Buy and Hold-Is it really worth doing? - Posted by bob

Re: Not if you want to make Quick bucks - Posted by bob

Posted by bob on March 31, 2006 at 08:51:46:

Thanks for all the responses. No doubt there is money to be made long term. The compounding upon the compounding really starts to add up.
My time horizon is a little different. For a number of reasons I don’t plan to hold my properties more than 5-7 years. Cranking the numbers and including REALISTIC EXPENSES I just don’t come up with a ROI that makes sense to me.
I understand tax benfits, ammortization, depreciating over 27.5 years ect. My position is simple: Buy and hold is not great when combined modest appreciation and 4-7 year holding periods.
IF you catch a wave of apprecation it can be great. If not the expenses will really eat you up.

Re: Buy and Hold-Is it really worth doing? - Posted by DaveD (WI)

Posted by DaveD (WI) on March 31, 2006 at 09:06:59:

Good points. But you forgot to remind bob about cashflow issues, and the fun things we can do to increase cash flows. Like morotoriums on payments, say, for a few years? Whoohoo!

Re: Buy and Hold-Is it really worth doing? - Posted by David Krulac

Posted by David Krulac on April 05, 2006 at 07:41:02:

  1. locations an amenities that renters want. we’ve had good sucess for example with small 1-2 bedroom condo units. all yard work and snow shoveling is included in the condo fees, which is inlcuded in the rent. the units also have a bunch of appliances like washer, dryer, dishwasher, disposal, ref, and stove. some condo units include heat, water and trash.

  2. there are exceptions but in general renters don’t like big yards. they don’t want to cut 3 acres of grass. for an out of town executive I had to include professional lawn care and snow removal in the rental package.

  3. renters don’t like far out properties as I already stated, but sometimes renters are more accepting of a location that buyers. For example I had a house that backed right up to the interstate, in fact part of the back yard was taken to built this highway. It was noisy but renters liked the location because it was close to shopping jobs etc. renters have a short term prespective and figure that even though there is this flaw, that they’re going to move in a year or two and its no problem. On the other hand a buyer thinks that they are going to live there forever and if they don’t they’ll have a problem selling the property.

  4. other proerties make good rentals because the cash flow is great. one neighborhood that I know is lower priced houses, but the rents are good there. Friends of mine bought a house there for $45,000 and rented it for $750 a month. I bought a house there for $32,000 that I rent for $860 a month. I target the rent to be 1% of the purchase price. a $100,000 house should rent for $1,000 a month. if i’m getting more than that then I’m usually doing very good. I told my friends that the appreciation is low in this neighborhood, it will be harder to sell, and will be on the market for a longer time. the reason to buy there is for the cashflow. at the begining of 2005 I did an extensive study of every house that sold in this neighborhood in the last 5 years. I had every sale through the MLS and most of the fsbos. I knew that market as good as anybody and better than most. many of the rents had moved up more than the prices of the properties, which was the opposite of most other neighborhoods. if you hold for the long term, it shouldn’t matter if the appreciation is slow there, because the cash flow is great.

  5. characteristics of the building including age factor into rentability. there are lots of houses here that are over 100 years old. in general they do not make good rentals because they constantly need work. the mechanicals, heating plumbing and electrical are old, out of date and need work even if there has been some updates. the roofs are old the windows are old. there’s no central air. the walls need work. the kitchen and bath need work. they typically have only one bath and are functionally obsolete. not a good rental as they need abunch of work going in and need constant maintenance. the room sizes and layout are often out of date, and there could have been remodling over the years including additions that are sub standard and need extensive work if not ripped out. its a money pit.

  6. in my town there are 41 houses without heat, and 5 houses without plumbing. they would not make good rentals. there are lots of old houses with walk through bedrooms, they do not make good rentals. there are houses where you have to walk trhough the bathroom to get to the bedrooms, not a good rental. these functional obselence makes it harder to rent, makes the rent lower, and turnover greater. I had an apratment where you had to walk through the bedroom to get between the living room and the kitchen, living roon and bath. not a good layout not a good rental.

  7. some properties are beautiful houses, but can’t cashflow so they’re not good rentals imho. I won’t buy a rental that has negative cashflow in order to capture some appreciation. a property that can have forced appreciaiton plus regular appreciation would make a good flip, but not a good rental if its a negative cashflow.

