Well said you guys.
Todd, I'm seeing the same thing here in the Bay Area, my main market being the East Bay (read, mostly middle management/engineer types, not the mega wealthy of the peninsula). Certain zip codes around here didn't go down proportionately to the average going down of other areas (read, mid to lower middle class) and those area continue to be strong in the real estate market. But i've only got a "bottom feeder" read on the real estate market (my glass company does a great deal of escrow transactions and i'm now doing glass/window inspections for people willing to pay for my reports).

Personally, i do not think this type of market (real estate) is sustainable, i can't see the masses and number of well paying jobs growing at the same rate as consumerism., But, thats just my opinion, i'm probably off 180*.

Like you said Greg, slow and steady investing is what "wins the race"...

Isn't investing, buy what you know? and since i know alot about housing, location, maintence, building, litigation etc, i should be focusing on buying REIT's or a duplex or fourplex or commercial property...But I don't, primarily cause i dont have the large capitol required in this market area., .in the mean time, i continue to save, maximize my pension contributions, moniter my Schwab accounts (minor stock investion) and buy down my mortage (fixed @ 2.75%, 10 years left)....

It's kind of scary looking at my generation in the future (I'm 26). Everyone my age just spends and spends without thinking about their future at all. Everyone has to have the latest and greatest phone, etc. When it comes to housing, no-down payment loans have become the norm, and I get funny looks when I tell people that I got a 15 year term on my house. When it comes to cars or anything else, if the money isn't there, well, let's just take out another loan! Most my age only see a monthly payment, with no real understanding of what things cost, or even the value of a dollar. A few of my friends get it, but when I bring up investing to most, the response I get is "that sounds like some real wolf of wall street stuff." Here in Michigan, the average wage is low too, so it's not like everyone is going to sock away enough cash to retire on without investing. Anyway, the housing market around here has plenty of buyers or want to be buyers, but not much inventory. I just bought a house last year, and when I was looking, it seemed like there was no middle ground for pricing, there were either small houses that needed alot of work in the 40-50k range, or houses that are 150k+ (I know that sounds cheap to alot of you, but like I said, the average wage is low around here. I'm at $20/hr and my friends think I'm rolling in piles of cash, lmao).

I made my post sound kind of doom and gloom. I don't believe that is the case. Our median price is still 95k below when the balloon popped and we have a low median at $220,000. Affordability is still good.

The construction industry, consumer spending, and stagnant median price with a shortage of inventory makes me think we are getting closer to the next cycle.

I do think the short term is solid. My real point, start preparing NOW to take advantage of the next Winter. They always come!

If I had to guess I would say the economy is better in Las Vegas then alot of places. Cars are selling, I know that. Its a much different deal in my area with the price of oil. It will be interesting to see what happens with this next election.

So once again the FED leaves the rate unchanged.... and that tells you the economy is just "okay". Globally we know various countries are loaded with debt and economies that aren't great.... China's "customers" (everyone else in the world) are not buying what they were - but let's not forget China is "slowing" to "only" 7% growth. The USA hasn't seen 7% growth in like "forever"!! OMG what we wouldn't give to just have 5% growth!!

We know that oil can be a big contributor to "inflation" - and obviously it's not inflating anything... This is good and bad. Good for "us" with cheaper gasoline and heating oil... but if you're in oil (me) - it sucks!

And WOW! If you were in Buffalo Wild Wings (BWLD) you're getting murdered! Was this a "priced for perfection" stock?? You always have to be on guard if you're in stocks that have that type of share price!

I was thinking the same thing. I just recently got a new phone and was shocked to learn I had to buy the phone. Even if you go for the 2 year payment plan on the purchase of the phone. Your cell bill went up that much.
I think this will hurt sales of the phone for a couple years till everyone is conditioned to it.
Will it effect Att and verison stock also? If people keep phones longer they can't lock people to 2 year contracts anymore. Makes it easier for people to jump to another carrier.
Prices for good used phones must be going up also.

Todd, fyi, i didn't see your post as negative at all. I saw it as "it is what it is", mine may have seemed to "negative nancy".....I would have to say i'm neither an optimist or pessimist, i'm a realist.

That's a good point, it comes down to what dictates your life. Local influence or continental. For me it's both. With a majority being local at this point with my business and real estate holdings.

I do have to wonder how many are judging the current economy by the unrealistic trends last decade? Everybody was making money and flush. It was EASY. That's not how it's supposed to be. It does take hard work and faith to be successful with any sticking power.

Bottom line, pay attention, analyze the market and try not to get caught with your short around your ankles.

