Open House – Rants & Raves

[NotCranky]

Thanks for posting surveyor.
The properties look nice. It does look like the roof needs attention. I have never been one to wait. It is not worth having it blow off in a big wind and rain storm. Maybe that is not the issue but it does look weak even in the pictures.

I had a few questions:
You said something about the target of equity withdrawals running a surplus. What did you mean. It sounds like you are saying that you took the equity from other rental property that still cash flows after increased encumbrances, or a personal residence that would if you had to put it on the market?

Bugs raised a concern about taking equity from California properties for seed money. I sort of concur. A good rule of thumb is to avoid withdrawals that would put cash flow on the California properties in the red. I am sure you have thought about this, just wanted to put in my .02 on that point.
Are you borrowing fixed or adjustable ? HELOC money?

I know you are, presenting for the board, more or less, a first year scenario. I think it is also important that you have put the probability of inflation(sooner or later) against your debt and the fact that your mortgages are being paid by a third party on your side . Have you crunched out return scenarios using some of those variables over longer periods of time?Cash flow is necessary bu tit is the long term that makes your “hassles” worth it IMO.

On the topic of the quality of enlisted personnel as tenants. First of all I think your units, as nice as they are, are not going to attract officers in droves. Maybe I am wrong. I also think there are more good enlisted people than bad, having been one myself for 6 years I think I am qualified to say that. Renting to military has the huge advantage of you or your property managers ability to appeal to the tenants chain of command if the person is messing up. I had a situation where a guy was subletting up and playing games with money. I told him I would be contacting his captain. Never before has a wallet opened up so fast and a guy turned from a big ass to kiss ass. On the other hand populations on certain types of bases rise and fall dramatically, even the civilian population. I would be concerned about that. I imagine you checked for long term base plans?

I did not see you account for vacancies. Maybe I missed it?

[Jumby]

I’m assuming part of the reason he bought in this area is because of the net gain in jobs thanks to the Base Realignments and Closures.

http://www.brac.gov/docs/final/AppendixO.pdf

[Jumby]

I’m assuming part of the reason he bought in this area is because of the net gain in jobs thanks to the Base Realignments and Closures.

http://www.brac.gov/docs/final/AppendixO.pdf

[Jumby]

I’m assuming part of the reason he bought in this area is because of the net gain in jobs thanks to the Base Realignments and Closures.

http://www.brac.gov/docs/final/AppendixO.pdf

[Jumby]

I’m assuming part of the reason he bought in this area is because of the net gain in jobs thanks to the Base Realignments and Closures.

http://www.brac.gov/docs/final/AppendixO.pdf

[Jumby]

I’m assuming part of the reason he bought in this area is because of the net gain in jobs thanks to the Base Realignments and Closures.

http://www.brac.gov/docs/final/AppendixO.pdf

[surveyor]

Lots of questions! Long answers.

1) Taking equity from California

The money ($12k) in question is coming from a rental property in California. The money is from a HELOC of 8.5% (thank you for lower interest rates, hahaha, it used to be at 9.5%, but still it’s not a lot of difference). It’s not fully used.

As for the wisdom of making a property cash flow negative by equity withdrawal, it is not recommended for most conservative people, but I have taken it into account already. The number to watch is called “cash on cash”. Whenever you are borrowing money to make money, the “cash on cash” calculation is key in order to make your decision.

So I am borrowing money at an interest rate of 9% (more or less). However, the property generates a cash on cash of 18%. That cash on cash number means I am able to generate enough cash flow to pay back the loan at an accelerated rate if I wish.

Risky? Yes. Can use of this make a property in California go from cash flow to negative? Yes. SO WHAT. The new property generates enough cash flow by itself to offset that negative.

Let’s also look at the ROE. We took $12k from a rental property and now it’s cash flow negative (it’s not, but let’s say it is). Let’s say I will pay back that loan in ten years at a rate of 9%. The rental property will now be cash flow negative at $152/mo. The new property’s ROE is 43%. For the cost of $1824 a year (the $152*12), I have generated a value of more than $17000 ($12k+12k*(0.43)).

