patrick.net

commonsense says

UAVMX says

Whats the agenda?

That is what I am asking. I have no idea but as only one pointed out logical advice to pay down debt and stay out of debt that type of advice appears to always be countered by the opposite. Someone tell me.

In your opinion that's the logical advice, but not everyone's apparently. Instead of criticizing and just saying that's logical, bring some arguments, some facts....actually contribute to the topic. Have you never had debt in your life? Is taking on debt to potentially increase income bad? Explain

commonsense says

And right off today's Patrick.net here is a reality check http://www.sacbee.com/2011/08/29/3868485/generation-of-homeowners-stuck.html?source=patrick.net

I don't see how that applies to my situation...I'm not buying at the top of the market, I have enough money to put a down payment, I'm looking at properties that are well within my means and budget. I'm smart enough to have waited this long when everyone was telling me 3 years ago to buy...then two years ago the prices dipped a little and I was told now's the time...

That's why I posted this, for advice and opinions. I'm not sure what the best path to take is and that's why I'm asking for help rather then just making a decision on a whim and screwing everything I have worked for and continue to work for.

burritos says

Sounds like you have the intelligence to understand mutual funds. My personal opinion is to spread the risk and not try to hit the homerun on one property. Max out your retirement accounts first. 401k/SEP IRA/KEOGH/ ROTH/Traditional IRA first. The tax benefits here are pretty generous. No need to lump sum it, you can cost average it over the course of 2-3 years. I think when the equity at stake for a rental is around 20%-25% of your invested assets, then you should pull the trigger.

I don't regard rentals as investments as they are inflation hedges. What their rent and appreciation does depends loosely on the money supply(inflation) and the local economy. This might be a moment in time where a rental's return might outpace stocks for few or so. But the way I look at it is this, rentals don't get bigger and chase more profits, stocks at least attempt to.

So are you saying that you would never do rentals? Stick to all stocks?

forget buying for now...instead, use your money to pay down or off your sizeable loans, which would be an investment that has GUARANTEED RETURNS in the amount of the interest that you otherwise would pay on those loans. (My advice assumes you would not be penalized for paying down or off either loan early. If you would be penalized, it may not be worth it.)

robertoaribas says

4. Real estate... blah blah blah... 3 or 4% over the long haul... barely better than inflation. Sure. Notice he is talking about buying places that return in rent around about 10%... check your math skills, but if his return after factoring in vacancy and maintenance is say 8%, he kicks the crap out of your historical stock average of 7%, with no appreciation at all. Add in say 2% appreciation over 10 years, and its a home run...

Here's another crucial piece that you're forgetting to conveniently mention. There is a big difference between real estate and stocks in that real estate until the entire bill is paid is a liability. There are way more risks in owning a wooden house versus stocks tied to corporate profits. You can stop putting money into stocks at any time and invest as little or as much as you want versus a house where the bill will unrelentingly be due month after month plus taxes, upkeep, and so on. Also- a 7-8% annual appreciation in stocks is actually a conservative estimate. If you're young enough and willing to stomach more risk you can easily get more like 10%. Then again you should only do that when you're young.

LasVegasREO says

Forget the 7% return on stocks over 100 years, when the US grew from overabudance of natural resources and a home grown manufacturing employment. The last 10 years, 2001 to 2011 shows a stock market total return or 10%, $100,000 in stock in 2001 grows to $110,000 in 10 years.

You are making long term predictions based on short-term results. 10 years is short term. Secondly, if the US economy is indeed 'done' and we're now entering a period of economic decline then I suppose the same should be said about real estate too- shouldn't it? I mean- if we're all gonna' be poor then I reckon the housing market is also done too isn't it? That would mean that the last 100 years was a fluke in housing and that prices will fall right along with rents- if we use that type of logic. Another thing is that while we as a country may no longer be a manufacturing country that doesn't mean the companies that used to make things here are doing badly. In fact an awful lot of US companies are making giant profits... overseas. A huge number of companies based in the US are making as much as half of their incomes overseas. Naturally this means their stock value goes up and as an investor you own part of those profits.

UAVMX says

The other concern with the stock market is right now I see it as being high, higher then where it should be. Also the fear is I KNOW NOTHING about the stock market, what to invest in, how to invest in, etc.....I think there is a lot more risk and I think it's rigged in so many ways.

You don't have to know a whole ton about stocks. I'm not even going to pretend to say I know about specific companies and their profits. The general idea is to paint with a broad brush. In other words- old fashioned mutual funds and 401k's. Sounds so simple it sounds stupid but that's really the case. The way they work is that you can choose different funds. Some will specialize in Asian and emerging markets. All will have a grouping of companies. Others in large cap and some in small and so on. At any given time one or more can be performing badly and others could be performing well. The principle is that people and companies make money all the time and by spreading the net as widely as possible you can catch some of that.

I'm not at all anti-real estate. My parents owned two rentals when I was a kid and to me they were a pain in the ass. I was constantly helping my parents care for these things. Plumbing would leak. We painted the interiors between renters. The lawns had to be mowed. And so on. They netted a small monthly income and when they sold them they made a little money from appreciation too. But its not like they were these magic instant overflowing piggie banks either. The things took a lot of work. On the other hand I have relatives who had ordinary middle class jobs and simply invested in a couple of mutual funds and 401ks who are now worth a couple million dollars. You would never know it meeting them either. They're just plain ordinary folks who didn't do anything crazy financially or try to get into any get-rich-quick schemes.

