All Forum Posts by: Jason V.

I'm 100% behind the idea that a correction is coming - we're just at that point in the cycle. But I'm not making any decisions thinking a repeat (or worse) of 2008 is coming. Unless banks have started doing No-Doc loans on a massive scale again, I see the residential sector as having a fairly sound foundation. 2008 is still fresh in the minds of many lenders, and everything I've seen says they're still being appropriately restrained. Maybe just starting to lean a bit loose.

Commercial and Commercial MF especially, I've been hearing a lot of the same things as you: there's a lot of debt coming due on properties that are now, or soon will be, upside down. And people continue to buy properties at the top of the cycle, based on future rent growth and pie in the sky expense ratios. I think there will be a bit of a correction in this sector, but with all the demand from outside the US for these types of properties, I think it will be muted.

As long as you're paying attention to the demographics (which is going to be dominated by the increasing age/wealth of the 'average' American for quite a while still) and/or don't play in the boom/bust sandboxes, you'll be fine. I'm definitely sitting on cash right now, because I can't find anything to get excited enough about to pull the trigger on. That could change tomorrow, or next year, regardless of the economy as a whole. 

I don't think it's a time to be scared, just disciplined.

@David Zheng You had somebody beat you to a deal on an otherwise already cruddy day, and it burned you a bit - definitely understandable. It does take something to call yourself out on it and apologize, so hats off to you for that. 

In the future, if you get a message on here with no greeting, no thank you, and no grammar, asking you for favors, just give them this: 27341

It's the zip code for Whynot, NC. 

You're going to give an almost even profit split (30%) to someone who's only bringing 12% of the funding, and doing none of the work, or taking any of the responsibility? 

@Travis Ferreira - Which County? Chances are a large portion of your closing costs were the property taxes, because Western NY (and the Greater Rochester area) have some of the highest property tax rates in the country. Some villages in my County have a total tax rate of almost 8% (no, not sales tax, property tax.) 

A lot of out-of-area investors don't realize this, and forget to take it into account (and whoever sells them the property doesn't mention it, for obvious reasons.) 

If you used a mortgage broker, make sure you check what their fees were: 1-2% of the loan amount wouldn't be unheard of. This can be money well-spent though too, depending on who you worked with. 

Overall, transactional costs as a percentage of the deal are extremely high in Western New York for all these reasons, additional NY State junk, and other regulations that drive our costs up, as well as the relatively small value of the properties. So to answer your original question: if you want a lower % of closing costs, your best bet is probably to buy someplace else. 

Honestly, reading this post without knowing the rest of your background made me cringe a bit. In my experience, very few long-distance investors do well here (but I'm sure a bunch of folks who are selling their stuff/services here will disagree with me.) Hopefully you came out to the ROC, worked with someone good locally, and got  a good tour of the city. There are quality properties and great folks in the business out here, but it is beyond critical that you're either here to manage/watch your properties, or have someone you trust implicitly to do so. And it goes without saying that it is paramount to buy in the right area, and not overpay (but it's too late to change that now.)

So hopefully this doesn't come across as too harsh - it's not intended as such. And if you run into a situation where you need some objective help, feel free to shoot me an email. I don't 'work' in real estate, and I'm not selling anything. 

Good Luck!

@Jason Sperling As long as the maintenance fees are low (use Vanguard!) and especially if you're getting a match from your employer, I would keep contributing to your tax advantaged retirement accounts. Obviously, growth in Roth IRAs and Roth 401(k)s is all tax free, which is HUGE factor if you're going to have money in them for another 20-30 years. 

If you're getting a dollar-for-dollar match (up to X%) think about it like this: all the money you contribute to that account is getting a guaranteed, immediate return of 100% (or 50% if that's the match.) Combine that with not paying taxes on the growth, and it makes a huge difference down the road. And you're more diversified. If you can get 100% return on that money in REI, without expending an ounce of effort, do that instead. And then tell me how to do it.

