Investing 102

[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.

[Flash68]

Originally Posted by ErikLS2

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.

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.

[im4u2nvss]

Originally Posted by ErikLS2

I have always had an LLC for any investment property I've owned.

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

[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

As of last Friday, we paid off the house and have 0 debt. 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?