well, we finally made some traction on two recent deals -- one is a single family and one is a condo. both are moving along and are well into financing.
the single family deal was pretty easy to get done. there was a little negotiating, but we settled in at a price that was actually lower than what i had modeled, so we should be getting some decent returns on that property.
the condo was a bit of a pain. the condo owner was an out of town owner in a different time zone, so negotiating took longer than what i'd like. in addition, his agent was really bad and didn't communicate the finer points of our offer very clearly. for example, after we made an original offer, the seller countered. well, to get to where we wanted to be, we negotiated with the agents to come down off their fee a bit and then could submit a lower offer than what we had originally submitted. the actual proceeds to the seller would be higher than our original offer. the seller saw that we had moved down and then re-countered back to the original list price! first, the listing agent should have communicated what was going on to the seller. second, once the listing agent got the counter back, he should have realized what had happened and explained it to the seller at that point. instead, he just brought the counter back to our agent. just goes to show you there are buffoons in every industry.
in any case, we are on track on both of these units. and, more are coming out of the woodwork every day.
Wednesday, May 25, 2011
Saturday, May 7, 2011
4 contracts, no deals
over the past couple of weeks, i've ferreted out 4 really good real estate deals and quickly moved to make offers. one was a sfh on the market less than 7 days, and the other 3 were condo units in a complex where we already own some units.
we lost the sfh during a short negotiation to another investor or cash buyer that was going to be able to close quickly. my guess is that two of the condo units went to buyers that are likely going to occupy the units, and were able to be pay more than we were comfortable.
we are still in negotiations on the third condo. i'm optimistic that we will arrive at the price that we want, but we are having to deal with a real bungling listing agent, who has almost lost the deal for us.
just goes to show you that sometimes you can make all the right moves and still lose -- that's how real estate go.
on the hunt today for more properties.
stay tuned . . .
we lost the sfh during a short negotiation to another investor or cash buyer that was going to be able to close quickly. my guess is that two of the condo units went to buyers that are likely going to occupy the units, and were able to be pay more than we were comfortable.
we are still in negotiations on the third condo. i'm optimistic that we will arrive at the price that we want, but we are having to deal with a real bungling listing agent, who has almost lost the deal for us.
just goes to show you that sometimes you can make all the right moves and still lose -- that's how real estate go.
on the hunt today for more properties.
stay tuned . . .
Sunday, April 24, 2011
how to become an investor
i helped put together a small group with the intent to get more involved in real estate investing. one of the guys i approached had already been interested in investing, but was facing a lot of hurdles making the leap from being interested to being an investor. he had all sorts of questions, and i told him the main thing is that there is some level of risk involved in investing in real estate. you can find all sorts of reasons not to do it -- what if you get a bad tenant? what if you buy a bad property? what if you can't lease it?
what i told him to remedy this situation is that there are all number of reasons that you can find to stay on the sidelines. if you look with that mindset, you'll keep finding reasons. if you change your mindset, however, you'll see a great number of reasons to become an investor.
what i told him to remedy this situation is that there are all number of reasons that you can find to stay on the sidelines. if you look with that mindset, you'll keep finding reasons. if you change your mindset, however, you'll see a great number of reasons to become an investor.
Friday, April 1, 2011
partnering up
i've been talking to a few of my friends about the advantages in partnering up in real estate endeavors. the main advantage of this is that once you get to a certain size, the cash that you can generate can start funding expansion. consider this, let's say that i was 1 out of 10 individual investors, each of us operating separately. if i wanted to add another holding, i could take the income my one property is generating, let's say $5,000 a year, plus another $45,000 out of my pocket to get 20% down plus closing costs on a new property worth 200k. now, i'd be cash flowing $10,000 a year, which is great, but i had to have that $45,000 just sitting around.
consider that the 10 of us individual investors formed a partnership, then with each of us contributing nothing but the $5,000 from our investments, we could each participate in 1/10th of a $200,000 purchase that would cash flow $500. the ROI is the same (10%), but this was done without any additional infusion of capital.
of course, there are some downsides to doing this. your partnership agreement must be well drafted and you need to deal with people you know and trust. even then, there are times when folks will want to get out of the deal and take their pieces with them. you have to have all of those details sorted out. it can be messy. especially when you are talking about lots of people.
consider that the 10 of us individual investors formed a partnership, then with each of us contributing nothing but the $5,000 from our investments, we could each participate in 1/10th of a $200,000 purchase that would cash flow $500. the ROI is the same (10%), but this was done without any additional infusion of capital.
of course, there are some downsides to doing this. your partnership agreement must be well drafted and you need to deal with people you know and trust. even then, there are times when folks will want to get out of the deal and take their pieces with them. you have to have all of those details sorted out. it can be messy. especially when you are talking about lots of people.
