All Forum Posts by: David C.

$26/month for an extra 150,000 is very cheap term insurance. You would not have had anything as a civilian either.

I pay about $400/year for 500,000 in term insurance. This means no cash value, if I die while its in effect the wife gets 500,000 or the kids if we both go.

Cash Value insurance would likely have cost you anther $100/month and then after 10 years, your 12,000 would be worth 14,000 or something. You are probably better off buying the $26 term insurance and investing the $100. If you chose to not invest $100/month, that's not the fault of the $26 in insurance.

Buying insurance stinks, its boring, you feel like you get nothing for it. However, when it pays off, you aren't there to see it, but it can make a huge difference in the lives of those you love. So, if you have a spouse and kids, suck it up and buy some term insurance.

@Chris Frydenlund in the US the common legal structure for doing what you want with Real Estate in an LLC.

There is much debate here about when its advisable to form one(if ever). Search on LLC and you'll see what I mean.

Some believe in the protection, others say its only protection if you are not involved as the manager, others propose trusts and other legal manipulations.

Commonly for the first property it is not considered necessary.

Not Legal Advise. Not a Lawyer. Not an Expert.

@Jacob A. congrats on getting it sold. Beautiful work. And that's very much for sharing it with us, warts and all!

This is precisely the same 'wild ride' that many SFH buy-and-hold investors went through, if they were highly leveraged, their equity went to zero(or negative), then back up to something again.

Your post implies that real estate is more stable, its not that much more stable when people use leverage as much as they do, its just less liquid so its easier for people to lie to themselves and wait it out.

If you owe 90,000 on an 80,000 house(that you paid 100,000 for), you are at -20,000 in returns and have negative 10,000 equity , but you can point at it and say: I've got an 80,000 house that will probably go back up in value.

When your stock goes from 100 down to 6, you are actually NOT as bad off as the first guy. It just looks worse. As you explained yourself, it went back up to 60, just like the underlying properties have recovered their values.

I don't mean to start a stock vs. RE argument, but there is a false assumption in your post that your real estate equity is 'less volatile'. It probably is if you are un-leveraged, or only slightly leveraged, but that's not what I see advocated for the most part, its 80% leverage or more.

@Troy Fisher you can be in RE for about $50. Open an account at buyandhold.com and buy $50 of any REIT that they carry.

Not a promotion, only a customer of buyandhold.com.

@Brandon Gamblin

Turnkeys cost 'more' than buying a property and rehabbing it yourself - because there is a company buying and rehabbing the property, plus adding on some profit margin. However, if you are not good at it, it might cost you more to buy and rehab than to buy one done by someone else. Turnkey implies 'with paid property management' - its more expensive to pay someone to be your PM than to be your own PM(free? or how do you value you own time?).

Once you add on a Turnkey company's profit margin plus the cost of a property manager, these deals are often left very 'thin'. The experienced rehabbers and buy-and-hold people here look at the numbers and say you are one capital expense, or long tenant-turn-over from a loss. They prefer to find the houses themselves, buy them much cheaper and then rehab themselves, preventing the turn-key operator markup.

Experienced guys here try to use the 2% rule - or close to it - where the rent is 2% of the purchase price. So rent x 50 = price of house.

$500/month rent = 25,000 house

$1000/month rent = 50,000 house

$2000/month rent = 100,000 house

No turnkey company is going to sell you rents at that rate. They are normally closer to 1% houses.

The experience here says: 50% of the rent of your 2% house will go to operating expenses(owner paid utilities, taxes, property manager, vacancy, tenant screening, property turnover(painting, cleaning), lawn care, snow removal, etc...), leaving the other half for profit + mortgage payment.

If you are buying at 1%, you need to estimate your expenses are lower than 50% for the math to work out. There is much debate here if its ever OK to use less than 50% for expenses. The turnkey providers need you to believe that 50% is unreasonable, because their deals fall flat if you stick to it, they need you to estimate 20% expenses.

The only other 'rescue' on these properties at these prices, is that if you believe you are buying in a good market, and that the values will increase, then you can use these properties to 'speculate' - you may be slightly cash-flow-negative, but if home prices go up 10% or 20% and you are leveraged, that will make up for your negative operating income. Most of the longer term experienced people here have seen this strategy burn their friends and themselves, others believe that over a long horizon appreciation from current levels is a safe bet.

@Lynn Currie Here's what I consider the biggest gem from the book. Its common practice to 'bundle up a pile of mortgages and sell it as a security'.

They decided to apply a bell curve to it, pulling off the top 20% or so and selling that piece as 'super safe' with low returns for the investor and low cost for the seller. then the next 60% was sold as an average normal security. Leaving the bottom 20%, which should have sold with a higher return reflecting its risk.

But then someone figured out this magical trick. Take the bottom 20% from 5 bundles and make a new bundle. That bundle is all crap, but, you have your buyers convinced that a 'top 20%' is safe - so they sold the top 20% of the pile of crap at a low rate to an investor who thought it was a typical 'top 20' not a 'top 20 of pile of crap'... same thing with the next 60% of the pile of crap was sold as 'average risk' - because it was from the middle of the curve, and the new bottom 20% of the 'pile of crap' was then re-bundled.

This was banks scamming insurance companies, because they managed to convince AIG to write insurance on these bundles and convinced AIG (or helped convince themselves) - that re-bundling the crap somehow magically removed the risk. So AIG sold piles of cheap insurance on very risky bundles of loans.

The ability to bundle and re-sell risky loans as if they were safe made a lot of people a lot of money... so... what do smart people do with a way to make lots of money - they do more of it! To do more, they needed more loans, so... lending standards had to drop to get more fresh new loans. Loan to you at 7%, sell the loan as if it were safe at 3% - make a huge spread.

@Lynn Currie The appraisals aren't false as long as there are 'bigger fools'. And easy money provides an endless supply of bigger fools.

My understanding of our last crash is: bad math and bad ethics resulted in drastically reduced lending standards. Low lending standards by the banks increased your supply of buyers, increased supply of buyers raised prices, increasing priced raised supply of buyers(everyone had to get in on it!), and so the loop went into a big old bubble.

The appraisals were accurate until one day, Poof! the money dried up. The zero down/low downpayments meant a very small correction in prices put a ton of people into 'negative equity' - meaning 'walking away' was the smart thing to do. Thus it spiraled down.

To answer your question, yes, I attribute much of the bubble to lending standards, permitting very high leverage is what accelerated the crash.

Of course there are a million ways to look at it, and politics, etc... These were the main issues as I see it.

'The Big Short' by Michael Lewis tells the story of the run up and the collapse - I pretty much believe it. There was also a wired magazine article 'Recipe for Disaster: The formula that killed wall street'. That's the bad math.

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all

NINJA loans!! No Income, No Job or Assets!

@David Krulac I thought you were enjoying Mai-Tai's on the beach and paying exorbitant tourist taxes :)