6 ms·

But your description sounds like a home the buyer lives in. That is not an investment, from an investor's point of view. Instead, for a specific example, cons

But your description sounds like a home the buyer lives in. That is not an investment, from an investor's point of view. Instead, for a specific example, consider a 4-plex my wife and I bought for $65K down ($215K total - it is in an economically depressed area). Rents, when fully occupied (not always the case, we see about a 5% vacancy rate) are $700 a month over all expenses, including debt service. Plus, we put close to 20% down but get 100% of the depreciation. End of the year: $7000 in our pockets, a legal tax loss of $800. And that is assuming no change in value of the asset. If someone offers to buy us out at %200 of the purchase price I would definitely consider it, but until then, I pocket the proceeds. For me, doing the due diligence up front reduced the luck factor, my preferred way of obtaining my goals, when possible.

brc 11y ago
What sort of area are you buying in? Where I live you cannot buy any real estate of any type for $200k. Are you buying out of state or out of country? How do you manage the risk?
- raintrees 11y ago
  Del Norte County California has many houses for less than $250,000, but single family homes do not "pencil out" here - The rents will not pay for the expenses. Multi-family units can, and the more units, the more likely they will. We also bought in Lee County Florida, where a single family home IS cash flowing. If the employment market stays stong, we will look at picking up more, assuming we find deals that are acceptable to us. Risk: Insurance (property and landlord's liability), entity (LLC), and strong property management that is tight on screening prospective tenants. Last, watchful management: We keep an eye on the Property Managers, and provide overall management decisions, like where to keep rents, what improvements/repairs to make, etc. We are new at this, only 5 years in, so we are still most definitely learning.
  - raintrees 11y ago
    And I should have put this in the first comment I made: This is not legal advice, nor is it financial advice. Please seek professional guidance for specific situations. This only serves as an example of specific deals I am involved in - H/T to gamblor956 for reminding me to state this.
    - brc 11y ago
      I'm an investor myself. I have gone the route of industrial property. Still learning as well. Not much multi-family where I am, maybe a few duplexes but they still sell too high for the yield. So no worries about taking advice!
  - markyc 11y ago
    what ROI are you looking for when investing in new property? how much do you pay for property management?
    - raintrees 11y ago
      As we are just getting started, we look for at least 11%, and will move that higher as we get more experience (and more patience :)). Property management in both locations is about 10% of Gross rents. One company also charges half of the first month's rent to cover turning, advertising costs.
      - markyc 11y ago
        11% sounds out of reach in the EU
      - brc 11y ago
        I have friends who are long established investors. They won't buy unless there is an expected 20% return either in yield or flip. They are mostly retired now and don't buy much anymore.
  - branchless 11y ago
    Happy land speculation. I thought Hacker News was full of actual entrepreneurs but it seems not, we have good old fashioned usurers and their foot-soldier landlords. It's the American dream!
gamblor956 11y ago
Your math does not add up. If your rental profits are $700/month (total for all 4 units), then your annual rental profits should be $8,400. For a property purchased for a total of $215,000, the depreciation should only be approximately $7800/year (straight line, 27.5 year recovery period), meaning that you should have annual taxable rental income of roughly $600. Moreover, the amount of depreciation you can take (in total) does not increase with a change in the value of the asset; it's based on your "cost basis" in the asset. It only goes up if your costs in the asset increase, such as for property taxes paid, improvements, etc. Finally, and this is a big one--the value of the land is excluded from the depreciation calculation--only the building and improvements to the property can be depreciated. So $215,000 is an upper bound on the recoverable amount--the properly depreciable amount is less than that, meaning that your annual depreciation should actually be less than $7800/year and that you should actually have more than $600/year in net rental income. You need to talk to an accountant soon, because if you get audited you almost certainly will be paying back taxes and penalties.
- raintrees 11y ago
  Sorry, I was rounding conservatively, and my tax returns were prepared by a conservative, professional firm that I hold in high regards, so I am not concerned there, but thanks. To be more accurate, we do get a bit more, but we withhold for repairs, replacement costs, wear and tear, new appliances, etc. So our income is higher, but I have trained myself not to count it, as the odds tell me I am going to have to pay for repairs. The $700 is what we get to hold onto most often, unless we are saving towards big repairs like new roof, outside paint, etc. And (crucially) I left out that we had enough first year expenses to legitimately lower that perceived income, as well as the interest that we get to deduct (interest being far higher at first in a mortgage payment). Next tax year will have different numbers, since we will have had different expenses and different occupancy (unfortunately they do not stay 100% occupied). I am just trying to get out round numbers that show that it can work. Most people have this concept that their house is their biggest asset, when a residence is really a liability for the person who lives in it. I should not have taken the shortcuts in my math, but regardless, we do well. We have used the profits to invest in more education, and have recently purchased another unit in Florida that will start cash flowing in about two more months. Well, actually it cash flows now, but we had to pay for some new appliances, so in my head, we are negative for two more months, then we start paying off ourselves for the down payment. Again, I am more conservative. So it is a slow path to wealth, but a valid path, nonetheless.
mistermann 11y ago
My point was, the simple advice "if you do this (prudent idea) then you can expect (this approximate outcome)" no longer holds. There used to be this idea that you could compare historic ratios (like a P/E ratio with companies for example) to determine relative value. Now, in a lot (not all) geographical locations, all these historical indicators are useless. Asset values no longer have any relation to local economics, in various different ways. In the US in the housing bubble, it was loose credit. In Canada and Australia, this persists, because they somehow escaped the psychological popping of the housing bubble. And at least in Canada, there is the additional massive "unnatural" demand coming out of China: http://www.huffingtonpost.ca/2015/05/03/vancouver-shaughnessy-house-2-million-above_n_7197754.html http://www.huffingtonpost.ca/2015/05/03/vancouver-shaughness... And this isn't crazy "no money down" like the US housing bubble - the Chinese have cold hard cash. Name a price, and they will write you a cheque.
- raintrees 11y ago
  I agree. That is why investing for capital gains, AKA flipping (buying low and selling higher) is more risk than I want. I pick deals where cash flows positively from day one. I have passed on several dozen deals and only purchased two so far. I have heard others say 100-20-5-1: Look at 100, put in bids on the best 20 (if they pencil out), maybe get 5 acceptances, choose 1. Those are averages, not direct experience, but it does encourage patience.