I know… - Posted by David Krulac

Posted by David Krulac on April 01, 2006 at 14:26:13:

tax certs

Re: Buy and Hold-Is it really worth doing? - Posted by Sean

Posted by Sean on April 03, 2006 at 15:37:47:

Where I live, a 50k house is not a hard find at all… I have a few that I got and are into sub 20k and rent for 500 a month plus utilities.

Now don’t get the wrong idea most sub 20 houses here are dumps… but there are a few isolated pockets where you can get a nice house that is in a safe area for 20 or 30 retail, but you have to know where to look. If you are willing to deal with low end tenants and neighborhoods you can pick up houses like that all day long… but your management won’t be 10-20 hours a year per property.

A 3 bedroom in good condition market value rent in all but the worst of areas is at least $600+.

Its not glamourous, but buy and holding is where real wealth is built. Flipping gives you a nice big check, but you gotta keep finding more properties to do that with.

I operate in the Pittsburgh PA region.

As to the 10-20 hours of management… really why would you need more than that on average per property per year? Unless you have tenants that just like to complain, or your properties are not in good shape.

Your main investment of time is trying to fill it when its vacant… once its filled, most contact will be a phone call here or there, and your handyman or plumber or whatever will be the one actually doing any work if needed… So, take the phone call, hear what the issue is, then call appropriate person and have them contact the tenant and set up appointment to fix the issue… get the bill in the mail and cut a check.

Also, if they are rent to owners, even less management.

Right now we are in the upper teens in terms of properties we have done and been doing it on the side for about 4 years now. We have all single families with the exception of 1 duplex.

You always have the option of flipping a house for some a big chunk if you need it, but when you can give yourself a $1800-$2500 a year raise buy just buying a property… why flip if your end goal is to build wealth??

Just do what I said originally 1 time a year, buy 1 house a year and hold it… and do that for 30 years… use your profits to pay off later buys and maybe scale back to 20 when you retire to lesson your load… with zero appreciation, you get 1/5 Million in cash from selling 10 of them… Retain a free and clear portfolio worth 1 Million, and have monthly incomes of 10k a month with a $500 a month average profit… and with 10-20 hours a year per property worked… your total work load for the year is 200-400 hours… or basically 5 to 10 man weeks a year to make 120k cashflow. And you just put the 1/2 Mill cash into bonds… making 9 or 10% and you get another 50k a year without even being creative or risky and you are looking at 170k a year in income.

The key to building long term anything is taking a LONG term approach. If you think in terms of crockpots vs microwaves you nearly always win… When you are thinking short term you will almost always make less than if you are thinking long term… no matter what you are trying to do.

Don’t get me wrong, I flip properties too, they are great for an infusion of cash when you need it… but flipping is a J.O.B. It involves putting tons of miles on your car, spending full days taking calls, looking at properties, paying for marketing to keep calls coming in… etc etc etc… You can make good money at it, but its still a J.O.B.

I want to be eventually sitting on a beach with my toes in the sand, and having lovely women bring me drinks all day long… and know that while I’m sitting there I’m still making more money than I’m spending.

Now, go back and assume a 4% inflation rate (rents going up with inflation, remember, mortgages are fixed payments… so inflation won’t affect them) and a 2-3% appreciation rate on the properties you own… and you wind up even better over the years…

I don’t chase appreciation… force it with rehabs, yes, but I don’t chase it… no need to.

Re: Buy and Hold-Is it really worth doing? - Posted by Natalie-VA

Posted by Natalie-VA on March 31, 2006 at 16:37:06:

Wayne,

No, the new buyer is an owner/occupant, so cash flow is not a consideration.

If an investor bought it (136k) they would not cash flow either.

I bought the property in the low 70s and later refinanced out 75k. I hope that clears it up.

–Natalie

Re: Not if you want to make Quick bucks - Posted by John Corey

Posted by John Corey on March 31, 2006 at 14:59:46:

Bob,

The comparison is a bit complex given all the variables.

I want to focus on a narrow version of the question. You noted that you were looking at stock as an alternative. You wrote “When I do the math it just never seems to make sense. Stocks look more attractive.”

