All Forum Posts by: Ava G.

Thanks for this reminder. Agree, I have so much to learn. I've only started reading about REI a few months ago (currently finishing my first 3 books on REI). This whole thing is totally brand new to me as I came from a completely unrelated industry (Information Tech). I'm reading BP everyday and it helps a lot.

BTW, thanks for all those who answered so far. It has been a great help. I'm now getting a better picture about this whole thing. Some things weren't clear to me from the beginning, and many things I wrongly assumed, hence the gloom and doom scenario. Now, I feel a bit more confident about REI.

That's one thing I'd like to clarify. If I'm in the middle of a mortgage, what will happen if I sell the property? Can I transfer the mortgage to the buyer?

In my example, not including appreciation, I sell the house at its original value of $100,000. Let's say the remaining mortgage is $60,000. I pay the bank with the amount I got and retain $40,000 (which was my equity). This is good if the person has cash. But there's very little market for people with that much cash. Wondering what's usually the process.

Anyone can answer.

Yes, I agree I have to do my due diligence. But, I'd like to know in case I did or in case I thought I did and things still turned bad, what are the worst things that I have to bear and whether they are realistic.

I agree with you though that in the end, if foreclosure doesn't happen, I still have a house.

Don't want this to be a REI vs stock market discussion but from what I've learned, as long as you're diversified with your stock market investments (you have a good mix of stocks / bonds (foreign & local) depending on your age), use cash (not buy on a margin), and yearly rebalance, you shouldn't take a huge hit. If you think you have lesser time to recoup any huge drops in stocks, you should be heavily invested in bonds / safer investments instead and have fewer percentage in stocks. Of course, with lower returns. The key to stock market investing is really starting early.

My concern is how to exit if things turn sour. It's easy to go in and out of the stock market. But once invested in REI with leverage, I feel there's no turning back as I'm tied to a 20+ year debt.

Ok, this means that No. 4 scenario is unlikely (as in completely unrentable).

How about scenario No. 3 (rentable but negative cash flow)? I imagine a case when I have some competitors who bought theirs at a discounted price or they could just have a much cheaper property. They can lower their rents and still have a good cash flow. Since they define the market price, I also have to lower mine to make it rentable.

In your experience, does this happen a lot of times? If I have negative cash flow, is appreciation the only way out?

I'm working in Singapore but I'm thinking of buying a rental property in the Philippines, which is my hometown. I notice they're more or less furnished especially with condominiums (which is what I'm targeting as a rental property). But you make a good point.

I have been investing in the stock market for quite some time and since I'm in for the long-run and I'm not obligated to pay monthly dues, I have some peace of mind. If, for some reason, I stop working and don't have a monthly income, it's no big deal. I can add more investments when I'm earning again. I can also take out my money anytime I want with just a click of a button.

Now, I began to take interest in REI but the prospect of being tied up to a 20-year debt (just an assumption, can be 15 or 30 instead) seems scary as a lot of things can happen in a span of 20 years.

But to make my fears clear, I'll give an example scenario. (Please bare with my me as I'm a total newbie and just familiarizing myself with the terms.)

Say, I bought a property worth $100,000 and put a DP of $20,000. Now, I owe $80,000.

Assuming fixed-mortgage, let's say, I need to pay $900 monthly for 20 years (mortgage + fixed expenses). These scenarios can happen (1 - being the best, 5 - being the worst):

1: I will have tenants all the way (with minimal vacancy) and great cash flow (at least 10%).

2: I will have tenants all the way (with minimal vacancy) and low to average cash flow (2-8%). It's as if I invested in money market / bonds / average return of the market.

3: I will have tenants but negative cash flow. Say, the market's rental rate is below what I need to have a positive cash flow. Therefore, I need to come out with some cash from my own pocket.

4: No tenants. I have to come out with the full amount monthly from my own pocket.

5: No tenants. No money out of my own pocket to pay the mortgage. Doom and gloom!

(Note that the above scenarios don't account for long-term appreciation, as I've read, it's not so predictable.)

Thinking about it, I can bear No. 3 scenario and I do think there may be periods when in this can happen. As with No. 4, I can just consider it as transferring my money to an illiquid bank (like forced savings). In the end, I still have a house worth $100,000 (+ whatever interest I paid). Now, it's the No. 5 that truly scares me. What if No. 5 happens in Year 10, for instance.

Again, going back to stocks / bonds, as long as I buy an index (local and foreign), there's very little possibility that everything I've invested would disappear (at the cost of a smaller returns). Worst thing that can happen is there's a total collapse of the entire market (like the Great Depression).

But when it comes to REI, the possibility of losing everything seems more likely as there are many foreclosed properties.

My question is, how do I avoid having the rental property foreclosed and losing everything I put into it?

Anyone can give their thoughts, especially those who have been doing this for very long? I may have a very shallow and highly unrealistic analysis as a newbie, that's why I need help from more experienced investors here.

From experienced REI here, do you usually furnish your apartment / unit? Or do you let the would-be renters furnish it themselves?

Just wondering which of the two has more market. Or what kind of market has demand for furnished VS non-furnished.

I'm thinking if I am going to furnish the unit once we close the deal and add that as an additional cost.

I'm reading The Millionaire RE Investor and he has a chart there calculating ROI and ROE. However, I'm a little unsure how some values were calculated.

Assumptions:

Property Value: $70,300

DP (20%): $11,249 (initial investment acquired at 20% discount)

Rent and market value appreciation: 5%

Mortgage: 30-year loan at 7.43%

Now on his chart on the first year, here are the values:

Start of Year Market Value: $70,300

Annual Price Appreciation: $3,515

Year End Appreciated Market Value: $73,816

Annual Principal Debt Pay Down: $420

Year End Accumulated Equity: $29,244

Annual Cash Flow: $300

ROI: 37.7%

ROE: 16.7%

I'm curious how Annual Principal Debt Pay Down, Year End Accumulated Equity and Annual Cash Flow were gathered based from the given assumptions.

Anyone can shed some light on this?

There are cheaper condo units in the area. We are also eyeing another unit being re-sold at a 33% discount by the owner (Option 2) but we need to come out with a huge amount of cash outright. Unlike if we buy from the developer (Option 1), the terms are more flexible / long-term for the DP. This inflexibility for Option 2 is holding us back as we don't really have that much ready cash.

Anyway, I don't know if I'm just making the mistake of falling in love with the property that I mentioned in the beginning (Option 1). The 2nd property is also in a great location (but not the best spot) and since it's cheaper, there's a bigger market to rent or sell it to (higher cash flow).

To help with the analysis, here's a rundown:

Option 1:

Pros:

• Great location within an already great location, almost a perfect spot (good for appreciation)
• More flexible payment terms (cheap initial cash out)
• Building's exterior & interior are hands-down more structurally beautiful & unique
• More amenities (has more that are not typically found on other condos)

Cons:

• More expensive
• Very low discount since being bought from developer
• Lower cash flow

-----------------------------------------

Option 2:

Pros:

• Great location (still good for appreciation)
• Big discount (33%)
• Higher cash flow
• Less expensive

Cons:

• Inflexible payment terms (huge initial cash out)
• Less amenities (just the regular ones)
• Structurally, it's just a regular building

If I'll base on the numbers alone, Option 2 is much better. But if I base it on the uniqueness of the property, Option 1 wins hands down. Plus, even Option 1 is more expensive overall, the payment terms are more flexible. The payment term is also a major deciding factor for us.

Can anyone help me think through these 2 choices? Am I overcomplicating it whereas the obvious choice should be Option 2?