What investment strategy you are more comfortable with? (1 Viewer)

[Isaac]

What fits you better if you were having to choose between these two general directions, and why? Fits meaning your own opinion, personality, tolerance for risk, giving you peace, making you feel secure, actual mathematical arguments accepted too!

Don't overthink it - just if you had to go one of these 2 directions - what would you consider and why? Or have you already? Experience? Testimonies?

Feel free to vote and then discuss or comment

 

[The_Doc_Man]

I don't invest in real estate. My grandmother chose the "acquire for later resale" but the down side is an unmovable property that NOBODY wants. I've got one now that she couldn't sell in her lifetime - and she died in 1951. Dad and his brothers couldn't sell it and so it fell to me. I've tried and I can't sell it. As a result, I don't care to invest in property at all.

 

[CJ_London]

Depends on where you are and the tax implications. In the uk, long term rental is now heavily taxed whilst buy as primary residence, do up and sell can be treated as a taxable gain. Partly depends on how long before you sell. I got caught out some years ago, bought a house did it up and sold 3 years later due to a change in job. Hmrc treated it as a taxable gain as I had previously bought and sold other properties as primary residence

Best option in the uk at the moment is to have a property company and buy a property and rent as holiday accommodation. Use an agent to manage cleaning and maintenance if you don’t want the hassle

a property company will give you access to funding etc but you still need circa 25% for initial deposit.

 

[Isaac]

@The_Doc_Man Yes, that makes sense - a bad experience will leave a taste in the mouth!

@CJ_London Also good advice, thanks. Taxes are a huge factor for sure.
Here, you can escape practically ALL taxes as long as you reinvest the money in a new primary occupied residence - and actually currently it's even better than that, but it depends on politics and new presidents/legislators, so who knows how long it will last.

I think a lot about personality, peace/happiness (what creates it for you), and security feelings too when investing.

I think I lean towards the multiple rentals, but have recently met some people who have made a LOT doing the other way. They didn't mind moving every couple years I guess. Interesting options.

We have the property management companies here too. The ones I have briefly used once in Texas in the past did not provide much benefit - basically they acted as a Fence, intercepting phone calls but not really doing much of anything - they did provide one benefit: In the event of a need to evict a tenant or sue, they provided some degree of coverage on the first few 'phases', if needed, which is appealing. But that was about it.

Can you do things like AirBnB in the UK? EXTREMELY popular here right now - so much so that too many are doing it and rates are not quite as good as they once were, but quite attractive in the sense that the AirBnB company provides multiple types of insurance (liability etc), and does a lot of handling of customers, as well as provides a platform where both Owners and Renters can be rated - so you can only rent to people of a certain reputation, for example.

 

[CJ_London]

Airbnb - yes, also lots of holiday rental companies, booking.com and similar

 

[Pat Hartman]

None of the above. When it comes to RE investments, the more units, the less risk. In a 4-unit, if one unit is vacant, you are still making a profit. If two units are vacant, you can still cover your monthly expenses. In a single-family house, when it is vacant, you are losing money every single minute and that money is coming out of your pocket. You buy for income not appreciation. Don't ever buy based on pro forma numbers. If he current owner couldn't get the pro forma number, neither can you. Buy based on the actual numbers. Always get at least 2-year's worth of rent rolls and audited income/expense statements. Know whether the area is on its way up or on its way down. That will affect appreciation or depreciation.

For young, first time home buyers. Stop looking for your forever home and buy a 4-plex. Live in one unit and let your tenants pay all the expenses and give you a little monthly profit. Without a mortgage to worry about, bank the money and in 2/3 years, buy another one. NEVER over leverage. After your second, think about buying/selling using a 1031 exchange to defer capital gains and step up to 20+ units. Live in one of those units for a couple of years if you can but don't let the other tenants know that you are the owner. Use a management company. The income will cover the expense and you don't take the midnight phone calls or have to go to court to evict a tenant or arrange to show units to people who never show up. You also don't have to be the bad guy and not give a break to a tenant who can't pay the rent.

Remember, over time, real property values normally keep up with appreciation but rarely exceed it. It is only in specific situations where values will naturally grow faster. The people who got caught with their pants down in the last RE melt down, got caught because they believed the hype that RE pricess never go down. In the run up to 2008, mortgage terms were loosened to the point of ridiculousness. If you could fog a mirror, you could get a mortgage with little to nothing down. People were encouraged (and allowed) to overpay and over leverage their purchase. They were using variable mortgages which are also dangerous because even if the asset is performing (producing the expected income and monthly profit), if the RE market goes down and it is time to adjust your mortgage rate, the bank may ask for additional money to make up for the drop in the assessed value or they won't give you a new mortgage at all even at a higher rate. If you don't have the cash to make up the difference, the bank will foreclose. This is a business expense and is deductible. Unless you are prepared to give up your day job to manage the property do not ignore this advice. Your job is to manage the management company which will be more than enough trouble. When you do quit your day job, it should be so you can spend your time finding more deals and partners to fund them, NOT to be a plumber. Your time is worth much more than that running your business. Donald Trump doesn't sweep floors, neither should you.

