Real Estate Investments

Rock Steady · 04-12-2006, 01:19 AM

I've been trying to stay out of this, but it just seems more compelling all the time. The banks give you credit for 75% of the rental fees as income towards buying a property. So if you put down 25% in cash, adn be patient, you can slowly build an empire. Especially, in CA.

Online I found an interesting 9 Unit Apt complex next to a great intersecition with a train station and major shopping mall. The property is about 2 miles from where I work.

The rents for these 1 Bdr 900 sf apts go for about $1,200 / mo. The place lists for $1,610,000. Considering that here, single family homes of 2,000 sf go for $950,000, this seems like a steal. What am I missing?

Seriously, folks. At this point I have to start thinking about investing my home equity. I have no mortgage on a $950,000 silicon valley home. I think I should get a $500K mortagage, use that as a down payment on the $1.6MM 9-unit Apt complex, and grow from there.

Beestie · 04-12-2006, 03:07 AM

Well the monthly potential gross income is 10,800 and the interest expense is 7,500 so even if the reductions (vacancy, maintenance, taxes, management, etc.) amount to 30% of PGI, you are still at breakeven cashflow wise not even considering deferred depreciation.

And if you put 25% down you can probably get a "stated-income" or "low-doc" loan where you just tell the lender whatever you want to get the loan. They figure if you are going to risk 400 grand then you'll be diligent about servicing the loan.

From what you have indicated, its an absolute steal. But, do your homework. If the price is substantially less than similar units have traded for in the past, that's a red flag. Also, check to see if there are any environmental problems pushing the price down. Also, check the county master plan to make sure that the unit is not slated for an emminent domain acquisition in the 10-year horizon. You should also review the rent rolls to compare the occupancy duration to similar units and be wary if the average per tenant is more than 20% less than comparables.

I'd retain a commercial real estate agent and submit an offer immediately but allow a generous "due diligence" period which essentially ties up the property while you figure out if its as good as it looks.

Cyclefrance · 04-12-2006, 04:50 AM

Buy-to-lets have really taken off over here with cheap loans and a period of sustained growth in the hosuing market. The things to keep in mind are:

1. These are generally long-term investments - but that's not saying that in a rising market a quick turnround is not possible.
2. You can hit bad patches between rentals - keep in mind that at the end of a rental contract, if the tenant moves on then you may suffer a period of no-income while finding a suitable replacement tennant. During this time you will still have to meet your outgoings.
3. The rental market could weaken - if the market becomes over-supplied then rental rates would drop - calculate how big a fall you could weather and for how long as part of your assessment.
4. These contracts aren't liquid - in other words if you do need to get out of an ownership deal it may take you weeks/months to do so - factor this in.
5, Letting can be a minefield - better to use a reputable agent, rather than end up with a tenant who won't pay and who won't move out either - but remember that letting agents don't come cheap either...
6. Don't forget the tax on your income after meeting expenses - this could reduce your expected return substantially.

All the above said - bricks and mortar have generally proven to be good long-term investments, and the attraction of the buy-to-let scheme is that you gain two-fold over time - rental income plus capital value growth. Get the right property/ies and tenants on board and you should maintain a smile on your face throughout....

Rock Steady · 04-12-2006, 01:23 PM

Thanks for the discussion, guys. I'm not going to act on this particular property because I am not yet prepared to be a wise buyer. I am still learning about much of this.

I am figuring on $9,913/mo for a 100% mortgage. The down payment would be a mortgage on my house. So, I have to consider that to be part of the investment capital. At 9913 versus 10800 it becomes much less clear. Vacancy becomes more of an issue. Although, I forgot about depreciation. The tax consequences often make it worthwhile.

I never buy those "For Dummies" books, but I just bit the bullet on this one. "Real Estate Investing for Dummies". Reminds me that I am a novice outside my area of expertise.

Clodfobble · 04-12-2006, 10:23 PM

Don't forget to take into account the amount of time and attention that renters can demand from you. It can easily turn itself into a full-time job.

Beestie · 04-13-2006, 12:56 AM

Depreciation only helps if you can use it now which most people can't. You have to roll it forward until you sell the property and use it to defer the gain on sale.

A 100% mortgage is a very bad idea unless you have plenty of cash to back it up in which case its a very good idea.

And, like Clodfobble points out, tenants are a demanding lot. You absolutely have to hire a mgt co to run the property.

