Investing 102

[John510]

If you have cash then buy real estate while its cheap and rent it out. I try to find major fixers and remodel them myself then rent them. These are usually foreclosed homes or REOs.

Example:

2 bdr/2 bath condo with flood damage. Worth 130-140K
Purchase price $80K
Escrow fees $1500
Remodel cost $12K

End Result $93,500

Rents for $1550
HOA/Prop Tax/Ins -368
Net Result Cash flow $1182

Thats a 16-17% Return on Investment. The problem is you need to search MLS everyday and make offers as soon as they get listed. This only works with cash deals. If you are getting mortgage loans to do this then you probably will not be positive since you have to pay interest up front.

[realcoray]

Originally Posted by John510

If you have cash then buy real estate while its cheap and rent it out. I try to find major fixers and remodel them myself then rent them. These are usually foreclosed homes or REOs.

Example:

2 bdr/2 bath condo with flood damage. Worth 130-140K
Purchase price $80K
Escrow fees $1500
Remodel cost $12K

End Result $93,500

Rents for $1550
HOA/Prop Tax/Ins -368
Net Result Cash flow $1182

Thats a 16-17% Return on Investment. The problem is you need to search MLS everyday and make offers as soon as they get listed. This only works with cash deals. If you are getting mortgage loans to do this then you probably will not be positive since you have to pay interest up front.

You can definitely do it with a mortgage, and I'm no expert, just getting started in this area myself but look at the same example property, but financing it and you can see how you can put your money to work.

If instead of paying cash outright for an 80k property (then 12k in repairs), you can buy four places @ 20% each (64k total), and then do say 10k or less in repairs each, and you would end up making very similar monthly cashflow (1295$), but you would build equity four times faster, aka putting your money to work for you. That is assuming 45% expenses and 8% vacancies.

Buying one outright is much lower risk, but buying four with a mortgage is not as risky as it may sound depending on an individuals circumstances. If a single house is unrented, you lose all of the cash flow, where if you have 4, you need two houses unrented at the same time to break even (the cash flow from one, covers the mortgage on an empty one).

I'm not in a position personally to get 4 places, so I'm looking at a triplex to get the same benefit of reducing my risk. The numbers from one example are like so:

List price: 144k
Down: 36k (my lender prefers 25%), 40k out of pocket total to purchase
Rent: 1800 (600x3)
Gross (minus 8% vacancy): 21,528$
- Expenses (50%): 11,808$
Net operating Income: 9,720$
- Mortgage (P&I): 6,470$
= Cash Flow before taxes: 3,250$

This results in a 9% return on the money I invest which is actually lower than what most people would desire for investment property.

[GregWeld]

I have a friend that lives in a 12 million dollar house -- he started (years ago) buying and fixing up single family rentals - while he and his wife owned and operated a restaurant. They worked their asses off late nights and burning the candle at both ends... After awhile they worked into duplexes and fourplexs...
Now they own HUNDREDS of apartment units - most in a the LLC style - where "investors" buy shares and get semi-annual interest payments - the investors all together own 49% and Ray owns 51% plus gets management fees etc.


The problem for "most" buying this type of property -- they don't have the skills or time to do the work themselves. That really complicates things -- or adds to the cost basis if you have to pay a pro - but LONG TERM - this is a great way to build wealth and cash flow. Pound that profit back into the next project - or pay off a couple early (20 years instead of 30) and you've got instant retirement savings and income.

[LS1-IROC]

Wow..lots of good reading here!

I'm curious as to what the best way to save for college is. My wife and I have a little one on the way and want to start right away saving for their college fund. I'm wondering if a 529 plan is better or should I just buy big company stable stocks?

[ErikLS2]

Originally Posted by LS1-IROC

Wow..lots of good reading here!

I'm curious as to what the best way to save for college is. My wife and I have a little one on the way and want to start right away saving for their college fund. I'm wondering if a 529 plan is better or should I just buy big company stable stocks?

A 529 plan is definitely the way to go. Look at Utah's, it was one of the best when I was researching them a while back. Neveda's was also pretty good if I recall. You don't have to live in the state to invest in their plan either. If you do happen to live in a state with a good plan and invest in it, you get a state income tax deduction on your contributions but this is not a good enough reason to invest in your home state if another state has a better plan. A nice benefit to these plans is once they are set up, anyone like other family members can make conributions to the plan directly. Most of them also have automatic plans where the money gradually makes it's way into bond funds as the child gets closer to college age, or you can manage your choices yourself within the plan. Check out this link, and the entire website:

http://www.savingforcollege.com/intr...-529-plans.php

A measure I like to use for rental property when borrowing money to pay for it is it's CAP rate . (see here:http://en.wikipedia.org/wiki/Capitalization_rate). Basically, if you can borrow the money at a lower interest rate than the cap you are earning interest on the borrowed money. This in itself doesn't automatically make it a good investment though, it's just a starting point.

