All Forum Posts by: Ben Stout

@William Hochstedler I completely agree with you. It will be very interesting to see how newer construction performs over time. Fortunately I know some guys that can still worth with lathe and plaster and do fantastic jobs. I have even purchased old glass doorknobs after they've been stolen from houses etc. I love to go to the old architectural salvage places in New Orleans. 

@Ben Leybovich I don't sell real estate. Thanks for your comments. 

@Jay Hinrichs  Great idea on the airplane. I'll think about that. :) 

As far as 1031 exchanges go, they're great. But what if you ever want to get completely out of real estate? There is no way out unless you want to take a major, major beating on that appreciation AND depreciation. I guess this is why some people end up doing questionable things like investing in TIC commercial properties.

@Greg Baker 

 My pleasure. My personal approach is a mix of everything. I have some that are more plays on appreciation, but I also have some that are mostly for cash flow. If it's a deal it's a deal. 

I believe it's disingenuous as well how some harp on appreciation when many people don't understand depreciation recapture and what that entails in terms of taxation and strategy. Numbers that work great for me as a Florida resident might not work well for someone in California in a different tax bracket and vice versa. 

@Greg Baker I have a few exceptional agents I work with. Most of my deals come from them because they know what kinds of properties I'm interested in and that I can close quickly. 

It all depends though... last year I was working on a house and the neighbor popped in and asked if I'd be interested in buying her house (which happened to be the same exact layout.) I asked how much she wanted for it and she said $58k. I told her that I'd just paid $23,000 for the one I was working on, but if her price came down to call me. I ended up buying hers for $23,000 and it's been rented ever since @ $700/month. 

There are many, many people on here that are far more successful than I am at this. These are just a few deals I've done. I've also had a tenant cause $7,000 in damage before too. (That wasn't a sub $30k house.)

@Bill Gulley  You're right on the money as usual. It is definitely something that I'm considering in the future if market conditions hold up and I could provide a premium service to investors. 

@Andrew S. I completely agree with what you said about having significant capital reserves. What many of us forget (after doing this for a while) is that when you are brand new/wet behind the ears you see your hard earned dollars flying out the window, it's VERY HARD to understand that the loss is temporary. There are good times and bad, but when you start with heavy expenses, it is much more devastating and you question your abilities/choices. 

I've now had shingles blow off roofs, pipes break, sumps malfunction, hail damage, fire, etc. It doesn't have the same effect on me mentally that it used to--especially when I didn't have multiple rent checks to absorb the blows. I do my very best to mitigate damage and control such circumstances, but I can also see the big picture. Most new guys can't and think the losses will continue until the end of time. I guess it's in our nature and that's why so many people unloaded their stock portfolios in 2008. 

The emotional response from losing money is far greater than making money. 

I just emailed my agent out of curiosity and asked him a question: 
"If I'm doing all cash deals, how many sub $30k properties do you think I could buy a year that would rent for $750/month if I'm all in at $35k or under?" 

His answer was "6-7." Obviously supply and very limited financing are at play here too. I definitely got a good deal, but there have been lots of those. This one just sold for $37k (not sub 30k, I know) and I missed it. 

What's that saying about how in real estate the deal of the century comes along every couple weeks? I just think the posts I've been reading that say all sub30k houses are garbage do a serious disservice to readers, especially newbies. 

If I were a betting man, I'd wager my year's salary that this property will still be standing after 27.5 years if there is no major disaster. 

@Bryan L. 

 Primarily I believe it's a fear of commitment. It is irrational behavior to us, but the average person doesn't want to have to worry about replacing an HVAC system or reroofing a house. They can't/won't/choose not to budget for these items. 

It seems many who do qualify are often caught unawares and lose their house to foreclosure. Some are unable to pay an insurance deductible or cannot cope with a rise in property taxes or insurance rates. I guess there are many reasons it's much easier to be a renter. The rental market reflects these forces at work. 

I guess the main reason here for the above-average rent is that I didn't buy a $30k house-- I bought a $70k house for $30k? Does that still make it a "sub$30k?"

I've started a new "Sub$30k" thread in an effort to step away from the chaos that has become a few of the other threads. While I've reviewed most of the opinions contained in their respective comments sections, I'd like to publicly tell everyone my experience, why I feel how I do, and present you finally with a question: "What makes a "Sub$30k" house?

I first started in real estate in 2005 at 23 years old with a $100,000 home purchase. My agent assured me this would be a sound investment and that it would grow over time. I'd read a lot, done what I considered to be a large amount of analysis, had a degree in business, and figured I should plug my nose and jump. 

