All Forum Posts by: Huggy Baird

@Brian Hoyt

With a sudden rise in inflation expectations, interest rates would go up. THis will make mortgages more expensive and put downward pressure on home prices in the short term. Flippers that are leveraged will see earnings decrease as home prices decrease (or stay flat if it's a growth reagon). So flippers earnings are inversely correlated to inflation. In other words, if inflation jumps up flippers earnings jump down

In the long term, after that abrupt shock to house prices... home prices will match inflation (or slightly outpace it) so people holding property for years are not worried about this. they benefit from inflation. it's only short term flippers that fear abrupt upswings in inflation

A contractor who pulls the permits can have anyone of his workers (employee or 1099) do the work. The main contractor that pulls the permits is responsible for the bonding with the city. You have permits pulled by bonded contractor, quality work done by the contractors crew, inspections passed. I'm not sure why anyone would raise an eyebrow to this

It would look odd to see the payment going directly to the workers, but I cant imagine this is legally incorrect. disclaimier: I'm no lawyer... you should consult a professional for true advice

This is a unusual concern to have. I'm guessing some event recently happened sparking this question. Why would this be a concern of yours?

Great thoughts everyone. I see some astute investors here.

On the inflation Ben Leybovich mentioned... I'd point out in the short term, if inflation hit 4% we'd see interest rates rise and that $2 million portfolio would be worth less due to affordability to buyers. It's a discounting cash flow exercise.

In the long term, levering real property absolutely provides the exact benefits Ben mentioned. And you will see that 4% return on the $2 million after the short-term price disruption subsides

The posters on this thread all seem to be long term passive income investors building a portfolio. So my comment is of little use to you. But if a flipper sees this thread, they'll want to realize leverage will cause cause their earnings to have a negative correlation to inflation changes

It is highly unlikely you can buy a home for $30k and refinance for $60k. @William Bannister comment to buy for $30k and refi a mortgage of $24k is reasonable.

The key benefit to cash out refi is you can make cash offers on homes. This will give you an advantage over a financed offer. Then you can cash back refi after the deed transfers.

The key downside is your cash out refi is rules including you can only borrower up to 80% of the PURCHASE PRICE (not appraisal, not purchase price plus renovation dollars). If you wait 12 months from the purchase you can cash back refi for 80% of the appraisal value. Assuming it appraises at $75k a year later you could borrow the $60k (80% of purchase price) at that point in time

Absolutely agreed on my situation. I'm very grateful to be so fortunate.

And I absolutely agree your advice has merit. Your advice has more to do with solvency though. It'll keep people from quitting their job only to find themselves going bankrupt. My advice isn't related to solvency, it's related to income maximization and knowing when it makes sense to quit job. The shooting from the hip formula I posted is intended to show where the additional income offsets the opportunity cost of lost wages.

In short, your good advice is all about cash flow statements and solvency. My advice is all about income statements and opportunity costs. Together they complement each other

It is true a 27% return will get you $35k in earnings. But if you could get a job and make $35k a year. You could take that $130k and invest it in treasury bonds to make an additional $3k a year. You'd be better off financially as a bus driver and bond investor. The key to quitting your job is knowing the ADDITIONAL returns you are getting compared to being a passive/part-timer is greater than your current salary.

btw, this is really just my jovial take on this matter. It's a fun topic to ponder. There are a lot of other things in terms of downside risk of a job, full time may enable private placement drastically changing things, etc. So I'm not married to the formula... it is really just a quick and dirty fun calculation that has some minor merit

I have a full time job and make six figures. I run a real estate company in my spare time and make an additional six figures. I truly enjoy both so it's more a financial decision than a "hate getting up for work" type of thing. So for me it all boils down to if I quit my full time job would I make even more enough ADDITIONAL money with my company to cover my salary loss. Highly unlikely since my returns on capital are already 25%+/year (and have been for years). I'd have to expect i could increase them to 50%+ for it to make sense for me to quit my job... and I just can't see that happening

Either my job or my real estate company covers well over the 6 mo reserves of living expenses and 2x monthly gross rent. So in my case Des N's suggestion wouldn't be applicable. Of course it is a great suggestion as a rule of thumb in terms of solvency... but it likely is not a good rule of thumb for when to go full time vs stay at thier job

In my post above. Sentence " If he left his job he'd only make the 37.5k" should read " If he left his job he'd only make the 37.5k plus the value added $30k (12% extra return ) *250k "

The 15% is the bus driver's expected passive return if he kept his job and hired prop management/maintenance/paid wholealers/etc.
Hypothetically, say the bus driver has $250k in savings. if he kept his job he'd make $35k/year plus the 37.5k return (250k*15%). total income of $72,500. If he left his job he'd only make the 37.5k. So the key is to subtract out the passive return to fully reflect the opportunity cost.

I'm prolly not explaining this well. but ultimatly it is really just a shooting from the hip formula anyway

I'll bite... with a formula i just made up shooting from the hip:

Ideal$ = Current_Income$ / (Value_Add_Return% - Exp_Passive_Return% )

Ideal$ the ideal amount of income to quit job and go full time
Exp_Passive_Return% the expected return on equity capital including net rental income plus home appreciation. Or if you're flipping net earnings per year as a % of equity capital
Value_Add_Return% This is your full time REI expected return. obviously higher than the passive return. This could be cost reduction if you do portions of your renovations yourself. Could be saving on PM fees. Could be additional deals you acquired from doing more yellow letter compaigns
Current_Income$ Your current annual income. This will help the formula to reflect that a medical doctor would have a higher hurdle compared to a short order cook

Putting it to the test with some made up numbers. A bus driver that makes $35k a year. Bus driver conservatively expects a 12% net rental return on equity (after levering with conv mortgage) plus 3% home appreciation. Total return on capital is 15%. Bus driver expects he can add add an additional 12% return by reducing maintenance costs and finding better deals with his time being full time. Total 27% return if he was full time

Ideal capital is $291,666.67 = $35,000 / (27%-15%)

That was fun. Doubt it is tremendously useful though