All Forum Posts by: David Faulkner

Great stuff! The only thing I would add is the tendency for a newbie to think stuff like, "Yeah, it sounds like a PITA, and it may be, but no problem, I'll just hire contractors and a property manager and they will take care of everything for me. Problem solved."

I cringe every time I hear this sentiment, because I suspect that is a newbie that's fixin' to get taken to the cleaners trying to outsource jobs they have no experience or knowledge in. Aside from the financial reality that a PM will consume over 1/3 of your cash flow (~15% all in with all fees included of GROSS rents, which is likely >30% of NET),  managing a bad PM is MORE work than managing a good tenant yourself ... a vast majority of PMs are bad (PMs and newbies will argue otherwise, but this has been my experience) ... if you buy quality properties in quality locations (see Sales part in OP) and then screen your tenants, then most tenants are good.

I would also hope that this post would dispel the common false belief that REI, at least as far as owning individual properties, is or even should be a passive investment ... it is not, it is starting and running a business just like any other. If you build and grow your systems properly, then it CAN become more passive over time, but not completely passive and certainly not passive at all as a newbie starting out. I'd argue that Jenna Jameson's business is more passive than a newbie starting out in REI, and more profitable and she may get f#%ed less than a newbie landlord too :)

IMO investing in RE in the form of individual companies vs stocks is apples and oranges, as others have mentioned. Investing in REITs vs common stocks, or even private placement syndications vs common stocks would be a closer comparison.

On the other hand, IMO investing in individual properties would be best compared to starting your own business in any other field. In that comparison, I'd say there are MANY different kinds of business you could start that would offer similar or perhaps even superior returns to REI through individual property ownership. It just depends on what your skills, knowledge, and passions are and the ability to apply these to create and exploit market opportunities, regardless of what that market is. I happen to love RE, so that is the route I chose and have done quite well with, but that is not to say that it is the only or necessarily even the best sort of business to start.

This is a good point ... in fact, to add to the leverage argument in #1 above, most stocks already have some amount of leverage built into them ... you are buying equity positions into real companies, and most of these real companies have debt (leverage), so by buying positions in real companies with debt, you already get some leverage and it is non-recourse leverage for you. Further, you could use options (not saying you necessarily should, but that you could) to control 100 shares at a fraction of the cost to purchase them ... this is also a form of leverage. Plus buying stocks on margin as stated ... I would actually go so far as to say there is MORE opportunities to use leverage in the stock market as there are in RE. Not that this is necessarily good or bad, but just to say that the argument that RE is better because of leverage has holes in it IMO.

In retrospect, the best move may have been to not renew the cat owner's lease, vacate the unit, fix it up, and sell with 1 vacant unit or at least one unit with month to month tenant. The reason is that the 4-plex may sell to an investor or it may sell to a "house hacker" that intends to live in one unit. So, having all the units in good shape will obviously maximize your sale value (more so than NOI since it is a 4-plex, which makes it residential property which will be valued off of comps), and having at least 1 that could be delivered vacant would make it more attractive for an owner occupant buyer.

My philosophy on the subject is that leverage is for growth, while free and clear is for safety. So, which do you value more at this time, growth or safety?

If you could pay off your mortgage and you have enough investment income from other sources to cover your expenses plus a reasonable margin (2x for me), then I would pay it off because you really don't need the growth. On the other hand, if with a paid off mortgage you would still need to work to cover your expenses, then you need the growth, so I would leverage it IF AND ONLY IF you can find another investment that you are confident could reliably cover the additional debt servicing plus margin even in a down market.

Would I do it? NO. Do I think you are likely to make much money on this deal? NO. Will you get a much better investor education with $50k on this deal then you would spending $50k on a guru training program? YES. And in the end you could probably sell it for not too much of a haircut from what you have in it so long as you don't go crazy with the purchase price or rehabs, so you are not likely to get wiped out on the full $50k ... so, I could think of worst things to do with your money, but it is not likely to be a good investment like you think it will be (ROI), but still could be a good investment in your education.

I do not invest in war zones, so not my area of expertise ... however, a couple of business models that I have heard of working better than others are:

1)Flip them as turnkey rentals to other investors

2)Flip them with seller financing to owner occupants and carry the paper

3)Buy the paper in the form of a discounted note

Note that in all cases, the optimal strategy is to NOT hold the actual property under your direct ownership for very long, and get a BIG discount at purchase to compensate you as the investor for putting money into a riskier asset class. This makes sense to me because there is typically no appreciation and big headaches associated with holing properties directly in these types of neighborhoods.

I'm sure the buyer is an investor ... ask him if you can tag along on the deal and help out here and there ... check in on the job site from time to time and take pictures for him, run to home depot, etc. Then you can get the answers to all the questions I asked and see what an investor deal looks like from the inside out. Or else, the worst that could happen is he could say no.

This is a great point that I would like to re-emphasize and elaborate on. I'm no fan of condos, but those that I have seen succeed with them are buying them in primo, central locations, where population is dense and condos and townhomes are the main type of property available. So, it comes back to location, location, location. If you are thinking about investing in a condo or townhome, you are better served IMO by doing it in order to get into a highly desirable location more so than because they are cheaper. Even then, I would favor complexes with lower HOA fees (which usually means fewer amenities) and restrictions, and make sure the HOA is well run and in good financial standing.

 I mentioned it 3 pages ago ... and I agree, Roth conversion ladder is a good way to go ;)