Sure, buying a rental with a 3% cap rate probably doesn’t make sense. I wouldn’t buy that as an investment unless I was very confident I would make it up in increased value of the property.
But that hope is one of the things that caused the real estate fiasco in 2008/2009, which led to the mortgage crisis. People were buying stuff for ridiculous amounts of money so they could flip it in a few months, when that didn’t work there were massive defaults because these people couldn’t afford the mortgage and the rents didn’t come close to covering expenses. They never should have been able to get a mortgage in the first place, but that’s another story.
But there is money to be made. Our two best investments:
bought a 2BR bank-owned condo for $42.5K. Paid for it with a check from our HELOC (hurray for 100% financing!) It brings in $12K/year in rent (which is a little under market), probably nets around $8K per year. My ROI is infinite, because I didn’t put a nickel of my own money into it. We could probably get $100-120K if we sold it.
bought a 4 unit bank-owned property for $140K. Utilities had been shut off, pipes froze, pipes thawed, serious mold and water damage. Put about $100K into it to fix it up, then refi’ed to get the money back out. Our actual out-of-pocket investment was probably $50K or so, the rest was HELOC and mortgage. This brings in over $40K in rent/year. It’s worth 2-3x what we paid for it.
Yes it can be a hassle. Whenever we go on vacation something seems to happen. When we were in New Zealand two years ago, an elderly tenant fell out of bed and got trapped between her bed and the wall. Fire department, kicked in door, yadda yadda, a bit of a pain to deal with when there’s a 17 hour time difference. This year we were in Paris when a water heater blew. A couple of phone calls to the plumber and everything was fixed.
DW is a RE agent and deals with rentals all the time. She’s got a system, and a network of pros when stuff needs to get done that I can’t do. That helps a lot.
Put it this way. If I offered you an investment opportunity, where you give me some money, and in 15 years I’ll give you an income stream of 50% per year forever on your initial investment, and your initial investment was worth at least 5x (about 10-12% annualized) what you put in, would you take it? Would it be worth a few hassles?
That’s our real estate empire in a nutshell. It’s even better than that, actually, because we’ve been making money all along, and the mortgages shouldn’t take the full 15 years to get paid off.
We are looking at getting another condo, but it is hard to see the numbers working out. Our condos now are north of Seattle, but commuting distance to both Seattle and Bellevue. They are all worth between 250-300K (I think), but the taxes are still reasonable, about $2-2.5K/yr, HOA dues between $300-$450/mo. Rents between $1475-$1650. They stay full, we underprice them, every now and then it’s a pain in the butt, but usually it’s just a matter of cashing the check. The numbers work because we get a positive cash flow of $900 on each or so, and we have no debt on them.
However…I’ve been looking for another condo, and I think we totally missed the boat. I found one in an area that my husband thinks is going to grow, for about $280K, but since we would have to get a loan, that would be paying approximately $1500 in all the expenses for about that much or a little more in rent. And that’s if it stayed rented the entire time, the only positive would be appreciation.
I guess if the market crashes there might be short sales and foreclosures again, but otherwise I just don’t see this working, as much as I want to, because of the possible appreciation. You know, I think I just talked myself out of doing this.
That doesn’t sound like a great deal. Appreciation is nice, but can only be realized when you sell the place. Rents will go up over time though.
You could always borrow against two of the other ones and pay cash. Then at least you aren’t paying anything up front. Leverage is a great tool.
It’s gotten very difficult around here to find properties with positive cash flow if you need to get a mortgage. DW keeps her eyes peeled, although I really don’t want any more rentals. We have enough.
Positive cash flow has long been a problem with rentals in Honolulu. Real estate is high and HOA expenses are high. Real estate is rather illiquid as well and tough to easily divide into smaller bits.
"I prefer ESPlanner. It’s worth it to me to have a sharper instrument to look at our various scenarios. "
what I did not like about ESP is there did not seem to be a way to adjust the “recommended” spending figures for the next 5 years before we retire to numbers more based on reality.
Because of that it kept on coming up with a far worse scenario than the retirement calculator I posted earlier.
Yeah, that’s what we were thinking of doing. We have a HELOC on one rental and are getting one on our home. The best rate so far is DCU, I think it’s 3.75% right now. We never get mortgages to buy these properties, we just scrounge up the money wherever we can find it for no fee/lowest rate. But we would still be paying interest on 280K, no matter how you shake it, I would just be moving numbers around if I decided it was for a different condo. Then again, we wouldn’t have to pay so much tax on the positive cash flow.
Selling a property also involves prep and paying 6% commission and 2% or so excise tax… (unless you are the realtor, lol). With all of that accounted for, 10% of the sell price goes kaboom. I am skeptical the prices will be going up as much as they have been, but then again, as SF demonstrates, the sky could be the limit.
