Real Estate

[jjbrr]

So I know the bridge world is full of people much smarter, wiser, and more mature than I ever hope to be, so I'd like to defer to your judgment on a topic I'm considering pursuing quite seriously. Any advice, insight, or experiences you can share I would find pretty valuable.

 

Background: I've been doing a lot of research lately about investing in multi-family residential properties. The general premise of the scheme is that I can buy a 2-4 unit property (duplex, triplex, quad) and live in one unit while leasing out the rest of the units. If everything works out, I put down the down payment, make cosmetic renovations to all the units, increase the rent slightly to reflect the improvements if necessary, and hopefully use the cash flow generated from the tenants' lease to pay for the mortgage. Long term the goal is more or less to own the property outright using none of my own money except the down payment. Alternatively, I can make the cosmetic changes and increase the rent (increasing the property value) and refinance after a year and use the appreciation and increase in value towards a down payment on another building; dry, rinse, repeat.

 

My question: Does anyone have any experience in real estate? I understand that a successful investor will consider things like location and appreciation potential, but I'm curious about strategies to find houses with good potential. I assume this is a skill just like any other, and practice and experience with some degree of natural talent will lead to success. Surely there are things that one should look for, some red flags, some things that reduce risk substantially, etc.

 

Assuming I've done my homework, is this something you recommend? I keep reading stories of "If only I had started in my twenties...", but for someone who has never taken out a loan for anything (free ride at college, bought a car with cash, currently renting an apartment), it's a pretty big leap to spend a quarter million on a house I would plan to only spend a year in.

[Lobowolf]

No experience, but I was intrigued by the same idea after reading the following:

 

http://www.amazon.com/Investing-Duplexes-T...73114645&sr=8-1

 

Sounds like maybe you already read it, but if not, you might want to check it out in addition to your other references.

[jjbrr]

No experience, but I was intrigued by the same idea after reading the following:

 

http://www.amazon.com/Investing-Duplexes-T...73114645&sr=8-1

 

Sounds like maybe you already read it, but if not, you might want to check it out in addition to your other references.

Yes, I read it :P It gave me the idea.

 

Edit: I mean my goal isn't really to become a baller real estate tycoon in Orlando like the author, but I think I'm in a good position where I can be successful in this area because of the fact I have money saved that I can use to invest and because I have a job that allows me some degree of flexibility to take a little bit of time off to take the necessary time to manage a property.

 

Obv Dallas has one of the lowest appreciation rates in the country, but it's a stable market and the occupancy rates seem pretty safe to me.

[jjbrr]

I've heard a lot of persuading arguments about why it would be sort of silly for me not to seriously consider this.

 

The only persuading argument I've heard that I should avoid this was from Dave Ramsey at a lecture he did a year or so ago. I guess he went bankrupt at 26 after he invested in real estate and the banks wanted more payment on his loans than he could afford, though I don't recall the details. He advocates avoiding credit as much as possible for someone like me.

[Lobowolf]

Not sure what "someone like you" is, but it sounds like you've been doing some homework, and it's a good time to get a low interest fixed-rate loan, and you have a job that's conducive to putting the work in. I'd think you'd be really well-situated to this.

[Winstonm]

Rental property is fine and fairly low risk as an investment up until about the 4-plex area. The more units the harder it is and the more risk. It is easier to rent a house than a duplex; a duplex than a triplex; a triplex than a fourplex.

 

I would not live in the place I was renting.

 

P.S. It is way more work than you can ever imagine at this point. Keep in mind:

There are no free lunches.

[jjbrr]

Investment=Risk.

The company I work for specializes in risk, so the concept isn't foreign to me. My undergraduate education was in business, so I have a very fundamental understanding of financial risk. What sort of risk do you think I'm looking at? The whole idea that a 5% average unoccupancy rate is subject to some standard deviation and that if I hit rough times I will certainly go bankrupt is something I totally understand.

 

As far as I know, every argument I've heard about bankruptcy has been along the lines of that if I'm going to go bankrupt at some point in my life, there is no better time to do it than now, given that I have plenty of time to recoup my retirement fund and I have plenty of opportunities to get my money back and more. Obviously I have some risk aversion; I'm not jlall after all. But at the end of the day I'm just wondering if anyone has any insight into the risk I would be taking if I pursued this endeavor. Is it a good gamble if I have the right skill set?