I have software that I built a few years ago that helps to evaluate income producing RE. I will not give it away but I will analyze any property and give you a 10 year report. I've attached a picture where you can see part of the data entry form and part of the evaluation form. There is other stuff also.

I was just scrolling through old items. This one I looked at in 2012 because it was so cheap. I noticed that it had sold for 330,000 in 2006. That was 2 years before the crash. $330,000 was way too much money. At that price with the numbers you see, it had a negative cash flow of 6000 per year. Apparently the buyer bought the hype and believed the price would just keep going up, never understanding, that income property is only as valuable as what people will pay you to rent it. When the crash happened, I'm pretty sure the bank would not refinance unless the owner forked over a ton of money so this was probably a foreclosure situation. I updated the desc with sale prices between 2012 and now. I left out th $98,000 that it sold for in ~ 2010. Today, they're asking $603,000. That is insane. Look up the address. They are basing the price on the new units going up across the street. But the neighborhood is still crappy an the development across the street has amenities and is brand new!!!

You have to understand the marked and know what your clientele can afford to pay for rent.

 

[Cronk]

Real estate. Are you thinking only of private dwellings or including also commercial and industrial real estate?

I used to have a portfolio of houses but got to the stage where I sold them all and put the money into the stock market. With stock assets, there are no ongoing taxes on the fact that you are holding the asset. There are no repairs. There are no problem tenants where you can spend a lot of time in courts or tribunals. If you need money, you can sell a parcel of shares, but not sell off one bedroom. Brokerage on buying/selling stock is minimal for and the market generally is very liquid so you can buy/sell the same day.

Those are my reasons for holding stock. Property rings the bell for some others, mainly because there is something tangible. I've learned to avoid arguing which is best. I know which is best for me.

 

[Pat Hartman]

Having a portfolio of single family houses is like having a full time job. Having the same monetary investment in a 10-20 unit building is stressless if you pay a management company to handle the details. You manage the managers instead of dealing with the tenants. Never lose sight of the Monopoly strategy of building hotels as soon as possible. Upsize for profit and ease.

 

[Isaac]

Having a portfolio of single family houses is like having a full time job. Having the same monetary investment in a 10-20 unit building is stressless if you pay a management company to handle the details. You manage the managers instead of dealing with the tenants. Never lose sight of the Monopoly strategy of building hotels as soon as possible. Upsize for profit and ease.

Excellent advice. But I have to curate my set of options to my personal capabilities. (Read: My lack of Money!)

At this point, it is doubtful that I can qualify for, or that I would be smart & persistent enough to pursue the biz process required to qualify for, the ownership of a multi-unit property.

Thus the renting of my first home and living in the second I think is my best move right now - really the only one open to me.

I do see your point about multiple properties quickly adding up to a LOT of headaches! Good comment.

In all honesty, the most likely scenario is I only end up with 2 properties total, with a possibility if I am lucky and disciplined that I end up with 3, with about 1.75 of them paid off.

Plus, I suspect they may all end up in this one city.

Not too bad headache wise, hopefully. And they will be in a form that I cannot stupidly liquidate in a heartbeat, like a 401k where the balance starts to look tempting when you're going through a temporary hard time.

 

[Isaac]

But I'm glad you said that, I'm going to keep that in mind. Perhaps when one is paid off, I can sell it and buy a 2- or 4-plex little apartment building. I lived in a little 10-plex in san diego in 2003/4, it seemed pretty efficient. The owner would come himself to fix things, ha ha, I remember our bedroom door didn't close b/c of warped wood, this landlord came over himself with a saw and a file and hacked off another 1/8th inch from the bottom of the door. I was like seriously ?? But only paying $1k/mo in SD, (even in 2003), I was lucky and didn't complain...much.

I would be more classy than that

 

[Isaac]

Real estate. Are you thinking only of private dwellings or including also commercial and industrial real estate?

I used to have a portfolio of houses but got to the stage where I sold them all and put the money into the stock market. With stock assets, there are no ongoing taxes on the fact that you are holding the asset. There are no repairs. There are no problem tenants where you can spend a lot of time in courts or tribunals. If you need money, you can sell a parcel of shares, but not sell off one bedroom. Brokerage on buying/selling stock is minimal for and the market generally is very liquid so you can buy/sell the same day.

