All Forum Posts by: Tommy Nguyen

Hi @Jake Andronico,

I am a fan of Dave Ramsey's (DR) advice for personal finance and retirement planning. I believe his advice for real estate investing is not optimal. Most people do conflate his advice into one, so I'll make the distinction below:

DR Personal Finance Advice (@Aaron Breckenridge):

- Have an emergency fund (6+ months).

- Do not carry a balance on a credit card and pay cash for all debts besides your primary mortgage.

- Invest in index funds rather than individual stocks.

DR's Real Estate Investment Advice:

- Pay all cash for your rental properties.

- Enjoy the "free cash flow" without a mortgage.

- Save up this cash flow for the next rental property (pay in full) => Rinse and repeat.

I agree with @Caleb Brown and @Mike Anderson's premise that most Americans are financially savvy. Consequently, they do not have a financial foundation to begin investing. I agree with Ramsey that you should not invest heavily until all your debts are paid off. If not, you are fighting two wars simultaneously. Once all your personal debts are paid off, you can begin investing.

However, I do not agree with DR's advice for real estate investing in regard to leverage. I believe these are factors he misses are 

(1) appreciation 

(2) opportunity cost 

(3) average American income 

(4) ROI

Let's use my example to discuss the following points.

According to C2ER, the median US home is $329,000, and the median American household earns $68,000. By some miraculous feat, the James family saves all $68,000. It will take that family nearly five years. However, by the time they saved enough for the $329,000, the value of the rental property increased 3% each year and now has a present value of $358,000. The James Family is out of luck.

Even if they bought the property at $358,000 and it rents on average for $1,700, the James family experiences an 1st year ROI of 5.5% (excluding all reserves). Would this money have been better invested using low-down payment loans, BRRRRs, US bonds, or the S&P 500? Most likely. Lastly, Dave Ramsey's advice for all cash works for people with high-paying earnings and disregards the average American trying to dip their feet into REI.

I do believe his method works once you accumulated enough properties and begin paying them off. Let me know your thoughts BP community especially @Jay Hinrichs

Hi @Owen Schwaegerle,

Thank you for sharing your story on the BP forum and asking the community for further guidance. I am using a post from a previous BP discussion similar to yours. I am on the premise that even $1 loss is not satisfactory even in high appreciating markets. Consider the following reasons why:

(1) Variable Costs

In your underwriting, you assume all costs remain fixed. As we all know, especially in this high-inflation economy, goods and services tend to tick upward, including HOA, insurance, and maintenance costs. As a result, your estimated -$1000 monthly loss will increase.

(2) Insufficient Reserves

Have you accounted for maintenance, vacancy, and reserve funds? No acquired properties are perfect and will need some fixes. If you are underwriting this deal without these in mind, you are walking a dangerous path, as one major repair may cause your calculations to spiral.

(3) Unpredictable Future

Who's to say this renter stays here for a prolonged period? How long will it take you to fill the vacancy? Will the labor market tighten up, resulting in fewer potential renters for HCOL units? In "The Psychology of Money" by Morgan Housel, he discusses the room for error. An investor should provide themselves with enough margin to safely cover unforeseen errors or events (e.g., a recession, capital expenditures for repairs, or tenant property damage).

Solution:

The majority of the forum members are against your real estate due to "speculating," whereby an investor bets that the property will appreciate more quickly compared to their losses. I usually do not agree with speculating, but let's provide you with some solutions!

(1) House Hack

I am assuming you secured the property at a low-down payment. If you paid a lower down payment, the loan is most likely owner-occupied, which means you can rent one unit and the renter lives in the other. Consequently, you are paying -$1000 in "rent" towards your own property. In the case of SoCal, this is a fantastic deal!

Also, you secured the property at 3.625% interest rate, it's futile because you are not saving or increasing positive cash flow; instead, you are losing money each month. The primary purpose of lower interest rates is to increase your positive cash flow, not to reduce your losses.

