All Forum Posts by: Marcus Johnson

Originally posted by @Russell Brazil:

Multiple properties, like owning multiple stocks helps to spread out your risk. I believe very much in the notion of diversification.  If you have 10 properties and 1 vacancy, you only have 10% vacancy. However if you only own one property and have one vacancy you have 100% vacancy. This holds true for any expense in your portfolio.  

And diversification can conceivably lead to worse returns. If you only owned Chipotle stock from 2012 to 2015, your portfolio killed it. However with the lack of diversification comes an increase in risk, because from 2015 to 2016 if you owned Chipotle only you got killed. Owning multiple properties could hurt your return conceivably....but it spreads your risk out....so maybe you have 1 property killing it, and one that sucks. Sure owning the one property that is killing it is better, but then all your eggs are in one basket.

I believe what your saying in regards to diversification. Unlike a lot of people on this forum who only consume Real estate investments, my wife and I have diversification between real estate (1 duplex thus far that's doing great), 401k's, Pera's, 403B's and Roth IRA accounts that are in Index funds (3000 companies). We feel that should one area drag at retirement, the others will pick up the slack. FYI, I'm working extra jobs to speed up the process of getting another DP together for another duplex and then rinse and repeat.

Originally posted by @JD Martin:

Some of your math is funny and there are a lot of assumptions in there. For example, what are the chances that Investor #2 had 4 lead violations and had to repaint all 4 duplexes? What are the chances that in the same year all roofs have to be done? What if investor #2 only had the same 1 unit violation as Investor #1? Now investor #2 is ahead of Investor #1 by 9 grand by year 3. And you are wrong, eventually the cash flow from Investor #2 is going to way outpace Investor #1, even using your scenarios, given enough years. Further, you have left a part of the equation out of this - average real estate appreciation. If you appreciate every unit by 2%, average, per year, using your $180k figure, at the end of 20 years Investor #2 is going to have units worth $270k each, while Investor 1 is going to have 1 unit worth $270k. If everyone sells, everyone will have paid off roughly half of the mortgage at that time. 

Investor 1: $270 - 70k mortgage = $200k

Investor 2: $270 - 95k mortgage = $175k x4 = $700k

Everyone is in favor of doing it their own way, and finding the facts to support such. And I'm not arguing against having some cash properties - I have cash properties. But if you want to talk pure numbers, apples to apples, you cannot beat the wealth creation of multiplication. Holding one of anything, all things being equal, is going to be worth less than holding two of the same thing, if everything is constant. Furthermore, the investor with multiplication is going to have better insulation from catastrophe through diversification, and less individual funds at risk in any case of financial disaster. 

Bare with me, but the reason I kept all duplexes as experiencing the same exact problems, is to keep things equal across the board to see what would happen in this scenario. It's very interesting to see how having multiple properties with FHA loans with little down and low cash flow can break the bank quickly if you're not financially stable. As for roofs. Roofs have a shelf life of 20 years and when you buy properties, they most likely aren't brand new and that's why I used the average replacement life of 8 years from the time of purchase. You can pick any length of time, but the longer you have multiple properties, they will all need new roofs eventually if not sooner. I mean the house I'm using in the example is from 1915. As for code violations from the City, they can happen at any time, so my point is that you should be ready with cash reserves should this happen and unfortunately having four duplexes with FHA loans with low cash flow per duplex, can be detrimental to the checkbook.

Originally posted by @Luc Boiron:

Originally posted by @Marcus Johnson:

Originally posted by @Luc Boiron:

@Marcus Johnson

You seem to have forgotten two important sources of profit for investors. These are appreciation, and mortgage pay down.

Appreciation is difficult to anticipate. However, paying down the loans is guaranteed. You should account for this in your calculations, and it will make a big difference.

