All Forum Posts by: Ben Zimmerman

There is a difference between being bad at math, versus being bad at economics.  And people who like 15 year mortgages are bad at economics.  While you may end up paying more physical dollars in the 30year loan, the 'true cost' is going to be almost identical.  A dollar loses purchasing power over the years due to inflation, therefor a dollar today is 'worth' a lot more than a dollar 30 years from now.  A 15 year loan pays a large sum of money in the first few years when each of those dollars is worth a lot, where as a 30 year loan spreads it out to where those dollars in years 20-30 aren't worth much at all.  Once you factor in the purchasing power of money, the two loan systems become nearly identical. 

The difference then isn't in the raw math, it is in the fact that a 30 year loan is generally speaking much safer.  While paid off properties are very secure, you still had to get through 15 years of high payments in order to get to that point.  It is much easier to survive a crash if you are only paying 9,168 a year in mortgage payments, then if you have to come up with 14,208 every year.  What happens if one year you can only come up with 12k?  While your house is being foreclosed on, I just cash flowed 3k. 

Most loans don't have a prepayment penalty, so why not get a 30 year loan, and if you really like free and clear properties simply pay extra towards the principle every month?  There is nothing that says you cant pay a 30 year loan off in 15, or a 15 year loan off in 10 ect.  But having the option to pay that much lower mortgage amount of a 30 year loan is invaluable especially during rough times.

As for myself I prefer to not pay off properties.  I would not be happy with any investment where it's true return on investment was in the 4-5% range, so why would I allow dead equity to generate that amount by reducing interest payments?

I really think you are expecting WAY too much from an agent. An agents job is to show properties, provide some information on the few properties that you are interested in, and guide the sales process to closing. That's it. He is not going to scrub through the MLS and calculate each one to see if it meets your particular financial goals of a 1% rule. YOUR job as an investor, is to properly screen what is available, and find the properties that meet your criteria and select the one that best fits your needs. If you are expecting an agent to scrub the MLS like you are wanting, then you will never be satisfied with an agent. You shouldn't need to have your realtor run rent prices on a bunch of properties, because you should already know within roughly $100 of what any house rents for based on the raw stats of the house (sq footage, bed bath count ect), a few pictures, and the homes location. You should be able to look at the list of 67 places that he sent you, and almost immediately narrow it down to a few that sound promising because you already have a rough idea what the rent, and sales price should be. Then you ask for specific details on those 2-3 properties that look promising and I'm sure any agent would gladly run whatever comps you wanted on those select few properties.

Secondly and equally as important, lets reverse the roles here for a moment.  Lets assume there is an amazing agent, or wholesaler out there, who always has a knack for finding deals.  Why should they work with you?  You already admit that you work with a dozen different realtors, so there is no loyalty.  And when it comes to investors, there are always bigger fish in the sea.  You will never know the name of this mythical amazing wholesaler because he takes ALL of his deals to the same 3-5 investors who he has worked with in the past who buy dozens, or hundreds of properties per year and are guaranteed to not waste his time by going through the motions only to fail to be able to close at the last minute.  This amazing wholesaler has no interest in talking to someone he has never worked with before, and is only able to buy 1 or 2 units per year.  This amazing wholesaler has other, better investors already lined up.  He doesn't need you, you need him.

I'm a little surprised by the majority of the responses to this thread.  The saying, "Don't mix business with pleasure" is a saying for a reason.  While there may be times that everything works out perfectly, those times would be the exception, and not the norm. 

FACT:  The overwhelming majority of relationships fail, heck in todays world even most marriages fail.  Putting up what is likely a sizable amount of each of your net worths into a partnership deal will only add to those struggles.  Contracts, legal entities, and buyout options can only assist with the business side of the deal, but nothing can salvage the personal side of things when the first trivial thing goes wrong and it suddenly becomes "your fault".

It could have been the balloon payment that scared him off.  He is putting down only about 13% of the purchase price which means outside of forced appreciation he is going to have a difficult time finding a lender to refinance with once that massive balloon comes due.

Why do so many people speed if speeding is illegal?  -Because the relatively low chance of being caught, and relatively low fines outweigh the benefits of not being fired from your job because you were late to work for the third time this week. 

It sounds to me like you are careful to get information from people who are giving you the type of advise that you want to hear, and disregarding information that is contrary to what you are trying to do.

Wholesaling CAN be done legally, however I would wager that easily 90% of wholesalers are in violation of the law when they do it.  Often times nothing is done to these illegal wholesalers because it takes too much time and effort on the part of the State to find and prosecute them, but don't think that you are immune to the legal process if someone in foreclosure takes you to court because they lost their home because you failed to deliver on your purchase contract by attempting to act as an unlicensed broker.

