All Forum Posts by: James Free

Not accounting for the reinvestment of cash-flow is, in my opinion, the biggest flaw in BiggerPockets' calculators (https://www.biggerpockets.com/rental-property-calculator). That flaw was my motivation to make my own spreadsheet that allows me to supply a "cash-flow reinvestment interest rate" in my inputs so that I can compare properties more accurately. It accounts for the fact that gain X dollars/month in cash-flow is better than gaining X dollars/month in equity appreciation because the cash is liquid and re-investable, while the equity is illiquid and has a rate of return of zero.

Tony and Dave are covering it well. I'll admit that a risk with a 1031 is that you overpay for the new property because you're afraid to miss your window.

A big unmentioned concern about the 121 plan is that they actually have to move into the house for two years. Do they want to do that? That's a big life change and a lot of inconvenience (if they're like my parents, they have a LOT of junk by this age) just to play the tax game.

Your parents should be at a stage in life where they are enjoying their wealth, not jumping through hoops to manage it.

Sitting in a single property and getting 15% over 30 years is quite hard, actually. The benefit of real-estate investing is using leverage, and in your scenario, most of your 30 years is spent with very little leverage. You're also doing the math in a way that suggests that as you collect your cash-flow, you'll let it sit in a bank at 0%, whereas your mutual fund option is reinvesting (compounding) every penny earned. That's not a fair comparison. You could put the cash flow in mutual funds as you receive it, or you could use it as down payments for more real estate. To fairly compare the two investment classes, you need to be reinvesting gains from both.

Of course, actually getting 12%/year in mutual funds is also very hard. 8% is a more realistic number, and beating 8% in real estate is a lot easier than beating 12% is.

Finally, there are the tax implications. Your equity investment will incur capital gains taxes at the least, and possibly income-level taxation if certain politicians have their way. With real estate, there are ways to realize gains tax-free, which has a substantial impact on total return.

I encourage you to look into getting more realistic numbers for each of your scenarios. In the real-estate case, consider rolling your gains into more/larger properties over time and cashing out your equity with refinances.

I'm curious as to whether any experienced landlords have had success with the technique of refinancing the same property twice, with the first being a cash-out refinance and the second being a rate-lowering refinance.

Having done both types of refinances before, I'm well aware that if you want cash out, lenders penalize you with substantially higher interest rate and point requirements. However, if you wait some period of time (often six months), you could refinance the property again (perhaps with a different lender, or perhaps with the same lender) and since no new cash is being taken out, you'd just get standard rate refinance terms.

The downside to this is obviously that refinancing is expensive, and doing it twice is doubly-expensive. However, the cost could be somewhat mitigated by opting for fewer points and a higher rate in the first refinance (to the extent that the lender offers the option), knowing that you'll only be paying that rate for a few months.

Has anyone actually done this? Have the numbers made sense? Any gotchas?

I was hopeful when I saw https://www.biggerpockets.com/... under BP Insights. Having a good rent analysis tool for BP members would save me from paying for other services. Then I tried asking it for a rent analysis for my 4-bedroom house in Longmont, CO, and it said the median rent is $795.

That's barely a third of what it should be.

The tool actually listed the comps it used to generate the data. Most were in Louisiana, and some were in Sioux Falls, SD.

Has anyone else had experiences with this tool that are worth sharing? I'd like us to help drive it to the point where it can actually save us from paying for competing services. To the BP Team: Good idea, but let us know when it's ready for prime time!

1031s and foreign investors have outbid me in the past, for exactly the reasons that @Ellie Perlman described. Another reason I'd like to add to the mix is short-term rentals, which have the potential to gross far more revenue than long-term rentals. A buyer planning to AirBnB can justify a significantly higher price than the rest of us. COVID may reduce that factor going forward.

In my market, the biggest problem driving prices higher isn't so much investors willing to overbid on new properties as it is an unprofitable rent-to-price ratio across the market. Cashflowing a new property is impossible if one pays anywhere near MLS pricing, unless you run the numbers incorrectly, which some newer "investors" may be doing. I also see more and more existing investors who are settling for, or even celebrating, terrible ROI on their rentals. I see two primary reasons for this:

1. Deferred maintenance, and lots of it. It's easy to say you're cashflowing when you haven't had capex for over a decade, but your equity ROI is probably negative.

2. Bad ROI math. So you acquired for $50k and are making $10k/year in total return. Great! For year 1, anyway. But if your gains are mostly equity, and years later you have $200k in equity and still only $10k/year in new return, your ROI is terrible now. You might think it's good if you're still imagining that you're only $50k into the property, but you're not. Those of us celebrating their paid-off $300k SFRs that cashflow $10k annually and appreciate at $10k annually would be better off in stock, where you average the same $20k total post-tax return, all in cash, and with no management effort whatsoever.

But all of this overpricing might be a moot point soon if it's true that a quarter of the country's renters won't be able to make payments once the government's COVID spending stops. Throw in a foreclosure boom, and those of us with capital are about to find deals aplenty.

https://www.cnbc.com/2020/07/23/heres-what-to-know-about-the-usdas-loan-program-for-some-borrowers.html

This isn't the first time USDA loans have appeared on these forums, but they're rarely talked about, so I thought this article was worth sharing. These loans are a potential way to get started in REI, but by and large, their "low-income only, and if you have savings, you can't get approved" nature screams "2008 all over again".

@Ian Stuart @Wendy Harden can you share the names of your lenders?

I have a thought that I'd like to run past the group.

I've been refinancing my portfolio to take advantage of lower interest rates lately, and I've found that my appraisals have been increasingly disappointing. More annoyingly, I find that they almost always exactly match Zillow's "Zestimates" for the houses as of the day of the appraisal, and that those numbers have declined in the weeks leading up to the appraisal.

Now, it's tempting to just shake my fist at lazy appraisers copy-pasting Zestimates, but I've had different appraisers in different properties. It would be quite a coincidence. Rather, when looking at the comps used in both the appraisals and Zillow, I'm starting to think that both methods of evaluation might suffer from a common characteristic: Not distinguishing between distressed sales and normal sales.

And this might make sense. If distressed sales become prevalent, why would any buyer - investor or otherwise - not hold out for a "distressed" price? Lower comps are lower comps; the impact on the value of your properties is legitimate!

Except for one thing: Condition.

Zillow's biggest weakness has always been its complete unawareness of property condition. A $50k kitchen remodel and a kitchen untouched since the 1970s are both just "kitchens" to the computer. Distressed sales are far less likely to feature cleaned-up, fixed-up interiors that we commonly see in MLS sales. While computer-generated comparisons can be decent when all properties are in similar condition, that is going to become less true as distressed sales become a larger share of total sales.

And it's not easy to identify distressed sales; they're not always foreclosures or short sales. Sometimes it's just a quick cash sale to an investor! Or even one involving an agent!

Nevertheless, we'll see the impact in appraisals, and that's something every investor needs to be prepared for, whether he's refinancing or financing a conventional purchase loan.

@Joseph Cacciapaglia I have the same opinion on retirement accounts.

I am not thinking about quick access to capital as an emergency fund here. I am thinking about maximizing returns. Locking money up means that if a deal requiring a quick close lands on my plate, I might not have the capital for it.

I suppose we could have a follow-up conversation about the merits of borrowing from HML vs using your own capital (say, by selling equities). You're probably better off using your own money if you have it, on paper, but if that costs you the ability to finance the next deal, then maybe not!