All Forum Posts by: Andy Hayes

I've watched Buffett for a long time. I've even attended a BRK shareholder meeting. He's a shrewd operator; don't be fooled by his folksy charm. BRK has quite a few companies that it owns that depend on RRE.

I think at this point in his life, Buffett views himself as a modern JP Morgan, who instilled public confidence and played a major role in stopping the Panic of 1907.

Shack!

Why's he doing it? He owns a very large chunk of Wells Fargo. I looked at banks' balance sheets quite a bit in 2006/7/8. Wells had a ton of negative amortization loans on their books - mostly concentrated in CA. Wachovia's books were worse and it wasn't any mystery as to why they had to be bought by Wells - for all practical purposes, Wachovia was insolvent.

I don't know the current shape of Wells' mortgage holdings. Unless they were able to sell their crap mortgages to the Fed, Wells is a potential ticking time bomb if residential real estate prices continue to slide.

If you look at Wells' business model, they make a large chunk of their profits originating mortgages. How do you get qualified people to step up and start buying real estate? I dunno ... maybe have Buffett announce on CNBC that now's a great time to buy residential real estate?

Buffett looks like he's trying to help put a floor under residential real estate prices. I've followed Case Shiller closely for almost a decade and it keeps moving slowly lower. Not a huge drop like in the last few years; more a long slow death by 1000 cuts. Every market's local and there are some areas of the country that will do well but there are a lot of housing cesspools out there (Las Vegas, Phoenix, Tucson, Orlando come to mind).

Don't get me wrong; I think that there are some areas of the country that are great opportunities to buy and rent out residential real estate. You can probably even make money in some of the worst locations if you have a very long time horizon and intimately know the local rental market.

I have enough in my IRA to buy ~1 1/2 rental properties cash. I was planning on converting it to a SDIRA and buy a rental once I see whether or not I stink at picking rentals and being a landlord - I don't want to vaporize my IRA. :D So full deployment of IRA funds is further down the road.
I currently have enough cash on hand for a 20% down payment on one property with ~15% for a second. Since we all underestimate our costs, I wanted to get one property and see how it goes.

This thread started out as an idea of mine to get a lower interest rate for a property that I'd turn into a dedicated rental. However, the plan was much like Newt's idea to colonize the moon.

I continue to read all of the great information here and will plan on executing a plan that is well outside of the grey areas of the law. As for my daughter, I'll probably push her into a 30 year FHA loan and have her buy her own house. My daughter currently has ~1/2 of needed funds for a down payment and will probably be very close to a full down payment by herself before this fall. If she needs some additional funds, I can give them to her to make it happen. She originally wanted to buy a townhouse or condo but I steered her away from them because they are much poorer investments - higher HOA fees and less long term asset appreciation in her area.

At this point, I plan on buying a rental with 20% down. I'd like it to be pretty much turnkey and there are plenty that I can find that would be cashflow positive from day 1. If that works out well, I'll buy a second rental with another 20% down. As long as the first two go well, I'll buy a rental with a SDIRA. Etc.
I may vary the plan and do some light property improvements if the price is right on the house - at this point, I don't plan on buying anything that requires significant sweat equity.

The first time home buyer clause of the IRA states that it can only go for a primary residence so the original response that I'd probably have an ERISA violation was sage advice. If caught, the IRS would extract several pounds of flesh from me.

I've been reading about cosigning a loan for my daughter and even that's not too appealing since even though I'd have no interest in the house, it would count in my future DTI calculations for mortgages.

J, I wanted to come right back to quote your post after a couple minutes of research (in case anyone else is thinking something along the same lines as what I was thinking). Link: http://en.wikipedia.org/wiki/Mortgage_fraud

Pertinent excerpt:
Occupancy fraud: This occurs where the borrower wishes to obtain a mortgage to acquire an investment property, but states on the loan application that the borrower will occupy the property as the primary residence or as a second home. If undetected, the borrower typically obtains a lower interest rate than was warranted. Because lenders typically charge a higher interest rate for non-owner-occupied properties, which historically have higher delinquency rates, the lender receives insufficient return on capital and is over-exposed to loss relative to what was expected in the transaction. In addition, lenders allow larger loans on owner-occupied homes compared to loans for investment properties. When occupancy fraud occurs, it is likely that taxes on gains are not paid, resulting in additional fraud. It is considered fraud because the borrower has materially misprepresented the risk to the lender to obtain more favorable loan terms.

I didn't even bother looking for the IRA/ERISA issues.

It was a bad plan right out the gate; I figured that I was skating around the borders of what's legal. I'd like to thank everyone for their inputs; it's always good to have others confirm that you're trying to put together a stupid plan.

This is still in the very preliminary stages; I suggested home ownership to her a couple of weeks ago. We took a look at a few houses and she understands how much house she qualifies for and I understand what she'd like. Based on comp rentals in the area, it would be cash flow positive. But I used a 20% down payment; a smaller FHA (with PMI) down payment would be much closer to cash flow neutral - and I'm sure that I've missed quite a few odds and ends in the numbers.

That was the original route that we were going to take; me loaning her some money for the down payment. I've considered cosigning the loan. My concern is whether or not her income will cover the mortgage. I crunched the numbers and came up with a figure that she can qualify for with her income and the homes that we looked at are doable.
I have a very good relationship with her so I'm not too worried about that part of the equation.

That right there's a plenty good reason to scrap this idea.
I was rethinking the idea without the IRA but we'd still be talking possible mortgage fraud.
Back to the drawing board.

I'm a newbie to the idea of rental properties.

I've chosen an MSA where my 22 year old daughter lives as where I'd like to start buying rental properties. The vacancy rate is low and rents are moving up but there is also a decent supply of SS and REOs; the area has taken ~40% haircut from peak. I'm currently living in Tucson and wouldn't touch this market due to high vacancy rates and falling home prices.

As a long time renter (moved a lot and recognized a housing bubble in 2003), I like 3/2/2 SFR that isn't too dated. That's the type of properties I'd like to buy and rent out. I discussed with my daughter that she should buy a house (nurse with degree, zero debt) but she doesn't have enough saved to make that happen. As an alternative, I proposed buying a nice 3/2/2 that she and a couple of friends (also young medical professionals) could rent from me. I figured that this would be an excellent way for me to break into the rental business. My daughter's lease expires 1 September so I have plenty of time to consolidate my feces.

Here's my plan; please let me know if I'm doing anything wrong.
I plan on finding a house that both my daughter and her friends like.
I will put 20% down, including $10,000 from my IRA as a first time buyer. I will get a conventional 30 year loan for a primary residence, not as an investment property.
I will not write a formal lease. I will charge my daughter and her friends a below market rental rate - it would still have positive cash flow of several hundred dollars/month after PITI.
I will not treat the property as a rental for tax purposes - no writeoffs for anything outside of what an owner occupied home is entitled.
Once my daughter and her friends move out (probably 2-3 years down the line), I will convert the property to a legitimate rental property.

I think that this would be a good way for me to break into the headaches of being a landlord but am concerned that I may be pushing the ethical boundaries with respect to the mortgage, IRA funds, and tax treatment of the property. All comments and suggestions welcome, including those extremely critical of my proposed approach. If you have alternative suggestions, I'd love your inputs.
Thanks in advance.