(2) Short-term (STRs) or Medium-term Rentals (MTRs)

I suggest you look into short-term or medium-term rentals as they tend to have higher cash flow compared to long-term rentals. This method will allow you to cover the loss with increased cash flow and enjoy the appreciation. I'll advise you to look at your local laws regarding these types of rentals, as more communities are banning STRs, especially Airbnb or Vrbo.

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As David Greene states, 'Cash flow is a defense mechanism when things take a turn.' I hope this helps, and feel free to send me a PM if you have more questions!"

Hi @Brady Mullen,

I agree with your premise that the mortgage essentially functions as an acquisition cost. However, it's still possible to achieve positive cash flow in this market, and negative cash flow isn't the optimal model for building a long-term portfolio.

Let's consider a scenario where you purchase five rental properties, all of which have a negative cash flow. This would result in two key issues:

1. You'd have less cash on hand to invest in the next property and to save for unexpected events.
2. More of your personal funds would need to be injected into the 'business.'

Indeed, low interest rates and affordable property costs are not on the horizon. An investor typically doesn't acquire a business or asset with the intention of consistently losing money each month. Moreover, investors will eventually hit their maximum threshold for obtaining residential loans. 

Consequently, they may shift towards commercial loans, and most underwriters will scrutinize the property's Debt Service Coverage Ratio (DSCR) and performance alone, without relying on external sources. If a property consistently generates negative cash flow, lenders are likely to view it as high-risk and may be reluctant to approve the loan.

Hi @Bradley Shuhart,

Don't worry! We all ask questions to facilitate learning. As the old saying goes, 'Learn from other people's mistakes, not your own!' I recommend exploring the extensive BiggerPockets catalog for further knowledge. There's a wealth of information available, but remember to take action and avoid getting stuck in 'analysis paralysis'.

All the best,

Tommy Nguyen

Hi @Bradley Shuhart

Thank you for sharing your story on the BP forum and asking the community for further guidance. I agree with the majority in this forum that anything beyond a $1 loss is not satisfactory even in high appreciating markets. Here are the following reasons why:

(1) Variable Costs 

In your underwriting, you assume all costs remain fixed. As we all know, especially in this high-inflation economy, goods and services tend to tick upward, including HOA, insurance, and maintenance costs. As a result, your estimated $800-$1000 monthly loss will increase.

(2) Insufficient Reserves 

Have you accounted for maintenance, vacancy, and reserve funds? No acquired properties are perfect and will need some fixes. Or does the HOA cover this? If you are underwriting this deal without these in mind, you are walking a dangerous path, as one major repair may cause your calculations to spiral.

(3) Unpredictable Future 

Who's to say this renter stays here for a prolonged period? How long will it take you to fill the vacancy? Will the labor market tighten up, resulting in fewer potential renters for HCOL units? In "The Psychology of Money" by Morgan Housel, he discusses the room for error. An investor should provide themselves with enough margin to safely cover unforeseen errors or events (e.g., a recession, capital expenditures for repairs, or tenant property damage).

Solution: 

The majority of the forum members are against your real estate due to "speculating," whereby an investor bets that the property will appreciate more quickly compared to their losses. Yes, I agree with the forum @Joe Villeneuve @Carlos Ptriawan @David Dachtera on that premise, but let's provide you with some solutions!

(1) House Hack 

I am unsure if you secured the loan with either a 2.5% down payment or interest rate (which I highly doubt, especially in this market). If you paid a 2.5% down payment, the loan is most likely owner-occupied, which means you can rent one unit and the renter lives in the other. Consequently, you are paying $800-$1000 in "rent" towards your own property. In the case of SoCal, this is a fantastic deal! 

If you secured this property with a 2.5% interest rate, it's futile because you are not saving or increasing positive cash flow; instead, you are losing money each month. The primary purpose of lower interest rates is to increase your positive cash flow, not to reduce your losses.

