  You would then set up ALL of your bills to be due on the 28th of the month.  (This is different than when you randomly decide to pay the bill)  You would simply contact your credit card companies, utility companies, cell phone companies etc, and ask them to bill you on the 28th of the month instead of the 1st, or whatever random day they have your due date set at.  Once all of this is done, you are putting all of your living expenses on a credit card, so from day 1-28 of the month you have no money actually leaving your accounts, only extra debt being racked up on your CC.  On day 28 you take out a 5k installment on your heloc to pay all of your debts in full and you carry this 5k balance on your heloc for the next few days until day 1 of the next month when you job pays you and is direct deposited into your heloc account fully repaying the account.  And now at this point you are back to square one, with no money in your bank account, and no balance on your heloc, and no bills due for another 28 days.

Lets assume that your mortgage is at 5% interest, and your heloc is at 7%.  Then many people will incorrectly claim that all you're doing is trading 5k worth of debt at 5% interest, for 5k worth of debt at a HIGHER 7% interest.  And that is partially true, but you are paying 5% interest on your 5k for the entire month, I'm only paying 7% interest on my 5k for 2-3 days between the 28th of one month, to the 1st of the next month.

Since the balance of the heloc is repaid in full each month, a balance only exists on the heloc for between 1-3 days, depending on what month it is.  This means I'm only paying interest on 1-3 days.  So if I'm only paying interest for 3 days, that means I'm effectively paying  

0.07 *$5000 *3/365 = $2.87 in interest

As opposed to what you are paying in interest of .05/12 *$5000 = $20.83

This small $18 dollar per month difference that you pay in interest, is instead going towards my principal.  Which over time reduces my loan amortization by a year or so.  

I don't recommend this alternate method, simply because it is too complicated to set up, and too little reward for the risk.  By running a negative balance each month, you are risking everything on the assumption that your bank will continue to give you that heloc money every month and they won't put a freeze on it when some global crisis ( Corona Virus??) spooks the investment world. 

I mean do you really want to go through all of this effort to essentially 'gain' an extra 18 bucks per month?  I sure don't.  Your time and energy is better spent analyzing more deals, or simply putting in 1hr of overtime at your W2.  

 Long term wealth is created by investing money.  The key here is that you must first have money to invest.  

 It often takes several tens of thousands of dollars to fund a 25% down payment on a rental (which most people don't have) just to hope to cashflow 1-200/month.  Then it's back to saving for another 4-5 years to afford the down payment on the next property while they slave away at their W2.  This is how 99% of people on BP scale their portfolio.  After coming up with a way to fund the deal, you must always worry about repairs etc which can be costly.

While I don't do STR's (As military I move every 2-3 years and don't want to long distance manage a STR), I do know several people that do the STR thing (they don't arbitrage). Their income obviously fluctuates slightly from month to month, but over the course of the year they average roughly 2x what they could otherwise rent it out as a LTR. This means if you are doing arbitrage, then you have twice as much income coming in, as you do expenses going out by paying your lease.

This means that after expenses are paid, you would still have 100% of what the property would otherwise rent for if it were a LTR. If we assume the 50% rule of expenses is true for buy and hold properties, then for every STR that you arbitrage, this provides the same cashflow as having 2 FULLY PAID off rentals that you own. Which do you think is easier to accomplish, finding a building to sublet, or completely paying off two full properties?

In many ways, subleasing a property could be more advantageous than actually owning the property. Besides the difficulty in raising the down payment, one of the problems with STR's is that they tend to experience higher wear and tear, but since you aren't the owner, this isn't your problem.

Yes, you are at the mercy of the landlord, and they may choose to non-renew your lease. But who cares? It's not like that is the only building in town. Simply find a new building and pay a few grunts from craigslist $200 to come with a truck and move the furniture to the new location. While you don't have any income coming in during this transition period, you also don't have any holding costs. Could the city decide to ban STR? -Sure, but then again government usually moves rather slowly so you would likely know if there was an upcoming vote anytime soon and simply not enter into that market.

