Pyriel Real Estate Corner

[pyriel]

I have decided to create my own Real Estate Corner where i'll talk about what I am doing regarding real estate transactions and my thoughts about this market.

As of now, I am thinking really hard about stopping my max contribution to TSP and ROTH and have these funds reallocated to the real estate market. Currently, my wife and I are maxing our contribution and forking over $38k into these retirement vehicles. After reading "We want you to be rich" written by Robert Kiyosaki and Donald Trump, I have a mind shift on my current outlook for investment and would possibly reallocate them into my pot for real estate investment

Its a big step and i'm uneasy since I am going against the herd. However, unlike playing the market (which i really don't know what the heck i'm doing), real estate planning is something that I know how to do. If I do decide to go this route, i will make every attempt to write down the what why, how am I doing my transactions.

Pyriel

 

[colonialmike]

P- I guess you are still deciding on the amount of contributions you will reallocate. I am sure you will keep in mind matching funds, aka free money.

best of luck...I will be living vicariously through you.

 

[pyriel]

P- I guess you are still deciding on the amount of contributions you will reallocate. I am sure you will keep in mind matching funds, aka free money.

best of luck...I will be living vicariously through you.

Dang, I wish i know what vicariously means;-) I've thought about it and will most likely keep the 5% for my wife since she gets a matching of 5% from her work. I'm also leaning on keeping the ROTH IRAs for both of us so we can pass that on to the kids. I am looking at the numbers now and will present it here. Then along the way, i'll be showing what I would be receiving in real estate vs. TSP. If I do start within this path, I will most likely start it off at the beginning of the next year which is less than two months from now. Good luck people..
P

 

[mlk_man]

Py, are you off tomorrow? Or is that today now? If so, I hope you got to sleep in.............

 

[pyriel]

Py, are you off tomorrow? Or is that today now? If so, I hope you got to sleep in.............

Just checked the TSP share prices after your post and I see that they are dropping. The thing is I am fully invested. Nevertheless, I am serious about staying in. Yes, I am now getting much more sleep. ;-) and ;-(
P

 

[Spaf]

Pyriel,
Hey, whats the time difference from Quam to say Central time??
Spaf

 

[pyriel]

Pyriel,
Hey, whats the time difference from Quam to say Central time??
Spaf

Spaf, not sure but I know 1200 est Friday is 0300 am Saturday here. So just work your way back an hour or so.

I would like to bring something to everyones attention. I am currently refinancing my home and have gone to several banks to get their supposedly Federal Truth in Lending quotations. After talking to several bank representatives, I decided to go to one bank which is the Government of Guam Federal Credit Union or GGFCU. Since I am not a member, they informed me that i just have to open up an account for $30 and they should be able to give me a loan. Prequalification took less than 3 minutes especially since I provided them my own financial statement. BTW, don't ever walk into a bank trying to borrow money without a financial statement or knowing what you are worth without one since it makes a big difference in the world on how you are treated by them.

Anyway, after they provided me the federal truth and lending paperwork which showed how much im borrowing, how much is the closing cost, and my monthly payment i then did all the paperwork to make a loan. The only difference is that I told them that I want to include the closing cost to the loan so no $$ will be coming off my pocket.

I was amazed when I received a bunch of letter from them a week later informing me that my loan had been approved and they provided me another truth and lending paperwork. BUT this time, this paperwork ended up having $12k more total and would have cost me $200 more monthly payment for the life of the mortgage. I went to see the bank rep and informed them that I decided to pay the closing cost myself and will stick with the original loan. I also started questioning each line item of the new paperwork they provided me.

To make the long story short, I was able to lower my monthly payment by $200. I also did not have to pay bigger closing cost. So, next time you see a bank or lending institution, don't throw away those truth in lending papeerwork they are providing you. Verify them again once they approve you on the loan since they are required to provide you another truth in lending paperwork which is also required by law. BTW, this is the one that really count....

Pyriel

 

[Gilligan]

I have decided to create my own Real Estate Corner where i'll talk about what I am doing regarding real estate transactions and my thoughts about this market.

As of now, I am thinking really hard about stopping my max contribution to TSP and ROTH and have these funds reallocated to the real estate market. Currently, my wife and I are maxing our contribution and forking over $38k into these retirement vehicles. After reading "We want you to be rich" written by Robert Kiyosaki and Donald Trump, I have a mind shift on my current outlook for investment and would possibly reallocate them into my pot for real estate investment

Its a big step and i'm uneasy since I am going against the herd. However, unlike playing the market (which i really don't know what the heck i'm doing), real estate planning is something that I know how to do. If I do decide to go this route, i will make every attempt to write down the what why, how am I doing my transactions.

Pyriel

P,
Congratulations on your new RE thread, I always learn from your success.

As far as not putting any more money in an IRA you might want to look into a “Self Directed IRA”, (google that for more info). You can invest into all types of real estate with this vehicle.

I’m going to pick up that new book that you mentioned, maybe you could start a thread with your RE book recommendations.


G

 

[pyriel]

Thanks Gilligan. I'm aware of the self directed IRA using RE as the vehicle for it. What I don't know is the intricacy (spelling?) of what goes on with it. I went surfing with the MLS last night and found several properties that I might be interested with. One is selling for 125k which was foreclosed and VA owned. One thing I know about VA owned is that I could possibly take over the loan without having to put a down payment. My RE agent is verifying that now but I would welcome other people's opinion about this. The other two are selling for 119k and 130k bank foreclosed. I'll be doing an inspections of the properties later with my RE agent. We'll see what happened.

