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Real Estate Investing

MRBXXXFVVS1

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Anyone here a real estate investor? I'm considering diversifying my portfolio with several more rental properties, and hopefully getting better returns over time due to appreciation and leverage (low interest rates). Historically, I've converted primary residences to rentals, and actively self managed the entire process including market and financial analysis, tenant procurement, property management, etc. This time, I'm looking to acquire properties for investment and for a more passive role moving forward, but need to make sure the economics are favorable especially since real estate is not as liquid and there are high transaction costs (relative to the stock market). Any advice and/or watch outs to consider?
 

kgizo

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I don’t, but have friends who do. For the reasons you mentioned (and don’t forget about taxes), it’s more about cash flow than ROI. Based on their experience: buy in your state (they had properties in the state they used to live in and taxes were a PITA in addition to general oversight) and get a good property manager. They have a bunch of duplexes within the same city and the property manager is great about getting out non-paying renters. On the flip side, if the property manager leaves how much $$ is at risk? Do you have a financial planner? If you are looking to diversify they might be able to help you get into commercial RE investments. Good luck!
 

Queenie60

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My husband and I own and operate apartment complexes and this is our primary source of income. It has been quite profitable and carries a heavy cashflow if managed properly. Also, the market in California has been good to us.
 

Dandi

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DH and I own 3 commercial rental properties, and we manage everything ourselves. It's a lot of work, but well worth it for the tax savings as DH gets taxed so much working full time, plus owning a profitable business. Plus, not having to pay an agent frees up more funds to pay for the properties, as our plan is to live off the rental income in retirement, which will be fairly substantial once they are all paid off. That said, I don't think the costs associated with an agent would be extraordinary, but every bit helps! I'd do the sums, and then shop around for an agent with a competitive rate.
 

Elizabeth35

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We have commercial and residential rental properties. One of the first big decisions would be--are you going to use a property manager or self-manage?
Our rentals are our main source of income but we are now starting to liquidate one house per year as we are in our 60's and the market is screaming hot. As others pointed out---this is a good time to sell but not a great time to buy price wise.

My words of caution would be to make sure you add up all your costs (and perhaps add 25% for unexpected expenses) and understand the tax ramifications for now and the future. Remember to allow for capital gains if you sell a depreciated property in the future.
All properties need maintenance and repairs--and they can be substantial on a commercial property.
Don't forget about things like snowplowing bills, annual inspections (depends on your municipality), having landscaping maintained, etc. And property insurance rates are rising rapidly.
We have annual bills for fire sprinkler inspection, elevator inspection and monthly bills for security alarm. It all adds up.

Don't be so heavily leveraged that you can't afford a large unexpected repair. We don't take all the income from the commercial property and build up a cushion for larger $40K+ repairs---roof, new windows, resurfacing parking lot, etc.

We always assume a commercial or residential space will be unrented for 2 months when changing tenants. There are ALWAYS repairs and painting to be done between tenants.
I got my brokers license so we save 2.5% on real estate commissions when we buy or sell.
 

sledge

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Assume you have basics covered such as:

1. No consumer debt, including school loans.

2. Minimum 3-6 months emergency fund.

3. Put 15% (above any company match) household income going to tax sheltered retirement accounts. General rule is company match > ROTH > traditional. Use combination of 401k, IRA and even HSA’s for maximum shelter. Spouse & individual can both contribute to IRA yearly. If income exceeds ROTH limits do what is called a “back door ROTH” which means you find a traditional and immediately roll to a ROTH (current loophole).

4. Setup and/or cash flow kids education. Unique to each family on what is “enough”.

5. Pay off house.

6. If you didn’t max out all tax sheltered account dollar thresholds with your 15%, then max out the dollars.

7. If you still have money to invest now you can be creative with brokerage accounts, real estate, etc.

Pay cash for rental properties. It’s appealing to borrow when rates are low but if you get too leveraged the bank can call your notes and effectively bankrupt you.

Depending on overall wealth and number of properties owned, there may be some validity to setting up the properties to $X value in an LLC so that you limit liability exposure. Imagine $20m+ net worth and you have a renter that gets sue happy. Assuming lease and all items were handled properly through LLC then their max potential is the max value of all items in the LLC. So if you limited to $2m then your risk exposure is $2m instead of $20m.

