Rental home as savings vehicle.. What do you think?

Rehabbing, Fix and Flip, Rental Properties
1

My wife and I are kicking around the idea of buying a home in about three years, the circumstances may be a bit odd and I wanted to get some opinions. I have been in the military for 10 years and will be making it a career. I have been renting since I joined but I would like to stop throwing that money in the trash every month. I still have a lot of reading and research to do, but my original thoughts were to buy a home in Jacksonville, FL (where we plan on going and where the market is still very much down), live in it for the three years while we are in town and then rent or possibly sell if the market is right when we leave. I am looking at a relatively cheap place which would be covered by my housing allowance and still have about 300-400 dollars left every month to put into a “house emergency fund” to keep around if we did decide to rent it later. My wife and I both have lived in the area where we plan to buy and also have family and friends in the area. We would not consider doing this in any other location than Jville because of our familiarity with the area.

It is near a military base and has a constant influx of renters looking for the 3 bedroom 2 bathroom with a fenced in yard, near a good school that fits into their housing allowance. The primary renters in that area are certainly military, which also is beneficial because all I would have to do is call their squadron if they stopped paying the rent.

I am looking at this as kind of a savings vehicle or really just a way to not throw all of that money away. I understand that owning a rental property is huge risk and a possible huge pain in the neck, but I feel like even if the property doesn’t appreciate or even depreciates a little, it would still be worth it to build equity rather than be paying rent forever. We would have an emergency fund specifically for the house to repair damages. We would most likely rent again on our next set of orders if we left Jacksonville for a few more years (if we rented out the Jville house) until I am retired from the military. At that time we would most certainly sell the rental and buy our first real home.

Here are some of my notes and I figured why not just put them all in the post:
-I would use a VA loan and put down only 5% to lower our VA funding fee significantly, but also not go much more than 5% in order not to drain our emergency fund too much.
-Should be close to Turn Key as possible: Plumbing, Roof, Flooring. However, if its small cosmetics, we should be able to look past those for a possible great deal.
-We should be planning on renting on next set of orders
-We aren’t coming back to that house so don’t go big!, we are using it as a way of not throwing rent away, and a possible equity builder for our “after military home”
-Maintenance and Beautification are important, but resist the need for large expensive projects, this is a savings vehicle, not a long term investment
-Maintaining a six month’s rent “home emergency savings” account is not a want, it’s a need.
-When deciding on a home, ask if we would want to rent it… Is it a good home for the rental market? If not, walk away. We need to rent this out when we leave.
-Stay within budget on the amount we are going to borrow, after all of this hard work, it would be foolish to get carried away and ruin what we have accomplished by making a hasty decision
-Look at it as a savings vehicle, not as a future home
-Run the numbers one more time, two more times, take your time.

Thank you for any inputs, thoughts, or hey bye-the-ways!!

2

One way to look at this is from the perspective of your total housing expense. For purposes of this discussion, let’s disregard utilities costs since you will have those whether you are renting or buying.

If you are currently renting for $1000 per month and getting $1000 per month as a tax-free housing allowance, then your net out of pocket housing expense is $0.

If you buy a home to live in and your mortgage cost (principal, interest, property taxes, homeowner’s insurance) is $1000 or less, then your housing allowance still covers your mortgage payment. Your out of pocket costs would be for maintenance and upkeep.

If you buy this kind of home, then get a rent that covers your mortgage costs, you still have mainenance and upkeep costs, but you are building equity. Now when you go to your next duty station, you still have your entire housing allowance to cover your rent and the maintenance costs frr the home you left behind.

Great plan as long as your total housing cost stays within your housing allowance. In fact, there is no reason you couldn’t keep repeating the buy then rent strategy. At your second duty station, buy a less expensive home, and rent it out for enough to cover your mortgage payment on the second home. You will still have maintenance and upkeep costs, now, for two homes, but at your third duty station, just get a property that keeps your total housing costs within your housing allowance (whether you rent or buy).

Conceivably, by the time you finish your military career, this plan will have your housing allowance building equity in three (or more) homes instead of just paying rent.

