"Bobby_M" <rmierzej[at]telcordia.com> wrote in message
news:1141762403.001497.196950[at]j52g2000cwj.googlegroups.com...

- quote -

A lot of people here focus on stocks and mutual funds, as you can see, but I
think some real estate investment in addition to your other holdings is a
good idea, provided you do it long term and don't expect a big profit
overnight. Also take a look at dividend reinvestment plans (DRIPs) if you
haven't already done so.

One point I would like to make clear is people should not be
'investing' in a property if it can not carry all of its own running
costs. Cash flow projected at 1.25 to 1.5 times the monthly payment.
You will then have the margins to cover vacancies, maintenance,
property management, etc. It is also suggested that property management
be hired out rather than be something you take on directly.

For a more complete version of the above, take a look at "The Weekend
Millionaire's Secrets to Investing in Real Estate: How to Become
Wealthy in Your Spare Time". You can find it on Amazon if you need the
details for a search at the library or bookstore.

For those in markets where rentals do not even cover the mortgage it
would be speculation if you buy a rental property and do not increase
the down payment until the property cash flows at the 1.25 to 1.5
level. Many folks have made money speculating on appreciation. I just
want people to be clear that they are speculating and there is downside
risk when the cash flow is negative and the appreciation stalls or
falls.

BTW - For those who are concerned about RE being a part time job. Fine.
RE is not for you. The book explains how a person can do both even when
working full time with lots of commitments. Most will still stick to
other investments. Choice is a great thing. It also might be true that
the returns achieved by one investment are lower than the other so
picking based on what is less work is not always going to produce the
best returns. The choice is personal and not fully based on a review of
best returns.

John Corey

<BreadWithSpam[at]fractious.net> wrote
re having a mortgage on a primary residence
- quote -

Another view:
But houses are consumed. They wear. Homes can be money pits,
because of the costs of maintaining them and property taxes.
Living in an apartment and investing money in stocks may
indeed pay off better than buying a house and having less
money to invest in stocks.

See the 1998 Wall Street Journal article on this at
http://www.southcoasttoday.com/daily...8/t04ho127.htm

To help ensure a house for primary residence purposes is a
good investment, one should probably buy as little and as
new a house as possible.

My point is to discourage people pining for home ownership
simply because the Jones have one and because they also
think it's a good investment. That's not at all necessarily
so.

Buy a house because you want the space and quiet and ability
to call your own shots as far as what goes in it. Be
prepared to pay for this.

"John" <john.corey[at]gmail.com> writes:

- quote -

I'm saying it's not 'bad debt' like typical consumer debt
(ie. cars, teevees, etc. - it's not for something that's consumed)

- quote -

It does.

- quote -

Over the long term, yes. Over the short term, that appreciation
may not be as fast as the interest on that debt, nor would rental
properties necessarily generate enough cashflow to make up
the difference without the owner running into cashflow problems.

- quote -

It can be. What are you trying to say here? (I know, you've
recommended real estate as an investment in several other
posts. For some few folks, it may be a great idea. For most
folks, especially those who don't want to effectively be
running a small business in addition to their current
employment, it's not.)

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When you say that debt for a primary residence is not 'bad debt'
because it is an appreciating assets should we assume that this is the
same as saying that real estate in general appreciates? Meaning that
even residential properties that are not your primary residence are
just as likely to appreciate?

It seems to be a broad statement implying that over a reasonable time
frame RE always goes up. If that is the case then it sounds like
something worth investing in.

John Corey

PS. When I was a young guy, just starting out, living in the SF Bay
Area, new child, etc. I did find that investing and working full time
was harder than just working.

Will Trice <wwtrice[at]paragondynamics.com> writes:

- quote -

Yes, that's true, but it's more complicatd than that.
What I was trying to get across is more obvious when
comparing a deductible IRA versus a Roth IRA (or a
401k v. a Roth 401k) where both have the same max
contribution limit - if you get up to the limit with
after-tax dollars, you've protected a lot more future
after-tax income then if you get up to the limit with
pre-tax dollars.

That all said, I recommend to the OP (and almost anyone
else who can afford it) to max out both or all qualified
accounts before even thinking about prepaying his
mortgage or investing in real estate or even funding
college accounts. So the Roth v. 401k question is moot-
max them both.

