patrick.net

@GNL,

I wouldn’t call it subsidizing. I’d call it making a bet. Also, real estate investing has a few puzzles. Financing is one of them. Mortgage rate is 6.5% for the average Joe/Jane. For some, it can be in the 4%ish… Also, you have factored in the principal pay down, all deductions that the landlord/investor gets from owning the rental, etc…..In addition, rent tends to go up every year. Some landlords find it acceptable to have 3-5 years of negative cash flow before breaking even.

Now, let’s zoom out and look at things from a macro level. From a historical perspective for my market, not sure about your example, real estate doubles itself every 12 years or so. This means that property should worth $1.5M in 12 years. $150k down payment will gain $750k in equity, about 500% return, not including principal pay down and positive cash flow after year 5, and all the deductions that come with owning rentals, etc….

Did you know that Tesla Model X is tax deductible? That’s over $100k in deduction. iPhone, phone bills are tax deductible. Meals = 50% tax deductible. MacBook, iPad, AirPods, etc….are all tax deductibles to name a few. CPA fee preparation is also 100% tax deductible.

As I mentioned above, financing is one of the puzzles. For full-time investors, we would like to buy value-add deals where we want to be all-in at 75-80% of fair market value. Then we would refinance. What we get is sweat equity with 100% loan amount from the lender. Then let time do the heavy lifting. We also get a lower property tax basis due to buying the property at a depressed price.

Lastly, real estate is about “control and leverage” while let time do the heavy lifting. Our real estate portfolio is $30M at the moment. We have amassed this in the last 8 years. Assume we don’t do anything else, they should worth $60M in 12-15 years….IF history is any indication. That’s $15M for each guy, not including our $10M in sweat equity and principal pay down thanks to our tenants. Each guy should worth over $20M+ for 2 decades of work. That’s about $1M/year. Not bad….

Eman says

GNL,

I wouldn’t call it subsidizing. I’d call it making a bet. Also, real estate investing has a few puzzles. Financing is one of them. Mortgage rate is 6.5% for the average Joe/Jane. For some, it can be in the 4%ish… Also, you have factored in the principal pay down, all deductions that the landlord/investor gets from owning the rental, etc…..In addition, rent tends to go up every year. Some landlords find it acceptable to have 3-5 years of negative cash flow before breaking even.

Now, let’s zoom out and look at things from a macro level. From a historical perspective for my market, not sure about your example, real estate doubles itself every 12 years or so. This means that property should worth $1.5M in 12 years. $150k down payment will gain $750k in equity, about 500% return, not including principal pay down and positive cash flow after year 5, and all the deductions that come with owning rentals, etc….

Did you know that Tesla Model X is tax d...

Hey @Eman, thanks for the detailed response. So, getting started, a person needs to lose money for the first 5 years and then the hope is that he/she will be cashflow positive and the property has appreciated? Does this mean, most likely, that the second property cannot be bought until 5 years go by (I assume the second property is bought using some equity from the first property)?

The cost equation of rent vs buy changed over time when we lost control of prudent monetary and fiscal policy, thereby sending inflation permanently to the stars. As a result, any desireable asset with finite supply will ALWAYS rise over the long run at an accelerated rate...it's economics.

Before this phenomenon, renting was more expensive than buying (as it should be), but policy screwed up that concept. Now, it's all about hedging against long term inflation on our net worth

It’s not my approach, but this is how retailers do it and find it acceptable as they’re too busy making money from their W2. I’ve seen high income earners such as surgeons, doctors and lawyers use brokers/agents to help them invest in commercial real estate and manage the assets.

For me, I’m a sweat equity guy. Without sweat equity and positive cash flow after less than a year, it’s not viable and scalable as I don’t have a W2 to supplement the losses. I need to get my seed capital back ASAP so I can rinse and repeat.

Find what works for you and your risk tolerance and go from there. There are many ways to skin a cat just like many paths to financial freedom. It doesn’t have to be real estate. Real estate is only one of the vehicles to our destination.

A few people I have met in Baja California Sur have rentals and like the 1. absurdly low property taxes 2. rent=unreported income for the IRS 3. AirBNB, etc. easy to advertise with .

My GF here wants me to take some of my money and buy one; when I told her my net worth decreased by $$$ last year she said "Why don't you take some money and buy a house!"
The locals are getting pissed off; foreigners are bidding up prices to rent to foreign tourists, and the locals get priced out.
If I get a place I will rent it to "starving student" females, as a service to the community of course.

clambo says

1. absurdly low property taxes

Low taxes in Cali?

clambo says

2. rent=unreported income for the IRS

Even if they know about it? That does not compute.

@Clambo and @Eman,

Ok, that makes a lot of sense. Yes, this are more than 1 way to find financial freedom. My path is a bit different but real estate is interesting.

@Eman, are you managing all of your real estate? Everything from snow removal to collecting rent?

GNL, I meant Baja California Sur state in Mexico; places like Cabo San Lucas, La Paz, etc. are in this state.

The property taxes are miniscule in Mexico; I think it's about $50 bucks per year for my GF's house for example.