I still go back to the fact that the stock market has been strong. Look at the 5 year charts. Our local real estate market has been strong for nearly 5 years. The national market has done well too. For me, it's been a huge Spring. I'm ready take advantage of those gains and prepare for the next wave. Maybe I've just worked my ass off, but I'm not taking any chances.

Here in Phoenix, in my micro-economy (neighborhood), we had a nice real estate run through September-ish 2015, it seems as though things have cooled significantly since then. Not a decline, just not the substantial growth seen in the prior 4 years. Given the run up though, I think it's more sustainable than the prior bubble. I'm expecting a pull-back, but not necessarily a collapse. Housing wise anyway...

Amazon (AMZN)
 

We should have all bought a million bucks worth of AMAZON (AMZN) this morning!

Just WOW! What a beat! The polar opposite of Apple (AAPL).

I don't know about you guys - and I don't own the stock - but I buy EVERYTHING on Amazon Prime and I mean EVERYTHING. Some days we get two boxes a day from them. I even bought my load leveling hitch for the new truck and trailer from them. And the new compressor for the trailer etc.

I only wish it paid a dividend - but you guys are different - you're not living in retirement (yet). If you'd have owned Amazon last week - maybe you'd be retiring early!! LOL

While you're looking.... check out the 485 P/E..... versus Apple (AAPL) 10.55 P/E --- Talk about being "priced for perfection"!! WOW!!

I've got Amazon, and it had dropped since I bought it several weeks ago, but like has been discussed in this thread, I didn't panic and it paid off. Too bad I don't have very many shares.

I'm sad to say I missed out on my first real-estate investment by 45 minutes yesterday. :bang: I already had a tenant that was going to pay rent that covered the mortgage and I would have had 1/3 for myself. This commercial property sat on .51 acres and was 1890 sq. ft. My offer was submitted 45 minutes after they already accepted an offer of 115k which was 5k less then mine, the list price. The listing was posted 4/25/16(Monday) I found it on Tuesday night. I went and looked at it Wednesday got financing Thursday morning and submitted my offer that day. It is literally 2 minutes from my house. I guess things happen for a reason.
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http://s1342.photobucket.com/user/eh...tml?sort=3&o=0
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At least I'm in the green on all 3 of my very small holdings that equal $900.00. Only a small difference of 119k :hairpullout:

Jacob - That would have been a nice place! Like they say - timing is everything.

I once missed a house that I really wanted by about 15 minutes. The seller had just accepted an offer before we called with ours. Oh well.

We never have enough shares of the "winners" and always have too many shares of the losers... The key is just to keep plugging along and keep investing. Good for you for being in Amazon! I think they've only just begun.

Agree with most of your analysis here. I've been looking for add'l rental properties since I bought my last one in late 2014 but the bidding and pricing is just insane in the areas I want. But with the low fixed rates, and skyrocketing local rental rates, I am still looking for something "acceptable" to me in terms of my own analysis and requirements -- neighborhood (path of progress), tenant situation (vacant vs occupied), etc -- as my target area is about the most anti-landlord you can find. But I welcome that as it keeps most of the scaredy cats away or those unwilling to deal with that.

I know I could sell my 4 plex I bought 18 months ago for $200-300k more, but I have an incredible 30 year fixed rate so will hold it. I mean, what would I buy with the proceeds anyway?

Beware what happens to VALUES of property when the interest rates begin to rise... people will be shocked to see what happens to the value of the properties as the rates price people out of the payment.

I think we're in an interest rate bubble on property. While the buyers since the big bust have real down payments and real credit... Incomes have not really been rising. The historically low interest rates has made that "okay"... But I think there's another shoe to drop when we see these rates begin to rise.

I personally think the FED understands this dilemma! The damage that will be done to BOND holders, the housing market, and the stock market could be complete carnage. Of course this is all dependent on the speed and percentage of any rise in rates. And again - I think the FED is well aware of what all of these interrelationships are.

The "cap rate" on rentals is always price dependent. As rates rise the cap rate required to make a building attractive will also have to rise... which means the value will need to decrease if the rental rates can't be raised. This has been the way of the world since the beginning of time so it shouldn't come as a surprise to anyone. Of course it's a bit more complicated than this because there's also the NOI (Net Operating Income) What's left after the COSTS to maintain, insure, manage the building (rental). NOI and Cap Rate are what determine the value of a commercial property. The market value is determined by dividing the NOI by the AVERAGE CAP RATE for similar properties in the area. Unlike trying to determine the value of a single family home - which is based on similar homes of similar condition that have sold recently... That really doesn't exist for commercial properties. So there has to be some way of calculating the "value" of a property and the Net Operating Income divided by the average cap rate is about the only way to make this determination.

