All Forum Posts by: John Clark

"With respect to their lawyer, he did give me time to approve lease, but they did not provide the full lease during that time frame and it just fell to the wayside. My instinct tells me they were working me to push the deal through."
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"it just fell to the wayside"? -- This is where you lose me. Did you discuss with your lawyer the consequences of them not providing the lease in time for review? Were YOU working to push the deal through? How could you expect the seller to NOT work to push the deal through?

If your lawyer asked what you wanted to do when the other side did not produce the lease in a timely manner and you hemmed and hawed, then this is 1,000 percent on you. Also, drop the crap about trusting your broker. Your broker is paid by commission, IF AND ONLY IF the deal is consummated. Your broker, not just the other side, is going to work to push the deal through too. You knew your broker only got paid if the deal closed.

Now you know what brokers think of their fiduciary duties to their clients, and why lawyers hold them in such contempt.

"My wife must have similar mindset to Joe as she also says there is no reason to say this is the plan for the next 15 years as unexpected things may happen. "

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It has been a sprightly discussion, hasn't it?

Just remember that there is a difference between having 15-year plans and 15-year goals. Always have goals. Be willing to change plans on how to achieve those goals as circumstances change. Be willing to adjust goals as life dictates.

"The more equity you have, the more exposed you are for lawsuits."
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I've heard that many times. Each time I've dug into it, I've come to the conclusion that operations weren't up to snuff, or the owner was skimping on insurance, or wasn't insisting on renter's insurance, and usually some combination of the three. Keeping high-rate mortgages in place rather than using increased cash flow to improve operations or tenant quality hurts.

"I keep records of what expenses are with what property along with each income for my taxes. I don't have a lot of places, so it isn't that hard."

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Anybody who doesn't do what you are doing -- just on on general principals -- is an idiot. Keeping track of expenses and income per asset, however, has nothing to do with the pernicious concept that "equity is dead money" which is what some people are trying to sell here.

"but combined could be used to snowball the remaining balances of the properties, starting with that first one which would have the lowest owed. "

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Forget snowballing debt payments based on balance owed unless cash flow is an issue and you need to free up/bolster cash flow. Snowball debt payments based on interest rates unless cash flow needs to be increased.

Other terms of loans (balloons, etc) will of course, affect one's analysis.

"Even though my tenants are paying the mortgage, it's still ultimately my money."

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You're on the right track, Shane, but ditch the idea that your tenant is paying the mortgage. YOU are ALWAYS paying the mortgage. Why? Because your internal allocations of income streams (this tenant's money to this mortgage, that tenant's money to that mortgage, etc.) is absolutely irrelevant. How so? Because who pays if there is no tenant income stream to allocate? The debt hasn't gone away. Nothing has changed except the lack of an income stream or source.

The question of asset building and wealth is always solely a function of comparative return on investment, as filtered by one's risk tolerance. Leverage works for the initial down payment analysis, but after that, particularly given one's ability to do wrap-around mortgages to utilize equity, one always comes to the issue of what gives you the highest return on investment.

But the idea that tenants pay your mortgage is false. The owner always pays. He simply has allocated income streams.

"Equity is dead money. It is equal to the same thing as equity as it was as cash outside of the property."
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It is dead only to the extent the opportunity cost for some other investment is greater than the interest rate on your mortgage. If you avoid a 5 percent mortgage rate by paying down debt then your payment "earned" 5 percent. That's better than you'll get keeping it in the bank at one percent interest coming in (on which you are taxed). If you have an alternate investment at six percent, then your increased equity is "dead" to the extent of one percent a year.

Nobody said you were increasing your assets by paying down debt. It is all about the return on the asset. If you have a house worth $100k, and it is fully leveraged ($100K mortgage), and you have $100k in the bank, then your net worth is $100k. That is unchanged when you empty the bank account and pay off the mortgage. You have a net worth of $100k (value of the unencumbered house). You are better off, though, avoiding that 5 percent mortgage interest by foregoing the one percent you make on the bank deposit, to the tune of 4 percent a year. Asset amount is unchanged, but your return on capital went up.

Given that one can cross-collateralize loans quite simply these days, liquidity costs are the only costs one is incurring, since one can access the equity in one house for a highly leveraged loan for another house, as opposed to taking that same money out of the bank and using it as a down payment for the next house.

