Home Investment Strategy... Do Something With Your Affiliate Monies

volknet

volknet

Jonathan Volk
Aug 27, 2007
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www.jonathanvolk.com
I've been looking for different - non-stock market - investment ideas. One of the ideas my friend mentioned made some good sense. So I figured I'd share it here.

In the California SF bay area (where I live) you can find some houses that go as cheap as $100k (you can find foreclosures even cheaper). Now, if you were to buy this house in cash, fix it up with cheap stuff that looks nice (maybe 10k worth of fixing up) and rent it out you could end up making a nice chunk. Ok... nothing new here.

But think of the $100k as like being in an investment account you'd end up getting maybe... a few percent max.

With this, if you have a renter paying $1000 / month (which is low in this area) you could make $11-12k per year. Sure you'd have expenses so let's say you have 4-5k in expenses per year. Thats still over 5% ROI yearly on a 100k "savings".

The other reason why I think this makes sense is because there have been talks that FHA loans, which traditionally only require 3%, might go up to as much as 5% minimum (or even 10%) which would mean more renters overall.

Either way... once you start looking at it in comparison to savings accts, etc the percentage seems pretty good.

I have only done research so far, but it might be something I do in the future.

Here is an example with real numbers.
My friend just recently rented out a nice new condo that cost $365k (I know because I was looking @ them when I was looking to buy a house). He pays $1800 per month (with a 1 year contract) and one down the street is charging $1895 per month.

1800*12 = $21,600 per year or a 6% per year ROI (minus tax).

Anyway - just some food for thought. Anyone here invest in real estate?
 


You also have to consider taxes, bringing the house up to code, and then dealing with renters. Now there's nothing wrong with that but your 10-12% is going to drop to about 5-6%. This is coming from someone that owns 5 rental homes.
 
Also, you're assuming 100% occupancy. What happens when someone's lease is up and the property sits vacant for 4 months while you're trying to find another tenant. Gotta factor that in.
 
don't forget a property management fee/company/person.. id assume if your in AM you like not dealing with clients, costumers, etc. if you don't get somebody else to do it consider yourself on call and I doubt you wanna be taking time out of your day to fix stuff...
 
investing in real estate is for two large groups of people: wishful idiots and those making real serious money

then there is a small portion of people who own a couple properties and are aware of all the issues and make money.

it is *NOT* an "easy" thing to do, a "practically risk free" thing to do or a "hands off" thing to do (in most cases especially when dealing with foreclosures, repairs, etc unless you fall into the real serious money in real estate group who simply have their employees/agents handle all the issues for them including/especially bidding/pricing/inspecting.

I was convinced this was a way I wanted to go a few years ago until I spent about 12 months really looking it it and became convinced it wasn't worth it at all. I have interest at a later point in life in developing, but none any longer in touching anything already built.
 
I know this is for stuff outside of the stock market but I'm buying general index funds like crazy right now. Worst case (imo), it keeps pace with upcoming inflation.

I expect it to return about 30-40% over the next 4 years (total, not annual)
 
its an interesting way to look at it, but as other people said, your not factoring in stuff that WILL happen (vacancies, repair issues etc) as well as costs you will have to pay to run it like property managers.
 
If you do it right you are not only looking at a 6-8% ROI yearly in terms of rental income, but also the fact that the property should increase in value 5-7% yearly.
 
100k for a house? jesus christ it costs $400k to get a shitty small house in my neighbourhood.
 
This is an example breakdown for properties I've been looking into recently. There are a lot of areas nowadays where you can buy houses for $20-30k a unit. Using 30% down, you could leverage out and get a bunch of them while the interest rates are low and the market hasn't recovered yet. Also, with less money invested, you get a much higher ROI on each. The ROI below doesn't even count appreciation. That's all extra.

I think its a great time to be thinking real estate. (For the right deals only where the numbers work.)

These numbers are estimates and based more on good scenarios but even the bad numbers came out to be 5-15% ROI.