So again, so what if the property is cash flow negative? I’ve been able to generate enough money to pay it back potentially in the first year. Also, let’s remember, I am only borrowing $12k. My household generates that in a month. So the risk to me is somewhat minimal.

Is this process for everyone? HELL NO. Everyone I have described this process to personally has called me crazy. =shrug= But think about it – the equity in the properties we have we can’t access unless we either sell the property or we refi the money out. This process allows me to generate money out of something that was previously doing NOTHING. That to me is a win-win.

But like I said, there are risks. I have offset that risk somewhat by various methods – doing due diligence, making sure the cash on cash calculation fits my requirements, and lastly my household generates enough income on its own so that a $12k hit means little. It hurts, but my household has $400k in liquid accounts (apart from the real estate).

I read here (and on other blogs) about how people will MEW (mortgage equity withdrawals) themselves into a new boat, or a new car. We did none of that. The money we take out of the properties, we make sure it generates a decent return.

I don’t have a fear of negative cash flow as most people on this board do because I know that in the long run, it will pay off for me. And this negative cash flow mentality has also made it unable for most people to see how to get rich using real estate.

Again, here is the math for emphasis:

$1824/year in negative cash flow => generates $17000 in value.

$1824/year in negative cash flow for rental property =>
generates $3600 in cash flow, leaving you $1776 left over to pay the loan.

Anyways, remember, math is your friend.

Also remember, because of the above, many people have called me CRAZY.

[surveyor]

Lots of questions! Long answers.

1) Taking equity from California

The money ($12k) in question is coming from a rental property in California. The money is from a HELOC of 8.5% (thank you for lower interest rates, hahaha, it used to be at 9.5%, but still it’s not a lot of difference). It’s not fully used.

As for the wisdom of making a property cash flow negative by equity withdrawal, it is not recommended for most conservative people, but I have taken it into account already. The number to watch is called “cash on cash”. Whenever you are borrowing money to make money, the “cash on cash” calculation is key in order to make your decision.

So I am borrowing money at an interest rate of 9% (more or less). However, the property generates a cash on cash of 18%. That cash on cash number means I am able to generate enough cash flow to pay back the loan at an accelerated rate if I wish.

Risky? Yes. Can use of this make a property in California go from cash flow to negative? Yes. SO WHAT. The new property generates enough cash flow by itself to offset that negative.

Let’s also look at the ROE. We took $12k from a rental property and now it’s cash flow negative (it’s not, but let’s say it is). Let’s say I will pay back that loan in ten years at a rate of 9%. The rental property will now be cash flow negative at $152/mo. The new property’s ROE is 43%. For the cost of $1824 a year (the $152*12), I have generated a value of more than $17000 ($12k+12k*(0.43)).

So again, so what if the property is cash flow negative? I’ve been able to generate enough money to pay it back potentially in the first year. Also, let’s remember, I am only borrowing $12k. My household generates that in a month. So the risk to me is somewhat minimal.

Is this process for everyone? HELL NO. Everyone I have described this process to personally has called me crazy. =shrug= But think about it – the equity in the properties we have we can’t access unless we either sell the property or we refi the money out. This process allows me to generate money out of something that was previously doing NOTHING. That to me is a win-win.

But like I said, there are risks. I have offset that risk somewhat by various methods – doing due diligence, making sure the cash on cash calculation fits my requirements, and lastly my household generates enough income on its own so that a $12k hit means little. It hurts, but my household has $400k in liquid accounts (apart from the real estate).

I read here (and on other blogs) about how people will MEW (mortgage equity withdrawals) themselves into a new boat, or a new car. We did none of that. The money we take out of the properties, we make sure it generates a decent return.

I don’t have a fear of negative cash flow as most people on this board do because I know that in the long run, it will pay off for me. And this negative cash flow mentality has also made it unable for most people to see how to get rich using real estate.

Again, here is the math for emphasis:

$1824/year in negative cash flow => generates $17000 in value.

$1824/year in negative cash flow for rental property =>
generates $3600 in cash flow, leaving you $1776 left over to pay the loan.

Anyways, remember, math is your friend.

Also remember, because of the above, many people have called me CRAZY.

