All Forum Posts by: George Pauley

I think "analysis paralysis" is the number one hurdle that most beginning investors have (fail) to get over.  Real Estate is very expensive compared to the typical costs most people deal with in their lives.  That makes it scary.

And it is tricky trying to give advice about this.  I mean, I don't want to encourage you to do something stupid!  ;)  At the same time, I do want to encourage you to trust in your own common sense.  I can (and I think many others here can), from personal experience, pretty much guarantee you that your first investment will have all sorts of negatives that you didn't know about.  Accept that.  And then move forward anyway.  You will learn a lot.  And your 2nd investment will be better, but you'll still learn ($$$) even more, making your 3rd investment better still, etc.  I like to think of this not inexpensive process as a different way of paying tuition for the education I need.  ;)

One nice thing about real estate is that it actually is pretty versatile.  Maybe you buy a house to flip, but can't find a buyer, so you turn it into a rental.  Real Estate has intrinsic value, and there is (almost) always away you can turn it into profit.  So you have more flexibility on an investment than you likely realize.

Learn as much as you can.  Seek advice.  Make the best decision you can.  And then pull the trigger.

Originally posted by @Anthony Wick:

I’d like to see some further math on your business model. If you forego that extra $50 per month, how much is that per year, over 2-10 years?

Over 2 years that's $1200. 

Now compare that to the tenant moving out.  I find on average (19 rentals built up over 12 years) that it takes me about 1 month to get a new tenant in place.  This includes the time it takes to get the unit back up into rent-ready shape.  But more importantly it costs me about 2 months lost rent, between the mortgage that I suddenly have to pay myself, repair costs, utilities, advertising etc.  So if I'm renting for $800 a month, it will cost me about $1600 to get the new renter in there.  If the old renter moved out because I raised the rent $50, then it will take me 32 months to make that $1600 back.  

I'm not saying never raise the rent.  If we think about rents in a market as being a bell curve distribution, I'm saying you can avoid expensive turn over by keeping your rent priced on low side of the median value, but probably still within the first standard deviation.

@Andrew Shelton. Your question about using personal residential equity to make investments is a common one in real estate. You will find plenty of people who argue strongly for both sides. I think mathematically it makes sense to use the equity. It's simple arbitrage. If I can borrow at 5% to make 12% on an investment, I should borrow as much as I can get my hands on. Emotionally the question is much more complex. We know in the back of our minds that there is risk associated with these investments. And I'm pretty conservative in my approach so I'm inclined to leave my personal residence alone. In addition my wife is pretty against taking out a second or a HELOC and... happy wife, happy life! ;)

Trying to find middle ground I think whether to HELOC or not is probably a question of timing.  It can be very hard for people to get into that first investment property.  They have to scrimp and save and do without, and build up credit, etc.  If those people are young (and presumably have time to weather an investment going bad), and are disciplined, then I'd say yes, go ahead and HELOC to get your foot in the investment door.  But after you have an investment or two, and have some income comining in, the next investment becomes a bit easier, and the next, and so on.  At this point, I think you need to pay off your HELOC and your mortgage and start solidifying your gains.

I heard Kiyosaki recently say that he had gotten to a point in his life that low, but stable, ROI was much more important to him than getting out there and maximizing his profit on every deal. I'm trying to describe that inflection point.

Also, one of the problems with this approach is that just about everyone's first investment ends up being a lemon.  We learn from them and move on.  But, do I really want to tell people to mortgage their home to go buy that lemon?

In the end, the HELOC is a personal decision.

I believe that rental turn overs are the most expensive, profit eating, things that can happen to an investor.  As such, even before Covid, my viewpoint has always been to maintain rents unless they are significantly under market.  And then, only raise them to a point that my renters would still be hard pressed to find a better deal.  "Best house on the block, for the least rent" is my mantra.  Rentals are a long term proposition.  It's not going to affect my bottom line that much if I get the extra $25-50 a month this year or have to wait until next year.  

Anyone know why my posts are always double spaced?  :)

You are putting away $5k a month.  If you buy the new home, costing you an extra $700 a month, you'll only be putting away $4.3k a month.  Most people would be quite happy putting away $4.3k a month.  So point one for buying the new home.  :)

You also have $50k in the bank and need $24k of that to get into the new home.  That leaves you $26k which is a comfortable cash reserve.  Point two for buying the new home.