Subleasing would allow you to scale rather quickly to multiple units which would generate significant monthly revenue. If you wanted a more long term plan then there is nothing stopping you from taking that revenue and begin to actually buy properties of your own. And as far as creating a job for yourself with the STR thing, there are plenty of management companies that specialize in running STR's so your only 'job' would be to find the locations. However being your own PM with LTR's is also a job, maybe not a full time job but it's certainly a job.

Given that the OP already has a decent portfolio of properties and likely enough income coming in to be able to afford an experiment such as this, I would highly suggest that she give it a shot with a few properties and see how it works out.  If it works then great!  -Continue to scale it.  If it doesn't work then the slight loss of money likely wouldn't even dent her net worth.

--If it's stupid and it works, then it's not stupid.

Is this second grade "I told you so"?  Words are important, and words have meaning.  There was nothing in the original post to indicate that these were notices of non-payment as opposed to any other of the dozens of notices that can be sent by landlords.  If anything the OP indicated that they were otherwise decent tenants stating how things were going fine for several years prior to not responding to these notices.  

As far as "how he is the bad guy", I still stand by the original tone of my posts.  Asking how to go out of your way and spend additional money so that you can deliberately make someones life miserable by dumping sh*t all over the yard for the sole purpose of pissing them off is petty, childish antics that if pursued could easily land him in hot water for harassment.  Just like there are laws saying that tenants must pay rent, there are also laws stating how landlords can not harass their tenants.

If he is so upset at his tenants when they don't do as he expects that he would resort to such levels, then it would be wise for him to look into property management as this is unlikely to be a good fit for him long term.  He is making his situation worse in every way by things like this.  Not only does it cost money to do it, he risks a harassment lawsuit, and then he will have to pay again to get rid of it so the next tenant will be willing to move in.  

You want to talk about sophistication on these forums, yet you are defending someone who is trying to go out of their way to piss someone off by using raw sewage.  Go ahead and think that one over for a moment.

Failure to pay is obviously a different scenario than failure to respond to a notice.

Its fairly common for people to avoid their landlord (or any creditor for that matter) when they are behind on bills.  Don't take this personal, begin the eviction process and move on with life.  Don't give them any reason to be able to file a counter suit against you for landlord harassment.

Notices are just that, a notice.  You are the one assuming that these are notices to comply as opposed to any other sort of notice.  Even a notice to comply like you suggested rarely requires a response, it only requires that they actually comply.  However nothing in the post indicates that these tenants have done anything wrong except not respond to a simple notice, in fact the OP says other then that things were going fine.  However there is plenty of entitled and vindictive overtones in the post.  I mean seriously who goes around litterally spreading sh*t just to annoy their tenants?  Its not even a matter of getting them out of the house at that point, its about pissing them off while they are still there.  

"what can I legally do to ensure their “stay” is not pleasant?"  Do I think the OP deserves to be attacked for this type of behavior?  -You betcha!

Notice of rent increase

Notice of offer to renew

Notice of non renewal

Notice of repairs/renovations/outages

Notice of Entry/intent to enter

Evicting tenants because they don't respond to you?  Seems like a pretty drastic measure on your part and your lawyer will probably advise against attempting to do anything.  As long as they are paying on time then leave them alone.

Dumping manure is petty, and should be avoided.  I've only ever heard of using manure on a lawn in the fall to promote spring growth, if you do it out of season along with other measures to harass your tenants they may complain to housing boards or worse they may contact a lawyer of their own.  But beyond that, why are you willing to spend money on manure just to piss off your tenants?  In the long run you will likely run into many different problems if you are unable to separate emotions from your business ventures.  So now not only do you have manure costs, you have eviction costs, and then make ready costs, holding costs, along with the hassle of finding new tenants that may or may not be worse than what you already have.