[jjbrr]

The more units the harder it is and the more risk.  It is easier to rent a house than a duplex; a duplex than a triplex; a triplex than a fourplex.

Is this true? That seems counter-intuitive to me and it goes against what my research suggests.

 

Suppose the average rate of unoccupancy of some rental is 5%. If you're renting a single, you should expect to eat 1 in 20 monthly payments. If you have a triplex and offer 2 units for lease, it seems the 5% would be the same, and it would offer a little more protection. 3 units up for lease would offer even more protection.

 

I'm no math wiz, and questioning this sort of logic is exactly what I need.

 

Where did I go wrong? Do you just think people are less likely to rent a unit in a quad than a triplex? A unit in a triplex than a duplex?

[barmar]

Where did I go wrong? Do you just think people are less likely to rent a unit in a quad than a triplex? A unit in a triplex than a duplex?

Having a whole floor of your own in a two-family home is more attractive than a unit in an apartment building.

 

So not only are they easier to rent, but you can probably ask for more in the rental rate.

[jjbrr]

Where did I go wrong? Do you just think people are less likely to rent a unit in a quad than a triplex?  A unit in a triplex than a duplex?

Having a whole floor of your own in a two-family home is more attractive than a unit in an apartment building.

 

So not only are they easier to rent, but you can probably ask for more in the rental rate.

Are they easier to rent? Rent is cheaper in a 4 unit than a 2.

 

Obv I can ask for more in a duplex than a quad. I can afford a lot more sq ft/unit in a duplex than quad.

 

10% down on a quarter million is a lot different from 10% on a half million for a 23 year old.

[MarkDean]

First off, a disclaimer: I have never bought real estate.

 

A mortgage is a long time. A really, really f'ing long time. There are a lot of costs buying and selling. So, I think you have to pretty sure you are going to be in that area for a while: being a landlord from afar is not any easy task.

 

Also, there is some risk that you will end up with a tenant who decides to stop paying rent. This happens more often than you might think, and it really is a pain to deal with.

 

That being said, there is obviously a lot of upside, and if you are good at fixing things up, it can earn you some good money. And as you have alluded, being 23 is a good time to take risks.

[jjbrr]

First off, a disclaimer: I have never bought real estate.

 

A mortgage is a long time. A really, really f'ing long time. There are a lot of costs buying and selling. So, I think you have to pretty sure you are going to be in that area for a while: being a landlord from afar is not any easy task.

 

Also, there is some risk that you will end up with a tenant who decides to stop paying rent. This happens more often than you might think, and it really is a pain to deal with.

 

That being said, there is obviously a lot of upside, and if you are good at fixing things up, it can earn you some good money. And as you have alluded, being 23 is a good time to take risks.

Bottom line? Yea or nay?

 

Assume I won't endure the buy and hold method, and rather I will try to refinance, reappraise, and hope to sell in X years where X is substantially shorter than the 30 yr mortgage.

[MarkDean]

I don't think it is a clear winner or clear loser. If you think you will be in Dallas for a while, and think this is the type of thing you would enjoy, go for it. If you are doing it purely for financial reasons, I wouldn't do it: it will be a fair amount of work, and after all the costs, taxes, etc., I doubt your $/hr will be that great.

[cherdanno]

The "hoping to sell" part obviously makes the risk much bigger (as it seems housing prices fluctuate more than rents).

Or to rephrase, your risk is that housing prices fall and you will be bound to Dallas. The opportunity cost of not really being able to move in with that girl in Manhattan might be pretty high :P

[jjbrr]

The "hoping to sell" part obviously makes the risk much bigger (as it seems housing prices fluctuate more than rents).

Or to rephrase, your risk is that housing prices fall and you will be bound to Dallas. The opportunity cost of not really being able to move in with that girl in Manhattan might be pretty high :P

I'm flattered you think my opportunity cost of raging with a NY gal is >0

 

 

I admit I had dismissed that possibility lest I could get lots of help from NYers getting work at the clubs at least once/day.

