Real estate thread

Dilated

Woodpecker
Other Christian
I for one will continue the "nomad" real estate strategy; you buy a house with an owner-occupant loan, live there for a year, rent it out and buy another home.

- Owner-occupant loans allow you to buy with low money down, say 5-10%, so you don't need insane capital.
- Renting out usually nets you more than the mortgage.
- The lender for the new property will want to see a favorable debt-to-income, but the mortgage makes that worse. Once you have the first property leased(you might still be in it, but a future lease start date), the lender can apply 75% of the lease income to the mortgage payments.

So, if your mortgage is $1700/month, you find tenants who will pay $2,000, the lender can use 75% or $1500 towards your mortgage. Now the lender only sees $200/month in remaining debt payment by you. You still get a little cash flow to help with the maintenance and capital expenses.

Sure, it's a pain to keep moving every 12-18 months, but if that's the price I pay to amass 5-10 rental properties and retire early, it seems very reasonable.

Do you accrue more debt? - Yes, lots.
Do you accrue more income? - Yes, lots.
Is it dangerous? What if the market crashes? - You can always slow the process down, build more equity, and invest in multiple areas/states/countries to hedge risk.

Do you personally manage (field renter complaints, fix broken appliances, etc.) your properties or have a property management company do it for you?
 

Hypno

Crow
I for one will continue the "nomad" real estate strategy; you buy a house with an owner-occupant loan, live there for a year, rent it out and buy another home.

- Owner-occupant loans allow you to buy with low money down, say 5-10%, so you don't need insane capital.
- Renting out usually nets you more than the mortgage.
- The lender for the new property will want to see a favorable debt-to-income, but the mortgage makes that worse. Once you have the first property leased(you might still be in it, but a future lease start date), the lender can apply 75% of the lease income to the mortgage payments.

So, if your mortgage is $1700/month, you find tenants who will pay $2,000, the lender can use 75% or $1500 towards your mortgage. Now the lender only sees $200/month in remaining debt payment by you. You still get a little cash flow to help with the maintenance and capital expenses.

Sure, it's a pain to keep moving every 12-18 months, but if that's the price I pay to amass 5-10 rental properties and retire early, it seems very reasonable.

Do you accrue more debt? - Yes, lots.
Do you accrue more income? - Yes, lots.
Is it dangerous? What if the market crashes? - You can always slow the process down, build more equity, and invest in multiple areas/states/countries to hedge risk.

My view is we are re-living the inflation of the 70s. If I'm right, then your strategy is a good one.

You are basically maximizing the amount of debt you have. This allows you to own or control a larger asset. During inflations, asset prices rise while the amount of debt stays fixed, so its a winning strategy.

Of course, there are no guarantees and you have to service the debt.

Also, those attractive financing terms are you YOU to occupy the place as your principal residence, not to buy it as an investment property. Further, for U.S. tax purposes, you want to make it your principal residence for at least 2 of the 5 years prior to sale.

Finally, lenders will look at your total debt burden and not net rent you expect to receive. So you can do this, but then you are going to hit a wall in the amount you can borrow pretty quickly.

Typically for investment properties traditional lenders will lend a max of 75% loan to value ratio and may charge a higher interest rate since it doesn't qualify under Fannie or Freddie programs aas a conventional loan.
 

jonNorth

Robin
Catholic
I for one will continue the "nomad" real estate strategy; you buy a house with an owner-occupant loan, live there for a year, rent it out and buy another home.

- Owner-occupant loans allow you to buy with low money down, say 5-10%, so you don't need insane capital.
- Renting out usually nets you more than the mortgage.
- The lender for the new property will want to see a favorable debt-to-income, but the mortgage makes that worse. Once you have the first property leased(you might still be in it, but a future lease start date), the lender can apply 75% of the lease income to the mortgage payments.

So, if your mortgage is $1700/month, you find tenants who will pay $2,000, the lender can use 75% or $1500 towards your mortgage. Now the lender only sees $200/month in remaining debt payment by you. You still get a little cash flow to help with the maintenance and capital expenses.

Sure, it's a pain to keep moving every 12-18 months, but if that's the price I pay to amass 5-10 rental properties and retire early, it seems very reasonable.