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BreadWithSpam[at]fractious.net wrote:

- quote -

Er? Your typical 401(k) has much higher contribution limits than a
Roth, yes?

-Will

Bread,

Thanks for you comments which certainly inspired some additional
thought.

Some new things I'm actually considering:

Continue to pay extra $500 principal on the house per month, I just
enjoy knowing it will be paid off much sooner.
I have a 4% raise coming next month and a promotion of unknown benefit
%-wise so I will immediately open a ROTH for both my wife and I and max
that out using that money and portions of the 102k in cash.

I was mostly holding that 102k for a possible real estate flip. I am
extremely handy with home improvements and it was actually how I
managed to profit quite a bit on my first residence (aside from natural
appreciation). Of course, I also lived there during the improvements,
but it doesn't mean I can't do it with another house. At this point I
do think the homes in my area have appreciated way too quickly for me
to be able to pull it off and I may just allocate most of that money
into mutual funds at least for now moving amounts into the ROTH as
dictated by annual limits. I had some reasonable piece of mind having
102k in a completely safe place and 4.7% apy is certainly not the worst
return out there. Still, I realize I can beat it.

I think I'll leave the 401k contributions at 8% (2% over company
match).

Bobby

"John" <john.corey[at]gmail.com> writes:

- quote -

Very much agreed.

- quote -

Mortgage on one's primary home is *not* bad debt inasmuch as
the following is true about it: (a) it's an appreciating asset,
unlike consumer-debt items like TVs or cars; and (b) you
need a place to live - that place can be paid for in any of
the following means: (i) rent; (ii) buy and mortgage (which
effectively means paying rent on the money used to buy it);
or (iii) buying with cash (or paying down one's mortgage) -
which also has an ongoing cost just like rent - if you pay
with cash, you have opportunity cost - that capital cannot be
used for anything else - if you use, say, $300k to buy a
house, that $300k cannot be earning or growing otherwise -
just because you've paid off your house, you are not living there
for free, not by any stretch.

- quote -

And there are plenty of folks who've lost heaps of dough in
real estate, as well as plenty who don't account for the
value of their own time and effort in those investments.
Just like the long-term records of mutual funds, there's
a huge survivorship bias in here to be wary of.

RE is potentially a great business to be in. But it's very
much not for everyone and, as I said elsewhere, a young guy
with a full time job and a new child may want to use his free
time in other ways besides managing a real estate investment.

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"Bobby_M" <rmierzej[at]telcordia.com> writes:

- quote -

You need to look at your *marginal* tax rate, not your overall
"effective" rate. The marginal rate is the rate that applies
to your next (or last) dollar of income. It's not 8%. It's
higher.

- quote -

That makes a huge difference - the only part of your
mortgage interest that is then effectively deductible is
the amount by which is exceeds your standard deduction.

I'm going to make up numbers here:
If you have a standard deduction of, say, $10k
property taxes of $8k and State income taxes of $4k,
then every cent of that mortgage interest benefits because
you'd itemize anyway - ($8k+$4k).

However:

Suppose std deduction of $10k, prop tax $4k, state tax $3k -
in the absense of your mortgage, you'd take that standard
deduction. And if you had mortgage interest of as much as
$2999, you still would take the standard deduction - so
that first $3k of mortgage interest doesn't do you any good
deduction-wise - you get that deduction anyway. If you have
$4k of mortgage interest, then only $1k really effectively
gets any advantage of being deductible.

I wouldn't make myself crazy over these calculations.

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"bo peep" <cowartmisc1[at]yahoo.com> writes:

- quote -

We've been through this many times. Assuming the same marginal
tax rate now and at retirement, there is no difference whatsoever
between the spendable end product for a Roth versus a 401k or
regular IRA. The ONLY difference - assuming the same rate
of return on the investment asset and assuming the same tax
rate - the only difference is that a Roth lets you put more
money away in the first place.

Other than the amount that one can protect, having both
Roth and non-Roth retirement accounts gives a form of
tax *diversification* - because if rates go up, the Roth
is better and if rates go down (ha!) regular IRA/401k is
better - so if you have assets in both, you hedge that bet.

Check the archives. Should be searchable on Google Groups.



