OT: Investing in Real Estate?

greenenvy · March 2015

I've been toying with the idea for years, and now I feel like it might be a bit late in the game after the major real estate recession seems to have largely recovered. I realize this is a very regional market and here in central Texas, no major bubble nor crash, so I'm not really sure whether to take the plunge.

Would love to hear of experiences, good and bad, with these types of investments.

Chubbs · March 2015

Land? Rental houses? Commercial? Flipping houses?

greenenvy · March 2015

Chubbs said:

Land? Rental houses? Commercial? Flipping houses?

Yes to all, although I'm not much of a handyman so flipping would require the additional step of finding/creating a trustworthy crew. Basically my interests would be mainly in asset appreciation and possibly building an additional source of retirement income.

Already have enough exposure to the stock market, and money in the bank is actually losing value relative to inflation so I'd like to put it to work.

DoubleEgger · March 2015

Vanguard REIT fund. Let someone else do the dirty work. Killed it last year with this gem.

DoubleEgger · March 2015

You also might want to look into buying a marina slip at the coast. Zero maintenance. It's just water. Rental income. Good capital appreciation at the right marinas.

jonnymack · March 2015

Rental real estate is tough. You really need to know the market and find good value relative to the rents charged. If flipping you would need someone who can do the work as a partner, if you try to just contract it out you will get killed on costs as they can smell a sucker a mile away. If it's a rental place a solid handyman will do the trick but be prepared for dealing with the headache of renters. We had two rental properties which completely opposite results (one very good, one very bad) and got out of the market completely as the market heated up a bit and then my job got too crazy to deal with the hassle of renters.

If you are really speculative and patient, if you can figure out the path of development and buy some land that, in 5-6 years time, may become desirable you can make some coin just sitting on undeveloped land. I like DE's idea of marina slip, never thought of it as I'm landlocked.

fishlessman · March 2015

waterfront sales around me are still in the downturn, people dont seem willing to take on that plunge yet on second homes.we got hit hard up here, 700k waterfront vacation homes were under 250k 2 years ago, they may be 300k now but the govt decided to mandate flood insurance on houses that were certified not to need it (trickey politics, need more money, move the flood zones on the map) i like water front, if i dont make money, atleast i get to enjoy it. and be really careful where you buy it, taxes on one my my properties is skyrocketing, house is owned by 4 families and the taxes just topped 14000 dollars for an old delapitaded beach house that was last updated around 1940. im not looking for money on them now, just places to relax, but someday....

SkinnyV · March 2015

imo things are peaking right now... no way i would do it personally.

It can pencil out however buying, fixing renting etc ...since you would hire out all the work that would make it tougher as well.

My brother has 5 properties but he was fortunate to have my dad who can do all things when it came to buying low, fixing, then renting thm out for more than what the mortgage payment is pretty much. That said there is also the headache of property management.

Up here in Seattle, we dont have the luxury of cheap houses to pick up and invest in so our primary is more than enough skin to have in the real estate game. Good Luck.

greenenvy · March 2015

Interesting perspectives. I've never actually considered a marina slip, but might look into that. Here in Texas my only observations are that many marinas along the coast don't seem to be bursting at the seams (some in Corpus Christi come to mind), while I've also heard that docks on certain restricted lakes (Travis/Austin?) sell for more than many houses.

Was reading a bit on the import of leverage on ROI. Seems appealing with today's low rates (assuming lenders will lend).

Also pondering the possibility of upsizing the primary residence every two years to a fancier one that could use some upgrades, and then pouring the tax-free gains (up to $500k for a couple?) into the next. Doubt the wife would be too enamored with this strategy though.

DoubleEgger · March 2015

If you are investing, you can buy a slip anywhere in the world so don't limit yourself to TX. The transactional costs of flipping my primary residence every few years has steered me in other directions. It was great when I got corp relo packages but not so much otherwise.

Zmokin · March 2015

greenenvy said:

I've been toying with the idea for years, and now I feel like it might be a bit late in the game after the major real estate recession seems to have largely recovered. I realize this is a very regional market and here in central Texas, no major bubble nor crash, so I'm not really sure whether to take the plunge.
Would love to hear of experiences, good and bad, with these types of investments.

I agree with others that if you are not going to spend the time yourself for fixing up and re-selling or renting and being the landlord, you might want to look at undeveloped land and buy and sit on it. That way it's no effort on your part. Or you may want to look at buying a 2nd home for vacationing/retirement. that's what I did, I bought a mountain cabin that I have no plans to rent out. I will use it for summer vacations and when I retire, spend the majority of the summer at it. It's up in the mountains, so no A/C needed in summer.

evie1370 · March 2015

My brother owns a few houses that he rents, primarily to family. Just how it worked out. Even with family it is a real pain, constant headaches with stuff breaking, utilities not paid and hassling his tenants for unpaid rent. That being said, IMO to succeed in this business you have to have a certain mindset/mentality. You can't be squemish about asking for your rent, and dropping the hammer when you need to do so. Myself, that is just not me. Not making a judgement, just saying.

