When do you know its time to buy?

Question

So after this deployment I will have some heavy cash set aside. I have managed to do a good job keeping my debt low. I have a truck payment, and two mortages, one mortage is currently renting and Im making $350 a month profit off of it...So really I have my Primary mortgage, and my truck payment.

My plan was to pay off that rental and then receive 100% of the profits every month, minus taxes and insurance. If felt this would give me a better foundation for my rental empire.  But now after reading a lot of the post on BP, I have realized it may be better just to pull 20% for my next property out of the money Ive made off of this deployment and buy another house.

What would you do? Would you continue to save and completely pay the first rental off, or take 20% from your savings and buy another rental and grow your empire?

There is no wrong or right way, I am just interested in your views as it may help me make a better decision. So, please tell me, what would you do in my situation???

Mike H. · Answer

Paying off a home makes no sense at all. Not if you're trying to build your "empire".  One of real estate's biggest value as an investment vehicle is the ability to use leverage - plain and simple. No other investment vehicle allows for the type of leverage you can get thru real estate.

The second you pay off the house, the returns simply aren't as great.

Pay 90k on a house worth 130k with taxes and insurance of 350/month and rents of 1,300 a month (my typical numbers.  What is your return?

Figure no mortgage payment so your net profit is likely around 800 a month or so with vacancy and repairs (assumes self PM).  On 90k, thats a return of about 10.5% if you figure a 9600 a year profit.  Appreciation at 2% (2600/yr) is another 3% so 13% total return on your money.   BUT you have NO mortgage interest so you're going to pay taxes on about 6k of that 9600 profit (1,500 taxes on 6k in net income after depreciation?) . And no principal paydown.  So your net return on your money is roughly 11%........

Lets flip that same deal around now with leverage.

Lets say you pay 18k out of the 90k and owe 72k. Your mortgage payments are 400 a month so PITI is 750 a month with everything else the same. Your net profits would be 400 a month (4800/yr). Your appreciation is still 2% (2600/yr).  Your principal paydown about $85 to 90/month or (1,000/yr).

Figure thats 8,400 a year in returns (i.e. to your net worth).  But its based on an 18k investment. So thats a return of almost 45 to 50%!

AND, better still, is that you now have a mortgage interest deduction of roughly 3,800 a year. Add that to your depreciation (3,200/yr) and you can write off 7k a year. That not only wipes out the net profit so that the cash you make is ENTIRELY tax free. But it also gives you a writeoff for your personal taxes as well.

Obviously, over time, your interest deduction will go down over time and your rental profits will go up as rents rise. But the key here is that, by leveraging your money via financing, you will preserve as much cash today (to use to buy more homes) as you possibly can.

Paying off a home, to me, makes zero sense if your intent is to grow your portfolio.

btw: While it was a great time to buy 4 years ago, there is always a deal to be had out there if you stick with it.  And if you just can't make the numbers work because your area is too hot. Then buy into it.  Meaning, since its such a good market, do a flip and take the profits to buy down a deal so that the rental numbers make sense.

130k house example again - but in a market where you can only get in at 75% LTV.

Get all in at 100k. Sell for 130k to 135k. Make 10 to 15k in profit. Do it again so that you have 20 to 30k in profit. Now buy another house like this for 100 or 105k and put down the 20 to 30k to buy it down to make the numbers work.

You might be all in at 80% LTV. But who cares if you used the profits from your flip so that you can still make the numbers work. The goal, hopefully, is to continue to grow your portfolio and to keep chunking in the rental income.

The biggest driver I had for myself during this run was - I want enough rentals so that if I lose my job, I won't lose my house........

And, btw, when it comes to the question of whether there are still deals to be had, I'd say this. The last 6 or 7 years before this one, I was buying 3 houses a year almost like clockwork. Over the past 10 months, I've bought 10 houses and put #11 under contract last week (that would be 30).

So for me, the past 10 months have been, BY FAR, the greatest investing time of any other time since I've been doing this - including the entire "bust" period. And not only have I picked up quantity but these 11 homes are easily the best product of my entire portfolio. Great area. Close to me. With great floor plans and incredibly equity capture.

Best deal:  984 anndon lane, braidwood. All in at 120k. 5bdrm, 3bath, 2,400 sq ft. Built in 97. Rents for 1650.  House appraised out at 195k when I went for the rehab loan. After rehab/rental, house appraised out at 200k even for the refi.   Rehab was completed in a month. House was rented BEFORE I closed on the purchase.  I literally showed the house to someone before I closed on it and they took it then (mostly because market rents for that house/area are closer to 1800 to 1900 so they god a great deal but so did I).