[jjbrr]

The "hoping to sell" part obviously makes the risk much bigger (as it seems housing prices fluctuate more than rents).

Why?

 

I think housing prices correlate directly with rent. In fact, property value is a direct function of lease.

[hotShot]

The "hoping to sell" part obviously makes the risk much bigger (as it seems housing prices fluctuate more than rents).

Why?

 

I think housing prices correlate directly with rent. In fact, property value is a direct function of lease.

You realize of cause that the very slow real estate bubble has just exploded.

So the long term experience from the last 5 decades that house prices only go up, is no longer true.

Did not the Goldman-Sachs Real Estate Fond get worthless last month?

It might be to optimistic to think that you can "refinance" and sell the property in the near future.

On the other side, they say buy when the prices are low.

 

If you can answer all of the following questions with yes, than it is probably a good idea to invest.

 

Do you have the money to

1) survive a big repair to the house that you did not expect.

2) deal with a tenant that does not pay his rent for month (legal costs etc...)

3) get over the time until you get a new job, in case you lose yours.

[Mbodell]

Texas, in general, did better in the first phase of the housing bubble crash. There's reason to think real estate there might be better than in many other places. However, there are a lot of signs that real estate is still very dangerous in general (The gov't and the Fed has spent truckloads of money and tax incentives and what not in the past year trying to halt the crash mid-crash, future directions are not clear).

 

The housing market in a particular location is influenced both by the local market "location, location, location" but also by the national market. I'd be very dubious of any plan that counts on appreciation in the medium term (like X much much smaller than 30 years). The 6% Realtor fee is also problematic to selling, as is the ongoing cost of maintenance, insurance, property taxes (don't know what Texas property taxes are like), vacancy, etc.

 

If you have properties that are cash flow positive even when you factor in all costs (mortgage, insurance, upkeep, vacancy rate substantially higher than 5%, etc.) then it seems likely to work out ok.

 

I'd check out some of the message boards and/or articles from patrick's housing site which will have lots of reasonable information on this, with some people who are doing what you are talking about, and any others who think housing has some serious issues still. Good to get some perspective from the other side before jumping in.

[shyams]

Investment=Risk.

The company I work for specializes in risk, so the concept isn't foreign to me. My undergraduate education was in business, so I have a very fundamental understanding of financial risk. What sort of risk do you think I'm looking at? The whole idea that a 5% average unoccupancy rate is subject to some standard deviation and that if I hit rough times I will certainly go bankrupt is something I totally understand.

Some thought below. But before I get to them, a BIG disclaimer. I am a foreigner with zero working knowledge of the US property market. So please take my views with a pinch of salt.

 

1. If you have done all the right research, you should go for it.

2. Based on your education and your current occupation, I'd guess you would be walking into this investment after a lot of thought / planning. This gives you an edge over a lot of others who start new ventures on a dream

3. Your cash-flow projections should consider some "downside" events. The property market has a 5% average of unoccupancy; but how does it translate it to 3 rentable units? e.g. if 1 of 3 remains un-let for 6 months, your unoccupancy rate is > average. If you can cater for such downsides, you should go for it.

As far as I know, every argument I've heard about bankruptcy has been along the lines of that if I'm going to go bankrupt at some point in my life, there is no better time to do it than now, given that I have plenty of time to recoup my retirement fund and I have plenty of opportunities to get my money back and more. Obviously I have some risk aversion; I'm not jlall after all. But at the end of the day I'm just wondering if anyone has any insight into the risk I would be taking if I pursued this endeavor. Is it a good gamble if I have the right skill set?

4. My last suggestion probably applies to the one related to risk aversion etc. Although we are logical people and usually know how to manage risk, we often miss the warning signals when we succeed (maybe, beyond expectation) with our first foray. If your venture starts off very well, you are likely to try for more success (e.g. more renovation for higher rents, one more duplex purchase ...). It is when you desert logical reasoning in the face of "success" that you are likely to create situations where you can fail.

5. Finally, talk to the experienced. There may be people you know who own property portfolios, big or small. Seek their opinions and refine your plan based on their inputs.

