All Forum Posts by: Chris Elkendier

Hi Chris.

Most people would tell you to diversify with multiple investments, because diversifying sounds good, right? Well, bottom line is, the wealthy do not worry about diversifying- they simply pick the best cash flow/return option and do that. So get to it ;)

The other part- finance or use cash?- Always finance as much as possible with the best possible terms, and still require conservative and positive cash flow. When the timing is ideal to 1031 exchange into another opportunity, hit it. At least that is my strategy. Then again, to each their own.

@Chris Elkendier also local in Milwaukee and have very similar scenario. Have invested in several ORLANDO properties to date but continue to explore options. This is a great thread / thanks for posting your question.

This is from the city government website of palm springs.  I think you are right you can have one permit: 

https://www.palmspringsca.gov/home/showdocument?id=61921

@Chris Elkendier

Good answers here already. Pointing out the obvious but yes you generally realize the best returns in real estate when using leverage (debt) esp when your tenants are paying off the debt for you.

I have been a full time STR investor and property manager for 6 years now. Here are my observations:

- I operate in SF Bay Area and Sedona AZ

- in both markets the amount of STR units has exploded which has brought down the overall rates and created some more vacancy in slower periods

- More and more regulation is happening every year. Most voters (with the help of hotel lobby) will choose to restrict STR rentals especially if it's not your primary residence. You mentioned Palm Springs. Non- resident vacation rental permits are no longer being accepted for vacation rentals there.

- STRs are much more management intensive than LTRs. Can be more fun too, but much more work for sure

- Once you factor in all expenses on an STR (utils, consumables like towels and linens, extra cleanings) it's not always more profitable than an LTR. You'll want to make sure that the STR has a large profit margin over an LTR esp if you have a property manager you are paying.

Good luck!

Financed for sure with a healthy equity position. I just closed on a commercial loan last week at 4.5% over 7 years on a property we own outright. Why would I leave a huge amount of cash tied up to save 4.5% if it can make 20% or more invested? 

I don't see a risk with healthy leverage. Always buy desireable properties, re-invest into improvements and keep the properties in above average condition, you'll never have to worry about vacancies.

Sidenote: personally I favor LTR over STR. People like going on vacation (when the ecomomy is good), but they have to live somewhere, regardless of economy.

Why would you not pay $500 to help inform your decision?  That's .1% of the amount you are looking to invest.  No reason to keep the service for more then a month.

Leverage is a tool.  You should use it to the extent that it helps you achieve your goals, but never to the extent that it puts your goals at risk. Ask yourself specific questions to find the right answer.

* What equity and cash flows do you expect to gain if you pay cash?
* How much would your cash flow and equity gains/losses be affected if you bought two houses financed at 50% LTV?
* What about 5 houses financed at 80% LTV?
* How else can you mitigate risk? Should you leverage 2-3 houses and maintain a large cash position?


Imagine some scenarios and compare the different ways to buy.  I'll go through some here, where all the homes are 250k, they rent for 2500 with pro forma monthly costs of $1350 with no mortgage, and $2370 with a 200k mortgage and $1960 with a 125k mortgage.

ways to buy
1) cash - Pay 250k cash for a single home.
2) high leverage -Pay 50k and borrow 200k each for five homes.
3) slight leverage - Pay 125k and borrow 125k for two homes.
4) hedge your high leverage purchase with a cash position - Pay 50k and borrow 200k for 3 homes. Keep 100k in reserve.


Initial scenario

1) cash buyer has 250k equity, $1150 monthly cash flow, and no debt.
2) The highly leveraged buyer has 250k equity,  $650 per month cash flow, and 1m debt.
3) The slightly leveraged buyer has 250k equity,  $1080 monthly cash flow, and 250k debt.
4) The cash position buyer has 150k equity, $390 monthly cash flow, 600k debt, and 100k cash.

Notice that for the slightly leveraged buyer there is not a tremendous cash flow difference from the cash buyer.

In a good market, let's say after 5 years, home value has gone up 20% and rent has gone up 10%.  

1) The cash buyer has 300k equity, $1400 monthly cash flow, and no debt.
2) The highly leveraged buyer has 590k equity,  $1650 monthly cash flow, and 910k debt.
3) The slightly leveraged buyer has 375k equity, $1580 monthly cash flow, and 225k debt.
4) The cash position buyer has 360k equity, $990 monthly cash flow, and $540k debt, and 100k cash.

The leveraged buyers (including the cash position) are all far wealthier, even after only 5 years, and two of them already surpassed the cash buyer's cash flow. If the cash buyer were to refinance and pay off 90k of his debt, he would also have higher cash flow than the cash buyer.

But how about In a major crash? Let's say after 5 years home value has gone down 40% rents drop by 10%.  With home values depressed, the guy who kept a cash position can purchase 3 homes that will cash flow $320 per month each.
 
1) cash buyer - 150k equity, $900 monthly cash flow, and no debt.
2) high leverage -  no equity (underwater 160k), Losing $600 per month. 910k debt.
3) slight leverage - 110k equity, $580 cash flow per month, 225k debt.
4) cash position - has no equity (but not underwater),  $600 cash flow, 900k debt, and 10k cash.

In this down scenario, the cash buyer is temporarily the best, but both the slight leverage and cash position scenarios are in great shape.  As the market turns back up the cash buyer will be envious of their positions.

So look at the high leverage strategy, and ask yourself - how would I survive this scenario? If you can not give a sensible answer then that's too much leverage for you.  Consider a less leveraged position or keeping a cash reserve as a contingency.