Wednesday, March 30, 2011
investment property search
i was talking to a friend of mine the other day about investment properties. he asked for some advice and the best thing that i could tell him was that if he was really serious, he'd have to stop looking for reasons not to take the plunge. he had concerns about finding a place that would rent, or about maintenance, or bad tenants, or any number of other things.
the fact of the matter is that he's right. there are a number of things that can make purchasing a property for investment purposes go terribly wrong. it's a risk that you have to weigh against the possible returns. of course, this is the case with any investment, but with real estate, it seems like so much more could go badly. but, there are a lot of things in your control, too. you can drop your rent if your property isn't moving. you can sell your property if it's too big a hassle. you can actually live in it, if you have to.
i'm about to begin a new search for some properties to invest in, and i thought i'd chronicle my search through this site to give a view into what i look for. the most important thing, as i said, was to just make the decision that you are going to become a landlord. the next thing to do is to develop a model that outlines the costs associated with a property against the revenue that you can expect. this is pretty easy to do:
your expenses include:
principal
interest
taxes
insurance
maintenance
management
hoa
your revenues include:
rent
there will be some ancillary costs associated with leasing like utilities and rehab, or with purchasing like closing costs, appraisals, and inspections, so you want to have a sense for those, as well.
i look to put between 20% and 25% down, depending on what kind of terms i can get on a loan.
after you have a model in place, you can fairly easily troll the listings for properties that fit with your investment strategy. i look for places that cash flow. so, generally speaking, i look for properties that i can rent out monthly at or near 1% of the purchase price. so, if i find something at $150k, i'd like to see it rent at $1500. this is just a rule of thumb -- i always go back to my model to validate cash flow. in general, with this formula, i can return between 6-10% in cash on my initial investment.
i have a few geographical places that are my go to places as far as location goes. the only reason for this is that i'm knowledgeable on the market rents and sales prices. when i made my first purchase, i had to make some assumptions. but, you can get a good feel on this, again just based on trolling the listings.
the next thing (or the first thing) that i'm going to do is contact my realtor. she's able to keep an eye out for properties for me so i don't have to spend all my time looking. i'll report back on that next time.
the fact of the matter is that he's right. there are a number of things that can make purchasing a property for investment purposes go terribly wrong. it's a risk that you have to weigh against the possible returns. of course, this is the case with any investment, but with real estate, it seems like so much more could go badly. but, there are a lot of things in your control, too. you can drop your rent if your property isn't moving. you can sell your property if it's too big a hassle. you can actually live in it, if you have to.
i'm about to begin a new search for some properties to invest in, and i thought i'd chronicle my search through this site to give a view into what i look for. the most important thing, as i said, was to just make the decision that you are going to become a landlord. the next thing to do is to develop a model that outlines the costs associated with a property against the revenue that you can expect. this is pretty easy to do:
your expenses include:
principal
interest
taxes
insurance
maintenance
management
hoa
your revenues include:
rent
there will be some ancillary costs associated with leasing like utilities and rehab, or with purchasing like closing costs, appraisals, and inspections, so you want to have a sense for those, as well.
i look to put between 20% and 25% down, depending on what kind of terms i can get on a loan.
after you have a model in place, you can fairly easily troll the listings for properties that fit with your investment strategy. i look for places that cash flow. so, generally speaking, i look for properties that i can rent out monthly at or near 1% of the purchase price. so, if i find something at $150k, i'd like to see it rent at $1500. this is just a rule of thumb -- i always go back to my model to validate cash flow. in general, with this formula, i can return between 6-10% in cash on my initial investment.
i have a few geographical places that are my go to places as far as location goes. the only reason for this is that i'm knowledgeable on the market rents and sales prices. when i made my first purchase, i had to make some assumptions. but, you can get a good feel on this, again just based on trolling the listings.
the next thing (or the first thing) that i'm going to do is contact my realtor. she's able to keep an eye out for properties for me so i don't have to spend all my time looking. i'll report back on that next time.
change of plans
well, after much deliberation, i decided against paying off rental property #1. the reason for this seems kind of at odds to my approach on finding good cash flow and yield on my investment. you see, the property has about 7 years left on the note, and the rent that we collect is just enough to offset all the expenses related with owning the property. if we were to pay off the property, we would easily see a positive cash flow out of the property. i took that cash flow and projected it over 7 years. it came to be roughly equivalent to the lump sum amount that we'd have to pay in order to payoff the property.
