All Forum Posts by: James Free

One of the hallmarks of the COVID era has been rampant unemployment abuse, whereby employers find that large numbers of people apply for jobs even on the other side of the country and don't respond to callbacks because their only real reason for applying is to continue receiving unemployment insurance.

Is there something similar for tenants?

I ask because one of my rentals is coming vacant and since I advertised it for rent on a popular online platform, people have been submitting applications (which costs money!) and then declining when I ask if they want to actually see the property. This seems like foolish behavior and would only make sense to me if there was some sort of government incentive to do it.

Can anyone explain these applicants?

And no, I'm not leasing to any of them; I have better candidates, so no need to derail the thread with advice.

https://www.wsj.com/articles/r...

It's not necessarily a positive mention, but there it is:

Local buyers bid against one another as well as against investors who now comprise about a fifth of annual home sales nationally. Online platforms such as BiggerPockets and Fundrise make it easier for out-of-town investors to buy real estate in smaller cities across the U.S., said John Burns of California-based John Burns Real Estate Consulting.

Often, Mr. Burns said, “the cash flows are better in the Tulsas and Allentowns of the world” for those seeking to rent out properties. In the fourth quarter of 2020, nearly a fifth of homes sold in the Allentown area were bought by investors, according to Mr. Burns’s data.

Not accounting for the reinvestment of cash-flow is, in my opinion, the biggest flaw in BiggerPockets' calculators (https://www.biggerpockets.com/rental-property-calculator). That flaw was my motivation to make my own spreadsheet that allows me to supply a "cash-flow reinvestment interest rate" in my inputs so that I can compare properties more accurately. It accounts for the fact that gain X dollars/month in cash-flow is better than gaining X dollars/month in equity appreciation because the cash is liquid and re-investable, while the equity is illiquid and has a rate of return of zero.

Tony and Dave are covering it well. I'll admit that a risk with a 1031 is that you overpay for the new property because you're afraid to miss your window.

A big unmentioned concern about the 121 plan is that they actually have to move into the house for two years. Do they want to do that? That's a big life change and a lot of inconvenience (if they're like my parents, they have a LOT of junk by this age) just to play the tax game.

Your parents should be at a stage in life where they are enjoying their wealth, not jumping through hoops to manage it.

Sitting in a single property and getting 15% over 30 years is quite hard, actually. The benefit of real-estate investing is using leverage, and in your scenario, most of your 30 years is spent with very little leverage. You're also doing the math in a way that suggests that as you collect your cash-flow, you'll let it sit in a bank at 0%, whereas your mutual fund option is reinvesting (compounding) every penny earned. That's not a fair comparison. You could put the cash flow in mutual funds as you receive it, or you could use it as down payments for more real estate. To fairly compare the two investment classes, you need to be reinvesting gains from both.

Of course, actually getting 12%/year in mutual funds is also very hard. 8% is a more realistic number, and beating 8% in real estate is a lot easier than beating 12% is.

Finally, there are the tax implications. Your equity investment will incur capital gains taxes at the least, and possibly income-level taxation if certain politicians have their way. With real estate, there are ways to realize gains tax-free, which has a substantial impact on total return.

I encourage you to look into getting more realistic numbers for each of your scenarios. In the real-estate case, consider rolling your gains into more/larger properties over time and cashing out your equity with refinances.

I'm curious as to whether any experienced landlords have had success with the technique of refinancing the same property twice, with the first being a cash-out refinance and the second being a rate-lowering refinance.

Having done both types of refinances before, I'm well aware that if you want cash out, lenders penalize you with substantially higher interest rate and point requirements. However, if you wait some period of time (often six months), you could refinance the property again (perhaps with a different lender, or perhaps with the same lender) and since no new cash is being taken out, you'd just get standard rate refinance terms.

The downside to this is obviously that refinancing is expensive, and doing it twice is doubly-expensive. However, the cost could be somewhat mitigated by opting for fewer points and a higher rate in the first refinance (to the extent that the lender offers the option), knowing that you'll only be paying that rate for a few months.

Has anyone actually done this? Have the numbers made sense? Any gotchas?

I was hopeful when I saw https://www.biggerpockets.com/... under BP Insights. Having a good rent analysis tool for BP members would save me from paying for other services. Then I tried asking it for a rent analysis for my 4-bedroom house in Longmont, CO, and it said the median rent is $795.

That's barely a third of what it should be.

The tool actually listed the comps it used to generate the data. Most were in Louisiana, and some were in Sioux Falls, SD.

Has anyone else had experiences with this tool that are worth sharing? I'd like us to help drive it to the point where it can actually save us from paying for competing services. To the BP Team: Good idea, but let us know when it's ready for prime time!

1031s and foreign investors have outbid me in the past, for exactly the reasons that @Ellie Perlman described. Another reason I'd like to add to the mix is short-term rentals, which have the potential to gross far more revenue than long-term rentals. A buyer planning to AirBnB can justify a significantly higher price than the rest of us. COVID may reduce that factor going forward.

In my market, the biggest problem driving prices higher isn't so much investors willing to overbid on new properties as it is an unprofitable rent-to-price ratio across the market. Cashflowing a new property is impossible if one pays anywhere near MLS pricing, unless you run the numbers incorrectly, which some newer "investors" may be doing. I also see more and more existing investors who are settling for, or even celebrating, terrible ROI on their rentals. I see two primary reasons for this:

1. Deferred maintenance, and lots of it. It's easy to say you're cashflowing when you haven't had capex for over a decade, but your equity ROI is probably negative.

2. Bad ROI math. So you acquired for $50k and are making $10k/year in total return. Great! For year 1, anyway. But if your gains are mostly equity, and years later you have $200k in equity and still only $10k/year in new return, your ROI is terrible now. You might think it's good if you're still imagining that you're only $50k into the property, but you're not. Those of us celebrating their paid-off $300k SFRs that cashflow $10k annually and appreciate at $10k annually would be better off in stock, where you average the same $20k total post-tax return, all in cash, and with no management effort whatsoever.

But all of this overpricing might be a moot point soon if it's true that a quarter of the country's renters won't be able to make payments once the government's COVID spending stops. Throw in a foreclosure boom, and those of us with capital are about to find deals aplenty.

https://www.cnbc.com/2020/07/23/heres-what-to-know-about-the-usdas-loan-program-for-some-borrowers.html

This isn't the first time USDA loans have appeared on these forums, but they're rarely talked about, so I thought this article was worth sharing. These loans are a potential way to get started in REI, but by and large, their "low-income only, and if you have savings, you can't get approved" nature screams "2008 all over again".

@Ian Stuart @Wendy Harden can you share the names of your lenders?