If you pay down mortgage debt, you are earning the mortgage rate on the amount so paid. If you have a better rate of return for your money, don't pay the mortgage down. If you don't have a better alternative, pay it down. It's not a question of increasing assets, it's a question of increasing one's rate of return on one's assets. Increasing the rate of return on one's assets involves risk assessment and risk tolerance. "Dead" equity assets/money is a flawed analysis, because it's only "dead" to the extent there are better opportunities out there, as filtered by your risk tolerance.

I’m always amused by the people who call one’s house a liability or a dead asset, and that equity in the house is dead.

That analysis might ring true if you didn’t have to live somewhere, but you do. Therefore, consider your share of the monthly mortgage payment as rent, and run the numbers accordingly. You cannot avoid the cost of having a place to stay, so treat your house payments, and expenses, as renting from yourself and as capital expenses or whatnot.

Accordingly, when you pay down your mortgage, you are earning your mortgage interest rate on your capital. There may be some adjustment for the fact that your interest deduction goes down, but that is offset by the fact that you pay taxes on the income you make from other investments. It’s essentially a wash, so just ask yourself if you can invest and receive a return greater than your mortgage.

Yes, there are great advantages to having liquid assets as opposed to illiquid assets, but a price can be assigned to that disadvantage, and you can determine your yield accordingly. That’s why everyone here agrees that the dilemma is academic if you do not have sufficient reserves set aside.

Don’t forget, too, that liquid assets are usually more volatile in prices than illiquid assets.

Don’t get too enamored with tax benefits, either. The government giveth, the government taketh away. How many of us have been hammered by the cap on SALT deductions on our personal tax returns?

If you want to be a big player, and don’t mind risk, use leverage. If you don’t care about having an extensive operation, or don’t like leverage risk (and risk tolerance includes your spouse’s opinion on the matter), then pay down the debt.

Either way, equity, and “your house” are assets, and are not “dead.” You have to live somewhere, therefore the ONLY analysis you can use is that you are renting the house from yourself. Run your numbers intelligently – and make sure you have sufficient ready reserves before you get fancy in your maths.

"Over the course of 15 years you could get 7 properties paid off . . . "
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First question: How do you get to those 7 properties? If you already have them, and look to start winding down, that makes sense. If you are just starting out, but you have a chunk of money and can handle 7 properties now, then buying them and then working down the debt makes sense, too -- if you don't want to get much bigger than seven properties. Spending thirty years acquiring the 7 seven properties because you are paying one off and then adding the next one makes your above statement irrelevant.

Second question: How much risk are you willing to take and still sleep at night? Landlords without debt are in better position (I didn't say great, I said "better") to weather downturns and rent moritoria than those leveraged to the hilt. Check with your wife before you answer.

Third question: What is your desired scale of operation? If you want to be small and solid then a low growth, high return, probably suits you better. If you want a hundred doors in the next 15 years, you won't do it without leverage.

Fourth question: What are the alternate uses for you money? What are the returns on those investments?

Ignore ideological answers like "always be buying" and other brainless crap like that. ideology is an excuse for not thinking. Answer for yourself the above questions and proceed accordingly. You might wind up with a hybrid approach, or with a straight line doctrinaire answer. The answer is in your gut.

1. Don't do kitchen cabinets by yourself unless you have plenty of experience. You will do a bad job, it will stick out like a sore thumb, and you will have to redo them, thereby blowing your October move in. Pay the money and get them done right by someone who specializes in painting kitchen cabinets.

2. Scratch the microwave from your appliance package unless you're doing built in. Spend extra on your stove vent -- you do not want grease and smells building up.

3. $1,600 for white quartz countertops? No. Something's wrong there. Too cheap. Also, Quartz WILL get burned/melted. The tenants won't care. Do granite and on your six-month walk through inspection re-seal the counter top then.

4. Floor -- What are your competitors doing? If they are doing select grade red oak, then you are doing select grade red oak. If they are doing less then you can get away with less. Personally, I go to the top of the line on fixtures like that, on the grounds that I can get higher rents, it's easier to raise rents, it's easier to sell when you want to sell, and the tenants will stay longer. They grow accustomed to nice oak floors and when they shop around rather than pay your rent increase, they will notice that the floors in your competition aren't as good, bite the bullet, and re-sign with you.

5. I skimp on the stove and splurge on the fridge and dishwasher. Usually the husband isn't cooking, so he's neutral on the stove. He does use the fridge, though, and he does use the dishwasher, so both spouses pay attention to those. Also, you can upgrade the stove after a few years if the tenants renew (an enticement). Again, they bite the bullet and re-sign.

It's not your expenses that kill you, it's you loss of income from vacancies.