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"Bobby_M" <rmierzej[at]telcordia.com> writes:

- quote -

Everyone's comfort level with debt is different, but if it
were me (and, actually, it is me), I'd max out the 401k
as well as a Roth or even non-deductible regular IRA before
making extra paydowns on the house. You've got lots of
equity in the place and a loan which is about as cheap as
you are ever going to be able to borrow money. The greater
proportion of your assets you can shove into qualified
accounts (401k, IRA, etc), as far as I'm concerned, the better.

- quote -

That's a big chunk of cash which is basically losing you money.
How serious are you about that investment property? Are you
actively looking? How soon do you expect to make that purchase?
It's basically costing you at least $2000/yr to have that sit there
(ie. the difference between the interest it's earning and the
interest you're paying elsewhere - though I'm not sure I'd
pay down the mortgage with that cash as an alternative, either -
I'd lean towards other stock investments which should do better
than your mortgage in the long run and which would add to your
portfolio diversification).

If you are really going to use that cash soon, then it's fine
to leave it where it is, so long as you do so fully aware of
the cost.

- quote -

Fine.

- quote -

I'd consider that $14k your play money, not really "investments"
per se or part of specific long-term financial plan. Nothing
wrong with that, and it's probably a good outlet for your
energy/enthusiasm for stock/sector picking. Keep the play account
a relatively small part of your assets and it's fine.

- quote -

At 30 with about half a million in assets, a steady plan where
you're living below your income, have a solid mortgage and home
and are steadily adding at a decent rate to your retirement
plans. You're doing great.

- quote -

Owning rental property is work. A lot of work. It's fully a
practice of running a business. It can pay off - sometimes
very well - and it can also lose money. I have way too much
else to do with my time and life than manage real estate.
It may be just right for you, especially if you can find a
good deal on property not too far from where you live and
you are handy enough to do maintenance and repairs. But
think carefully about how much time it'll take, how much
stress it may add, and whether you'd rather, say, spend
that time with your young child and family.


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John -

Thanks very much for your recommedations on books. Having lived in LA
during the 70's and again in the 90's, I've heard odds and ends, but I
think having an authoritative source is necessary to begin to see how
the pieces relate. Very good point you make about setting things up
from the outset with precise contracts, as a business. You write very
knowledgeably, but there is far too much to cover just posting - and
you allude to that very well. (A friend in LA started with one rental
property, and last I talked to him, he had five. He learned and built
up over the years. I've also heard horror stories about landlords stuck
with extended families of fourteen illegal aliens living rent free for
six months in a two-bedroom apartment, due to California laws that were
designed to prevent unjust and sudden evictions of legitimate tenants
by landlords who wanted to skirt rent control.)

By analogy, in stocks, many talk about their portfolio and performance,
but if you want to do a good job, your 'portfolio' will include at
least twice as many stocks that you have researched, but do not own.
The stocks you do own, will include a list you may sell. The 'presently
owned' portfolio is just the current surface. In case you are
interested, the books I always recommend for stocks are Benjamin
Graham's "The Intelligent Investor" (and or the prior edition,
"Securities Analysis"), and a good introductory accounting text that
covers interpretation of financial statements, with specifics on
shareholder's equity. Most texts will cover that, but some place more
emphasis on it that others.

Thanks again for the books! Even if I decide not to do anything in real
estate, I'll read them.

To claim that one bad tenant after 17 years of being a landlord means
that it is not for you seems a bit rich.

In my personal experience the rules that govern the landlord/tenant
relationship are very specific to a state or city. Hence observations
in one market might not be useful for another market. Hence some of
what I will say might not work for NYC.

I have found that most of the nightmare tenant issues during an
eviction are down to poor procedures on the landlord's side. A landlord
needs to take the view that a tenant might stop paying the rent and
therefore set up defensively. This covers full screening and background
checks, clear rules and regulations, clear and legally correct rental
contracts for the local market, quick responses to actions outside the
allowed rules (late pay, noise, etc) and full but fair legal process to
pursue claims. Just like you can not tell your banker you will pay late
this month because of problems at home. A tenant gets the same
treatment. Notice to evict or formal warning as appropriate per the
regulations on the first day there is a violation.