Scenario 1:  An investor who invests in real estate and has bought several properties finds a great deal.  He enters into contract with the seller with full intention and capacity to actually purchase this home.  He either has cash on hand or the appropriate financing already lined up to purchase this property.  During the days or weeks that it takes to close on the property, he overhears another investor complain that they can't find any good deals and how this person would love to find something below market value.  The investor decides to assign his interest to the contract over to this second party, collects his fee, and goes on to pursue a different house to purchase for himself.

Scenario 2.  A person who describes themselves as a wholesaler, enters into a contract with the sole intent of reselling it, having never actually purchased a home, and with no intent on ever buying this particular home.  They have no money, and have no financing lined up and are relying on finding a secondary buyer once they have the property locked up in contract.  Once it is locked up, they post on Craigslist and other websites or email their buyers list, with the address, photos of the home, price, sq footage, bed/bath count, and retail price in the hopes that someone will contact them and they can then assign over the property to this second individual for a fee.

One of these scenarios is legal, the other is not.  Which one best describes your current situation?  One of these people is legally assigning his interest in a contract, the other is acting as an unlicensed broker.  Now I'm not trying to tell you what to do, or what not to do.  We are all adults and make decisions for ourselves.  But you need to be honest with yourself and your situation and realize that what most wholesalers do is illegal.  Just like with speeding down the highway, we all realize it isn't the right thing to do, and that it is illegal, but we do it anyway because the perceived benefit outweighs the perceived risk.  Maybe you will never have a legal problem, but don't kid yourself into thinking that there aren't strict laws already on the books governing these types of transactions and that you aren't exposing yourself to risk if someone were to file a complaint.

@Olivia Darling Who says that wholesaling in AZ is legal?  I know of many people that do it, but then again I also know many people that speed down the highway, but that doesn't mean speeding is legal.

Arizona Revised Statues: 32-2122. License required of brokers and salespersons

A. This article applies to any person acting in the capacity of a:

1. Real estate broker.

2. Real estate salesperson.

3. Cemetery broker.

4. Cemetery salesperson.

5. Membership camping broker.

6. Membership camping salesperson.

B. It shall be unlawful for any person, corporation, partnership or limited liability company to engage in any business, occupation or activity listed in subsection A without first obtaining a license as prescribed in this chapter and otherwise complying with the provisions of this chapter.

A.R.S. § 32-2101.47

“Real estate broker” means a person, other than a salesperson, who, for
another and for compensation:
(a) Sells, exchanges, purchases, rents or leases real estate or timeshare
interests.
(b) Offers to sell, exchange, purchase, rent or lease real estate or timeshare
interests.
(c) Negotiates or offers, attempts or agrees to negotiate the sale, exchange,
purchase, rental or leasing of real estate or timeshare interests.

...It goes on to list about two dozen other activities that are reserved for brokers only.

Don't mess around with people in foreclosure, especially if you don't know how to handle it.  These people are on the brink of losing their homes and need to speak with qualified people who can actually close the deal 100% of the time. 

@Jia Liu If you borrow money against your 401k, then you are essentially giving yourself a loan.  This loan is just like any other loan and must be repaid on time except in this case the interest from this loan is repaid to you.  Failure to properly repay these loans can have very serious penalties and tax consequences.  You own the property as soon as you close on it, and it is owned in your name, and is not owned under your 401k unless you were to change your retirement account into a self directed or solo K. 

While loaning yourself this seed money can be useful under certain circumstances, often times the loan must be repaid in a relatively short time frame.  While the mortgage itself may be a 30 yr loan, the loan against your 401k that you used as the down payment may only be a few years in duration.  A 50k loan at 5.25% interest rate is only 275 a month if it had been a 30 yr loan, but if you are required to pay that money back in only 5 years then the monthly payments jump all the way up to 950, which would destroy any cashflow and cause you to pay out of pocket every month.  So borrowing 50k to purchase a 200k home at 25% down payment would cause a total monthly payment of 975+830 = $1805/month, not counting taxes/insurance.

Some 401k providers allow for a 15yr repayment cycle, which helps reduce the problem.

@Jia Liu

My most recent rental in Phoenix had the AC unit (18 years old) go out in the middle of July.  I had received 1 yr of 'free' insurance through the purchase of the home and the insurance company contracted out a company to do the estimate, who said it needed a new compressor, but he never submitted his actual bid back to the insurance company.  Two weeks into it they cancelled his contract due to non-submission and hired someone else.  This person had to start the process all over and go out one day to specifically determine what was wrong with the AC unit, even though we already knew from the previous guy what was wrong.  Sure enough he said the same thing was wrong, and while he did ultimately submit his bid back to the insurance company, it took another week for him to do so.  I googled both of the companies that were sent to the property and both of them had 1 star reviews and their telephone lines went straight to voicemail and never returned one of my calls.  I was in constant contact with the insurance company stating that AC in July in Phx isn't a nicety, it is a health necessity and that this process needed to be expedited 10fold, I was repeatedly told that none of that was their problem, and that I was not allowed to hire my own repair service and be reimbursed on the back end.  When the insurance company finally received his itemized bid of repairs, they said that they would only cover roughly half of the cost, which was the cost of the compressor.  The other half, (draining existing Freon, disposition, and refilling ect) was not covered as they do not insure Freon.  WHAT!?  How can you insure an AC unit and not insure the substance that actually makes the unit run? 

