OK, so he wants you to buy five houses this year … and, he gives you the quick ‘hard sell’ at the end … but, the basic philosophy – to me – is sound:
– Houses are depressed in the USA, but so are interest rates,
– Unless the USA ‘double dips’ prices will begin to go up (when?)
– You can fix an incredibly low interest rate on your primary residence (can the bank rewrite the mortgage if you move?)
– You MAY be able to receive enough rent to cover most/all of the mortgage
– Who says you need to buy five houses (except for this Realtor!?) … just think about one for now
Do the numbers for your area/s of interest (price of house, monthly cost of mortgage, likely rental income, other expenses such as 6% – 9% property management etc.) … if you can even come close to breaking even, could you find a better return on your deposit plus the cumulative cost of any monthly shortfall (or gain of any monthly excess)?
Now, run the numbers again assuming that the US market stays flat for another 5 years before some sort of rebound … maybe it still makes sense?
Have you run the numbers? If so, what do you think?
I read on a blog, I think it was Phil Town, though I spent ten minutes trying to find it and failed, that people can’t really afford the houses that they’re living in. So we have the counter argument. The vid argument: that bank owned housing inventory goes down and property values go up. The counter argument: that interest rates go up and people can’t afford to pay mortgages and are forced to sell, property values go down. Which one is more likely? What happens if you trow all your equity into houses that promptly lose value?
If the numbers showed a positive cash flow on a long terms P+I fixed rate mortgage, I would go for it. The interest rate risk would not worry me as the rate is fixed which gives me the ability to ride out any further down leg in real estate prices. If I am still cash flow positive or neutral, I can afford to be patient and wait for prices to rise.
The greater risks are (i) no tenants or bad tenants causing cash flow problems and (ii) rising property taxes (many of the state governments are pretty much bust and desperate for money). This is why I would prefer to see a positive cash flow on day one to give a bit of room for things to go wrong.
Even if values go nowhere for a decade or so, equity is still being created as the principal component on the mortgage is paid down.
I don’t know Adrian, the more I’ve run the numbers and looked at it over the past year or so and really think about it, buying residential rental properties just seems more like a “get rich a longer time from now while you keep working your job” instead of a 7million in 7years gig.
I’m really starting to believe that it falls into one of two categories:
1. A really EXCELLENT long term get rich plan. By long term, I mean at least a good 20 years, so that enough time has elapsed that you’ve realistically been able to raise rents enough, the property has appreciated enough(hopefully doubled value, so a 100-200k property bought now is at least worth 200-400k) and/or you’ve paid enough of the debt down on them so that you really begin having some monthly income that would rival having 4-7 million or more in investments and you have enough monthly flow to ready for Money Making 301.
2. Of which is(I really think the best) the use of these(mostly paid for) properties now as an excellent Money Making 301 tool, once you’ve established your Number.
Do you really think a person starting out where they currently are in income can use the process of buying residential properties to get richer, quicker? For example, could you have used a 50k per year salary back when you started with 30k in debt, and get to 5 million in 5 years by residential real estate, or get to 7 million in 7 years with it?
I’m really starting to think that the only real path to those serious kinds of numbers in a few years is starting businesses, then selling them later for multimillion dollar profits, much like you did and possibly getting hold of a big commercial level real estate windfall or two along the way, much like you did as well.
Either that, or starting out with a very massive level of income, of which you live on half or less of it and aggressively invest it for high percentage growth(and be lucky enough to get it, lol). Even then, it could take 10 years or so to do that, depending on your number, maybe more!
What do you think?
Ok, I see a couple flaws in his assumptions. Correct me if my math is a bit off, but these houses won’t be worth $600,000 in 5 years if you do the math(average increase each year being around 5 to 6% ). Second flaw is what if you rent the house (buy the next one) and someone moves out of the last home and you have a problem renting for say 6 to 8 months? Can you handle the mortgage on say 3 or 4 homes while your living in 1 of them for 8 months till you can get them rented again?
Note to self…. if you compose a long message, save it before you post in case of a timeout on the webform.