Never own property out of state or if you don’t enjoy the process. It’s hard work and there will be problems.

Consider length of ownership. Traditionally real estate has increased in value. So buying at $X today means it will likely be worth a higher value at some point in the future. However, no taxes will be paid on these capital gains until the property is actually sold. If you do sell, higher taxes are incurred within short periods of ownership. And if Biden, or any politician starts adjusting laws, your CG taxes may increase a lot more making it more imminent to wait out new governance before dumping properties.
 

Elizabeth35

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Sledge is spot on.
Our properties are all within 10-15 miles and we self-manage. They are all in LLC's and mortgage-free. I don't see how it makes sense to purchase with a mortgage, even a low interest mortgage. Very hard to make a decent return after all the costs.

DH bought many of his residential properties during the 2008-2009 downturn. And they are not sexy properties. They are starter homes in working class suburbs with decent schools.

Also discuss with your accountant and financial person how to protect yourself. We have an umbrella policy, on top of property insurance with liability on each property and owning within LLC.

It really depends on your location and market--but with the real estate market smoking hot right now, and uncertain political/tax situations, I would err on the side of caution.

Keep in mind how you will weather a recession or downturn. We lost 50% of our commercial tenants in 2008-2009. It took a few years to build back up. If you are overly leveraged you cannot survive tough times. So my advice is to be ultra conservative.

Edit to add--I don't mean to be negative. But be cautious.
We saw many people lose everything during the early 2000's by buying rental properties with zero down payment. If it make sense from an income standpoint--then go for it. But don't do it banking on the property increasing in value. That works in some locations but is purely speculative. And remember that we are currently (in the US anyway) in an over-heated market.
 
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sledge

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Great advice also @Elizabeth35. :cool2:

To add on a bit. Buying right now takes some finesse. Many markets are going for $50-100k over ask price, and may have 10+ offers. That's great for sellers and horrible for buyers.

It may sound a little odd, but your best opportunity to make money on the sale of that home is when you purchase it.

You aren't going to make money buying at market prices. You are looking for a deal. Hopefully for a 30%+ discount. Right now if you're not careful you may pay 30% premium instead. That's a swing of 60% in your financial position! So IMO, today's market is risky for an investor as deals are hard to find.

Also, consider your target renter audience. Middle class high earners that may be saving for their own home, or suffered a financial/credit setback and can't qualify for their own home loan are great renters. They generally tend to have cash & take care of the property. Some may even try to work an arrangement to buy the home from you allowing another set of creative owner-finance options (with down payment) and avoidance of costly realtor fees.

All these little things help boost that internal rate of return (IRR).
 

MRBXXXFVVS1

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Thanks for all the great advice!

@kgizo I can definitely do the property management myself, but I don't know if I have the bandwidth to take it on myself ongoing due to other commitments. DH and I are pretty advanced financially, so we self-manage our finances and do our own taxes to save on fees.

@Queenie60 Yes! I've invested in REITs and residential new construction companies. I recently exited my positions as despite the growth upside, lumber costs are skyrocketing. I'm a little shy on commercial real estate due to changing workplace trends with WFH and COVID impacts, but perhaps it's a good time to buy...

@kenny Definitely, but better to invest now than in the future!

@Dandi Do you know how much a property manager would run? I need to do some more research on this, last I checked they charged 1+ month of rent.

@Elizabeth35 What yields and cap rates do you consider attractive for rental properties? My latest calculations have fairly low yields and cap rates, but more upside from an appreciation stand point. How do they typically compare between commercial and residential rental properties?

@sledge We have all of it covered and have maxed out every single tax sheltered opportunity. The only debt we have is our mortgage which we can easily pay off, but the interest rate is less than 3% and we've been getting 40% returns in the market, so it's not worth paying off. 40% returns is not sustainable, so looking for some diversification. We could buy the rental properties in cash, but I'd like to finance to take advantage of low interest rates and benefits of leverage (higher return on equity). I definitely am not going to buy something unless the economics are in my favor. Right now, unfortunately it's less about "value" investing and more of a "growth" opportunity. We are very conservative and live well below our means with significant cushions! Thanks for the great advice about setting-up a LLC, this isn't something I've considered but definitely should from a liability perspective!