So the run isn't over yet. Keep looking. Expand your area if you have to. Expand the ways you buy if you have to as well (I bought that deal off hubzu - which I had steered clear of before because it never seemed like they would price things even close to my numbers).

John Thedford · Answer

The time to buy is when you find a bargain. I have been looking for months without finding anything worth buying. Last week, something presented itself. After getting comps, property inspections, etc I am going to close.  Don't buy for the sake of buying. When the time is right..you will know it.

Ian Hoover · Answer

I think it is always the time to buy, but as Donald Trump says depending on the market your in is going to depend on how or what you are going to buy.

If your in a really hot market you might want to lean more towards a quicker flip type of deal or buy and hold in a really safe area where you might get smaller cash flow but less risk of losing money if the market goes cold.

If the market is cold then it would be a great time to buy some holds and get nice cash flow going then you can always look at selling when the market is hot again.

I think if you wait for the "right" time then you will keep watching from the sideline and never become the investor you want to be.

Mike H. · Answer

There's only one way I know of to finance over 10 and thats thru local banks that do portfolio lending. Its actually a commercial loan that they'll do for a SFH investment property.  Don't bother going to any of the larger banks (BofA, Citi, etc) - they don't do these types of loans.

Those loans typically look like this:1) Term 5 yr balloon2) Amortized over 20 years (sometimes 25)3) Rates - between 5 and 5.75% (although I did 4 with one bank that was at 4.5% this year)

Its a commercial loan that they can do under an S Corp, LLC, or even under your personal name. The terms are obviously not as good as a conventional loan but they're good enough that you can still cash flow and - most importantly - can still continue to grow.

I will add that you really need to touch a lot of banks and will need to find more than one lender that does these too. Most will do one or two with you right away. And then they want to see how those perform for a while.

Over time, then they tend open up more. I've got these commercial loans with 8 different local banks. And have recently kind of narrowed my loans down to 3 banks that seem to be very good about saying yes to these for me now.  I could probably try going with one but through my discussions with all these banks, I think they have a set number of key metric items they use to determine their "layers of risk" with a buyer and having too many eggs in one basket with a borrower seems to be one.

Plus, sometimes, local banks reach a limit on their ratio that they literally have to shut off the spigot to these types of loans. Then they wait for their other loans to help rebalance the ratio and will open these loans back up.   So, believe it or not, sometimes a no is really just a not now.

But thats why you want to maintain a relationship and bring constant business to several local banks. In case one has to hold off on any loans.  There's actually one of the banks I use that has an interest rate thats .5 to 1% higher than the others. But I continue using them. One, because they were there for me when I really needed loans and nobody else was doing them. And, two, because I want to maintain that relationship with them.

Eric Fernwood · Answer

@Mike H.

How did you finance your 11th and onwards properties? The loan program for 11-20 houses went away this year and I have a few clients that are maxed at 10 properties now but want to buy more.

Thanks.

Shelly Swanzy · Answer

@Chance Cooper  Personally, I believe that anytime can be the right time to buy.  Although, there are several things that make it the right time. 1. You've done your due diligence and checked it as good.  
2. You've run your numbers and they are good. 3. You've got your exits A, B, and possibly C into place.  4.  You funding is in place.   If you've checked off these 4 things then I'd say its the right time.

Nilesh Makhija · Answer

Wait for the deal that works for you and factor in your time spent. There is always a good deal and is always relative

Brant Richardson · Answer

Financing is what will make it possible.  Interest rates are incredibly good, now is the time to finance.  10 years from now you will have much higher rates, those higher rate loans will be the ones you want to pay down fast.  Lock in these rates with 30 year fixed loans and pay the minimum each month until you complete the acquisition phase of your investing.

Elizabeth Colegrove · Answer

@Chance Cooper

My husband is active duty Navy. We have 3 personal turned rentals and 2 pure rentals with another 2 houses (1 personal/1 rental) budgeted in the next 10 months.  I leverage as much as possible. My goal is for the tenants not myself to pay off the house. Two of the houses were bought with VA loans.

We use our transient nature to our benefit and buy a personal every chance. Than live off of one income and save the other. Using that saved income to invest.

You might enjoy my website. It is going to be about our strategy/investment plan. Our goal is to have 5 more houses in 2 years. We are also class A property investors as we want professionals.

Good luck and I look forward to see you around. Stay safe!

Chance Cooper · Answer

I appreciate all the ideas, Mike I think your on to something. That blueprint you laid out is nice. I got some serious decisions to make within the next couple of months. When I come off of this deployment I def want to buy another, this will be my third home. 2 Rentals and 1 primary residence. Some of you guys that have like 10 houses, man you make it seem easy. Thats where I want to be one day...

When do you know its time to buy?

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