[surveyor]

Lots of questions! Long answers.

1) Taking equity from California

The money ($12k) in question is coming from a rental property in California. The money is from a HELOC of 8.5% (thank you for lower interest rates, hahaha, it used to be at 9.5%, but still it’s not a lot of difference). It’s not fully used.

As for the wisdom of making a property cash flow negative by equity withdrawal, it is not recommended for most conservative people, but I have taken it into account already. The number to watch is called “cash on cash”. Whenever you are borrowing money to make money, the “cash on cash” calculation is key in order to make your decision.

So I am borrowing money at an interest rate of 9% (more or less). However, the property generates a cash on cash of 18%. That cash on cash number means I am able to generate enough cash flow to pay back the loan at an accelerated rate if I wish.

Risky? Yes. Can use of this make a property in California go from cash flow to negative? Yes. SO WHAT. The new property generates enough cash flow by itself to offset that negative.

Let’s also look at the ROE. We took $12k from a rental property and now it’s cash flow negative (it’s not, but let’s say it is). Let’s say I will pay back that loan in ten years at a rate of 9%. The rental property will now be cash flow negative at $152/mo. The new property’s ROE is 43%. For the cost of $1824 a year (the $152*12), I have generated a value of more than $17000 ($12k+12k*(0.43)).

So again, so what if the property is cash flow negative? I’ve been able to generate enough money to pay it back potentially in the first year. Also, let’s remember, I am only borrowing $12k. My household generates that in a month. So the risk to me is somewhat minimal.

Is this process for everyone? HELL NO. Everyone I have described this process to personally has called me crazy. =shrug= But think about it – the equity in the properties we have we can’t access unless we either sell the property or we refi the money out. This process allows me to generate money out of something that was previously doing NOTHING. That to me is a win-win.

But like I said, there are risks. I have offset that risk somewhat by various methods – doing due diligence, making sure the cash on cash calculation fits my requirements, and lastly my household generates enough income on its own so that a $12k hit means little. It hurts, but my household has $400k in liquid accounts (apart from the real estate).

I read here (and on other blogs) about how people will MEW (mortgage equity withdrawals) themselves into a new boat, or a new car. We did none of that. The money we take out of the properties, we make sure it generates a decent return.

I don’t have a fear of negative cash flow as most people on this board do because I know that in the long run, it will pay off for me. And this negative cash flow mentality has also made it unable for most people to see how to get rich using real estate.

Again, here is the math for emphasis:

$1824/year in negative cash flow => generates $17000 in value.

$1824/year in negative cash flow for rental property =>
generates $3600 in cash flow, leaving you $1776 left over to pay the loan.

Anyways, remember, math is your friend.

Also remember, because of the above, many people have called me CRAZY.

[surveyor]

Lots of questions! Long answers.

1) Taking equity from California

The money ($12k) in question is coming from a rental property in California. The money is from a HELOC of 8.5% (thank you for lower interest rates, hahaha, it used to be at 9.5%, but still it’s not a lot of difference). It’s not fully used.

As for the wisdom of making a property cash flow negative by equity withdrawal, it is not recommended for most conservative people, but I have taken it into account already. The number to watch is called “cash on cash”. Whenever you are borrowing money to make money, the “cash on cash” calculation is key in order to make your decision.

So I am borrowing money at an interest rate of 9% (more or less). However, the property generates a cash on cash of 18%. That cash on cash number means I am able to generate enough cash flow to pay back the loan at an accelerated rate if I wish.

Risky? Yes. Can use of this make a property in California go from cash flow to negative? Yes. SO WHAT. The new property generates enough cash flow by itself to offset that negative.

Let’s also look at the ROE. We took $12k from a rental property and now it’s cash flow negative (it’s not, but let’s say it is). Let’s say I will pay back that loan in ten years at a rate of 9%. The rental property will now be cash flow negative at $152/mo. The new property’s ROE is 43%. For the cost of $1824 a year (the $152*12), I have generated a value of more than $17000 ($12k+12k*(0.43)).

