Tips for Real estate investing debt free?
Real Estate Broker · Louisville, KY · Member since 2014 · 362 posts · 232 votes
Tips for Real estate investing debt free?
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes@Jay Leisten Remember those questions I listed above? I'm going to fill in the blanks for you based on a typical property:
Typ. Property:
$60,000 ARV (either when you buy or down the road)
$45,000 Cost to buy/rehab/close...also = 75% ARV
$ 9,000 20% of Cost (DP)
$ 500 Cash Flow per month with NO DEBT
9 years How long it takes to get the next $45k to buy next property all cash ($5k/yr)
Here is the list of questions you need to ask, then compare the answer from the 3 options:
Q1 - How much out pocket (cash) am I putting in?
Q2 - How much cash am I getting back...what is my cash flow?
Q3 - How long will it take before I break even, and actually making money...see Q1 & Q2.
Q4 - How long will it take before I have the means (cash) to go onto my next property?
Q5 - What is my Cash on Cash Return?
Q6 - How long could it take to acquire 10 properties?
Q7 - How much money would you end up spending for those 10 properties?
Q8 - How long would it take to break even...as in all the cash you put in, you got back?
Here are your 3 options to buy/rehab:
Option1 - Buy all cash, and carry no debt.
Q1 - $45k
Q2 - $6k/yr
Q3 - 7.5 years (assuming no repairs, not vacancies, no problems)
Q4 - 9 years (assuming $5k/yr)
Q5 - 13%
Q6 - 90 years (9 years per property)
Q7 - $450k ($45k/property...not counting inflation)
Q8 - 75 years (7.5 years per property)
Option 2 - Buy using cash for 20% down payment & financing the rest.
Q1 - $9k
Q2 - $3.75k/yr
Q3 - 2.4 years (assuming no repairs, not vacancies, no problems)
Q4 - 2 years
Q5 - 42%
Q6 - 5 years
Q7 - $90k
Q8 - 22 yrs +/-
Option 3 - Buy all cash, then refinancing to get all your cash back out within 6 months.
Q1 - $45k
Q2 - $48.35k = $45k + $3,35 in CF
Q3 - 3 - 6 months...when you refinance
Q4 - 3 - 6 Months...when you refi
Q5 - 107% (remember, you're getting all your cash back + CF
Q6 - 2.5 - 5 years
Q7 - $0 When you refi that last property, you get your original cash back.
Q8 - Your ahead as soon as you refi.
64 Replies
- 9yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Dave Ramsey is the King of backwards thinking. You don't focus on living within your means, you focus on expanding the means you are living within.
- Investor · Aurora, CO · Member since 2017 · 34 posts · 11 votes9y
Right, it's difficult though because debt, to a certain degree is scary.
We are only small time investors, but if we did not take on the debt, we would not be where we are today. The debt allowed us to build up a nice nest egg, plus the rental income has been a nice perk.
The second property, we bought right around the housing bust and we were literally under water for about 4 years. We had to feed the property, but always maintained it and kept it rented. I really contemplated my own sanity for a few years! Now, after the housing market came back, I am so glad we kept that property. It was a struggle though!
My husband is retired and I am nearing retirement soon. We have always been hands on with our properties. Never really hired out for a lot of things, but now that we are getting older, we don't want to spend weekends messing with broken pipes and broken dishwashers.
Exchanging the property for a newer lower maintenance one seemed like the most logical choice. I had our realtor look at the other property and am leaning towards an exchange with that one as well. We have a small mortgage on it but once again, it is an older property and will need quite a bit of rehab to get it rented out again.
For now, leverage seems like the most logical approach.
- IA · Member since 2015 · 304 posts · 152 votes9y
@Account Closed
Here's some logic for your consideration....
Generally leverage is most useful when used to build equity in properties over a 20-30 year timeline. The tenants pay down the debt over the life of the mortgage (with a little bit of cash flow for you), and after the mortgage is paid off you've got a paid for property with good cash flow income. TIME is the key element that makes leverage work to your advantage.
