All Forum Posts by: Axel Meierhoefer

@Chris Coffman As others have suggested, you want to really run the numbers and see how the comparison comes out. For your investment properties, you have to accept higher interest rates these days and they will probably climb further. I have seen 5%+ lately, even on 30 years for investment properties. Both properties are now investments and do not qualify as owner-occupied, which means higher interest rates.

The other part that should guide you comes from your goals. If you say you want to keep the properties 20-30, I suspect you are building a passive income portfolio. If that is the case, what I call the "Ideal Investor Journey" should determine how you purchase all the properties you need to reach your passive income number. Many people look at that number as if it is the end of the journey. I rather see it as a milestone. It's the point on the calendar where your passive income reaches your goal number for the first time. With that in mind, you will have to wait a long time before your 30-year mortgages are paid off and you will enjoy the jump from paying the monthly mortgage to not having to do that anymore. Obviously with a 15-year mortgage that happens much sooner and will significantly improve your quality of life.

I know this is a very long-term perspective that many people these days have no patience for, but I saw you mentioned 2-3 decades, so you might be interested.

Just imagine you can buy a property each year in addition to the two you have now. You said you make $400 positive cash flow each month right now. Let's just assume you have a goal to get $4800/month in today's $$$ as your financial freedom, or as I call it, Time Freedom Number. That means 12 properties total @ $400/month each. You have 2 already, so 10 more to go for another 10 years (just hypothetical). In 2031 you will reach your number the first time. Maybe you decide to quit your job to do stuff that does not pay much. If you wonder why you reach nur number in 9 years, it's because your rents will increase but your costs (property taxes/insurance/property management) won't at the same rate, so cash flow is slightly increasing over time.

Still, in 2032, a year after you reach your number, you will probably only have 3 years left until your current 15-year mortgage will be fully paid. Let's say that's in 2035. By now your cash flow is a bit above $5000month. As soon as your 15-year mortgage is paid off, your passive income just from that one property will probably jump up by about $1200/month (you still have to pay insurance and property taxes) That jumps you probably to $6500/month or more. Yes, your tenants paid more into your 15-year mortgage but if you had a 30-year mortgage, you would have to wait at least 15 more years to reach that jump. If the numbers in your comparative calculation for switching form 15 years to 30 years are not really a lot better  (which I suspect is the case due to the recent increase in rates), I believe the long view would suggest keeping the 15 year mortgage. You are probably not consuming the positive cash flow right now or anytime soon anyway. 

A little icing on the cake: When you have paid back the HELOC in 30 months from now, you can maybe buy 2 properties that year and get to your time freedom number even sooner :-)

@Cinto Sunny  I have been working with Spartan Invest for many years. https://spartaninvest.com/our-... Yes, they are a turnkey provider in AL and TN but a large part of the operation is property management. If I were in your situation I would reach out to them and ask if they would be willing to manage your properties as long s you're willing to follow their system.

@Pal Sa I agree with what @Daniel Umstead suggested.

In addition I suggest to do a comparative analysis. If I were you I would just visit some of these properties in your area that you say are comparable and similar to yours. That way you can see what other landlords or property managers offer and what their paperwork looks like. When you can look through the eyes of a tenants, maybe you can find things that apply to your property that make it less attractive than you think.

@Goredy Tess You have revealed a very interesting point that is rarely discussed in BP threads.

To be able to have at least a basic starting point for comparable calculations, BP has suggested entries in their rental property calculator. Most people use 5%/5%/5% for vacancy, maintenance, and CAPEX. Joe V is still correct, as others as well, that these numbers added to your mortgage expenses and property management fees (typically 8-10%) only help you as an initial starting point and remove a lot of revenue/gross income from the property equation. I have always looked at these values as a way to compare a number of similar properties to each other. The other assumption the calculators and %-values make is that you would never have more than 1 property and that you would frequently have a need to use these amounts as you own the property. To illustrate these two points looks at these two situations:

1. You buy a property that provides $3000 in rent/month and has a 3-year warranty on everything. That means you will not have to spend any money on any repair, the tenant is guaranteed to pay rent the whole time, and nothing major breaks (CAPEX) and if so, it's covered. If you now take 15% (5/5/5/) from your rent you would have $16200.00 sitting in a bank account, even with just this one property. If your property were to pay $1000 gross rent, that amount would be $5400. So with a higher rent property, you could probably replace 3 roofs after the 3 years and with the lower rent property, you could only cover 1 roof (barely). That's why nominal, actual numbers are more helpful. Check what could realistically be needed and put that amount away.