brc 11y ago

What sort of area are you buying in? Where I live you cannot buy any real estate of any type for $200k. Are you buying out of state or out of country? How do you manage the risk?

raintrees 11y ago
Del Norte County California has many houses for less than $250,000, but single family homes do not "pencil out" here - The rents will not pay for the expenses. Multi-family units can, and the more units, the more likely they will. We also bought in Lee County Florida, where a single family home IS cash flowing. If the employment market stays stong, we will look at picking up more, assuming we find deals that are acceptable to us. Risk: Insurance (property and landlord's liability), entity (LLC), and strong property management that is tight on screening prospective tenants. Last, watchful management: We keep an eye on the Property Managers, and provide overall management decisions, like where to keep rents, what improvements/repairs to make, etc. We are new at this, only 5 years in, so we are still most definitely learning.
- raintrees 11y ago
  And I should have put this in the first comment I made: This is not legal advice, nor is it financial advice. Please seek professional guidance for specific situations. This only serves as an example of specific deals I am involved in - H/T to gamblor956 for reminding me to state this.
  - brc 11y ago
    I'm an investor myself. I have gone the route of industrial property. Still learning as well. Not much multi-family where I am, maybe a few duplexes but they still sell too high for the yield. So no worries about taking advice!
- markyc 11y ago
  what ROI are you looking for when investing in new property? how much do you pay for property management?
  - raintrees 11y ago
    As we are just getting started, we look for at least 11%, and will move that higher as we get more experience (and more patience :)). Property management in both locations is about 10% of Gross rents. One company also charges half of the first month's rent to cover turning, advertising costs.
    - markyc 11y ago
      11% sounds out of reach in the EU
    - brc 11y ago
      I have friends who are long established investors. They won't buy unless there is an expected 20% return either in yield or flip. They are mostly retired now and don't buy much anymore.
- branchless 11y ago
  Happy land speculation. I thought Hacker News was full of actual entrepreneurs but it seems not, we have good old fashioned usurers and their foot-soldier landlords. It's the American dream!

