Jauronimo Posted June 3 Share Posted June 3 4 hours ago, Royale with Cheese said: I just look at it like, why stretch yourself that thin? Start with one property, pay cash, never have a mortgage on it and then buy another one later when you have the cash. It'll take years buying 20 properties with 10% down to turn a consistent profit. Paying cash means immediate returns and cash flow. Thats a really inefficient use of your cash. The goal of any investing is maximizing return on your cash. Theres a reason why people who can buy in cash still finance their purchases. The return profiles on a levered investment are much more attractive. You have immediate returns regardless of the financing of the investment as long as you have a tenant. Ideally, you put down as little cash as is needed to close the deal or secure a good rate and the rest of the cash is available for other investment. Just make sure you have enough monthly income to cover debt service on two or more properties for a spell and can still afford McDonalds. 1 Quote Link to comment Share on other sites More sharing options...
Royale with Cheese Posted June 3 Share Posted June 3 6 minutes ago, Jauronimo said: Thats a really inefficient use of your cash. The goal of any investing is maximizing return on your cash. Theres a reason why people who can buy in cash still finance their purchases. The return profiles on a levered investment are much more attractive. You have immediate returns regardless of the financing of the investment as long as you have a tenant. Ideally, you put down as little cash as is needed to close the deal or secure a good rate and the rest of the cash is available for other investment. Just make sure you have enough monthly income to cover debt service on two or more properties for a spell and can still afford McDonalds. I think I just might talk to more risk takers I guess. My brother set me up with a guy that owns a cabin in North Georgia....he was thinking of selling it. He paid cash for this cabin about 15 years ago. He showed his P&L for the last 2 years with his short term renting. He averaged about $8,500 a month in revenue from renting it out. After taxes, cleaning fees and other costs associated with short term renting....he has netted about $4,000 a month....net. His tax guy has him set up as some sort of business independent contractor to help with the tax implications which apparently saves him a lot. It seems like a very good ROI right? Purchase price in 2010 for $190,000, asking for $850,000 to sell it today. Quote Link to comment Share on other sites More sharing options...
Royale with Cheese Posted June 3 Share Posted June 3 1 hour ago, DCofNC said: Yeah, and you outlay all the cash to have it pay you back slowly or you buy 10 houses with 10% down, for the same money, have 10 houses cash flowing, 10 houses to claim depreciation against and 10x the tax shelter. You don’t understand the investment in real estate game. There are massive tax considerations you aren’t thinking about with the real estate vs stock investment. Both have their place, but for a high earning employee, there’s a very good reason to take on investment properties for tax shelter. You're not going to have cash flowing on those 10 houses for awhile. You will probably lose money in your first few years. A 10% down payments gives you a high mortgage and rent that you will not be able to charge much more than that. Then you're talking about home warranties and insurance. Any damages/repair work as well. I didn't make money on my place until last year and it's at $263 ish a month. The property has gone up about 40% so the value is there but the cash flow isn't. Quote Link to comment Share on other sites More sharing options...
DCofNC Posted June 3 Share Posted June 3 1 minute ago, Royale with Cheese said: You're not going to have cash flowing on those 10 houses for awhile. You will probably lose money in your first few years. A 10% down payments gives you a high mortgage and rent that you will not be able to charge much more than that. Then you're talking about home warranties and insurance. Any damages/repair work as well. I didn't make money on my place until last year and it's at $263 ish a month. The property has gone up about 40% so the value is there but the cash flow isn't. The cash flow depends on the purchase price vs the rent, you won’t be able to finance something that’s not going to cash flow, so that part is pretty safe bet. Either way, the tax shelter is the real play here. Quote Link to comment Share on other sites More sharing options...
Jauronimo Posted June 3 Share Posted June 3 18 minutes ago, Royale with Cheese said: I think I just might talk to more risk takers I guess. My brother set me up with a guy that owns a cabin in North Georgia....he was thinking of selling it. He paid cash for this cabin about 15 years ago. He showed his P&L for the last 2 years with his short term renting. He averaged about $8,500 a month in revenue from renting it out. After taxes, cleaning fees and other costs associated with short term renting....he has netted about $4,000 a month....net. His tax guy has him set up as some sort of business independent contractor to help with the tax implications which apparently saves him a lot. It seems like a very good ROI right? Purchase price in 2010 for $190,000, asking for $850,000 to sell it today. Thats a sweet return profile. It would be an even better return profile had he put next to nothing down and locked in a 30 year mortgage at 5%. Quote Link to comment Share on other sites More sharing options...