this means that by doing nothing, and leaving our money essentially just in cash or some vehicle that at least keeps up with inflation, we'd be in the exact same position in 7 years whether we pay off the property now or not (assuming no appreciation). in one situation, we'd be out that cash, but it would slowly be building back up, and in the other, we'd have that cash on hand and the property would pay itself off.
instead, if we found some other vehicle for that capital that i was going to use to pay off the property, we'd actually come out ahead (assuming that the capital retains its original value). for example, if we purchased another property, that cash would be converted to equity, and any return on that cash would actually improve our position.
this seems to be a 180 degree reversal from what i was advocating before, which was to seek out investments with good cash flow. though the cash flow would not be as good, it actually makes more sense in the longer term. after 7 years, our cash position would be less, but we'd actually be cash flowing 1.5 times what we would cash flow by paying off the property.
this means that by doing nothing, and leaving our money essentially just in cash or some vehicle that at least keeps up with inflation, we'd be in the exact same position in 7 years whether we pay off the property now or not (assuming no appreciation). in one situation, we'd be out that cash, but it would slowly be building back up, and in the other, we'd have that cash on hand and the property would pay itself off.
instead, if we found some other vehicle for that capital that i was going to use to pay off the property, we'd actually come out ahead (assuming that the capital retains its original value). for example, if we purchased another property, that cash would be converted to equity, and any return on that cash would actually improve our position.
this seems to be a 180 degree reversal from what i was advocating before, which was to seek out investments with good cash flow. though the cash flow would not be as good, it actually makes more sense in the longer term. after 7 years, our cash position would be less, but we'd actually be cash flowing 1.5 times what we would cash flow by paying off the property.
Sunday, February 6, 2011
taxman
i think we've gotten all of our documents to prepare taxes: w-2's and 1099s from our employers, 1099s from our banks, real estate tax receipts, mortgage interest statements, documents from our investment accounts for gains/losses, and the like. we will probably schedule some time with our tax person here in february to get things done.
we use someone to help with our taxes, not because we can't do them ourselves, but because we like the person that does them for us and she does a good job. we started using her when we had to fill out additional schedules apart from the 1040.
after years of consulting work and having to write a decent sized check, we changed up our withholding and now routinely get a decent sized refund. this year, my wife went part time, so it may balance out, but i'm thinking we will have to fork some money out due to some capital gains as a part of some trades that we made. i have to be honest, i never have any clue as to how much we will have to pay or how much we will be getting back from the government.
tax refunds are a mix of emotion and economics to me. while i totally understand the economics about avoiding a big refund -- it means that you've given the government an interest free loan on your money -- it's always seems nice to have that money returned to me! the opposite is true, too. while having to pay means that you've had access to money -- usually with little or no penalty, it's always a downer to have to fork over that cash.
we use someone to help with our taxes, not because we can't do them ourselves, but because we like the person that does them for us and she does a good job. we started using her when we had to fill out additional schedules apart from the 1040.
after years of consulting work and having to write a decent sized check, we changed up our withholding and now routinely get a decent sized refund. this year, my wife went part time, so it may balance out, but i'm thinking we will have to fork some money out due to some capital gains as a part of some trades that we made. i have to be honest, i never have any clue as to how much we will have to pay or how much we will be getting back from the government.
tax refunds are a mix of emotion and economics to me. while i totally understand the economics about avoiding a big refund -- it means that you've given the government an interest free loan on your money -- it's always seems nice to have that money returned to me! the opposite is true, too. while having to pay means that you've had access to money -- usually with little or no penalty, it's always a downer to have to fork over that cash.
Saturday, January 29, 2011
big decisions
i've been looking at our finances and looking at ways to improve our cash flow. on thing that has been jumping out at me is a rental property that we purchased about 8 years ago on a fifteen year note. the cash return on this property is pretty close to 0%, though, we obviously are increasing our equity position with tenants paying down the note each month.
in 7 years, we will own the property free and clear, and it will start returning us around $1,000 a month (after property management, hoa fees, insurance, and taxes) in cash.
we could pay this down early and start getting the benefit of this return today, though this would be a pretty big drain on capital, it's hard not to consider. the annual return would be around 12-13%, the only real concern that i have is the opportunity cost of putting all that money into play. over the long term, it's hard to refute this as the best play -- we have the money earmarked for investment, anyway. the other option would be to put that toward another property, but the cash return on that would probably be half.
it seems like a no brainer, but i'm still on the fence about it. when my wife and i got married, we joked that she is responsible for all the small decisions and i'm responsible for all the big decisions, and up to this point there haven't been any big decisions.