This is the approach that many BP users have advocated for newbies: Buy a more expensive property/cash flow is your enemy/look to appreciation/cheap houses=anathema. Since 2005, that $100k house has been my biggest, most constant headache. The construction quality is awful. Like many other recent builds, this one was thrown together. It needed a new roof after only 9 years. It has had many, many problems. A friend of mine purchased a house in Texas that was recent construction that already has foundation issues 10 years later, while a few of my houses that are older than my grandmother are structurally very sound due to what I consider a higher-quality standard in terms of craftsmanship and also better materials.

As a person first starting out, this experience was absolutely devastating. It felt like every other month I was on the hook for a new major repair, a tenant was threatening to move out because of some problem, and I still had a huge mortgage to contend with. I almost gave up investing and sold it off at a steep loss. That is also what EVERYONE around me said to do. Cut your losses, move on, real estate investment isn't for you. Everyone gets out of it. There is no money to be made with rentals. I began to second guess everything I'd read/done and felt defeated, looking at my bleeding balance sheet. Did I just have bad luck? Was there really no money to be made? What could I have done to avoid this?

But what if I'd invested in a "Sub30k" house as my first? What if I'd had heavy cash flow in a solid working class neighborhood? My property manager/agent of course did not want that. No one wants to manage a house that doesn't bring in a large monthly rent. No one wants to sell a $30k house and collect a paltry 3%. 

In my opinion what you have are a lot of salesmen here who push a product. They understand the commission side. If I were selling turnkey properties, I'd be on here telling everyone to let me solve your problems. Let me do all the dirty work and put in the elbow grease. Hand over the lion's share of your profits and I'll gladly make money with your money.

I've since gravitated toward "Sub$30k" houses like this one (Paid $25,000 and did $3,000 in renovation): 

What a dump, right? The eaves needed to be painted, it needed some other work, so what? It has rented for $750-775 every month since I bought it and it always rents the first day it becomes vacant. Property taxes and insurance are a combined $80 a month. 

I WISH I'd started with this house as my first. I wouldn't have become so gun-shy and waited 3 years to make a subsequent purchase. I'd have been in the market when things were cheaper and my portfolio would be much more impressive now. I'd have developed better skills. I'd have understood that with a portfolio of cash-churners, you can absorb operating costs a lot better much sooner. <--I consider this to be one of the most important lessons to be learned in REI.

By the way, I could sell this "junker" for $70k now and I did not buy it at the bottom of the investment cycle. I put sweat equity into it. I refinished the hardwood floors and Art Deco woodwork. Does that make this a "Sub 30k piece of garbage" or did I merely pay sub $30k for a $70k property? How can we really paint all properties with the same brush and say simply because you pay less than $30k it is a bad investment? 

What if someone sold you a Corvette for $5? Would you sell it to me for $10 to double your money? Is it a $5 car? 

Hey dudes, 

I've enjoyed reading all 15 pages of this convo! I think I represent a group that hasn't been heard from yet: 

I started in properties around the $100k mark... and gravitated toward this market... and these are the only type of properties I'm super interested in anymore. I guess that runs completely contrary to what a lot of people feel. Let me discuss why: 

1.) The properties I go for tend to have awesome features like Art Deco style built-in bookshelves, hardwood floors which are very cheap to maintain and keep looking good, higher grade building materials, and overall better craftsmanship. My first house was a cookie-cutter track home and it has had numerous problems despite my paying entirely too much. Older homes often times have more character and are in neighborhoods with other cool, older homes. Call me crazy, but I just think claw-foot bathtubs and high ceilings are awesome. Fortunately many tenants agree. 

2.) Bang for the buck. @David Beard Yes, I've been doing this for well over 5 years. The ROI is insane when compared to my more expensive properties. Proper tenant screening and regular maintenance alleviate 99% of my problems.

3.) Depreciation recapture. If you're going to 1031 exchange your properties later on down the road, it's easy to point towards depreciation as a major part of your strategy. If you are buying lower-end houses, you may find that you prefer to not have as much depreciation recapture to deal with at a later point. Higher end financed houses with a lot of depreciation I consider to be almost doubly leveraged. 

4.) Carrying costs. I love not having to fret about vacancies in my low-tax, low-cost insurance, high-demand rental market. 

5.) Free money. The more astute BPers get into hard-money loans, big dollar deals, etc. I do a lot of small deals. For example, I bought a house for $25k with an ARV of $60k. The bathroom floor had fallen through. I had it up and running for $30k, refinanced it for $40k, took the $10k tax/interest free and the house still cash flows $460 a month plus prinicipal of $50/month (increasing month to month of course.) I like these kinds of setups.

6.) Despite being able to sometimes work deals like #5, I hate dealing with financing.  

Ben