All Forum Posts by: Bob Ebaugh

Hi Rick,

I haven't thought about CDW in a long time.   Nor has anyone else...Look at the Wikipedia article on CDW and you won't find any updates in the last 9 years or so.

If there is anything "new", I don't know about it.   Since the seller is disclosing it, then it's likely still there.  Back then, and likely today, the only remediation is replacement of all the contaminated drywall.  The problem is to identify each panel is essentially a destructive test.  And once discovered, it probably all came from the same shipment.

I mentioned in posts above,  that I suspected the problem was overstated and would fix itself over time.   Has that happened?   The only evidence is the lack of new information since then.  Certainly there are many properties that were never remediated like the one you are looking at.   So it's possible, even likely, there really isn't a current "problem".   

But......

Technically, this disclosure issue will taint the property forever until remediated.  So unless it's being sold well below comparable sales in the area, buy a different property.   How much below?  At least the current cost of doing the remediation.   Do you have to actually do it?   Maybe not, but then you can expect to offer a similar discount when selling.

Not sure this really helps, but is how I would approach the issue today.  It would be terrific to see some university research the effect time has on self resolving the issue.   Then we would know.   But I couldn't find anything out there this morning on that, and think finding it now or in the future is a wishful dream.

I'm going to step back from the specifics of this case a little. NAR has solid roots. NAR's foundation of bringing ethics to real estate and the creation of the MLS to facilitate cooperation between brokerages is commendable. At that time, there was probably a lot of discussion on how to make the process better for clients. Today, I see NAR's priorities as primarily protecting the status quo. What change (without legel or regulatory pressure) in the last 30 years has been made to primarily benefit clients?

The root of the evil today is the MLS. At least in my market, no one can work in the system without joining the association and supporting NAR to gain access to the MLS. I've even had agents tell me I'm not entitled to the buyer's side commission since I'm not affiliated with a participating broker. And they may even be legally correct. There was merit to the challenge, although I could find no case examples in FL. If the objective was embracing the customer and technology, why wouldn't Zillow FSBO's be listed on the MLS and Realtor.Com? Evil may be too strong, but monopolistic isn't.

Anyway, I will end with this...change can happen relatively fast...there is a historical example. Look at the cost below of a stock trade from when I graduated from college in the mid 80's. Most of this revolution happened in 15 years, essentially complete by 2000.  Real estate isn't directly comparible, a share of IBM is a share of IBM.  Two identical houses in the same subdivision can have many differences.   Plus many more differences.  But the fact we still do everything mostly the same way is ripe for change.  I've been promoting the concept for over 20 years and been wrong, but maybe the time is finally here?

------ Charles Schwab (first famous discount broker) circa 1986 ------

Commision schedule was: 

"Dollars Traded: 0 to $2500, Commission: $26+ 1.6% of transaction amount. Dollars Traded: $2500 to $6000, Commission: $51+ .6% of transaction amount."

"So to buy 100 shares of a $24 stock would have cost you approximately $64, To buy 200 shares of a $32 stock would have cost you approximately $89 (the same to get out)"

For those of you not old enough to remember, stock brokers used to make their living completly on sales commissions.   Now they make their living charging fees with many variations to manage your portfolio.  Transaction cost is nearly eliminated.

It's not a crazy idea.  Even where I live in Tampa/St Pete it's hard to have positive cash flow on a newly financed property.   And the last thing you need is a cash drain if unemployed.   

Paying cash is a way to reduce risk if selling prices decline, that also reduces potential returns for the same amount invested.   Financing uses other peoples money to make up what you don't have.  For comparison, the traditional 80% financing requires buying 5 similar houses.  Home prices rarely decline, hence the traditional advice.   This analysis represents the complete investment lifecycle from buy to rent to sell.

During the holding period, income is maximized by paying cash.   You're basically paying yourself instead of the guy/financial institurion with money.

I think the question you must answer is are you interested in pursuing real estate as a significant part of your investment strategy?   If so, it's a way to get your feet wet and learn more about it.  You have to start somewhere, but a single house doesn't provide enough diversification, financed or not.

