All Forum Posts by: Scott Passman

I just want to put some numbers to what @Nick Rutkowski spelled out for you to help you conceptualize how the money/financing works.  Let's use this example:

Purchase price: 100k with 20% down and 8% interest rate (Hard money) would be about a $587/month payment.  

Rental Income: $1000/mo

Rehab: you put 20k down for rehab

Refinance: After putting rehab, the property reappraises at 150k.  So if you refinanced with 20% down again at a 5% interest rate it would come out to 150 x .8= 120k.  This means you would have 120k to pay off the original loan of 80,000 + recover the 20k you put into the rehab and 20k down payment.  This would leave you with $0 invested in the property since you pulled all your cash back out and theoretical infinite returns.  Since you have a larger loan, your new mortgage payment would be $644/mo, but if you can increase rent to $1100/month because of the upgrades then it works out in your favor anyway and you would still cash flow.

Now, these numbers are just hypothetical as an example to help you see how it all works out.  Hope that helps.

If you're looking to get a good feel for market rent, what I would do is a combination of these things:

1. Run a property address on Rentometer.com for the property address or neighborhood you are looking at to check median/average rental rates.  Rentometer is more accurate in some areas than others. 

2. Look at Zillow and other rental sites to see about how much rent is being marketed for the type of property you are researching.  Zillow rents are more accurate in some areas than others. 

3. Most importantly, talk to a knowledgeable agent or property manager in the area and ask them what type of demand and average rents they are seeing for those types of property. 

Doing a combination of these 3 things should give you a range that you can feel comfortable running numbers with. Best of luck. 

First off, there are multiple components to ROI outside of the traditional annual return vs. money invested. The reason real estate is such a powerful wealth generator and that owning it is one of the prevailing commonalities among the wealthy is that it generates income with:

1. Cash flow (annual income exceeds annual expenses)

2. Appreciation- much like the stock market, real estate tends to appreciate over time with some markets appreciating greater than others.  

3. Tax advantages- real estate provides tremendous tax advantages that not only can allow you to retain a greater percentage of your gains but can also reduce the taxable income from your other sources of income. 

4. Loan paydown- This is where the benefit of debt comes in.  While yes, there have been many who overleveraged themselves and did not have adequate reserves to weather a downturn in the market, black swan event, or just plain old bad luck, one cannot negate the value of owning a leveraged asset that others pay off for you.  When debt is used responsibly, it is one of the fastest and best ways to build wealth. 

The stock market is taking its own lumps right now and many who have based their entire retirement plans on it are really hurting.  We don't know the ultimate outcome, but it's a great reminder that no matter how much you plan you never know what life is going to throw at you. The great thing about real estate is it is an asset that we can have a lot of influence and control over its performance.  You can't control everything, but you have a direct say in how you respond to external events and there are many options to reduce expenses, market to different tenants, find alternative uses for the property etc.  With the stock market, you are just along for the ride.  I know we could get much deeper into the weeds on this, but these are just some of the 30,000 foot points and I don't need  a Starbucks gift card so I'll stop here. 

The 4% rule would take effect AFTER you retire.  It means you would need to acquire enough wealth in your retirement portfolio to withdraw 4% of it every year to live on without depleting any (or at least minimal) of your principle.  The internal rate of return on the stock market since 1950 is ~7-8%, so theoretically if you are only withdrawing 4% each year to live on then the average returns in the market should safely cover this so that you're living off the returns and not drawing down your principle.  The trinity study back in 1998 is the primary study that ran all the statistical analyses over different time horizons in the market and discovered that withdrawing 4% per year would give you a >95% chance of having sustained income for a 30 year retirement without running out of funds. 

So the simple math would be to 25x whatever annual income you calculate you will need to live off of and that is the ultimate amount you would need in your portfolio to retire.  Ex: if you calculate you would need $50,000/year to comfortable live and pay your expenses, then you would need to accumulate (50,000 x25)= $1,250,000 in order to reach your goal to retire.  Hope that helps.  