2. As you keep adding properties to your portfolio the numbers shown above apply as well but in a different way, more related to risk. If you had 3 properties that pay $1000/month rent you would also end up with $16200.00 in your bank account if none had any major repairs or vacancies. Even if they do, you will quickly see that the amounts of reserves get large and if you have more than 3 properties and more than $1000/month rent, your numbers can skyrocket. That's why I recommend you evaluate what is really likely going to happen. I use my $6000-roof as my guidepost. How many houses will all need a $6000 roof in the same year? If you say 1 or 2 or 3, that's the amount you need to have in reserves. Keep in mind that everything else that could happen (or have a risk of happening) is less than the cost of a roof or is converted by your insurance if you carry a $5000 deductible. Therefore, your risk is covered. That also applies if you have 10 or 15 properties. if you keep saying: There will be no more than 3 new roofs required in any year, your reserve number will remain at that value, which also means your COC and your cash flow will be higher as you don't need to keep adding to your reserves anymore.

If you like to go deeper, feel free to DM me.

@Daniel Sanchez I agree that there is no one size fits all answer.

I find it saddening that the media keeps telling people that investing and especially investing in things that are $150K, or $300K, or $500K is only for rich people. My goal is to show people that they can join the real estate investing world with about $30K. When applying solid criteria, that means markets that are cash flowing like Cincy are a means to enter. Markets that appreciate a lot have their appeal but often don't allow a new investor with limited funds to enter.

I see it as a service to my mentoring clients to allow them and show that that entrance well before thy can afford the down payments in the strongly appreciating markets along the coasts. As for @Jim K. 's Vampirism, I see the world through Maslow's eyes. People need safety, food, and shelter and I believe it is a great service to provide good quality properties for a fair rent. It's not vampirism, its a basic service that investors like the ones commenting on this thread offer in much better ways than the government - which would be the only other alternative if we were not interested in it.

Sometimes the choice of words can indicate a mindset.

@Eagle Yeh Hi Eagle (cool name). I like to point out that there are a few things to consider (admitting right away that I am not an expert on Canadian rules) when it comes to residential real estate investing, asset appreciation, and rent-to-purchase price ratio.

You can choose to look for gains from appreciation in the value of a property or you can look for properties that provide positive cash flow.

In an ideal world, you would want to have both. That's where the 1% rule has its origin, according to my research. If you find two properties that are equal in size and quality and are both in the same general location with the same appreciation of value over time, up would pick the one with the higher cash flow. The 1% rule helped to limit those properties to A and B class neighborhoods. Yes, you can get (theoretically) even more than 1% in rent but then your neighborhood would be C or D or even E class and the appreciation would typically end up being lower.

The time when this was all possible is about 10 years ago. First, it was no longer possible to get the 1% rule in A-class neighborhoods, so people were willing to accept it for properties in B and C+ class neighborhoods.

Then the value increase of properties that you have seen in Canada and to some lesser extent we have seen in the US has made it less and less possible to reach the 1% rule at all.

That's why I say you need to make a decision these days. You have to decide if you have the goal to develop income or develop asset value.

If you decide you want to develop asset value, you would keep your investments in Canada and find properties that allow you to at least break even, meaning the rent income covers the mortgage, taxes, insurance, and property management. It's not the 1% rule but probably the 0.65% rule :-) This works well as long as the prices/valuation keep increasing. This strategy would also include that you check your properties every 18-24 months and the ones that have increased in value a lot are ripe to get a HELOC so you can use that money to buy more of these appreciating properties. The risk is that if prices ever stagnate or even go down, you might be over-leveraged.

The other option, which is what I help my Canadian mentoring clients with, is to invest in well-performing properties in the US. The goal here would be to develop a portfolio of properties that have good positive cash flow and built a passive income flow that will always be in place for you, no matter how the value of the properties develops.

