All Forum Posts by: Steve K.

@Joshua D. Congrats.

I toast your success! Your success should be required reading on BP. Looks like you really know how to invest.

I'd say you and your family are the king/queen of delayed gratification. Hope you can enjoy a little more fruit of your labors going forward. I like your humbly saying "if I can do it, anyone can"....but I disagree with the "I'm stupid and lazy"....side comment. Congrats on working 2 or 3 jobs with conviction and succeeding. You're anything but lazy.

Best wishes for your continued success.

@John G. , I'm with @Cody L. , the rent looks better on #1. I'd buy it and leverage it....

Wow, @Justin Yocom and @Cody L.  !!!!

That's a 26% annual capitalization rate! Where can I get one like that?

@Antonio Palumbo , welcome.

Many investors on this BP forum are mostly interested in an investment property that cash flows. I'd encourage you to read up on the BRRRR method, as one way to grow wealth the quickest, and it works best if you use high leverage, (i.e. you have minimum equity in the property and maximum loan size).

Read on these forums the targeted "2% Rule", wherein you buy a rental property that has rent per month equal to 2% of the purchase price. (if your $3,150 per month place in NYC could be purchased for $157,500 , then you'd be in the best zone for cash flow. I'm guessing NYC isn't a 2% City....yes, many of them are in the Midwest with a $50,000 home bringing rent of $1000/mo) Note that this rule is independent on how you finance the purchase, or how much down payment you put into it.

Then, investors try to finance the property such that with 20% down payment, 80% loan, and considering other insurance, taxes, maintenance, capital improvement, they get net cash flow of +$300, per month per property. They then calculate their return on capital as the $300 per month ($3600 per year), divided by a $20,000 down payment (ie. 20% down on a $100,000 unit) and calculate that they are making 18% APR on their cash employed. Note that the 18% cash on cash yield is possible with 20% down payment, in this case. A person paying 100% equity and no loan, will calculate a higher net cash flow per month (without a mortgage payment) but will have a dramatically lower cash on cash yield.

Note that this "cash on cash return" is just the cash flow compared to the cash invested, and ignores the principal repayment by the tenant, and ignores any market appreciation (if any).

You are getting comments above because you have a -$175 per month cash flow, and therefore, your "cash on cash return" is negative. You are hopeful that you still have a viable "investment" because you like the tenant paying down your principal monthly (growing your equity, but not cash in your checking account). (@Cody L. is correctly making this distinction, and clearly strives to have the monthly cash flow.....his equity growing by $50,000 per month is not to be ignored however...... but he'd have to sell a property and/or cash-out refinance a property to convert that unrealized gain into spendable cash, and may have a taxable capital gain to pay tax on, too).

You haven't stated, but you might have $300,000 or $500,000 tied up in your down payment and growing equity over the past 8 years. Others are questioning why you would be happy with no cash return on that investment. You could instead have it invested in indexed mutual funds and get perhaps 8% yield, without all the risks and headaches of real estate investment. Folks like @Thomas S. are correctly pointing out that the "opportunity cost" of having so much of your capital tied up in your down payment is only effectively earning you about 4% yield (if your mortgage is 4% APR)....and why not extract it and put it to work in a property yielding 15% or 18% annually.

So, if you have $500,000 equity in the property and are happy that you're getting $700 per month in principal repayment, that's only a 1.7% annual yield.....you'd be better in a different investment.

I looked at a housing index for NYC....looks like it's up about 10% in last 8 years.....1.25% appreciation per year. So, you might be getting 1.7% from principal repayment and 1.25% from appreciation....are you thus netting just 3% annually on your risky investment?

Good Luck.

@Dan Richter , you're doing something wrong in your calculations.

If a 30-yr loan is a $430/month payment and a 15 yr loan is a $591/mo payment, that's an extra $161 per month used to pay down the mortgage 15 yrs earlier. (Echoed in your $-91 vs +$70 net cash flows....which are also $161 per month different).

The proper calculation is to compare your net worth growing between the 2 scenarios "apples to apples". The 15 yr loan doesn't get a "free" $161 per month compared to the 30 yr scenario (caution: don't use $91). In the 30-yr case, you should deposit $161/month into an investment account earning (your choice: 6% ?) per year compounding interest. Now, look at the paydown of the two loan balances, considering that the 30 yr loan also has an investment balance.

IF you had said that both loans were 4% APR and the investment account earns 4% APR.....there is mathematically no difference between the two loans. In other words, the investment account balance grows by exactly the same amount saved by the 15-yr loan's acceleration.

So, if you're seeing a difference, it's just because you're burdening the 30-yr loan with an extra 1% APR. (consider the after tax effects too; if you're in a high tax bracket, and that extra interest is deductible, the after tax savings won't be as great as you see pre-tax)

I favor more leverage, and am comfortable with the risk/reward of that extra debt. Your extra $161/mo of principal payment in the 15-yr loan scenario is earning you 4% yield (before tax). In your own estimates above, you're striving for a 15% ROI.....why pay off a 4% loan when you could invest in another property yielding 15%????

