Real Estate
#1
Posted 2010-May-05, 20:54
Background: I've been doing a lot of research lately about investing in multi-family residential properties. The general premise of the scheme is that I can buy a 2-4 unit property (duplex, triplex, quad) and live in one unit while leasing out the rest of the units. If everything works out, I put down the down payment, make cosmetic renovations to all the units, increase the rent slightly to reflect the improvements if necessary, and hopefully use the cash flow generated from the tenants' lease to pay for the mortgage. Long term the goal is more or less to own the property outright using none of my own money except the down payment. Alternatively, I can make the cosmetic changes and increase the rent (increasing the property value) and refinance after a year and use the appreciation and increase in value towards a down payment on another building; dry, rinse, repeat.
My question: Does anyone have any experience in real estate? I understand that a successful investor will consider things like location and appreciation potential, but I'm curious about strategies to find houses with good potential. I assume this is a skill just like any other, and practice and experience with some degree of natural talent will lead to success. Surely there are things that one should look for, some red flags, some things that reduce risk substantially, etc.
Assuming I've done my homework, is this something you recommend? I keep reading stories of "If only I had started in my twenties...", but for someone who has never taken out a loan for anything (free ride at college, bought a car with cash, currently renting an apartment), it's a pretty big leap to spend a quarter million on a house I would plan to only spend a year in.
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#2
Posted 2010-May-05, 20:59
http://www.amazon.com/Investing-Duplexes-T...73114645&sr=8-1
Sounds like maybe you already read it, but if not, you might want to check it out in addition to your other references.
Call me Desdinova...Eternal Light
C. It's the nexus of the crisis and the origin of storms.
IV: ace 333: pot should be game, idk
e: "Maybe God remembered how cute you were as a carrot."
#3
Posted 2010-May-05, 21:02
Lobowolf, on May 5 2010, 08:59 PM, said:
http://www.amazon.com/Investing-Duplexes-T...73114645&sr=8-1
Sounds like maybe you already read it, but if not, you might want to check it out in addition to your other references.
Yes, I read it It gave me the idea.
Edit: I mean my goal isn't really to become a baller real estate tycoon in Orlando like the author, but I think I'm in a good position where I can be successful in this area because of the fact I have money saved that I can use to invest and because I have a job that allows me some degree of flexibility to take a little bit of time off to take the necessary time to manage a property.
Obv Dallas has one of the lowest appreciation rates in the country, but it's a stable market and the occupancy rates seem pretty safe to me.
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#4
Posted 2010-May-05, 21:11
The only persuading argument I've heard that I should avoid this was from Dave Ramsey at a lecture he did a year or so ago. I guess he went bankrupt at 26 after he invested in real estate and the banks wanted more payment on his loans than he could afford, though I don't recall the details. He advocates avoiding credit as much as possible for someone like me.
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#5
Posted 2010-May-05, 21:19
Call me Desdinova...Eternal Light
C. It's the nexus of the crisis and the origin of storms.
IV: ace 333: pot should be game, idk
e: "Maybe God remembered how cute you were as a carrot."
#6
Posted 2010-May-05, 21:22
I would not live in the place I was renting.
P.S. It is way more work than you can ever imagine at this point. Keep in mind:
There are no free lunches.
#7
Posted 2010-May-05, 21:31
Winstonm, on May 5 2010, 09:22 PM, said:
The company I work for specializes in risk, so the concept isn't foreign to me. My undergraduate education was in business, so I have a very fundamental understanding of financial risk. What sort of risk do you think I'm looking at? The whole idea that a 5% average unoccupancy rate is subject to some standard deviation and that if I hit rough times I will certainly go bankrupt is something I totally understand.
As far as I know, every argument I've heard about bankruptcy has been along the lines of that if I'm going to go bankrupt at some point in my life, there is no better time to do it than now, given that I have plenty of time to recoup my retirement fund and I have plenty of opportunities to get my money back and more. Obviously I have some risk aversion; I'm not jlall after all. But at the end of the day I'm just wondering if anyone has any insight into the risk I would be taking if I pursued this endeavor. Is it a good gamble if I have the right skill set?
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#8
Posted 2010-May-05, 21:35
Winstonm, on May 5 2010, 09:22 PM, said:
Is this true? That seems counter-intuitive to me and it goes against what my research suggests.
Suppose the average rate of unoccupancy of some rental is 5%. If you're renting a single, you should expect to eat 1 in 20 monthly payments. If you have a triplex and offer 2 units for lease, it seems the 5% would be the same, and it would offer a little more protection. 3 units up for lease would offer even more protection.
I'm no math wiz, and questioning this sort of logic is exactly what I need.
Where did I go wrong? Do you just think people are less likely to rent a unit in a quad than a triplex? A unit in a triplex than a duplex?
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#9
Posted 2010-May-05, 21:53
jjbrr, on May 5 2010, 11:35 PM, said:
Having a whole floor of your own in a two-family home is more attractive than a unit in an apartment building.
So not only are they easier to rent, but you can probably ask for more in the rental rate.
#10
Posted 2010-May-05, 22:19
barmar, on May 5 2010, 09:53 PM, said:
jjbrr, on May 5 2010, 11:35 PM, said:
Having a whole floor of your own in a two-family home is more attractive than a unit in an apartment building.
So not only are they easier to rent, but you can probably ask for more in the rental rate.
Are they easier to rent? Rent is cheaper in a 4 unit than a 2.
Obv I can ask for more in a duplex than a quad. I can afford a lot more sq ft/unit in a duplex than quad.
10% down on a quarter million is a lot different from 10% on a half million for a 23 year old.