stay tuned . . .
in 7 years, we will own the property free and clear, and it will start returning us around $1,000 a month (after property management, hoa fees, insurance, and taxes) in cash.
we could pay this down early and start getting the benefit of this return today, though this would be a pretty big drain on capital, it's hard not to consider. the annual return would be around 12-13%, the only real concern that i have is the opportunity cost of putting all that money into play. over the long term, it's hard to refute this as the best play -- we have the money earmarked for investment, anyway. the other option would be to put that toward another property, but the cash return on that would probably be half.
it seems like a no brainer, but i'm still on the fence about it. when my wife and i got married, we joked that she is responsible for all the small decisions and i'm responsible for all the big decisions, and up to this point there haven't been any big decisions.
stay tuned . . .
Tuesday, January 18, 2011
property taxes
because we don't have a state income tax here in texas, our property taxes are relatively high -- on the order of about 2% or more of the assessed value of the home. so, for a while, i had been escrowing that, so it was included in our monthly mortgage payment. a few years back, i thought that there was clear benefit to holding that myself. our annual property taxes are around $12,000, so i figured that i could earn some interest on that money before i had to pay it out.
mathematically, it all works out, i even set aside an estimated amount at the beginning of the year so that i won't be caught off guard. but with interest rates these days, that amounted to little more than $10 this year! i'm going to shop around a bit for a better rate, but even if i find something that pays 1%, which at a glance seems like it would be doable, that would only amount to $100.
emotionally, there are a couple of factors at play. one, it's a bit painful to write that check every year, even though the money has been set aside. two, around about june, long after the pain of writing that big check has worn off, i get a exaggerated sense of wealth, because that money is sitting around. i know it doesn't make sense, but that's the truth of the matter.
from a purely mathematical standpoint, i still don't like escrowing, but there are clearly some advantages to it. and, every once in a while, you can benefit from it, as banks will do an escrow analysis only every once in a while, you can actually have less in your escrow account than what is needed to pay your taxes. this essentially amonuts to a 0% loan from the bank. of course, the opposite is also true, so it probably balances out.
for now, i'm still going to stick with my non-escrow plan, i feel that it gives me a bit for flexibility, but definitely something to think about.
mathematically, it all works out, i even set aside an estimated amount at the beginning of the year so that i won't be caught off guard. but with interest rates these days, that amounted to little more than $10 this year! i'm going to shop around a bit for a better rate, but even if i find something that pays 1%, which at a glance seems like it would be doable, that would only amount to $100.
emotionally, there are a couple of factors at play. one, it's a bit painful to write that check every year, even though the money has been set aside. two, around about june, long after the pain of writing that big check has worn off, i get a exaggerated sense of wealth, because that money is sitting around. i know it doesn't make sense, but that's the truth of the matter.
from a purely mathematical standpoint, i still don't like escrowing, but there are clearly some advantages to it. and, every once in a while, you can benefit from it, as banks will do an escrow analysis only every once in a while, you can actually have less in your escrow account than what is needed to pay your taxes. this essentially amonuts to a 0% loan from the bank. of course, the opposite is also true, so it probably balances out.
for now, i'm still going to stick with my non-escrow plan, i feel that it gives me a bit for flexibility, but definitely something to think about.
Monday, January 3, 2011
what's a net worth
when i used to think about retirement, i used to think that i'd need to have a net worth of about 2 million bucks. i figured that with a 5% rate of return, that would net a cool hundred grand a year to live off of in retirement -- that a $100,000 a year would be sufficient to meet my standard of living. in reflecting on this, i realized that what i was concentrating on was income, which is something that we naturally think about. in our working lives, we try to make as much as we can. in thinking about retirement, though, i've been trying to shift my mentality. instead of thinking "i need 100k a year to retire", i've been trying to arrive at the amount that i would spend in retirement to live. if my income can cover my living expenses, that would allow me to retire. that income could come from any number of sources -- in my previous way of thinking, it was investment income of some sort off of a $2,000,000 nest egg. the realization to me here is that you don't necessarily have to have a hefty net worth to retire.
this realization has come relatively recently, even though it's quite obvious when you stop to think about it. through the years i've been pretty diligent about tracking our net worth every few months, and i'm not saying that knowing your net worth isn't a valuable thing, but it can be misleading. if you are not paying close attention to your cash flow, your net worth can quickly be eroded away. moreover, your net worth often includes real assets (like property) that can give you a sense of wealth that is imaginary, or at least very hard to tap into to cover expenses.
so, now i'm trying to concentrating on cash flow, and more specifically our monthly expenses. by tracking that and similarly tracking passive modes of income, we can see how close we are to a break even point. in my mind that break even point is the event horizon for retirement.