You don't need an outside custodian, just a plan advisor.   The paperwork isn't that hard.  The cost difference wasn't comparable when I started.   It will take more of your time, but not that much if you are interested enough to follow and understand the rules.   

You do need a business, any ordinary business.  The business doesn't have to be profitable every year, although the strategy is amplified when you have business profits and can defer more taxes by investing those to your Solo K.   Probably the biggest hurdle is the business has to be owned by husband and/or wife with no employees.   Or I think perhaps also for 2 partners, but still no employees.  Our's is a very small part time consulting practice.  It's always been profitable, but only 5-30K per year depending on the work available and our interest in working.

We started our Solo K after retiring from ordinary full time jobs in 2013, consolidating funds from several prior employer sponsored 401K's and our personal IRA's. Within a year, we had 12 rental doors, mostly single family with a couple duplexes, all acquired with no financing. Since then, we traded one that was exceptionally hard to manage for one that wasn't, sold one to a tenant and replaced it, and sold one for distributions.

The Solo K has worked exceptionally well for us, here are some thoughts for those who might do something similar:

- We were exceptionally lucky with timing. One of the SFH's purchased in 2014 for $65K, just sold for $320K. While we do spend whenever needed for good maintenance, roofs (we've done all but 1 now), HVAC, paint, flooring etc...we have not made any significant improvements. This sold house came with a kitchen that would have made any chef in the 1950's happy, I'm sure the appliances have all been replaced, along with the flooring, but it wasn't improved. That was probably a lost opportunity, had the house been improved, it would have likely sold for $400K. We will be looking at doing this different in the future.

- Financing.  We have none.   This breaks the often stated rule about using OPM, other peoples money.   Very early on I looked real hard at doing just that.   But you can't use traditional financing, it must be non-recourse.   That raised financing costs from 3-4% to about 8%.   It's essentially hard money, unless you have a rich friend.  Afraid to ask what that number would be today, althogh the difference may be less now.  At the end of the day, our analysis showed that financing would basically eliminate the income part of the equation and profit would only come from appreciation.   In hindsight, another lost opportunity.   But...still happy.   There is far more risk with financing at those kind of rates, and after all, the plan held retirement savings we needed soon.  But the deal breaker was work.   We self manage, we didn't want to double or triple the amount of work necessary keep the operation running.   Sure if I could have known for sure, we would see 400% appreciation over 10 years, I would have done things different. But you can't. 

- Self management, to clarify, is basically advertising, showing property, selecting tenants, signing leases and hiring contractors to do repairs.   It's not actually making repairs or improvements. That's not allowed since it's considered a "contribution" to the value of the 401K. Using a property manager has potential, but does reduce income.   In our case, we were not happy with the gains seen in our traditional 401k holdings, and part of the transition to the Solo K, we wanted more hands on control of how our investments worked out.

- Finally, we went 100% invested residential rentals.   While it's a good problem to have, since the Solo K has done so well, we are spending more in retirement than originally planned.   Our mix of pre-tax to post-tax investments is out of balance.   For example, we had several years with really small amounts of taxable income, should we have distributed more out of the 401K earlier and reinvested post tax?  We didn't, and as a result our income tax bill has gone from near nothing to something we might have avoided.   There are many moving pieces here, Social Security timing, transition from ACA to Medicare, how much of your wealth is to be left as a legacy and the investment strategy that keeps your investments in large unseperable chunks.  There is a great tool to game alot of this out, I started too late to see all the benefit.   Take a look at MaxFi if this situation looks like it might impact you.

Flood zones don't change frequently.   I believe we are just about done, if not done, with the only revision in many years.   On the Pinellas property appraisers office website, on each property page, there is a link to the county GIS map showing the location and flood zone.  I use the original not the "new" version of the PAO website at PCPAO.COM

Our rentals are all outside of the flood zone, but even then, there is still significant wind storm risk.   So insurance cost is still much higher than most of the country.   The lowest rates through Citizens are about $1500 with roof clips or straps, $2500 without for a basic 2 BR home.  Add $500-1000 for a 3 BR.   Citizens is the "state" insurer of last resort, if a regular company accepts the risk, it can be up to 20% higher.   Further, in 2025 or 2026, Citizens will require flood insurance, even if outside of the normally required flood insurance zones.  My estimate here is $500-$1000 for a zone X property.