gamblor956 11y ago

Your math does not add up. If your rental profits are $700/month (total for all 4 units), then your annual rental profits should be $8,400. For a property purchased for a total of $215,000, the depreciation should only be approximately $7800/year (straight line, 27.5 year recovery period), meaning that you should have annual taxable rental income of roughly $600. Moreover, the amount of depreciation you can take (in total) does not increase with a change in the value of the asset; it's based on your "cost basis" in the asset. It only goes up if your costs in the asset increase, such as for property taxes paid, improvements, etc. Finally, and this is a big one--the value of the land is excluded from the depreciation calculation--only the building and improvements to the property can be depreciated. So $215,000 is an upper bound on the recoverable amount--the properly depreciable amount is less than that, meaning that your annual depreciation should actually be less than $7800/year and that you should actually have more than $600/year in net rental income. You need to talk to an accountant soon, because if you get audited you almost certainly will be paying back taxes and penalties.

raintrees 11y ago
Sorry, I was rounding conservatively, and my tax returns were prepared by a conservative, professional firm that I hold in high regards, so I am not concerned there, but thanks. To be more accurate, we do get a bit more, but we withhold for repairs, replacement costs, wear and tear, new appliances, etc. So our income is higher, but I have trained myself not to count it, as the odds tell me I am going to have to pay for repairs. The $700 is what we get to hold onto most often, unless we are saving towards big repairs like new roof, outside paint, etc. And (crucially) I left out that we had enough first year expenses to legitimately lower that perceived income, as well as the interest that we get to deduct (interest being far higher at first in a mortgage payment). Next tax year will have different numbers, since we will have had different expenses and different occupancy (unfortunately they do not stay 100% occupied). I am just trying to get out round numbers that show that it can work. Most people have this concept that their house is their biggest asset, when a residence is really a liability for the person who lives in it. I should not have taken the shortcuts in my math, but regardless, we do well. We have used the profits to invest in more education, and have recently purchased another unit in Florida that will start cash flowing in about two more months. Well, actually it cash flows now, but we had to pay for some new appliances, so in my head, we are negative for two more months, then we start paying off ourselves for the down payment. Again, I am more conservative. So it is a slow path to wealth, but a valid path, nonetheless.

mistermann 11y ago

My point was, the simple advice "if you do this (prudent idea) then you can expect (this approximate outcome)" no longer holds. There used to be this idea that you could compare historic ratios (like a P/E ratio with companies for example) to determine relative value. Now, in a lot (not all) geographical locations, all these historical indicators are useless. Asset values no longer have any relation to local economics, in various different ways. In the US in the housing bubble, it was loose credit. In Canada and Australia, this persists, because they somehow escaped the psychological popping of the housing bubble. And at least in Canada, there is the additional massive "unnatural" demand coming out of China: http://www.huffingtonpost.ca/2015/05/03/vancouver-shaughnessy-house-2-million-above_n_7197754.html http://www.huffingtonpost.ca/2015/05/03/vancouver-shaughness... And this isn't crazy "no money down" like the US housing bubble - the Chinese have cold hard cash. Name a price, and they will write you a cheque.

raintrees 11y ago
I agree. That is why investing for capital gains, AKA flipping (buying low and selling higher) is more risk than I want. I pick deals where cash flows positively from day one. I have passed on several dozen deals and only purchased two so far. I have heard others say 100-20-5-1: Look at 100, put in bids on the best 20 (if they pencil out), maybe get 5 acceptances, choose 1. Those are averages, not direct experience, but it does encourage patience.