All Forum Posts by: Ben Zimmerman

I guess I'm the outlier, because I'm currently buying with ARMS.

I don't know of anyone who thinks that rates will be higher in 5 years than they already are (of course anything is technically possible).

With ARMS being usually the lowest interest rate loans you can find it can save you a lot of money up front. A hypothetical 400k home with 20% down is going to cost you $200 per month more at 6% interest as opposed to 5% interest. So right off the bat if it's a 5/1 ARM I get to save 12k in interest payments during those first 5 years. If rates remain flat, or drop I win big. The only way to lose is if rates increase high enough that my 12k head start doesn't offset the additional cost due to a higher interest rate during the refi.

Additionally as rates begin to drop anyone that is buying today will be rushing to refinance which will cost them an additional few thousand dollars in closing.  This puts me even further ahead since I am in no particular hurry to refinance since my rates are dropping automatically and don't necessarily need to refinance right away.  I have the luxury of waiting to see if rates continue to drop even further before deciding to eventually lock in a fixed rate loan.  

If I use the 200/mo savings from a lower interest rate of the ARM, and apply that to the mortgage balance each month, then after 5 years I'm nearly 18k ahead of the fixed rate loan when it comes to paying down the mortgage.  So even if rates do tick up slightly at the end of 5 years, I'm currently far enough ahead in the repayment schedule that it likely won't matter.  Because of my initial head start, it would take me paying 6.75% interest for the remaining 25 years for me to eventually break back even with the guy who started with the fixed 6%.  

There is still obviously risk involved.  In theory the world could be in complete chaos at the end of year 5 and cause all kinds of problems.  But I am willing to take calculated risks.  Sometimes I win, sometimes I lose, but I am confident that over an investing lifetime that the law of averages will play out.

Real estate prices always are slow to react to market conditions.  While price/interest rates are causing monthly payments to be higher than a year or two ago that isn't necessarily a bad thing.  The reason is that interest rates change and refinancing is always possible, however the price at which you bought the property at stays the same.

I don't know of anyone who thinks that interest rates will remain this high beyond maybe 1-3 years at most before starting to trend downward.  When interest rates begin to fall, the price of those homes will once again shoot upwards.  So while immediate cash flow might be relatively slim, its relatively likely that in the short-medium term you can triple your initial down payment investment once rates begin to drop.  Then after a simple refinance you are all set.

Yes, I realize that "long term historical interest rates have averaged between 5-8%"

However that is only meaningful if we live in the same overall economic conditions that were prevalent when 5-8% was actually average.  Looking at the chart you can clearly see that mortgage interest rates have been steadily falling since 1980.  This isn't a coincidence as that is the exact same time that the national debt began to spike upwards.  

30Yr interest rates:  https://fred.stlouisfed.org/se...

US Debt to GDP ratio:  https://fred.stlouisfed.org/se...

The entire financial system is interconnected, stocks, bonds, interest rates, whatever.  There is often not a direct correlation between some of these systems because investors think that conditions are only temporary and thus they factor that temporary status into account when determining what is a 'fair' price.  However the longer that interest rates stay high, the more the systems enter equilibrium pricing.  If mortgage interest rates remain high, that is going to force other changes such as rising bond rates.  

However the government can not afford a situation with high bond rates.  With 31 Trillion dollars worth of debt, a 1% change in the bond rate equals an additional 310 Billion in additional interest rate payments each year.  We already can't afford our current debt load, let alone afford it when rates start jumping multiple percentage points.

As such I feel like the government will actively start pushing to lower interest rates as soon as inflation has been squashed and we will return to something much closer to the 2-3% interest rates we were paying a few years ago as opposed to the "long term historical 5-8%".

If you believe that rates will fall in the next few years, then this is the perfect buying opportunity to cash in on the inevitable price appreciation.

 It only looks like 'underwear' because it currently has green water sitting in it.  Empty it and spend a few hours cleaning it and you won't be able to tell the difference.  

As others have mentioned, a tub is only new for the first guest, after that its used just like all the other tubs that are being frowned upon by people here.  If the tub looks nice and is clean then that is all that matters. As long as the tub looks clean then there isn't a single tenant that is going to be able to tell the difference if the tub is 1 day old, 1 year old, or 10 years old.

New tubs will run many thousand, or tens of thousands of dollars, while a used tub can often be picked up for free.  

Your job is to screen for people who will take care of your property and pay on time,  You aren't screening to see who might become your new best friend.  This is a business and should be treated like one.  

Who cares if he makes eye contact, who cares how he stands?  Even if your first impression of him is actually accurate and he is one of those people that needs to be in charge... so what??  The fact remains he isn't in charge, YOU are in charge.  And if you let him be in charge then that actually says more about your personality type than it does his personality type.  If he is ever able to gain an upper hand then you probably shouldn't be self managing your properties in the first place.

He's a well qualified applicant who seems nice by your own admission.  How perfect does someone need to be?

Past performance does not guarantee future success.  It's easy to make money during a bull market and when this happens people often overinflate their sense of investing sophistication because they just made a ton of money.  However it takes no skill to make money when everyone around you is also making money. 

As you said, an untrained monkey could have made money in the last decade.  These are the types of people who tend to get wiped out because they think that life will always be this easy and never develop any actual knowledge of investing.