Do you accrue more debt? - Yes, lots.
Do you accrue more income? - Yes, lots.
Is it dangerous? What if the market crashes? - You can always slow the process down, build more equity, and invest in multiple areas/states/countries to hedge risk.
Using your personal mobility to gain an edge in the market is a smart idea but I don't believe that you can find a property that cash flows with a 5-10% down payment. With that amount down it will negative cash flow and you will need at least some cash reserve to cover the smallest maintenance costs. Just trying to be realistic
 

cosine

Woodpecker
Using your personal mobility to gain an edge in the market is a smart idea but I don't believe that you can find a property that cash flows with a 5-10% down payment. With that amount down it will negative cash flow and you will need at least some cash reserve to cover the smallest maintenance costs. Just trying to be realistic
Agreed. One unit that is very cash-flow positive offsets the one that's slightly negative.

I also make sure to only buy in places that are seeing demographic inflows. That means rent AND property values go up, so I get out of PMI quickly and move towards a cash flow positive situation. Before COVID, I read the book Big Shifts Ahead and made some decisions based on that. Whereas my more recent purchase is in an idyllic place where remote workers are moving, there's no homeless people or graffiti...etc.

Overall, after maintenance and capex, I'm roughly break-even, but am accruing equity at a really excellent rate. I could sell one property, pay off some debt against the others and gain cash flow that way, or I could leverage even more and accumulate. Or I could focus on remodels. So many options open up if you have multiple properties. For me right now, I work a steady remote tech job and ALSO have a real estate license on the side. So I don't need cash flow to live off properties at the moment, although it would be nice. I also picked up a sweet commission from my last purchase.

Also, of course, you are right: the smaller the down payment, the longer you have to wait before you can cash flow once rented. Solutions are either to: 1. wait a little longer 2. Remodel thoughtfully to drive up rents 3. Airbnb/VRBO.

The place I'm in currently is small, it's downtown in a small town which gets a decent amount of tourists, so I'm looking at airbnb. The kitchen is pretty messed up(sellers completely failed some DIY jobs and they need to be redone), so when I remodel it'll look new and hopefully net a good airbnb rate. I'll do some amount of the remodeling myself.

Do you personally manage (field renter complaints, fix broken appliances, etc.) your properties or have a property management company do it for you?
I work with the tenants directly, and make sure to generally be as charismatic as possible with them particularly once they have been there a while. If your tenants don't resent you, the whole relationship is easy. I fix things that are easy to fix, I hire out the more difficult/labor-intensive parts.

Also, one thing that benefits me from living in an expensive area is that you probably only need a few properties to make an upper-middle-class nest egg. I follow the site biggerpockets.com which has quite a few people that invest in large quantities of modestly priced housing. A lot of them generate huge cash flow but they'll have 50-100 units between houses, duplexes, apartments, etc. There is no way I would possibly manage all of that myself.

Also, those attractive financing terms are you YOU to occupy the place as your principal residence, not to buy it as an investment property.
That's why I legitimately move in and live there for a year and satisfy the owner-occupant requirement. The loan doesn't "become" an investment loan when you move out after a year.

Further, for U.S. tax purposes, you want to make it your principal residence for at least 2 of the 5 years prior to sale.
So... buy in places that will be attractive for a long time and don't sell, at least not for decades.

Finally, lenders will look at your total debt burden and not net rent you expect to receive. So you can do this, but then you are going to hit a wall in the amount you can borrow pretty quickly.
Generally, lenders won't lend past a debt-to-income of 50%. My lender uses Fannie/Freddie loans and was able to take the leases from the other properties and offset the debt burden. If you don't offset the loans, I'm at something like 94% debt-to-income.

I also made a commission off my last purchase since I have an active real estate license. With Freddie loans you can even use the commission in your down payment, so you can potentially put 5% down, collect a 3% commission which can be plowed directly into the down payment, and you don't even pay income tax on the commission until the day you sell. This means you would be able to go in with 2% down, but 5% equity upon closing. Unfortunately, Freddie does have stricter DTI requirements, so for this purchase I had to just put the 5% down and take the 3% as a standard commission.

Funnily enough, the automatic platforms that auto loan companies use kept rejecting me for a $34,000 car($600/mo payment), but then my lender approved me for a $700,000 house($3,000/mo payment). When I spoke with a human at an auto lender, they asked for documentation of the rents received, leases, tax returns, etc, and then approved that loan too.
Typically for investment properties traditional lenders will lend a max of 75% loan to value ratio and may charge a higher interest rate since it doesn't qualify under Fannie or Freddie programs aas a conventional loan.
Yeah, that's why I go to such efforts to get owner-occupant loans and stay away from investment property loans.
 