I get what your saying and yes 30 years down the road would be interesting to see which investor would have a higher net worth, but that wasn't what i was trying to show in the first 9 years the risks of owning multiple properties with little down.   Whats interesting is that investor #2 had a lot of obstacles along the way and went 20k in the red within 2 years.   And then in year 8 replacing 4 roofs for 44k was another hit to the savings for investor #2.   By year 9 Investor #2 only had 16k in savings, whereas Investor #1 now has 57k.  

 I don't mean 30 years down the road. If you refinance or sell and do a 1031 exchange, you're going to care how much you've paid the mortgage down. I'm unclear how much exactly is the mortgage amount for each property, but you can roughly estimate that on a 30 year amortization, for a $180,000 mortgage, you will have paid off approximately $25,000 after 8 years (by 2022, for your numbers). This means on 4 duplexes, you will have paid off $100k, which you will have in equity in 2022. For Investor #1, he has only paid down $25k of the mortgage.

Add that to your numbers and Investor #1 is at $82k, and Investor #2 is at $116k.

This also is assuming that the property value has not changed at all. You're correct from a cash flow only perspective, but not from an actual increase in wealth perspective.

I don't think your wrong if everything happens perfectly for Investor #2.  But as we all know as investors that risk needs to be calculated when making investment decisions.  As I showed in my example, because Investor #2 didn't have enough savings early on when a large expense came up, he may have had to try to borrow 32k or sell a property (which he could take a hit on if the value of the property took a hit due to the housing market) or even have to declare bankruptcy.  So yes the reward may be larger for someone taking on excessive risk, but from my own experience I have gained my wealth by taking things slow, putting 25% DP that I bought for 180k on a duplex that cash flows well and is worth 70k more then I paid for it and the mortgage left is only 125k.  Plus my Vanguard Index funds that my wife and I've had for years have done quite well and our 401k's.  So wealth can be built slowly due to compound interest and for Real Estate properties putting more down.   I realize we may not agree on this, but my method has been beneficial to me and I thought I'd share my findings with everyone regarding the cash flow situation.  

Originally posted by @Luc Boiron:

@Marcus Johnson

You seem to have forgotten two important sources of profit for investors. These are appreciation, and mortgage pay down.

Appreciation is difficult to anticipate. However, paying down the loans is guaranteed. You should account for this in your calculations, and it will make a big difference.

I get what your saying and yes 30 years down the road would be interesting to see which investor would have a higher net worth, but that wasn't what i was trying to show in the first 9 years the risks of owning multiple properties with little down.   Whats interesting is that investor #2 had a lot of obstacles along the way and went 20k in the red within 2 years.   And then in year 8 replacing 4 roofs for 44k was another hit to the savings for investor #2.   By year 9 Investor #2 only had 16k in savings, whereas Investor #1 now has 57k.  

Originally posted by @Joe Villeneuve:

Let me add this to your thought process..."the fewer the properties, the less properties you have cash flowing that can cover a property that has a financial hit".

I thought the same thing but as you can see in my math, that isnt the case.   Unknown expenses such as code violations like i detailed can come up without warning    The paint on the duplex didn't look bad at all, but the city of minneapolis is working at hard at making the neighborhoods nice.  The problem is in 2015 I had to paint the house which costs 3k and i already knew about the 5k in renovations, but I didn't think the tenant was going to move out the spring of 2015, so these things happen sometimes.   And because both investors didn't have a lot of time to accumulate savings from cash flow 32k for investor #2 put him in the red at 20k.   So what I proved is that should you have multiple properties and not a ton of savings or cash flow saved up, 32k can wipe you out.   

Originally posted by @Joe Villeneuve:

What you just described is one person's experiences based on facts that are not necessarily applicable to anyone else.  I'm not saying you're wrong.  What I'm saying is your long "tape" of properties doesn't really prove anything.

Actually, I thought the same, but it does prove that in this real world experience buying multiple properties with FHA loans with little down, should expenses come up early on, there isn't sufficient cash flow for the 4 duplexes.   What most people don't think about is that if they don't have a sufficient savings after they purchase their rental properties and they are relying solely on the cash flow, when expenses come up on 4 properties, that's alot of money.  Remember that the situation with Investor #2 is very common for people on this forum who prefer to use creative financing to achieve great number of properties with $100 per door requirements.   I personally wouldn't ever go that route.  