If I had a Mexican place I would have the people pay me cash for rent; that money would be for my expenses in Mexico.

I am not yet a real estate investor; I just bought some JEPI which is paying me a monthly dividend. I haven't put a large amount of $ into it, but it's yield is now 11%.

My other money is largely comprised of stock mutual funds which I love; you can start investing today with $100 at Fidelity and get professional management of your money.

Fidelity even has some "zero funds" which have 0% management fees.

The only reasons I would buy a place in Mexico is to have an escape plan if the arrangement with my GF becomes untenable, and tax aviodable income.

GNL says

clambo says

1. absurdly low property taxes

Low taxes in Cali?

clambo says

2. rent=unreported income for the IRS

Even if they know about it? That does not compute.

Unreported income is tenants that pay cash. You then show a loss on taxes but still had your monthly nut covered and get to write off any expenses put into the property and depreciation.

My biggest beef with residential real estate is dealing with humans. “My sink is broken (that I broke) can you send someone to fix it?” Or “I had to pay to put my dog down and I’ll be short rent this month.”

I’m starting to get the itch to get back into RE but I think it’s going to be industrial and non-retail commercial properties. Think people that have online sites, work from home and need space for inventory not at their home. Like someone that makes wood tables, cabinets, etc. A small sized plumber that can buy in bulk for cheaper and store pipe and material and old water heaters they have to take and recycle. So many businesses need 2k square feet. You can do basic leases or NNN where you just need to make sure they pay the rent to you and taxes. That’s 5 min a month.

You still may get the sob story of business being slow, but you have more recourse as the landlord because it’s business and not housing. Longer leases generally as well. I’m not a people person so I just don’t do well in the residential sector. People are liars and too emotional.

GNL says

Clambo and Eman,

Ok, that makes a lot of sense. Yes, this are more than 1 way to find financial freedom. My path is a bit different but real estate is interesting.

Eman, are you managing all of your real estate? Everything from snow removal to collecting rent?

No snow where we live, which is San Francisco Bay Area. We have a full time property manager for our rentals. You want to be an investor, not a landlord. Landlords get burned out. We also have a full time handyman to help us repair stuff and turnover the units.

The formula is simple, but we need to put in the efforts. It’s like planting a tree, then 2, then 3, etc… A decade later and look back, they’re all bearing fruits. We just have to harvest. It’s the gift that keeps on giving. Rent used to be $1k/month for a 1-bedroom when I started. It’s now $2k. 2 bedrooms used to be $1.2k, now $2.4k.

The best part about this job is that there’s no deadline. No one to report to. I can take off anytime. I put in a couple hours each day to make sure things run smoothly….kind of like watering the plants instead of having to dig, fertilize and plant the tree. One time effort for decades of rewards.

@Eman - as a rental prop owner in the bay area, do you worry about regulatory changes like rent control in particular or any caps on rental increases?
Also, did you have anyone not paying during covid and did you get compensated by the state at some point?
For evictions, do you have a team that takes care of that or do you vet potential renters well enough that eviction is never needed?
RE seems great - but it also seems that there are groups now that really want to limit RE profitability and ability of landlord to control his own property. Agree?
Or are your properties more in the suburbs (east bay) which is less restrictive than say SF?

krc says

Eman - as a rental prop owner in the bay area, do you worry about regulatory changes like rent control in particular or any caps on rental increases?
Also, did you have anyone not paying during covid and did you get compensated by the state at some point?
For evictions, do you have a team that takes care of that or do you vet potential renters well enough that eviction is never needed?
RE seems great - but it also seems that there are groups now that really want to limit RE profitability and ability of landlord to control his own property. Agree?
Or are your properties more in the suburbs (east bay) which is less restrictive than say SF?

@krc,

Yes, we had 1 tenant who fell behind during Covid shutdown. He wrote a letter in pencil with broken English, and sent the letter to our PM company. He said he would pay us back every penny he owes. He kept his promise and paid everything within 3-4 months when things opened up. He’s a blue collar worker.

I own a 4plex in Oakland. I was shocked that all tenants paid through Covid till now. I bought it because it was cheap and on an oversized lot where I could learn about development without holding costs vs. buying land. This 4plex cash-flows like mad. 🤑

Late 2021 to early 2022, a couple tenants “intentionally” fell behind and used the Covid Rental Assistance Program to pay for their rent for like 3 months. We didn’t feel a dent in our operation actually.

We have rent control in both Oakland and San Jose. Oakland is getting stupid with their rent control TBH. City employees are a lazy bunch. It took 2 years to get the project entitled for development, but now I won’t build. I’ll wait and probably sell the 4-plex with approved plans once interest rate comes back down.

Our PM is solid. We have not had 1 eviction from his screening process. We had 3 evictions from legacy tenants during this 8 years. They were being handled by attorney Daniel Paris of Eviction Service Center. Our PM handles this process.

San Jose rent control is not bad. Most of our rentals are around SJSU so we get natural turnovers every 2-5 years and get to reset the rent at fair market. Rent control creates opportunities for investors while it hurts mom-and-pop landlords and retailers. I’m not worry at this point. We all make our bets and live with the consequences.