My financial adviser I think gave me the best piece of advice: Invest in what makes you feel comfortable. If you just want to save cash- do it. If you want to buy houses- go for it. If you want to invest in stocks, well that's fine too. Whatever makes you comfortable and sleep well at night. Either way, as mentioned before you might want to consider contacting a financial adviser of sorts. Good luck.

Earlier I suggested that the first priority should be to pay off the student loan debt, and the car. The first reply to this (I guess from the original questioner?) was, "let's assume noone lives debt free." Are you kidding me? I live debt free. ABSOLUTELY debt free. Debt is slavery. You can get your "debt is slavery" bumper sticker from patrick.net, I think. If you can borrow at 1% or something, well then, OK. Otherwise, you are playing a dangerous game of leverage, the same game that got all the banks in trouble.

UAVMX says

So are you saying that you would never do rentals? Stick to all stocks?

Not at all. I have four rentals of my own. All SFH's 3bed/2.5 baths. All built 2004 or later. They just weren't my first step in asset/wealth accumulation. At the age of 26, that's when I started working and saving. At the age of 34 after having built up a modest account, I saved enough DP for my first rental. The equity however did not exceed 20% of my total invested net worth.

At the same age, I had a negative net worth(60k in student loans). You already have 50k. That's a great start. Unless you're the next creator of facebook or google, saving/paying yourself first(monthly) is a great way to accumulate wealth. Even if you just invested your monthly 401k in cash(though you should really be doing stock mutual funds), depending on your tax rate, you're getting an instant 25% return because of it's deductibility. Then do a ROTH. If you make too much for a roth, do a traditional IRA and convert the previous year's contribution a ROTH this year. Wash, rinse, and repeat. If you're gungho on RE, save 20% of your contributions for a DP for RE. The prices of RE ain't going up for a long time. You've got plenty of time.

Rich4 says

What I think may be really helpful to you is to understand the differences in tax and liability between buying a rental or primary. This is something that has concerned me a little bit.

I'm not going to say I'm in the same boat, but I am older, have paid off all my debts, and am still renting. I haven't purchased any rentals yet (in this area it's difficult because good cash-flow properties are being bought in cash transactions and usually above asking) but have you considered purchasing your properties in a corporate structure and then paying rent to the corporation you own?

What would be the advantages or drawbacks to something like that? Let's assume that the mortgage interest deduction is simply not going to be a factor on a primary residence because prices simply aren't that high.

robertoaribas says

1. You cannot "tax deduct" interest on a primary residence. You can itemize, but at the prices he is talking about, without some other large deductions, the standard deduction is bigger. My primary residence mortgage is 180K, and I don't get one penny of tax savings on the interest for that very reason.

- Good point. I live in California, so my state income tax is much higher than the standard deduction, effectively meaning that i itemize everything by default. In lower tax states, this is not the case.

edvard2 says

You don't have to know a whole ton about stocks. I'm not even going to pretend to say I know about specific companies and their profits. The general idea is to paint with a broad brush. In other words- old fashioned mutual funds and 401k's. Sounds so simple it sounds stupid but that's really the case. The way they work is that you can choose different funds. Some will specialize in Asian and emerging markets. All will have a grouping of companies. Others in large cap and some in small and so on. At any given time one or more can be performing badly and others could be performing well. The principle is that people and companies make money all the time and by spreading the net as widely as possible you can catch some of that.

- great point. diversification is extremely important to reduce the non-systemic risk in any portfolio. Another simple option is to consider picking up index funds. Basically an ETF that tracks a market index such as the Dow, S&P, Wiltshire, etc. it is a security composed of all of the components of the index in the same proportions as that index. ie, it allows you to track the performance of the broad index.

az_lender says

Earlier I suggested that the first priority should be to pay off the student loan debt, and the car. The first reply to this (I guess from the original questioner?) was, "let's assume noone lives debt free." Are you kidding me? I live debt free. ABSOLUTELY debt free. Debt is slavery. You can get your "debt is slavery" bumper sticker from patrick.net, I think. If you can borrow at 1% or something, well then, OK. Otherwise, you are playing a dangerous game of leverage, the same game that got all the banks in trouble.

- debt is a tool. it can be used to hang yourself, yes. It can also be used intelligently as a leverage to increase wealth. In general, it is good advice to tackle high interest rate debt as quickly as possible. It is also important to distinguish between leveraging yourself to buy assets vs liabilities. Most of America leveraged themselves more to buy liabilities - ie. increase my mortgage to buy a new large screen TV or a new BMW. Meanwhile, policy created an environment wherein banks were incented to extend more credit to people in more creative ways, and pass on the risk to the government and foreign investors. the increased leverage increased purchasing power which fueled an asset price bubble, as more money could now chase the same assets. with asset prices rising, it then self reinforced the cycle as more could be borrowed against the "asset". Obviously, this did not work forever. Utilizing debt to purchase assets can actually be extremely helpful in wealth creation. If you can borrow money against your house at 4%, then turn around and invest that money at 8%, you are assuming a level of risk, but potentially reaping the rewards of arbitraging and gaining 4% for the cost of assuming more risk. Important to note, a house is not always an asset (in my opinion, it almost never is). Quite frankly, a house can be a liability as well. If you would rent a 1 br for $1000 per month, but only buy a 2 br for $2000 per month, the house is likely more a liability than an asset. In general, I think it is a dangerous fallacy to demonize debt. Debt is not inherently good or bad, it is people's dangerous use and misunderstanding of debt that is bad.

edvard2 says

You don't have to know a whole ton about stocks. I'm not even going to pretend to say I know about specific companies and their profits. The general idea is to paint with a broad brush. In other words- old fashioned mutual funds and 401k's. Sounds so simple it sounds stupid but that's really the case. The way they work is that you can choose different funds. Some will specialize in Asian and emerging markets. All will have a grouping of companies. Others in large cap and some in small and so on. At any given time one or more can be performing badly and others could be performing well. The principle is that people and companies make money all the time and by spreading the net as widely as possible you can catch some of that.