Let me try to give a real world experience that may provide some conclusion as to whether or not owning more properties provides greater protection.I’m going to use a duplex that I purchased in city of South Minneapolis back in 2014, that I self manage.I purchased the duplex for 180k with a fixed 5.25% for 30 years with 25% DP and 3% closing costs.Let me point out some of the specifics of the duplex.The windows, furnaces, water heaters and HVAC were brand new as of 2012.I have put 5k into unit #2 for renovations and 3k into painting the house due to a violation of lead order by the City of Minneapolis.So keeping those upcoming expenses in mind for the near future, suppose two investors have 50k to spend which is to be used for closing costs, DP and realtor commissions.Since I paid for closing costs with cash, I’m not going to roll them into the loan for this example. The first investor is me who I describe in the paragraph below and the second investor is someone who will put less down with the intent to acquire 4 duplexes.Keep in mind the total rent paid for both units in each duplex is $2,100.

Total Fannie Mae conventional loan amount:$180,000

Loan Term:30 years

Interest rate:5.25%

DP @ 25%:$45,000

Closing costs @ 3%:$5,000

Mortgage Monthly payment which includes property taxes:$998.84

Insurance:$142.00

Sewer, Water and Garbage:$104.00

Average monthly expenses:$150.00

Renovation and painting expenses for early 2015:$8,000

Roof in 8 years:$11,000

The second investor decides to go with an FHA loan so that they only have to put 3.5% as a DP.Here are the specifics.

FHA Total loan amount:$180,000

Loan Term:30 years

Interest rate:5.25%

DP @ 3.5%:$6,300

MIP:$123.04

Upfront FHA MIP:$3040.00

Monthly taxes:$250.00

Insurance:$142.00

Sewer, Water and Garbage:$104.00

Average monthly expenses per duplex:$150.00 X 4 duplexes = $600.00

Monthly Mortgage payment:$1,491.00

Closing costs @ 3% rolled into loan:$5,000

Renovation and painting expenses for early 2015:$8,000

Roof in 8 years:$11,000 per duplex

Total money required at closing for purchasing duplex using FHA loan:$14,340

Using that figure, investor 2 can buy 3 duplexes and cannot afford a 4th home.That leaves investor 2 with $6980 as disposable cash.So investor 2 borrows$7360 (loan term=72 months)from Family at 8% to help buy duplex #4.

Private money lender monthly expense:$110.40

Investor #1 monthly cash flow per duplex:$705.16

Investor #2 monthly cash flow per duplex:$244.60 X 4 duplex’s = $978.4

*As you can see Investor #2 has more cash flow each month.

2014

Investor #1: NOI 2014 = $8,461.92

Investor #2: NOI 2014 = $11,740.80

2015

Investor #1:$8461.92 (NOI 2015) - $8000 (Code violation to paint 1 duplex for $3,000 and renovate unit #2 @ $5,000)= $461.92

Investor #2: $11,740.80 (NOI 2015) - $32,000 (Code violation to paint 4 duplexes for $3,000 each and renovate unit #2 @ $5,000 each) =-$20,259.20

2016

Investor #1: $461.92 (2015 balance) + $8,461.92 (2016 NOI) = $8,923.84 (2016 Year end Gross)

Investor #2: -$20,259.20 (2015 balance) + $11,740.80 (2016 NOI) = -$8,518.40 (2016 Year end Gross)

2017

Investor #1: $8,923.84 (2016 balance) + $8,461.92 (2017 NOI) = $17,358.76 (2017 Year end Gross)

Investor #2:$8,518.40 (2016 balance) + $11,740.80 (2017 NOI) = $3,222.40 (2017 Year end Gross)

*It took 3 years for Investor #2 out of the Red.

