All Forum Posts by: Greg Scott

You have some valid points, but I would like to present a counter-argument.

I agree that people that only buy properties that have the highest pro-forma cashflow, often are buying in rough parts of town.  They are management-intensive to operate and rarely does the predicted cashflow match the actual cashflow.  Trying to get to the bare minimum cashflow number to leave your job is extremely risky.  On this we are aligned.

On the other extreme, investing for pure equity growth can be equally disastrous.  As you know, real estate goes through cycles.  If you are relying on doing a re-finance every couple of years and you hit a dip in the cycle, you could be in trouble.  You may be forced to sell in a down cycle and you may never be able to recover.  This is happening to people in commercial real estate right now.

I like being somewhere in between.  I want consistent cashflow to handle my day-to-day living expenses.  I never want to be forced to sell in a down market.  In an up market I can harvest gains and re-invest in further growth opportunities.

One could argue "Yes" to both of the questions in your title.

Near-term, prices do appear higher than normal and affordability is low. Prices may come down.

Long-term, the US government keeps debasing its currency, so it isn't difficult to forecast that 10 years from now, home prices will almost certainly be much higher than they are today.  The chart below is useful for discussing both points.

How the near-term and long-term issues play out is less clear.

I disagree with the premises of this post.

The problem in California is primarily due to growing population and lack of supply created by NIMBY activists and mountains that make further development difficult.  In contrast Austin, TX has seen a huge surge in construction and prices and rents are coming down.

AI is just a red herring.  Every technological leap forward people said it would destroy the economy.  While it is true that not many people make buggy whips any more, the automobile ended up creating numerous other jobs.

I don't know much about them, but wouldn't touch them with a 10-foot pole.

Looking at their investment returns. All the ones with a positive ROI were sold before interest rates started higher in mid 2022. There is a good chance that everything they bought mid 2021 through 2022 is performing poorly or underwater.

The biggest red flag is their story.  A passive investor through 2019 that suddenly becomes an operating investor and takes down 15 properties in 2 years has no idea what they are doing and they do not have the capacity to do it correctly.  I can tell you that being a passive investor provides zero training for operating a property.

Also, I've never seen anyone publish a pro-forma 30% IRR. That, by itself, is a red flag.

Tom

You are correct.  Because your return is 8% and mortgage rates are close to 8% the amount of leverage doesn't change the cash on cash return.

On the other hand, leverage can be very beneficial. Let's say you could find a house that gave you 10% cash on cash with no mortgage.  If you can get a mortgage at 7%, the money your borrow still makes 10%.  You benefit from the arbitrage. In that case, your cash on cash goes up the more leverage you have.

A few things to consider.

1) Cash on cash is one of several ways we make money in real estate.  One of the best is getting equity capture.  In other words, buy below market.  There are also appreciation benefits, loan paydown benefits and tax write-off benefits.  If you had to chose between two houses 50% leveraged and one free-and-clear, the two houses would almost certainly make your more money

2) If you are trying to be conservative, the most conservative thing is to have cash on hand.  For example, a free-and-clear house with zero cash in the bank is much riskier than a 50% leveraged house with ten thousand dollars in the bank.  In other words, no debt and no cash is much riskier.  Some of those the anti-debt crowd got killed in the GFC.  If they had been putting every $ to paying down their mortgage and then lost their jobs, they had no excess savings to bridge them to the next job.

Now, on the question you didn't ask. I'd recommend you find a house with better cash on cash return. Eight percent is on the very low end of what I've been seeing.

You didn't say if this was 2-4 units or 5+ units.  The financing is very different for those.

I'll assume you are talking 2-4 units.  If you are walking into a local bank, you are probably getting a "no" because they don't understand rental real estate.  This is very common.  You should seek out a lender that works with investors.

@Ken M.

I love the link you sent.  Also, I 100% agree that investors should always be buying below market, which was the important point you were making.

But, I am confused about your first sentence.  The suggestion that a foreclosure tsunami is coming does not seem to be borne out by the report you provided.  There two charts in particular (screen shot below) that show the risk has moderated significantly since 2020.  

I have had asbestos removal training. 

Asbestos remediation is very expensive.  If you don't have to do it, you don't want to do it.  If the tile is breaking apart, it would be called friable, and that would be a reason for removing it.  If it is in good shape and intact, there is no need to disturb it.

Covering the old tile with new flooring is a good solution. Related to asbestos it is called "encapsulation".  That is a recognized safe way to protect against health issues. The only problem with encapsulation is that it doesn't remove the asbestos so if sometime later you wanted to remove all the flooring, you now have to go through full asbestos remediation.

FWIW, most people don't realize that houses even into the 1980s had asbestos.  1960s and 1970s homes almost certainly had it.  A century ago insurance companies gave you a discount the more asbestos you had in your house, so the older the home, the more likely it has asbestos.  If people knew how much of the stuff was probably around them in an old house, they would probably freak out.  On the other hand, if it isn't airborne / friable, it doesn't pose much risk.  

I don't understand why your dishwashers are causing such problems.  We don't experience the issues you were describing.  Were they installed correctly?

As a source of water problems I would put them behind roofs, sewer lines, washing machines, plumbing leaks of various kinds and stupid resident decisions (Why do I have to use a shower curtain?)

As something that needs replacing regularly, I would put microwaves at the top. (What do you mean I can't just put a can of soup in the microwave to heat it up?) HVACs are probably the biggest single work order item. We replace as needed, but sometimes it just needs maintenance or the resident is being unreasonable. (Why can't I keep my heat at 85 degrees when it is 10 degrees outside.)

You've actually got two problems here, not one.

The first is: Why is your house not renting?  Without an address or knowing much about your house, it appears you've priced it near the top of the market.   There are nice-looking 4/2.5s with much lower rent than you in West Plano.  (see screen shots) Most of the homes at $3,000 and above have more bedrooms or baths than yours.  If you want to get it rented fast, drop the asking rent to $2,800. You've already lost one month having it sit vacant, which means you've lost the equivalent of $250 per month on a 12-month lease. At $3,000 you may be waiting a long time for a renter.

The second issue was:  Lease vs Sell.  Honestly, you didn't give enough information.  Was this your primary residence before?  What kind of appreciation have you enjoyed?  There are numerous questions.  However, if you are not ready to be a landlord, you should sell.