Thank you for your insight, that was a very helpful post. With mutual funds, lets say I want to pull 20% out for a downpayment. Are there penalties? Is there a certain amount of time you have to hold onto them, etc? Is the fund itself the one that's paying you? Or are your shares being sold on the market to someone else that wants to buy them. It sounds like mutuals are a good way to get very diversified.

Do you own real estate as an investment?

uvafitz says

forget buying for now...instead, use your money to pay down or off your sizeable loans, which would be an investment that has GUARANTEED RETURNS in the amount of the interest that you otherwise would pay on those loans. (My advice assumes you would not be penalized for paying down or off either loan early. If you would be penalized, it may not be worth it.)

no penalties for prepayment on my student loans nor the car. I see what your saying, in terms of the return on that money.az_lender says

Earlier I suggested that the first priority should be to pay off the student loan debt, and the car. The first reply to this (I guess from the original questioner?) was, "let's assume noone lives debt free." Are you kidding me? I live debt free. ABSOLUTELY debt free. Debt is slavery. You can get your "debt is slavery" bumper sticker from patrick.net, I think. If you can borrow at 1% or something, well then, OK. Otherwise, you are playing a dangerous game of leverage, the same game that got all the banks in trouble.

And you've always lived debt free? Do you have an education? How was that paid? I didn't receive a golden egg from anyone, as I said earlier, I've worked very hard. My first loans were gov't loans, around $10k with a good interest rate. My second set student loans were private for $30k dollars at about 16% interest because I had no one to co sign for me. Then I ended up with another $20k in student loan debt. All while working nearly full time to afford to live in the bay area paying all my own bills. In 2 years, those loans ended up increases by about $5-6k in interest. Once I got a job, I consolidated and got a better rate. By the time I was done with school I owed around $61k So, I've paid down $30K or so in student loans in 4 years.... The other debt is a car loan, at $18k is reasonable, not extravagant. I'm not ignorant here, I'm not just trying to get as much debt as possible. I'm trying to take balanced approach.

I feel like some of you are just seeing me as some 26 yr old that is trying to bury himself in debt....I'm trying to make the best move to secure my financial security.

I'm here on this site because I DIDN'T DRINK THE KOOL AID

Rich4 says

- debt is a tool. it can be used to hang yourself, yes. It can also be used intelligently as a leverage to increase wealth. In general, it is good advice to tackle high interest rate debt as quickly as possible. It is also important to distinguish between leveraging yourself to buy assets vs liabilities. Most of America leveraged themselves more to buy liabilities

exactly! Thank you, that's what I'm trying to get at, but you've said so eloquently. But others just want to attack.

cc0 says

I'm not going to say I'm in the same boat, but I am older, have paid off all my debts, and am still renting. I haven't purchased any rentals yet (in this area it's difficult because good cash-flow properties are being bought in cash transactions and usually above asking) but have you considered purchasing your properties in a corporate structure and then paying rent to the corporation you own?

What would be the advantages or drawbacks to something like that? Let's assume that the mortgage interest deduction is simply not going to be a factor on a primary residence because prices simply aren't that high.

I have considered it, but I must confess I am no expert here. my first thoughts are that the drawback is likely a higher interest rate, expense of setting it up and maintaining the corporate shell, and potentially more difficulty getting financing. The advantages could include the ability to write off many more of your expenses from a tax perspective, and for me in particular, when i move up to a bigger house it would then be very straight forward to maintain the same financing structure and convert it into a rental. I am dying to talk to a professional about this though, in terms of the cost comparison, and how to go about doing it properly.

That's not how it's typically done.

Have you researched all the costs associated with it, all the work you'll have to put into it being a land lord? All the laws and regulations? Don't gamble. All that late night tv talk is just there to sucker you into buying their cd/book.

double post

FortWayne says

That's not how it's typically done.

Have you researched all the costs associated with it, all the work you'll have to put into it being a land lord? All the laws and regulations? Don't gamble. All that late night tv talk is just there to sucker you into buying their cd/book.

Quality Auto Repair Since 1979

can you elaborate? Whats not how it's typically done? Don't gamble? Aren't all investments a gamble, isn't that how you acquire wealth? Please then, what path should I take?

again, to reiterate. I'm not talking about going out and buying a $400k home for a rental, getting buried in debt etc etc....

The "rental" in question would be around $80k. On an $80k rental, tell me what you would expect your total costs associated to be? And again, the area's rents go for $1000 - $1400/month. Taxes are 1.2%

UAVMX says

Thank you for your insight, that was a very helpful post. With mutual funds, lets say I want to pull 20% out for a downpayment. Are there penalties? Is there a certain amount of time you have to hold onto them, etc? Is the fund itself the one that's paying you? Or are your shares being sold on the market to someone else that wants to buy them. It sounds like mutuals are a good way to get very diversified.