GoBills808 Posted June 3 Share Posted June 3 35 minutes ago, Royale with Cheese said: I think I just might talk to more risk takers I guess. My brother set me up with a guy that owns a cabin in North Georgia....he was thinking of selling it. He paid cash for this cabin about 15 years ago. He showed his P&L for the last 2 years with his short term renting. He averaged about $8,500 a month in revenue from renting it out. After taxes, cleaning fees and other costs associated with short term renting....he has netted about $4,000 a month....net. His tax guy has him set up as some sort of business independent contractor to help with the tax implications which apparently saves him a lot. It seems like a very good ROI right? Purchase price in 2010 for $190,000, asking for $850,000 to sell it today. How many hrs/wk is your brother putting in managing this rental? Quote Link to comment Share on other sites More sharing options...
Royale with Cheese Posted June 3 Share Posted June 3 8 minutes ago, GoBills808 said: How many hrs/wk is your brother putting in managing this rental? It's not my brother's, its a friend of his that he knew was potentially looking to sell his place. He doesn't spend any hours on it. He pays a management company to handle everything from bookings, to cleaners to make sure the place has toilet paper. Around 30% goes to the Management company. 14 minutes ago, Jauronimo said: Thats a sweet return profile. It would be an even better return profile had he put next to nothing down and locked in a 30 year mortgage at 5%. Yeah. He hit the jackpot on this one. This area was underdeveloped and not much going on in there 15 years ago. Then it became a hot AirBNB market and everything skyrocketed over there. Quote Link to comment Share on other sites More sharing options...
Alphadawg7 Posted June 3 Share Posted June 3 (edited) On 6/1/2024 at 11:16 AM, billsfan89 said: For example if you had 330,000 invested into an S&P 500 Index Fund in 2004 it would be worth 1.32 million. That's without dividends reinvested. That's a lot bigger of a return than the 800,000k a home would be worth if bought in 2004. Even if you got an average of 2k a month in rent consistently for those 20 years that would get you to 1.28 million which would be a very generous amount of consistent rent to get you are still falling short about 40k and you have to deal with a lot more maintaince and stress with renters and you have to pay property taxes and capital gains on sales. Whereas once you cash out on an index fund you pretty much just pay the cap gains tax. This is your original post above I responded to. You gave the example of $330,000 into the Index Fund and said it would be worth $1.32m today and then you compared that to owning ONE home in the example I provided...which was an oversight mistake because the player did NOT invest $330,000 into the home, they invested $30,000 on the down payment only. So that led to you incorrectly comparing a 20 year return on a single $30,000 real estate investment to the 20 year return on 11 times more starting money at $330,000 in an index fund. NOTE: I made my own oversight mistake in my previous response and provided the math on if he did 20 properties because I had just done the math on that and mistakenly was thinking of that. So the correct comparison if they had invested $330,000 into the real estate under the same parameters of the first transaction ($330,000 home, $30k down) then they would have actually acquired 11 homes and after 20 years his initial $330,000 would now be $7.27 million dollars which is nearly 6 times the value your index fund returned. $330,000 into each and your fund gets $1.32m and the real estate gets you $7.27m...I don't know anyone who would prefer to take $1.32 million over $7.27 million. That is a 568% better return on investment. And the real estate investment would include rental income on 11 properties every month for life, and once the properties are owned free and clear, owning 11 homes in the $800k range could easily average $4k a month in rental income (I know because my wife and I looking at places across 4 states right now to both buy and rent). So they would be looking at $528,000 a year in income for the rest of their lives, which will grow as rents rise over time and grow if they increase their property holdings. That means in the first 2.5 to 3 years they would net (rents minus impounds) about what your fund did in 20 years. Even if you lower the rental expectations to $3k that is still $400,000 a year so in 3.5 to 4 years they would net about what your fund did in 20 years still. And this doesn't factor in future equitable gains. 