patrick.net

Which areas would have a better return in your opinion?

That's less than a 8% return, NOT including expenses. How are you doing your math?

Look, you'll be making 5.75% after expenses. After taxes and write offs, you'll be pocketing around $600-750 per month depending on your tax bracket. About 4%-4.5% net. You can bump that up to 8%-12% if you leverage up by financing multiple properties. But that's riskier.

I agree that older properties can be better deals. I want to live in a newer home for my next principle residence for energy efficiency but hopefully I'll be my own contractor building to my own specs/quality desires.
2 of my 3 rentals either have or is getting close to turning a century old. Easy to re-wire/re-plumb with a crawl-space. Try that in a newer home. You also don't have any neighborhood associations to mess with or pay up to. It all really depends on the deal and neighborhood. Crappy old homes can be good deals if they're in a decent neighborhood. My Riverside property (1895 according to county records) is built of solid redwood lumber that's half-petrified. It's a small house, but makes a great rental for a couple and their baby. Northridge earthquake in '93 or w/e didn't do a thing to the house. My '28 duplex needs a new foundation, but at this point I might scrape it and build 4 row-houses or small lot SFRs.

Outside the (still) overpriced bay area and high-dollar areas 250K can buy you a good chunk of real estate. Lock in prop 13 at these lower prices and you'll do well in the long term.

Actually, you don't have to finance multiple properties for that return. I guess I was trying to say, you can get a higher return, but since you have to pay off a mortgage, the profits are tiny, so the solution is to buy about 8/10 homes.

I can't see a single home/unit being much of a cash cow unless some one is really giving it away, in which case I would buy because its a good deal. What's the point in handing over a lot of money to get back a little at a time. Like you said, property is still going down.

All you have to do is miss one rental payment and your whole year is wiped out. One water heater, roof leak, broken pipe, carpet ect. I can see keeping a rental after you've moved out, but the TVM is usually not there on a single unit prop unless of course there's major disincentives to selling (taxes ect).

knewbetter says

One water heater, roof leak, broken pipe, carpet ect.

Rental means very high maintenance cost. Big question is will you be able to sell and make profit if and when you are ready to sell?

1300 * 12 / 199000 = 7.8%, which is gross at full occupancy.

Then you have to deduct from that:

* vacancy
* property tax
* HOA (if any)
* maintenance
* insurance

And there's real work involved if you don't have a management company doing it. But since he's talking about paying it off at purchase, there's no mortgage or associated fees. I think 7.8% is a bit low. You need at least 9% to start (though most landlords seem to speak in GRM, which is the number of months of rent that would pay off the property - basically the same number, inverted and multiplied by 12).

Please try my Bargain Finder! Now I cover the Seattle area too. It's free for the first month, and will tell you the addresses, asking prices, and rents for those >9% properties:

http://patrick.net/?cat=3

I would keep cash on the sidelines at least until this year plays out in the real estate market. With so many alt-a loans and the like coming into foreclosure, that townhouse could very well go down to 10x Gross yearly rental value. At $1300 a month rental that means the Townhouse is worth 156K at 10x gross rental. And with the housing supply being at an all time high, that monthly rental could drop to $1200 or $1100 a month rent.

Pay attention to the articles here. Buying at $199K now is not smart with all that is happening in real estate now.

No doubt to what I would do with it. Buy myself a shack on 5-10 acres in Nevada or Placer County with cash and live on it.

Tude says

No doubt to what I would do with it. Buy myself a shack on 5-10 acres in Nevada or Placer County with cash and live on it.

Yer' talkin' my language! Of course my dream home is a siezed indoor pot-growing house hidden on 200 acres with a class 6 road and no services. Just peel back the yellow tape and carry her over the threshold!

1300 * 12 / 199000 = 7.8%, which is gross at full occupancy.
Then you have to deduct from that:
* vacancy
* property tax
* HOA (if any)
* maintenance
* insurance
And there’s real work involved if you don’t have a management company doing it. But since he’s talking about paying it off at purchase, there’s no mortgage or associated fees. I think 7.8% is a bit low. You need at least 9% to start (though most landlords seem to speak in GRM, which is the number of months of rent that would pay off the property - basically the same number, inverted and multiplied by 12).
Please try my Bargain Finder! Now I cover the Seattle area too. It’s free for the first month, and will tell you the addresses, asking prices, and rents for those >9% properties:
http://patrick.net/?cat=3

Don't forget closing costs. Even if you write a check you still get socked for everything that goes with it. Reminds me of a wedding: How can a $35 court fee end up costing people $20-40k?

