All Forum Posts by: Pete Barrow

As Sam said above, you're getting a terrible rate of return. And depending on where your property is and how inflated the prices are there, you could be about to lose a lot of equity. 

You can probably find a much better place to park that 350k. Hanging onto a poorly-performing property just because it will be paid off some day doesn't really make sense. Find a better performing property and let the tenants pay that off.  

==>Actually a typical $500k house in thr DC suburbs will rent for $3000-$3400. I target low to mid $400s that rent for $2800 or so.

I was just going by houses I knew about in my old neighborhood, North Woodside. There must be better deals. 

Was talking to my older son about this, and I think his take on leverage is pretty smart. Here's what he says. 

If you own properties on the coasts, where housing costs are high, your mortgage costs are big enough to be scary. Here in the Midwest, where you can find income properties in the $60-100k range, they are not. 

On an 80k house with a 60k mortgage, the payment might be 300/mo. Other expenses might add up to $300, so the mortgage is not an overwhelming part of your expenses.

When the unit is standing empty, you need $600 / mo, half of that going to expenses you will have whether you take out a mortgage or not: taxes, insurance, and maintenance.

So taking out that mortgage doesn't create a huge payment; what it does, assuming you had the money to pay cash in the first place, is leave you money either for an emergency fund, or, better, to invest in another house which, even if also mortgaged, should also cash flow. Either of those things is good when you have a vacancy at the first house.

But this only makes sense when you live in a place like the Midwest, where there are 80k houses that rent for $1200-1600.

On the west coast, I don't even know the numbers. But in the DC suburbs, you can easily plop down close to 500k for a modest house that might rent for $2300 / mo. If you get an 80% mortgage with a payment of $2000, you are roughly breaking even every month the place is occupied.

When it's vacant, you are bleeding $2300 / mo. If you have kept the money in an emergency fund, you can cover that. If you've invested it in other properties in the same area, probably not cash-flowing either, you have a problem.

People still invest in these areas, hoping for appreciation. But they are taking more risk with leverage than a guy in the Midwest who has small modest properties that cash flow a bit. In fact if you do some thought-experiments with the latter scenario, you might find that there are situations where a little leverage reduces your risk. 

1) Sell truck, buy 10-yr-old F-150.

2) Self-manage your properties.

3) Do all repairs you are capable of, learn how to do as much as you can.

4) Start a small wholesaling business, separate from the property business (you are obviously good at digging up off-market deals). 

5) Pay yourself a salary from each, totalling a little more than what your wife gets. 

6) Reinvest what's left. 

7) Spend $477 / month on marriage and financial counseling. 

There you go. 

It's hard to say what you're missing, but the way to bet is that there is some such thing. 

It is extremely unlikely that this is a good house for you to get rich on, when every experienced investor in your area has chosen to pass on it for six years.  

It might be a good house for someone who can assess it and has just the skill set to fix it up well and economically. And if such a person comes along, he's probably going to want to get it for half of asking. 

Like a poker player who folds most hands, it's not unusual for an investor to look at many hundreds of houses for every one he buys. I would say you should look at a lot more houses.  

I put an ozone generator in a hoarder house hoping to get rid of the smell and it didn't really have a strong effect. Bleach, concrobium for mold, kilz and paint everywhere, plus a dehumidifier solved the problem. There was no pet urine and even so, the ozone generator was not enough.

You may be screwed and have to pull up the subfloor. It's going to hurt, but think how it's going to hurt if you cover it with new flooring and THEN have to pull all that up to rip out the subfloor. 

I can even imagine, from years of experience with bad things happening in houses, that you might treat the subfloor with something and have the smell abate, only to come back again like a bad dream, as whatever is deep in the wood works its way out to the surface.

I do wonder how it happened that you didn't know how bad the house was. But regardless, you have my sympathy.

==>locals in INdy are filling a niche or a demand that's capitalism. 

Capitalism is a rough sort of contact sport, but in the end, it gets the money out of the hands of people who can't handle it, and into the hands of people who can, more or less. It's just painful to watch sometimes. 

3. Are lower end investments naturally a bad deal even if a thorough, conservative analysis shows a decent ROIand you don't have to leverage to the hilt? I do wonder how a bank lends on a 25k house that would cost 100k to rebuild. Strange.

It's pretty hard for even the most sober analysis to account for the tenant who moves out and gives the keys to his cousin, so that genmtleman can steal your furnace and AC for the copper, or for some of the other truly manic things that happen in class D properties.  And remember, all this is happening on top of the regular maintenance , which is enough work already. 

4. If lower end investments are a bad idea, how does someone without a huge nut begin? 

Lower end investments, but buy smart and cheap, but do the rehab yourself, manage them yourself, screen tenants like mad, enforce rules rigorously, alarm systems in place the minute of a moveout, etc etc.  All this means your properties have to be local. 

==>OK.... you leverage the family home buy the toughest rentals on the planet and 97% of the people on this site want to do the same thing and cant wait to do the same thing.. so that's your mind set.. 

No offense to anyone on this site, but I don't understand how the football game mentality has become so strong in what should be a serious business of calculating expenses and risks. 

And it's not just here. I've been to meetups where people literally stood on their chairs, pumped their fists, and yelled FINANCIAL FREEDOM!

And if you say, hey hold on there buddy, then you're a hater and a dream-killer. 

People should see what wholesalers are buying this stuff back for after a miserable year or two goes by. 

Well, it is after all a big transfer of wealth from the coasts to the Midwest. I just hope these people don't need their money. 

==> My fiance's job brings enough for us to cover are needed expenses and I have about a year's worth of savings built up on top of that.

Once you've said that, you can say anything else you like, even, "So I'm going to learn to play the mandolin for a living, although I don't own one yet." 

Wholesaling is a great business once you get it built up a bit. I don't know, maybe Baltimore is a good place to do it. A beautiful old city with plenty of beautiful-but-distressed properties. I lived there for a year, back about 40 years ago, and I truly loved it. 

Actually I just read down a little further and it seems you are leaving Baltimore soon.  Well, all that stuff I said about it is still true. It's hard to say if you'll have time to close a deal before leaving. For most people, getting that first deal or two takes a while. But you can spend your time learning and reading about RE and getting your feet wet in the business. 

And here's some advice. Meet all the RE people you can before you leave, and learn and build relationships. Then after you move, you may meet people elsewhere who will want to invest in Baltimore, or you may find people in Baltimore who want to invest in your new area. You never know what may come of meeting new people. 

Wishing you success.