2 hours ago, billsfan89 said: Then you are talking about just being insanely over leveraged by taking out 3 million in debt counting on rentals on 11 individual homes to help pay that consistently. While pay property tax, insurance, up keep and closing costs on 11 different homes. The risk that comes with that and the money needed to cover the difference on the mortgage and rental on 11 properties is not really a viable proposition for the first 5-8 years. The odds of getting 11 good renters for 20 years is nearly 0%. Also banks are not likely to lend to you at a good rate for 11 homes as they would for one home you would be living in even in the looser credit time of 2004. You should almost always aim to own the home you live in but as far as where to invest your other money? I would say an index fund in the S&P 500 with dividends reinvested is far better and less stressful way to invest money as opposed to over leveraging yourself on investment properties. No disrespect, but I have said this many times now...I have NEVER once suggested to over leverage oneself and have repeatedly said 2 things: NEVER over leverage and that they should DIVERSIFY and do BOTH (Caps are not to yell...just highlight). Once again, this is a multi-millionaire athlete, investing $330,000 into real estate comes no where close over leveraging said player. My aunt literally did this exact same thing while making $150,000 a year and has 12 properties (11 SFR houses and 1 small 4 unit strip mall) and a 13th bonus vacation cabin on Lake Tahoe and is retired and living on the rents making nearly $40,000 a month for life on those rents as she used surplus along the way to pay the mortgages down. So I 100% agree to NEVER over leverage, but this is not a scenario where this specific player is over leveraged by any means, not even close. And the reason its hard for a lot of people to understand this is because the rents are the LEAST important factor and the only role they play is determining if said person can afford to do this or not...and by afford, that means they can handle holding costs during vacancies, unexpected repairs, etc. The value of someone else paying your mortgage off combined with historical equitable gains is where you make your money. You don't even need to break even on the rents for the holding to have huge returns on a long term scale. Its all good, been a fun convo...its not like investing in a fund is a bad thing, I think they should do both. But for me, Funds value is in providing safe avenues to preserve money and still get some decent growth out of it. Long term Real Estate is where I put my money to grow wealth and retirement income. Edited June 3 by Alphadawg7 1 Quote Link to comment Share on other sites More sharing options...
GoBills808 Posted June 3 Share Posted June 3 21 minutes ago, Royale with Cheese said: It's not my brother's, its a friend of his that he knew was potentially looking to sell his place. He doesn't spend any hours on it. He pays a management company to handle everything from bookings, to cleaners to make sure the place has toilet paper. Around 30% goes to the Management company. Yeah. He hit the jackpot on this one. This area was underdeveloped and not much going on in there 15 years ago. Then it became a hot AirBNB market and everything skyrocketed over there. So this is third hand investing advice 1 Quote Link to comment Share on other sites More sharing options...
Royale with Cheese Posted June 3 Share Posted June 3 1 hour ago, GoBills808 said: So this is third hand investing advice Yes it is. Quote Link to comment Share on other sites More sharing options...
hondo in seattle Posted June 3 Share Posted June 3 I'm came here expecting a conversation about Xavier Worthy. I guess I was confused. 4 2 3 Quote Link to comment Share on other sites More sharing options...
Royale with Cheese Posted June 3 Share Posted June 3 (edited) 2 hours ago, DCofNC said: The cash flow depends on the purchase price vs the rent, you won’t be able to finance something that’s not going to cash flow, so that part is pretty safe bet. Either way, the tax shelter is the real play here. I know and that's why I said 10% will not give you any cash flow. If you were to buy a $400,000 condo in my city and put 10% down....you're looking at about a $3,000 mortgage BEFORE HOA fees. Most HOA fees by me are around $300 a month. You will not be able to charge $3,300 a month for a 2 bedroom condo. You will probably be able to charge about $2,500-$2,700 a month....so you will be losing money on this place for at least 4-5 years before the rent inflation kicks in over your mortgage. There are tax benefits that I am not aware of that I have been told by Advisors but it would help me tremendously. When I buy my 3rd place, I will get with an Advisor. Edited June 3 by Royale with Cheese Quote Link to comment Share on other sites More sharing options...