2018

Investor #1: $17,358.76 (2017 balance) + $8,461.92 (2018 NOI) = $25820.68 (2018 Year end Gross)

Investor #2: $3,222.40 (2017 balance) + $11,740.80 (2018 NOI) =$14963.20 (2018 Year end Gross)

2019

Investor #1: $25820.68 (2018 balance) + $8,461.92 (2019 NOI) = $34282.60 (2019 year end gross)

Investor #2: $14963.20 (2018 balance) + $11,740.80 (2019 NOI) = $26,704.00 (2019 Year end gross)

2020

Investor #1: $34282.60 (2019 balance) + $8,461.92 (2020 NOI) = $42744.52 (2020 Year end gross)

Investor #2:$26,704.00 (2019 balance) + $11,740.80 (2020 NOI) = $38444.80 (2020 Year end gross)

2021

Investor #1: $42744.52 (2020 balance) + $8,461.92 (2021 NOI) = $51206.44 (2021 Year end gross)

Investor #2: $38444.80 (2020 balance) + $11,740.80 (2021 NOI) = $50185.60 (2021 Year end gross)

2022

This is the year the roofs need to be redone on the duplexes.The cost per duplex is $11,000.

Investor #1 – Total cost for new roof on single duplex building = $11,000

Investor #2 – Total costs for new roof on 4 duplex buildings - $44,000

Investor #1: $51206.44 (2021 balance) + $8,461.92 (2022 NOI) - $11,000 (new roof) = $48,668.36 (2022 Year end gross)

Investor #2: $50185.60 (2021 balance) + $11,740.80 (2022 NOI) - $44,000 (4 new roofs) = $17,926.40 (2022 Year end gross)

After 9 years as you can see Investor #1 has $48,668.36 in savings and Investor #2 only has $17,926.40.My conclusion up to this point is that having more properties may bring in more cash flow each month at first, but expenses can wipe out those savings quickly.Eventually the cash flow from investor #1 should outpace Investor #2 as proven by the larger balance.Let me know what you think from my example.I tried to keep everything completely even between the two investors, the only difference is the way the two investors choose to spread their intitial cash.I’m personally more in favor of doing it my way.

Believe Me i do get it and please don't infer I don't. We can just agree to disagree. Moving on to another topic, I've stated my belief and facts.

@Thomas Rutkowski

You state that "Yours will provide more income in retirement".  Is that a gaurentee that you can provide to me in writing?    There is risk in investing and that is something you need to provide in your calculations.  Also what people need to be aware of are the following with UL

1.  High Premiums - Term is always less expensive per month then UL.

2.  Surrender fees -Insurers usually charge "surrender fees" for early cash withdrawals. The fee varies, with earlier withdrawals incurring higher fees. And when you take the accumulated cash out of your policy, the cash value is normally taxable income. Plus, you give up the death benefits on the policy once you take the cash.

3.  Fluctuating interest rates -"Insurance providers often promote enticing interest rates on universal policies. The higher the rates, the more money your policy accrues over time. A common problem, though, is that interest rates fluctuate, according to a September 2011 CNNMoney article. For instance, your policy might start at a 4 percent rate but you find several years down the road that your plan is earning just 1 to 3 percent interest. This often would be a much lower return than you could have gotten with many other types of investments."

4.  High fees and commissions - UL's are pushed heavily because they are well commissioned and the fees are high.    Try getting an insurance agent to write up a Term life policy.  They won't because there isn't the same compensation as there is with UL or WL.  

http://www.bankrate.com/finance/insurance/life-ins...

Thomas Rutkowski You can keep preaching your UL, but I'll stick with my term insurance that's cheaper and my low expense vanguard IRA's that have averaged 11% and will be tax free at retirement. Thomas, can you tell me why you don't think an index fund from Vanguard that has averaged 11% (low fees and tax free distributions) and a term life insurance (500k) that costs $20.00 a month is a bad thing?