Property Cost: 60000
Down Payment: 18000
Closing Costs: 2500
Mortgaged Amount: 44500

Money IN:
Rental Units: 2
Monthly Rent: 575
Months Vacant: 1.5
Yearly Rent: 12075

Money Out: (Year)
Mortgage Interest: 4.72% 2100.36
Principal Payment: 675.6
Tax: 1500
Repairs: 600
Insurance: 2000
Lawn Care: 600
Total: 7475.96

Non-Cash Expenses:
Depreciation: $1,525.42

Profit:
Profit: $4,599.04
Profit/Month: $383.25
Taxable Income: $3,749.22
Tax Rate: (State/Fed) 40%
Total Tax: $1,499.69

After Tax Profit: $3,099.35
AT Profit/Month: $258.28

Gross Profit ROI: 25.55%
Click to expand...
 
People that make money in real estate do one of two things.
They buy a house for waaaay the fuck less than it's worth (20-50%) and then sell it for what it's actually worth.
Alternatively they buy a few rentals that make them a decent return over very long periods of time by building equity so that in 15-30 years they have multiple houses paid in full that they rent out for 1k each and then they don't have to do anything but that.

I budget paint and carpet at $15,000 for a ~$100,000 house. Because something as simple as paint and carpet ends up more like
Paint, carpet, replace a couple vanities, air conditioning/heat is fucked, sandpaper brushes, gasoline, random wood trim, cabinet hardware, counter tops, plumbing, mulch, moving crew, water leak.

This is all if the house doesn't have much really wrong but is just ugly. So now we're at $85,000 break even. Now you don't want to have that house on the market for 6 months so you need to plan on a 10% discount or so for an easy sale. That puts you at $75,000. So even if you buy this at $65k. You're going to make 10 grand for a whoooooole lot of fucking pain in the ass work or at least dealing with a lot of bullshit. But wait. Now you subtract 7% realtor fees, closing costs on the original loan for the house and you make nothing on a house you paid 65% for.

Unfortunately most people aren't capable of doing the math so you have to compete with 11ty billion retard housewives who want to get into real estate so it's very hard to steal a decent house. The ones who are able to do it, usually know about the foreclosure and make an offer before the realtor even realizes he has it for sale.

In the right market you can buy houses that rent for way more than the payments and as a long term investment it's definitely worth doing, but it's hard to do casually because of all the bullshit involved.
 
bowlcutah said:
but also the fact that the property should increase in value 5-7% yearly.
Click to expand...
If not better, depending on how well you buy. There's a lot of bargains out there right now. Who knows how long it will take to bounce back, but this is a long term investment anyways.
 
your repairs numbers can be WAY WAY off however.

Case in point:

family members of mine rented a house they owned for years. One tenant burned it down ~12 years ago with a lit cigarette.

about 4 years ago their tenant repeatedly requested to put a sat dish on the roof. They denied telling them to get cable. This idiot did it anyway, and in the process did just over $20k worth of damage to their spanish tile roof. They sued (obvious costs here) and won. Still can't collect. Lawsuit costs + repair costs of the roof.

Didn't end there however - due to the damage water leaked in and rotted away wood and brought in mold after a bad rain season. 6 weeks of repairs cutting out all the drywall on both floors in the front areas of the house. This is a home that even in this market is worth about $1.1M btw- so we're not talking the trash you'll get as a slumlord who decide to BBQ with a gas grill IN the house.


Now let's move to their apartment complexes (they own about 30 units total)

1) tree fell during a rain storm (this btw Volky is in the SF Bay Area as well), crushed some gardeners truck. Insurance picked up the damage but this idiot then sued for alleging the missed work over the week the truck was unusable caused him to spontaneously lose 90% of his clients and thus he was entitled to compensation.

2) Indian tenant moved in who used so much strong spices that the neighboring two tenants moved out within 4 months. good luck trying to tell that guy he can't cook what he wants in his house. people complained of the smell when touring the unit and it was difficult to re-rent both units.

