All Forum Posts by: Ian Russell

@Ian Russell first of all, kudo's on getting to where you are, you've done very well and that deserves some pat's on the back, celebrate the win's. 

I hear you speaking to questions of the business fundamentals at this "sport", the one's often NOT written of or spoken of. Reason being, most content out there is to draw in "rainbow chasers" and the upstarts. There is a lacking for the nut's & bolt's intermediate. 

As much as getting to free & clear and holding forever sounds great and has a natural feeling of being "the" thing to get to. In Business it's neglectful. 

As your starting to experience, as @Nathan Gesnerpointed out, your bottom line is eroding. 

Let's reframe this and imagine instead of rental real estate you had rental cars. 

It readily jumps out that right away when you get a new car into the fleet, it's a great performer even though the net from it is a bit tighter because of covering that acquisition cost. 

It rents for more because of that new car smell. No maintenance to be had as, everything is new. 

Than a bit into the ownership, that bottom line starts growing and growing. It's this middle timeline that it really starts putting a smile on the face and earns that moniker "cash cow". It's not that old, so it handles the miles well. Sure there's been oil changes and tires, but these expenses were not that big an impact and it's still got "that look" and it books fast and stays booked up. 

Now, a little more time passes and all of a sudden that smile is upside down and turned into sentiment of every time that auto is mentioned "great, what now....".  

It's easy to get a feeling what was great has become possessed. It's really just the natural arch of time, the miles are taking there toll. They style is now a bit out of date, it's more and more often begrudgingly rented as a later option by people who truly wanted something else but, ok, fine, that's all there is, ok, I guess...... 

The maintenance seems to be a steady flow, and every time it's gritting teeth hoping and praying it's not another major item of significant cost. 

And if keep in this downward cycle, it become a chase of trying to recoup the expense outlay conveyor. And it's a loosing battle but one get's so far into it chasing "it's gotta be done now, I think, I hope, maybe". 

Real Estate is no different. 

Everything wears out. Everything has a use span. And if stay into any 1 property long enough, no, it's never really "paid-off" because after say 20-odd years your most likely to have to replace EVERYTHING to such an extent that it's an expense roughly matching a complete property purchase itself. 

There is a "sweet-spot" of performance that is on average yr 3-7. On average about 5yrs of happy-days. 

Now Commercial Residential (apartments etc) is a bit different. Yes, this cycle still happens but it's factored in, at least everyone who know's what there doing factors it in and there is a program for rolling renovations every 4'ish yrs on average. With major renovations every 7'ish. Rejuvenating them to be like-new, with the current trends, etc.. 

Now too the money. 

Your doing yourself a great disservice keeping so much $ locked up in equity. 

First of all, your ability to earn off those $'s locked into equity is much more limited, and thus the returns it could be earning, lost. 

Second, and so many miss this and it's confuses me, by having expanded net cashflow your also making your tax impact and loss of gross revenues too taxation way WAY bigger than it need be. 

A free & clear property = maximizing how much flesh the tax-butcher takes. 

And it's a choice, so why choose to donate maximum $ from your pocket to really the worst steward of capitol deployment since..... well since EVER. 

Mortgages are your FRIEND. They (a) put the $ in your pocket and (b) limit how much that tax-butcher is taking from the same pocket. 

Now INTEREST RATE, because i already feel the questions and arguments of "but, but, but the interest rate is ____". 

So here is the TRUTH about lent money: If you borrow me $100 today, and I pay you back that $100 in 10 years, did I give you back $100 ????? NO. 

Confused? It's ok, that's understandable, the US education system is designed to make good little consumers, not wise informed investors. 

INFLATION. 

Inflation is a function that is omnipresent in US economy and really nearly all. Meaning, it will ALWAYS be. 

And via inflation, say today that $100 buys a person 3 full tanks of gas. But in 10 years, it buys only 1.5 tanks of gas.     So, is that the SAME $100? 

NOPE. 

So in truth, when a borrow say $100k of money today, to acquire an appreciating asset that we can operate for an appreciating use value, the true and accurate math is that the purchasing power of that $100k we got full use of today, and can pay it off over time, DEMINISHES in it's purchase power over time THUS making it less $ we are paying back over time once inflation adjusted. 

And when you understand this, we can understand even an 8% interest rate isn't really the full money plus 8%. 

And going a step deeper, it's not you the investor who pay's this 8%, it's the tenants isn't it. 

So the only factor that truly matters is does the revenue it will produce cover the expenses to an extent where it's a net profitable venture? 

Ok, to wrap it all up. 

Most LT professional Landlords keep there leverage point via leveraged/lent funds to a range of 45-65% LTV. As the equity builds and that start hitting on or near 50% is when most start thinking refi, or SELL too 1031 to deploy into other, newer assets resetting that cap-x timeclock too 0.

And smart investors think "facelift" every 4'ish years and renovations/updates every 7'ish.

For your situation I would be discussing Pyramiding, and Consolidation. We would be discussing which is the better fit for yourself, your lifestyle, life goals etc.. Each has it's merits, each has it's thorns. 

From there would come the discussion of which financing (OPM) is a best fit for that next chapter of things. 

Unless these properties have some special factors such as waterfront etc., I would not get attached to then with thought of "forever home". 

Forever Homes are for owner occupants, not for business.  

@Ian Russell

1. Not a bad problem to have.

2. What is your goal? If the properties are taking care of themselves, and providing you a return ie. income, tax deductions against W-2 income then consider what happens when / if you sell.

3. Have you looked at multifamily larger than 4 units? Consider selling some of the older properties to do a 1031 exchange to buy larger properties. Ensure you learn how to evaluate and value the multifamily properties properly before jumping in, it's definitely worth the leap if you want to grow your portfolio.

4. Re-finance some of the paid off properties, then use the refinance money to buy more properties. 

Hope this helps.

Diminishing Return on Equity (ROE) Over Time in Real Estate Investment

The graph above shows how the Return on Equity (ROE) diminishes over time for a real estate investment. As property values increase (through appreciation) and the equity grows, the ROE declines unless cash flow increases proportionally. This illustrates the common problem of holding too much equity in real estate without actively leveraging or reinvesting it. Investors should regularly evaluate ROE and consider moving funds to a new investment when their return diminishes below 8%, which typically occurs by year 7.

You also mention that your properties require a lot of maintenance. I would consider selling off your older, lowest-performing properties and investing in something nice and new. You could sell a $500,000 property and use the funds to purchase two properties worth $750,000 with $250,000 down on each.

If you have the time and energy, consider diversifying into self-storage, multi-family, stocks, or other investments. I bought a self-storage facility that produces more cashflow than ten single-family homes for 1/5th the price. You have enough equity that you could purchase a large storage facility with employees and produce a much better return for decades to come without the headaches you experience with tenants and toilets.

You could: 
1. Pull a line of credit over all the properties and invest that in the stock market or other investment properties. (I do this and flip more properties.)
2. Sell off half and pay off the other half or so which is probably give you more cashflow now, but less appreciation over time. 
3. Sell all and reinvest into some new constructions in your area that you can manage. This eliminates the PM, and hopefully a lot of the cap ex, but you will shrink your cash flow and appreciation potential. 
4. Pull a line of credit or sell some and invest with a partner like a JV or Syndication.

What I am hearing is you are done with the growth stage of your real estate journey. What risk would you be willing to take, and what do you want the next 10 years to look like for you?