Of course - it's always more complicated.... because you might be buying a run down building in an area of nicer buildings - and you can clean it up and raise the rates etc. But you'd still need to determine the end result to know what you can pay for it "as is" and then add your costs for fixing it up - and you'd have to know what the units are going to rent for after you're done.

We recently did this for a building in Seattle. It was the ugly one on the street - needed updating. This is capital intensive, income disruptive, and takes professional management! The results can be surprisingly good if done correctly! Like most things - if it was that easy - the fat chicks would be doing it.

A quickie search shows San Francisco and San Jose as having some of the lowest cap rates in the country. There are other markets that share this, of course... but the cap rate for Multi-family units there is about 4.5%. Seattle shares in this relatively low cap rate.

The "market" for investment in commercial properties competes - as does every other form of investment - with the expected returns from other forms of investment. In order to make an investment "attractive" - it needs to return some basis points above a mean. In a lot of investments that mean is the 10 year treasury.

Right now - a 10 year treasury is paying 1.84%.... so if you do a quick calculation... a 4.5% cap rate is 266 basis points above the 10 year. You can see how that will be squeezed if the 10 year jumped to a paltry 2.00% and even worse at 2.25% etc. Suddenly the investment return of 4.5% isn't looking so hot.

Long term - like any investment - there has to be some thought put in to where we are in any market cycle - what the future looks like - and the net end result of a particular investment. It's infinitely easier to take a loss on a stock if the market turns to crap... you own 100% of the investment - unlike a property with a mortgage.. which has sales commission costs etc. and could possibly be underwater! But like a dividend paying stock - commercial property provides income and the POTENTIAL for appreciation over time.

My original plan was to buy and hold my two investment properties for the long term. In fact, until they were paid for by the tenant. I didn't expect them to appreciate so fast (One I'm selling has nearly doubled) and my financial picture and vision was different at that time. I tend to be on the conservative side and don't mind getting out EARLY. I got lucky and did on a few properties 10 years ago. I got out a little late on one because I was greedy. That greed cost me a few bucks. While I still think they are very solid long term plays, I'd rather be debt free and cash heavy moving into the next cycle.

At the end of the day, it all comes down to your own risk tolerance, financial position, and personal circumstances. Personally, I like the idea of reducing complexity and liabilities for more time to live life and be a Dad moving forward.

You'll only ever know "early" and "greedy" when it's history. You never know this at the time of the decision. I 100% agree with your statement that it all depends... each persons time horizon - ability - goals - are different.

Being DEBT FREE is one of the biggest statements a person can make. It's also one of the biggest goals EVERYONE should have. Nobody ever went broke taking a profit.

XOXO

Great point buddy...:thumbsup: I was just telling a couple about you yesterday. They are moving up to the Boise area to retire.

I read an analogy not long ago. It was comparing us to a dog fetching a bone. Meaning, as soon as one goal is achieved, on to the next. While I think it's important to be ambitious and goal driven, I've seen many keep stepping it up in a relentless pursuit that could alienate their families and health. A bigger house, more expensive car, lifestyle, etc.. The problem, you are now forced to keep working like a DOG. Your lifestyle and corresponding liabilities make it very hard to let up once you have obligated yourself. Bottom line, your lifestyle stays on pace with your income growth.

I've been the dog achieving worthy goals through hard work and discipline. I needed to by the way. At some point, it isn't that fun anymore. Lately, I've been working on simplifying and satisficing. It results in moving towards your greatest values and better energy/time management. A big part of it is being content with what you have. That's a challenge for most of us. It doesn't mean you can't be ambitious. It just keeps you from being the dog fetching the bone.

Rental discussion
 

By the way -- the post about NOI and Cap Rate is not for those that know this information or understand it. It was - and I should have identified it as such - information for "INVESTING 102".

I personally think everyone that has the ability - should have investment(s) in commercial and/or rental properties. This is another way to diversify your investments... has great long term proven success etc.

Live every other form of investing - they are not without ups and downs, and their own perils. Renters move out leaving you holding the bag... neighborhoods change (fundamental change you must watch out for!)... they require investment for maintenance and even improvement. They are rarely buy it and forget it.

What people forget are some pretty important investment goals such as:


The income (NOI) is, or can be, offset by depreciation for taxable purposes.