There is nothing that says tenants must respond to you.  If you need to do an inspection, it should be in your lease that you can simply enter the property and do what you need to do.  Notify them in advance when you plan on doing your inspection and then simply go about your business while they are at work.  Other than that if they are paying on time and not destroying the place then leave them alone.  Just like you don't want your tenants calling you all the time about dumb stuff, they also don't want their landlord trying to call them all the time either.

And finally I would advise against getting on your high horse about how gracious you have been by providing them a safe, clean place to live.  Fixing issues and providing a clean place to live is the entire reason they are paying you rent every month.  I would highly advise against bringing emotions into this and feel like your tenants should owe you some debt of gratitude.  Be happy that they are paying you, and not bothering you with minor maintenance items, collect your check every month and relax because life is too short to worry about this kind of stuff.

 To each their own, but I would 100x rather have the 7% growth and a 4 cap.  Over the long run, rent rates will increase with the growth rate.  Which means that at 7% growth my 1000/month rental might rent for 1070 the next year, and 1149 the year after.  It won't take long before my cashflow is far superior to your 7% cap rate property.  And on top of that, my property will be worth more too.

Real estate is a long term play, so if all you are looking at is what does it cashflow on day 1, then you are missing the big picture.  Unless you are close to retirement age, and are looking for stability and a steady income stream, then the immediate cashflow a property throws off is highly overrated.  It obviously needs to generate enough to survive a downturn, but other then that the real money is made in appreciation and equity paydown.  Cashflow is king is a short sighted approach, one that often has limited room for growth potential.  

You can throw a dart at a map of the midwest and hit a cashflowing property.  But that doesn't mean I would want to own that property.  California and other desirable locations have produced an awful lot of accidental millionaires, people who just happened to buy a house to live in and now that house is worth a small fortune.  So imagine what happens when someone is tactical in purchasing properties in those locations.

Some people claim that relying on appreciation is speculative in nature.  This is simply false.  Inflation rates mean that over the long run, home prices will increase.  There may be pocket years where prices go down, but as mentioned, real estate is a long term play.  Some areas will appreciate faster than others.  It should be no surprise that properties in Hawaii will increase faster than something in Wyoming.  Some areas in the nation are dying, and may actually experience negative appreciation, these areas should be avoided regardless if you are trying to buy for cashflow or appreciation.  You can't cashflow on a property in a dying town when there are more empty houses than people wanting to rent.  

A casino doesn't gamble, the individual player is gambling but the House isn't gambling.  The house is using time, and math, to consistently generate income.  Sure on any individual blackjack hand the House might lose some money, but over the course of the night, the House makes millions.

All of my single family properties have increased my net worth by well over 1k/month.  If I was generating 1k/month in cashflow per house people would call me an investing guru, but if instead I generate 1k/month per house in appreciation then those same people call me foolish. Either way I'm generating 1k/month in net worth and am "retired" and spend most of my time at the beach.

But the thing is, due to rent increases my appreciating homes are now cashflowing significantly higher than some of the homes that my peers bought because they thought it cashflowed well.  Their houses did cashflow well on day 1, but because there was no growth, or limited growth, they are still cashflowing close to the same amount many years later while my rent rates have skyrocketed. 

I think the big thing that you are missing is that there IS recourse in a sub2 deal.  A properly executed deal will have something like a Deed of Trust to Secure Performance, which allows the seller to foreclose on the sub2 buyer if the sub2 buyer fails to make the mortgage payments as he promised. 

You also mentioned that it is risky for the seller since saving their credit if they are in foreclosure isn't guaranteed.  For an action to be risky, there must first be something of value that could be lost.  In this case, their credit score is that something of value, however their credit score is already forfeit during the foreclosure process so their score is already toast unless they find a solution.  If a sub2 deal is the best (or only) offer that they have received, then it is not putting their credit at risk since their credit would have been ruined regardless.  The only two outcomes are the new buyer defaults in which case you are back to square one with your ruined credit, or the buyer does as he says and the sellers credit is saved and actually improves as these payments are continually reported to the credit bureaus.  So the seller is either back in the same situation he was previously in, or his situation improves.  

