Investing 102

[slow4dr]

I have been lurking in this thread for a while but I figure now is as good of time as any to join in and contribute anything I can (which is minimal).

What I've done may be considered crazy to some but when you have minimal cash flow you really have to think outside the box. The old saying of be aggressive when others are scared and be scared when others are aggressive has worked for me. I had some great help from not only my boss who also has rentals but a great family friend who at his peak had over 20 SFR's being rented.

BTW: I fit the "other" classification that 'glassman' mentioned above since I am 70 miles East of L.A.

Just a little back story:

*Bought my first house in 2001 with a 80/10/10 loan (primary residence)

*Refi'd house #1 in 2002 to a 15 year loan compiling all 3 loans (rates had dropped far enough that my payment stayed the same)

*Refi'd house #1 again in the Summer of 2010 (this is where many would call me crazy but I went back to a 30 year loan to keep cash flow more positive).

*We bought a bigger primary residence (house #2) with only the minimum required for an FHA loan in December 2010. Using an FHA loan allowed me to keep more cash in hand. IMO too many people are hung up on saving just enough to have 20% down and then they don't have any cash left over for back up. I'd rather not tie up that cash (since I didn't have a lot of it). This was my first swing at a rental property so I was preparing myself for the worst. I wasn't in a position to wait while I saved more any longer because my local market had already started climbing back up by this time.

*I was able to rent house #1 within a few days of listing it. It is a house I am familiar with since I lived in it for 10+ years so I know it inside & out. It is a great SFR with RV storage, 800 sq ft air conditioned shop, big easy to maintain yard. Which made it easy to pretty much have the pick of the litter when it came to applicants.

*The rent payment for house #1 was making the P&I payments on both #1 & #2 houses plus a little extra.

*The newest little bonus came about a month ago. I was able to refi house #2 at a point and a half lower rate AND the house had appreciated enough to get rid of PMI. This dropped the total payment including PMI roughly 20%.

*I've had a few little hiccups at house #1 over the last 2 years. Clogged kitchen sink (plumber called), water heater was leaking from the valve (just needed to be tightened down LOL), I had to replace a garage door spring and I had a leaking stand up shower that I ended up upgrading to a tub (full bath now instead of a 3/4) anyway but overall nothing too crazy. Should the proverbial poop hit the fan I still have the money I didn't spend on the down payment as a cushion.

*I would love to pull the trigger on house #3 as an upgrade for my family and then rent #2 but there just isn't enough inventory right now in my area. For instance there have been less than 10 listings matching my search criteria in the last 90 days. My current residence is very similar to the original only bigger, RV storage, shop, and of course a big easy to maintain yard so renting it should also be no problem either.


*********************************************

Up until this thread I never thought I would ever invest in the stock market. I would like to thank all involved and especially Greg for the ever-so influential way of putting things into perspective. I not only have been researching stocks the last few months but have also gotten my rather stubborn on the subject wife to come on board as well. She would have laid over dead before investing in the stock market but she has read through most of this thread and is now asking me how much a week we should be investing.

I am starting to familiarize myself with the Yahoo & Google finance pages to find my comfort zone and follow basic trends. However, there is one small thing I've noticed that is different between these two sites and that is the Dividend. The Yield is always the same but the Dividend amount is always substantially higher on Yahoo's page. I am sure it is just some small difference in the way it is written but for this reason I have leaned towards Google instead (mainly because Greg has posted specific amounts and they have matched Google exactly). If anyone can explain the difference so I can understand it would be much appreciated.

-J

[JKnight]

J - Yahoo quotes dividends as an annual amount, whereas Google shows what you are "expected" to get on a quarterly basis.

[slow4dr]

Originally Posted by JKnight

J - Yahoo quotes dividends as an annual amount, whereas Google shows what you are "expected" to get on a quarterly basis.

I figured it was something simple, thanks.

[GregWeld]

Originally Posted by slow4dr

I have been lurking in this thread for a while but I figure now is as good of time as any to join in and contribute anything I can (which is minimal).

What I've done may be considered crazy to some but when you have minimal cash flow you really have to think outside the box. The old saying of be aggressive when others are scared and be scared when others are aggressive has worked for me. I had some great help from not only my boss who also has rentals but a great family friend who at his peak had over 20 SFR's being rented.

BTW: I fit the "other" classification that 'glassman' mentioned above since I am 70 miles East of L.A.

Just a little back story:

*Bought my first house in 2001 with a 80/10/10 loan (primary residence)

*Refi'd house #1 in 2002 to a 15 year loan compiling all 3 loans (rates had dropped far enough that my payment stayed the same)

*Refi'd house #1 again in the Summer of 2010 (this is where many would call me crazy but I went back to a 30 year loan to keep cash flow more positive).