So a short answer:
It isn’t a deal.
I’ll agree with Scott.
His numbers don’t work as described, and you have to stay in a place for 2 years to get the real tax benefits.
$200/month for property taxes, insurance, upkeep (let alone management fees)? Not a chance. My house is appraised at $460K, will sell for more, and I have to pay twice not including upkeep.
If you can get positive cash flow, and you don’t have to put a lot of money down then it is something can consider, but how much do you need to put down? Good dividend stocks (JNJ) will beat the 20 year return he says.
Personally, after running the numbers for a local rental I came to the conclusion that it wasn’t worth it even if I would manage the property, and I can probably do better on a business (and I don’t want to deal with tenants).
I think real estate is way too shaky to invest in it currently in a big way:
a.) no-one really knows where the market is going – there a strong arguments for both bullish and bearish views, but I personally think that people have overspent, resulting a financial hang-over / spending remorse that will reduce long-term appetite, reducing housing valuations (so I am a bear)
b.) most people will need to use leverage to buy properties, multiplying their exposure – which can back-fire in a big way
c.) I also think that the US stock market has more legs than real estate (where will the money go that used to go to real estate – stock market..)
d.) and finally, in my neck of the woods, cash flow positive is impossible: buy-to-rent multiples north of 15-20 annual rents (how many annual rents will buy a place).
Great analyis, all; thanks to those who have commented in so much detail [ web timeouts aside 😉 ]
@ Scott – I was about to say “drop the first half of 1. and then I might agree’, but then you wrote the first sentence of 2.!
Even so, for a MM301 strategy, I may be more inclined to go commercial (perhaps a few shops and/or small offices spread here or there to spread vacancy risk) for the (depending upon where you are) higher rental returns.
@ Steve – see comment to Scott, above. Sometimes, more tenants are a good thing … but, only for MM301. For early stage investing one property may be enough to start, however, if I was trying to use property to accelerate my wealth (MM201) then risking multiple-tenancies may be a chance I simply have to take.
Scott makes a good point at the end of his post. I’ve been saving 50% of my decent salary and trying to parlay that into making some outsized returns with higher risk / higher reward investments. So far, no luck at all but I guess I’ve got time on my side.
-Mike
@ Mike – If my recollection serves me right, you are already making a “higher risk / higher reward investment” … it’s your job!
My suggestion is that you use that somewhat risky cashflow (you could be laid off or injured or …) and parlay that into LOWER RISK/REWARD (at least, in the short-term) investments; RE is ideal for the task.
I’m in a similar position as Mike.
Our family income (salary + stock/bonus) is probably peaking over these next few years and we are saving/investing 50% of what we earn. We are not investing in Real Estate as we want something more liquid and short term and don’t.
Meanwhile, my business plans are proceeding apace, with a timeline two years out for one (my time is not the limiting factor), and getting started on the other (smaller) one this month.
Adrian. I agree on the multiple-tenancies part,but not the single family home part as referenced in this video. Unless you are sure you can handle 3 or more mortgages at once(should they become vacant). Better strategy I think would be multi unit apartments(perhaps 5 units or more) so if you end up with vacancies, you may still be cash-flow positive. At least not cash flow negative.
@ Neil – I guess you need to remain ‘liquid’ to fund your two businesses? I don’t think that Mike has the same immediate liquidity needs …. ?
@ Steve – I’m not sure that I see the difference between multiple-mortgages and multi-unit tenancies (perhaps, aside from extra paperwork and extra fees) from a vacancy perspective?
But, I do agree that IN GENERAL multi-unit tenancies produce better cashflow than multiple single residences of similar total value.
Adrian. The difference (as I see it) is you buy a single family home as the guy in the video speaks of. If you rent it out ,and repeat, you end up with several mortgages on several homes, and if someone moves out, you have no income to support that mortgage. Where as, the multiple (i.e. 5 or 6 unit) if someone moves out, you still have income coming in from the rest of the units to support that mortgage.