(2) Short-term or Medium-term Rentals 

I suggest you look into short-term or medium-term rentals as they tend to have higher cash flow compared to long-term rentals. This method will allow you to cover the loss with increased cash flow and enjoy the appreciation.

---------------------------
As David Greene states, 'Cash flow is a defense mechanism when things take a turn.' I hope this helps, and please feel free to send me a PM if you have more questions!"

Hi Ethan, 

I believe the primary way to decrease house prices is by increasing the housing supply. The demand for rental properties far exceeds the available supply, leading to inflated prices. Currently, investors are hesitant to invest in new construction due to rising costs of labor, materials, and taxes. To encourage new construction projects, incentives such as tax breaks and reduced regulations should be offered to investors. Once there is an adequate supply of houses, the market will shift towards a competition based on the quality of properties rather than people buying out of desperation.

Furthermore, the increased interest rates aim to curb inflation caused by a surge in demand for housing. As the demand rises, more supplies and workers are required, which in turn drives up prices.

Hope this helps!

Best,

Tommy Nguyen

 Hi Richard,

I want to clarify that I always follow federal and local laws regarding tenants and landlords. I do not cut corners or delegate improper tasks to my property manager. My concern was about being unaware of changes in state or local laws hidden in the fine print. To avoid legal trouble, I prefer my property manager to keep me informed about any updates to the rules and regulations governing landlords and tenants.

All the best,

Tommy Nguyen

Hello BP community,

I recently closed on a duplex, and I am seeking the opinion of the BP community regarding my situation. The duplex I purchased has three tenants, one of whom is using it for storage.

While I have confidence in my property management abilities, there are certain aspects of property management that I am not particularly keen on, such as staying up to date with current rules and regulations, resolving tenant disputes, and screening tenants. In essence, I am not fond of the day-to-day tenant interactions.

However, there are two main factors that I need to consider:

(1) Desire for Property Management:

The property is still generating decent cash flow even with a property manager. However, I am uncertain about my desire to handle the hands-on property management tasks. I am more interested in the administrative aspects of property management, such as bookkeeping and financials.

(2) Efficiency of Property Management:

While I am capable of managing the property myself, I am questioning whether it would be the most efficient option. I have a list of contractors ready to handle maintenance and repairs, and I have established backup systems and processes in case property management becomes challenging. If I find a competent and reliable property manager, their efficiency could prove to be a fantastic investment.

I would like to pose the following questions to the BP community:

• Have any investors used property managers early in their investing journey?
• What has been your general experience with property managers?
• If you have used property managers, what questions and criteria should I look for to find a rockstar property manager?
• If you have not utilized a property manager, what were your reasons for opting out?
• Share any of your experiences or comments regarding your stance on PMs.
  

Thank you all for your time, and I am eagerly looking forward to your responses!

Best regards,

Tommy Nguyen

Hi @Travis Andres,

I personally wouldn't invest in any real estate courses that demand such a significant upfront payment. I agree with @Chris Seveney that these classes often seem like sales and marketing tactics. Currently, the 'initial' investment is set at $997, but as you progress through the coursework, they will likely require additional payments for further education, keeping you in a continuous loop of purchasing their materials and courses. It could feel like being stuck in a rat race.

A better alternative is to explore books and podcasts from sources like Bigger Pockets. Remember, price does not always reflect value. Just because a product is more expensive doesn't necessarily mean it provides greater value. The BiggerPockets community, for instance, offers a wealth of valuable information, possibly even more than classes like Grant Cardone's.

All the best,

Tommy Nguyen

Hi @Lee Korak,

I am glad you are educating yourself and taking a step forward in this journey. As a reminder, analysis paralysis is an epidemic especially for novice investors. To combat this "disease", take action steps such as contacting agents and bidding for houses. Remember to take one step at a time. Focus on today. Also, Charlotte is a thriving market as the population grows each year!

Best,

Tommy Nguyen