Those are my reasons for holding stock. Property rings the bell for some others, mainly because there is something tangible. I've learned to avoid arguing which is best. I know which is best for me.

That's exactly how I think of it - investing is pretty personal, because only the individual knows himself/herself well enough to predict what types of situations will bring out the best of them, or perhaps suffer b/c of their own defects/struggles.

Also the boilerplate advice that, say, Ramsey and financial consultants give out, I always remind myself that they tend to stick with the advice they can give out to very many clients across the board, with slight customizations only.........Thus, they may never recommend something that would work perfectly for YOU, only b/c it wouldn't be "safe" enough to add to their repertoire of things-they-recommend.
Example: a friend of mine regularly (has done this 15+ times), takes out a HELOC and actually leverages it to loan money to real estate flippers in his local city's Real Estate Investment Association. He does his homework, knows the game, and has never failed to turn a profit - Usually, a much bigger return than the market would give.
However, I doubt you'll find many financial consultants ever recommending that people leverage their HELOC! But it works great for my friend. It also satisfies his sense of excitement, brings him unquantifiable happiness to boot.

I have this fear that "Well, after all, there ARE generations on occasion that lose big in the stock market - and if it happens at just the right time, there may be no recovery in time to benefit that generation's life" - so while I realize the market is typically good, and comes back even after worrisome times, Yet, I know myself, and I will constantly be worrying that "Is this finally it? Has our country's politics, or world wars, finally gotten to the point where the stock market will be trashed and some massive paradigm change in currency or economy will make my stock moot?" ... Might be a small chance, but I'm a worry wart.

I like the tangible real estate, and I kind of like the "double"-benefits - the off-label benefits, so to speak, like when I am old, if my children are going through a rough patch in life, it may be a place for them to stay, or, it may be a winter home for us (in AZ) if we live in a cooler place, or whatever.

Of course, real estate is not divinely guaranteed either, but somehow I like the idea of a tenant paying my mortgage and after that point, even if real estate goes substantially down, I have an asset that is VERY unlikely to become "worthless"....in my personal feeling, less likely than could happen to stocks.

Many people really enjoy the stock market tho, and works great for them - I admire those who understand and work it.

 

[CJ_London]

A friend of mine specialises in student rentals. Return is good, parents pay a damage deposit, students leave every year so no issues over tenants not moving out. Wear an tear is a bit of an issue but he budgets to replace furnishings and white goods on a regular basis.

a 4 bed house will typically house 5 or 6 students with shared facilities. Additional work needs to be done in the uk for ‘multi occupancy’ properties. Don’t have a full list but soundproofing is on there

properties do need to be in a university town

 

[Pat Hartman]

I have also loaned money to flippers. The most important thing is to ensure that the property is not over leveraged and that your note is no worse than the second mortgage. There needs to be at least 30% equity in the project so I never loaned to people using 100% OPM. I did have one situation where the flip went south. A long and very stupid story. The town foreclosed and I had to show up to be prepared to buy the property for the cost of the fines. Lucky for me, mine was the first mortgage and so when other flippers showed up to bid at the auction, I was able to get enough for the property to cover the town debt plus what the flipper had borrowed from me with interest. She got nothing and she deserved nothing for what she did.

I would never use a HELOC to get money to do this though. There is calculated risk and there is insanity. A HELOC can be called. The terms are different from standard fixed mortgages. If you don't have another source of funds to pay the HELOC, you could lose you home. The common terms at the time I was doing this were 6 month term, 4% up front so if the flipper needed to borrow $20k, he would sign a note for $20,800 and you would give him $20,000. He would pay back $20,800 at 9% amortized monthly but with no payments due until the note was due or the property sold. Usually also a two month minimum so you were guaranteed a certain amount of interest. You got your money at the closing including all the interest. The borrower also had to buy title insurance and property insurance and your name had to be on the insurance policy so the flipper couldn't just cancel it without you knowing. When you watch the flipping shows and they talk about the monthly carrying costs, that is the interest payment they owe for borrowing the money. Most notes were 3-6 months with one guaranteed extension. After that, you were not obligated to give the flipper more time.

The terms for using OPM are pretty harsh but nowhere near as bad as payday loans, mostly because there is a hard asset backing the loan.

 

[Isaac]

I would never use a HELOC to get money to do this though. There is calculated risk and there is insanity. A HELOC can be called. The terms are different from standard fixed mortgages. If you don't have another source of funds to pay the HELOC, you could lose you home

I'm sure in his case he DID have money to pay the HELOC regardless. We're not talking about huge sums here, what he has done (again successfully many times), is loan maybe 70,000 at 14% interest rates and get it back in 6 months. Made a lot more than a market investment.