04-12-2006, 01:19 AM	#1
Rock Steady Day Tripper Join Date: May 2005 Location: Silicon Valley Posts: 784	Real Estate Investments I've been trying to stay out of this, but it just seems more compelling all the time. The banks give you credit for 75% of the rental fees as income towards buying a property. So if you put down 25% in cash, adn be patient, you can slowly build an empire. Especially, in CA. Online I found an interesting 9 Unit Apt complex next to a great intersecition with a train station and major shopping mall. The property is about 2 miles from where I work. The rents for these 1 Bdr 900 sf apts go for about $1,200 / mo. The place lists for $1,610,000. Considering that here, single family homes of 2,000 sf go for $950,000, this seems like a steal. What am I missing? Seriously, folks. At this point I have to start thinking about investing my home equity. I have no mortgage on a $950,000 silicon valley home. I think I should get a $500K mortagage, use that as a down payment on the $1.6MM 9-unit Apt complex, and grow from there. __________________

04-12-2006, 03:07 AM	#2
Beestie -◊\|≡·∙■·∙≡\|◊- Join Date: Feb 2003 Location: Parts unknown. Posts: 4,081	Well the monthly potential gross income is 10,800 and the interest expense is 7,500 so even if the reductions (vacancy, maintenance, taxes, management, etc.) amount to 30% of PGI, you are still at breakeven cashflow wise not even considering deferred depreciation. And if you put 25% down you can probably get a "stated-income" or "low-doc" loan where you just tell the lender whatever you want to get the loan. They figure if you are going to risk 400 grand then you'll be diligent about servicing the loan. From what you have indicated, its an absolute steal. But, do your homework. If the price is substantially less than similar units have traded for in the past, that's a red flag. Also, check to see if there are any environmental problems pushing the price down. Also, check the county master plan to make sure that the unit is not slated for an emminent domain acquisition in the 10-year horizon. You should also review the rent rolls to compare the occupancy duration to similar units and be wary if the average per tenant is more than 20% less than comparables. I'd retain a commercial real estate agent and submit an offer immediately but allow a generous "due diligence" period which essentially ties up the property while you figure out if its as good as it looks. __________________ ♠ ♥ ♣ ♦

04-12-2006, 04:50 AM	#3
Cyclefrance Pump my ride! Join Date: Aug 2005 Location: Deep countryside of Surrey , England Posts: 1,890	Buy-to-lets have really taken off over here with cheap loans and a period of sustained growth in the hosuing market. The things to keep in mind are: 1. These are generally long-term investments - but that's not saying that in a rising market a quick turnround is not possible. 2. You can hit bad patches between rentals - keep in mind that at the end of a rental contract, if the tenant moves on then you may suffer a period of no-income while finding a suitable replacement tennant. During this time you will still have to meet your outgoings. 3. The rental market could weaken - if the market becomes over-supplied then rental rates would drop - calculate how big a fall you could weather and for how long as part of your assessment. 4. These contracts aren't liquid - in other words if you do need to get out of an ownership deal it may take you weeks/months to do so - factor this in. 5, Letting can be a minefield - better to use a reputable agent, rather than end up with a tenant who won't pay and who won't move out either - but remember that letting agents don't come cheap either... 6. Don't forget the tax on your income after meeting expenses - this could reduce your expected return substantially. All the above said - bricks and mortar have generally proven to be good long-term investments, and the attraction of the buy-to-let scheme is that you gain two-fold over time - rental income plus capital value growth. Get the right property/ies and tenants on board and you should maintain a smile on your face throughout.... __________________ Always sufficient hills - never sufficient gears

04-12-2006, 01:23 PM	#4
Rock Steady Day Tripper Join Date: May 2005 Location: Silicon Valley Posts: 784	Thanks for the discussion, guys. I'm not going to act on this particular property because I am not yet prepared to be a wise buyer. I am still learning about much of this. I am figuring on $9,913/mo for a 100% mortgage. The down payment would be a mortgage on my house. So, I have to consider that to be part of the investment capital. At 9913 versus 10800 it becomes much less clear. Vacancy becomes more of an issue. Although, I forgot about depreciation. The tax consequences often make it worthwhile. I never buy those "For Dummies" books, but I just bit the bullet on this one. "Real Estate Investing for Dummies". Reminds me that I am a novice outside my area of expertise. __________________

04-13-2006, 12:56 AM	#6
Beestie -◊\|≡·∙■·∙≡\|◊- Join Date: Feb 2003 Location: Parts unknown. Posts: 4,081	Depreciation only helps if you can use it now which most people can't. You have to roll it forward until you sell the property and use it to defer the gain on sale. A 100% mortgage is a very bad idea unless you have plenty of cash to back it up in which case its a very good idea. And, like Clodfobble points out, tenants are a demanding lot. You absolutely have to hire a mgt co to run the property. __________________ ♠ ♥ ♣ ♦

04-12-2006, 10:23 PM	#5
Clodfobble UNDER CONDITIONAL MITIGATION Join Date: Mar 2004 Location: Austin, TX Posts: 20,012	Don't forget to take into account the amount of time and attention that renters can demand from you. It can easily turn itself into a full-time job.

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