Investing 102

[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?

[GregWeld]

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!

[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?