Also to echo what previous posts said, you really need to me somewhat handy. Painting, minor plumbing/carpentry. You try to source that out and you will be killed in costs. Just my thoughts for what it is worth.

BGE Convert · March 2015

I own several properties for rent and will say that for me it is long term play. Keys to cash flowing the property are:

1. Negotiating the correct price - although sometimes the market is such that cash flowing the property immediately is not tenable

2. Debt leverage - I think most financing for a rental property is 25% down which gives you a 25 to 75 equity to debt ratio

3. Interest Rate

4. Awareness/Control of other costs - Insurance, Real Estate Taxes, HOA dues and basic repairs and maintenance

5. Tax benefits if any related to the property - over time this benefit will decrease as interest expense/depreciation expenses/Real Estate taxes as a whole decrease and thus uncover your rental fees to being taxed.

You have described a stable market that you currently are looking in. That makes the above items easier to predict and measure whether it is a good investment. Determining an acceptable ROI is up to the individual. Some will use opportunity cost (i.e. could I use my money elsewhere at a better ROI). Note that cash is king and is the life blood of what you do day in an day out. Another poster mentioned that they went with a REIT investment and killed it. I could be wrong about this but I doubt that REIT investment is throwing off cash on consistent basis to be used by you. While the increase in value of the investment is nice, you can't use that to pay for vacations or other bills. You would have to cash out which generally takes time and has transaction fees associated with it. When assessing ROI also assess access to cash flow and how important that is to you.

A lot of people mention the time associated with renting. I will be honest and say that properties are not effortless but they are not anywhere close to being as much of a time suck in comparison to my career. In my opinion the greatest amount of time spent on maintenance of rental properties is limited to the change over to new tennants (depending on the state that you live in). Having the ability to write out the rental agreement in a manner that essentially puts normal burdens of home ownership on the renter are key in not having to deal with requests to fix minor leaks, lightbulbs (yes I had a tenant ask me about free light bulbs), squeaky door knobs etc. Once this is out of the way, you have big issues to deal with such as leaky roofs, appliance replacements, HVAC issues etc. Depending on how well the cash flow is on the property you could even get a management company to help you out with (note this may negate some of your tax benefit on the property) dealing with these issues...for a straight monthly percentage of the rental income. This would add cost but theoretically reduces your time involved (I don't use a management company as I don't think the time they save me is worth the fee).

The Marina Slip is a good idea. I have reservations that there is "no" maintenance as people need to be able to safely access it but it sounds like something that would cash flow quicker. Then it comes down to volume in creating a significant cash flow source in retirement.

As for rolling over your property and upgrading. The transactions costs would eat into how much cash you can roll into the next property. Depending on your market you may have to concede closing costs to get a sale done. You will also probably surrender 3% at a minimum supposing that you represent yourself but most buyers will have representation and limiting your buyer population to those that are willing to self represent will just increase your time to sell. If you choose representation then those costs are 6%. As for the closing costs you could be made whole on your buy side. If you are in a market where you are giving up closing costs on the sell side you should get them on the buy side.

Foghorn · March 2015

This is a great OT discussion for this board (as people here are pretty well unbiased and a number have good insights/experience). I have thought about starting a thread on it here several times. I have been ruminating about this for years and I will summarize what I THINK I know - and I welcome others to correct/educate me.

My experience:
In 2003, we refinanced our starter home to a 4.875% 15 year mortgage and kept it as a rental. When it is rented, the rent covers 90% of the PITI. It has been rented for 134/144 months. Unlike the rest of the country, real estate in South Texas rises about 2-3% each year and doesn't fluctuate very much - at least in rental home portion of the market (under about $200,000). We've had 5 renters - 3 have been great, 1 was mildly problematic, and 1 was terrible. It has not been much trouble because we bought the house new from a good builder and lived in it for 7 years - and we have good friends that still live there and keep an eye on it. It will be paid off in 3 years and will become a source of cash flow at that time.

What I think I know:
- I've toyed with the idea of selling this house to use the capital to start flipping houses but all the pitfalls that have been mentioned by others scared me off.
- Purely as an investment, averaged over time, real estate goes up about 2% (inland) to 6% (coastal and other high demand areas) per year. Some areas fluctuate wildly (up 20-40% in some years and down just as much in others). South Texas doesn't fluctuate very much.
- A waterfront property that gets rented out during vacation seasons can generate 40-60% of the PITI in rental fees (that's why we have kept the current rental home instead of buying a condo on the Texas or Florida coast).
- If I had sold our first house and put the money in the market AND added every dollar I have put into the house including repairs, etc. I would have equities that are basically the same in value as the equity that I have in the rental house. BUT, if I had sold the house when we moved I PROBABLY WOULD NOT have put that much money into the market so I wouldn't have as much equity/worth as I do now.
- So, I think the main advantages of real estate investing are 1) it diversifies the portfolio and 2) when you take on a mortgage it is a forced savings plan. But I don't think it is necessarily BETTER than investing in equities.

What am I missing?

THEBuckeye · March 2015

Go with plastics.

stlcharcoal · March 2015

Get your real estate license before you start, that way you can collect the buyers commission when you buy the property for yourself. Then when you go to sell it, that will pay for the buyer's agent. Otherwise, you're paying someone else 3% on each end of the transaction to do the work for you.

