All Forum Posts by: Ben Zimmerman

Yes, you "may" be able to get 10-12% return and be very liquid, or you "may" not. 

A more realistic number over the long term is 7-8% return.  The S&P500 got 8% from 1950-current assuming you reinvested all dividends. 

Leverage is easily one of the best parts about real estate, but some people don't like the associated risk of being multiple hundreds of thousands in debt.  For them, all cash financing is a better alternative as it is very safe, but comes with the tradeoff of lower returns.  But even ignoring the money side of it, cash in full real estate offers another benefit.  Real estate is REAL!  By that I mean you can touch it, feel it, kick it.  It is a tangible object that is intrinsically valuable that you and only you can dictate what happens with it.  If you want to buy it under value, then you can do that.  If you want to renovate, and raise rents then you can do that too.  You control your investment, as much or little (property managers) as you want.  With stocks you are at the mercy of the board of directors and have no input on how the company is ran.  You often get poor information about their prospective incomes, and by the time real information comes out, the stock price has already adjusted near instantly. 

But even full cash real estate can often beat the stock market, or at least match it.  Assuming you buy using the 1% rule, your mortgage should be 50% of your expenses.  But in this case you don't have a mortgage so your income is 1% monthly, and .5% expenses.  Over the course of a year that is 6%+ return, plus ~3% inflation.

Different markets will have different rates of return on what is realistically possible to obtain. People love to say they don't touch a property unless it meets the 2% rule, but if anyone can find a SFR property in San Francisco that meets the 2% rule here in 2016 then I will view you as a real estate god. Also be wary of people who quote ungodly high numbers, as we recently went through one of the biggest market downturns in history, it's easy to find good deals when your average house lost 20-50% of it's former value, rents may have also gone down, but not nearly by as much which led to some good buys.

In general however is if a property rents for 1% of the purchase price then all else being equal you should break even or at least very close to it.  The higher you get past 1% the more profitable a property is.  So if a property is bought at 125,000, and rents for $1,250 a month then you should essentially break even once all factors including vacancy and expected maintenance are considered.  A property that is 1.5% as Gerald mentions, should rent at 1,875 which would cashflow roughly $625 a month on the same 125k home.

I would need to see an example excel breakdown, but I'm highly skeptical.  I understand that the idea is that heloc's base their interest on the loan amount on any given day, not just for the whole month so on the 1st when your paycheck comes in you pay down your loan to the lowest amount for the month, and then it slowly rises back as you buy things, meaning you pay off the loan as early in the month as possible, and delay buying anything as much as possible so that you carry the lowest possible balance for the longest possible time.   However this is offset by the fact that current interest rates for a heloc are generally fairly significantly higher than for a traditional mortgage.  A quick googling lists traditional mortgages at ~3.6% and heloc at 5.99-8.49%.  Additionally since you are using it as your regular bank account, all purchases including gas, groceries, utilities ect are now subject to this loan interest amount.  Which means if I use my heloc and spend $20 to fill my car up with gas on the January 3rd, then I'm paying 28 days worth of interest on that $20.  If I use my credit card to pay these same bills then I pay zero interest assuming I actually pay my monthly bill in full on time.

Why not just simplify the whole process and make regular unscheduled payments against the principle?

And finally banks aren't stupid, they wouldn't allow something that makes them ridiculous amounts of money like a 30yr loan, to simply be bypassed and paid off in 3 years using nothing more than money magic tricks.  Regardless of any money tricks you try to pull, you still need a minimum of 90k to pay off a 90k mortgage.  And your not going to earn 90k worth of disposable income in the 3 - 5years you claim is possible by making your cited 3k a month no matter what tricks you try to play with the interest rates.

@Jerry Padilla Is the 15% down a requirement due to it being NOO? And if so is it still 20% to avoid PMI or does that jump to 25-30?

Hello BiggerPockets!

My situation: I purchased my home last year for 165k, and have roughly 45k in equity. I have a decent job and am saving ~2k a month with ~30k in savings. I am looking to buy my first rental with long term strategy of buy and hold, and am constantly flipping back and forth between SFR versus MFR. I know that I will only live in the area for at maximum another 2 years so I will need to rely on a property manager which will ultimately eat into some profits either way. When it comes to SFR I prefer recently built homes to (hopefully) reduce long term expenses.

Being 100% realistic, I likely will find a decent, but not great deal due to being inexperienced.  But sometimes simply getting into the game so to speak is better than constantly waiting for lightning to strike.  Due to this fact profit margins may not be as large as some of you are used to seeing.

Sadly, 30k is at the very low end for what is available for 20% down on a SFR here in phoenix. However a newer home in that price point would be along the outskirts of town, in a decent area. A multifamily may not be doable considering I likely would not meet the 20% requirement for even the cheapest quads. What would the experts at BP suggest? I see many people buying MFRs as their first rentals. Is it worth potentially waiting for funds to improve to buy a lower end MFR? Or press on and 'get in the game' with a SFR? I know SFR tends to appreciate more than MFR, and while appreciation sometimes seems like a dirty word in this business and everything centers around cashflow, I am in this for the long haul and have 30+ years for appreciation to occur. Given this fact appreciation can be very large and isn't something that should be completely overlooked.

Finally, do you feel that potentially buying two properties using 10% down is a better solution? It's guaranteed to be more pricey on a monthly basis due to PMI ect, but would allow for faster long term growth. The down side being profit margins would already likely be somewhat slim as is.