I’d be shocked if DCU had the best HELOC rate. We refi’ed our HELOC away from DCU a few months ago to a local savings bank. Got a 1.99% teaser rate for a year, then it goes to prime-1%, which right now would be 3%.
The minimum payment is interest-only for the first 10 years, but you can pay it down whenever you want.
The only stipulation is that you had to take a $25,000 draw at closing, and keep that balance for 3 months. Since we were refi’ing, this was not a problem.
To get the teaser rate for a year, you have to open a checking account and let them auto-pay from it. Otherwise, you only get the teaser for 6 months.
I just checked, the teaser rate is still good but now it’s prime - 0.5. Hmm, now I’m not sure if ours is prime-1 or prime-0.5, the prime rate has gone up half a point since we closed.
I’m not sure that I understand completely, but perhaps it is something that can be addressed by using 5 years of “Special Expenditures.” I used them to account for the college expenses (which in our case were not accounted for in a 529.
Anyway, they are very helpful in their support center, which is staffed by people who know things. I have gotten a response directly from Dr. Kotlikoff himself.
I’m not saying that the program is perfect. I am, however, more reassured by it than anything similar. IME, if it only takes 2 minutes to set up a scenario, it is unlikely to be worth much more than the 2 minutes I invested.
That really is an awesome rate. Right now we are getting a HELOC through B of A, but it is such a goat rope that we might go with PenFed or DCU (both 3.75%, prime - 1/4). B of A has a teaser rate that is pretty good for a year, then goes up to 4. something or another. We just want an open line, just in case.
Right now I’m so disgusted with B of A that we might just give up. The processor never returns calls, blows off telephone appointments, doesn’t look at the materials we send, gives us no information. They are telling us that they need all documentation as far as our rentals, like insurance, HOA dues, taxes…though I’m not even using the rentals as income. They are claiming that these are monthly charges against our income, though the reality is that they are all good cash flows with no liens. So, what? We have no debt except for our mortgage and a small car loan, our income is fine and reliable, credit score over 800. In fact one of my credit scores is 834, I’ve never had such a high score before. And they are nickel and diming us about something that actually brings in about $3600 per month income, after costs. We’ve had several HELOCs with them before, never had such bad service. I think the guy is just too busy and isn’t bothering to listen to what I’m saying.
I hate borrowing money, but I really like having an open HELOC just in case.
Our HELOC on House1 that was opened in 2007 will be closed at the end of this week. BofA - good rate, but not as good as NRE’s. We used it a couple of times when it was cheaper to borrow there than elsewhere. Paid off promptly. Need to open a new one on House2 just in case…
Hmm, NRE’s? We always like to get B of A because it ties into our checking account, nice and easy. Sometimes we spend more than we make in a month, sometimes we save. Our income is very uneven because some months we try to work a lot and others we don’t (yay to Seattle summers). It’s good to have a HELOC because you never know.
Thanks for the lead, notrichenough. If my B of A HELOC falls through, I’ll research these guys, though it does look more local. I really like the DCU first mortgage I got, credit unions are awesome. Thanks again!
We have a couple of condos (on a live/work artist studio and the other a 2 BR condo) that muddle along from a cash flow standpoint because we’ve put 3.25% or 3.5% mortgages on them. I had thought interest rates were going up and that it would be good to be a debtor with relatively low 30 year mortgages. But, we’ve had substantial appreciation. The artist studio, we paid $50K for in the 90s with $5K down. It is now worth about $450K and we have done almost nothing to it. We are planning to do a renovation this year so that we can rent it for more (or in an alternate case, we move back into the city and ShawWife takes it as her studio again). The second we bought for $425K four years ago when ShawD transferred after her first college semester to school in Boston for a 5 year program, hated the dorm living, and found it incredibly expensive to rent a share in an apartment. So, we bought a condo and she rented it the large BR to a couple of roommates. She/they are gone, and, after a bit of a bump transition, we are renting it out. Great rental property as it is walking distance of the Harvard Medical School area. On the whole, we think it costs us a little less than the expensive dorm (maybe about the same) and now the property is about breakeven on a cash flow basis. The value has gone up from $425K to $600K based upon the sale of the unit upstairs (same floor plan, nicer kitchen) in four years. We would need to subtract some capital repairs from this so maybe our equity has grown doubled in four years. Each has been a bit of a PITA at times.
Given the state of the economy and the world, I still think RE is a good asset class for this environment. But, it can be a lot of work.
I’m thinking the only real estate that makes sense in our area is to buy a pre-sale (ie put a little bit of money down and wait for them to build it…price will go up substantially in the year they take to build it), or to get a fixer nearby. My husband loves a project, but financially it would have to be worth the effort. Especially since I’d get stuck doing some of it too.
It’s even better than that, actually, because we’ve been making money all along, and the mortgages shouldn’t take the full 15 years to get paid off.