this realization has come relatively recently, even though it's quite obvious when you stop to think about it. through the years i've been pretty diligent about tracking our net worth every few months, and i'm not saying that knowing your net worth isn't a valuable thing, but it can be misleading. if you are not paying close attention to your cash flow, your net worth can quickly be eroded away. moreover, your net worth often includes real assets (like property) that can give you a sense of wealth that is imaginary, or at least very hard to tap into to cover expenses.
so, now i'm trying to concentrating on cash flow, and more specifically our monthly expenses. by tracking that and similarly tracking passive modes of income, we can see how close we are to a break even point. in my mind that break even point is the event horizon for retirement.
Sunday, January 2, 2011
the escalating cost of higher education
a common conversation topic when i'm talking with my friends who have kids is the price of a college education these days, and whether we as parents are intending to cover any or all of that expense for our children (and, if we are planning on doing so, when to clue the kids in).
back when i graduated from the university of houston, about 15 years ago, tuition and fees for a full course load was less than $1,000 per semester for an in state student. i remember that figure, because i had a scholarship that paid that exact amount, and i would routinely get some spending or book money when my check came in. i just checked around, and the price is now closer to $3,000 per semester -- that's a decent chunk of change to have around, when you've got two kids that are going to overlap their college careers. and, that doesn't count room and board or other living expenses, which could easily double that figure. it wouldn't make much sense for my kids to go to the university of houston, though, unless they got some scholarship money there. with our rental properties in austin, it would be almost a no brainer that heading to the university of texas would be a better bet, as their housing would be set. but, what if they want to attend a school out of state? or an ivy league school?
i was able to live at home for part of my college life, which helped with expenses, and allowed me to be in the enviable position of not having to borrow any money in pursuit of my degree. after my freshman year, i decided to get a job and live on or nearer to campus with friends and have a more complete college experience. i juggled a pretty full load of school and work pretty much throughout my years at school, which i think helped prepare me for the "real world" in a way that many of my friends did not get to experience, while trading off some of the activities that my friends were able to participate in.
as parents, i think we all want to provide as much support and assistance as we can to our kids, and many times that comes with great sacrifice on our part. as i mentioned, i feel that my college experience allowed me to be better positioned for life after school, but i don't feel that is a lesson that i'd want to force on my kids.
we've already socked away enough for our three year old to handle a little more than year of tuition at the university of texas, and our one year old might just have enough to get through a semester at this point. i'd imagine, barring a drastic decline in their rates of return, that they'd have enough to get through an in-state public school, even with the trend of tuition increases that we've seen over the past years continue. and that's what we are prepared to do for them -- put them through a public university. of course, if they choose to go out of state or attend a private university, we'll let them make up the difference.
back when i graduated from the university of houston, about 15 years ago, tuition and fees for a full course load was less than $1,000 per semester for an in state student. i remember that figure, because i had a scholarship that paid that exact amount, and i would routinely get some spending or book money when my check came in. i just checked around, and the price is now closer to $3,000 per semester -- that's a decent chunk of change to have around, when you've got two kids that are going to overlap their college careers. and, that doesn't count room and board or other living expenses, which could easily double that figure. it wouldn't make much sense for my kids to go to the university of houston, though, unless they got some scholarship money there. with our rental properties in austin, it would be almost a no brainer that heading to the university of texas would be a better bet, as their housing would be set. but, what if they want to attend a school out of state? or an ivy league school?
i was able to live at home for part of my college life, which helped with expenses, and allowed me to be in the enviable position of not having to borrow any money in pursuit of my degree. after my freshman year, i decided to get a job and live on or nearer to campus with friends and have a more complete college experience. i juggled a pretty full load of school and work pretty much throughout my years at school, which i think helped prepare me for the "real world" in a way that many of my friends did not get to experience, while trading off some of the activities that my friends were able to participate in.
as parents, i think we all want to provide as much support and assistance as we can to our kids, and many times that comes with great sacrifice on our part. as i mentioned, i feel that my college experience allowed me to be better positioned for life after school, but i don't feel that is a lesson that i'd want to force on my kids.
we've already socked away enough for our three year old to handle a little more than year of tuition at the university of texas, and our one year old might just have enough to get through a semester at this point. i'd imagine, barring a drastic decline in their rates of return, that they'd have enough to get through an in-state public school, even with the trend of tuition increases that we've seen over the past years continue. and that's what we are prepared to do for them -- put them through a public university. of course, if they choose to go out of state or attend a private university, we'll let them make up the difference.
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