Do you own real estate as an investment?

You're quite welcome. I can't say for 100% sure for all funds but its typical that if you do put money into 401k's, mutual funds, etc that there are usually stiff penalties for pulling anything out. So its generally not a good idea. There are details that pertain to each fund. It would be best to consult with people who sell these funds. The way they work in general is that you can buy either one or several mutual fund products. These are all packaged, sliced, and diced in a zillion different ways with different levels of risk and types of companies. These are all rated via their past performance on sites like morning star that shows how well they have performed per name of mutual fund. But there is really no way to determine how well a fund will do. These ratings give you some sort of guesstimation.

Here's the thing: It is generally recommended that the average person commit 10% of their income into retirement funds. The earlier you start the more chances you have to reap the rewards of compounded interest because most of your overall value will come much later- as in in 20-30 years when you start having 7-10% increases in large sums of money then the total value begins to accumulate at an accelerated rate. So let's imagine that you did the bare minimum and invested 10% of your income. You mentioned you made $100k a year. So then that works out to be $10k a year. By the time you were 36 you would have 100k in retirement funds. generically applying the long-term historical return to that sum, 100k with 8% annual appreciation means that 100k =108k the next year, 116,000 the next year and 125,000 the next. So in other words things start to compound fairly quickly. But then keep in mind this is over the long term- as in 20-40 years. Yes, there will be doldrums. There will be prolonged periods of meager growth. Its more or less controlled betting but the odds are fairly good in your favor. Like I said- talk to a financial adviser because I'm a mere plebian on the internet.

I don't own real estate primarily because I live in the Bay Area where starter homes are 4 times as much as a nice house back in NC where I'm from. I grew up with rental houses that my parents owned and even though I'm not saying I won't consider rentals in the future right now the idea doesn't sounds appealing after having dealt with my folk's rental properties all while growing up. At some point we will probably move to a cheaper area and just buy something straight up. We're in our early 30's and also make fairly good 6-figure incomes. We've simply been saving and investing for around 7-8 years in preparation for a move and to locations that will probably not have as good of job prospects- hence why we're saving as much as possible so we could buy a house and have no debt which would put less strain on us financially in case we do have to do something else for a living.

edvard2 says

I can't say for 100% sure for all funds but its typical that if you do put money into 401k's, mutual funds, etc that there are usually stiff penalties for pulling anything out.

Hmmm, okay, so I guess the money that I would be putting into the stock market I have to consider it not available...not liquid. I do want to put some into something that's liquid now, so I can "hopefully" make money on it to use towards a DP.
edvard2 says

Here's the thing: It is generally recommended that the average person commit 10% of their income into retirement funds.

Well, Like I've said, I'm 26, I already have over $60k in retirement (401k and pension. I could have had 100k, but again, I do a balanced approach of paying off debt, building my life (furnishing a home, hobbies, etc

I tend to be around 10%, but again, I wanted to save up $20k in cash for emergencies so it hasn't always been that much (that's just sitting in a 1% account right now) Some of that would be nice to invest. That's about 6-8 months of expenses, which is probably more then needed.

UAVMX says

Does that include owning the property outright, collecting the positive cash flow and having the 100% equity that you can use, or sell the house, etc? The thing that entices me about real estate is that it would be not only a cash flow, but a long term savings account that someone else is paying.

That only matters if you get adequate return on equity. If not, you're taking a risk that may not be justified by the risk/reward curve, and you'd be better off in another investment. Simply being cashflow positive is a naive way to look at an investment.

UAVMX says

But then what do I do with my money in the mean time until prices come down to where it needs? I would need something more liquid, and my 1% ING account is doing me no good...

Why is buying a rental property better than the other choices?

cc0 says

but have you considered purchasing your properties in a corporate structure and then paying rent to the corporation you own?

For what purpose? Why would you pay rent to the corporation? How would the corporation get financing? Chances are that you'd still need to personally guarantee the loan.

UAVMX says

With mutual funds, lets say I want to pull 20% out for a downpayment. Are there penalties? Is there a certain amount of time you have to hold onto them, etc? Is the fund itself the one that's paying you? Or are your shares being sold on the market to someone else that wants to buy them. It sounds like mutuals are a good way to get very diversified.

You should learn more about this.

One question I have, however, is that if you are concerned with pulling 20% for a down payment, why wouldn't you put those funds in something safer than stocks or rental housing? Shouldn't you put it in a savings instrument?

UAVMX says

Hmmm, okay, so I guess the money that I would be putting into the stock market I have to consider it not available...not liquid. I do want to put some into something that's liquid now, so I can "hopefully" make money on it to use towards a DP

you can borrow from your 401k for DP on a primary. you can borrow up to 50% of the value of the 401k and you have to pay it back over 10 years (to yourself). there are stiff penalties for a withdrawal, but borrowing from yourself for a DP is not a withdrawal. stocks are completely liquid. you can buy and sell whenever you want. There are however tax implications of holding for less than or more than a year, and there are the longer term thoughts about whether it is a good time to buy/sell or not. Mutual funds may have penalties for early withdrawal as well, which is why i suggested ETFs. they are basically a stock you can buy or sell whenever you want, that are basically a slice of a much broader portfolio (kind of like taking a mutual fund, and selling shares on the stock exchange). Also, as I mentioned earlier, you can get a brokerage account with Margin that will allow you to borrow money against the stocks you hold. I would not recommend this unless you really know what you are doing (and I'm sure some here will rage against the idea), but it is another liquidity option available when investing in equities. It makes sense for me as my portfolio throws off significant cash flows, I want to sit on the equities for longer to benefit from appreciation, and my personal cash flows can quickly repay it. as a young person like yourself with good income, I have less saved up due to less time working, but a very strong cash flow to play with.

corntrollio says

Why is buying a rental property better than the other choices?