All great advice given above.  The only other thing I'd like to add is that it's a great idea to diversify your income and investments to minimize the chances of needing to go back to work in 10 years to supplement income.  It is becoming increasingly clear over the past decade how unsecure pensions (as a whole) are and that they aren't as guaranteed as they used to be. As we are being reminded, yet again, investments in the market are subject to ups and downs that are out of your control, so to hedge some of your retirement income in real estate to have additional control over your assets and income would be a wise choice. 

What gets me out of bed every morning is the pursuit of a life of "luxury". But for me luxury has a different meaning. My drive is the to provide my family the luxury of never having to worry about losing our home.  To have the luxury of not worrying about how we'll afford food, clothes, gas, or other essential items.  I work hard for the luxury of sleeping at night without the stress and fear of an unexpected bill coming in that could put serious financial hardship on our family.  I don't want or need high end or fancy stuff. 

If nothing else, the last couple months has really helped me realize how truly blessed I am that we are well positioned financially and don't have to live in constant fear and stress of how we will pay the bills or feed our family if there is a temporary disruption in our income. 

@Bill F. I agree that process is far more important than the outcome.  There are so many variables in any situation that cannot be fully controlled, but if you have the right framework for decision making than the probability that your outcomes will be favorable more often than they are unfavorable goes up.  There is a good book on this called "Thinking in Bets" written by Annie Duke that is worth the read if you aren't familiar.  

I appreciate that you drew attention to deliberately writing out your thought process in narrative form to make yourself slow down and draw out your whole line of thinking.  Currently, I write down my rationale primarily in bullet points to help me list what assumptions/conclusions I'm making based off what data or indicators.  Perhaps I should add a little more long form writing to draw out my thought process a little more and see how that impacts my process.  Thanks for the suggestion. 

Great suggestions @Will Fraser.  Accountability and getting other people's perspectives are so crucial. I had a financial mastermind group going last year, but every single one of us had a child born at some point in the past 12 months so it has fizzled out for the time being.  Gaining a better understanding of my decision making process is important for me to develop so I'm working not only to self-analyze but to also gradually build a financially savvy group with different backgrounds that I can engage in higher level discussions with. 

There are so many people on BP that I have learned so much from, and would love to hear how they have honed their decision making process over the years.  There are way too many to name, but a few of the contributors whom I really respect their thought processes are: @Bill F., @Joe Splitrock, @Alexander Felice, @Russell Brazil, @jay Hinrichs, @JD Martin, @shiloh lundahl and many, many more. 

Well I only have 1 rental property and they paid last month.  They've spent the past couple weeks trying to convince me to let them pay to put a fence in the backyard so they can purchase and install an above ground pool, so I'm feeling pretty good that they have the money to pay rent this month!  

Hope this month turns out similar to last month for most where the threat of no rent is more bark than bite.

I keep an excel spreadsheet detailing all of my investment decisions, RE and non-RE, as a tool for me to use long-term to update and analyze my decision making skills. The way I have it outlined is very simple using 4 columns:

-Investment decision- outline what I did or did not do

-Why I think it is a good decision- Write down all the factors, variables, and assumptions I’m using to justify my decision and why I think it’s a good move.

-Why it may be a bad decision- Analyze what could go wrong or what assumptions could prove false, internally or externally, and how that may affect my investment.

-Result- periodically updated since things can change over a period of months/years/decades.

I am only 33 years old, and hopefully have many decades of investing left in me, so I want to form a good understanding of how I’m making decisions and track long-term how those assumptions play out. My goal is to identify common areas where I either make mistakes, poor assumptions, show information bias, use data improperly, or when I followed/didn’t follow gut feelings and how that worked out. By identifying these characteristics about my decision making process, I know it will help me in the future to be aware of these biases and blind spots which can allow me to account for it and ultimately lead to better decision making skills. How do you guys track your decisions long-term? I’m always open to improving upon this spreadsheet so I’m interested in learning what others are doing to keep track of these things and periodically return to analyze, evaluate, and learn from prior decisions.