Even if you have all your tax-advantaged accounts in Index Funds (a-la Warren Buffet) you're probably going to get around 7% over the course of those 20-30 years, which is a pretty solid return for having zero time invested, and extremely low risk relative to other investments. Unless you're willing to be at least a little 'active' in real estate, and in today's market, you'll have to be fairly active, you're probably not going to see much better than that in REI, unless you have a big number of dollars to put into a syndication deal, etc.

Good Morning BP Community!

I know, I know: It depends. 

BUT, for the sake of gaining some really general knowledge: On a "standard" $500,000 deal, what would be a best guess for closing costs and/or upfront costs? (FYI: I'm in Western New York, where taxes and fees destroy everything.)

I.e. On a typical MF deal, what's a fair amount for my lawyer to charge for the closing? What should I expect him to do that doesn't get done on a residential closing? 

What should I expect lender closing costs to be? Appraisal? Inspection?

I've been doing some digging/asking around, and the numbers I'm seeing seem to vary quite a bit - I'm just looking for a baseline, and I understand special circumstances make things more expensive. But if I'm going to be able to analyze these deals properly, I can't just keep using an extremely 'safe' number. (Well, I can, but it just means I might be walking away from an otherwise good deal, because I think my cash into the deal is more than it will be.) 

Thanks all!

@Arin Whedbee - If you're going to be working directly with sellers (which is the primary function of a wholesaler) you should live and breathe Michael Quarles, Zig Ziglar, Dave Kahle, etc. 

One of the things that always stuck with me from one of Michael's appearances on the podcast (besides his love of peanut butter) is that he is almost painfully honest with the people who are looking to sell their houses. He'll tell them that he might buy their house, not put a dollar of work into it, and relist it on the market for a higher price the day after they close with him. Then they happily sign the contract and sell him their house, which he can turn around and sell at a profit on the open market. 

He can do that because he is providing value to the seller in the ability to close quickly, and buy the house in as-is condition. He can also add value in a lot of other ways (all of which he discusses at length in his podcast, articles, etc.) If your seller walks away from your meeting and can't tell someone else why they would consider selling to you at below market price, you haven't done your job as a wholesaler. If you're looking to buy from an older person, and you can't make their kids happy about the deal, you're not doing your job as a wholesaler. 

If you feel the need to be dishonest, misleading, or hold back information from your seller, that means you aren't confident in your ability to add value to the situation. And someone who is willing to be dishonest in one situation is willing to be dishonest in all situations, and as a buyer, I will not, ever, under any circumstance, buy from someone I think is being dishonest with me, or their seller. 

The only reason to lie when you're selling is because you don't have anything worth buying.

@Ali Boone - I'm with you, and I don't think our numbers are actually all that different if you look at them. That $120,000/year number just seems to be a pretty typical amount I see here on the forums, and at $100-$200 per door, per month, that means having from 50-100 units. Cut the annual income in half, and you obviously cut the number of units required in half, and in most states, that level of income will get you close to that magic "happiness threshold" where making more doesn't affect how you feel about your life. 

I still think real estate is a great way to build wealth, and most people's best opportunity for achieving financial independence - I think it might just be overstated (quite a bit sometimes) how "easy" or "quickly" it can be done. And as a lot of others have said - it's never going to be a way to become one of the mega-rich people. 

Your point about lifestyle design is a good one, and I definitely agree with it, and maybe we don't hear it more often because "live within your means" doesn't sell things as well as YouTube commercials with private jets and fancy cars. 

@Nick C. - When you say 'putting in 100% of your own cash' you're talking about funding down payments yourself, correct? Because all of the returns above reflect what a lot of investors do: using traditional 30 year mortagages to buy SFRs with 20 or 25% down. So if you have $800,000 of your own money 'invested' into deals, that could be 4 SFRs in a really expensive area, or 30-35 in a cheaper area. As long as the return on that cash invested is 15% (which is a lot more likely in the cheaper areas) everything above holds. 