That's what I'm trying to determine. This topic started out if it made sense to buy a rental before a primary...but now it has turned into more of "what approach to invest" which is fine, and great. It has really opened my eyes.

The one thing that entices me (more then stocks) about a rental property is having some additional monthly income (if done properly). And as mentioned before, its taking on some debt in order to make more money (if done properly)

corntrollio says

You should learn more about this.

I'm trying!! I'm really a person that researches the HELL out of everything. Every purchase, every move I research. Thus, why I'm here debating this out loud. Where and how do you recommend I can research more about stocks/mutual funds, etc?

corntrollio says

cc0 says

but have you considered purchasing your properties in a corporate structure and then paying rent to the corporation you own?

For what purpose? Why would you pay rent to the corporation?

That's my question. Why would you pay rent to a bank(/mortgage)? If you own the property, you pay taxes and improvement costs. If you rent the property, those are corporate expenses. The rent ultimately ends back up in your pocket, minus income taxes, but surely you could lock yourself into a 50 year fixed lease at reasonable rates.

corntrollio says

How would the corporation get financing? Chances are that you'd still need to personally guarantee the loan.

Assuming you get a loan. Financing is rather immaterial as to whether or not the idea is fundamentally sound.

UAVMX says

Where and how do you recommend I can research more about stocks/mutual funds, etc?

Maybe something like Bogleheads. There are plenty of places to read about the basis of mutual funds. What you're asking are very basic questions and you need to understand more before asking more questions.

UAVMX says

The one thing that entices me (more then stocks) about a rental property is having some additional monthly income (if done properly). And as mentioned before, its taking on some debt in order to make more money (if done properly)

If done properly means you get sufficient return for the risk. You should look at something like Mr. Landlord or other online resources regarding landlording. The participants on Mr. Landlord tend to want 10% return, including all costs.

cc0 says

That's my question. Why would you pay rent to a bank(/mortgage)? If you own the property, you pay taxes and improvement costs. If you rent the property, those are corporate expenses. The rent ultimately ends back up in your pocket, minus income taxes, but surely you could lock yourself into a 50 year fixed lease at reasonable rates.

Your question is incoherent. What mechanism are you suggesting here to buy a property through a corporation?

Are you suggesting that you adequately capitalize a corporation, then you purchase a house through the corp, and then you rent the house to live in personally through the corporation? Why would that help you get a 50-year lease? You're not making any sense. If you have a coherent deal structure in mind, please describe it.

Read somewhere (can't find the article now) that rental costs (insurance, repairs, vacancies, taxes, etc) typically eat up about 40% of your monthy rents on the long timeline. So if you're collecting $1000/month, you actually have $600 to pay a mortgage.

Others who actually have rental properties please feel free to chime in with their experiences here.

Some folks try to argue that their costs are lower, but that's because they are doing lots of the work themselves (maintenance, finding renters, etc). Calculate the hours, and calculate the income, and many part-time landlords find they are working for less than minimum wage. They're betting solely on property appreciation, which is probably dead for a while. They would have been better off working at McDonalds.

If you're thinking strategically (and I think you are), you must account for the value of your time. Your goal is not to work as a property manager, your goal is to have LOTS of properties with others managing them for you. So build in the cost of hiring real workers (even if you do it yourself initially) when planning how much you're willing to pay for any given property. It sounds like the properties you describe do indeed cashflow, though maybe not quite at the rate you were hoping.

UAVMX says

Hmmm, okay, so I guess the money that I would be putting into the stock market I have to consider it not available...not liquid. I do want to put some into something that's liquid now, so I can "hopefully" make money on it to use towards a DP.

I can't be 100% sure but after looking around there tends to be less of a penalty for selling your mutual funds. On other hand there is generally a stiff penalty for withdrawing from 401ks and Roth IRAs.UAVMX says

Well, Like I've said, I'm 26, I already have over $60k in retirement (401k and pension. I could have had 100k, but again, I do a balanced approach of paying off debt, building my life (furnishing a home, hobbies, etc

If you have 60k now then you're well on your way and truthfully in better shape than most Americans. I believe the last time I looked the average boomer has less than 40k saved at this point- which is really... really... bad because at that point they basically can't retire. If you continue as you are doing PLUS you have a pension you should be ok.

My Mother also has a pension and will give her around 40k a year. That doesn't sound like much but assuming she lives from age 60-100 that works out to be around the equivalent of having saved 1 million dollars. If you can absolutely totally count on your pension than that's a great thing in the grand scheme of things.

I have about the same amount as you in retirement. My wife is more the heavy investor and has several times that amount in funds. On the other hand I am fairly cash-heavy because that will be used for a future primary residence. So we too are trying to be balanced in our financial situation. Our goal is to limit ourselves to financial liability and avoid all debt if possible. Some people would say that saving lots of cash is totally stupid. But like I said before- its whatever makes you feel comfortable. If buying rental property is what makes you feel the most at ease and you're able to turn an income out of it then that's just as good a choice as others.