My main concern is DH is not fully on-board and discourages real estate investing. He thinks it is too much work and he's not interested in it. He said I can do it, if I do it all myself. I need to do more financial modeling, but I do think long term it could have better returns than the stock market.
 

Elizabeth35

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@Elizabeth35 What yields and cap rates do you consider attractive for rental properties? My latest calculations have fairly low yields and cap rates, but more upside from an appreciation stand point. How do they typically compare between commercial and residential rental properties?

The rental homes were all purchased distressed, most during the 20007-2011 timeframe. They currently return (after RE taxes and insurance/repairs) about 10% based on what we invested in each one (purchase price plus repairs). They are now worth about double what we invested in each one. So return is only 5% if you use current value. But gradually the rents will increase to reflect the higher values.

The commercial property is actually much better. Currently the cap rate is around 15%. Its an older building and there are no good comps for valuing in the same geographic area. I used my best estimate using MLS data on other commercial property.
Again---this would be very hard to duplicate since it is a unique property that was bought a long time ago.
 

LilAlex

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I'm looking to acquire properties for investment and for a more passive role moving forward, but need to make sure the economics are favorable especially since real estate is not as liquid and there are high transaction costs (relative to the stock market). Any advice and/or watch outs to consider?

You're dead set on buying high, then? Maybe get some Dogecoin and BTC while you're at it? :cool2:

OTOH, if you were planning this before the recent and very rapid run-up in prices, that's different. But otherwise it's just peformance-chasing. I guess the way to know is this: are you looking at the markets with the least or the most recent appreciation?
 

Elizabeth35

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LLC (residential homes) and partnership (commercial) were set up using the appropriate professionals. I would strongly recommend having a discussion with your attorney and your financial advisor/accountant (and banker if you have one). You may need to adjust your will and trust so that the LLC is either liquidated or passed on to an heir.
I would not step into commercial property ownership without professional advice. There are significant legal and tax ramifications and pitfalls to be avoided.
My understanding (not an accountant or attorney) is that if you have multiple properties, it is ideal to have each one in a unique LLC. So that is a question I would ask of your professionals because that is not an inexpensive route.
 

sledge

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Echo @Elizabeth35, with one caveat. Depending how many properties you own, it may be a headache to have each in their own LLC.

if you own 3, it likely doesn’t matter. If you own 100, that’s different. And it may be something where you start an LLC for each property in the beginning but then stack properties in each LLC so you don’t exceed $X value as you begin to acquire more.

Some of this will be personal preference, risk tolerance and overall wealth level you are trying to protect.
 

Elizabeth35

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Echo @Elizabeth35, with one caveat. Depending how many properties you own, it may be a headache to have each in their own LLC.

if you own 3, it likely doesn’t matter. If you own 100, that’s different. And it may be something where you start an LLC for each property in the beginning but then stack properties in each LLC so you don’t exceed $X value as you begin to acquire more.

Some of this will be personal preference, risk tolerance and overall wealth level you are trying to protect.

Agreed. It depends on your wealth and exposure. DH has all residential properties in one LLC because due to their (relatively) low value it doesn't justify the initial cost and annual fees to have each one in a separate LLC.
But maybe if you are investing in $1M property it makes sense to have separate LLC's? That's why I recommend working with your legal/financial professionals.
It is not simple and there are a lot of levers. You have to figure out what makes sense for you and your situation. And part of the decision making involves how to exit the landlord business. We are in that process and it is a sticky wicket tax-wise selling fully depreciated properties.
 

voce

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You're dead set on buying high, then? Maybe get some Dogecoin and BTC while you're at it? :cool2:

OTOH, if you were planning this before the recent and very rapid run-up in prices, that's different. But otherwise it's just peformance-chasing. I guess the way to know is this: are you looking at the markets with the least or the most recent appreciation?

With all due respect, LilAlex, it's not about the least or the most recent appreciation; if your expectations are that inflation is here to stay because the Fed has promised not to raise the interest rate, then all real assets are going to have inflated prices that don't come down until there's deflation. The Fed is going to do their damned hardest to try to prevent a crisis with deflation. So much of what's going on in the real estate market and stock market are nominal returns and not real returns.

I would only add that if it were me investing in real estate, I'd go more conservative and only buy in markets offer locations where tenants will be plentiful even in a down economy. The best bet at the moment are the properties rented by big hospitals, nursing homes, and retailers like WalMart, but if you can't purchase that yourself, why not invest in a REIT?
 