Hypno

Crow
So... buy in places that will be attractive for a long time and don't sell, at least not for decades.

No, I didn't say that. For U.S. tax purposes, you can avoid taxes on the gain on a property if it was your principal residence for 2 of the prior 5 years. You probably want it to be your principal residence to start in order to get favorable financing, so buy a house, live in it for 2 years, and sell it within 5, is a tax efficient strategy. Since you have 5 years, consider buying houses that need work and fix them up.


Witih current rates of actual inflation north of 10%, doubling your money in 5 years is realistic, even before any gains due to upgrades or repairs.

If you go past 5 years, you might use the over-55 exemption, https://www.investopedia.com/terms/o/over-55-home-sale-exemption.asp.
 

cosine

Woodpecker
We're speaking a different language. You meant to live in it for 2 years instead of 1, in order to nullify capital gains, or that's what I think you meant.

My point was that ideally you find something that you don't ever want to sell. You just hold forever, borrow more against it, etc.

Another route is 1031 of course.
 

Papaya

Peacock
Gold Member
We're speaking a different language. You meant to live in it for 2 years instead of 1, in order to nullify capital gains, or that's what I think you meant.

My point was that ideally you find something that you don't ever want to sell. You just hold forever, borrow more against it, etc.

Another route is 1031 of course.
1031 exchange is for investment property only and any money you take out / touch is taxed at capital gains rate.

2 out of the last 5 years in order for tax exemption up to $250k of boot ("profit") as individual. $500k for married couple

But yes leveraging equity is a good way to "level up". As always you need to know what youre doing
 

Hypno

Crow
We're speaking a different language. You meant to live in it for 2 years instead of 1, in order to nullify capital gains, or that's what I think you meant.

My point was that ideally you find something that you don't ever want to sell. You just hold forever, borrow more against it, etc.

Yeah, I was just clarifying that you don't need to live in it forever to avoid capital gains.
 

Zach

Sparrow
Catholic
Opinion on real estate with rates going up?
Worth holding out or buying?

Well if interest rates do indeed start going up (not sure if this will actually happen anytime soon) then housing prices should somewhat start coming down. So if you get a higher rate you should at least make up for some of that with a lower purchase price, but theres a lot of f**kery afoot in the economy and real estate inparticular so its hard to say, really.

If you need a home to live in, may as well go for it. Not sure I'd be interested in investing in RE much more than a primary residence right now though.
 

Hypno

Crow
What Zach said. If you buy a house you can get a fixed rate mortgage so rate increases don't directly affect you.

But if rates rise significantly, it makes houses less affordable for others, which lowers demand and prices for houses.

However, the Fed really can't raise rates much without tanking the economy, and there is pent up demand for houses and constrained supply so I'm not too worried. I think the safest bets are affordable starter homes or townhouses and large, updated luxury homes in the far suburbs or exurbs. Mid to higher end homes are more at risk to rising rates because the higher price point means there are fewer people who will be able to qualify to buy them if rates rise significantly.
 

Dilated

Woodpecker
Other Christian
What Zach said. If you buy a house you can get a fixed rate mortgage so rate increases don't directly affect you.

But if rates rise significantly, it makes houses less affordable for others, which lowers demand and prices for houses.

However, the Fed really can't raise rates much without tanking the economy, and there is pent up demand for houses and constrained supply so I'm not too worried. I think the safest bets are affordable starter homes or townhouses and large, updated luxury homes in the far suburbs or exurbs. Mid to higher end homes are more at risk to rising rates because the higher price point means there are fewer people who will be able to qualify to buy them if rates rise significantly.

Agree on the Fed. They’re in a tough spot. I think they err on having too much inflation rather than causing a massive slowdown/recession. Also, they can lie and explain away inflation better than they can a recession (they’re doing that right now).

I would pull the trigger on the house. Lock in your low fixed rate. No more than 20% down payment. Invest in income producing assets. Have an end goal of your assets producing 2X your wage income. You now have locus of control.
 

Zach

Sparrow
Catholic
What Zach said. If you buy a house you can get a fixed rate mortgage so rate increases don't directly affect you.

But if rates rise significantly, it makes houses less affordable for others, which lowers demand and prices for houses.