*We bought a bigger primary residence (house #2) with only the minimum required for an FHA loan in December 2010. Using an FHA loan allowed me to keep more cash in hand. IMO too many people are hung up on saving just enough to have 20% down and then they don't have any cash left over for back up. I'd rather not tie up that cash (since I didn't have a lot of it). This was my first swing at a rental property so I was preparing myself for the worst. I wasn't in a position to wait while I saved more any longer because my local market had already started climbing back up by this time.

*I was able to rent house #1 within a few days of listing it. It is a house I am familiar with since I lived in it for 10+ years so I know it inside & out. It is a great SFR with RV storage, 800 sq ft air conditioned shop, big easy to maintain yard. Which made it easy to pretty much have the pick of the litter when it came to applicants.

*The rent payment for house #1 was making the P&I payments on both #1 & #2 houses plus a little extra.

*The newest little bonus came about a month ago. I was able to refi house #2 at a point and a half lower rate AND the house had appreciated enough to get rid of PMI. This dropped the total payment including PMI roughly 20%.

*I've had a few little hiccups at house #1 over the last 2 years. Clogged kitchen sink (plumber called), water heater was leaking from the valve (just needed to be tightened down LOL), I had to replace a garage door spring and I had a leaking stand up shower that I ended up upgrading to a tub (full bath now instead of a 3/4) anyway but overall nothing too crazy. Should the proverbial poop hit the fan I still have the money I didn't spend on the down payment as a cushion.

*I would love to pull the trigger on house #3 as an upgrade for my family and then rent #2 but there just isn't enough inventory right now in my area. For instance there have been less than 10 listings matching my search criteria in the last 90 days. My current residence is very similar to the original only bigger, RV storage, shop, and of course a big easy to maintain yard so renting it should also be no problem either.


*********************************************

Up until this thread I never thought I would ever invest in the stock market. I would like to thank all involved and especially Greg for the ever-so influential way of putting things into perspective. I not only have been researching stocks the last few months but have also gotten my rather stubborn on the subject wife to come on board as well. She would have laid over dead before investing in the stock market but she has read through most of this thread and is now asking me how much a week we should be investing.

I am starting to familiarize myself with the Yahoo & Google finance pages to find my comfort zone and follow basic trends. However, there is one small thing I've noticed that is different between these two sites and that is the Dividend. The Yield is always the same but the Dividend amount is always substantially higher on Yahoo's page. I am sure it is just some small difference in the way it is written but for this reason I have leaned towards Google instead (mainly because Greg has posted specific amounts and they have matched Google exactly). If anyone can explain the difference so I can understand it would be much appreciated.

-J

HUGE KUDOS TO YOU MY FRIEND!


Here's my one though I will add to your investing... Diversify. Don't just do all single family rentals. Stocks will add income - usually over time they grow - but more importantly for YOU - they will be LIQUID. So - I'd build a portfolio of dividend paying stocks.... to add to your housing empire. Seldom do all facets of investing work in conjunction with each other. Housing can go up - stocks might be down - interest rates WILL go up from here which will cause your housing to take a "hit" if they rise too quickly or too far... So you want BALANCE in investing. What happened to MANY MANY people is that all their liquidity dried up when they needed it most... that's a very very bad thing!

If your two houses go up enough -- you might try parlaying them into a fourplex or something similar but don't keep borrowing on them. The key here is to build a retirement cash flow - and that happens when your renters pay off the balance and YOU become the bank!

I have a friend that lives in a 12 million dollar house -- he started out doing EXACTLY what you've done. He parlayed that into 1000's of apartments. It didn't happen over night -- and his apartments are the type I invest in -- LLC's with investors -- his company puts the deals together - and they manage them. Sweet deal.

[Vince@Meanstreets]

Yeah, The property has been in the familly for years (25) and I have been paying the property tax on it for 6 years. I just hate seeing it there sitting. Maybe i'll figure what to do with it. My buddy says dirt bike track but my thoughts are the whole place is a dirt bike track.

A very good customer of mine manages the local Public Storage. He says the company does very well. But then again we are in the middle of Silicon Valley. 10x30 goes for $575 a month.

Originally Posted by GregWeld

My brother in law builds and invests in Mini Storages. He has people that have been doing just that - for 25 or 30 years now. They have a very specific set of demographics/cost per square foot/size of property etc that absolutely must be adhered to. Any time they've ignored them - the property hasn't worked out.

Having said that...

These things are the most amazing cash cows I've ever seen. Most of the time Eric tells me that they're all rented out before they ever get an occupancy permit finished. The ones they build have on site live in management. For most of the units there is very little effort on managements part... the few that fail to pay get locked up and the contents sold to people that do that kind of work. He told me once that the biggest job is keeping the electronic gates working 24/7.