That's easy...buy 2 undervalued BRKA shares - sleep well and enjoy the satisfaction of having Goldman Sachs pay you 10% interest on your money...

Don't forget the up to 2.03% real estate transfer tax in Washington. And the fact that Washington was late to the bubble, few are buying, and prices have a ways to drop still.

I'd probably take half of it and buy a property that cashflows nicely.

I'd sit on the rest of the money and if prices continue to fall I'd buy a second property that cashflows even better!

toothfairy says

I’d probably take half of it and buy a property that cashflows nicely.
I’d sit on the rest of the money and if prices continue to fall I’d buy a second property that cashflows even better!

Gee, that's a great idea. What does it mean when a property "cash flows"? Why would anyone hand over a lot of cash to get a little cash a little at a time?

knewbetter says

toothfairy says

I’d probably take half of it and buy a property that cashflows nicely.

I’d sit on the rest of the money and if prices continue to fall I’d buy a second property that cashflows even better!

Gee, that’s a great idea. What does it mean when a property “cash flows”? Why would anyone hand over a lot of cash to get a little cash a little at a time?

wow you and I are on different wavelengths. I dont even know how to respond to that question or where to start...
here maybe this will help
http://www.youtube.com/watch?v=qCpEsKtObzs&feature=channel

Buying a house to rent out is a gamble. I'm just asking if your goal is to have cash then why would you hand over 200k to get back 1300/month? The rate of return is being compared to a 1 year CD, but if you bought and sold rental property by the year you'd almost certainly see a negative cash flow.

By the time you're done buying a house your 10k in the hole MINIMUM. Then you get to sit back and wait for checks.

Year one pays for the cost of buying.
Year two and three pays for the cost of selling.
Year four pays for the upkeep.
Year five, you start making money, if you've never had a bad tennant or a major repair.

By year five maybe you've got a nice capital gain but I wouldn't bet on it. Property isn't going anywhere in real terms for the next 10 years. You're going to have to leverage your money to see the gains you want. Buy 3-4 houses, but a single home is all your money where you can't get to it.

wow you and I are on different wavelengths. I dont even know how to respond to that question or where to start…
here maybe this will help
http://www.youtube.com/watch?v=qCpEsKtObzs&feature=channel

I wasn't questiioning your financial IQ, simply exposing your naivety.

Do you or have you ever owned rental/income properties? If so, can you explain to the rest of us how one would go about finding a property that "cash flows nicely!" because after 15 years as an ACTUALL buyer/investor in real estate I have found it difficult to purchase worthwhile buildings/units. It seems the owners of these buildings are themselves aware of their value.

I think I'm entitled to my opinion since the question was what would YOU do with $250k.
No such thing as a free lunch so obviously it's going to take a little work if you expect to earn more than miniscule returns of a 1yr CD.
I'm only on my 5th rental property wouldn't say that I'm naive though. Real estate is not a game for everyone.

Personally I like passive income. Apparently you like dumping your cash into a huge liability in the middle of the sticks with no income stream (unless you plan on selling the pot).

Different strokes for different folks.

What's it cost to sell a CD or wait a year for it to mature?
I'm at a point with my money where I'm sick of money. Sick of spending it, sick of making it, sick of worrying about it. I hate money. I despise money. Money is nothing but problems to me. As far as money in the sticks, my cousin has that 200 acres I covet so dearly. He nets about 20k every it 10 years after taxes, which isn't much but trees always pay on time, and the upkeep is minimal.

So, as a real estate investor, you would take 125k and buy a property with a positive cash flow, or perhaps 250k for two? Park 125k for prerhaps 300/month? With interest rates where they are today it makes much more sense to beleveraging properties to the hilt, and not dumping principle to lower payments, therefore gaining a phantom cashflow. What kind of leverage are you using on your 5 properties? Because at 80%LTV and a 7% rate I'm hard pressed to find a positive cash flow property within 20 miles of Southern NH.

