All Forum Posts by: James Free

I'm interested in starting a discussion on easy ways to figure out appropriate amounts of dwelling and liability coverage to purchase for a rental property in a given area. I don't see a lot in terms of resources for helping consumers do this, other than "use the numbers that insurance companies hand you", which seems like a poor idea. As investors branch out into different regions, it can be difficult to figure out what's needed in a new locality.

What strategies has this community found?

I need a new tax preparer who specializes in dealing with rentals. I have several self-managed SFRs in northern Colorado. Anybody know a rock star?

I'm looking for recommendations for lenders in the Milwaukee area who do post-rehab refinances on properties valued around $100k. Delayed financing support would be great.

Thanks!

Exterior panels tend to have latches that take a padlock.

http://reason.com/blog/2019/01/17/dc-mayor-says-ne...

Looks like Washington, DC is trying to ban short-term rentals if the landlord doesn't occupy the building AND limiting rentals where the landlord does occupy to 90 days per year.

I think my biggest personal concern will be not being able to AirBnB when staying there myself, but it's a major hit to investors in that area. I can't imagine it will help valuations much, either.

@Shane H. I've heard that rule of thumb before, but the problem is the transaction costs. Selling is very expensive, and buying is expensive too. If I own a property and could buy an identical one next door for 5% less, selling mine and buying that one would be a losing proposition.

Generally speaking, you'll get a higher interest rate and more flexibility with a HELOC.

With a HELOC, you pay little or nothing up front and can borrow or repay whenever you want, up to the limit. With a refi, you have up-front refinance charges (you can finance these into the loan, but don't think that that makes them go away), and then you get your entire amount immediately, at interest. You can't partially repay an unused amount. Advance principal payments on a mortgage don't lower the payment; they shorten the term, which is meaningless if you do another refinance before the term ends.

Also, a refinance changes the interest rate on all of your existing debt. A few years ago, this might have meant lowering it. Today, it probably means raising it.

In short, cash-out refinances were great in 2013, when people wanted to refinance anyway to lower their rates. Today, they're less sensible. You'll probably prefer a HELOC. Of course, it's much harder to get approved for a HELOC (most lenders will only do one on your primary residence), so you may not even have a choice.

@Brent Perkins You are where I was when I started investing in real estate. I did a cash out refi and then retained the house as a rental, and I still believe in that decision.

At the end of the day, it comes down to opportunity cost. If you sold that house and took the cash, what would you do with it. Invest it? Invest it how?

If you believe that the stock market is a better place for your money than real estate investing is, then go for it. You won't find much of that opinion on this website, but that's your prerogative. You won't have $100k to invest, though. Selling a house costs you about 6% of its value in agent commissions. For a $240k house, that's ~$15k lost forever. 

But if you believe in real estate as an investment, then you need to understand that transaction costs are huge in real estate. Selling will cost you that $15k, and buying costs you a good $5k in closing costs. In other words, if you sell your house and use the money to buy a different house as an investment, your transaction costs will take a huge bite out of your money!

Far better is to choose a different tax-free option: not selling. Obtain your first investment property without the costs of an extra sale OR an extra purchase - just repurpose the house you're moving out of! You'll have some combination of monthly cash flow, mortgage principal payments, and house appreciation all adding to your net worth. The rate of return on your equity is usually far larger than you could expect to earn investing that money in other ways.

In fact, many investors deliberately move every few years just so they can purchase using friendly owner-occupant mortgages, improve the property while occupying, and add to their portfolio by moving out.

Now, what about selling? Won't that big tax bill come eventually? Not necessarily. You can use cash-out refinances to extract more equity forever. Why ever sell, as long as the investment is worth it? Own 'til you die!

None of this means you get out of having to do market analysis, though. It may be that your current residence makes a uniquely terrible rental. Your suggested $500/month cash flow sounds good, but that's pre-refinance. I also have no idea whether you ran your numbers correctly, or whether your neighborhood is growing or dying.

What I am saying is that the fact that you already own it is a huge benefit vs having to buy to invest.

My first SFRs are middle class or better. The tenants never call, and the property is returned about like it was when they moved in.

Then I bought a duplex in a blue collar area. It is my bad deal. Great on paper, but only because the only way anyone in the area could afford rent was with welfare programs. I've been through a few people, finally shelled out for expensive management, and still have regular issues. Not only do they do damage and make messes, but they make service calls for things like "I can't figure out the thermostat" or "I have too much trash for the trash can this week."

Contrast with my SFR tenants who once said "We broke the screen door, but don't worry, we replaced it!"

"You should have screened better" is lousy advice when no one who truly passes screening would rent in your area.

Lesson learned.

Quickbooks seems like a common standard here, but I can't let this thread go without a mention of Mint.com.