You'll have to make these decisions yourself because all of us on here have our own opinions- which are just that- opinions, and you know what they say about opinions...

corntrollio says

Are you suggesting that you adequately capitalize a corporation, then you purchase a house through the corp, and then you rent the house to live in personally through the corporation? Why would that help you get a 50-year lease?

Sure. I'm assuming you have multiple rental properties but one would do. The corp purchases the house in cash, you pay $5000/year in rent, collect the depreciation, and write off any taxes and improvements (assume cost is $5000/yr). Corp's income is $0 and you get new flooring every year with untaxed money. Or, if you have two properties, you can pay $2000/yr in rent and pay for improvements with the $3000/yr income from the other property, netting profits of $0.

The simplest scenario as an example is probably: you own 100 properties in the corporation and live in 1 of them. Maybe you pay $20/mo on a 50 year lease; maybe you don't pay rent at all. I don't know. That's what I'm asking ... pros/cons of doing that instead of buying a primary residence.

edvard2 says

I can't be 100% sure but after looking around there tends to be less of a penalty for selling your mutual funds. On other hand there is generally a stiff penalty for withdrawing from 401ks and Roth IRAs

Yeah, I'm aware of the penalties on 401k, etc.Drone says

Read somewhere (can't find the article now) that rental costs (insurance, repairs, vacancies, taxes, etc) typically eat up about 40% of your monthy rents on the long timeline. So if you're collecting $1000/month, you actually have $600 to pay a mortgage.

That's really interesting, but I would like to see some data to back it up. That would play a big part of the equation. Or some first hand NO BS information from landlords on this site.

Also, when doing all these equations stocks vs RE....I think the aspect that gets overlooked: that for my intial lets say $10k investment (on an $80k house....I'm not only getting cashflow (return, again if the numbers work) but the rest of the mortgage is being paid off....not by me, so you end up with lets say in 30 years a $150k that appears....off your $10k down payment, right? That's not looking for an insane amount of appreciation over time. Or is the argument that because RE follows inflation historically, that $150k, is really equivalent to your original $80k mortgage. So $10k investment over 30 years is really only netting you (not including cash flow over the years) $80k. That still works out to 12% right?

cc0 says

That's what I'm asking ... pros/cons of doing that instead of buying a primary residence.

So basically you don't know anything about this structure (or even if it's plausible), but you're making up some weird deal structure and asking us if it's plausible? Ask your accountant or lawyer, especially since you don't seem to know anything about depreciation, capitalizing expenses, corporate tax, passive activity rules, etc.

Improvements are capital expenditures, not expenses. They go into your basis.

Maybe you can even buy a unicorn with your rental income through the corporation so you have 0 income!

corntrollio says

So basically you don't know anything [...] and asking us if it's plausible? Ask your accountant or lawyer, especially since you don't seem to know anything [...]

Maybe you can even buy a unicorn with your rental income through the corporation so you have 0 income!

Well, on this point I'll agree with you: If you're looking for information or advice, don't look here.

Thanks

I had to skip down and comment after reading about half of this thread. I've seen some good advice and some horrible advice. I'm a 10 year mortgage broker and a 13 year real estate (mostly single family homes) investor.

First, for those comparing the return on the stock market of 7-8% to 3-4% for homes they are leaving out critical information. UAVMX you hit it on the head when you said "some debt can be good". Fixed interest rate debt at 4.75% when you can get a yield of anything above that is what they call being "positively geared" and that is a very good thing. For instance say you buy a house for $100,000 and put $25,000 down (25% is the amount you will want to put down to get the best fannie/freddie loan interest rates possible). If that house goes up by 3% and the value goes to $103,000 was your yield 3%? No it was 12%. That is because your equity hasn't gone from 100 to 103 but rather has gone from 25 to 28 for a 12% return. This number, while theoretical, blows away the stock market returns of 7-8% mentioned (which are unlikely going forward anyway).

Now don't get me wrong appreciation of the property is not the most important way that you can profit, actually it is the least important. The first area of profit in real estate is in the cash flow it brings you. If you rent your hypothetical house for $1,000 and use my rule of thumb of 1/3 of rent towards costs, then your yield on the property will be 8%. (2/3 of $12,000 is $8,000/year). Thus if you can leverage at any mortgage rate of less than 8% you should definitely borrow. I'll let you calculate what your "cash on cash" yield is using $25,000 down and $8,000 profit a year (don't forget to subtract interest!). The second area you profit is the forced savings of paying down the mortgage over time. Only after these two areas should you calculate or think about appreciation.

Regarding the loan you will want to put 25% down and get a 30 year fixed rate loan. On your first purchase only a few banks will let you count rental income on the property towards qualifying. It sounds like with the money you make income won't be your problem. After you show the income on your tax return for even 1 year then the vast majority of lenders will allow you to count the income towards qualifying for another loan (whether it be another rental or a primary residence purchase).

Regarding paying down your other debt. Not in a million years should you pay down student loans that are at 2% when you are borrowing at 4.75% on a mortgage so that you can make 8% yield on a property. Borrow low invest high people. Think of your wealth as a big water resevoir on a hill. Your job to become wealthy is to build pipes in and out of your tank. You want small slow pipes going out (interest leaving) and big fast pipes coming in (interest you are earning). They are two sides of the same coin. Now if you were carrying credit card debt at 14% annually what should you do? That's right pay it off. IT IS THE RATE/YIELD THAT MATTERS. It is all that matters. Repeat that to yourself 100 times and you'll go far.