The insurance market is grim here.   On the other hand, it's never taken more than a couple weeks to find a qualified tenant and sign a lease to move in within 4 weeks.

We've been considering selling a couple properties to mitigate risk by buying outside Florida.  Only reason it hasn't happened is the need to hire property management.

Very late answer for this.  RLI offers Umbrella tailored for FL Citizens paltry underlying of $100,000.   Many agents can write this or I think you can quote online.   Good luck!

In Florida, I don't think any traditional company will write a home with knob and tube wiring.   For that, you have to go to the surplus lines market (high risk).  Depending on property value, $1500 sounds like a good rate.  

Without any knob and tube I have 8 properties, average value 180K, average property insurance $1365.  Florida is or close to the highest cost property insurance market in the nation because of windstorm risk.

That said, knob and tube is not good.   We had that in 2 structures, it was a single 30A circuit for all outlets and ceiling lights.   While the attic distribution wire was sufficient for 30A, the feeder lines were not.   It's a real hazard.   We re-wired and updated the electric panel right after purchase.

@Palmira Angelova it varies so much on the specific property.   The first one we bought, we actually live in today (5 years later) as our primary home.  It was a duplex, sort of.  2 stand-alone 1925 houses on a single 40x100' lot.   A 720 sqft 2/1 main house and a 450 sqft 1/1 cottage.   Not counting the screened porches and stand-alone garage.   The roofs were recently done.   But the place had termite damage.  Especially the windows.  There are no old houses here without some history of termites.   Both houses had knob and tube wiring.  Both houses had window A/C units.   We spent $20,000, or 20% of purchase price on termite fumigation of all structures, re-wiring the main house and replacing the old AC panel, exterior painting, replacing all the old windows, and putting in new central A/C in the main house.   The cottage had a tenant.   So we waited on that building.   Years after purchase, we've re-wired the cottage and replaced all those windows too.   That was less, about $7000.   It still has window A/C, not especially unusual, but still on our eventual hit list.

The oldest house, a 1918 bungalow.   A small 2/1 with 700 sqft and stand-alone garage.  It was a recent "flip", we bought it from the first post flip owners that decided urban living wasn't for them.  But it was in pretty good shape.   All we did was change the locks and rent it.   So it really varies a lot.   All we've really done there since purchase, slightly out of the ordinary is replace the sewer line from the house to the street connection.   That was about $4000.   We also swapped out the central AC equipment ($2700) and reroofed both the house and garage ($6500), but both of those were expected at some point due to the age at purchase.  Exterior paint coming soon.

A couple others:

1925 Triplex, 2 1/1's and 1 2/1.   It needed paint, new roof and fumigation for termites, central heat and air for each of the 1/1 units.   Spent about $20,000 there.   It was a foreclosure.

1930 Over/Under duplex.   2 2/1 units, but large for here at > 1000 sqft a unit.   Both had tenants at purchase.   Unusual structure, originally a doctors house with living upstairs and the office practice space downstairs.   Later, but way before we bought it, the downstairs was converted to a second residence.  We fumigated, painted the exterior and re-roofed only the 3 car garage.  Also some fixed some deferred tenant complaints.   About $15K at purchase.

@Seth Hochberg

Truth is...I'm probably not a good judge of Baltimore.   I did grow up in Carroll County just NW of the city, but know little about Baltimore.   The comment was based on a desk review of a couple places within 4-5 blocks of John Hopkins Medical Center.  Which happens to be near Fells Point, which is analogous to the neighborhoods we like in St Pete.   But these were on the opposite side of Hopkins, and it looked like it might take a few years to catch up.   But this review limited to real estate listings and Google street view.   I don't remember the exact street addresses.

@Aurelio Soliveri