Long story short after having my tenant suffer through the phoenix summer heat for a month with no repair in sight, and the actual 'repair' would have been a band-aid fix on an old system of which I would have to pay half for anyway I told my insurance company to cash me out.  They sent me a check for the amount that they would have covered to replace the compressor, and I called my repair team and they had a brand new unit fully installed within 8 hours.  Needless to say the insurance was not renewed at the end of the year.

Insurance companies rarely if ever pay out like you would assume that they should, and often do more harm then good as the very long delays in repairs causes significant stress on your tenants and strains your relationship with them.  Even in a best case scenario it would have taken a week to repair this AC unit, if you were the tenant how happy would you be living in 120 degree house for a week with no AC?  Remember, in the long run the insurance company is in business to make money, meaning they are collecting more than they are paying out.  Why would you find this acceptable if you can simply budget properly for capex expenses like you should be doing?

@Matthew Kafami Buying in the near future may be a good idea, but buying NOW is not.  Let me explain...

Don't take what I'm about to say personally, as I am going to make a few assumptions since I obviously don't know you.  But the average 22yr old thinks that they know everything, when the reality is often the exact opposite.  If you don't know if buying a home is the right thing to do or not, then you haven't done nearly enough research to make an informed decision.  You have stumbled upon a great website with tons of free information, so use it.  Go to the library and find a few real estate books, watch the podcasts on this site, read the forums, do research on your local market conditions ect ect.  Once you have done your research, you will intrinsically know the answer to your question, and instead you will have other, more intelligent questions.

The question should never be 'should I buy a home'.  instead it should be:

What neighborhoods should I buy in

How can I find a good deal at a below average purchase price in one of the neighborhoods that I want

How will I fund my purchase

What happens if I need to relocate for my job

How will I pay for an unexpected expense such as a broken AC unit

What happens if home values dip and I end up owing more than the house is worth

And the list goes on....

The second reason why you shouldn't buy now is that you simply don't have enough money in reserves in my opinion. If you use an FHA loan you only need to put a 3.5% down payment on the house. This translates into $5600 on a 160k home. This does not count all of the misc fees that come with purchasing a home such as appraisal fees, loan origination fees, realtor fees, or any minor repairs that need done ect, which your 7k will struggle to pay for. Even after you pay all of this, you still need to have enough money in reserves to pay any unexpected bills. What happens if the month after you buy your home your car breaks down? Or your refrigerator stops working?

Take a few months, and do your research.  Find out if there are any down payment assistance programs that you qualify for, first time homebuyer programs, or if your state offers a Mortgage Credit Certificate ect.  While you are doing your research live frugally and save up your money such that when you are mentally ready to make a decision, that you have the assets to be able to pull the trigger.

If done PROPERLY, owning real estate is the most proven path towards obtaining long term financial success.

I am active military, have a TSP that I started prior to getting into real estate, and am rather happy with it. I don't get an employee contribution, but if I did I would certainly max it out. I started with the standard 401k since that was the only thing offered at the time and have since switched to putting new funds into the Roth plan since I plan on making significantly more money during my retirement years than I do now because I am constantly investing and growing.

A few things worth mentioning is that under some circumstances you can make a loan to yourself using the money in your TSP. This is how I got the downpayment to buy my first home. There was interest charged on the loan, but that interest is paid back into your TSP account.

It sounds like you are unsure if you will be making more, or less money in the future if you accept another high paying job.  In this case I would suggest putting the money into a traditional 401k plan (you are already in a very high tax bracket so deferring this tax couldn't hurt anyway) and if you do end up making even better money later on you can start thinking about a roth conversion ladder which is a system in which you slowly transfer your money from a traditional plan, into a roth plan and can pull that money out with no penalties prior to age 65 so long as you start your ladder at least 5 years prior to when you start to withdraw the money.

Others have mentioned diversity, and the fact that stocks are very hands off way of investing which means 0 time taken away from your future fishing trips.  But I find it useful for other things as well.  Lenders typically want to see a certain amount of money set aside in reserves, and every lender I have worked with so far has accepted my retirement account as the reserves.

Lastly as far as retirement accounts go, TSP is fantastic. Some retirement plans are essentially scams and skim 1-2% off the top as various fees. TSP is one of, if not the lowest plans out there as far as fees are concerned (one of the few things government ever got right) and has a yearly expense ratio of 0.04% the last time I checked. This is the same rate that the 'super low cost' vanguard index funds boast about.