Alphadawg7 Posted June 3 Share Posted June 3 5 hours ago, Royale with Cheese said: I think I just might talk to more risk takers I guess. My brother set me up with a guy that owns a cabin in North Georgia....he was thinking of selling it. He paid cash for this cabin about 15 years ago. He showed his P&L for the last 2 years with his short term renting. He averaged about $8,500 a month in revenue from renting it out. After taxes, cleaning fees and other costs associated with short term renting....he has netted about $4,000 a month....net. His tax guy has him set up as some sort of business independent contractor to help with the tax implications which apparently saves him a lot. It seems like a very good ROI right? Purchase price in 2010 for $190,000, asking for $850,000 to sell it today. I think what @Jauronimois saying that while that return was great, had they not paid cash he could have leveraged that cash and acquired multiple properties or diversified into other instruments to further maximize gains. Using your math you provided, lets assume he still put the full $190k into real estate here but instead did so with a mortgage instead of paying cash. What actually happened based on your post: Initial $190,000 investment to buy in cash - $660,000 in equitable gains (worth $850 now) plus $4K net rent average for 14 years adding $672,000 in rental income. Total return is $1.33M over 14 years. Which is obviously a fantastic transaction that no one will be upset with. Now, had he put say 10% down which is $19,000 he could have bought 10 like properties instead of 1 using the same amount of capital. $19,000 initial investment: Still $660,000 equitable gain. $171,000 mortgage at 6% (assuming no refi or additional payments to pay down balance) would 14 years later have a payoff balance left of $126,000 which would be an equitable principal gain for another $45,000. And given the fact you said he netted $4k on avg in rents, given the mortgage payment is only $1025 a month, we can deduct that $1025 mortgage payment from the $4000 net he averaged and get a new monthly net of $2975 for 14 years which is another $500,000 in rental income. Prop 1 - $19k investemnt: $660k increase in value + $45k in equitable gain from mortgage pay down +$500k in rental income = $1,205,000 compared to $1,330,000 total gain by paying all cash. Now multiply prop 1 by 10 like properties, and on the same $190,000 cash asset he had in 2010 he would have made over $12,000,000 dollars. That is the power of leverage, and it is why rich people still finance everything. But lets say 10 properties was too much exposure for him and wasn't comfortable at that risk level...he could have bought 5 and kept $95,000 in the bank or other investment instruments for rainy days and it he would have actually only invested $95k and netted over $6M in the same 14 years. Quote Link to comment Share on other sites More sharing options...
Fan in Chicago Posted June 4 Share Posted June 4 3 hours ago, hondo in seattle said: I'm came here expecting a conversation about Xavier Worthy. I guess I was confused. No kidding . This thread has been totally hijacked. 1 1 Quote Link to comment Share on other sites More sharing options...
buffblue Posted June 4 Share Posted June 4 I never knew how many financial advisors perused these boards 1 Quote Link to comment Share on other sites More sharing options...
hondo in seattle Posted June 4 Share Posted June 4 12 minutes ago, buffblue said: I never knew how many financial advisors perused these boards The next time I need financial advice, I'm coming to the Xavier Worthy tread! Quote Link to comment Share on other sites More sharing options...
Royale with Cheese Posted June 4 Share Posted June 4 48 minutes ago, hondo in seattle said: The next time I need financial advice, I'm coming to the Xavier Worthy tread! I may start charging for these services. 1 Quote Link to comment Share on other sites More sharing options...
Royale with Cheese Posted June 4 Share Posted June 4 13 hours ago, Alphadawg7 said: I think what @Jauronimois saying that while that return was great, had they not paid cash he could have leveraged that cash and acquired multiple properties or diversified into other instruments to further maximize gains. Using your math you provided, lets assume he still put the full $190k into real estate here but instead did so with a mortgage instead of paying cash. What actually happened based on your post: Initial $190,000 investment to buy in cash - $660,000 in equitable gains (worth $850 now) plus $4K net rent average for 14 years adding $672,000 in rental income. Total return is $1.33M over 14 years. Which is obviously a fantastic transaction that no one will be upset with. Now, had he put say 10% down which is $19,000 he could have bought 10 like properties instead of 1 using the same amount of capital. $19,000 initial investment: Still $660,000 equitable gain. $171,000 mortgage at 6% (assuming no refi or additional payments to pay down balance) would 14 years later have a payoff balance left of $126,000 which would be an equitable principal gain for another $45,000. And given the fact you said he netted $4k on avg in rents, given the mortgage payment is only $1025 a month, we can deduct that $1025 mortgage payment from the $4000 net he averaged and get a new monthly net of $2975 for 14 years which is another $500,000 in rental income. Prop 1 - $19k investemnt: $660k increase in value + $45k in equitable gain from mortgage pay down +$500k in rental income = $1,205,000 compared to $1,330,000 total gain by paying all cash. Now multiply prop 1 by 10 like properties, and on the same $190,000 cash asset he had in 2010 he would have made over $12,000,000 dollars. That is the power of leverage, and it is why rich people still finance everything. But lets say 10 properties was too much exposure for him and wasn't comfortable at that risk level...he could have bought 5 and kept $95,000 in the bank or other investment instruments for rainy days and it he would have actually only invested $95k and netted over $6M in the same 14 years. I completely understand what you're saying but I think the one thing that is not taking into consideration is if you only put 10%, you are going to lose money for a while. That's why it doesn't make sense to me to put 10% down on multiple properties. If you put 10% down on a $400,000 property, you're going to lose about a $1,000 a month each month. Quote Link to comment Share on other sites More sharing options...