Hey, if you can find a renter who will give you more than market price for an apt then great, but I'd rather farm lumber than people, because sooner or later people figure out there's a better deal across the street. Classifying rental income as a passive revenue stream is dangerous.

knewbetter says

I’m at a point with my money where I’m sick of money. Sick of spending it, sick of making it, sick of worrying about it. I hate money. I despise money. Money is nothing but problems to me.

AMEN to that! I spend my time trying to figure out better ways to LIVE, not ways to make money.

I'd put $10,000 down on each of 20 different houses and change my name to Casey.

10caipirinhas says

I’d put $10,000 down on each of 20 different houses and change my name to Casey.

Now that's damn funny! Whatever happened to our dear Casey?

"In January 2010, Serin had left the US to travel to Korea and become a boy band manager."
(http://en.wikipedia.org/wiki/Casey_Serin)

No - that's damn funnier.

I'd answer with more question

1) do you have the time and energy to maintain a property?
If not can you hire someone to maintain it for you?

2) Are you SURE this property won't go down in value? If it lost 50K in just two years how do you know it won't lose another 20K this year?

3) do you have any debt to pay off first?

4) Is there anything else in the background you might want to think about? 200K is quite a bit to spend right now. It might be more worth it to go after a degree or at least keep a chunk of that in an emergency fund. Maybe think about your health? Are you getting married in the future? Having kids?

If your property does not appreciate 3% a year you are make a bad financial decision at least for 10 years and after that you'd have to hope for return of the days of 2002-2007 glory.

renting houses out at a 6 or 7% return on your investment is not very smart unless you plan on living in them later on. You can invest in safe muni. bonds that return 5% taxfree with ZERO maintenance.

If you invest in muni bonds, be sure they are G.O. (general obligation) bonds, which have the smallest probability of default.

Also note that cities are beginning to go bankrupt so be careful about munis.

http://www.reuters.com/article/idUSTRE61D27C20100214

I'm sitting w/ 80% of my net worth in cash. I change my mind daily about whether we're in for another down leg and stay in cash or if the dollar is going to meltdown and I should buy a ton of gold, houses, etc.

Fund my kids' education; if I didn't have kids, then nieces.

SF ace says

Burritos,
Contrary to some other belief’s there is a place for investing for cash flow, it can be a good investment but you do need to give us more background to see if it is the right deal for you?
What is your income level? expectation in the next 10 years? Are they earned income or passive income? Do you have other passive loss? Can you add value to the home without hiring contractor for things like plumbing, patching walls, and minor stuff? This can make a difference to your costs.
You currently have a CD and seem unhappy with the return? Perhaps you should consider investing in Muni Bonds and preferred shares instead. Yield on a house is not fun and worse of all, is not a liquid investment (which is ok if you do have access to other liquid assets). The yield have to be more attractive than that to push me there.
House investor should consider capital gain/loss in addition to cash flow. From that perspective, I really think you should invest in liquid investment at this point, have the capital ready when there are concrete signs that the economy is turning the corner and pounce on that opportunity. a great sign of that is when the fed starts to raise interest rate.
All this is just my opinion. Do your own research and good luck.

Household income level 330k.

10 years from now I'll be 49. I don't have a financial goal other than to have a well balanced investment portfolio(75% stocks 25% RE) with a decent return. When I near retirement(60), I'd like to have my home paid off but also enough safe passive income to maintain my current level of income.

All my income is earned income. Maybe 10k is passive, but most of it is dividends which is reinvested.

I'd don't have any sweat equity skills. Everything will be done on the recommendation of my property manager. That's why new properties are preferable to me.

Yes, I don't like the CD returns, but I'm 39, should I just be sitting on 250k in cash? I also have been maxing out my retirement accounts and IRA every year. I'm considering Muni bonds. Can you do that through schwab?

SF ace says

ok, please keep in mind that this is my opinion only, and someone else is sure to disagree.
That is a nice level earned income, especially in Pac Northwest, for retirement, max out and defer as much as possible.
I think with your rate of savings/income it is perfectly ok to make a housing hedge. Although I would be a hawk for a good deal with all that cash. I think 10% housing yield would be my target and adjust accordingly to put as little as possible to secure the investment with the best interest rate. (If your house can yield 10%, seriously, what is downside risk?) This way, you are still saving for retirement with cash and hedge against housing price. Be careful of new properties because with the newness, also comes a new community which may be decimated by foreclosure. established communities close to job centers/university have a certain desire effect that people tend to want to rent and own and withstand the test of time.
You should not be sitting on 250K cash. There are preferred shares of utilities company yielding 5-6%. Muni Bonds is another option as well, with 250K, Schwab will sit down with you and ask for some personal service, if not, you need to change to someone that would. I have 2400 shares of WLFCP generating $180 every month for the past 24 months yielding 10% from cost. It has an income statement and balance sheet that is stronger than any utility, but that takes a little more time if you are willing to put in. Maybe schwab can provide a list of preferred shares that their VIP clients invest in.

