I’m not talking your garden variety of what you think a motivated seller is… (the guy who just reduced his property from $199,000 to $195,900… )
But, rather the guy you uncover through marketing by getting your message out there… they guy that “needs” to sell… and is a don’t wanter…
Start there and you’ll find deals with value in them… Value that if you structure the deals correctly you can then turn them around for a nice profit…
Take the profits and reinvest as at first you’ll need cash… to pay todays’s bills… after awhile you will have to buy investment property and that is the time to hold when you have the cash and cash machines to do so…
Starting a strategy of holding to early in the game… in my opinion will make you grey…
Holding a house for a 25 - 30 year payoff is half your life and if you started when you are in your 30’s… well… That’s just too darn long to wait…
Go make money now!!
Create a real estate business that is a cash machine…
I am wondering, if I could get some tips & advice from the nice people here, on the idea of taking equity out of existing real estate to purchase more real estate, if there are pitfalls to watch out for, and if it is/can be a good idea on how to create my empire?
My idea:
to buy my first 2 unit and live in one of the units. Then take out a heloc or after fixing it up or refinancing it to pull out some extra money with the added equity (if there is some) and use for the down payment for my next apartment building. As long as I can have enough cash flow and do this carelully I can keep doing this, right?
I want to get opinions on this before I go and do it.
David-PA has some solid advice. The one thing I would add is that the CAP rate is equivalent to the Interest Rate on money market or other bank accounts. So when deciding if a CAP rate is good, remember that leaving the money sitting in an ING Direct account yields over 5% with no risk (FDIC insured under $100k or whatever the current limit is), no headaches (no evictions and the only thing trashed might be when the post office sorting machine manges your statement). So in making your decision about what to buy, be certain that you are doing much better than having your money sitting in an account getting interest because you are taking a much higher risk.
You also need to make sure you take into account all of your expenses as well as income. The HUD side has some numbers on how long things last (27 years for an asphalt shingle roof, 10 for a fridge, and so on) and factor these in because you make have to pay for them.
Also keep in mind that Real Estate can become worth less than zero. I have seen other posts here claim that stock is worse because it can go down to zero. Well, I just realized recently that actually RE has the potential to be worse because it can be worth less than zero - such as if you lose a lawsuit with a tenant and they get a deficiency judgment against you for the excess proceeds after the property has been sold or if toxics are found on the property, which the government expects the current owner to pay for cleaning up.
So NEVER be cheap with the liability insurance. Make sure your net worth is covered so the one bad decision you make doesn’t bankrupt you.
Meanwhile, I have been doing this since 1988, when we unwillingly because landlords because you couldn’t sell a condo (except new built) to save your life in No. Cal. That’s almost 20 years and with care and not cutting corners on making sure an investment is a good one, this is a way to go. BTW, the one condo sold for 4 times what we paid and bought us into Phoenix just before the explosion there so in 5 years we have quadrupled our equity. You can’t count on that but is does happen and nothing in the stock market (except one lone stock pick) has done that for us.
I highly recommend you read Lonnie Scruggs’ newest book,
“Taking the Mystery Out of Money.” It is available on this site. If
starting out, you might want to check out the MH Forum here,
too. That is less risky for novices. Good luck!
Re: Using existing equity to buy more real estate - Posted by Bruce Reeves
Posted by Bruce Reeves on May 28, 2007 at 12:35:43:
I did the exact same thing. Bought a duplex in 1997, lived in one half rented the other. I pulled equity after six years to build by own custom house. I recently did a refi and used the money to buy another single family rental.
The key for me was a nice 3/2/2 unit in a good area. It has averaged 5% per year appreciation over the last ten years. Bought it for 125k, it appraised for 216k last month.
Never had more than two months of vacancy and that was planned for some new carpet, etc.
Re: Using existing equity to buy more real estate - Posted by Mark (SDCA)
Posted by Mark (SDCA) on May 28, 2007 at 11:09:59:
This is called pyramidding. Yes, it can work. I know “experts” who advise having bsically zero equity at all. Pyramidding is also highly agressive. Just make sure that your buy and hold empire isn’t built on a house of cards.
Can you handle a 3 month vacancy after an eviction? A new heat pump? A new roof? A “complete rehab” when the tenant vandalizes the unit? Tenants in both properties skipping at the same time. And so on…
There is buy and hold and there is flipping.
If you have 10 units cashflowing $500/month each in 30 years you have $5,000 a month to live on. You have 30 years to get there. Along the way you may find some deals that you don’t want to hold but are just too good to pass up, say a $20,000 profit in 3 months. This can certainly create fuel for your buy and hold strategy. When the IRS tags you with dealer status you will pay huge taxes.
There WILL be math. There are 100 times more bad deals than good. You have to sort them out. Find motivated sellers, not houses. For buy and hold the single most important metric is CAP rate. If you aren’t willing to calculate this then don’t go into buy and hold real estate. There are a dozen other metrics, so become familiar with them as well. Be suspicious of rates of return that divide by the downpayment and not the purchase price. They give big eye popping numbers, but don’t reveal risk or substantial effort. Flipping math is mostly addition and subtraction of income and costs. There are a huge number of things with a minus sign to subtract and they are always double what you originally thought.
You will find that buy and hold real estate expands relatively easily when the CAP rate you are getting exceeds the cost of borrowing. E.g. a 9% cap rate while borrowing money at 7%. There is always “financial friction” that slows down the growth rate. This could be substantial downpayment, closing and fix up costs or the tree that fell on your roof and you insurance only covered half of it. Trees don’t grow to the sky. Exponential increases eventually stop and sometimes collapse under their own weight. The world should have been filled shoulder to shoulder with bunny rabbits a century after theiy were “invented”, but you will notice it isn’t. Bunny rabbits are mighty good eatin’.
Brian Wittenmyer wrote a book “Strategic and Tactical Real Estate Investing Secrets” (spiral bound, low volume) that has 100’s of pages about buying low cost properties for buy and hold and flipping along the way. At $90 it’s pricey, but may fit your situation well.
If you live in one unit and rent out the one next to you, you need to have the proper decorum. You want to be friendly with your tenants but they are not your friends. You will evict them 3 days after they fail to pay the rent. Mention those killer mortgage payments the bank won’t let you be late on often.
I understand what you are saying-which is the reason why I posted this thread. Some people are saying its good to do this and is what some RE investors do, and some don’t do this.
"Learn to get deals done with your brain… some marketing money to build a casah generating machine… "
–> Care to elaborate, on how to get properties with my brain, in order to aquire property as far as everything I have seen in my area nobody wants to sell for less than money. Not sure of how else to buy property and your advice is appreciated.