3

We sold our Jax house in the fall of 2005 before things started to fall apart there. We made a nice little profit from owning that little house for right at a year. In fact, here’s the link for it:
http://www.trulia.com/property/3056449679-7916-Honeysuckle-Rose-Ln-Jacksonville-FL-32244
We’re the one’s who bought in Oct 2004 and sold in Oct 2005. Look at the price now.
There are plenty of houses like this close to the base. I haven’t really checked into market rents there, but it could be a really good thing for you. You could always try having one rental and see how you like it. Try to make the numbers work so you could get a 15 yr loan (or less) on something like this. I wouldn’t stretch out something this amount for 30 yrs for a rental.

4

Rental real estate is a wonderful savings vehicle. If you put $10,000 on a house worth $100,000 and get $200/month cashflow from the house then you are getting $2,400/year on a $10,000 investment that is 24% return. Where can you get 24% today? The house is still there and you still get the $2,400/year. It is hard to beat. Once it is up and rented there is no need to consider the housing allowance because the house pays for itself.

Rental real estate makes you money 5 ways. 1) First equity capture. When you buy the house for $100,000 that is worth $150,000 you capture $50,000 in equity. 2) Second you have principle paydown. When you pay your mortgage a percentage of that payment goes to pay down the borrowed amount (that paydown is done with rent payments not your own cash). 3) Third is the cashflow. That is the difference between the mortgage and expenses and your rent. The beauty if this is unlike any other investment you can actually get this money every month without losing the investment. For example if you buy $10,000 of gold and it goes to $20,000 the only way to get at the $20,000 is to sell your gold. With rental real estate you don’t have to kill the investment to go and buy a hamburger. 4) The fourth way is appreciation. This is the value of the housing will eventually go back up as long as you can hold on to it. 5) The fifth way is the favorable tax treatment. For example if you buy a house for $100,000 and you claim that $80,000 of that is house and $20,000 is land. You depreciate that house portion over 27 ½ years. That means that you subtract $2,900 from the money you make on that real estate and pay taxes on the rest. Since in our example you made $2,400 you subtract the depreciation ($2,900) from that $2,400 so for that year you pay taxes on none of that money. So when you are looking at replacing your employment income and you make $50,000/year you don’t have to replace all the $50,000 just replace the take home portion.

So you buy 10 houses for $100,000 putting $10,000 down on each. And each of these houses is worth $150,000 you have $1.5 million worth of real estate for your $100,000. Since each of these houses yield $200/month cashflow you are making $24,000/year (for your pocket). If you hold them until they are paid off in 30 years and they never appreciate not one penny, you have made $2.25 million off of your $100,000 investment.

5

How are you getting into a $100,000 house for $10,000? Are you buying it for $40,000 so the $10,000 constitutes a 25% down payment? Yes, there are ways to buy equity and as such pull out some of your down payment and still maintain 25% equity (75% LTV) but your example above was a gross oversimplification. And setting the expectation of a 24% Cash on Cash return probably isn’t the best idea.

6

nemmert you are right. I just wanted to make the math easy. But I bought 4 houses last month and have none of my money in them. That makes the return infinite. I would not use that example either.

7

Bluemoon…

Congratulations on your recent purchases…nice post.

-Mike

8

These houses were a really good deal. This local bank was stuck with 4 houses in portfolio loans that had gone bad. They sold them to me #1 for $65k worth $120k, #2 for $70k worth $150k, #3 for $70 worth $150k and #4 for $80 worth $110k. I really don’t like #4 but it was a package deal. I had not planned to buy any more houses for now and then this banker that I know also knows that I keep my houses. He also knew that I would make these portfolio loans perform for them. But I am getting from $500/month to $150/month cashflow on these houses. I was kind of surprised but pleased with that phone call.

They even came to my office to close, (how cool is that) I felt like Donald trump.

9

I think a lot of that went on in December. My brother-in-law picked up a nice short sale condo-townhome that’s 10 minutes from Disney World in Orlando. Bank insisted on a Dec 29th closing.

Glad to see that these are going to be providing you with some nice additional cash flow.

What is it about #4 in your package that you don’t like?

Thanks,
-Mike

10

Bluemoon,

What type of financing were you able to secure? How were you able to pick these up w/ 0 of your own money?

Also, if you have a chance, can you list the rents that you are pulling (or will be) with these properties so us newbs can see what a “great deal” is?