Thanks for your advice. It's much appreciated. I don't live in the PacNW, I live in Socal. In my SEP IRA account, I invest heavily in utilities and energy fidelity mutual funds(for income). I also like Canada and China(for growth). That's about 40% of my portfolio with the rest being US stocks/international/some gold/some commodities.

The purpose of my getting rental properties is because I think RE has a place(though not a majority stake, maybe 25-30%) in my portfolio. My three uncles(but not my parents of course) here in Socal all got rental properties in the 70's. The were all smart(engineers), but certainly not finance gurus. They didn't have finance advisers, they didn't have their portfolios re balanced every quarter, and they didn't have an asset allocation that was finely tuned based on their age and risk tolerance. Needless to say, they have cash flow torrents that they'll never outspend in their lifetime. Would they have been richer had they bought certain stocks? Probably, but they don't care cause they can buy whatever they need, whatever their kids need, and still fund all their grand kids' college tuitions. Can I replicate this. No. It's way too expensive here in California to do anything like that. But I believe the Puget Sound has affordable opportunities.

SF ace says

i hear what you are saying. I have three uncles that own mutil-unit complex in San Francisco. They worked for close to minimum wage yet somehow manage to sit on 2M-3M property generating cash flow 15K-20K a month. They did told me that they spent next to nothing on themselves for 15 years to pay for the house. It really sets things ups for the kids and the kids, kids which all are doing well. My mom never made more than 25K a year yet manage to cash flow that amount in her own rental properties. Whether prices go up, down and sideways, it is really just a larger part of an investment strategy when done correctly. Of course, we can’t expect the same magic now. If I manage to pay off three houses and save for retirement by the time my career is over, I think we’ll be fine in any measure imaginable and will be in position to help the kid and kids kids ourselves.
I am not as fortunate as you income wise, perhaps we may be 5 years away if the chips fall correctly. We did better in passive income as we netted about 35K in dividends/gains. We made bets in housing but also saved aggressively for retirement with controlled accounts and non-controlled accounts (401K). The strategy is to have the highest rate of return without risk of loss, which after a couple market crashes mean muni bonds and preferred shares. I am also fortunate enough to have a brother in law who is an ibanker with Goldman’s so I can trust his judgement and his insights with well regarded clients.
Some people get nostagic about the past and how much better it use to be (which it is), affording housing with one income, second chance in college and affordable healthcare. Those days are long gone and will never come back. In fact, my mom will not stand a chance if she somehow started 20 years later. It simply takes more to get less and is a function of the global economy. Everything that maters to us simply costs more, That is a fact, college will be unreachable as ever, quality healthcare will be as expensive as ever, and quality housing will suffer the same fate.

Wow. Those multiunit rentals are at least double the bang for the buck return compared to anything in Socal. You're right in terms of the Magic being gone in Coastal California. If you buy anything then you're just the Johnny come lately who's funding the wealth of the children of people like our uncles. I don't think we've missed the boat completely in the Puget Sound. Seattle yes we have, but going south I think there's opportunity. Everyone knows about LA and SF, but did they know that the RE wealth sprawls 40-60 miles in circumference? Puget sound is west coast. It's got the 3rd largest port on the West Coast(behind, L.A. and Long Beach, bigger than Oaktown). It's got a massive Army Base in Fort Lewis(Military industrial complex will never end. 2 of my renters in the past have been military. They've been great tenants so far). It's a place where Californians tired of high housing prices will move to. If you're a believer of climate change(I am, and believe it will be different in a generation), Socal will be hotter. Phoenix and LV will be unlivable in the summers(more so that it already is). PacNW will slightly be warmer. Bay area, unchanged maybe a little warmer. This might all be partial wishful thinking.