All Forum Posts by: Ben Zimmerman

2. I'm quite sure he knows that is how an amortization schedule works, however he said it was quick math and I think it illustrated his point well, averaging the returns out over the full term.

3. You're right, there's no way a 150k house will sell for 300k at the end.  It likely will be much higher.  For a home to double in value over 30 years it will have appreciated a meager 2.3% annualized. 

5. Capex was included, it is naturally included in his cashflow statement. Cashflow by definition is the money you have left after all the bills are paid.

6.  Taxes are better off in real estate.  I'd rather get a yearly tax deduction on my investments, and continually defer until I die, than I would pay a 15% capital gains tax every year.

Now for the fun part.  At the end of 30 years you likely have a home valued at 397k, this is assuming a 3.3% appreciation rate based on historical inflation rate, which should approximate what real estate will get on a nationwide level.  This home also steadily increase in rents, which can be reinvested, I shouldn't have to mention the effects of not counting in 30 years worth of cashflow into other investments will have as opposed to sitting dead the way it did in your math. 

For the really fun part, I created an excel product to analyze the returns of stocks versus an estimated rental property a few months back that you might find interesting.  The numbers I used was for a recent purchase of mine at 165k purchase price, using 33k down payment +3300 closing costs versus 36,300 worth of stocks.  For simplicity sake, if you buy a property that during the first year is completely cash flow neutral after expenses, and yearly raise your rent by 3.3%, and increase your property taxes, capex, repairs, ect by the same 3.3% then after the first year you will make start to make a small profit because your income has gone up, and so too has your expenses but not at the same rate because one of your biggest expenses (debt service) has stayed the same.  While you may start out cashflow neutral, at the end of 30years you are cashflowing nearly 1k / month.  If you take that gradually increasing monthly cashflow, and reinvest it, (lets just say into the stock market), then after 30 years your home is 437k, plus about 426k worth of stocks (10% annualized)  thanks to constantly adding additional capital every month from your cashflow.  For a total of 863k, as opposed to roughly 633k with the same 10% annualized had you simply stuck the 36k into stocks from day 1. 

There's nothing wrong with stocks, but I seriously doubt anyone can consistently beat the returns of real estate using stocks.  Sure you might pick a winning stock and do quite well, but then again you might pick Enron.  With stocks, regardless of how much research you do, your fate is ultimately out of your control.  We like to think about facebook being a good stock, but what happens when the next trendy social media site is created and everyone migrates there and quits facebook.  Does nobody remember how quickly Myspace vanished?

Everyone has different goals, and ways to accomplish them.  After reading your post a few times, things such as "I don't need to be rich, but..., I don't wan to work for the Man, I currently work full time AND manage RE, I want to support my current modest lifestyle."  really started to stick out to me.  Not everyone in life wants to be Trump, some people just want a solid passive lifestyle that allows them to enjoy life instead of stress over it.

Phoenix doesn't have great rent to value ratios, so you will always be asset heavy, and light on cashflow.  Consolidating into more cashflow friendly multiunit commercial buildings is certainly one way to go about increasing your cashflow, but as you have noticed that comes with it's own set of difficulties. 

A second possible solution, and one that isn't often touted on these forums, is to simply consolidate and pay off what you currently have.  The amount of leverage used is inversely proportional to the amount of cashflow you will receive.  Therefor selling some of your non performing assets, or places that are geographically far from your residence (you mentioned they are scattered all over the valley) and paying off the loans on a few of your existing properties, thereby decreasing your leverage could help you in two ways. 

First, you will be able to relax a little.  Instead of managing 18 doors and 4 commercial spaces, if you could consolidate into 10ish fully paid off units it would reduce the amount of time and effort put into managing your properties, allowing you to spend more time with the family.  It would also reduce your management costs when you do decide to fully retire as you now only have a handful of properties for them to watch over.

Second, this will increase your cash flow significantly.  I don't know what price points you currently rent at, but if you had 10 doors free and clear at 1250 a month, that would bring in 150k, which should be at your yearly goal of 100-120k once you deduct expected capex, vacancies, and property taxes ect.

While this does obviously slow down future growth rates, if ~100k is your magical number to be able to live a happy and content life then this is probably the easiest way to get there.  Although you can likely find a better balancing ratio then simply having ALL of your properties free and clear, between having a few homes fully paid for and a few that are leveraged that will give you essentially the financial returns you are looking for and still have room for future growth.

You originally signed paperwork with Section 8.

You screened and placed the tenant, and found them qualified on their own merits.

Your property successfully passed the inspection with no repairs needed.

Remind me again what exactly is the problem?  If you are that worried about not receiving the rent amount from section 8 for a few months while the process gets going, then you don't have a sufficient amount of money held in reserves to begin with, and/or should have done more research about the pros and cons of section 8 prior to signing ANY paperwork with them.  At this point you are likely facing legal action if you chose not to proceed. (no legal advise given). 