Alphadawg7 Posted June 4 Share Posted June 4 1 hour ago, Royale with Cheese said: I completely understand what you're saying but I think the one thing that is not taking into consideration is if you only put 10%, you are going to lose money for a while. That's why it doesn't make sense to me to put 10% down on multiple properties. If you put 10% down on a $400,000 property, you're going to lose about a $1,000 a month each month. That can be true, by that also depends where you buy. For example, your guy averaged $8k a month in rent…the mortgage was only &1025 a month. Sounds like he wouldn’t have been losing money on the rents even early. So yes, it’s critical you understand the rental market in the area you buy before making that determination…and especially make sure it’s not a rent control area or you could be really screwed. So yes, that’s part of the equation you need to determine when making those decisions. I’ve bought several properties with 10% down where I was pretty much breaking even after mortgage and impounds to start. But, that means any vacancy periods or unexpected repairs will put you in the negative temporarily if you’re not cash flowing yet, so that is where it comes down to what the individual can afford. So like in your example, he could reserve $95,000 and still buy 5 properties and have cash reserves to cover expenses and vacancies. For example, $95k would cover 7.6 years of mortgage payments, which I think we can safely say he will never have that much vacancy. And those 5 properties he did buy for only $95k would have become $6m in those same 14 years. But everyone has to make decisions for how they do it individually, as no two peoples financial capabilities and goals are the same. The point I was making is that focusing on the rent profit/loss is the wrong focus for determining the strongest rate of return. Rental P&L focus should be about risk tolerance and affordability. The more you can leverage within one’s safe financial means, the more you will earn over time. Nobody should ever do what I am suggesting if a couple vacant months or a roof leak puts them underwater. But if you have enough to pay cash for a home, you have more than enough to spread that out over multiple properties and still reserve a sizable safety net so that you are not over leveraged or at risk. Quote Link to comment Share on other sites More sharing options...
Rubes Posted June 4 Share Posted June 4 2 minutes ago, Alphadawg7 said: That can be true, by that also depends where you buy. For example, your guy averaged $8k a month in rent…the mortgage was only &1025 a month. Sounds like he wouldn’t have been losing money on the rents even early. So yes, it’s critical you understand the rental market in the area you buy before making that determination…and especially make sure it’s not a rent control area or you could be really screwed. So yes, that’s part of the equation you need to determine when making those decisions. I’ve bought several properties with 10% down where I was pretty much breaking even after mortgage and impounds to start. But, that means any vacancy periods or unexpected repairs will put you in the negative temporarily if you’re not cash flowing yet, so that is where it comes down to what the individual can afford. So like in your example, he could reserve $95,000 and still buy 5 properties and have cash reserves to cover expenses and vacancies. For example, $95k would cover 7.6 years of mortgage payments, which I think we can safely say he will never have that much vacancy. And those 5 properties he did buy for only $95k would have become $6m in those same 14 years. But everyone has to make decisions for how they do it individually, as no two peoples financial capabilities and goals are the same. The point I was making is that focusing on the rent profit/loss is the wrong focus for determining the strongest rate of return. Rental P&L focus should be about risk tolerance and affordability. The more you can leverage within one’s safe financial means, the more you will earn over time. Nobody should ever do what I am suggesting if a couple vacant months or a roof leak puts them underwater. But if you have enough to pay cash for a home, you have more than enough to spread that out over multiple properties and still reserve a sizable safety net so that you are not over leveraged or at risk. I haven't looked at this thread in a long time, but I keep seeing it at the top of the thread list. So I popped in to see what in the world people could still be saying about Worthy at this point and now I can't remember which message board I'm on. Quote Link to comment Share on other sites More sharing options...
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