Your REI Big Picture

General Real Estate Investing
1

I originally wrote this as a response in another thread, but I decided to put it out here instead as the beginning of a new topic which will, hopefully, be more interesting and lead to a deeper and more positive discourse. It may appear that I am explaining and defending a philosophy which has not been criticized, but that is because this was originally written for another thread.

What does your Real Estate Portfolio look like? Is each property the same as the others? Is it “I have a $250 per month positive cash flow in this one, a $150 per month positive on that one, and a $200 per month positive on the other one because I am a Cash Flow Investor. Cash is king and that’s the only way to go”?

Or maybe it’s “I made 20% on this flip, 18% on that one and 22% on the other because I am a Flipper. Flipping is what I do. Flipping is what it’s all about”?

I don’t see real estate investing that way at all. Real estate investing is a world of opportunity. Many different kinds of opportunities are out there. I want to take part in any deal which makes sense as a stand alone deal AND fits into my cash on hand/cashflow situation. Another way to say that is to say that I am looking for a deal which fits into my real estate investment portfolio.

My last 4 properties bought, over a 6.5 month period: (1) SFH, flip with minimal (< $1000) fixup, sold it this week, $58000 profit, I had this under contract for 8 mos (in an appreciating market) before the Nov 2005 closing because the seller wanted to delay closing until his new house was finished, they were appreciative that I allowed them to delay. (2) SFH on 2 acre lot, I subdivided it into 3 lots, lease option on lot with house is in the works for break even cash flow for 6 mos., I will keep the vacant lots for at least until the 1 year point where I may 1031 one or both into an income producing property. (3) SFH, buy and hold, old waterfront property on 2 lots, rented with small negative, will redivide within a couple of years, I have large equity in these lots already and I may build my next two primary residences on them. (4) 1998 doublewide on 3/4 acre lot, bought on courthouse steps at 55% of recent VA appraisal, rented, will hold for at least 1 year. (5) is under contract, late June closing, a <90 day fix and flip.

At this moment I have a large negative cash flow on (2) and small negatives on (3) and (4). I will have a large negative on (5) when I own it. Thousands of dollars of negative cash flow, how could I be so foolish?

Now take a step back and look at the BIG PICTURE. Positive cash flow? Got it. Large equity position? Got it. Accumulating more real estate? Yep. Selling 1 and 5 is part of my accumulation strategy. Those give me slugs of cash for down payments and offset negative cashflows.

Consider that a number of real estate properties can make up a balanced real estate portfolio, even if not every individual property is “balanced” if it were standing alone.

Consider also that my portfolio is custom made to fit MY goals, not yours. I don’t need monthly cash flow from rei. If I need a chunk of cash, then I will sell or refi something. My goal is to accumulate a large amount of wealth in the form of real estate over the next 20 years. I am succeeding with that goal. I will maintain flexibility. As the market changes, my strategies will change. Opportunities will always be available.

What is your Big Picture?

2

Steve,

You’re a gambler - which is perfectly acceptable. You are betting on continued appreciation - something which you have absolutely no control over. Personally, I prefer to operate businesses in which I am in control of as many factors as possible. Gamblers often have lucky streaks and if yours lasts for the next 20 years, you’ll be fine.

The truth of the matter is that I also like appreciation. However, I want to receive my “appreciation” at closing. I do this by buying at a big discount and therefore picking up a bunch of equity at the close (instant appreciation). After I close the deal, I rent the properties out because I’m interested in sustained cash flow. Every one of my properties has a positive cash flow. I would not accept a negative cash flow from even one, just because another one can offset it - that’s counterproductive.

There is another negative side to your strategy that you have forgotten to mention - TAXES. When you buy and sell properties as a business, you will pay a bunch in taxes. So, your profit is not even close to what you claim. Having negative cash flow on some of your properties is further deteriorating your profit picture.

Am I saying that you should not speculate on appreciation as your business plan? No. If you can gamble on appreciation, slots, or even lottery tickets and make it work - go for it!

Mike

3

Steve,

There’s a huge difference between taking calculated risks/gambles as you have and a newbie investor rushing into REI because everyone else is and taking a bathbecause he/she “just didn’t know”…didn’t know about hte tenant hassles, didn’t know about all of the expenses, didn’t know about (fill in you favorite REI landmine here).

There is nothing inherantly wrong with speculative investments as along as you understand and can manage the risk on the backside (what if the market goes REALLY soft and there is negative appreciation AND negative cashflow? Can my portfolio handle that or will it be financial ruin beacuse the portfolio was too highly leveraged to begin with?).

Newbies – you gotta understand all aspects of your investment before you make it!!!

Keith

4

Real estate 101. Buy at less than FMV. Your “appreciation” is not appreciation at all. It is buying for less than FMV. Your appreciation happens AFTER you own or control the property

Taxes are a given. The number I mention is the pretax profit because that provides a consistent way to discuss a deal. It doesn’t make sense to give an after tax profit because that is dependent upon my tax situation. My after tax profit on a $50000 deal is different from yours. I have an intimate knowledge and understanding of taxes.

To further explain, if your son graduates from college and gets a job making $60000 per year, that is gross income. Everybody in the world knows that he doesn’t take home $60000 per year. Yet he does make $60000 using the common way that people discuss income.