Accept it for what it is and chalk any negative items up to a learning experience.   Take the section 8 and let the lease ride out for the remaining 9 months and then choose to renew or not with the tenant.  If the tenant is bad, decline to renew the lease and don't get another section 8 yearly inspection done.  The good news is often times section 8 will overpay market rents for the types of properties an investor would actually use this program for.  So at the end of the 9 months perhaps a 10% rent raise is in order, or whatever would bring it up to the cap imposed by section 8.

When I choose to invest in an area, my primary concern is the long term health and growth of that area, immediate cashflow has nothing to do with my investment strategy.  You could throw a dart at a map of the Midwest and hit a cashflow positive house, but that doesn't mean that investing in that home is a sound long term plan. 

The buy and hold strategy isn't a get rich quick scheme, and yet some people have entirely too short sided of a viewpoint and only worry about what kind of returns it gets TODAY.  What is the immediate cashflow, instead of what is the long term outlook towards my financial goals.  A cash flow neutral home in an up and coming area will blow away any $200 a door cashflow home in the Midwest over the long run.  People seem to love investing in Cleveland for cashflow, until you realize that since 2000, homes have depreciated by roughly 5% per neighborhoodscout.com.  And average rent, and household income during those time frames aren't really any better for the area.  Over 50% of homes were built in the 1930s and only a trivial amount of new construction since the 70s.  I'm not saying Cleveland is a bad place to invest, especially if you are at the end of your investment lifecycle and are looking for a safe place to park your money and ride out retirement, but as I am a 30's something male I wouldn't want to invest there in the hopes of growing a future.

You look like a young guy, so I would advise picking a location with good future growth, and worry slightly less with the immediate cashflow situation.  With that said, I don't know anything about the Boulder market, and I don't know if this pricepoint would be the norm or if you could find a better deal.  However if you can afford to carry the trivial loss (sounds like roughly $40 a month if expense calculations are truly accurate) AND if you think that the area has a large amount of long term growth potential, AND if this is the best deal you are able to find in the area, then I would say go for it. 

A lease is way too formal for this situation, and causes other problems.  If you break up are you going to still enforce the lease?  If she doesn't pay rent are you going to evict her?  Additionally this creates a system of double taxation as her earnings are taxed, and she uses those earnings to pay rent which is income for you...also taxed. 

Instead if you really want / need her to contribute financially, I would suggest having her buy the groceries, or put a few of the utilities in her name.  It feels less formal to her if she is paying for utilities, than if she is paying rent and would likely be more willing to do that, and the money is no longer treated as income for you that is taxable.

I know that several people here are saying to purchasing a 4plex, but I wouldn't suggest it.  There is no one size fits all system when it comes to investing, so sometimes a 4plex isn't the right path.  Rental markets are different, and the phoenix market favors appreciation, over monthly rents.  While it may not be as bad as some markets, even a quad isn't likely to net you much past the 1% mark, and that would be for a run down neighborhood.

A 4plex with your income, and debt isn't likely to happen. At your price point, It would need to be the cheapest 4plex in town type of scenario in the low 200s, and you would be living in the ghetto, and likely end up with 3 sub par tenants that would drive you insane as a first time homeowner and first time landlord. The price point at which you would be able to afford these properties means that average rent would be roughly 5-600 per unit, which attracts low quality tenants, and means that neglected repairs and capex items can quickly eat into any profits that you may think you are getting. In my opinion, the rent to purchase price ratio simply doesn't favor purchasing these items. The cheapest quads have only a roughly 6-8% CAP rate, and in terrible neighborhoods. Dealing with the crime and annoyances that would come with living in these types of neighborhoods just isn't worth it.

Instead I would do as someone else suggested and purchase a decent sized 3-4 bedroom SFR in Mesa, and rent out the other rooms. This is how I got my start in the RE game years ago. I purchased a 3bed home for 165k at 20%, mortgage being $800 and rented out the two upstairs bedrooms for 400 each. I had the best of all worlds, I got to live in a decent community, I got the appreciation rates of the SFR phoenix market, I lived rent free and essentially only paid for utilities, and I got to live and hang out with my friends who I know are going to take care of the place.

If you don't have friends that are interested in moving in, craigslist has an abundance of people looking for a place.  While craigslist can be sketchy, you need to screen your tenants just like you would anyone else.  The good news is since you are cohabitating the area, you are lawfully allowed to discriminate for any and no reason at all.  So be selective and find someone that will be a good fit.

In the long run I think this option would be better financially and better for your mental sanity than buying a cheap quad.

@Michael L.

It sounds to me like this isn't a matter about which venue will make you more money, but rather about stress and time.  Some people have a different stress threshold than others, and if it is causing you more harm then good, then it is time to get out, regardless of what the numbers say.