Short term is also becoming very saturated in many areas making it difficult to achieve decent occupancy rates unless you have a super premium property.  This can easily wipe someone out if they overpay for a property during the bull run hype, only to find out that so did everyone else and there is simply too much competition and rates don't support the mortgage payments.

If those chickens lay eggs, you will be financially retired in no time!

When a property first enters pre foreclosure, the seller has enough time to rectify the situation.  Maybe this means putting it on the open market and selling it for top dollar.  However many people instead burry their heads in the sand and pretend like everything will magically work itself out.  As the foreclosure date draws closer and closer, the seller starts losing options because now even if they found a buyer on the open market, the loan process simply takes too long and wont close in time.  This means that there are only two types of people that can now help the buyer: 

1. A cash buyer investor who is going to severely underbid the property because they need to get a return on their massive equity purchase.

2. A creative finance buyer who is still going to way underbid, but can offer more than the cash buyer because the 2.5% underlying loan has intrinsic value to him, as does the ability to lock up a property under market value for very little money out of pocket, essentially just enough to bring the house current on its mortgage and maybe a few k to the seller so they can put down first/last months rent deposit at a new place.  

Other scenarios include your average Joe that isn't in foreclosure, but doesn't have a ton of equity. Imagine a 400k house with a loan of 350. Agent fees alone will eat 6% of that 400k, or 24k meaning at best the seller walks away with 376 minus other closing costs. So what if you offered him 380 for the house and skip the agents altogether? Sub2 the 350 loan, and either pay the remaining 30k outright, or maybe do something like 5k cash to buyer, and have a second note for the remaining 25k paid over the next 5 years at 5% interest.

Under this scenario you were able to get the house for 20k under market value, saved thousands of dollars in loan origination fees, was able to probably lock in a lower interest rate (the buyer had a owner occupied loan, which is nearly always at least a half point lower interest rate than what a rental loan would be).  You didn't need a 20% down payment of 80k, instead all you needed was either 30k if paid outright, or 5k cash to seller if doing a second note.  And you were able to take over a loan that might only have 25 years left on it as opposed to a new loan that would have 30 years.  Your note payment would cost you $471 per month for 5 years to repay that 25k second or you could just pay it outright and still be happy the a 30k down payment is still easier than an 80k down payment required from the bank.  The seller makes 4k more than he otherwise would have, and avoids things like making silly repairs to the tune of several thousand $ of the trivial things found wrong with the house during the inspection that nobody really cares about, but a new buyer still is going to want fixed because they aren't the ones paying for it so why not get it fixed.

Deals like this happen all the time.

It's actually usually beneficial if the new buyer defaults and doesn't end up buying the house.  If this happens he can simply remarket the property and collect another $25k fee and start the lease clock back to day 1.  Worst case scenario he needs to evict someone, which is no different than any traditional rental.  

Think about how much stress some people put themselves through in order to obtain $200 per door in cashflow with a traditional rental.  He is getting nearly 5x that, with no down payment (he actually collected the 25k down payment).  All Mike has to do to collect $1k during most months is head to the mailbox each month to collect his big check, and mail out a smaller check to cover the sub2 payment.

Most people commenting about how vital purchase price is, are thinking in terms of normal real estate transactions.  However since you specifically stated that you are in creative financing, then purchase price is largely irrelevant.

Terms are often way more important than price when dealing in the creative financing space. Think of it this way, if a home has a fair market value of 200k, why would anyone pay 210 for it? Well, you could get a mythical 100% LTV loan from the bank at 8% prevailing interest rate and pay somewhere in the neighborhood of $1463 per month not counting taxes and insurance. OR, you could sub2 the deal at 210 and take over the payments on the loan that the seller obtained a year or two ago when rates were 2.5%. Now your monthly payment is only $829 per month, a savings of $634 per month.

That's right, I overpaid by 10k for a house, but am saving $634 per month and will quickly come out way ahead and am cash flowing massively right out the gate. In addition no bank will give you anywhere close to 100% LTV for a rental property, but with creative financing that is relatively normal to carry the entire amount allowing you to scale infinitely fast, you are only limited by the flow of deals you find. Now obviously you still don't want to offer more than you need to in order to secure the deal, but this was just a hypothetical example to illustrate that overpaying isn't the end of the world if the terms are right.

From reading a decades worth of BP posts, I know @Account Closed is another legit source of information when it comes to the creative space, and I think he primarily does lease options but there are many different routes you can take.

There is no such thing as earning too much money for a Roth IRA if you use the Backdoor Roth, or Mega-Backdoor Roth IRA. Essentially all you need to do is open a traditional IRA with the same company you have your Roth. Put money into the traditional IRA, wait one day, and then do a rollover conversion transferring the money from the traditional directly into the roth. You can perform a rollover once per 365 days

Otherwise, if you feel the need to withdraw the money for potential use in real estate, remember that you can withdraw your contributions at any time tax and penalty free from a Roth IRA, however any EARNINGS you may have accumulated do get taxed and penalized if you try to withdraw them. So you could withdraw the roughly 10k anytime, but if you try to touch the other 7k you get slapped with penalties.

There is no right or wrong answer, but I like having funds in a retirement account growing tax free and shielded from creditors. The account also makes a pretty decent last ditch emergency fund. I invest my Roth funds into REITS such as AVB, EQR, O, and others. This is due to the way REIT dividends are taxed as ordinary income as opposed to capital gains, this makes them a prime consideration for a Roth account and will almost guaranteed significantly outperform the broad S&P500 over an investors lifecycle.