[slow4dr]

Originally Posted by GregWeld

HUGE KUDOS TO YOU MY FRIEND!


Here's my one though I will add to your investing... Diversify. Don't just do all single family rentals. Stocks will add income - usually over time they grow - but more importantly for YOU - they will be LIQUID. So - I'd build a portfolio of dividend paying stocks.... to add to your housing empire. Seldom do all facets of investing work in conjunction with each other. Housing can go up - stocks might be down - interest rates WILL go up from here which will cause your housing to take a "hit" if they rise too quickly or too far... So you want BALANCE in investing. What happened to MANY MANY people is that all their liquidity dried up when they needed it most... that's a very very bad thing!

If your two houses go up enough -- you might try parlaying them into a fourplex or something similar but don't keep borrowing on them. The key here is to build a retirement cash flow - and that happens when your renters pay off the balance and YOU become the bank!

I have a friend that lives in a 12 million dollar house -- he started out doing EXACTLY what you've done. He parlayed that into 1000's of apartments. It didn't happen over night -- and his apartments are the type I invest in -- LLC's with investors -- his company puts the deals together - and they manage them. Sweet deal.

I have been a little reluctant to look at multiplexes even though the ROI is usually much higher than a SFR. Both of my mentors have had bad luck with them and in my area multiplexes are typically in the not so desirable areas. That's not to say that it is not a possibility but it may be down the road once I have a little more time (confidence) under my belt.


The one thing I have been really thinking about lately is starting an LLC for the rental property. Many of the regulars at biggerpockets have recommended starting one for any rental venture. The problem I see is that technically you will need one for each property. What are your thoughts about that?

Property management is another subject I have been thinking about. For the time being I am more than happy to manage the one property by myself. With the future possibility of managing multiple properties in my spare time it may be worth every penny.

[GregWeld]

You must fully understand the market that you're investing in -- that has to be first and foremost. Sounds to me like you've already got a decent handle on that. If multiplexes are not to your liking - then absolutely stay away from them.


LLC's -- Yes and no. If let's say you already had all the properties -- and you bundled them into one LLC and then sold shares in the LLC to investors (if they were willing to buy them) it COULD work... but multiple properties like that in one LLC would become unwieldily. What if you wanted to just sell one bleeder - or one that had an outsized gain etc. Too many issues there. So YES -- it would be better to have one property within one LLC. The problem with that is that a lot of the profit/cash flow would be burned with accounting and regulations etc so what would be the point.

LLC's are better left for larger investments where you need a larger pool of cash/investors and the cash flow etc can sustain the legal requirements.

All these really are is a way to borrow the downstroke and improvement cash at a % - from "others" - while picking up a management fee and your 51% of the upside without a lot of cash out of your pocket. The investors put up the down etc. BUT ----- management has a lot of up front out of pocket expenses before they ever get to package "the deal". The LLC needs to be set up - prospectus production - accounting - up front earnest money - and blah blah blah. AND more importantly -- you'd better know who your investors are going to be up front. You don't do a deal like this and then go begging for investors! So there is a lot of work etc to get to that point.

I've looked at two deals in the last 3 months -- one in Tucson with $100K per share minimum - and one in the Bakkens with a 1MM minimum that was new construction. Both of these are multi million dollar deals. They both were at 7% return annually -- and of course your share of the upside if any and the tax offset depreciation along the way.

I turned them both down because of the idiots in congress and the POTUS -- since I don't know what the eventual tax changes - if any - are going to be. These kinds of investments are terribly illiquid and as an individual investor - you have ZERO say so. You're just along for the ride.

[Flash68]

I thought you were asking about forming an LLC to hold each rental property in for asset protection vs what Greg is talking about.

I would absolutely form separate LLC's (or at least one) to protect your personal residence and assets from any lawsuits or accidents that could result.

All it takes is one big incident to ruin a lot. An LLC is cheap when you look at it that way.

[XLexusTech]

When a Company issues these what does it mean to the rest of the stock?
Meaning since these are are more secure then comoon shares... would it drive down their price?

Problem... say you have Co. x shares of stock.. Co. X issues new Senior notes... will that drive your share price down?

[slow4dr]

Originally Posted by Flash68

I thought you were asking about forming an LLC to hold each rental property in for asset protection vs what Greg is talking about.

I would absolutely form separate LLC's (or at least one) to protect your personal residence and assets from any lawsuits or accidents that could result.

All it takes is one big incident to ruin a lot. An LLC is cheap when you look at it that way.

^^^ This Asset protection was the primary goal and maybe a little extra anonimity as well.