All Forum Posts by: Kevin H.

Everything you're saying here makes perfect sense to me...  I've run the numbers and they seem to fit what you're saying.  But, do you have concerns that a declining population base in these areas will ultimately hurt your ability to rent and/or sell these properties in the future?  

My hometown is Cleveland, where the population has been slowly and steadily declining for decades.  I see great deals there right now, but wonder if that great deal today will be a leveraged lemon in 10 years.  I hope that's not the case, but it's a concern I have.  

It sounds like you're doing some great things in the Midwest right now yourself! 

You and I are in the same boat (Arvada, CO here).  I'd also like to know how people handle the OOS purchases.  

Cleveland is a mixed bag for me.  I was raised there, and I know the area better than some other OOS markets.  The prices are enticing right now, but the population is (and has been) declining.  That's a scary prospect for the future, with negative population growth. 

I think you're both right.  I'm trying to teach myself to stomach the risk more, and make the moves I know I should have made in the past.  I look at the post I just wrote, and realize that I wrote an argument in favor of leverage, though I've never done it myself.  I have a paid off house, and a pile of cash.  Neither are doing any work for me on their own.  Sure, the house has almost doubled in value in the ten years I've owned it, but I could have done a lot more by putting that money into other investments at different times along the way.  

Still, I held that house through the worst housing recession any of us have probably ever seen, and when you're holding onto a property in the first couple of years and watching its value plummet, it makes you a bit risk averse.  On the other hand, I've now been in that property long enough to watch its value nearly double, so there is that side of the market cycle, too. 

I've always been very good at saving money, and living well beneath my means.  I just need to learn to embrace the idea that spending money on an investment property, and carrying debt that makes me money, is entirely different than financing a new sports car, or putting a vacation on a credit card.  I've never been a gambler, but a calculated risk shouldn't be seen as gambling.  As soon as I get that idea right in my head, I'll probably be unstoppable :) 

I think the only thing you're missing here (and you aren't necessarily missing it) is leverage.  Now, please don't think that I'm arguing for or against leverage.  That's a classic risk versus reward argument, and there are arguments in favor of either technique.  

I've always been a debt-free kind of guy.  I own one property currently, and it's a property that I bought to live in, and later convert to a rental.  I ended up becoming a bit scared of the debt during the great recession a few years ago, and aggressively paid on this property, until I eventually paid it off.  I then started saving cash for a downpayment on the next place.  So, I now sit in a position with one paid off house, and a lot of cash.  

The argument for leverage (which in this case simply means buying a place with debt instead of cash) is that you can use other people's money to your advantage.  Now, there's no denying that this comes with more risk, but it also comes with more reward.  

I'll give a very elementary example of this phenomenon, using completely arbitrary numbers (and totally ignoring all of the other little moving pieces like lender requirements, etc):

Scenario 1:  You purchase a single family residence for $100,000, and pay for it in cash.  This property is ultimately returning 10% of the purchase price per year for you, or $10,000 on your $100,000 investment.  Not bad, right? 

Scenario 2:  You buy the same home above, and you only put $10,000 cash on the table.  You finance the remaining $90,000 with a loan that costs you an arbitrary 5% per year.  So, you've now earned $10,000 at the end of the year, minus the financing cost (90,000 X 0.05 = -$4,500).  In this instance you've made $10,000 minus your $4,500 in financing costs, for a net return of $5,500.  

While scenario #2 gives you less cash in hand at the end of the year, it did so with substantially less cash leaving your pocket in the first place.  In the first scenario you paid $100,000 and took home $10,000 in Year #1 (10% return on your cash investment), and in scenario #2 you paid $10,000 and took home $5,500 in year #1 (55% return on cash investment). 

If you were able to procure financing that allowed you to buy 10 identical homes to the hypothetical one described in this scenario, each with just $10,000 on the table, you would have ultimately spent the same $100,000 described in scenario #1 at the end of the year.  The difference is  twofold:

1) By leveraging yourself in the manner described, you would theoretically make $55,000 in profit in year #1 instead of $10,000 profit, using the same outlay of cash.  

2) But, by doing this you will have also exposed yourself to $900,000 in debt, that cost you $45,000 to finance in year #1.  So, your returns are higher by using leverage, but your financial risk goes up substantially, too.  

That's a very fair point.  I'm certainly not entirely against self-managing local properties (to an extent), and obviously professional management really becomes an issue with out of state properties.  But, you're correct in recognizing that I have some time limits.  It isn't that I can't or won't put in the effort necessary to make a deal work, nor is it that I don't understand that it takes effort to make money.  I just recognize that my current cashflow is entirely dependent my employment (part of the reason I want to invest), and I have to leave time for those responsibilities until I'm in a better position to actually employ myself full-time. 

Thanks again for the reply! 

