All Forum Posts by: Stuart M.

 Live there for a year, do 10 in 10 years, now you're up to 5 mil in properties, cmon.

But anyways I'm looking for people to poke holes in my idea and make sure Ive considered all the different angles.  I could have just rationalized all this quietly myself and just gotten on with it, but that's not what I was looking to do.

Again, I could do the scenario with 20% down or 10% down or 25% down and different house prices and repair costs and etc etc etc.  But sometimes using two specific hypothetical examples helps to keep everyone on the same page and not introduce unnecessary variables.

 I know its not normal to reply to a post twice but this made me think.

What originally got me thinking about all of this is the fact that I do all the work myself on the houses I buy.  And you're constantly being told that you have to calculate how much you're making, that you have to "pay yourself."  You do 1000 hours of work and your house is now worth $5k more, congrats, you just made $5/hr.

I guess what I'm getting at is, you're working hard and doing all these repairs (or spending your hard earned dollars) to have a 200k crap house all fixed up and rented, but for 25k down could you just buy a turnkey house, do no work, and rent it and be better off in the long run?  The neighbors next door to the house in Boca rent, and when rents are 3k+, you're not dealing with the same people paying 1k, its less work on average.  He got a tenant and collects a check.  And appreciation.  And if you don't assume an MSA is going down, you're more likely going to get a higher rate of appreciation in good areas than bad areas.  I mean, there are even places in detroit that have appreciated over the last few decades, but it wasn't the cheap areas.  I know what I'm "supposed" to do - buy 100k, put 25k cash out, worth 200k, get my 150k back out, rent for 2.5k, but its A) not as realistic in areas like CA, NYC, MIA that have bad rent to price ratios and/or a plethora of investors willing to follow a 1.5% or 1% "rule," and B) sometimes I wonder if the amount of work going into the lower properties is being accurately accounted for.  Fixing, chasing rent, and a lack of appreciation relative to nicer homes, just the headache and worries of worse areas, five houses instead of one, fifty houses instead of ten, etc.

I'm really not opposed to either one and how/why we acquired the Boca house wasn't based on this "idea" - it is a weird story - but events I've witnessed have got me thinking...are we accurately projecting the costs/returns here?  Which one really is better in the long run?

 Because there are expenses that are not the mortgage in the original scenarios, so I backed out the mortgages.  In scenario one it was implicit that taxes/insurance/etc were 1046/mo and in scenario two it was implicit that taxes/insurance/etc were 1733/mo.  Then you get to keep the rest of the rent every month if you paid cash.  Then I calculated the returns.

 Yes, that is a consideration I should take into account.  But just like one assumes access to more upfront funds, the other assumes access to certain inventories that may not exist.  I actually think either one could be a winner, but both have to be found and acquired.  I would personally take either right now.  This whole discussion was to see if there was something big that I totally left out.

 I admit I was thinking in South Florida.  And there are almost no $100+20=250's down here.  Someone else is offering 190 for it.  The whole game is to find way below market price houses, I get that.  But that's not really repeatable in an area like this.  Like I said before, we have people offering 600k cash to get a place that cashflows 1k a month.  It's insane.

And we can't/won't move and I don't want to long distance anything.  I'm looking for realistic strategies down here.

 20?  I'd take 20, if they're worth 500k each and money down was minimal.  They'll all be break even soon enough - probably next year when I increase the rent $75.

But seriously, I was saying a breakeven house in a nice area vs. a fixer-upper in a worse area.  If they require the same cash out of pocket, which is better in the long run?  The main argument seems to be "the cash flow house has more potential to make it to the long run."  I get that.

 25k cash invested at 7% for 30 years is 190k.  A life insurance policy that costs 25k that "quadruples" in 30 years is 100k.

The lower of the two houses was 857k after 30 years.  The point is to use leverage (mortgage from bank and tenants paying said mortgage.)

I used a 2% estimate for appreciation so as to not skew the example, and because that is the expected rate of appreciation if housing prices continue to track inflation, on average, and inflation averages 2%.  Of course you start winning lottery type money if appreciation is more like 4% or 12% per year.  I'm just trying to see how houses like House 1, even using conservative numbers, comes out ahead.  I'm not making predictions here about different cities, etc.

The 5% down is because if the name of the game is to leverage the banks money to buy as much land as possible, then that's what you do. Would you pass on 0% down? I got 5% down last time, that's the lowest I've seen people be able to reasonably go without starting to pay out the nose (FHA 3.5%?) so that's what I based my assumptions on. Even if I COULD put 20% down, that's 4 of the same houses at 5%, I will always put the min down. Even if it "cash flows" at 20% down and doesn't at 5%. Also, having that last 15% in the bank still could account for a broken water heater, a new roof, etc.

If banks offered 5% down unlimited number 4% rate investor loans, I'm imaging we'd have 100% of people here taking them.

There are plenty of cash flow positive when purchased homes that say empty for years in Detroit and had no cash flow.  We're all gambling here, and I'm still not sure how the risk on five 120k homes is significantly different than the risk on one 600k home in the same city.  Especially if it took 150k out of pocket to acquire/ready the first five and only 30k for the expensive one.  We can all make assumptions - "it'll be harder to rent a 600k house than five 120k houses during a recession" but "the poor get fired first, not the Drs..."  Anything can be rationalized.  I appreciate all the feedback though, it makes you realize some of the risks you're taking on, different scenarios, etc.

 Wellllll....not exactly.

Implicit in the scenarios is that with House 1, other expenses are $1046 ($137 mortgage balance reduction and $500 cash monthly and $317 interest to bank) and other expenses in house 2 are $1733 ($684 mortgage balance reduction monthly and $1583 interest to bank).

So if you paid cash, House 1 is $954*12/120k = 9.54% ROI and House 2 is 2267*12/500k = 5.44% ROI. I will stipulate House 2 is dumb if paid in cash, but in reality, the point is to leverage the banks money to acquire more land. I don't have 500k laying around and if I did, that's up to 20 downpayments on other nice houses....

 Neither is risk free.  There is an awful lot of risk buying these 100k houses in war zones that I see going on.

I assumed 2% appreciation to track expected inflation because that's what houses have averaged forever here.  Of course there are many variables - everyone leaves for example.  This also harms rents though.  I'm not trying to make this about speculating on above average appreciation, about picking the next NYC, I have no special insight there.

I looked at rent declines during the last housing bust, which had larger declines than we could possibly see now, and I didn't see that large of declines in most metro areas - and many just had stagnant rents for a while. I understand that risk.