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#11
Posted 2010-May-05, 22:37
A mortgage is a long time. A really, really f'ing long time. There are a lot of costs buying and selling. So, I think you have to pretty sure you are going to be in that area for a while: being a landlord from afar is not any easy task.
Also, there is some risk that you will end up with a tenant who decides to stop paying rent. This happens more often than you might think, and it really is a pain to deal with.
That being said, there is obviously a lot of upside, and if you are good at fixing things up, it can earn you some good money. And as you have alluded, being 23 is a good time to take risks.
#12
Posted 2010-May-05, 22:54
MarkDean, on May 5 2010, 10:37 PM, said:
A mortgage is a long time. A really, really f'ing long time. There are a lot of costs buying and selling. So, I think you have to pretty sure you are going to be in that area for a while: being a landlord from afar is not any easy task.
Also, there is some risk that you will end up with a tenant who decides to stop paying rent. This happens more often than you might think, and it really is a pain to deal with.
That being said, there is obviously a lot of upside, and if you are good at fixing things up, it can earn you some good money. And as you have alluded, being 23 is a good time to take risks.
Bottom line? Yea or nay?
Assume I won't endure the buy and hold method, and rather I will try to refinance, reappraise, and hope to sell in X years where X is substantially shorter than the 30 yr mortgage.
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#13
Posted 2010-May-05, 23:00
#14
Posted 2010-May-05, 23:11
Or to rephrase, your risk is that housing prices fall and you will be bound to Dallas. The opportunity cost of not really being able to move in with that girl in Manhattan might be pretty high
#15
Posted 2010-May-06, 00:32
cherdanno, on May 5 2010, 11:11 PM, said:
Or to rephrase, your risk is that housing prices fall and you will be bound to Dallas. The opportunity cost of not really being able to move in with that girl in Manhattan might be pretty high
I'm flattered you think my opportunity cost of raging with a NY gal is >0
I admit I had dismissed that possibility lest I could get lots of help from NYers getting work at the clubs at least once/day.
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#16
Posted 2010-May-06, 00:33
cherdanno, on May 5 2010, 11:11 PM, said:
Why?
I think housing prices correlate directly with rent. In fact, property value is a direct function of lease.
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#17
Posted 2010-May-06, 01:00
jjbrr, on May 6 2010, 07:33 AM, said:
cherdanno, on May 5 2010, 11:11 PM, said:
Why?
I think housing prices correlate directly with rent. In fact, property value is a direct function of lease.
You realize of cause that the very slow real estate bubble has just exploded.
So the long term experience from the last 5 decades that house prices only go up, is no longer true.
Did not the Goldman-Sachs Real Estate Fond get worthless last month?
It might be to optimistic to think that you can "refinance" and sell the property in the near future.
On the other side, they say buy when the prices are low.
If you can answer all of the following questions with yes, than it is probably a good idea to invest.
Do you have the money to
1) survive a big repair to the house that you did not expect.
2) deal with a tenant that does not pay his rent for month (legal costs etc...)
3) get over the time until you get a new job, in case you lose yours.
#18
Posted 2010-May-06, 01:14
The housing market in a particular location is influenced both by the local market "location, location, location" but also by the national market. I'd be very dubious of any plan that counts on appreciation in the medium term (like X much much smaller than 30 years). The 6% Realtor fee is also problematic to selling, as is the ongoing cost of maintenance, insurance, property taxes (don't know what Texas property taxes are like), vacancy, etc.
If you have properties that are cash flow positive even when you factor in all costs (mortgage, insurance, upkeep, vacancy rate substantially higher than 5%, etc.) then it seems likely to work out ok.
I'd check out some of the message boards and/or articles from patrick's housing site which will have lots of reasonable information on this, with some people who are doing what you are talking about, and any others who think housing has some serious issues still. Good to get some perspective from the other side before jumping in.
#19
Posted 2010-May-06, 02:10
jjbrr, on May 6 2010, 03:31 AM, said:
Winstonm, on May 5 2010, 09:22 PM, said:
The company I work for specializes in risk, so the concept isn't foreign to me. My undergraduate education was in business, so I have a very fundamental understanding of financial risk. What sort of risk do you think I'm looking at? The whole idea that a 5% average unoccupancy rate is subject to some standard deviation and that if I hit rough times I will certainly go bankrupt is something I totally understand.
1. If you have done all the right research, you should go for it.
2. Based on your education and your current occupation, I'd guess you would be walking into this investment after a lot of thought / planning. This gives you an edge over a lot of others who start new ventures on a dream
3. Your cash-flow projections should consider some "downside" events. The property market has a 5% average of unoccupancy; but how does it translate it to 3 rentable units? e.g. if 1 of 3 remains un-let for 6 months, your unoccupancy rate is > average. If you can cater for such downsides, you should go for it.
jjbrr, on May 6 2010, 03:31 AM, said:
5. Finally, talk to the experienced. There may be people you know who own property portfolios, big or small. Seek their opinions and refine your plan based on their inputs.
Then go for it. Good luck!
#20
Posted 2010-May-06, 02:50
Some observations:
- Rental units in the posh suburbs are overpriced, presumably because rich people buy them for their children who attend university. Rental units in poor suburbs and downtown cause too much troubles although one could probably make good money there if one had the nerves, and is on good terms with criminal gangs etc. So the best place to buy is probably smaller towns.
- Units with a legal ceiling on the rent, and therefore in short supply on the rental marked, are overpriced because landlords can make additional income by collecting bribes from prospective tenants. So avoid those if you are not into criminal practices.
- It is amazing what insiders in the business are willing to tell you if you manage to make friends with them, especially if you get them drunk. So don't rely on public information, you can get better information if you build on your network first.
OK that was a Danish perspective, maybe not so relevant since I suppose you are aiming at the US market.