However I would like to refocus a moment and examine a few points.  First is about the stress itself.  Being a first time landlord can be stressful.  You need to familiarize yourself with contract law, tenant screening processes, collection methods, and a slew of other things.  This can seem overwhelming at first, but once you do it a few times, the amount of time required to perform these tasks drops significantly.  Now it should only take a couple of hours to properly screen a tenant, show them the property, and sign the contracts.  additionally, in an "A" class neighborhood you should have very little if any problems with the tenant, such that after the initial papers are signed, you might get one or two phone calls during the next year from your tenant.  Figuring out what you need to do to manage that first property, is likely more stressful than managing the next 20 units once you know what it is that you're doing.

My second point is about the money.  If you are going to compare returns, then you need to account for everything, otherwise the comparison automatically fails.  This includes the items that you left out such as taxes, and appreciation.  You could have depreciated that property by roughly 9k during those 2.5 years, which at a hypothetical 20% income tax bracket saved you 1800, plus the 10k appreciation.  So now your returns become 5+3.5+10+1.8 = 20.3k, which translates into a 23.6% annualized return on your original 29k.  Additionally now that you are a business owner, many items can now be turned into tax deductions. 

Finally the S&P 500 averages are much closer to 7%, than they are to your claimed 10%.  You mention that you are familiar with the stock market, and if that is genuinely the case, then you know that only idiots think that they can actually beat the stock market average returns over the long term.  If we assume the more appropriate 7%, then RE is over triple your rate of return.  A 2.5year span is a very short timeframe, however I'm sure you can appreciate the astronomical difference that obtaining triple the returns over a long period of time will do to the final number when it comes time to retire.

@Omar Cantu

In life, we need to know the difference between things we can change, versus things we can't.  And then focus on those items that we can change. 

With that in mind, you are correct in that if you had a student loan debt of 560 a month, nobody here would have an issue with it.  But student loan debt is something you can not change, you are simply stuck with, in many cases not even filing for bankruptcy will make that debt go away. Meanwhile a car payment is something you can change simply by selling the car.  See the difference? 

Why are you so opposed to selling the car?  Are you trying to impress someone?  Because if the only reason a girl is interested in you is because you have a nice truck then you need to run away from that girl as fast as you possibly can.  At 23 years old with a mediocre job, you can either spend your  money and LOOK wealthy, or you can save that money and start to BECOME wealthy, but you can't do both at the same time.

This truck likely costs a lot more than 560 a month, I don't know what a 20yr old male with a 41k truck pays in insurance, but I would bet everything I own that you pay more in insurance per month than I do for my entire car payment.  Not to mention gas, maintenance ect.  I would assume that this vehicle costs you well over 800 per month once everything is included.  You mentioned the possibility of selling this 41k truck that you have owned for a little over a year for 35k.  So during that year, you have been making very large payments, and yet your car has DEPRECIATED and you have LOST $6,000 of net worth, let that sink in for a moment!  You are trying to become an investor, and yet you pay 30% of your total income and in return you get the privilege of LOSING 6k worth of value!

You mentioned not wanting to take the easy way out....

 WHY!!!!

There is nothing noble about doing things the hard way, and when it comes to making money, I guarantee that someone who plays it smart, will out earn someone who 'works hard' every single time.  In the immortal words of Scrooge McDuck, Work smarter, not harder.

If you sell your car for 35k, and buy something outright for lets say 5,000 that would give you 11k left over once you repay the existing loan.  That 11, plus the 7 you already have is 18k, which is very close to the 20-25k you would likely need for a down payment on a 100k house.  Your debt to income ratio problem with the banks instantly vanishes, and your 800/month payment likely turns into closer to 100 since you own the car outright, and will likely just need liability + gas + minor maintenance.  That 700/month savings will get you to your required 20-25k down payment in a matter of a couple of months.

In summary you can either work your tail off getting a second job, having little or no free time and ultimately save up the required amount of money in a couple of years, or you can sell the truck and immediately start looking for rental properties to buy as you would be ready to buy something in a matter of months and be well on your way to long term financial success.

The choice is yours.

As several others have mentioned, there is a lot of new construction here in phx.  Many new mega apartment buildings including near the heart of downtown.  However there are also many new SFRs being built as fast as they can throw them together in any of the housing communities that have vacant lots.  My community has had at least 15 new homes in a four block radius put up last year alone.  The appreciation over the past few years has been great, but I feel that is beginning to slow down as well. 

I am probably done buying local for the time being.  Rents have not gone up anywhere fast enough to make most properties profitable.  Any starter home in the 150-200k price range seems to get bought near instantly as an all cash purchase so there is limited options when it comes to haggling the price lower.  The high prices and low rents cause most properties to be roughly break even at best once all expenses are factored in.  I'm sure you could find deals here if you bought in some of the more ghetto areas, but I'm not about to go down that road.

 If renting were truly cheaper and a better way to go, we wouldn't have tens of thousands of investors here on BP finding ways to make money by BUYING houses and renting them out.