All Forum Posts by: Evan Miller

Hey Arianna,

It sounds like you are getting started with a good perspective! I skimmed through the responses and think there is a lot of good information already shared. I would prioritize the day-to-day details of your life that will be affected by this decision - for example, regardless of what market you decide to get involved in, you will likely end up traveling there more often than other cities. If you don't like Ohio, or don't want your travel days taken up by a business trip there, don't invest out of state! No matter how good your systems are you will likely end up in that city a few times per year at least, especially in the early years.

With that being said, once you have your core team established in long-distance investing, it becomes much easier and problems equal google searches for vendors, phone calls and book keeping in your life (project management) vs. swinging the hammer or fixing a toilet yourself because you're forced to put those systems in place.

I live in a similarly expensive city and would honestly be stoked to find a duplex in Denver for $600K! I invest in Denver, but also invest long-distance in Omaha, NE and Destin, FL so have some experience with both types of investing. I'd love to chat more with you if you'd like! Send me a message and we can find some time.

@James Hamling

Thanks for the reply James! I think it's a fair point to say that a 71 year timeline doesn't apply to most individual investors. My point there is to say there is a very good track record of great returns over time so if I am going to choose real estate over just investing in index funds then I am only doing so because I believe my returns will far exceed 10%. Otherwise it's not worth it.

The rest of your points are only relevant to very active traders, and not the point here. Further, real estate has just as many nuanced bearish points to make. Not super relevant to a long-term investor which I think 99% of us on these forums should be. 

Love the passion @James Hamling!

The S&P 500 Index has averaged a 10.26% return since it settled on the 500 company limit in 1953. Dating back to its inception in 1920 (exact date is debatable) it's averaged about 9.9% annual returns. There are several index funds that have similar performance including Vanguard's total stock index fund - VTSAX and Fidelity's Total Market Index fund - FSKAX. It's a good point that you need to take into account the fees and tax implications of gains, but this is a good starting point. Management fees for index funds tend to be in the 0.3% - 0.6% range, so the foundational principle holds true.

One more note - I think it is always smart to add some skepticism when someone presents subjective opinions as indisputable fact. There are very few one-sided arguments in any investment world and Stock Market vs. Real Estate is certainly no exception.

Again, I love the passion and appreciate getting some opinions throne my way!

Love the passion @John Clark!

John, I'm not sure what you mean by "this is why people hate real estate shills" but I 100% agree that there is value to peace of mind! My post that you're referencing is purely addressing the math side of the equation, but everybody needs to make their own decision because each situation is very personal. I think some people see the stock market as super risky and some people see the real estate market as super risky - and they're both right! Ultimately most people are more comfortable with what they are familiar with, simple as that. Always good to compare apples to apples and include cold hard numbers in your decision making.

All of that analysis was only taking into account the gains she would realize on a sale. So I wasn't even including any money she put into a down payment when she purchased it. For example, if she put 20% down, that's another $110,000 which is just sitting there. That get's added to the denominator which decreases the return number even further.

Now factor in that she owns the house outright, and we have to include the full $550K in her capital equation, bringing her returns even lower per dollar invested. All of that only improves the case to sell and use the capital elsewhere. 

So instead of the apples to apples number being $565,000, we add in the $550,000 of equity that she already has by owning the house outright. Now the equation is as follows:

$565,000 (gains net of capital gains taxes and sales costs) + $550,000 (her additional equity in the house now that we know she owns it outright) = $1,115,000 of capital deployed in this investment.

Expenses are less because there is not mortgage payment, but we still need to allocate 30% to other expenses (property taxes, OpEx, CapEx, etc.). So let's say she's netting $21,000 in rent every year. That is still only 1.83% return. Some savings accounts pay that out right now, let alone a completely passive middle-of-the-road bond. If she took that money and put it in the right index funds she will likely get close to an average of 10% annually without having to manage anything.

Nice! Is that same price point what you're looking to sell yours for, and that works with your numbers?

My favorite way to pull comps (don't have MLS access) is to use RedFin to take a .5 mile radius from my property, same bed/bath count, sold in the last 3-6 months, and then see what their price per square foot is. Then apply that to my property and that's roughly what my ARV will be. Watching the current listings is great too, but just requires the time to wait for them to actually sell.

Either way, good luck! 

Hey Shawn! Love the creative thinking. Have you taken a look at comps? That should answer your question. It seems to me that anyone who is looking for 3 bedrooms is going to want more square footage than yours has, but I don't know your market. 

A recent example for me is a flip that has plenty of square footage, enough to put 5 or even 6 bedrooms into it, and 4+ bathrooms. But ARVs don't go up at all after 4 bedrooms and 2 bathrooms, so that extra space was better left as living space. Could be similar in your market. People may value a bit more living space at that price-point vs a couple more walls.

I would just use the LLC that you already have if you are going to opt to put it in an LLC vs. under your own name. File the foreign entity form with FL if they require one and you're good to go. Minimize the number of LLCs you have to keep track of! Every new LLC is another state's tax and business laws that you have to keep up with, and another tax return to file.

I have found opening a new bank account for each property to be super helpful. If you run everything through that account for each property then it basically does what QuickBooks would do for you. I have USAA which doesn't do business accounts though so if NFCU does then that might be the better option. If you're keeping the property under your own name, then USAA is a great option because they make opening and managing bank accounts incredibly easy!

From a numbers standpoint, the highest use of this capital is to sell and buy another investment, or even just invest in the markets. Even if she just pays the capital gains tax - likely 15%-16% effective unless she has a very high income - it shouldn't be very hard to beat the return she is getting on that true equity. 1031 is not even necessary to justify selling. Here's the quick math:

$1,300,000 (Sale Price) - $130,000 (Sales costs 10% of sale price conservatively) = $1,170,000 net

$1,170,000 (net sale proceeds) - $550,000 (cost basis assuming no improvements) = $620,000 Capital Gains

$620,000 (Gross Cap Gains) - $250,000 (Cap Gains waived for primary res) = $370,000 taxable cap gains

$370,000 x 0.15 = $55,500 cap gains taxes owed

$620,000 (capital gains not including original equity in the home from downpayment and principal payments over 5 years) - $55,500 (cap gains tax) = $565,000 

That $565,000 number is the apples to apples number that you want to make sure you're getting the best return you can from. $2,500 monthly rent (not subtracting monthly expenses and mortgage payments yet) is $30,000 annually which is 5.3% return. Assuming at least 50% of the rent is going to expenses and mortgage payment, now she's making 2.65% on her money. She can get that in a high yield savings account. No hassle, 100% liquid.

Now factor in the equity she had at the beginning, the option of using a 1031 exchange, and intelligently investing the proceeds and there is a TON of room to improve the return on this capital!

Thanks for the discussion @Kelly Johnson! My wife and I have been debating replacing our queens with kings but hadn't occurred to us to put queens/kings in the bunk rooms instead of the bunk beds. Great idea worth considering!