Thanks!

11

I was not looking to buy any more houses. I was actually working on buying an apartment complex. Remember when I say you need to deal with investor grade professionals? That is what happened here. Because I am around people in the industry all the time, when this guy had a problem he called me to solve that problem. His problem was that he had some houses he had to find an owner for. He basically laid these houses on my doorstep.

I have been getting calls from banks since March 2011. I had been looking at those calls as pesky sales calls until about August 2011. I had banks wanting to refinance my investment properties into lower interest loans and doing different financing strategies like blanket loans etc. For one reason or another they have not been able to get me closed. But in August 2011 things started to change. Most of my mortgages were in the 7% to 10% interest range and I let Chase refinance the loans I had with them. Since then most of my mortgages have been refinanced and all of them now are around 4.5% to 5%.

I then got this call from a banker at a local bank that I had met before. He knows me and how I do business. He had some houses that they financed and held the loans as portfolio loans. These are loans that they don’t package for resale into mortgage backed securities. They hold the notes for cash flow like in the old times. These loans don’t conform. There was a package of 4 houses that they had taken back. The original deal was a 5 year balloon that the guy could not (would not) refinance so the bank had taken them back. He offered the package to me. I said I would only do it if they financed it on a 30 year basis. We compromised on 20 year. The deal required that each house appraise for no more than 75% of the market value. Any amount over that value I would have to pay the difference. I also agreed to not refinance out of the deal within 2 years. They all came in below that plus closing costs. That meant I didn’t have to put any money in the deal.

I found out that around me the economy is changing. Right now the amount of people looking to purchase a foreclosure is down from 56% to 48%. For the last 4 or 5 years it sounded like every house in the world was in foreclosure. Really there was no more than 5% or so houses in foreclosure any of these years. Now the number of houses in foreclosure in Texas is down to 1.89% from 4.52% and the houses 90 days delinquent are 2.8% down below 3.0% for the first time in several years. That means the amount of foreclosures entering the pipeline is slowing down. Even during normal times there are 1% to 2% houses in foreclosure. This is approaching normal times. Guys this perfect storm is coming to an end. You better buy some houses now. 5 years from now you are going to look back on this time and say “I should have bought some houses back in 2012.” This is also a time when interest rates are so low that you can really make some great cash flow.

You need to buy some houses now or you will miss the ride.

12

I completely agree now is the time to buy. We’re at the point now where if REI becomes a fad again and prices go way up, it won’t matter to us as we’ve bought a good amount of property the last few years. We got a blanket loan fixed for five years at 5.65% last week. Our banker asked if we were going to keep growing at this rate. I told him probably not, but we were putting it on the line taking advantage of the current market.

13

SkolVikes7 I looked at your original question and decided to say something about levels of thought. What is the difference between a rich person and a person that is not rich? The answer is not that the rich person has money the answer is that the rich person thinks rich. His level of thought is not at the employee level it is at the rich person level. He builds his life differently and because of that if his money is taken away over time he will end up rich again. You ask about using real estate for savings vehicle. Rich people don’t save money. A saving vehicle is not the kind of thing you should be working towards.

This is what happened to me. I had my budget set up so that I made money I paid all my bills, did my entertainment, gave charity and church offerings, and put money into savings. Then I bought 4 rent houses in short order. The first month I took in the rent of $1000 per house. My business bank account showed a balance of $4,000. I then paid the mortgages of $800 each for a total of $3,200. That left me with a balance of $800. Since my personal budget and income from my job didn’t change there was nothing to do with the business money. It just sat in the account. The next month the same thing happened I took in $4000 paid out the $3200 and left $800. I did this a couple more times and after I paid the mortgages I was alarmed because something was wrong. There was over $3000 in the account. That amount was the trigger for me that I must have forgotten to pay somebody or something. There was just too much money in the account. I realized that after a year that account would have $10,000 in it just sitting there if I didn’t do something.

Using real state you don’t have a savings problem you have a money management problem. You have so much unassigned money coming in that you don’t want it just sitting in a checking account so you feel compelled to find places to “stash’ the loot.

14

Can’t use 5% VA funding for a non-owner occupied rental house. VAS sends out an inspector 30 days after loan is funded. I think it is a felony if owner occupant NOT living there