You have "dividend" income - or at least an income stream - that should grow over time. Often times this is NEGATIVE in the first few years.

You can have long term appreciation of the asset on top of the cash flow (NOI) generated. This tends to accelerate with time.

If you compute the income created downstream - against your initial investment (down payment) - the return on investment (ROI) can be staggering.

Let's look at this in a very basic way.

You put 50K down on a 200K property. The rental rate is $1,300 a month. That rate just covers your overhead (payment - taxes - insurance). But 5 years later that rent is $1,500... and 10 years later it's $2,000. At 20 years the mortgage is paid off.... and you're not collecting $2,250 a month. Pocketing $1,750 after expenses. That's $21,000 a year in income off your initial $50K investment.

The above is obviously oversimplification - as there will be paint jobs - roofs - appliances - carpets - landscaping - down periods with no renter - or a period with a bad renter... but in the end.... Your $200K house is now worth $375K and it provides $21,000 a year in retirement income. BAM!

This is my personal plan(on top of 401k and ROTH). My question is, what is the best way to protect your rental(and other assets) from lawsuits, exc?

For "residential" type rentals (1-4 unit properties) I got a Landlord Policy. I pay a fair amount more for this from Farmers. It is not required - you can get a run of the mill homeowners/GL type policy. But this one covers a lot of problems you can get into with your tenants. And in my pro-tenant political environment investment area, it was an easy call for us.

My wife fights with insurance companies for a living, and she thinks Farmers is the most formidable opponent in our area at least.

I have always had an LLC for any investment property I've owned. It protects your personal assets from any lawsuit related to the property, if set up right AND you don't co-mingle personal funds with LLC funds. It must have it's own bank account and you can't ever buy anything personal from it. You can take cash out to "pay" yourself and contribute to it if you need to for big expenses and stuff and if it's a single member (meaning no partners) it doesn't need it's own tax return, it just goes on your personal return.

Good call. I kind of skipped over that part. :lol:

That should be the first thing you do IMO. I actually set mine up before I acquired the actual property.

You can own several properties under one LLC -- some do it that way, and it's better than nothing -- but having a separate LLC for each property is the cleanest and offers the most protection.

To be clear on the LL insurance policy -- it is to provide legal representation in the event of potentially expensive events such as unlawful eviction. You have to have Homeowners/GL policy on the property anyway - so paying a little more where 6 figures of legal fees could be provided by your carrier under a number of unfortunate circumstances is worth looking into IMO.

Are lenders OK with this conversion on a current mortgage, or does it have special requirements?

I would most certainly set up an LLC for investments like this.


By the way - you don't have to buy these properties on your own - there are many companies that do all the work - find the properties - set up the LLC's - do the management - and just send you a check. That's the way I have always done these types of investments. Personally - I don't want to manage an apartment building. I don't want a phone call that the sink is plugged... I just want the investment and the income.

Now - when you think about it - this is far easier than finding and identifying a "good" investment property - securing a mortgage - find tenants - all the legal ramifications etc.

Typically then - the management company sets everything up - offers a "prospectus" describing every detail of the investment - and their plans - and financials etc. Then if you want "in" - they offer "shares" at a set rate. You can choose to buy one share or whatever. The deals I've always done have been anywhere from 50K to 100K per share. They typically will return 6 or 7% and after a while (years) they're typically sold and have a capital return. Most if not all of the income received is offset by the depreciation on your taxes during the income / holding period.

Here's the downside:

You CAN NOT invest 401/IRA/ROTH funds in these. They're considered "passive" investments and as such have different taxable situations.

You have ZERO control of how they're run - when they might be sold - whether or not they're sold or 1031 exchanged etc. You're just along for the ride. They're very illiquid.

Because of the illiquidity - you typically must "qualify" as an accredited investor. Meaning - you must declare that you have "X" net worth - per share - outside the value of your house etc. This is done because they don't want investors that are going to be calling and wanting their money back 6 months or 3 years down the road.

Like any investment - things can go against you. Rental rates may face stiff competition from a new building in the neighborhood. Management might suck. The economy can actually be TOO GOOD and your renters move up or out (I once had this happen to one of mine).


Here's the upside:


You generally get a very nice cash dividend annually (typically paid every 6 months).

The income is "tax differed" in a sense - because of the offsetting depreciation you get in the tax forms.

The returns can exceed 100% over a 10 year period. I once had an investment that returned 117% in 4 years. That was a special - probably never to be duplicated - event.

A 50K investment (typical single share cost) that is far simpler than owning and managing a single family rental.