WookieMan says

People are liars and too emotional.

A friend of mine complains that the renter who is a single AA woman stopped paying rent for the last few months. Now she says that she is being harassed when asked for the rental payments. My friend trying to find options. Hope it is easy to evict in TX which is one of the land lord friendly states. It is one of the things one should anticipate for being a slumlord although there are lot of tax advantages to maximize the gains.
Recently I met a landlord who is leasing out to fast food restaurant chains for 15+ years in Bay Area. He claims that he is getting about 4%. It doesn't look too great unless he is writing off lot of his expenses, (minus inflation!?) etc. Though its low but he is happy as he doesn't need to spend time on it.

Interesting. I was thinking that investing in RE around colleges might be a less risky proposition as there is built in demand.
I was looking around Chico and there now seem to be commercial groups that buy lots and build 50-100 4 bedroom apartments that fully rent out.
Maybe you need to be a bigger player to be in that sort of market.

krc says

Interesting. I was thinking that investing in RE around colleges might be a less risky proposition as there is built in demand.
I was looking around Chico and there now seem to be commercial groups that buy lots and build 50-100 4 bedroom apartments that fully rent out.
Maybe you need to be a bigger player to be in that sort of market.

There are new student high-rise housing popping up around SJSU all the time, but the supply doesn’t keep up with demand. Also, they’re much more expensive too.

We’ve been getting record rents since spring of last year till now. Thought about assembling a few parcels, then do new development, but it’s too much work, money and efforts involved. My partner and I only want to enjoy life now and go at our own pace.

Blue says

Hope it is easy to evict in TX which is one of the land lord friendly states.

Very easy here. However, I've never had to evict anyone and have had some great single AA women as tenants.

My houses are in one of the most popular subdivisions in San Antonio and so I'm able to screen people pretty well just by the higher than average rents.

Blue says

Recently I met a landlord who is leasing out to fast food restaurant chains for 15+ years in Bay Area. He claims that he is getting about 4%. It doesn't look too great unless he is writing off lot of his expenses, (minus inflation!?) etc. Though its low but he is happy as he doesn't need to spend time on it.

@Blue,

Sounds like a 4 cap NNN lease on the asset he bought. 4% is in the ballpark for the Bay Area.

If history is any indication and he gets historical appreciation of 6%, he’s good.

I’ve seen people bought assets in “the path of development” and made out like bandits, or if one is lucky and owns an asset in the path of development.

The price of land changes as the cities change their zoning relating to their “Vision of Future Plans and Development”. Higher density = higher land value. In this biz, I’ve seen people downplay their knowledge while they’re very savvy and calculated with their purchases. Things become apparent once unveiled.

There’s a saying in real estate. Riches are in the niches. I’ve fortunately witnessed this first hand on several occasions myself. I’ve encountered quite a few average Joes called “smart and savvy” people stupid for buying things that don’t make any financial sense. After awhile, I just walkaway. No point of convincing anyone of anything. They’re average for a reason, and the smart and savvy folks are rich and successful for a reason.

clambo says

Today foreigners are sucking up the rentals in droves, making it worse for everyone.

do you mean the americans and canadians in mexico fucking it up for the natives?

Eman says

This is my real estate trustee mentor.

For a minute I thought it was Nicklaus.

komputodo says

Eman says

This is my real estate trustee mentor.

For a minute I thought it was Nicklaus.

I guess you’re referring to Nicklaus the golfer? My trustee sale mentor used to own a golf course. He sold it in 2001 and retired. He learned his trustee sale craft from attorney Ward Hannigan in SoCal.

Ward used to have a forum where his students asked questions and answered anything trustee sale related. I read up the entire forum and the archive. I was going to take the course from Ward ($5k for a one on one weekend coaching). My mentor said let’s have a chat before I sign up. He spent 2 hours 40 minutes on the phone with me, answered all my questions and shared all the nitty and gritty of the trade. I was free to roam after that and call him if I stumbled across any difficulties. 😁

GNL, saw this post on Quora and thought of your post. 441% return since 1987 and 207% return since 2008-2009 housing crash. Apply the ROI by a factor of 4 assuming 25% down payment. This doesn’t include the increase in cash flow over the years. Has rent gone up 3-4x since 1987? Has rent gone up 1.5-2x since the 2008-2009 crash?

The assets bought in 1987 should be free and clear by 2017 if one didn’t do anything with it. What if the owner repositioned the asset a couple times during the ownership to acquire a couple more properties? When doing this in real life, it’s like the monopoly game.

My ROI since the housing crash is not 207% times 4. It’s by a much bigger multiplier since I’m a value add investor. I wanted my seed investment back within 6 to 12 months so I could keep acquiring. It can be a lucrative investment/biz for someone who is driven, dedicated and likes this line of wealth building. It’s like tree planting. One time effort for many years/decades of fruit harvesting.

https://www.quora.com/Is-real-estate-a-viable-option-to-accumulate-wealth/answer/Patryk-Wlodarski?ch=15&oid=1477743634679422&share=3906e9f3&srid=hK5Qu5&target_type=answer