Real Estate as a wealth building vehicle.

[AdamL]

Has anyone here gotten involved with buying properties for a small amount or no money down at all and renting them to pay off the mortgage?

In my research I've come across numerous books that claim this is the most effective way to build wealth for a middle-income earner. The stock market tends to pay off more when you are already dealing with large sums, but you can work with 300k in capital (a house) with 30k down. You can't get a mortgage for a stock.

Some concerns:

1) Finding the right tenants. How hard is it?

2) Rent rooms, rent the whole house, or split it into basement and upstairs and rent it as two apartments?

3) How risky is it to do this when real estate prices are somewhat uncertain? I see real estate prices coming down in the next ten years as interest rates rise. They might still increase enough to offset that, but it will at least put a damper on things. When you're only putting %10 down does it really matter if the house doesn't appreciate, or even depreciates a little?

Adam

[GeorgeF]

I suggest you spend a year looking at real estate in your area. Talk to a realtor and see what multifamilly dwellings are available. Read real estate for sale ads. Go see the buildings and see if you think you can manage the building, and the tenants.

[Ray Zee]

the book stuff doesnt work as not many people will sell you their property for no or little down. why would they. if it goes up you make out and down they get it back. most times only those with poor vacant land will entertain that idea. as gorge said do your foot work first.
most poeple that get rich do it by buying real estate. and many broke.

[lu_hawk]

With only 10% down it matters much more if the real estate depreciates. A greater than 10% loss and now you have to pay the bank to sell the place.

[midas]

Adam:

If you can't answer questions 1&2 yourself - you shouldn't be in real estate.

Regarding question 3, high interest rates are great for landlords (more renters), low interest rates (renters buy homes) are terrible for landlords.

Do your research, build some cash-flow models and decide if you like the risk/return profile before you get taken on some no-money down scam.

[SossMan]

[ QUOTE ]
I suggest you spend a year looking at real estate in your area. Talk to a realtor and see what multifamilly dwellings are available. Read real estate for sale ads. Go see the buildings and see if you think you can manage the building, and the tenants.

[/ QUOTE ]

I agree with your post. However, I lend on Multi's, and I don't think this is the best time in the world to be investing in apartments. GIM's have skyrocketed (up to as much as 12-14!!), cap rates are way down (as low as 4.5-5%), and income is steady at best. Most of the purchases we have seen are cash flowing at about 1.2:1 on a 30% down. That's about a 3-4% cash on cash...so you would be banking on some serious property appreciation (i.e. increase in rents, decrease in expenses, or an unlikely continued increase in GIMs and decrease in Cap rates) to beat even a CD.
Keep in mind, that much of this is dependent on the local area, and I'm sure there are still areas where you can do much better in terms of cash flow and appreciation. I lend mostly in the SF bay area, and it's pretty crazy.

good luck.

-sossman

[Nemesis]

If you're looking at LONG TERM investing I don't think anything beats real estate as far as tax advantages go, and renewable income. I'm sold on RE and as soon as i get the capital to begin investing i'm going for it.

[SossMan]

That's fine, and I somewhat agree with you, but there are good times to get into RE and bad times to get into RE. Obviously, this is location dependant. Just realize that it's not a risk free giveaway, or else everyone would be in it.
Additionally, I was simply commenting on the increased costs associated with obtaining these cash flows in the Bay Area (specifically MultiFamily properties). If you do your homework, you can still find good deals, but it's not as simple as seeing something for sale and dumping money into it.

[element00]

ditto what nemesis said

[Warren Whitmore]

(1) How I turned 2 million in cash into $15 in real estate by steve martin.

[sprmario]

My girlfriend is driving me nuts about this. I'm an investment analsyst. I analyze commercial real estate amongst other things. She calls me last night and tells me she's going to buy a property in the boonies in south central florida for $9,000 and she's sure she can flip it for $15,000. Nothing I tell her is convincing her that this is a risky investment. She says she gets it and then she'll say that she's gonna make $xxx off the flip and when I ask her what if she can't sell it? she just replies that she can and that real estate is hot up there. She just thinks I'm being negative. She's got idiotic parents who have gone bankrupt twice and she's got a sister who is 1 bad tenent away from losing her house because she moved to California and the rental income is covering her mortgage, she put zero money down and she has her own rent in Cali to worry about out there.

Then on top of this she has no money and is financing this purchase on a credit line that is basically a credit card. She gets zero % interest for 12 months and then it defaults to 8.9% and if she is late on a payment it goes to 27.9%.

And to top it off, she has $7,500 in credit card debt already (it was $11,000 and rising when I found out about it).

There are so many people who think its so easy to make money on real estate... and they don't know the half of it. Look at Trump who's real estate business is gonna file for chapter 11 again.

If you can't afford to cover the mortgage of the property without all the rental income then don't buy property. Tenants are a real pain in the ass and take up much more time than you might think.

That said... I'll be investing in real estate soon when I know I can handle it, but it's not an easy venture.

[moondogg]

Please tell me that:
A) You are not going to marry her
Or,
B) You have already made it clear (and she has agreed to it) that if you guys get married she will have no input whatsoever on your collective finances.

[sprmario]

Haha. Her family is a disaster. She's in much better shape now than when we met but she has this impression that I'm just a stick in the mud about financial matters. i'd rather she just kept paying off her credit cards and get a nice guaranteed return of 8% or so (it was 17% on most of the debt before) rather than risk something fancy when she can't afford to take those risks. The odd thing is she is much better than i am about daily financial matters. She balances her checkbook to the penny and is rarely late on payments. I'm terrible about that sort of thing, though I've improved a lot over the last several years.

[ QUOTE ]
Please tell me that:
A) You are not going to marry her
Or,
B) You have already made it clear (and she has agreed to it) that if you guys get married she will have no input whatsoever on your collective finances.

[/ QUOTE ]

[cardcounter0]

My family used to own a huge amount of rental property in the 50s and 60s, but has been slowly divesting itself over the years. I think we only own about 8 to 9 houses now.

Here is what happened:

1) People used to live in a house for years and years and years. Now with the mobile society, someone renting a house more than two years is golden. So factor in that you are only going to get 10 months rent on average per year instead of 12.

2) Property taxes. What profit you retain after doing maintenance and upkeep to protect your investment, a big chunk of that goes to the ever increasing property taxes. What used to be a hundred bucks is now a month or two worth of rent. Insurance is the same. Never known it to go down.

3) Two Steps Forward, One big step back. After maintenance, property taxes, insurance, etc., you get that one nightmare tenant who totally tears the [censored] out of your house before you get rid of them. Years of profit gone. Oh, yeah -- I forgot to mention it has now been ten years and the roof needs fixed -- or that winter, the pipes in the basement freeze and burst.

Selling the house and getting the appreciation out of it? Well, there is risk there too. When you bought the house in that nice neighborhood, well -- the neighborhood isn't so nice now. Plus, with really cheap interest rates -- homebuyers can just as easily build a brand new house in those nice suburbs that didn't even exist when you bought your investment.

My family made a good income on its rental properties. But it wasn't the easy "go in the backyard and pick bills off the money tree" deal that people imagine. Work is involved in finding the right tenants, finding the right houses, maintenance on the houses is constant, and you need a big cushion for the unexpected bumps on the way.

[SossMan]

good post...that's the big flaw in the "no money down" theory.

Most of the time the people who do no money down are the people with no money to put down. Not a good recipe for success.

[AdamL]

Very useful info there, I needed to hear that.

Thanks,

Adam