I’m under the impression that the goal was to buy low – sell high not Buy high – sell low…
I went for it (one sfr) and I’m ready for more. Why? Mostly because the number of strategic defaults is on the rise. These are good people with jobs, who are now stuck in the renting cycle for the next few years. Due diligence is a must but worth it.
The main gauge that I used was to compare the local rents. If a 2-3 br apt. with a carport rent can cover/ put you cash positive then it is worth buying the sfr and renting it out for the prime renters.
@ Luis – Yep, I think that cashflow+ makes RE – in the current stage of the market cycle – a ‘no brainer’
My comments after seeing this video, couldn’t see it before as Youtube is blocked from my work server.
1. It seems very difficult to find a property where the rent is in excess of the PITI. US apartment / rental vacancies are at 30 year highs at the moment so there is pressure to drive rents down- of course all markets are local but I haven’t seen a market in the US where rentals are attractive. Granted I live overseas so my exposure to this is very limited.
2. Even if you can find an attractive renting price, I belive it’s hard to find a tenant with a stable financial / employment situation. Surely if someone has a very stable job situation they would be buying themselves unless of course the rental rate is much much less than the monthly PITI. For example, the coastal areas of CA.
3. It’s hard to see what would drive asset prices higher than what they are today. Expectations on inflation I believe will be muted simply because the unemployment / underemployment situation is so bad. Also global wage arbitrage is a real factor in the market and there is a surplus of labor worldwide even with all the government stimulus flying around the planet.
4. I believe that higher interest rates would hurt asset prices. Furthermore, interest rates can only go up from the level of today. It’s hard to say what would be the catalyst but there are many black swans out there. For example, Japan is running 230% debt to GDP ratio and most of this has been funded by domestic savings. As the Japanese age they will need that savings for living and that source of funding will dry out and force the Japanese treasuries to climb and raise interest rates. Another black swan is China as they are openly discussing raising central bank interest rates to put a damper on the property bubble. Convenient timing, now that they are fully stocked up on all sorts of raw materials and commodities. These interest rate rises will effectively force the US Federal reserve to raise rates and when that happens expect property prices to take a dive.
5. That said I would not want to be a holder of a property unless I really don’t care about the value of the residence and am using it for shelter only. Certainly I would not want to be a holder for multiple properties, as this guy advocates.
-Mike
AJC,
You are right- I’m busy going for the bigger payoff of my job. After much work to improve the finances of the company we are projecting a very strong full year result. As such we are now shopping the company to to make a sale. If the sale and valuation completes as planned I should get an exit bonus of $500K – 675K USD. That will go into the bank along with the other cash I’m sitting on.
The only risky play is I’ve got some money in some ETF’s that are short against US financials. So far I haven’t made any money- only losses. Call me a sucker for hanging in there but I’m waiting for the market to take a tumble. If I’m wrong it’s ok because it’s only 15% of my net worth.
I’ve come up with a new financial goal to retire- I would like to have 200 – 300 years of living expenses at my current burn rate, about $33K a year. Means I need to have about $10 million in cash or equivalents. I’m just under 20% of the way there so more work left to do. The reason I’m going for such a big number is if you want to really exit the high paying career world and have 50+ years left to live you better be really sure you have a big multiple in your cash cushion to help adjust for any financial shocks and bumps in the road.
Call me unconventional because I’m earning nearly zero return on my cash and I’m in my mid-30’s, an age where investors tell you that you better have 80% of your money in stocks. However I’m ok with the cash just sitting there and not earning money since the chance of loss is much less as well. And as long as I earn a good salary and save big I can grow my net worth fairly quickly. Sure inflation will cause the value to be worth less but see my post above, I am not so worried about inflation in the next few years.
-Mike
AJC,
Last one- your memory is good. I have very little demands on my cash flow. Annual spend rate is $33K and this is living pretty lavishly. In a pinch we could drop this down to about $15K. Since we have cash on hand in excess of $1M this means many years of not having to worry about brining in income. We just have to resist making stupid investment or impulse purchases. Also we don’t have children yet but are considering this. If kids come into the picture we will need to recast our financial trajectory and certainly this will only drive expenditures upward.
-Mike