All Forum Posts by: James Free

Hello BP,

Fairly new here, and I had a thought that I want to run by the group. It feels like there ought to be something wrong with this, but I'm not sure what it is.

Suppose you're at the stage of life where you're ready to retire, and you want your income to be truly passive. That is, you're not looking for great deals like Brandon on his sixth frappuccino every day; you want to lay on a beach and forget about it.

The trouble here is that it's hard to average over 10% net ROI (after taxes) when you're truly passive. Unleveraged real-estate generally rents for less than 10% of value, and then there's management fees, repairs, and taxes to consider. Leveraging means that most of your gains are in equity, not cash flow, with cash flow being far below 10% of equity.

Usually when people build a lot of equity here, they talk about selling, 1031s, etc. But why not simply do cash-out refis? I'm imagining a strategy where you refi upwards every year, extracting equity, and this basically causes your loan payments to keep pace with annually rising rent payments.

Conservatively, suppose your lenders require 25% down/equity, and your property appreciates at 4%/year. This means that the annual appreciation is 16% of your equity. You refi back to 25% at the end of each year, extracting an amount equal to 12% of your original equity. The refi fees roughly cancel out the principal payments you made over the course of that year. The mortgage payments increase as a result of your cash-out refi, but your rent also increases slightly each year, canceling out again.

Your cash flow, then, is 12% of equity COMPLETELY TAX FREE since you're increasing your debt along with it, plus whatever rent cash flow you might be making, which is probably small since your mortgages are substantial. And you get this without doing any work besides the refis once a year.

Ok, somebody shoot holes in this please.

First $250,000 in profit from sale of a primary residence is tax free, by law.

@Ralph R. I don't need to be persuaded that real-estate is a good investment in general. I asked specific questions about trying to operate from the Denver area because I don't see how to earn the rates of return that other people on this site seem to get (unless I assume that the recent 13% annual appreciation will last forever).

@Jerry Padilla any local agent I find seems to think that any property they can show me is a great investment, which is hardly surprising. That's why I'm asking here.

I am looking at overall return, but I don't have a good idea of where my expectations should be in this market.

Also, I notice that the Scott Trench work analyzes the just-completed year. He can't predict the future.

I live in the Denver, Colorado area, where values have been increasing at 10%/year for three years, single-family homes can hardly be found for under $300k anywhere, and there seem to be no multi-family units for sale within a hundred miles. I am ready to add property, but I’m not sure where the value is. Lenders want 25% down, and with that my cash flow on a single-family seems like a poor value for the investment.

Ballparking a $225k loan on a $300k property renting for $2k/month with a 10% management fee and $50 HOA dues (all typical here), it feels like I can't hope to cash flow more than $400/month even with 100% occupancy and zero repair costs. On a $75k investment, that's a paltry return. After taxes (my day job pays well; high bracket), it's even less. The real value would be in equity growth, but it feels like the local market has to pause soon, or even go backwards some.

I have basically two questions.

First, if I were to look at buying out of state and using a management company, how do I decide where? Suggestions?

Second, what kind of rate of return would experienced investors expect to get in my area? Am I doing something wrong with my math?