When nearing retirement age, taking on more debt to build more equity doesn't make much sense because you don't have time on your side anymore. INCOME should be the focus for those nearing retirement. This would mean selling off some properties in order to pay off others, and then collecting the healthy cash flow from the paid off property as retirement income.
Unless of course, you don't need the income for your retirement.
- 9yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Account Closed, One option that you could have pursued using the 1031 exchange would be to buy multiple smaller properties. This not only dilutes risk over more real estate but it also allows you to sell one every once in a while and only take a % of that 60K hit instead of all of it at once.
And one other thing that you could have done is to purchase one of those replacement properties for cash and use maximum leverage on the remainder. This would ensure you a safe haven in a downturn.
As an aside, the book Debtor Nation: The History of America in Red Ink, Louis Hyman, Ph.D. ’07, give a fascinating history of the recent phenomena of debt as a right and norm of the american people. In 1900 it was Sears and Singers that started the trend. Now everyone hawks it. Dave Ramsey may not have it all right. But the idea of debt as the norm scares me to death!
The 1031 Investor5137 Reviews - Investor · Aurora, CO · Member since 2017 · 34 posts · 11 votes9y
We actually thought about multiple smaller properties but the problem is we live in the Denver metro area and real estate is ridiculously expensive.
Another option was to look at a couple of these Townhomes as a means to eventually downsize into one of them. We don't have a mortgage on our primary residence and once my son gets out of high school we would like to sell our primary residence which is getting kind of large for us and to downsize into one of these smaller Townhomes converting it into our primary residence.
- 9yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
Spot on idea @Account Closed. You'll get a portion of the gain tax free. And if you want you can keep both town houses for now and move into them in succession keeping some of the gain tax free each time!
The 1031 Investor5137 Reviews - Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes9y
@Account Closed so here is something not mentioned yet. You could sell the property you are "done with" on owner financing to a well qualified experienced buyer. Basically you get income from the property without the headaches. You do have to pay capital gains on the principal portion of the income but it is spread out over years and in the beginning the principal portion of the payment is very small and so your tax liability is also small. Finally interest income is taxed at a lower rate than most people's ordinary income. It can be a win for all. A couple people have sold their properties to me with owner financing and they have been happy with the outcome. Send me a private message if you would like to discuss this more.
- Member since 2016 · 13k+ posts · 12k+ votes9y
The difference in philosophies of the use of money to invest is a factor of risk.
Buying income properties with all cash is equilivant to the individual that would put their money in a savings account and be content collecting a secure .5% return.
The 100% leveraged investor would be in the realm of a educated professional stock trader, much higher risk but far higher potential returns by risking other peoples money.
It comes down to skill, risk and ambition.
I have made the vast majority of my personal wealth off of using OPM. I have had some losses, this is normal in any investing, but obviously income property investing is relatively simple to comprehend and is lower risk than many other options.
I have had very little need or desire to use my own money when I can generate my personal income from OPM.
- Investor · Aurora, CO · Member since 2017 · 34 posts · 11 votes9y
Thank you all for your advice! I really appreciate the feedback here! I just looked at another potential 1031 exchange in West Colfax in Denver. Neat area with lots of new projects going up left and right.
I want to explore all options, rental rates too. We went ahead and put a down payment on one town home in Denver and market rents are really good there. I am hoping for about $700 clear a month (after expenses).
Our other older property is in NE Denver, which has appreciated somewhat but because the zoning is all single family, the appreciation is not going to be as much.
We currently clear $700 net after all expenses on this per month but, since it is older and always needs repairs, that eats into our net. So maybe we end up with $200 or $300 a month? We just finished up a lease, so it's vacant. We were thinking of taking out about 40k in home equity loan to fix it up so we could bump up the rent.
