All Forum Posts by: Toby Johnston

@Serge S. I was actually just referring to the 50% rule, meaning that I want my monthly mortgage payment (just the principal and interest) to be 50% or less than my monthly rent. Regardless of any rules of thumb, are you still down on this market given a 15 to 30 year holding period and today's interest rates?

Sorry I don't know how to PM you.

I'm in contract to sell a rental property in San Jose, CA and trying to decide what to do with the proceeds. Given that the numbers don't really work where I live, I'm willing to invest out of state. My primary focus is SFR or small multi-family rental. I'm a long-term buy and hold investor. Ideally I'd like to buy somewhere with favorable long-term demographics, warmer weather, and low taxes but it seems like prices have really run up in a lot of places I look. Any suggestions for me? Ideally I want it to be a short plane ride away so I've ruled out the East Coast including Florida. Should I just sit on the money for a while to see if we have a market correction? I'm afraid of missing out on low interest rates if I wait too long. Thanks for your thoughts.

I'm in contract to sell a property in San Jose, CA where the market is at an all time high for some areas. My plan was to reinvest in a few SFRs in the Phoenix area (maybe Gilbert or Chandler). My investment requirements were something in the $150K to $200K that meets the 50% rule. Do you think I can find properties off the MLS (working with a realtor) to meet these terms? Are my return requirements too low? If the market is softening down there, should I just keep making below list offers until one gets accepted? What would you do if you were me?

I've been worried about the run up in prices the past two years but my thinking was that the low interest rates now still justify the investment if I am holding for the long-term.

Welcome Adam. I'm also a CPA interested in the Utah market. If you were to choose a City in Utah County or Salt Lake area, where do you forsee the most growth potential over the next 10 years?

Thanks guys. I believe Derek got the gist of my poorly worded question. I am comfortable with the definition of the rule as I've read a bunch of the forums treating that subject (including several well written posts by Jon Holdman). I am using it to quickly analyze potential investments by taking 50% of the gross monthly rent and seeing if that exceeds my debt service by $100 or more (which is my positive cash flow goal per door). It's just that I can change the debt service number by varying the down payment. So maybe the question just goes back to how much leverage I am comfortable with and what my bank will accept for a LTV ratio.

What should I be using for the down payment assumption when applying the 50% rule? Obviously, the larger the down payment the smaller the mortgage and thus the greater the likelihood of actually passing the 50% rule threshold. I mean passing the 50% rule with a 20% down payment is a lot better than a 30% down payment, right? I'm interested in hearing how others think about this.

Possible yes but not a realistic/probable expectation in my opinion. Appreciation is too optimistic and it sounds like he does not factor any economic/real estate cycles. His numbers get that large because he is expecting it all to work sequentially to perfection so that the compounding is so powerful. I would assume more down payment, less appreciation, and then factor in at least one or two down turns in the market during the 15 year stretch.

A couple of points to clarify:

If you run this HML business as a sole proprietorship and it is truly a business, not just making periodic investment loans, then the interest income from the loans becomes ordinary subject to self-employment taxes. This also allows you to make retirement contributions subject to certain limitations. If you do the same thing, and it sounds like you won't, within your retirement account, then it would be subject to UBTI. Bottom line is to distinguish between an investment activity which generates interest income and a business activity which generates ordinary income (just like bank).

Be careful with rules for UBTI if your plan is to use self directed retirement plan funds to run an HML business.