Example:
Property CAP rate 8%
Mortgage Interest Rate 6%

This 2% spread is what you are effectively earning on the borrowed money. The CAP rate is based on the current market value of the property though, not necessarily what you pay for it. Therefore, if the property goes up in value but the rents don't increase the CAP rate goes down which could mean less potential buyers if you want to sell. The flipside to that is if you are able to raise the rents and the market value doesn't increase the CAP rate goes up! Also, the higher the CAP rate, the more risky GENERALLY the property is. Upscale fancy Class A properties usually have a lower CAP rate but a more stable tenant base as well as "pride of ownership" and often times less risk than a Class C or D property which might have a higher CAP rate and cash flow every month but probably isn't something you want to show off to your Lat-G buddies

[pw2006]

Originally Posted by LS1-IROC

Wow..lots of good reading here!

I'm curious as to what the best way to save for college is. My wife and I have a little one on the way and want to start right away saving for their college fund. I'm wondering if a 529 plan is better or should I just buy big company stable stocks?

I live in CA and have 2 little ones (2 and 5). I set up 529s out of Utah when they were born (Utah has one of the lowest fee structures and there are no tax benefits using a CA 529). There are some limitations and/or penalties with 529s if the funds are not used and/or withdrawn (like if you overfunded the acct, kid decides not to go to college, life throws you a major curveball and you end up needing those funds due to illness, etc). You can roll any unused funds over to another family, but frankly, I am setting this bucket up for my kids' education. I am currently targeting a balance of ~$100k for each when they are 18. However, $25k per year may not be enough to cover an education when they are ready. So, I am supplementing the 529s with CA muni bond ladders. Personally, I would rather be underfunded in the 529 and have the flexibility of the bond ladder if needed. Just my 2 cents.

[GregWeld]

Two separate posts here -- will respond to both in this one:

REAL ESTATE --

I own "shares" of an apartment house LLC -- I own 2/3rds of it - it is professionally managed - I do NOTHING but collect the interest payment every 6 months. Usually these LLC's will accept investments of around 50K per "unit" (share). Sometimes they'll sell a 1/2 a unit if they have two people that only want half each. It's a good way to be in real estate WITHOUT THE HASSLES.

Downside - totally illiquid... but many of these are "flipped" in about 10 years when the tax benefits run out. Just something to think about.


COLLEGE --

Start early enough - invest in big cap dividend payers -- in 20 years (starting at birth -- they'll spin off enough income to HELP pay the tuition and you'll probably end up with a nice college graduation "gift" in the form of still having some capital left after 4 or 5 years of school. AND OR - if they choose a different path -- you can use the money for something else.

Do the MATH FIRST -- if you have a 3 year old -- you have 15 years to pound some money away. If you can save $400 per month -- that's $4800 per year -- 15 years -- you'll have 72 GRAND IF YOU HAVE ZERO CAPITAL GROWTH (this scenario is almost impossible!) which should spin off about 6% dividends or $4300 a year... so then if you took $5000 grand a year from capital -- and a little "out of pocket" -- you're good to go for a state school. Private school?? You better hope you have real good DNA and he/she gets a full scholarship! Both my kids are "out of state" tuition -- and the living expenses on top of that - figure 35 to 40 grand per year - took Alex 5 years - and Adrienne is right behind him - he's out - she's in (they're 4 years apart).

Student loans are just for those folks that didn't SAVE now -- so they'll pay much much more LATER. I want to BE the bank not OWE the bank. But that's a personal issue!

[GregWeld]

Originally Posted by pw2006

I live in CA and have 2 little ones (2 and 5). I set up 529s out of Utah when they were born (Utah has one of the lowest fee structures and there are no tax benefits using a CA 529). There are some limitations and/or penalties with 529s if the funds are not used and/or withdrawn (like if you overfunded the acct, kid decides not to go to college, life throws you a major curveball and you end up needing those funds due to illness, etc). You can roll any unused funds over to another family, but frankly, I am setting this bucket up for my kids' education. I am currently targeting a balance of ~$100k for each when they are 18. However, $25k per year may not be enough to cover an education when they are ready. So, I am supplementing the 529s with CA muni bond ladders. Personally, I would rather be underfunded in the 529 and have the flexibility of the bond ladder if needed. Just my 2 cents.

Good info but you'll be far better off if you buy some good dividend paying stocks and choose to re-invest the dividend. That way you "SHOULD" have capital growth and collect the dividend.

A school "savings account" like this really needs the growth component to it to help you get there... bonds don't "grow" but are bought for SAFETY. You also don't need the tax free status of the bonds. That is just giving you a lower return and you need a higher return - COMPOUNDED - to also help you get there. So just using McDonalds stock as a well known example -- whatever you'd have put away 5 years ago -- would be MORE THAN DOUBLE what you put away.... already! Where as your bond would still be the exact same value (if you're holding to maturity). If you're not "comfortable" with all stocks - then do half and half....

Put the account in the childs name with you as joint owner -- that way the dividends are taxed at THEIR rate which can be ZERO.

[pw2006]

Good call Greg! I will look into the joint accounts for the little ones, and the dividend plays are more interesting than my muni approach. Sorry, I'm a cpa and have ultra conservative tendancies. Can you send me more info on the mgmt co for your LLC? Our mgmt fees in Hawaii are outrageous, and I don't have a lot of time to deal with tenants. However, you LLC sounds intriguing!