I don't know how it is in your state, but it is fairly easy to get here in Missouri. I've had mine for many years, it's only a few hours of training every two years for renewal. Only have to sell one house a year to pay for board dues, MLS access, SUPRA key, and insurance.....all write offs anyway.

fishlessman · March 2015

Foghorn said:

This is a great OT discussion for this board (as people here are pretty well unbiased and a number have good insights/experience). I have thought about starting a thread on it here several times. I have been ruminating about this for years and I will summarize what I THINK I know - and I welcome others to correct/educate me.

My experience:
In 2003, we refinanced our starter home to a 4.875% 15 year mortgage and kept it as a rental. When it is rented, the rent covers 90% of the PITI. It has been rented for 134/144 months. Unlike the rest of the country, real estate in South Texas rises about 2-3% each year and doesn't fluctuate very much - at least in rental home portion of the market (under about $200,000). We've had 5 renters - 3 have been great, 1 was mildly problematic, and 1 was terrible. It has not been much trouble because we bought the house new from a good builder and lived in it for 7 years - and we have good friends that still live there and keep an eye on it. It will be paid off in 3 years and will become a source of cash flow at that time.

What I think I know:
- I've toyed with the idea of selling this house to use the capital to start flipping houses but all the pitfalls that have been mentioned by others scared me off.
- Purely as an investment, averaged over time, real estate goes up about 2% (inland) to 6% (coastal and other high demand areas) per year. Some areas fluctuate wildly (up 20-40% in some years and down just as much in others). South Texas doesn't fluctuate very much.
- A waterfront property that gets rented out during vacation seasons can generate 40-60% of the PITI in rental fees (that's why we have kept the current rental home instead of buying a condo on the Texas or Florida coast).
- If I had sold our first house and put the money in the market AND added every dollar I have put into the house including repairs, etc. I would have equities that are basically the same in value as the equity that I have in the rental house. BUT, if I had sold the house when we moved I PROBABLY WOULD NOT have put that much money into the market so I wouldn't have as much equity/worth as I do now.
- So, I think the main advantages of real estate investing are 1) it diversifies the portfolio and 2) when you take on a mortgage it is a forced savings plan. But I don't think it is necessarily BETTER than investing in equities.

What am I missing?

What am I missing?

i tried explaining this to my investor, his investments make money over time that i cant seem to use til im old and dead. my home is meek, sits on the water, makes me happy to sit on the water, my camp sits on a big recreational fishing lake, makes me happy to sit at camp and sit in the boat all summer and ski in the winter, my 25 percent of a beach house lets me sit on my beach, gives me a place to park my boat and offshore fish. its like going to camp every week and every weekend and every vacation

heres something stupid, the boat i bought in 1992 for 10k is now worth 30k, not the best investment but ive got 10,000 plus hours on it with very little maintanance. i havent made tat much with my mutual funds and i DID NOT have any fun with them

BGE Convert · March 2015

stlcharcoal said:

Get your real estate license before you start, that way you can collect the buyers commission when you buy the property for yourself. Then when you go to sell it, that will pay for the buyer's agent. Otherwise, you're paying someone else 3% on each end of the transaction to do the work for you.
I don't know how it is in your state, but it is fairly easy to get here in Missouri. I've had mine for many years, it's only a few hours of training every two years for renewal. Only have to sell one house a year to pay for board dues, MLS access, SUPRA key, and insurance.....all write offs anyway.

In some states you can't be an agent for your self....you can represent yourself...if that makes sense....the catch is that since you can't be an agent for yourself you can't technically collect the 3% on the buyers side...now that being said....since most buyers have representation....any good agent will and should advise their client to cave in on giving a 3% concession on the sales price to a buyer that is representing themselves as that 3% is generally what the selling agent would get anyways....the only reason not to do so is the agent is being greedy and wants to take advantage of the situation to get more than their 3% when they should be doing what is in the best interest of the client and getting a deal done....

Hi54putty · March 2015

I am in the medical real estate development business and it is very good for our investors. They are making above market returns with little risk. We do every deal stand alone, so you can actually take some money out of the cash flow and not have to roll it in to other projects. Very transparent all the way around.
On the residential side, I own 3 houses but only want to own 2. We have had renters in the one we don't want and that has been fine but I would rather put the equity from that house into one of my commercial deals. Unlikely to happen. Oh well, can't win them all. Good luck.

greenenvy · March 2015

Wow, lots of useful insights in here. Curious if anyone has a bead on the current state of financing for rentals. What rates are being offered, and is there a limit to how many properties to finance at once?

Also, for those who own/owned residential rentals, what market segment do you target and why? I'd always assumed borderline slumlord properties had the highest return, but my preference would be to avoid the associated hassles unless it's really worth it.

Finally, ownership as an individual, or via an entity such as an LLC? I set up a series LLC a few years ago when I first started toying with this idea, but haven't really delved into how much it will complicate financing, insurance, and other aspects.

OT: Investing in Real Estate?

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