So again, so what if the property is cash flow negative? I’ve been able to generate enough money to pay it back potentially in the first year. Also, let’s remember, I am only borrowing $12k. My household generates that in a month. So the risk to me is somewhat minimal.

Is this process for everyone? HELL NO. Everyone I have described this process to personally has called me crazy. =shrug= But think about it – the equity in the properties we have we can’t access unless we either sell the property or we refi the money out. This process allows me to generate money out of something that was previously doing NOTHING. That to me is a win-win.

But like I said, there are risks. I have offset that risk somewhat by various methods – doing due diligence, making sure the cash on cash calculation fits my requirements, and lastly my household generates enough income on its own so that a $12k hit means little. It hurts, but my household has $400k in liquid accounts (apart from the real estate).

I read here (and on other blogs) about how people will MEW (mortgage equity withdrawals) themselves into a new boat, or a new car. We did none of that. The money we take out of the properties, we make sure it generates a decent return.

I don’t have a fear of negative cash flow as most people on this board do because I know that in the long run, it will pay off for me. And this negative cash flow mentality has also made it unable for most people to see how to get rich using real estate.

Again, here is the math for emphasis:

$1824/year in negative cash flow => generates $17000 in value.

$1824/year in negative cash flow for rental property =>
generates $3600 in cash flow, leaving you $1776 left over to pay the loan.

Anyways, remember, math is your friend.

Also remember, because of the above, many people have called me CRAZY.

[surveyor]

Lots of questions! Long answers.

1) Taking equity from California

The money ($12k) in question is coming from a rental property in California. The money is from a HELOC of 8.5% (thank you for lower interest rates, hahaha, it used to be at 9.5%, but still it’s not a lot of difference). It’s not fully used.

As for the wisdom of making a property cash flow negative by equity withdrawal, it is not recommended for most conservative people, but I have taken it into account already. The number to watch is called “cash on cash”. Whenever you are borrowing money to make money, the “cash on cash” calculation is key in order to make your decision.

So I am borrowing money at an interest rate of 9% (more or less). However, the property generates a cash on cash of 18%. That cash on cash number means I am able to generate enough cash flow to pay back the loan at an accelerated rate if I wish.

Risky? Yes. Can use of this make a property in California go from cash flow to negative? Yes. SO WHAT. The new property generates enough cash flow by itself to offset that negative.

Let’s also look at the ROE. We took $12k from a rental property and now it’s cash flow negative (it’s not, but let’s say it is). Let’s say I will pay back that loan in ten years at a rate of 9%. The rental property will now be cash flow negative at $152/mo. The new property’s ROE is 43%. For the cost of $1824 a year (the $152*12), I have generated a value of more than $17000 ($12k+12k*(0.43)).

So again, so what if the property is cash flow negative? I’ve been able to generate enough money to pay it back potentially in the first year. Also, let’s remember, I am only borrowing $12k. My household generates that in a month. So the risk to me is somewhat minimal.

Is this process for everyone? HELL NO. Everyone I have described this process to personally has called me crazy. =shrug= But think about it – the equity in the properties we have we can’t access unless we either sell the property or we refi the money out. This process allows me to generate money out of something that was previously doing NOTHING. That to me is a win-win.

But like I said, there are risks. I have offset that risk somewhat by various methods – doing due diligence, making sure the cash on cash calculation fits my requirements, and lastly my household generates enough income on its own so that a $12k hit means little. It hurts, but my household has $400k in liquid accounts (apart from the real estate).

I read here (and on other blogs) about how people will MEW (mortgage equity withdrawals) themselves into a new boat, or a new car. We did none of that. The money we take out of the properties, we make sure it generates a decent return.

I don’t have a fear of negative cash flow as most people on this board do because I know that in the long run, it will pay off for me. And this negative cash flow mentality has also made it unable for most people to see how to get rich using real estate.

Again, here is the math for emphasis:

$1824/year in negative cash flow => generates $17000 in value.

$1824/year in negative cash flow for rental property =>
generates $3600 in cash flow, leaving you $1776 left over to pay the loan.

Anyways, remember, math is your friend.

Also remember, because of the above, many people have called me CRAZY.