You can also pay a tenant to leave or otherwise make it easier for them
to go than fight. It is better to have a place vacant than to rent to
someone who will be a problem. It is better to lower the rent and
attract multiple quality candidates than it is to hold out for a higher
rent and suffer vacancies (1 month's rent lost is the same as a year of
rent at 86/100 of the original asking rent).

Being a landlord is a business. That means that there are acceptable
losses. If someone chooses to invest in equities or bonds that just
means that the business or entity masks the issues and maybe offers a
return that is adjusted for that masking of the issues. If you have
direct ownership of a rental property you have a much greater upside on
average and I think manageable downside. Stuff does happen. What you do
and how well you set things up prior to the event is the key.

At some level I choose 'more hassle' now so that when I am old and less
able to function I can have no hassle and a very comfortable lifestyle.
I also do not see the hassle as being significant compared to the
rewards when I look at what other activities take in time and effort
vs. the rewards they produce. Even investing in the stock market
requires time to be invested or an acceptance of the average.

John

As to books to read.

Two that I think are classics (one is not old enough for the label but
indulge me a bit).

Nothing Down - Robert Allen. A very good book for explaining the
mechanics of creative deal making and how you can minimize your
personal cash contribution to a real estate investment. The book first
came out in the 1980's or very late 1970's. There have been 2 revisions
I believe. Very likely that a library will have a copy. Any version
will be fine.

The Weekend Millionaire's Secrets to Investing in Real Estate: How to
Become Wealthy in Your Spare Time

The Weekend Millionaire's Secrets to Investing in Real Estate: How to
Become Wealthy in Your Spare Time - Mike Summey & Roger Dawson. There
are two messages in the book that are important. The first is that you
can invest in real estate while holding down a full time job or
otherwise dealing with a busy schedule. You do not need to invest a lot
of time quickly. Steady application of time over a period of months and
years will make a world of difference. One of the authors was able to
retire after 10 years of part time investing. 6-8 hours a week is the
maximum time needed. Maybe some will see this as a part time job.
Others will see it as less TV time on the weekend. Very few part time
jobs will make you a millionaire after 10 years.

The second important message (and maybe different from the point of
Nothing Down) is to focus on cash flow and not on appreciation. When
you have cash flow the property support themselves. They pay for their
own existence. Mike says that an investor should not do his own
property management as that is not where you make the money. If a
property cash flows it will produce enough surplus cash for all
repairs, vacancies, property management, taxes, insurance, etc. Cash
flow keeps you in the game. If appreciation kicks in then you get a
bonus. If the tenants are paying you to own the properties you have a
better chance of doing really well if appreciation happens compared to
sitting on the sidelines figuring the best days for real estate are in
the past.

This book has been out about 2 years so you might have to buy a copy
from Amazon or a bookstore. If you are lucky it will be in a library.

There are other books I could recommend. The two above are what I think
people should start with.

John Corey

PS. I recently read of a retiring military pilot (F15 - two tours in
Iraq). He and his family are picking a place to live. He has 10 rental
properties that have a combined equity of $1,000,000 but no personal
home that they own. The guy is 43 if my memory is correct. He will
restructure the portfolio so the family can pull out some cash (sale or
refi) so they can live in a nice area that is above what he could
afford otherwise. He figures he owes some time to the family after the
15 year military career. His story is on www.creonline.com as he was
asking for suggestions on the best way to restructure his assets to
fund the new family home. I think he posted under the main (general RE)
forum.

one thing i learned here in new york city is rental real-estate is
great to do...that is until its not!...for 17 years now i owned a co-op
in new york and rented it out..it was wonderful ,then darkness
fell....a tenant got divorced and the rent stopped..after months of
court and legal fee's and lost rent she was out...8,000 in damages and
no one to collect from..i wouldnt be a landlord again for all the tea
in china.....

John - Really good discussion of RE and debt! (I love good logic!)

You point out: "There is a lot more to real estate. You asked about
leverage and the risks. While not the most focused answer I think this
provides more room for a healthy discussion." I wonder if you have, or
know of, and would be so kind as to recommend a couple of books on RE,
from beginner to comprehensive? (It will take me some reading to get up
to a healthy discussion level - I'm passingly decent with numbers and
finance, but green on RE. Thank you, already, for your informative
posts

Skip,

Leverage works both ways so it can be very negative if there is a
problem servicing the debt.