These are typically LARGE (100 or more units) Class A apartment complexes. Therefore the occupancy rate can fluctuate throughout the year (years) and not have a big effect on your income. If you invest in single family - and the renter doesn't pay - or moves out - or destroys the property... you have a LARGE swing in income!

This is great info for someone trying to get into that kind of investment property. In my case, I already live in my future rental(will buy property and build in future). Mainly wondering if I would need to change my loan to convert to LLC or if it is a simple title change? Thanks again for all the information.

On one of my properties I was unable to set up the LLC in time (my original name was rejected by the SOS for being too similar to an existing LLC) before taking possession and had to deed the property twice. My lender did not have an issue with it (not sure what I had to do - but it was not a headache). But I would check with your bank/lender on it for sure.

Every time I had to get an investment property loan the lenders wanted me to personally be liable for the loan in addition to the LLC. This doesn't affect the legal protection offered by having the LLC.

Also, we haven't talked about trusts here much but if you think you'll have compiled any significant amount of assets by the time you die you really should have one that fits your own personal situation. The trust will have just you as Trustee if you're single or you and your spouse (typically) if married but is it's own single entity and will be the sole member of the LLC

As of last Friday, we paid off the house and have 0 debt. :relax: It feels pretty damn good! The idea of not getting anymore bills for car payments or mortgages is really kind of strange. I've had some type of debt my entire adult life. It was consdiderable not so long ago. Living this far below our means really opens up many doors. It gives us the flexibility to work less, save more, give more, travel more, and be more content. The bible said it best, "The borrower is slave to the lender". I get rid of the liabilities, bills, insurance, tenants, repairs, property manager, larger CPA bill, and on down the line.

Now, I do still believe in strategic debt for investing if the risks aren't too great, you've thoroughly educated yourself, and have a real strategy in place. That means cashing out if there is a healthy gain. Owing taxes is a GREAT problem to have! It served me well in real estate. I do have to admit that I came very close to getting caught with my shorts around my ankles twice using this strategy. You shouldn't have to fudge the numbers to make it work, it either works or it doesn't. Are the fundamentals there? Meaning, the market trends looks right and the ROI is reasonable. Can you survive a suffering economy, repairs, and vacancy factor financially?

Congratulations Todd. We went debt free last fall. You are right, it feels pretty damn good. :cheers:

Don

:cheers: Back at you Don, congrats!

You guys have no idea how big a smile this puts on my fat little face! I know now that I can leave this earth and know this thread helped a couple people live better lives. My job is complete.

So -- I was just listening to statistics for "MAY" -- and the "sell in May and go away" -- which gets lots of questions in this thread. And I normally say - pay no attention to all that kind of stuff - it's trader talk - not investor talk.

May was UP (percentage wise) more than almost any other month.... so if you sold - you blew it. LOL

I think it has helped a lot more than a few. Some more than others maybe but a lot of folks just the same. Thanks Greg!

Don

You have helped a lot more than a couple people with this thread.
I thank you every time I look at my portfolio, and say if it wasn't for Greg it would still be in someone else hands. I would of had very little control. Now I apply what you have taught. I won't be rich tomorrow, but I hope to retire comfortably.

Congrats Todd and Don for being debt free!! I only owe on my house, at 3.75% and a commercial income property with about 50% equity in it so I'm pretty good as well. Now, if either of you miss ever miss it, you're free to make a couple of my house payments if you like! :D

Anyone seen "Money For Nothing" on Netflix? Highly recommend it, maybe the next bubble that bursts, we've been on an 8 year cycle and it's about 8 since the last one.

Thanks, Erik!

I'd be seriously looking at your local market and making a firm decision on whether it's time to "Take your money and run". If the decision is no, you should be ready to ride out the next low cycle. I know commercial leases can run through cycles, but if that business was to fold, you could be left with a vacancy.

I'm on the residential side, but I have some commercial knowledge here. What seemed to happen with the last cycle was that tenants migrated into newer, nicer spaces for a similar outlay. That left many of the older buildings with vacancies.

Going back into debt or getting back into the market is EASY. Those liabilities and opportunities are plentiful. Timing dictates the latter...

Todd - Do you mind sharing some of the key factors your talking about in the real estate market. I'm looking at purchasing a the building we currently occupy and have found the open lease space ratio to be getting higher but not alot for sale just yet. But I'm wondering if this is the time. I think things are gonna go on sale and I seem to keep hearing that the sky i falling and alot of smart guys are prepping for market correction. CASH is KING. Just trying to learn all I can.