All Forum Posts by: Steve Miller

@Eric T. What I'm saying is that if you invested $600 at 10% annually for 10 years, you would have $123k. My goal was to illustrate the value of having access to cash that can be reinvested rather than worrying about paying extra interest over the life of a 30 year loan.

I would not be too discouraged by your results so far. It is extremely common to make lots of offers before getting one accepted. I'd be nervous about the buy if my first offer ever was accepted immediately. My biggest concern is that you drove out to 6 properties but only offered on one. Here are some things that have worked for me over the past year or two as I was trying to make my process more efficient:

1) Figure out what your definition of a "good return" for your market is - and it will vary based on asset class but should remain fairly consistent for your region. You're looking for a numerical value on each property, I use a cash on cash return percentage. 

2) Do your research beforehand (look at # of bedrooms, overall quality, cross-reference against Craigslist, Zillow etc.) and determine if it meets your criteria within at least a reasonable window of what you are willing to offer. If the property (even rehabbed) stands no chance of meeting your criteria without a rediculously lowball offer, you don't go see the property. This is 10 minute pre-work that avoids an hour or more of travel/showings.

My biggest point in all of this is that to make 6, or 10 or 25 offers without success is not that out of the ordinary if you're trying to get a deal. What you don't want to do is go on 100 showings to make 25 offers. I make an offer of some type on nearly every property I see (and I don't mean that I offer on everything, quite the opposite). Just use your predetermined standards to figure out if it's something at least within range, and then back into your offer number to meet your standards. You're trying to improve your ratio of showings:offers made in this way. 

It's also worth noting that if this is your first property, you might want to look at a million properties just for the heck of it and to get your feet under you. Six is by no means a large number of showings overall, I mention the above just to provide some suggestions on how to streamline your process in the future. But more showings will help you determine your standards and use your time more effectively.

@Eric T. again, keep the opportunity cost in mind. When you do those interest calculations, you neglect that the 10 year note model costs you $72,000 over 10 years in potential cash flow (very simply multiplying current monthly loss times the number of payments, I understand that this is overly simplistic). A recurring $600 payment at 10% cash return (again, ignoring the equal importance of appreciation and debt paydown on any incremental properties purchased) has an end value of $123,921 after that same ten year period. You would end up with significantly more property and with significantly greater returns if reinvesting the cash, it actually dwarfs the importance of the extra interest payment when you actually run the numbers. 

While it may FEEL GOOD to pay down debt, and I agree with you that it feels good, it hardly ever makes sense to pay down a low interest rate if you have the discipline to continue investing. Dave Ramsey doesn't preach what he does (eliminating all debt as quickly as possible) because it's mathematically logical for a disciplined investor, he does it because most folks can't be trusted to dutifully reinvest. 

Hey Eric, welcome. I have a few concerns with the approach:

1) 10 year note leaves you extremely exposed and illiquid in the scenario you proposed above. Any change in personal situation or the market puts you in a really tight spot. As other posters have suggested in the past, you never lose the opportunity to pay down extra principal if personal circumstances make it worthwhile, I just wouldn't want to be yoked to a disproportionate large payment in a downturn or if I lost my job. 

2) Home loan rates are extraordinarily low right now when compared to the reinvestment value of the cash. Let's say you can reasonably get metro Denver to yield 6-12% CoC right now. When you say that you're concerned about the interest you're paying, what you're ignoring is the opportunity cost of the reinvested cash flow (which likely triples the rate paid on the mortgage, and that's ignoring debt paydown and appreciation of the new property)

3) Depending on your income situation, you may be ruining your chances of qualifying for additional loans by screwing with your debt to income ratio. The bank I use primarily in Colorado will count 75% of my projected rental income towards the debt when I buy a new property, so in the case you're providing above, you're creating a nearly $1000 liability for yourself from a DTI standpoint every time you buy a property. I'd guess it wouldn't be long before you couldn't get a loan approved at that rate, again depending on your W-2 situation.

Basically any extrapolation (assuming cash flow is reinvested) using current rates and trends favors a 30 year. I could think of a few scenarios (perhaps a monster W2 income where you're getting completely hosed on taxes and expected it to continue for the next 10 years) where it MIGHT make mathematical sense to eliminate any cash flow, but I doubt it, even then. Don't get me wrong, I love the idea of being free and clear as rapidly as possible (and you still can!), I'd just be disinclined to tie myself to it. 

I've always though the per door metric was a little misleading as it gives no credence to size of unit, price paid, etc. For example, I try to focus on larger units (3/4 BR) as my goal is to LIMIT the number of total units I own relative to the cash I have invested, mostly because I want to self manage with minimal extra effort at this stage in my career. This does not mean that I don't have cash flow standards, simply that a per door metric is extremely arbitrary in the sense that someone like me could deploy the same amount of cash across 1BR and 2BR units and report a "per door" figure that is half of mine. 

For what it's worth, I cash flow at roughly $415/mo/unit across my units (or 12% CoC :)), self-managed here in Denver.

Has anyone had experience using Venmo in excess of $5,000/mo? I have been using it for about a year for collecting rent and it is super easy to work with, but coming up is my first month collecting gross rents in excess of that number. Per the Venmo site:

-Sending Funds: limited at $2999/wk (not really a big deal as I'm almost exclusively collecting and I don't see this being problematic.

-It also includes the language "the rolling weekly limit of all transfers is $4,999". That implies both inbound and outbound transfers to me, but who knows.

If this is going to be a problem, I think I'm going to find out pretty quick as everybody pays the 1st of each month. Anybody run into these limits? Staggering the rents seems an alternative if this is a legitimate limit to the platform, but I'd probably go to a new payment platform before I did that.

There is also an element to this diversification discussion that has not been brought up, which is the ability of that diversification to functionally serve as a backstop for risk.

The most powerful tool that younger investors have working in their favor is leverage. How aggressively a given investor may want to use that leverage is a matter of their personal outlook/propensity for risk/current life status. For example: would you take out a 95% LTV HELOC on your primary residence to fund a deal you felt confident in? How would your mindset change if that was the entirety of your net worth? How would the conversation change if you had a family? Some people would, but I wouldn't.

Consider the same situation now coming from a well diversified position (perhaps penalized, but still liquid). You may feel more comfortable moving aggressively on that deal if you knew you had a backstop of 10s or 100s of thousands of dollars elsewhere.  My point in all of this is that risk (especially with regard to leverage) is personally subjective. If the money from an employer is free, take it! Even though it may feel like that money is dead (it's not) compared to the returns you would see in real estate, it also gives you the gift of being able to use leverage more responsibly.

Awesome, thanks @Account Closed I agree with you and I may make some adjustments based on that. For perspective, I have everything sitting in a $1000 deductible right now, which seems excessively conservative.

Hi Everyone - this happens to be my first post on BP, excited to be part of the forums.

I've been investing for about a year and have purchased 4 units in metro Denver at an average cost of around 150k/unit. I had a thought for the first time as I was setting up insurance policy for a duplex (units 3&4). Is there any school of thought around the level of deductible you choose (obviously this varies based on the size and specifics of the property, but basically high vs. low on the spectrum to deductible:total annual premium)? I have traditionally chosen the lowest deductible and pay a higher premium monthly for this, but I wonder if I'm leaving money on the table. I've yet to have a major incident (but these are pretty common in Colorado, hail damage being a big one) and like to think I keep respectable reserves (10k/unit liquid + whatever is being saved for the next property at any given time). Am I leaving money on the table or being safe by keeping my deductibles low?