The reason that banks charge some of their lowest interest rates for
loans secured by residential real estate is because low default risk.
Not zero default risk; just low default risk. The banks are not dumb
and they price the mortgage rates at the lower end of the risk/reward
scale when compared to other possible loans to consumers and small
businesses. I am ignoring the large players and the big commercial
deals as they are priced slightly differently.

The biggest assumption about investment property is the need for
generous debt coverage. Something like 1.25 to 1.5 times the debt
service to income. That way you have extra income above the debt
service for maintenance, taxes, insurance, vacancies, property
management, etc.

Cash in the bank is worth a lot more than equity in a piece of real
estate. Hence I would rather have a loan on a property and cash in the
bank than a free and clear property. Bankers like to lend when you do
not need it and want to hold back when you are pressed. Hence my view
is to use leverage and bank some cash rather than drive for a free and
clear situation.

You can also lower the risks associated with residential real estate by
having more rather than less. There are some economy of scale factors
and the impact of a vacancy goes down (1 unit vacant out of 10 is a 10%
loss in income vs 1 unit out of 1 vacant).

There is a lot more to real estate. You asked about leverage and the
risks. While not the most focused answer I think this provides more
room for a healthy discussion.

BTW - Debt on a personal residence is not the same as debt on a rental.
One is a personal liability with no income and the other is a tool for
a business with the tenant being the person who pays the costs
associated with the debt. Maybe a simple view but I am trying to
highlight that some people want a free and clear home why the same
logic would not be as rational for a rental.

John Corey

PS. I have done some scouting in SC. There are deals to be found there
and they will cash flow.

On Wed, 15 Mar 2006 07:12:02 -0600, "John" <john.corey[at]gmail.comwrote:

- quote -


I take it you like real estate. <grin
Do you consider that there are any negatives to leverage, and if so,
what are they?


-HW "Skip" Weldon
Columbia, SC

Bobby,

Investing some physical time into real estate can make a dramatic
difference in ones long term net worth. Similar to getting an advanced
degree that raises ones lifetime income. Hence I would not use the
argument that time is required to discount the value of directly
investing real estate (point raised by someone else). Put another way,
investing is not required to be a passive sport.

If you directly invest in real estate it will take a bit of study. You
will come to realize that there are many ways to invest beyond just an
REIT or being a hands-on property manager while holding down a day job.

A quick example of an almost passive RE investment that is more like a
bond than owning a rental. You can lend funds to investors and earn 15%
annually. You will have a secured 1st position lien on the property at
65% LTV or less. You get a check mailed to you each month for 12 months
or less before the loan is paid off. You would be need to in a new loan
if you wanted to continue. Lots of people are unaware of the option so
you will not hear sage advice from many of the folks who are
traditional (read - wall street) investors.

Ignoring all of the above for a minute as something else has me more
concerned. You noted that you "feel safer with less debt". I think the
focus should be on good debt vs. bad debt. Debt that is used to
purchase assets that produce an income greatly in excess of the debt
service I would call good debt. Debt for consumer items (including debt
for ones primary home) is a liability and creates pressure to have an
income just to service the debt. This is bad debt generally. People
will argue about debt for their primary residence. I use the litmus
test that debt that comes with an income stream that is not tied to my
getting out of bed and working is the best with any other debt being
open to debate.

You have a fair amount of cash and some equity that could be put to
use. As someone who believe in income producing real estate (direct
ownership and not through an REIT), I suggest you take a look at the
options. You could find that you tax bill goes down so the government
would be a silent partner if you owned more real estate.

Real estate might not be for everyone. Few discussions of financial
planning cover much more than traditional investments (home, stocks,
bonds, cash) so few people do better than the averages. Many older
people who have used real estate have both income and an inflation
hedge built in. There are many studies and reports that show that many
folks have done much better with real estate compared to the more
liquid investments give the right time horizons. The argument for a
young person buying equities is the same for RE - time to smooth out
the bumps with the long view being very positive. The magic about RE is
the ability to use leverage safely to magnify the appreciation. If you
have 25% down on a rental and the income covers all the rest you have 4
to 1 leverage so if the property doubles in 12 years your cash on cash
return is greatly magnified.

Yes, enough of the rant.

John