Rental Properties... in your personal portfolio.

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  1. #1
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    Default Rental Properties... in your personal portfolio.

    Well given the financial times, I'm considering buying up some residential properties for a looooong term investment.

    My question for the more experienced people here is:

    How much do you leverage your current income/net worth to buy the property? Personally, I''m very conservative in this arena. I've seen the house of cards fall and I'm a bit leary to consider any property I couldn't pay for out of pocket for at least 12 months.

    That being said, I'm looking at the lower end properties. Sub $150k which I can hopefully rent for ~$1200/mo. Even including property taxes I can be in the positive as far as yearly gross, but that's not factoring the change in my personal income.

    I would like to have said propertie/s 100% paid for in the next 4 years.

    I have a gut feeling that with the current credit crunch people won't be able to buy as easily thus raising the rental values.


    Thoughts?

    Up front I'd like to get two properties going and hopefully putting $800/mo in my pocket after paying the expenses. I know it's on the bottom end for a lot of you guys, but it's a start. And hopefully when I'm ready to retire in ~20 years it will be a nice monthly nut.

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    i am involved in local south florida real estate (in various capacities) and know of a well known developer in palm beach county (so. florida) that has been given approval from their lender to sell brand new condos at REO prices (with warranty, brand new, in a really nice project). price for a 2 bedroom is 124 and 1 bedroom is 97 K.

    let me know if you'd like information. they make great rentals. i bought one as well. i am friends with one of the developers. when i did my deal, they paid CONDO fees for a year too. these prices are the bottom, it is a no-brainer.

    dimisa77@gmail.com
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    Last edited by JPanamera; 04-08-2009 at 11:55 AM.
    Paradise 'ain't cheap.

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    i own several commercial rentals including a mall in louisville. i prefer commercial and try for big name tenants who normally like to stay the long term, 5,10 and 15 years. Unfortunately I am about to lose one of my anchor's Sears which is going to hurt big. If you have cash on the side it is a great time to buy commercial because it is almost impossible to get a mortgage on non owner occupied right now.

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    Dimisa you have PM.!

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    Quote Originally Posted by autowerks racing View Post
    i own several commercial rentals including a mall in louisville. i prefer commercial and try for big name tenants who normally like to stay the long term, 5,10 and 15 years. Unfortunately I am about to lose one of my anchor's Sears which is going to hurt big. If you have cash on the side it is a great time to buy commercial because it is almost impossible to get a mortgage on non owner occupied right now.
    I love the idea, but it sounds sooooo far out of my financial galaxy I wouldn't even know where to start.

    But I guess it's worth a look.

    DiMisa, I'd definitely like some info on those condos.

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    Quote Originally Posted by autowerks racing View Post
    i own several commercial rentals including a mall in louisville. i prefer commercial and try for big name tenants who normally like to stay the long term, 5,10 and 15 years. Unfortunately I am about to lose one of my anchor's Sears which is going to hurt big. If you have cash on the side it is a great time to buy commercial because it is almost impossible to get a mortgage on non owner occupied right now.
    Conventional Residential 80% LTV Non-owner occ loans are no problem right now as long as you can actually qualify. Not to mention they just up'd the NOO limit to 10 properties per borrower. I'd flip your statement around and say CRE loans are the near impossible product.

    I wouldn't touch a CRE deal with a 10 ft poll right now. The silent storm is brewing in the CRE debt market, and with rising vacancies, and downward pressure on rents, defaults are going to continue into the foreseeable future. On top of that, if we see an inflationary period, interest rates will need to rise, and market CAP rates will follow. The cards are stacked against CRE as a whole right now and I sure wouldn't want to be the one catching the falling knife.

    Well given the financial times, I'm considering buying up some residential properties for a looooong term investment.

    My question for the more experienced people here is:

    How much do you leverage your current income/net worth to buy the property? Personally, I''m very conservative in this arena. I've seen the house of cards fall and I'm a bit leary to consider any property I couldn't pay for out of pocket for at least 12 months.

    That being said, I'm looking at the lower end properties. Sub $150k which I can hopefully rent for ~$1200/mo. Even including property taxes I can be in the positive as far as yearly gross, but that's not factoring the change in my personal income.

    I would like to have said propertie/s 100% paid for in the next 4 years.

    I have a gut feeling that with the current credit crunch people won't be able to buy as easily thus raising the rental values.


    Thoughts?

    Up front I'd like to get two properties going and hopefully putting $800/mo in my pocket after paying the expenses. I know it's on the bottom end for a lot of you guys, but it's a start. And hopefully when I'm ready to retire in ~20 years it will be a nice monthly nut.
    A few thoughts,

    - You need to apply leverage appropriate for the project/property. Generally speaking, this involves looking at the cash flow, risk tolerance, and available down payment. You should be looking at projects that make solid returns at full 80% financing (about all you can get right now). RESI properties generally have poor CAP rates, hence why you need leverage to boost your returns to appropriate levels.