I think we're on the same page - but lately it feels like not many of us are. 

As soon as you start talking about raising money, syndicating deals, finding investors, etc., in my mind, you're building and running a pretty serious business - that's not anything you can do passively. Not only that, but I cringe every time I see really green people talking about "putting deals together" and starting syndications - there are a TON of moving parts in large commercial deals, and even more competition from experienced investors and firms. Other than dreaming big, these folks don't really bring much to the table, and I wouldn't trust them with my money for a SFR, let alone a 300 unit complex.

Or maybe I'm just really frustrated with the current market, because I can't find anything even close to my 'buy' criteria, and it's darkening my look on REI.

When it comes to obtaining "financial freedom" is investing in real estate just the least worst choice?

I tripped over this article the other night, which sums up a lot of what I've been thinking about REI lately: Investing in Real Estate Won't Build Massive Wealth

I think there are some pretty obvious omissions or flaws in it, most notably that the author is looking at ten years as an unbearable amount of time to build "massive" wealth, but that it also hits on some very important points. 

I'd guess the goal for most people on BP is to be able to quit their job, and live life on permanent vacation while having disposable income to travel, drive a Tesla, and otherwise generate social media posts to make people jealous. A number I see thrown around a lot is $10,000 per month, which is obviously $120,000 per year (I'm assuming that's before taxes.) But what does that look like?

At a 10% CoC return (which is probably fairly typical for a TK operation) you'll need $1.2 Million dollars of your own money invested.

At a 7% CoC return (what an Index Fund would have gotten you over the last 10 years, and probably close to what it'll get you for the next 10 years) you'll need $1.7 Million dollars of your own money invested.

At a 2% CoC return (what typical Hedge Funds would have gotten you over the last 10 years, after fees and splits) you'll need $6 Million dollars.

At a 15% CoC return (because you're a semi-active, successful RE investor) you'll need $800,000 of your own money invested (as pointed out by the article.)

At a 30% CoC return (because you're hitting non-stop home runs in RE, even in today's market) you'll still need $400,000 of your own money invested.

And in any of these situations, I would argue that you're not building 'massive' wealth (although if your goal is freedom month-to-month, your net worth is just a number.) 

Is this all possible, given decent income and enough time? Absolutely. Is it going to happen overnight, with no money down, or by investing passively? I'm sure there's a couple of people out there who have, but for the vast, vast majority of people, it's just not going to happen. 

If we start talking about IRR, instead of CoC (which is the logical and intelligent thing to do) those 10%, 15%, and 30% numbers become a lot easier to hit...except IRR involves exiting the property, meaning the money will need to be reinvested somewhere else to keep earning you a return. CoC during ownership is the only money you'll have to "live on." If you did it right, and refinanced out but still own the asset, that's the ideal situation, but finding opportunity to do that today is something "ordinary" investors are really struggling to do, if they're able to do it at all. Value-Add opportunities seem to be fewer and farther between all the time, and requires us to be more and more active to find them. (Or else drive levels of frustration to the "smash my head on the desk" point.)

So what's an aspiring yacht owner to do?

I think there is an important distinction to be made, that the people we know who were able to build wealth by investing in real estate likely did it slowly, over a long time - which doesn't let you quit your day job. Even more important is that unless you build a Real Estate Investment Business, you're going to struggle to build mansion in the hills, private plane wealth. I think this also ties in to Serge Shukhat's appearances on the podcast, where he talks about what it takes to be successful, and why he invests, as well as the one with Noah Kagan where Josh Dorkin talks about why he spends his time building BiggerPockets, and not building his real estate portfolio. 

Thoughts? Am I completely wrong? Did you achieve a $10 Million dollar net worth in 10 years by solely investing in real estate in a way that the average person could do in the next 10 years? If so, can I interest you in becoming a $50,000 per student guru? Are these returns all depressed because everyone and their cousin is a real estate investor now? Or has most of the value-add just been eaten up for a while?