Sure. But anytime you’re buying an asset with leverage, you’re increasing risk.
Some of you may remember golfwaymore from RetireEarly/Campfire. A 30-year-old who diversified the $25 or $30 million he netted from the sale of his company in the late 1990’s tech boom into real estate. And as I remember he was very conservative and was only operating with about 30% leverage, not the 80% or 90% Goofy is talking about.
I liked Golfwaymore and used to email back and forth with him quite a bit. It’s been a while and I have lost contact with him some time ago, but IMO Golfwaymore was highly speculative in his real estate investment, focusing on a single area and a single market…vacation homes in the North GA mountains. Additionally, he had no cash flow to be able to continue payments on those properties since he was a speculative builder for resale not rental. His lack of diversification, both in and out of real estate was in part what killed his finances. His aggressive approach had helped make him in the first place with his cell phone sleeves, but he had no contingency plans in place. His approach to real estate was like putting all your money on one high flying internet stock and buying on margin. Great while it’s going up, but at some point you may find that earnings do matter. He failed to have a comeback plan in place when his speculative approach to real estate failed, and could not ride out the tough times until the market came back. I frankly don’t recall the amount of leverage he used to buy the properties, but whether you can’t pay back $1 or $1mm, the bank can and will foreclose. It’s one reason why we keep more cash on hand rather than pay down mortgages.
It is important to look for properties in an area that has constraints to new entries, which again was seriously lacking for GWM. There are glorious views all over the place in those mountains, and anyone could throw up a house if they bought the land. We actually looked at buying a place in the area at the high demand part of that time, when there had not yet been pile on by everyone and a dilution of profit caused by over supply, but because there was a seeming endless supply for others to do a vacation rental there, making it a how low can you charge business rather than a premium business, we chose not to buy. Then came a tightening of lending and a cratering of buyers for the properties, and without rental income coming in, GWM had to continue paying the mortgages from his own pocket.
Geographical constraints to building is a great way to improve the marketability of your property and the appreciation, because it makes your house a limited commodity. Our riverfront vacation home is kayakable upstream and down, private, (but not so private that someone would break in to put up a meth lab,) pristine environmentally, easy to access from a highway but not so close that you hear it, out of the flood plain, and with other things to enjoy should kayaking not be your thing. With a National Forest across the road, there is further constraints to building and enhancements to enjoyment. There are great put ins and take outs upstream and down for kayakers.
Our city rental is in a city that is highly constrained to new building, to the point where it is now eliminating single family home zoning to allow for conversions for up to 3 units. With a little investment we will be able to take our existing SFH and convert it to a duplex with an accessory dwelling unit, (think tiny home,) in the yard. This will increase our ROI over the 25% return we are already getting on the 20% down plus improvements that we spent buying the property. With it’s diverse employers, (a university, medical and law school, two hospitals, military employers, defense contractors, and tourism,) the area is less exposed to downturns in the economy. Even the 2008 housing downturn was barely felt here. There are a lot of people rotating in and out of this area for a few years at a time, and a high demand for quality rentals.
Our real estate investments are pre-tax cash flow positive, even with considering 10% vacancy and collection as well as projected maintenance costs of 10% income, advertising and management fee. The tenants pay our mortgage but we reap the benefit of appreciation on the whole house, not just the amount of cash we put into it. I run a 10 year profit projection spreadsheet that does not initially take appreciation into account, and the property must be both profitable and cash flow positive to be considered. If I can do better by buying a bond or a dividend paying stock, I do not touch that property.
Even our home has to pass the alternative use spreadsheet of being a rental. We are only 5 miles to center city, on a small lake and with a pool. Not easily duplicated, the value of this property, which we bought with 30% down and a 2% 30 year FRM, has almost doubled in the 2.5 years we have had it, making the ROI on our primary residence very high. Yes, Covid has changed what people are looking for in a home, but it was a screaming buy when it was placed on the market by a Realtor who did not understand the market and priced it too low, ignoring the pool and lake. There are great values to be had if you understand your market and can move fast, though they are few and far between. Our riverfront vacation home was one of those great deals as well, as was our rental. I am a patient buyer.
We have a very healthy stock portfolio as well, and a heavy cash position at this time while we look for well priced investments in both the real estate and stock market. Almost bought another property this week, (deciding against it for personal reasons though my spreadsheet said it was a screaming buy,) telling the seller to move on to the next buyer when they came back to accept our initial offer after we declined their counter. I also am working on a list of stocks that we would be willing to buy at a certain price, in anticipation of a decline in the market when rates go up. We have no bonds, considering our real estate to be a bond alternative. All investments require work and a strategy to rebound should the unthinkable happen. You must have a survival strategy in place. GWM did not.
I am not a fan of index investing, but know that it works for many who prefer to avoid the hunt of individual stocks and real estate. If that’s your jam, go for it, but know that there are other options that can work very well also.
IP
), but I really don’t consider it an investment. It’s where I live.