[surveyor]

Long answer (cont’d)

2) First year scenario……

As everyone knows here, it is difficult to make predictions over the long term. The ROE calculation of 43% is meant to be something that you examine year after year and make appropriate actions to keep your ROE that high. There are going to be some years where your ROE is low and your property isn’t generating as much money as it should. Steps should be taken to counter that. There will also be years where the appreciation of the property will be higher than the 4% I anticipate. If it happens, great. If not, oh well. Real estate is a slow moving beast so you can direct it properly. Still, the ROE calculation is meant to be a barometer of a 10 year cycle.

As for the mortgages being paid, I pay all the mortgages myself and I do all of them on auto-pay. I could have the property manager of each property do the payment of the mortgage for me, but the banks send the statements to me, and I find it helps if you get your hands into the nitty gritty.

Vacancies… The property is already fully rented so I did not account for vacancies in the first year. The rent is low, at $375 per unit and there is room to move that up to market (which has been running at around $425). I have learned that I have to aggressively rent my units out, so I have instructed my property managers that if a unit is vacated, immediately place an ad offering a rent discount on the first month. This helps generate interest right away and keep vacancies to a minimum. If vacancies happen, that’s the fact of life. However, I have minimized the vacancy risk by the aggressive discount and by the fact that the property is a 4 unit (SFRs have a vacancy disadvantage because once the tenant is out, you’re out the full rent amount, as opposed to multi-units, where if you have one vacancy, you at least have some rent income still available to come in).

3) Miilitary tenants

One of the things that attracted me to Huntsville was, like Jumby said, the fact that BRAC was closing a base in the midwest and expanding operations in Huntsville. There were other aspects to the BRAC report too, because they are moving defense contractors as well as personnel over to Huntsville. So the long term area prospects are good.

I will tell you that I am not specifically targeting military personnel as tenants (and certainly not officers). A lot of investors make the mistake of going after high value tenants (military officers, high income people), and as such buy expensive rental properties as such SFRs. Many investors will buy rental property based on the question, well if I had to live there, what would I like to live in? I avoid that line of thinking entirely because I pursue properties that have cheap rents. Cheap rents allow you to appeal to a huge population of minimum wage earners, vs. having to fight for high income tenants, which are few in number and are chased after by most everybody.

Let’s also remember the “high number” of foreclosures affecting everyone in the country. If Huntsville does go into a situation where there are a lot of foreclosures, forcing owners to rent instead of own, where will they go? WHERE THERE IS CHEAP RENT.

Also another advantage of cheap rent is that you are able to keep vacancies to a minimum.

And lastly:

4) Are the hassles worth it?

Um, let me see, I am able to make an asset which was previously doing jack to all of a sudden generate a 43% return.

I am able to pay ridiculously low taxes even though I have a household income of over $200k.

I’m sure there are others who will pick holes into my investing and will say, well you’re too risky, or you’re a sucker for buying into the real estate makes people rich crowd, or any other comments. And I don’t doubt that this is risky. However, you can minimize risk several ways (as I’ve outlined here) and you can use the factor of time to both make you money and minimize your risk.

[surveyor]

Long answer (cont’d)

2) First year scenario……

As everyone knows here, it is difficult to make predictions over the long term. The ROE calculation of 43% is meant to be something that you examine year after year and make appropriate actions to keep your ROE that high. There are going to be some years where your ROE is low and your property isn’t generating as much money as it should. Steps should be taken to counter that. There will also be years where the appreciation of the property will be higher than the 4% I anticipate. If it happens, great. If not, oh well. Real estate is a slow moving beast so you can direct it properly. Still, the ROE calculation is meant to be a barometer of a 10 year cycle.

As for the mortgages being paid, I pay all the mortgages myself and I do all of them on auto-pay. I could have the property manager of each property do the payment of the mortgage for me, but the banks send the statements to me, and I find it helps if you get your hands into the nitty gritty.