We struggle to reach the 1% rule in A and B class neighborhoods here as well, but we can still get close and it is likely that we will get back to that ratio in the near future. Here is why: The asset valuation has grown much faster than the rent price inflation. As wages are increasing now, triggered by overall inflation, the rents will come back to improve the ratio in the next few years. With a starting point closer to 0.85% it is reasonable to invest and get to the perfect situation of balance between asset value growth and positive cash flow reaching again 1%.

To make this possible for Canadians, I have developed a package of info and resources to support the current tax and corporate structure as well as financing to take advantage of leverage, so it makes sense to invest in the US and live and enjoy Canada. Anybody who likes to learn more about it can just DM me and we can set up a call and discuss it in more detail.

@Blake Wood Hi Blake. I live in San Diego county myself and am currently investing in Fort Myers as well as other places out of state, i.e. Ohio and Panama.

The main aspect I haven't seen touched on in this thread is performance. You are the perfect example to illustrate this case. You live for $750/month and even @$1450/month the owner of your property is not getting good performance. The place is probably worth $350K, maybe more.

Good performance would be rent of $2600/month and above. Even at $1450 it's a steal.

Now take a property in Florida you buy for $300K and rent for $2300/month, you are the one getting the good performance while your landlord is still suffering from bad performance on his property. Your purchase would work fine with about $50K down payment.

I have been investing out of state because I live here in SD county where I or you can't get good performance and it all depends on the turnkey providers we work with. I know that BP is not a huge fan of TK investing but I am living proof that it can work very well. I have 100% occupancy, basically no turnover, good cash flow, and time to help others do the same.

In case you like to chat about or meet for some coffee/ice-cream to cool down from the Santa Ana - heat we have these days, feel free to DM me 

@Rebecca E. I saw some of what Meet Kevin said and did not really see that he is ending his channel but you are right about him claiming to have sold his stocks and some of his real estate.

One should also consider that not long ago he ran around with a different color in his hair to attract attention and wanted to become the governor of California in the last election. I like him, maybe because we have the same ancestry.

What is missing in his change of approach is the differentiation into the purpose of investments - at least its missing for me in what he says.

He seems to now believe that everything is just a matter of profit optimization. That's not surprising as the American culture seems to only focus on that. When he first started teh service aspect was still more prominent. I am hanging on to it.

What I mean by that is the difference between investments in stocks to own a shares of them and then benefit from their profits versus providing shelter to people for a fair price. The latter has a strong social and service component and it does not matter what the asset costs after it was purchased. That's why the focus for me and my mentoring community is getting well-performing deals when we buy and then making sure we generate good cash flow as part of that social service.  

The changes in the valuation of the assets in big market cycles is not that relevant and the need for shelter will not go away.

You might be surprised to read that I actually agree with the statements and predictions of the book "The Fourth Turning" and the latest book by Ray Dalio titled "Principles for dealing with a changing world order".

Even with all those big-cycle changes, the need for shelter will continue to exist and that's what I and my mentoring folks provide with our SFR investments.

Everybody here on BP and in the investing world will have to decide how they want to position themselves as we are moving through these big cycles and associated changes.

If you like to chat about what we do and why we don't sell, feel free to DM me and set up a call

@John Timmerman I am a little surprised that you are casually mixing two property types that have different valuation approaches. 

The 5 unit is commercial residential that is normally valued based on rent roll. The single and the duplex are valued based on comparative analysis. You should be easily able to find out what similar properties in the same address locations have sold for in the last few months, just like an appraiser would. For the 5 unit, you should be able to get the rent role and do a market rent comparison to determine the valuation.

Stating one lump sum appears strange to me. Did you really complete your due diligence on these properties?

@Jared Bauer I agree with what @Mike D'Arrigo suggested to start with and really determine what you want. That should drive your actions.

I have developed a strategy that used out-of-state investing to reach what I call "The Time Freedom Point" where my passive income allows me to cover all my living expenses. Part of those expenses in my case also include traveling which adjusted my strategy to include properties in desirable international locations for travel.

The folks I mentor follow that same path and we are all generating a nice passive income to live the life we desire.

If you like to learn more about the approach, feel free to DM and set up a call