Investing 102

[Flash68]

Originally Posted by Vegas69

I'm starting to see many similarities locally that I saw just over a decade ago. While I don't see the indicators there for the same type of meltdown, I do know that things cycle and I think Spring is over and we are well into Summer, maybe even approaching Fall in the cycle.

Housing is up over 40% in less than 4 years
People are spending, spending, spending on non essentials.
The construction industry is BOOMING driving construction costs up substantially. I met with a local architect that is a real player. He said it's curtailing the commercial segment.
Low to no down payment programs are back for housing
Sloppy and new professionals are coming back into my industry
A recent Inman poll showed a majority of Americans are moderately optimistic to optimistic about the real estate market. That's a stark contrast from a short time ago.
I have a listing appointment tomorrow where the value is ABOVE the price they paid in 2005!

We are coming up on 5 years into our housing recovery. The median price of a home has stayed stagnant for 9 months with a shortage of inventory. The stock market is up there...look at its growth in the same period.

I do feel the foundation is much stronger this time around. I just think the next cycle is coming on in 1-3 years. I want to be cash heavy and debt free this time around.

What's your local economy or industry feel like?

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?

[GregWeld]

Originally Posted by Flash68

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.

[GregWeld]

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.

[Vegas69]

Originally Posted by Flash68

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?

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.

[GregWeld]

Originally Posted by Vegas69

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

[Vegas69]

Originally Posted by GregWeld

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... 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.

[GregWeld]

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!

[im4u2nvss]

Originally Posted by GregWeld

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.

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?

[Flash68]

Originally Posted by im4u2nvss

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.

[ErikLS2]

Originally Posted by im4u2nvss

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?

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.