All Forum Posts by: Greg Scott

Tom

You are correct.  Because your return is 8% and mortgage rates are close to 8% the amount of leverage doesn't change the cash on cash return.

On the other hand, leverage can be very beneficial. Let's say you could find a house that gave you 10% cash on cash with no mortgage.  If you can get a mortgage at 7%, the money your borrow still makes 10%.  You benefit from the arbitrage. In that case, your cash on cash goes up the more leverage you have.

A few things to consider.

1) Cash on cash is one of several ways we make money in real estate.  One of the best is getting equity capture.  In other words, buy below market.  There are also appreciation benefits, loan paydown benefits and tax write-off benefits.  If you had to chose between two houses 50% leveraged and one free-and-clear, the two houses would almost certainly make your more money

2) If you are trying to be conservative, the most conservative thing is to have cash on hand.  For example, a free-and-clear house with zero cash in the bank is much riskier than a 50% leveraged house with ten thousand dollars in the bank.  In other words, no debt and no cash is much riskier.  Some of those the anti-debt crowd got killed in the GFC.  If they had been putting every $ to paying down their mortgage and then lost their jobs, they had no excess savings to bridge them to the next job.

Now, on the question you didn't ask. I'd recommend you find a house with better cash on cash return. Eight percent is on the very low end of what I've been seeing.

You didn't say if this was 2-4 units or 5+ units.  The financing is very different for those.

I'll assume you are talking 2-4 units.  If you are walking into a local bank, you are probably getting a "no" because they don't understand rental real estate.  This is very common.  You should seek out a lender that works with investors.

@Ken M.

I love the link you sent.  Also, I 100% agree that investors should always be buying below market, which was the important point you were making.

But, I am confused about your first sentence.  The suggestion that a foreclosure tsunami is coming does not seem to be borne out by the report you provided.  There two charts in particular (screen shot below) that show the risk has moderated significantly since 2020.  

I have had asbestos removal training. 

Asbestos remediation is very expensive.  If you don't have to do it, you don't want to do it.  If the tile is breaking apart, it would be called friable, and that would be a reason for removing it.  If it is in good shape and intact, there is no need to disturb it.

Covering the old tile with new flooring is a good solution. Related to asbestos it is called "encapsulation".  That is a recognized safe way to protect against health issues. The only problem with encapsulation is that it doesn't remove the asbestos so if sometime later you wanted to remove all the flooring, you now have to go through full asbestos remediation.

FWIW, most people don't realize that houses even into the 1980s had asbestos.  1960s and 1970s homes almost certainly had it.  A century ago insurance companies gave you a discount the more asbestos you had in your house, so the older the home, the more likely it has asbestos.  If people knew how much of the stuff was probably around them in an old house, they would probably freak out.  On the other hand, if it isn't airborne / friable, it doesn't pose much risk.  

I don't understand why your dishwashers are causing such problems.  We don't experience the issues you were describing.  Were they installed correctly?

As a source of water problems I would put them behind roofs, sewer lines, washing machines, plumbing leaks of various kinds and stupid resident decisions (Why do I have to use a shower curtain?)

As something that needs replacing regularly, I would put microwaves at the top. (What do you mean I can't just put a can of soup in the microwave to heat it up?) HVACs are probably the biggest single work order item. We replace as needed, but sometimes it just needs maintenance or the resident is being unreasonable. (Why can't I keep my heat at 85 degrees when it is 10 degrees outside.)

You've actually got two problems here, not one.

The first is: Why is your house not renting?  Without an address or knowing much about your house, it appears you've priced it near the top of the market.   There are nice-looking 4/2.5s with much lower rent than you in West Plano.  (see screen shots) Most of the homes at $3,000 and above have more bedrooms or baths than yours.  If you want to get it rented fast, drop the asking rent to $2,800. You've already lost one month having it sit vacant, which means you've lost the equivalent of $250 per month on a 12-month lease. At $3,000 you may be waiting a long time for a renter.

The second issue was:  Lease vs Sell.  Honestly, you didn't give enough information.  Was this your primary residence before?  What kind of appreciation have you enjoyed?  There are numerous questions.  However, if you are not ready to be a landlord, you should sell.

Part of making it fit for occupancy is waiting for the insurance carrier to get their act together, so it seems like they should pay.

It's a bit late now, but if you have another claim, you may want to hire a public adjuster. They would fight an issue like that on your behalf and get you your maximum insurance claim.

I hope your restoration company is also a good one.  You should be able to get a lot more repaired than just what was in the claim.

Yes. All the time. 

Offering 70% of a properly-priced beautiful house is a waste of time.  However, you can find a busted-up house that needs a lot of rehab at a great price. 

First-time home buyers can't buy that house because they don't have the cash to fix it up.  If it is in bad enough condition, the bank won't even finance it.  Those properties make great investment properties.  Because there are fewer buyers, it is fairly easy to find a property that needs $50K worth of repairs, and when you are done, the value of the property went up by $75K or $100K.

I've never heard a CPA distinguish between REPS status and REPS without active participation.  Every CPA I've talked with says that to achieve REPS status you need to be actively engaged in real estate (plus other qualifications I will leave out.)

FWIW, the poster did not say whether or note he materially participated in real estate outside of the self-storage passive investment.

Thanks for explaining your PoV.