MRBXXXFVVS1

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It looks like property management fees are around 8% of collected rent. It's important to base it on collected rent so that if you don't get paid, neither does the company and that motivates them to find the right tenant and collect.

I did more research and there doesn't seem to be much interesting inventory at this time, so I'll keep looking but hold until I find something I like. Maybe in the fall/winter it will be less competitive. I'm not willing to do a non-contingent offer over asking in this market and engage in a bidding war for an investment property.

Seems like the best path to be competitive as possible is potentially to buy in cash and then do a cash out refinance. Without leverage, the returns aren't attractive enough for me to make it worthwhile. I'm open to the risk, and also aware that things can go down much faster with leverage. Definitely will look to start a LLC for the investment properties.

@Elizabeth35, I'm sure your professionals have thought about this and/or have better insights, but based on what I've read you could consider a cash out refinance, 1031 exchange, or pass it on as an inheritance which will then reset the value to current market value. Just a few ideas, although not necessarily applicable if you are looking to exit the business and not give it away...
 

whitewave

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Definitely put them in an LLC. We have two houses and I just purchased an empty residential lot in a beach community (construction is too high right now to build). We have no mortgages.

We are thinking buying more empty lots in desirable areas that are perhaps rebuilding from storms (beach areas)— this is the least risk/least cost scenario but you are only looking at resale and ROI at a later date. The good news about this is if you pick the right spots, the market hasn’t exploded yet because they are in a rebuild.

The other thing we are thinking about is short term rental condos on the beach facing the beach for income potential. As others mentioned, it’s a sellers market right now. However, no construction (unless you buy a fixer upper) and everyone is doing a staycation or close to home vacation instead of exotic locales.

if you consider this, you need proof of rental income, plus the taxes, fund for insurance and repairs, plus 20% to the property manager. Most people we know do make money (provided they abide by the laws which is owner gets 14 days a year to stay at the property), but it’s not a ton of money.... basically it pays the note and the taxes and insurance and slush fund for repairs and not much after the 20% to the manager), but the property value has generally speaking increased desirably over the years.

From what I read, this isn’t the 2008 bubble as buyers have to be qualified, and with short term rentals, I am cautious of how it could be contributing to pricing locals out of year round places to live. I think we are a good 6 months too late on this hot market.

So I’m waiting and watching. It might be a good time still to buy given low interest rates etc.

undecided....
 

Elizabeth35

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@Elizabeth35, I'm sure your professionals have thought about this and/or have better insights, but based on what I've read you could consider a cash out refinance, 1031 exchange, or pass it on as an inheritance which will then reset the value to current market value. Just a few ideas, although not necessarily applicable if you are looking to exit the business and not give it away...

Yeah, we are simply reducing the # of residential properties so that DH has less management to do. We won't do cash out refinance because all the property is mortgage free now. And no 1031 as we are not in the market for buying an expensive property or vacation home.
We prefer to rent on vacation and not tie up $ in a vacation property.
Everything remaining goes into a trust when we die but frankly, we are the kind of people that do not feel any obligation to leave our kids a ton of $$.
Lol--we are planning on spending like drunken sailors until we fall off the perch.
 

LilAlex

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With all due respect, LilAlex, it's not about the least or the most recent appreciation; if your expectations are that inflation is here to stay because the Fed has promised not to raise the interest rate, then all real assets are going to have inflated prices that don't come down until there's deflation. The Fed is going to do their damned hardest to try to prevent a crisis with deflation. So much of what's going on in the real estate market and stock market are nominal returns and not real returns.

My point was that lots of people see how RE prices have shot up and suddenly want "in." That is dumb. OTOH if this is something one has always wanted wanted to do, it is simply a somewhat dumber time to do it.

My comment has nothing to do with RE in particular. My comment is about market-timing, which nearly everyone fails at miserably. With every asset. Why not buy timber because lumber prices are up 400%? Because this is all a trasient function of supply and demand; it's not that lumber is newly a super-great thing to own.

And, there has not been wholesale inflation as I and others point out above.
 

voce

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And, there has not been wholesale inflation as I and others point out above.

Market timing can work if you're trading algorithmically and can act within nanoseconds based on keywords in news feeds... But of course not such things as real estate.