There is a concept of buying new investment properties to generate the income you need to buy your doo-dads (like the new home).  You need $700 a month.  You can get into properties in the midwest that will net you ~$250 a month for about $25k in expenses.  You would need 3 of these and about $75k.  You could either buy the investment properties first and then buy the home, or vice verse.  Since your condo isn't going to be available forever, and it should only take you about 1.5 years to buy enough investment properties to cover the $700 a month, (at your current savings rate), I would lean towards point 3 for buying the new home.

You did mention building equity in the new home that you intend to live in.  I really discourage thinking about you personal residence as an asset.  You always need a place to live.  If you sell your home to pull the equity out, you will just need to use that money to buy a new place to live.  If you take a mortgage out against the equity then you are incurring (non-productive) debt.

Physics/CompSci here.

Let me posit an engineering response :)

According to labor statistics about 5% of the work force are engineers.  The median engineering salary is at about the 75th percentile of national salaries.  Thus we should expect engineers to have disposable cash to make real estate investments.  In addition, engineers have the backgrounds needed to understand the mathematics of real estate investing. (Something which probably is an obstacle to the rest of the population.)  It should not be surprising that all of this combines to cause engineers to comprise a substantial percentage of real estate investors.  Well over the 5% of the general population.  Which should make the real estate investment world appear to be overflowing with engineers.

I am a fan of turnkey.  It fits my busy lifestyle well.  However, you will pay a premium when going turnkey.  The turnkey provider wants to make money too!

On the surface it just like this particular deal isn't working.  That happens a LOT.  Most deals don't actually work out.  But there will be other deals.  Keep looking.  Tenacity is a virtue when looking for real estate deals.

On the other hand, there is something in the wording of your post that makes me think perhaps you really don't want to deal with the hassle finding new properties, getting quotes, calculating returns on successive properties until you find the one that works?  If so, that's OK.  The sweat equity approach isn't for everyone.  (Did I mention I'm a fan of turnkeys?) ;)

Robert Kiyosaki often talks about the difference between a job and investing.  With a job, you work for your money.  Investing is, should be, much more passive.  Pretty much check your bank statement each month to see how much you made.  (Gross oversimplification!)  A lot of people here seem (to me at least) to have turned real estate into a job.

If you'd rather spend your energy, say perhaps working a job that gives you $25k to invest in turnkey properties, that is perfectly fine and even reasonable.

If you do go turnkey, be sure to check the company and the deal out thoroughly.  Start a new thread and ask other BPer's what their experience with the turnkey company has been like.

Good Luck!

A few years back I had a similar question and started asking my team for advice.  More involving how much to set aside, but this ends up getting into the mechanics of how and where to put the money.  One piece of advice I got from a conservative lender was to hold back 6 months worth of operating expenses.

So, we start by having a separate bank account for the business.  When the rents come in, they go to that business bank account.  We then allow ourselves to transfer any funds above that 6-month reserve value to our personal accounts.  This is tracked as a payment to the officers of our LLC.  Which helps to make sure we don't co-mingle business and personal funds and have clear tracking of how business money is spent.

This does mean that some months we don't get to pull any personal cash out due to high expenses.  But it also means we're not writing personal checks to cover those expenses either.  

Also, as our real-estate "empire" has grown, we've made some adjustments.  With 15 rentals, 6 months of operating costs is about $70k.  That's a lot of money to leave sitting in a checking account.  So we'll take about 1/2 of that (arbitrary amount based on our comfort level) and put it in short term investments like Patch of Land.

One of my favorite aphorisms is "Do the math, and the math will tell you what to do."

The key here is that these types of questions can almost always be answered with simple math.  But, just like those dreaded word problems in math class, you have to set it up correctly.

For example, you're realtor friend suggests putting 20% down to lower your interest rate, and you're wondering if this is a good idea or not.  The first question is:  How much lower of a rate?  Let's assume that the 20% down lowers your rate from 5% to 4%.  So you save 1%.  

Now, the next questions are.  1.  Can you afford to pay the extra 1% if you don't put 20% down?  (If not, then you have to put the 20% down!)  2.  If you took that down payment and made a different investment with it, could you make more than 1% on that investment?  If you can make more than 1% in a different investment, well then you should probably put that down payment money in the other investment!

Of course, in the end, there are other considerations than just pure math.  For example, its usually a good idea to have cash reserves.  If making the 20% down payment leaves you cash strapped, then there is risk that you could lose the home during a bad economic situation.  Whether to accept this risk or not is a personal decision.  But the math moves you a long way towards coming up with informed decisions.

The same sorts of mathematical analysis can help you determine whether to buy house #1 for $200k, or house #2 for $250k.