However, the Fed really can't raise rates much without tanking the economy, and there is pent up demand for houses and constrained supply so I'm not too worried. I think the safest bets are affordable starter homes or townhouses and large, updated luxury homes in the far suburbs or exurbs. Mid to higher end homes are more at risk to rising rates because the higher price point means there are fewer people who will be able to qualify to buy them if rates rise significantly.

Big agree on the smaller home thing. If you can find even a 2 bed/1 bath ~1200 sqft home, with an unfinished basement, that is probably the best opportunity for the least $$. Finish the basement and double the sq footage, and its now a 3 bed/2 bath that everyone wants, and is worth at least 100k more. You'll notice these small homes on 1-2 acres in the exurbs 1-2 hrs from major cities are going for sometimes ~$200 sqft. Look at a McMansion 4 bed/3bath in a exurb and they're like ~120 sqft. They just aren't as profitable/desirable.
 

Hypno

Crow
I don't know that square footage is the way to look at it. Its simply the aggregate purchase price. There are more people who can afford the lower aggregate price, so more demand. Same phenomenon translates to higher rents too.
 

Hypno

Crow
Rates on a 30 year mortgage have ticked up from around 2.75% to about 3.75% - 3.875% over the last year or so.

Home prices are up 20%-40% in the last year or two, and the rise in rates hasn't reduced prices (although it may have temporarily slowed the price incresaes).

Rents were lagging home prices but now are up around 30%, which makes sense because they are a function of home prices.

The beautiful thing about real estate as an investment is there is a one-way option on rates. If rates go down, say from 3.875 to 2.75, you can refinance and lower your monthly payment (while the rent you charge stays the same, the savigns goes into your pocket every month). If rates go up, it doesn't affect you because your rate on the mortgage is fixed.
 

The Beast1

Peacock
Orthodox Inquirer
Gold Member
I feel really blackpilled on the whole home buying thing. Seems nearly impossible to get the funds together with three kids and a wife. I have a good job but it feels so far away. Any advice/tips?
How much do you have to put down right now and how much is your combined yearly income?
My story: Wife was pregnant, I was working as a contractor. Our yearly income was $80k and this was in California.

We had about $20k saved up to put down. I went to loandepot.com and they laughed and said give us $10k. I bought a condo in a quiet suburb. 3 bed, 2 bath, a bonus "den" room, galley kitchen, and living room. About 1200 square feet. Boomer wanted $390k, I was like, let's do $385k. In retrospect, should have done $380k. Boomer bought the place for $360k back in July of 2008 (ouch).

We got approved for the loan at $375k. Over a year later, currency debasement has made our eQuItY somewhere around $90k-ish. I should feel wealthier, but I feel bad that that is what inflation is. The remaining $10k went to ripping up nasty old carpet and replacing it with vinyl fauxwood flooring and a washer/dryer hookup.

We need to redo the kitchen and bathrooms and have zero cash or time to make it happen.

Just go to loandepot.com, see how much loan you can be approved for, and try to buy something, anything.

My family almost got priced out of Los Angeles. My barber bought an epic house for roughly the same that I paid for my condo, but he now has to commute from San Bernadino to Burbank. He at least has a real house.
 

septuigintlemen

Pigeon
Orthodox
How much do you have to put down right now and how much is your combined yearly income?
My story: Wife was pregnant, I was working as a contractor. Our yearly income was $80k and this was in California.

We had about $20k saved up to put down. I went to loandepot.com and they laughed and said give us $10k. I bought a condo in a quiet suburb. 3 bed, 2 bath, a bonus "den" room, galley kitchen, and living room. About 1200 square feet. Boomer wanted $390k, I was like, let's do $385k. In retrospect, should have done $380k. Boomer bought the place for $360k back in July of 2008 (ouch).

We got approved for the loan at $375k. Over a year later, currency debasement has made our eQuItY somewhere around $90k-ish. I should feel wealthier, but I feel bad that that is what inflation is. The remaining $10k went to ripping up nasty old carpet and replacing it with vinyl fauxwood flooring and a washer/dryer hookup.

We need to redo the kitchen and bathrooms and have zero cash or time to make it happen.

Just go to loandepot.com, see how much loan you can be approved for, and try to buy something, anything.

My family almost got priced out of Los Angeles. My barber bought an epic house for roughly the same that I paid for my condo, but he now has to commute from San Bernadino to Burbank. He at least has a real house.
This is good advice thanks! We are working on the down payment right now. Can I ask why they talked you down to 10k? Do you have exceptional credit?
 
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