Read RobertoAribas note up towards the top of the page, he got a lot of stuff right. One thing he got wrong is that not every expense is deductible on a rental. Things that last more than a year are to be capitalized and added to the basis which increases your depreciation but can't be expensed in the first year. Still recent rules have allowed accelerated depreciation. Just know that as good as the investment your looking sounds, it's likely even better as your income will be tax advantaged as most of it will be sheltered by the "phantom" deduction of depreciation. If you are making 6 figures and you have excess depreciation you won't be able to deduct it against your ordinary income. However, with the numbers you are talking about it is unlikely that you will have much depreciation left over as what you have discussed sounds pretty high yield to me.

Here's some rules of thumb to make you rich: 1) Don't pay more than 100 GRM (Gross rent multiplier) on a property. If you can do better great. This means that if it rents for $1400/month you want to pay no more than $140,000. The less you pay obviously the better. 2) Bigger properties will have higher yields. Some expenses like fixing a toilet, closing costs, eviction fees, ect are the same no matter how much rent you are getting. Thus they are a smaller expense relative to your income the more income you are getting. Also for the work you will have to do you want more absolute return for the time you will invest.

From the questions you've asked I think you are well on the right track. Good luck with property investing. Last bit of advice is to try to buy so many you can hire a property manager. Managing rental property sucks! Once you can outsource that job you will have a lot more fun!

cc0 says

Well, on this point I'll agree with you: If you're looking for information or advice, don't look here.

Answer me this: If this is such a great idea, why doesn't everyone do this with their primary residence?

Where'd you get the idea and why do you think improvements would work as you suggest? Your idea seems to hinge on buying properties cash, for one thing.

I will not ever, never, rent out a house without a professional property manager. If you can't figure in the 10% fee in the equaqtion, don't due it. I also recommend home warranty for all the appliances, another expense that can keep you from losing $4000 on a replacment AC.

I would call the property manager's in the area I am thinking of investing, and ask them what the best rent return is for the price of the house. In Las Vegas, the best return is a 3 bed, 2 bath single story which sells for $90,000 and can rent for $1000 a month.

BrettB says

This number, while theoretical, blows away the stock market returns of 7-8% mentioned (which are unlikely going forward anyway).

Again- using short-term performance as a metering gauge for future long-term performance, ignoring 100+ years of data isn't an accurate means to judge performance. I'll repeat: 10 years is not long term. Historical performance clearly shows that stocks will perform much as they always have. For a perfect example of this read the lower part of this post.

I can just as easily make the argument that since the 90's the housing market has been completely based on irrational, artificial economics. Most would probably agree to that degree. Thus its much more likely safer to bet that stocks will continue to perform much as they have for the past 100+ years versus assuming real estate will perform like it did for the short 15 year span it did compared to the previous 90 years where it barely eeeked out a 2-4% appreciation. Meantime real estate for all practical purposes has barely budged since 2006. We're going on 6 years into the bust and nothing has happened. Thus I can sit back and with more confidence state that the housing boom- or bubble- was a total fluke and any form of reliance on that kind of performance is unrealistic. Hence a more likely scenario of a return to historical norm- which is a good thing.

On the other hand I'll use my other point which is that let's take away the names of the investment for a minute. Let's us pretend you bought 2 things. Now one item lost 45% of its value fairly quick while the other began a slow and steady decline, eventually stopping at a 30-50% total loss in value. The first item dramatically fell but then was back up close to its original value in 2 short years. If you had picked the first one that is precisely what happened with the stock market. At one point the DOW was kissing the 6,000 mark. After all that calamity with everyone panicking and wringing their hands its approaching the 12,000 mark.

let me put it this way: If you had bought a house in 2005- or at the peak, how great would it be is as we speak that house was right now back to its 2005 value? It'd be fantastic in fact but the reality is that home values have fallen and have stayed down for years and will probably stay this way for a prolonged period.

You want to know who's making a ton of money right now? Its all those stock investors that bought the crap out of stocks when they were falling in value- when things were seemingly at their worst. Those are the folks who didn't panic, looked at historical averages, and bought up some low priced investments.

But either way, this has been talked exhaustively. People invest in what they feel comfortable with. That's all there is to it.

Over the long haul, nothing beats owning hard assets such as real estate. But you must hang on for long term, through good and bad times. But if you want quick profits, there are a lot of other ways that are easier.

cc0 says

Sure. I'm assuming you have multiple rental properties but one would do. The corp purchases the house in cash, you pay $5000/year in rent, collect the depreciation, and write off any taxes and improvements (assume cost is $5000/yr). Corp's income is $0 and you get new flooring every year with untaxed money. Or, if you have two properties, you can pay $2000/yr in rent and pay for improvements with the $3000/yr income from the other property, netting profits of $0.

I don't think you know what you are talking about. If you don't show profit in a few years IRS will come down on you very hard. It's worse than dealing with the Board of Equalization.

UAVMX says

can you elaborate? Whats not how it's typically done? Don't gamble? Aren't all investments a gamble, isn't that how you acquire wealth? Please then, what path should I take?

again, to reiterate. I'm not talking about going out and buying a $400k home for a rental, getting buried in debt etc etc....