I am in the military, and my current focus is buying sub2 deals from other military members. Military people tend to move every 1-3 years and fairly often use 100% VA loan financing and wrap their closing costs into the deal. For these people it's not uncommon for them to not have built enough equity to cover the closing costs associated with selling a home so they are either stuck being unwanted long distance landlords, or they sell their home at a loss, or possibly break even. I offer them another option, one in which they are able to sell the home and still make a few grand.

One of the nice things about being a 14yr military member is that I have 6 more years until formal retirement. This means that for the next 6yrs, if for whatever reason I would try to default on my obligations, the seller would simply call my First Sergeant, and they would put my military paychecks on an involuntary allotment. If after my 6 yrs and I am no longer in the military, if I default at that point the seller simply forecloses on me, and does a little happy dance as they reclaim a property that has had 6yrs of mortgage paydown and 6 yrs of appreciation. If the home was bought using a VA loan, I have it written into my contract that IF ASKED, I will refinance out of their loan within 6 months of being formally notified in writing, so long as a minimum period of 3 years has lapsed since I bought the property. This allows them some leeway should they ever want to use their full VA loan entitlements again.

A typical scenario might be they bought a home for 200k, and with closing costs the loan was for 205k at 3.25% interest. Two years later they need to sell because they are moving and the home is now worth 210, and they now owe 201k on the loan. Assuming 6% agent fees, the seller will only make about 197.5k minus the other closing costs, which already puts them in the negative by 3-4 thousand bucks not counting the other closing costs. In this scenario I may offer them 2k cash, and take over their payments at 201k. The seller walks with a few grand, and I get control of a house for 2k with ridiculously low interest rates, as opposed to a traditional 25% down payment plus origination fees on a 210k home totaling 52k down payment with 5k loan origination, carrying 157k mortgage at 4.75% interest on a rental property. While buying the home sub2 means buying the property at a very high LTV which in many instances causes it to be considered a risky venture for me as the buyer, the reality is that the monthly mortgage payment is only about 50 bucks higher doing it this way than if I had payed a massive 25% down payment because the interest rates are so fantastic on VA loans. I keep my properties and don't wrap them so I don't have to worry about the next buyer in the chain defaulting. I keep more than enough reserves in liquid funds to cover any downturn.

As with anything in real estate, sub2 deals can be slimy.  But that is a function of the buyer, and not the process.  A slimy person can turn a traditional purchase sour by offering a decent price with low or no earnest money, and then countering with a ridiculously low offer after the inspection report.  Because of the amount of time that has already lapsed in the process, the seller may be desperate to now sell as they have likely found a new home to buy and that sale is contingent on the sale of their existing home which they thought they had a solid offer on.  Now they are forced to potentially back out of both sales, or take a significantly reduced price.  

The 2% rule should have never been a 'rule' and I wish it would die off, just like the 1% rule, and every other rule that gets thrown around these forums.  BP has readers from all over the nation, in many different types of markets.  Readers who are trying to learn and educate themselves hear about these 'rules' and think that they are true, when in reality that number may have never been appropriate for their geographic location (either too high or too low), let alone be accurate a decade after the podcast was made during the greatest real estate crash in the history of mankind.  Instead of teaching people accurate ways to calculate their expenses, we advocate for people to use these shortcut rules that could be wildly inappropriate in our market.  

Also I think that anyone who claims they won't get out of bed for less than 3-5% is being very disingenuous to the overall question at hand.  While you may be able to get 5% returns by buying 100 year old homes for 10-15k each and then renting them for 500-750, that is nowhere close to the norm in the US, and does not accurately portray the financial prospects of owning homes as old as these.  Unless you are buying super cheap homes for under 100k each, or are purchasing homes in areas with consistently declining population, you will likely not hit these 'rules'.

The median home in the US is valued at 231k according to zillow.  If you are buying anything even remotely close to that you will not reach this mythical 2% target that should have never existed to begin with.