When you buy stock you pay all cash in most cases. Hence to compare stocks with RE you need to assume zero leverage. If you do borrow to buy RE you get a cash-on-cash return that can be a multiple of the rate of appreciation (either up or down).

You have a tenant who agrees to pay the holding costs if you correctly budget all expenses including property management. Hence you can safely use leverage with RE and never get a margin call and have someone else pay all holding costs. You can also raise the rent over time so you get pay-down on the loan if you like.

Hence it is very rare that the stock market is going to out perform RE if you are comparing a 100% cash position in the stock market with a 60% to 80% LTV RE deal that has 1.25 (or better) income to debt coverage ratio.

Stock investors think they are having a great year when they are seeing 20% total return in a particular year. Most RE investors are warming up at 20% and expect better when measuring cash-on-cash.

John Corey

Re: Not if you want to make Quick bucks - Posted by Frank Chin

Posted by Frank Chin on March 31, 2006 at 10:36:07:

Bob:

Interesting that you raised the issue this way as I’ve discussed “what if” scenarios with my dad over the years.

After he bought the property in 1963, around 1970, several 3 families were built across the street, selling for 70K each. Conventional wisdom at the time was prices had doubled since the mid 60’s, from 35K each, and it was pricey at 70K. He could’ve refi’ed the commerical property, and put something down on these properties across the street.

Currently, these properties sell for about 900K each, and he would’ve had perhaps 3MM worth in properties vs only 1MM. Rent wise, he would be collecting and netting 150K in rent as the residential properties cash flowed less.

Now, I’m talking to a guy that spends his SS checks, banks ALL his rent checks, and invest proactically everything on "tax free municipals. He’s been banking all his rent money for over 20 years. He does not believe in the stock market.

Over the past 20 some odd years, I figure principal and interest on rents banked adds up to over a million. Instead of having 2MM more in real estate, he has it maybe a million instead in liquid cash.

The question is, is 2MM in RE better than 1MM in liquid cash??

What he’s got right now suits someone in his 80’s, and homebound.

He once told me, eating out in fancy restaurants, expensive vacations are not for him. He’s content doing as little as he can and risking as litle as he can. What he’s got is MORE THAN what he needs and wants out of life. Why does he need 8 or 10 million for his life style vs only 2 or 3 million??

Frank Chin

Re: Not if you want to make Quick bucks - Posted by jeffnc

Posted by jeffnc on March 31, 2006 at 14:59:35:

Bob-
Based on your time frame, I think you are correct. Most investors greatly underestimate the expenses of owning rental property. Unless the area is experiencing rapid appreciation, buy and hold would not be a good strategy short term.

Wow… - Posted by rm

Posted by rm on April 05, 2006 at 09:13:06:

Thanks for taking the time to respond.

I target the rent to be 1% of the purchase price.]

Do you mean 1% of YOUR purchase price or 1% of the retail value of the home once you’ve finished repairs?

Re: I know… - Posted by Mark (SDCA)

Posted by Mark (SDCA) on April 01, 2006 at 16:16:55:

Yeah… that would be the obvious guess. I’d like more details though. My understanding of tax liens is that those returns aren’t really happening anymore.

Re: Buy and Hold-Is it really worth doing? - Posted by Wayne-NC

Posted by Wayne-NC on March 31, 2006 at 17:16:50:

Thanks Natalie, that explains a lot when I know your target market. Rents in that area would not support a $136K property. That is the case here too. Nothing will cash flow. People still buy to subsidize their vacation home with rents. That still makes it a great deal given their motivation.

Re: Wow… - Posted by David Krulac

Posted by David Krulac on April 05, 2006 at 15:17:45:

I try for 1% of finished. I try to limit my work to painting, floor coverings, sometimes landscaping, sometimes roofs.

I usually don’t change the foorprint, don’t do additions, don’t knock out walls, don’t put in new furnaces, don’t put in new windows, don’t add a garage or carport or out building. If 60 amps, I’ll upgrade to 200 amps, if already 100 amps, I leave alone.

Re: I know… - Posted by David Krulac

Posted by David Krulac on April 01, 2006 at 20:56:32:

depends in some states you bid down the interest and some have been bid to 1% or even zero. slim profit margins there.

in other cases bid price is bid up and if the property is crapola the owner doesn’t pay the lien and you could end up with somebody else’s problems.