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written by reader Real Estate

By SoGiAm, July 19, 2016

I enjoy real estate also.
A number of people have indicated
preference for tangible assets so I think there
would be a fair number of participants. – Hendrixnuzzles
So here we go:

This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.

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Vijay
6 years ago

Hi Ben, Where is the subscribe button? TIA

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Vijay
6 years ago

Thanks, it showed up after I asked the question.

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hendrixnuzzles
6 years ago

Hi everyone. Some thoughts and stories from my first modest activities in real estate.

A while back I became convinced that world central bank and government policies will eventually result in high monetary inflation and loss of value in fiat money, and that real tangible assets would benefit. And there were bubbles in the assets that are attracting the cheap money and benefitting from low interest…specifically stocks, bonds, and real estate.

The risk in the bubble assets is mostly interest rate related, and this is especially true for real estate. Yet I still decided that direct ownership of real estate was attractive. And I have read several advisories that warn readers in the strongest terms AGAINST
real estate.

My situation is that I am retired, I have modest assets, and I need income. My thinking was as follows:

1. I enjoy shopping for and evaluating residential real estate, and I am in an area that I believe will have good residential and demographic growth.
2. If the purchase can be for cash, I do not run the risk of overleveraging, but I can still get capital appreciation if I buy cheap enough in the right location.
3. The income available as a landlord compares favorably to instruments available in the stock and bond markets, and I need income.
4. Selection of the proper tenant can mitigate the risk of an overall downturn and increasing unemployment or under-employment.
5. Real estate is unlikely to be confiscated by the government.
6. While relatively illiquid, lines of credit against owned real estate can be opened to give access to cash if needed.
7. Even if the nominal resale price goes down, there will be rental income; assuming one can find a good tenant.

General caveats:
–One needs to be interested in residential real estate.

–I think you must be in an area that has at least a moderately favorable growth outlook.

–It is adviseable to own property that is nearby and therefore manageable.

–The property must have prospects of good cash flow.

–Pastience is a virtue. Find a situation where the other side is under time pressure, or has capitulated and lost patience. If you buy “at the market”, then be very confident of the future prospects and growth of the area.

I am in North Carolina, which is a good target area for northern tax refugees looking for places to retire. So I felt the future prospects of the region were good enough to take a chance.
When I moved here, there was still a fairly large overhang of foreclosures from the 2008 crash.

CASE #1. The developers like to build and sell detached homes because they make more money. However, I believed that a lot of
retired people would prefer townhouses or condos that require less maintenance effort and a more carefree lifestyle. They are also easier to maintain for the landlord. But there is a relative shortage of these, compared to detached houses.

Accordingly I targeted townhouses and condos. Three years ago, I found a 1200 square foot townhouse that was 7 years old, in a convenient location and in good condition. It was a foreclosure and my offer to the bank was accepted. The price was $84,500, or about $75 dollars per square foot…below the cost of new construction.

On the income side, the unit is rented for $950. My tenant is a married couple, both working, one in government. My HOA is $175 per month and my taxes are $95 . So I am grossing $950×12=
$11,400 per year and my expenses are $270×12=$3240.
This is a net of $8160. On the purchase price, this is a net return
of 9.65%, much better than I can expect from a bond or stock dividend; and I also might benefit from price appreciation.

It is true that there are other expenses; this unit required a new
major appliance, and also some HVAC repair.

But it is also true that I have gotten some price appreciation.
Identical new units in the complex are listed at $120,000, so my opinion at the moment is that I could realize $105,000 or so if I sold my older unit. After an agent’s fee, let’s call it $100,000…a gain of $15,500, or 18.3%. But why should I sell it ?

CASE #2. I ventured into a small undeveloped subdivision of six lots. The original developer had failed. There were no buildings on the lots, but there were approved plans, environmental and zoning approvals, state standard road, streetlight, water, and electricity. The HOA was also filed and set up.

I bought the lots for $48,000, which I thought was a bargain as the original developer had sunk over $300,000 into the plans, approvals, and improvements.

But on this one I lost patience, and sold out for a very small profit. My timing was just off, three months after I sold, land prices exploded. I broke even, but could have doubled my money if I had waited a few more months. The buyer developer immediately started building and the six houses are sold.

CASE #3. I took the money from the lots and found another townhouse. The condition was only fair but it had 1500 square feet and four bedrooms. I was able to buy it for $66,000, or $44
per square foot. HOA is $150 and taxes are $90.
It is rented for $900 a month.

Income $10,800/yr, fixed expenses $240/month=$2800/yr,
net $8,000/yr. 8/66= 12.1% return, plus a chance of appreciation.

I have no firm picture of appreciation yet on this property, but if you can buy something halfway decent for less than $45 per square foot, you are doing OK, at least where I am.
+++++++++++++++++++++++++++++++++++++++++++++++++
In the other threads we try not to disclose position size.
I can refrain from disclosing prices if it offends, but I think that a
frank discussion of real estate will benefit from actual prices, as well as square footage and price per square foot.

I have only a few other properties in addition to those discussed, and my residence. I am sure there are many readers who have much larger investments than me, and by no means do
I disclose prices and financing to brag or show off.
If there is a consensus to discuss these matters without pricing,
I will refrain from disclosing prices in the future.

Hope this gets the ball rolling and is helpful to someone out there.

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hendrixnuzzles
6 years ago
Reply to  SoGiAm

What do you think the mistakes were on this property that you could have avoided ?

With $18 K investment, at the end were you able to break even ?

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Griffin
Griffin
6 years ago

I’l start by saying I’m looking to buy my first house at the age of 70. The one thing I’m not sure about is insurance just what does it normally cover, forget earth quake, flooding, and weather. What I’m concerned about is how much of the structure is covered from termites, dry rot, a tree falling on it, or a car running in to it.

HN started with some nice examples and mentioned pricing. I don’t know that we can get away from stating actuals in our area and from left to right coast. Even in the San Francisco Bay area from San Jose to SF (50 mi) prices will double, triple, and quadruple for the same relative accommodations. My Dads’ house (3bdr, 2ba, 1000sft, 2 car g) in San Jose when new was sold 6k, bought in 1968 for 28k, and sold in 2008 for 500k.

How much do you consider the buildings structure, is it enough to ask the owner if the building is structurally sound. I’m knowledgeable about a buildings condition as far as what can be seen.

I hope this isn’t far off topic and of some help.

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hendrixnuzzles
6 years ago