The property I looked at today in West Colfax, is a new town home, could probably net about $600 clear with no issues for about 10 years.
More debt, but better property. Also since the area is going up, potential to make more on the value of the home later on down the road.
Lots to consider!
- Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes9y
@Account Closed Just curious if you are willing to share what your purchase price, down payment and expected rents would be on a new construction town home would be to achieve that net? I ask because I have considered the same, but couldn't get there on a return that would fit.
- Investor · Aurora, CO · Member since 2017 · 34 posts · 11 votes9y
Travis,
Sure! We purchased the second property about 8 years ago for $210,000. We are selling it for $415,000. The buyer is an realtor/investor and waived her commission. So net is about $215-220. We have a mortgage on it now at about $180,000.
Purchase price of new property is $490k. Mortgage, party wall agreement, taxes, etc. will bring the mortgage up to about $1900 or so (this is my rough estimate).
New 2 bedroom/2 bath townhomes are currently renting for about $2700 in the area. There are actually two new townhomes half a block away with a third bedroom that are renting for $3300.
Rent in Denver has really gone through the roof. To put it in perspective, when we bought the property (it's a duplex), we got $800 for the upper unit and $500 for the bottom unit. Now we are getting $1400 for top and $650 for bottom (bottom tenant has been long term so kept rent low for her.) Mind you, these rents are below market for the area.
The first property was purchased about 15 years ago for $130k. We currently rent it for $1400 (also below market). It is a 2 bedroom/1 bath.
I want to sell it for about $350 and plop it down on one that is about 400 or so. Rents for the newer townhome should be about $2200 for area. Hoping to get about 600 net per month.
Also, for this property, we started out at about 600 a month and were barely breaking even back then.
We are lucky to live in an area that is growing, this was not always the case.
- Investor · Aurora, CO · Member since 2017 · 34 posts · 11 votes9y
On another note, we purchased both properties in up and coming areas, more risk. First one was NE Denver and back then it was kind of dodgy lol. Getting good tenants was difficult, often ended up with section 8 and lower rents to float the property.
Second property, same thing. Funky area that has started to change over the last few years. Most of the older properties are being torn down in liu of higher end duplexes. Since the property needs work, the only people interested in purchasing it were investors. They will probably keep it rented for a bit and then scrape it.
- Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes9y
@Account Closed thank you for sharing the details. The biggest challenge I have which you confirmed with your numbers is that buying a nearly $500,000 asset to get $600 a month doesn't fit the returns I am seeking. I do see and agree that the maintenance should be very low for years, there probably is room for appreciation in that area with all of the new development happening, but often times the existing town homes value struggle because of the amount of new inventory coming on line.
I am pretty familiar with the Denver market - experiencing the same - raising rents I cant keep up with and property values that have boded well for net worth. I am still seeing properties that you can buy around $250k that could provide $600 monthly - but of course older properties that could have more maintenance. No wrong way to do it and a great time to clean up a rental portfolio.
Good Luck!
- Investor · Aurora, CO · Member since 2017 · 34 posts · 11 votes9y
@Travis Sperr
Right, I agree. I think because the prices have gone through the roof it's very difficult to purchase with little down and get a decent net each month.
When the market was not great, we really struggled with breaking even sometimes. We would get a property cranking along and then get hit with a huge repair which would pretty much take us right back down to ground zero.
I also agree with your statement about town homes and market saturation. This does worry me somewhat but then I see what happened with LoHi and I feel as though as long as our population goes up, inventory is low, then prices should go up. I remember LoHi used to have homes priced so low, now it's insane!
There are areas with lower prices homes. We live in SE Aurora and you can still purchase a property for around 300k. We thought about that route too but being a landlord for awhile, I kind of like marketing to the younger singles in Denver. I also see that even though the purchase price is cheaper, rents are also cheaper. A single family in my area would probably rent for about 1600 or so.
Thank you! Good luck to you as well
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