Posted by Chris in FL on September 22, 2011 at 21:39:48:
I am in Central Florida… Want to point out a few things…
First, I am not sold on the idea that we will experience “additional 20% + projected drop in home values”… But, my crystal ball is murky on what will happen, so we will leave that topic for another day.
Second, I don’t think it matters what our FL RE market in general does in the future (which nobody can tell you with certainty). Here is why… As RE investors, we don’t buy the way everyone else buys. If we can find ways to pay cash, we buy 25-50% below today’s market value (if you can’t do that, don’t buy paying cash)! Example of my average purchase this year: paid $20K, have $25K invested with closing costs and repairs. I borrow $20K from a private lender, so down to $5K out of pocket. I rent house for $650/month, and collect first month’s rent plus security deposit, dropping my out of pocket to $3,700. Monthly cash flow: $650 rent, less approx. $300 mortgage payment (my terms are 7.5 year fully amortizing mortgage, 8.75% interest), less approx. $100 taxes and insurance, leaving $250 positive cashflow. Of that, I conservatively factor $150 as my vacancy and repairs, leaving $100/month positive cash flow (more if it is in good repair, and I manage it well). In 37 months, maybe less, I have all of my money back, and still collecting $100/month positive cash flow. Stay with me here. Next, in 90 months (7.5 years) my mortgage is paid off (and my cash flow jumps by $300/month). Now I own the home free and clear. Further, I have passive income, and other tax benefits - depreciation, 1031 exchange privileges, ability to borrow money against the property without paying taxes on it! Wait, could it get any better… I think it can… The house I invested in, when I finished repairs, was comparable to houses selling for $40-50K around it (retail). If, during this time, the RE market drops 20%, do you think I really care? In fact, I see that as an opportunity, and a challenge to buy more houses faster, because the prices are better!
This is the cookie cutter method I have used to buy 13 houses in the last 18 months, and I am waiting to close on 1 more next week, and another next month. Mostly REOs and short sales.
One caveat: when looking at ROI, etc., recognize I am running a business (sort of). What I do requires more knowledge, work, and involvement than just buying a stock and waiting, hoping it goes up… It also involves much less risk of loss (I think you can see that). However, compared to a full time job, I work less and make more… Plus, the retirement plan is a lot more healthy than S.S. In fact, for comparison sake, I own about 30 houses now, at age 42… I have about a 6 figure income, which, if I quit buying more, I can manage, and do some repairs myself, in 20 hours a week or less… Plus, if I settle for a little less income, I can hire out almost everything, and vacation in the Bahamas. By age 50, it will all be paid for, and my income will shoot up more than double.
Best of all, I started poor. I bought my first rental in 1998, while working a full time job, making $8-9/hour… A year later, bought another… The next year a couple more… When my first son was born in 2002, my wife was able to quit working and be a stay at home Mom (we had to scrape by). In 2007/2008, several promotions later, I quit my full time job, because the $40K salary seemed too small for committing 40 hours/week of my time. Fast forward to 2011, I have two sons, 4 and 9, a very nice pool home in a great neighborhood, and my finances are quickly moving towards the point where money should never be a concern in our family decisions, such as where to vacation, eat dinner out, etc. Within reason, we will be able to do what we want in life… Most of our family, and friends from back in 1998, are struggling financially, robbing Peter to pay Paul, and generally working longer and harder trying to get by on less and less as the cost of living rises twice as fast as their incomes.
So, my advice to you, Nelson, and many of the other Nelsons out there, if you are serious about RE investing, is to study, learn, find a cookie cutter of your own - one that works for you regardless of what the general RE market does tomorrow - and then start making cookies…
Chris in FL (who really couldn’t care less if the general RE market in my area drops another 20% or not)!
P.S. - My original plan was to quit at 30 houses, and work on paying them all off… However, RE is so good right now, and building wealth is so easy, that I had to sit down and have a heart to heart with my wife… Together, we decided that rather than stopping now, we have set a moving target: currently anticipate stopping somewhere in the 40-50 range… But, I reserve the right to lower that number if my phone starts to ring too much, and to increase that number if I get there and find I am still having too much fun doing this (personally, I am hoping it is the later)!!!
P.S.S. - Also, my 9 year old is quite interested in the RE investing already - begs me to take him to all of my REIA meetings with me, and consistently asking me to teach him more about it - and I am hoping that sooner rather than later, I can start transitioning some of the management/repairs, etc. to him. Let him earn his stripes the same as I did, and if he chooses, he can follow in my footsteps. If I had that advantage from the age of 9, I would have been a multi-millionaire by 30!!!