The "rental" in question would be around $80k. On an $80k rental, tell me what you would expect your total costs associated to be? And again, the area's rents go for $1000 - $1400/month. Taxes are 1.2%

No, gambling isn't how you make money on a long term commitment. Long term you should invest, short term is where gambles are.

You wouldn't go out onto a street pick a random woman because price tag looks all right and marry her with no information about her. Same with housing, it's a huge commitment, not something to gamble on.

Too many unknowns there man, you really need to put research into how much your specific property will cost you, how much work will it take to keep it running. How much rent you can collect, budget for times when it won't be rented out at all, falling apart. Management, unless you'll do it yourself.

Look, if it was easy money everyone would do it. It's not something you jump into because some jackass on late night tv told you it's an investment. Especially when you are looking to buy in an area you know nothing about.

BrettB says

If that house goes up by 3% and the value goes to $103,000 was your yield 3%? No it was 12%. That is because your equity hasn't gone from 100 to 103 but rather has gone from 25 to 28 for a 12% return.

that's what I think a lot of people are missing...is how much you actually put down is your investment.

That'BrettB says

Regarding paying down your other debt. Not in a million years should you pay down student loans that are at 2% when you are borrowing at 4.75% on a mortgage so that you can make 8% yield on a property

My student loans are at 6% fixed....car loan is 3.9. That would eat into essentially any investment I make wouldn't it? But again, some cash flow would help pay it down faster.

BrettB says

The second area you profit is the forced savings of paying down the mortgage over time. Only after these two areas should you calculate or think about appreciation.

This is also something I was trying to bring up that I think people don't see or account for. But how do you calculate that into the equation?

Again, with the people arguing the peek of RE, and lack of appreciation...I COMPLETELY agree. I don't see RE ever jumping like it did again. I'm not looking at this as a short term, gain as much as possible. I'm looking at is as a long term, don't really care about appreciation, more about the cash flow and forced savings.

I guess we need to actually crunch some numbers to work this out....I will put together a quick spreadsheet.

Okay, crunched some quick numbers. Tell me what I'm missing, or how to adjust it.

Property in question (never seen it, but use it for this example)

http://www.redfin.com/CA/Victorville/15134-Luna-Rd-92392/home/4151464

Purchase Price $80,000
Closing Costs @ 1% $800.00
Downpayment @10% $8,000.0
Net Mortgage $72,800.0
Monthly Income (min) $1,000

Monthly Annual
Mortage @4.75 $379.76 $4,557.12
Insurance $63 $750
Tax at 1.2% $80.00 $960.00
Maintenance @ 2% $133.33 $1,600.00
Lost Rent, 1 month $83.33 $1,000

Expenses $738.93 $8,867.12
Income $1,000 $12,000

Net $261.07 $3,132.88

Again, this is more of the worst case in terms of rent (could be more like $1200 -$1400. And using 2% as maintenance (which I would do most of it myself at least to begin with)

Also, if you calculate in a property manager at 10% (which is probably high, that would reduce it another $100 a month. So not an amazing cash flow, but in the worst case scenario, it's there.

Heres a link to a rental for $1200, similar size house

http://inlandempire.craigslist.org/apa/2564721009.html

And to go a little further, looking at it with 30 year's of owning and assuming NO appreciation in the house value

30 year cash flow $57,986.40
house owned outright $80,000

total $137,986.40

If my downpayment was $8000, how do I calculate my return on investment?

This is including the 10% management fee for the entire period. (its on my excel sheet, not sure how I can upload it for people to play with it)

http://www.money-zine.com/Calculators/Investment-Calculators/Return-on-Investment-Calculator/

According to this, my ROI would be

Return on Investment (%) 1862%
Simple Annualized ROI (%) 62%

UAVMX says

http://www.money-zine.com/Calculators/Investment-Calculators/Return-on-Investment-Calculator/

According to this, my ROI would be

Return on Investment (%) 1862%

Simple Annualized ROI (%) 62%

Exactly. Go buy now or be priced out forever before your ROI turns from 1862% to a mere 1% per year. All of us are total idiots out there, when we can be making 1000%+ ROI we instead do everything else. But all there is to being rich and happy is simply buying a house, it's a free credit card.

FortWayne says

UAVMX says

http://www.money-zine.com/Calculators/Investment-Calculators/Return-on-Investment-Calculator/

According to this, my ROI would be

Return on Investment (%) 1862%

Simple Annualized ROI (%) 62%

Exactly. Go buy now or be priced out forever before your ROI turns from 1862% to a mere 1% per year. All of us are total idiots out there, when we can be making 1000%+ ROI we instead do everything else. But all there is to being rich and happy is simply buying a house, it's a free credit card.

Quality Auto Repair Since 1979

how about instead of sarcasm, some input into the numbers and what/where doesn't it work? Obviously that number doesn't seem correct, so what am I missing?

If you put $8000 into a down payment, and all your costs are covered by the rent, and it thirty years you have ended up with that cashflow (on the conservative side of the numbers) and house paid off....What's your return? what are the other costs? I guess you could also include taxes on your income, but that shows up for any investment

I think you might want to do some research into seeing if there are indicators about how long it takes to rent out a piece of property in your area. For example the house we rent in the Bay Area sat empty for almost 4 months before we signed the lease. There's a few down the street from us right now that have been vacant for a month or 2. So in other words what would the cash flow scenario be if this were the case and you didn't have any income on these for who knows?- 2,3, or 4 months or more. That isn't to say you won't get lucky and find renters each time every time. But its a realistic possibility as well.