Thanks, Travis.  Our long term goal would be to replace the income we're making from our jobs with profits earned from investing (that would be about $180K/year).  This may be a lofty goal, because it seems to be one that is often sought and rarely achieved for many people.  

I personally haven't found any deals in Denver, but I'll admit that I could be looking in the wrong places. I've only really looked at the single family home market here... even with $200K+ in cash to put on the table, I somehow doubt I could touch anything larger than a fourplex in the greater Denver area. I've also (thus far) stayed away from condos/town homes (for fear of HOA costs and things like that eating into profits too much -- I may need to rethink that idea, too).

Again, I won't say that I'm dead set on any one plan at the moment.  I believe real estate is a great way to invest money for longterm wealth, and I know there are a lot of ways that people can achieve their wealth-building goals with real estate.  But, unless I reach a point where this can be my primary source of income, I will have to be doing my investing in a way that is at least somewhat passive (because I don't have an extra 60 hours per week to dedicate to the management of a rental property on top of my current job on an ongoing basis).

Thanks for the input!  Of the areas where investment returns look promising, Ohio or Florida might be the most likely places for me to draw on some help from others.  I have a lot of connections in Ohio (grew up in Cleveland and lived in Columbus for 8 years while going to Ohio State University), and I have an uncle in Florida who has a good amount of experience with home repairs.  How much any of these folks know about the current 'good and bad' areas may be another matter entirely, but at least I have some folks in those places.  

I definitely have very little experience about financing on the commercial lending side of the house.  That's one hurdle I'd need to overcome.  It probably helps that I have a significant amount of cash (relative to most starting investors), and some real equity to work with in my current property (equity I'd prefer not to touch if I could avoid it).      

Actually, a number of the areas you mentioned (the Ohio ones in particular) have been on my mind.  I grew up in the Cleveland area, spent 8 years in Columbus, and did a year of college in NW Ohio.  

The numbers look good on paper in those areas at the moment, but the one thing that does scare me is the fact that a lot of those areas have seen declining populations, and some of them are expected to continue declining in population over the next decade or two.  

I'm not new to owning real estate, but I'm still new to investing in real estate.  As such, I don't want to claim that my strategy is set in stone, but I'm currently thinking that I'd like to acquire income producing properties that I could hold long-term to generate passive income.  I'm also starting to wonder if buying a large building in another state is a reasonable way to start, or if this is some ridiculous pie-in-the-sky strategy for a newbie investor. 

Here are the factors driving my thoughts:

1) I currently have no debt, $240K in available cash, a home that is owned free and clear, and a reasonable/stable income at my regular job.  This encourages me to believe that I might be able to start with a larger building.

2) I'd like to invest locally, but the local "deals" here in Denver don't really seem to have numbers that add up for the investment strategy I outlined above (Denver is booming right now, and near me a property with a $375-400K purchase price might rent for just $2,000-2,300/mo). 

3) Going out of state on a first investment scares me, but I believe I could somewhat smooth that risk and better afford to have a property professionally managed if I started with a larger building (maybe 10+ units?).  The challenge I see here is understanding the regional/local market dynamics of an area where I don't live, and finding the right management partner in that area. 

Again, nothing is set in stone for me at the moment...  when I first joined this forum I was convinced I was going to invest in local single family homes as rental properties.  I haven't found any enticing deals locally (at least for that strategy), and I'm trying to broaden my real estate investment horizons at the moment.  

Any thoughts? 

Thanks!   

Thank you both for your replies, and insight!

At this point I'm considering the idea of cutting my loses, but with a bit of a caveat...  

What if I request that the seller signs a separate contract offering me the first right of refusal to buy this property at our currently negotiated price if he decides to sell it within the next year?  

If that's a viable option it would save on the headaches of a legal battle, but still protect my interest in the place in the event that the seller's plan was to simply turn around and sell it to some other person who has offered him more money (for all I know that might be the very reason that he wants out of this contract in the first place).  

I don't know if the seller would be inclined to sign this kind of contract, but he certainly might be more inclined to do so if he realizes that a lawsuit to request specific performance is my other legal alternative.  

While this next sentence might make me a decent human being and a crappy businessman, I have to say that I wouldn't feel particularly great about forcing the sale on this guy if he really, truly, just decided that he changed his mind and wanted to stay in the house that he built.  If that's the case it's still a very irritating and unreasonable way for him to do business, and a clear breach of contract, but I can accept that reason without a lot of animosity.  On the other hand, if he's actually trying to get out of my contract to go in search of a better deal, I want to be protected.  That's the type of situation I'd be more than willing to litigate just on principle. 

I personally feel like negotiating a deal on a primary residence is a lot tougher than negotiating other deals.  This house was this guy's home, and it was intended to be my home.  There's a bit more than just money at stake in that kind of deal, for everyone involved.