Vacancies… The property is already fully rented so I did not account for vacancies in the first year. The rent is low, at $375 per unit and there is room to move that up to market (which has been running at around $425). I have learned that I have to aggressively rent my units out, so I have instructed my property managers that if a unit is vacated, immediately place an ad offering a rent discount on the first month. This helps generate interest right away and keep vacancies to a minimum. If vacancies happen, that’s the fact of life. However, I have minimized the vacancy risk by the aggressive discount and by the fact that the property is a 4 unit (SFRs have a vacancy disadvantage because once the tenant is out, you’re out the full rent amount, as opposed to multi-units, where if you have one vacancy, you at least have some rent income still available to come in).

3) Miilitary tenants

One of the things that attracted me to Huntsville was, like Jumby said, the fact that BRAC was closing a base in the midwest and expanding operations in Huntsville. There were other aspects to the BRAC report too, because they are moving defense contractors as well as personnel over to Huntsville. So the long term area prospects are good.

I will tell you that I am not specifically targeting military personnel as tenants (and certainly not officers). A lot of investors make the mistake of going after high value tenants (military officers, high income people), and as such buy expensive rental properties as such SFRs. Many investors will buy rental property based on the question, well if I had to live there, what would I like to live in? I avoid that line of thinking entirely because I pursue properties that have cheap rents. Cheap rents allow you to appeal to a huge population of minimum wage earners, vs. having to fight for high income tenants, which are few in number and are chased after by most everybody.

Let’s also remember the “high number” of foreclosures affecting everyone in the country. If Huntsville does go into a situation where there are a lot of foreclosures, forcing owners to rent instead of own, where will they go? WHERE THERE IS CHEAP RENT.

Also another advantage of cheap rent is that you are able to keep vacancies to a minimum.

And lastly:

4) Are the hassles worth it?

Um, let me see, I am able to make an asset which was previously doing jack to all of a sudden generate a 43% return.

I am able to pay ridiculously low taxes even though I have a household income of over $200k.

I’m sure there are others who will pick holes into my investing and will say, well you’re too risky, or you’re a sucker for buying into the real estate makes people rich crowd, or any other comments. And I don’t doubt that this is risky. However, you can minimize risk several ways (as I’ve outlined here) and you can use the factor of time to both make you money and minimize your risk.

[surveyor]

Long answer (cont’d)

2) First year scenario……

As everyone knows here, it is difficult to make predictions over the long term. The ROE calculation of 43% is meant to be something that you examine year after year and make appropriate actions to keep your ROE that high. There are going to be some years where your ROE is low and your property isn’t generating as much money as it should. Steps should be taken to counter that. There will also be years where the appreciation of the property will be higher than the 4% I anticipate. If it happens, great. If not, oh well. Real estate is a slow moving beast so you can direct it properly. Still, the ROE calculation is meant to be a barometer of a 10 year cycle.

As for the mortgages being paid, I pay all the mortgages myself and I do all of them on auto-pay. I could have the property manager of each property do the payment of the mortgage for me, but the banks send the statements to me, and I find it helps if you get your hands into the nitty gritty.

Vacancies… The property is already fully rented so I did not account for vacancies in the first year. The rent is low, at $375 per unit and there is room to move that up to market (which has been running at around $425). I have learned that I have to aggressively rent my units out, so I have instructed my property managers that if a unit is vacated, immediately place an ad offering a rent discount on the first month. This helps generate interest right away and keep vacancies to a minimum. If vacancies happen, that’s the fact of life. However, I have minimized the vacancy risk by the aggressive discount and by the fact that the property is a 4 unit (SFRs have a vacancy disadvantage because once the tenant is out, you’re out the full rent amount, as opposed to multi-units, where if you have one vacancy, you at least have some rent income still available to come in).

3) Miilitary tenants

One of the things that attracted me to Huntsville was, like Jumby said, the fact that BRAC was closing a base in the midwest and expanding operations in Huntsville. There were other aspects to the BRAC report too, because they are moving defense contractors as well as personnel over to Huntsville. So the long term area prospects are good.

I will tell you that I am not specifically targeting military personnel as tenants (and certainly not officers). A lot of investors make the mistake of going after high value tenants (military officers, high income people), and as such buy expensive rental properties as such SFRs. Many investors will buy rental property based on the question, well if I had to live there, what would I like to live in? I avoid that line of thinking entirely because I pursue properties that have cheap rents. Cheap rents allow you to appeal to a huge population of minimum wage earners, vs. having to fight for high income tenants, which are few in number and are chased after by most everybody.