Good luck

@Rick Munoz , I'd guess your attraction to that new home is that it's the nicest you can find for $350k????

In reading your profile page, you want to grow a passive income stream.....have you considered using your first purchase/primary residence to springboard you into that goal?

I've looked at Westwood (agree w/ @Dan Mackin , it is pretty rough) It is appreciating now, as the low-budget modest homes are being purchased, and renovated. I looked at a few $160k properties on a fix/flip or fix/hold/rent strategy but never pulled the trigger. One concern you should weigh in the risk/reward, is that you would be the nicest home in the neighborhood....all the $150-$250k homes hold you back in appreciation, until they're all fixed up.

Have you considered buying a fixer-upper? Then you get to live in that neighborhood for 70% of your current idea?

Have you considered "house-hacking" and look for a duplex or quad in that neighborhood?

For example....I just saw this quad last week.....$339k

https://www.redfin.com/CO/Denver/4255-W-Dakota-Ave-80219/unit-4267/home/34134576

What if you lived in one unit for a year or two.....then have an income producing rental....move into a SHF as property #2??

Good luck

@Gail Roberts , I'm not really qualified to be giving financial planning advice (I'm just an amateur real estate enthusiast.)

You have $100,000 earning 6% yield in mutual funds (about $500/mo income), but you're fearful of this investment. You have $245,000 saved and not earning any yield/interest, because you seem to be "risk-averse". You're attracted to annuities, because that sounds low-risk and guaranteed (and you don't have to guess at out-living the annuity amount. (I haven't researched those lately, but I know that they're over-priced because the salesperson earns (something like 10%) on your investment. Be careful; do your due diligence and ask a trusted friend or family member for a 2nd opinion).

Real estate investors are here, trying to earn 10 to 20% returns (or so) on real estate, instead of settling for 1% in a savings account or 6-8% in mutual funds. But, it's a risk vs. reward proposition. It isn't for everyone. It is only a good solution for you if you can learn/research and judge that the reward is worth it for you, even if it's uncertain.

There are age-appropriate investments in stock mutual funds and bond mutual funds that could reasonably safely yield you 6% on your $345,000 nest egg. Could you live on $21000 per year $1750 per month), plus your SS check, if that included renting a place?

Best wishes to you.

@Gail Roberts , not to pry, but to try to help.

You seem to be looking for a new retirement plan/strategy beginning at age 66? Why the change of course at this time? What was your retirement plan before finding BP?

You say you have $100,000 of your assets in mutual funds & muni bonds earning $500/mo (that sounds like a 6% yield to me). What is the other $245,000 doing? Are you earning a yield there?

If you read up on BP on investing in rental income properties (with our without a property manager), you'll see folks that like the passive income that rentals provide. Owning a $250,000 rental house free and clear might yield $2000 passive income? (sorry, I don't know Oregon markets). You'll also read about investors that try and buy 4 such rental homes/properties with 25% down payment and 75% borrowed mortgages, to make their money earn more wealth through the leverage.

Or, if you're good at hospitality, maybe you should look at a MIL apartment.....you could run a miniature short term rental business (read up on short term and vacation rentals and AirBNB type rentals).

good luck.

@Bryant Patterson , I see the merits of house-hacking (wish I had done it 35-yrs ago to jump start my net worth), and I've been thinking about it lots....advocating it for a niece and her husband with a new infant.

If you're just starting out REI with minimum capital saved for down payment, the 3.5% FHA (owner occupied) loan on a quad-plex would allow you to get 3 tenants to pay the whole mortgage. You get to live for free (save your otherwise rent money for the next investment). But, you have to be willing to live in that quad with your 3 kids for at least a year.

Separately, there could be other rentals in Austin wherein the tenants are paying 1.33 times the landlords' costs. Owning three of them separately in theory generates enough cash flow to subsidize your own single-family house elsewhere (that you might prefer for yourselves).....but you're likely looking at 25% down payment on each.

In the house-hack scenario, you jump start your REI because of the low-down-payment "owner occupied" loan in a 2, 3 or 4-unit property. You accelerate your wealth-growing because of the low down payment. Ask yourselves if you could live in the quad for 1+years, then move.....might work before your kids are school aged. If not, just use the slightly slower wealth growing, without hack.

Good luck.

@Skip Gilliam, among your other possible real estate investing ideas, if you know how to have a new house built for less than it will sell for, you can be a profitable home builder. If you're going to do that, repeatedly, many builders  will move into a new house every 2+years. Be careful of that date....living in the primary residence for more than 2 years allows the capital gain to be non-taxable when you sell.....you could repeat every 2.1 years if you're family is willing to move for tax-efficient gains.

Good luck.