Real Estate Investment

[surveyor]

Tennessee

I’ve heard good things about Tennessee’s real estate market. It’s getting decent appreciation, and there are a lot of good cash flow properties there. ROE’s are running about 30% to even 40% in some properties (which are usually not SFR’s or condos). Even if you run the numbers from the properties listed on loopnet.com, you’ll get 25% ROE’s. I’ve seen cost-per-units there from $30k to $60k. If I had some extra money, I would have bought in Tennessee. Alabama has cheaper properties but the demographics make raising the rent difficult. Tennessee has more room to grow in that capacity.

As for the real estate work, it’s hard the first year or two, and it certainly puts a lot of demand on your time. There are a few people I’ve tried to inspire to get into real estate investing, but they’re the complete opposite – they are way too negative and they see the difficulties instead of the future rewards. For anybody who is curious about it, I would say they should look into it sooner rather than later. In real estate the most important thing is time.

[surveyor]

optimal conditions

By optimal conditions, I mean:

1) You can handle the cash flow (if negative). It is ok to buy a property for appreciation if the cash flow is negative. However, you just have to realize that the location of the property gives you that feature. If you can’t handle it, buy something that cash flows more or go buy in a place where the cash flow is positive. There are also locations in the U.S. which have terrific cash flow but their appreciation is actually negative (the rust belt). You can mix and match properties in order to diversify your real estate holdings.

2) Property is economically rented (meaning that the tenants in there are actually paying rent, not just in there to give the illusion of being fully rented).

3) Per unit cost does not exceed $175k (the lower the better!)

4) Not in a bad neighborhood!

5) Timing the market (if you buy at what you perceive to be a good time to buy into the market).

6) Investor capital. If there are a lot of investors buying in the area, avoid! For example, there was a lot of investors buying in Arizona and Florida and they propped up the prices. If I know a huge amount of investors are going there, I tend to stay away from it.

7) YOUR WIFE. You will need to gauge your wife or significant others’ risk tolerance. You do not want to all of a sudden find yourself facing an angry spouse asking “why did you buy this property?”. If you think your wife might find it too risky, either educate her or buy a “safe” real estate investment.

I’m sure there’s more but that’s all I can think of.

[HLS]

Lenders still only allow 75% of market rent when factoring income.

With 20% down, Full Doc, 30 YR Fixed, Fully Amortized, Credit Score above 680, Loan amount below $417K for one unit, today’s rate for investment property is 6.50% with a cost OR 7% at no cost.

With 25% down, you can get that rate closer to 6.25%

Conforming loan limits are higher for 2-3-4 units.

For Stated Income, Rates are 6.625%-6.75%, depending on credit score. 700+ gets you the lower.

It’s still a matter of qualifying.

I wouldn’t buy a property “expecting” any appreciation.
I’d want that to be the bonus. Sticking with around 125X monthly rent makes sense, but condo HOA’s can be a poor long term investment, as the monthly fee grows and mandatory assessments show up, and you have little control.

[NotCranky]

Surveyor’s style is the “thinking man’s way” and probably what appeals to most Piggington’s. I haven’t heard mention of any blood, sweat and tear techniques…Improving the rental capacity/productivity of properties(which in theory also compliments any appreciation). Being that the cost of doing these things is rediculous and our region is still overpriced , San Diego is not currently a good candidate for this. However in time it will be. It is a much a fundamental as the rent vs buy and wage to price relationships. In the past people have done well with this style even when paying for all or most of the labor. I won’t guarantee this is going to happen again, because SD might defy the fundametals that existed pre-boom(I learned to add that from Rich,LOL).Anyone intending to do this surveyors, way or the blue collar way, in the market they live in really would do themselves a huge favor by getting a RE license.

A third and easiest way to become and investor for first time buyers is to time the market and buy much less than you can afford with an eye for it being a good rental property in the future, live in it until the numbers crunch and buy another. Your’s truly did this and so have a few of my friends. I really recommend this to young people who are not huge income earners or who don’t want to work forever, yet want a good start on a balanced portfolio. If you know , or want to learn rehab/construction work that is an added plus.

[Vishon]

I started thinking about this topic after considering my home ownership situation.

I am currently renting and saving up for a home purchase. It occurs to me that after the market stabilizes, I could put the savings into a nice home costing $500k, or buy something less expensive and buy another condo as an investment property.

The latter makes more sense to me…

[HLS]

The reality is that people who DON’T think like this may keep the market from getting to where it ought to go.

People who think that 200x monthly rent is worth buying will pay more than others think they should.

The big question is will there be enough of them willing to pay closer to 200x+ to support the avalanche. There will be plenty of buyers willing to step in at the lower factor.

Time will tell.

[HLS]

VISH,
It’s all about leverage….

At the right time, it makes more sense to buy 5 properties with 20% down on each than to pay 100% cash for one property, assuming that you can deal with the risk and carrying costs.

Many people have a pile of equity, and sleep soundly every night. They could have made 500% more.

You can reap rewards OR double your losses, depending on your timing.

Past history has shown that the magic of leverage in real estate is no secret. There is no guarantee that will continue, although most people seem to think that it’s a sure thing, but it isn’t.

[NotCranky]

Vishon,

Good for you. A friend of mine always says,” it’s not the little decisions that count, it is the big ones”. That is a big one.

[surveyor]

more notes

I think everyone here knows how people will often invest in things that they have little to no knowledge about. I have come across real estate investors who can’t even tell me how much cash flow their property makes or are shocked to find out that they have to calculate depreciation!

So I think that by using the ROE calculation above, you can at least have a better idea on how to evaluate properties as to their potential using real numbers and realistic expectations. Collect and analyze the numbers, see how hard the money works for you, and then choose whether or not to invest.

[HLS]

I think everyone here knows how people will often invest in things that they have little to no knowledge about.
***********************
It’s safe to say that the stock market is EXACTLY that…

Some day when there are few buyers, people will quote the prices at the peak, wanting to hold on until they break even, cuz they don’t wanna lose money, as the market falls much quicker than housing ever will.

Classic example of a legalized pyramid scheme, with the vast majority of players having no knowledge….

AND no chance of a govt bailout !

[Author]

Posts