Let’s also remember the “high number” of foreclosures affecting everyone in the country. If Huntsville does go into a situation where there are a lot of foreclosures, forcing owners to rent instead of own, where will they go? WHERE THERE IS CHEAP RENT.

Also another advantage of cheap rent is that you are able to keep vacancies to a minimum.

And lastly:

4) Are the hassles worth it?

Um, let me see, I am able to make an asset which was previously doing jack to all of a sudden generate a 43% return.

I am able to pay ridiculously low taxes even though I have a household income of over $200k.

I’m sure there are others who will pick holes into my investing and will say, well you’re too risky, or you’re a sucker for buying into the real estate makes people rich crowd, or any other comments. And I don’t doubt that this is risky. However, you can minimize risk several ways (as I’ve outlined here) and you can use the factor of time to both make you money and minimize your risk.

[surveyor]

Long answer (cont’d)

2) First year scenario……

As everyone knows here, it is difficult to make predictions over the long term. The ROE calculation of 43% is meant to be something that you examine year after year and make appropriate actions to keep your ROE that high. There are going to be some years where your ROE is low and your property isn’t generating as much money as it should. Steps should be taken to counter that. There will also be years where the appreciation of the property will be higher than the 4% I anticipate. If it happens, great. If not, oh well. Real estate is a slow moving beast so you can direct it properly. Still, the ROE calculation is meant to be a barometer of a 10 year cycle.

As for the mortgages being paid, I pay all the mortgages myself and I do all of them on auto-pay. I could have the property manager of each property do the payment of the mortgage for me, but the banks send the statements to me, and I find it helps if you get your hands into the nitty gritty.

Vacancies… The property is already fully rented so I did not account for vacancies in the first year. The rent is low, at $375 per unit and there is room to move that up to market (which has been running at around $425). I have learned that I have to aggressively rent my units out, so I have instructed my property managers that if a unit is vacated, immediately place an ad offering a rent discount on the first month. This helps generate interest right away and keep vacancies to a minimum. If vacancies happen, that’s the fact of life. However, I have minimized the vacancy risk by the aggressive discount and by the fact that the property is a 4 unit (SFRs have a vacancy disadvantage because once the tenant is out, you’re out the full rent amount, as opposed to multi-units, where if you have one vacancy, you at least have some rent income still available to come in).

3) Miilitary tenants

One of the things that attracted me to Huntsville was, like Jumby said, the fact that BRAC was closing a base in the midwest and expanding operations in Huntsville. There were other aspects to the BRAC report too, because they are moving defense contractors as well as personnel over to Huntsville. So the long term area prospects are good.

I will tell you that I am not specifically targeting military personnel as tenants (and certainly not officers). A lot of investors make the mistake of going after high value tenants (military officers, high income people), and as such buy expensive rental properties as such SFRs. Many investors will buy rental property based on the question, well if I had to live there, what would I like to live in? I avoid that line of thinking entirely because I pursue properties that have cheap rents. Cheap rents allow you to appeal to a huge population of minimum wage earners, vs. having to fight for high income tenants, which are few in number and are chased after by most everybody.

Let’s also remember the “high number” of foreclosures affecting everyone in the country. If Huntsville does go into a situation where there are a lot of foreclosures, forcing owners to rent instead of own, where will they go? WHERE THERE IS CHEAP RENT.

Also another advantage of cheap rent is that you are able to keep vacancies to a minimum.

And lastly:

4) Are the hassles worth it?

Um, let me see, I am able to make an asset which was previously doing jack to all of a sudden generate a 43% return.

I am able to pay ridiculously low taxes even though I have a household income of over $200k.

I’m sure there are others who will pick holes into my investing and will say, well you’re too risky, or you’re a sucker for buying into the real estate makes people rich crowd, or any other comments. And I don’t doubt that this is risky. However, you can minimize risk several ways (as I’ve outlined here) and you can use the factor of time to both make you money and minimize your risk.

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