    - Why in the world would you want to pay off the debt in 4 years? You are going to be throwing TONS of cash at the mortgages every month (on a $120k loan, you'd be paying an extra $2100/mo to pay it off that fast). Your equity returns are also going to fall off the map, probably to sub 5% net. From an investment standpoint, this makes no sense. Again, the use of leverage is the only reason to even consider investing in RESI rentals.

    - By my quick math, to cash flow $400/mo net on a $150k house that rents for $1200/mo, you'd need to have a $116k down payment (yes, down payment), and a $34k mortgage. $1200/mo rent X 50% expense ratio (40-60% is standard) = $600/mo gross - $200/mo debt service (30 yr 6%) = $400/mo net (before uncle sam takes his share ).


    I'll go ahead and assume you are new to the rental game. I'd suggest a large dose of quality education. This is definitely not as easy as some people think. Cash flow is the only thing you've got on your side, so you've got to make sure your financials are down 100% because we don't have appreciation to bail us out anymore. On that front, I'd wait until things stabilize. No point in catching a falling knife. That $150k property you buy today is going to be worth less tomorrow.

    And finally, if you are looking for a buy/hold residential rental, look for multi-family properties (2-4 units, preferably 4). You'll obtain a small amount of economy of scale, bringing your expense ratio down. Plus they are still RESI loans, so you can get a nice ~80% LTV, 5-6% loan right now.

    Any other questions, shoot away.

    Spencer

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    Thanks for the info Spence, I was vastly underestimating the expense ratio.

    The whole point of paying them off quickly is I just don't like having a ton of debt hanging around. Given that you lose the tax writeoff on the mortgage I didn't see a point in it. In all reality this was a worst case scenario, I was shooting for homes in the $100k range.

    I'll search around for some quad's and see what is available.

    Any recommendations on reading material? Or sites to visit?

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    Quote Originally Posted by anon View Post
    Thanks for the info Spence, I was vastly underestimating the expense ratio.

    The whole point of paying them off quickly is I just don't like having a ton of debt hanging around. Given that you lose the tax writeoff on the mortgage I didn't see a point in it. In all reality this was a worst case scenario, I was shooting for homes in the $100k range.

    I'll search around for some quad's and see what is available.

    Any recommendations on reading material? Or sites to visit?
    Most people do underestimate it, then look at their P&L at the end of the year and scratch their head. Vacancy, management (need to expense it if you do it yourself or sub it out), taxes, HOA (if applicable), maintenance, etc all add up quickly.

    You don't lose the tax write off. With an investment property, your interest expense is just that, a pre-tax expense. So, technically, you are "deducting" much more compared to your own residence where you are limited by your tax bracket and/or AMT. Don't forget, you can also depreciate the property, which helps lessen the tax burden.

    I wouldn't think of leverage on a rental house as debt in the same way you may look at your primary residence, or CC debt. As long as your are running the project correctly, it just becomes part of the deal. Again, if you look at your ROE, as you pay the debt down, your ROE is going to drop to levels that make the hassle of owning rentals not worth it.

    If you have the excess income to pay down a 30yr loan in 4yrs, I'd stockpile that cash and use it as down payments on more and more deals. Instead of paying $2k/mo extra (as my example above), I'd save it, until you've got a down payment for another deal. This will keep your returns appropriate and diversify your holdings so you aren't relying on one deal for all your cash flow. Risk does go up if you aren't properly managing the deals.

    As far as education, I'm not currently on the "up and up" with rental eduction since its not my investment preference. I'll do a quick search for you tonight to see what guys are using. Just don't buy anything off the TV at 3am...

    Where are you located (or looking to invest)?

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    guys, if you'd like the hook up on the property here in palm beach, please email me. PM is too hard to communicate in. Thanks, J.P.

    DiMisa77@gmail.com
    Paradise 'ain't cheap.

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    Quote Originally Posted by DiMisaTips.com View Post
    i am involved in local south florida real estate (in various capacities) and know of a well known developer in palm beach county (so. florida) that has been given approval from their lender to sell brand new condos at REO prices (with warranty, brand new, in a really nice project). price for a 2 bedroom is 124 and 1 bedroom is 97 K.

    let me know if you'd like information. they make great rentals. i bought one as well. i am friends with one of the developers. when i did my deal, they paid CONDO fees for a year too. these prices are the bottom, it is a no-brainer.

    dimisa77@gmail.com
    one clarification, i just talked to the sales director and they're NOT paying condo dues anymore...they're only .33 cents a foot though and cover all the insurances you'd need to carry too.
    Paradise 'ain't cheap.

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