Then go for it. Good luck!

[helene_t]

My cousin bought some rental residential estate in Denmark in the mid-90s, when one pension fund of his parents' was released (his mother was in her late 50s so wouldn't need the money the first few years anyway, lol), refinancing when prices went up as to free money for down payment for new purchases, so his estate imperium grew quite quickly. He offered me a share in the beginning when he only had the pension scheme money, I regret that I didn't buy into it back then since it would have made me rich.

 

Some observations:

- Rental units in the posh suburbs are overpriced, presumably because rich people buy them for their children who attend university. Rental units in poor suburbs and downtown cause too much troubles although one could probably make good money there if one had the nerves, and is on good terms with criminal gangs etc. So the best place to buy is probably smaller towns.

- Units with a legal ceiling on the rent, and therefore in short supply on the rental marked, are overpriced because landlords can make additional income by collecting bribes from prospective tenants. So avoid those if you are not into criminal practices.

- It is amazing what insiders in the business are willing to tell you if you manage to make friends with them, especially if you get them drunk. So don't rely on public information, you can get better information if you build on your network first.

 

OK that was a Danish perspective, maybe not so relevant since I suppose you are aiming at the US market.

[jjbrr]

My cousin bought some rental residential estate in Denmark in the mid-90s, when one pension fund of his parents' was released (his mother was in her late 50s so wouldn't need the money the first few years anyway, lol), refinancing when prices went up as to free money for down payment for new purchases, so his estate imperium grew quite quickly. He offered me a share in the beginning when he only had the pension scheme money, I regret that I didn't buy into it back then since it would have made me rich.

 

Some observations:

- Rental units in the posh suburbs are overpriced, presumably because rich people buy them for their children who attend university. Rental units in poor suburbs and downtown cause too much troubles although one could probably make good money there if one had the nerves, and is on good terms with criminal gangs etc. So the best place to buy is probably smaller towns.

- Units with a legal ceiling on the rent, and therefore in short supply on the rental marked, are overpriced because landlords can make additional income by collecting bribes from prospective tenants. So avoid those if you are not into criminal practices.

- It is amazing what insiders in the business are willing to tell you if you manage to make friends with them, especially if you get them drunk. So don't rely on public information, you can get better information if you build on your network first.

 

OK that was a Danish perspective, maybe not so relevant since I suppose you are aiming at the US market.

- Units in posh suburbs seem like an unattractive market to me. It seems to me that the likely demographic to rent a unit in a duplex is either university-aged students looking for all the features of a home but at the cost of an apartment or young-ish families using the duplex as a way out of apartments and towards a house. The people who can afford to rent an expensive unit in a posh suburb are good candidates to buy a house rather than rent. This is, of course, dependent on location, as a posh beach-front rental unit would receive more attention and have more room for appreciation than a comparable unit in a nice neighborhood in Dallas, for example. I expect to stay far away from bad neighborhoods and downtown in general, unless I can find an area with lots of growth potential. Despite what everyone believe, I expect, I don't actually have any connections in criminal gangs, so that's not really a hassle or a risk I'm willing to endure. Perhaps somewhere down the line when I can afford to hire someone to manage the properties for me, that will be a more reasonable option.

 

- The legal stuff is all very confusing to me. I'm not sure I'll ever get my head wrapped around everything involved, but I think I can recognize a red flag when I see it; recently I was looking at a property fo which I learned that, if I were to purchase it, I wouldn't be able to evict the occupants or increase the rent for one of the units in the event of any domestic violence against one of the female tenants. Dealing with potentially violent drunks does not sound like something I want to get myself involved with.

 

- Indeed, I need to network extensively. Just like most thigns in life, I think to be successful in this area, who you know is as important or more important than what you know.

[cherdanno]

The "hoping to sell" part obviously makes the risk much bigger (as it seems housing prices fluctuate more than rents).

Why?

 

I think housing prices correlate directly with rent. In fact, property value is a direct function of lease.

Have you heard of that "housing bubble" that happened not all too long ago? :D It included an atypically high P/E ratio for real estate.

[jjbrr]

The "hoping to sell" part obviously makes the risk much bigger (as it seems housing prices fluctuate more than rents).