3) another tenant cut a hole into the side of the drywall to install an in-wall AC unit. Without asking. Some broke idiot, again sued and won but can't collect.


This doesn't mean property is a bad deal, but when I see the breakdown above of $600 yearly for repairs, one thing failing every few years will be much greater than this. Have to put a roof on the place? better factor that in.



People treat rentals like we treat rental cars, so price accordingly. To touch property and the hassles that come along with it for 5-10% a year in a market that's still very volatile is laughable to me.

If you're going to leverage and risk make sure you return more. Many of us wouldn't run a large campaign at a 5-10% ROI with risk factored in (nonpayment, slow payment, quality issues, conversion fluctuations, etc)
 
i'm quitting affiliate marketing and getting a real job to invest in real estate ... seriously

sure the money doesnt roll in as fast, but you have real life assets. when there is no on in your house, sure times can be tough, but at least you still have a fucking piece of real estate
 
nvanprooyen said:
If not better, depending on how well you buy. There's a lot of bargains out there right now. Who knows how long it will take to bounce back, but this is a long term investment anyways.
Click to expand...

yeah but you can make other long term investments that don't require the bullshit.

i invested in Yahoo in '96 and Amazon in '97. Both were long term investments, and despite strategically dumping I still hold initial positions in both.

Effort required? Little.

Real estate can round out a portfolio nicely, but I find often people are convinced this is "the way" to really increase wealth. Have to as well factor in opportunity cost for all of us. My time is very very valuable - I can plunk an order down in Schwab's system in 3 minutes but would burn days and weeks of my time finding the perfect buy on a house.

All of a sudden my sunk costs are a lot more.
 
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I've owned a bunch of property, I like the quick flip instead of renting. Tenants are a pain in the ass to deal with. In NYC it's so ass backwards it takes forever to evict someone for non payment.
 
leadsupplier said:
sure the money doesnt roll in as fast, but you have real life assets. when there is no on in your house, sure times can be tough, but at least you still have a fucking piece of real estate
Click to expand...

what does that mean and why would the real estate investor care that despite losing money every month at least they 'have a fucking piece of real estate?'

is that like the 'American dream' where owning is better for some arbitrary internal feeling of accomplishment? (especially in cases where the math indicates otherwise?)

I thought we were marketers that didn't buy into that nonsense.


A lot of my non-homeowning friends like to tell me how lucky I am to own, when they hear about my $5,000/month mortgage and weigh that against their $1700/month rent all of a sudden they're shocked.


lol

KEY TAKEAWAY: I know many people who are serious into real estate (portfolios over $20M), the one constant is that not a single one of them tells the tales of splendor and easy money that speculative real estate moguls who haven't made their first transaction yet do.

Just saying, not a personal attack.

edit: just like no one on here who is successful tells tales about how easy it was to post links on Google like Kevin Hoeffer and get paid $25 per link!1111111
 
Commercial real estate is where it's at. My parents live off that. They own both residential & commercial. Residential can be a management nightmare. Commercial on the other hand is quite hands off: long term lease, triple-net; just get the money wired to your account every month; tenants pays for everything (including property taxes).

Get yourself a copy of this book if you're serious about RE:

[ame=http://www.amazon.com/Confessions-Real-Estate-Entrepreneur-High-Stakes/dp/0071467939]Amazon.com: Confessions of a Real Estate Entrepreneur: What It Takes to Win in High-Stakes Commercial Real Estate (9780071467933): James A. Randel: Books[/ame]
 
volknet said:
Here is an example with real numbers.
My friend just recently rented out a nice new condo that cost $365k (I know because I was looking @ them when I was looking to buy a house). He pays $1800 per month (with a 1 year contract) and one down the street is charging $1895 per month.

1800*12 = $21,600 per year or a 6% per year ROI (minus tax).
Click to expand...

At that price you'd have negative cash flow (after monthly principal/taxes/insurance/vacancies/expenses) unless you paid out $365k cash in which it wouldn't be wise to tie up that much capital in one unit.
 
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