I can see with my own eyes food, gas, and real estate maintenance costs increasing. American dollar losing value in terms of what it can purchase in terms of raw materials coming from China. This is of course related to COVID somewhat and the increase in tariffs, but these costs are going to trickle down to the American consumers. I don't know what you define as wholesale inflation, but with what I'm seeing with my own eyes, prices of my everyday consumer items have all gone up.

When do the rich become even richer? This happens every year, with the taxation differences in active income vs passive income, but the greatest disparities in wealth on an annual basis are created when there is an economic crisis, and the wealthiest 1-10% are invested in "real assets" instead of in monetary currencies that lose value through inflation, because the bottom 90% don't have the capital to have enough to dump into investments, especially when the markets are down.
 

Dancing Fire

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As soon as the interest rate starts to move up the party will be over for both real estate and the stock market. I can't ever be a landlord b/c I would be in prison for murder.
 

LilAlex

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Market timing can work if you're trading algorithmically and can act within nanoseconds based on keywords in news feeds... But of course not such things as real estate.

No, this is a myth; hedge funds are no better than I am. I mean you can certainly read Flash Boys and see how they steal from small-time investors but almost no one beats good ol' index funds over decades. Even sovereign wealth funds and state pension plans have learned this.

The key to making money through investing in anything is to have money -- so your moderate 5 or 10% annual gain is still a boatload of money.

It is not correct that the rich buy real things for investing. The rich buy real things for a host of other reasons (e.g., concealing wealth through a maze of shell companies -- like all the fully-sold, half-empty Manhattan condo towers).

And people do get rich through real estate using leverage -- and you can do the same thing with any asset class with 2X and 3X funds and ETFs. The risk for both is when things do not go as you "expect." And this, of course, happens all the time...
 

whitewave

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My CPA did say (sternly I might add): do NOT take money you would put into the stock market and buy real estate. 1) money goes into the stock market 2) anything else you want to play with goes into real estate.

do not choose #2 over #1 for investing.....


YMMV, this was advice specific to Dr and Mrs whitewave.
 

Elizabeth35

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My CPA did say (sternly I might add): do NOT take money you would put into the stock market and buy real estate. 1) money goes into the stock market 2) anything else you want to play with goes into real estate.

do not choose #2 over #1 for investing.....


YMMV, this was advice specific to Dr and Mrs whitewave.

Very sage advice.
It all depends on individual situations regarding income, investments, risk tolerance, etc.

But I would not be purchasing investment RE now unless I was in for the very long haul, getting a bargain price distressed property and buying cash.
Way too much uncertainty and way too much risk for me.

Remember back in 2006 when RE was rising dramatically? When most of us never considered that RE prices could actually fall--and fall dramatically? I knew lots of middle class people who fancied themselves RE investors back in 2004-2006. They were leveraging one property to buy another rental property and imagined they were building a RE empire. They ended up with 4-5 homes with 98% loans---and by 2008 they had lost all of them and declared bankruptcy and foreclosed.

That is why I am not a fan of leveraging to buy investment RE--and especially do not buy when the market is screaming hot!

Because the trains you don't see coming (COVID, 2007 RE Bubble) are the ones that can wipe you out if you are heavily leveraged. If our properties were leveraged we would not have survived the crash in 2008 and subsequent years of drastically reduced rent. Nor would we have survived COVID when many tenants have been behind on rent payments.
 

sledge

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I'm with you @Elizabeth35. How you invest depends on so many variables.

However, I think @whitewave's CPA was trying to elude to retirement (tax-sheltered) investing as opposed to all investing in general. If so, @MRBXXXFVVS1 confirmed they were maxed out on retirement options and looking for additional creative investing (wealth building) opportunities.

I'm also not buying real estate right now. My speculation that prices are artificially inflated and will eventually stabilize aside, the reality of the matter is that right now it's hard to find a real estate deal. If a person is distressed & needs to sell quickly, they can do so pretty easily in today's market. This doesn't fair well for the investor, who should always be buying at discount and never market (let alone market + premium) prices.

If I'm going to buy at market or higher prices, I might as well invest in a mutual/index fund and enjoy those artificially inflated rates that are extremely liquid and easy to jump out of when market conditions change and a new opportunity presents itself. Saves me risk and headache.
 
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