Why?

 

I think housing prices correlate directly with rent. In fact, property value is a direct function of lease.

Have you heard of that "housing bubble" that happened not all too long ago? :D It included an atypically high P/E ratio for real estate.

Ya, the book that was linked earlier is from ~2006, so it doesn't mention any of the troubles of the past couple years. Not an insignifcant problem.

 

I'd be interested to know how the jump in foreclosures affected the demand for rental units.

 

Also, if anyone has a crystal ball or can contact Ms. Cleo for me, I'd like to know how the market will look in the next 5+ years.

[Phil]

Background: I've been doing a lot of research lately about investing in multi-family residential properties. The general premise of the scheme is that I can buy a 2-4 unit property (duplex, triplex, quad) and live in one unit while leasing out the rest of the units.

 

What's the rental market like in your area? How high is the vacancy? Are units hard to lease?

 

If everything works out, I put down the down payment, make cosmetic renovations to all the units, increase the rent slightly to reflect the improvements if necessary,

There isn't much correlation between the condition of the units and the amount of rent, unless the improvements are REALLY nice - like things you won't wan to spend money on (granite counters, upgraded appliances, etc.). The reason you make these improvements is because it makes the units easier to rent.

 

and hopefully use the cash flow generated from the tenants' lease to pay for the mortgage.

And hopefully a little more. If the market gets soft, you'll need a reserve in case you have some vacancies.

 

Long term the goal is more or less to own the property outright using none of my own money except the down payment. Alternatively, I can make the cosmetic changes and increase the rent (increasing the property value) and refinance after a year and use the appreciation and increase in value towards a down payment on another building; dry, rinse, repeat.

 

See above. If you are running this efficiently, and your down payment is large enough, then you should be building some equity after a few years. Again, improvements do not equate to increases in value.

 

My question: Does anyone have any experience in real estate? I understand that a successful investor will consider things like location and appreciation potential, but I'm curious about strategies to find houses with good potential. I assume this is a skill just like any other, and practice and experience with some degree of natural talent will lead to success. Surely there are things that one should look for, some red flags, some things that reduce risk substantially, etc.

Get a good broker involved and let her/him know you are serious about buying. 1-4 unit properties are normally handled by a residential broker instead of a commercial broker specializing in income properties. They will give you some good advice on what the good areas are, whats in decline, and most importantly, what good values are out there.

 

Assuming I've done my homework, is this something you recommend? I keep reading stories of "If only I had started in my twenties...", but for someone who has never taken out a loan for anything (free ride at college, bought a car with cash, currently renting an apartment), it's a pretty big leap to spend a quarter million on a house I would plan to only spend a year in.

 

I think its a great idea, but also understand that the lending market is very tight. Even before you start looking, develop a relationship with a local banker that is actively lending in this market. You might need someone to co-sign if you have never purchased property before, and your credit needs to be A++ for something like this. Good luck!

[jjbrr]

There isn't much correlation between the condition of the units and the amount of rent, unless the improvements are REALLY nice - like things you won't wan to spend money on (granite counters, upgraded appliances, etc.). The reason you make these improvements is because it makes the units easier to rent.

Forced appreciation has often been compared to printing money. In apartment investing, taking a few simple steps this will give you the ability to increase the commercial real estate rents.

 

Forced appreciation is often as simple as new landscaping for your investment, or adding amenities and services such as cable or wireless Internet service. They are simple steps that are not overly expensive, but that give you the ability to raise rents higher than the past owner was able to get for the property. You can also offer premium suites to discerning tenants. This may have an initial cost for refurbishing, but it will also allow you to rent them at a much increased price. These simple ways allow you to use your property management to create a better environment for your apartment investing, giving it an advantage and creating an increase in income.

http://ezinearticles.com/?Commercial-Property-Forced-Appreciation---The-Basics&id=873842

 

All the research I've done suggests that paint, new carpet, maybe some new tile, maybe some landscaping are enough of an excuse to raise rent. Obviously lots of factors go into it. If the rent is already high, I can't force them higher without substantial improvements. But if the rent is on the low end, these are simple things to get them where they should be.