There is one thing I would like inform everyone here and that is about looking over your property boundaries. I really don't know that rules from other places but here the boundary rules when building a home should be 15 feet away from the front, 8 feet from the side and another 15 feet from the rear.
Now what I found out is that if the property is a corner lot, the property has two fronts (both are facing the street) and two sides.

Why is this significant? Well, i'm doing a renovation around the house and putting up a 1240SF patio and garage when I encountered this problem. My house sits in a corner lot and the garage is hitting the corner at around 13 feet. My RE agent who used to be an appraiser informed me to call a surveyor to verify the distance of the boundaries for my lot. I told the contractor to stop working and called in a surveyor. It cost me $500 but it was worth it and saved me thousands of dollars down the road. After he put up the boundaries we just had to readjust our work to meet the 15 feet variance. If I didn't catch this and we proceeded with the work, I would not be able to refinance for my house will be non conforming.

I understand that our zoning and voundary points rules and regulation might be different from others here but my point here is that you must never forget to check everything (to include baoundaries) to ensure that you will be in compliance with the law.

Goodluck to all.... Pyriel

 

[pyriel]

Went surfing at the MLS a couple of days ago. I found several properties that I would like to research. I called my RE agent and we looked at 2 of them. Both are selling for 135k. One was foreclosed by the bank while the other one was VA owned. The lender of the VA owned is willing to finance 100%. The problem is that there is a setback issue. The back of the house only has 8 feet instead of 10 feet. It would probably take 10k for each house to be renovated + throw in closing cost of about 7.5k each. On the other house, i have to put in 30% downpayment since it will be assessed as investment and there is no setback issue. I've done the numbers and the VA owned is coming up with good returns but with a problem. While the other one is coming up with ok returns but without a problem. What to do?
Pyriel

 

[colonialmike]

P-
What is the difference in returns? How long will it take t recoup the 30% if you went with that property? How will the setback issue effect your investment? I am not familiar with this.

By the way, what kind of house does 135K buy you in Guam?

Good luck

Colonialmike

 

[pyriel]

P-
What is the difference in returns? How long will it take t recoup the 30% if you went with that property? How will the setback issue effect your investment? I am not familiar with this.

By the way, what kind of house does 135K buy you in Guam?

Good luck

Colonialmike

will post it here as soon as i get back to Guam. Currently in Hawaii right now. Should be back tomorrow...

 

[pyriel]

Hello i'm back home now. I made an offer for 85k for a foreclosed property that has an asking price of 105k. When i did the calculation, i set the purchase price for 95k. Lots of work to be done and i'm thinking that I will need 20k (very high estimate) to repair and I will need to put 30% down since the bank will consider this an investment property.

I also made another offer for another property which is VA owned and the bank will finance me 100%. They had an offer for 100k and they turned it down so I offered 105k. I put down 110k in the excel worksheet.

Now, the excel attachment has four worksheets. House1 and House2. Each of them was analyzed using a 30 year loan and a 15 year loan. The loan rate used was 7% (if it comes out lower then its good for me). Maintenance fee was assessed but was not formulated for tax deduction. I figure that if there is no maintenance required then I can keep the money thus, increasing the rate of return.

I'm thinking of taking the 30 year loan for both of them. Comments?

 

[colonialmike]

P-

Just a few questions, not criticism. I'd like to know your thoughts and theories that I may use when I calculate my investment property profits. I calculated some of my profits and percentages but did it a little differently.

On the sheet for House 1 30 years, is there a reason you do not calculate the cost to you for the down payment and renovation, i.e. HELOC interest, or interest not received if funds were in an interest bearing acct? Shouldn't this "cost of money" be calculated? If not, why?

Still with House 1 30 year, your 5 year calculation shows you refinance (with closing costs not taken int account) and take out $38,902 as profit to get back your initial investment. But won't you then be paying on a $101,500 mortgage? That extra money each month in your mortgage payment would then negatively effect your monthly cash flow and you may lose money each month.

Lastly, on all of the properties, maybe I am just missing something on your profit %. For example, on house 2 30 year, your initial investment is $17,700, your passive income is $20,710, your 5 year profit is $3,010 and your cash on cash return on investment is $3,010. You indicate your profit is 117%. Why isn't the profit 17%? You got back your $17,700 plus $3,010 profit on the deal. Shouldn't it be figured $3,010 profit made on your $17,700 investment, which is 17%? Wouldn't 117% profit be getting back your $17,700 investment, plus 100% of that -another $17,700, plus $3,010?

Looking forward to your response.

Colonialmike

 

[pyriel]

On the sheet for House 1 30 years, is there a reason you do not calculate the cost to you for the down payment and renovation, i.e. HELOC interest, or interest not received if funds were in an interest bearing acct? Shouldn't this "cost of money" be calculated? If not, why?

But it is calculated... Money coming out of my pocket is about 55k something. That includes closing cost, downpayment of 30% purchase price, and renovation cost. This is how much that came out of my pocket.;-)

Still with House 1 30 year, your 5 year calculation shows you refinance (with closing costs not taken int account) and take out $38,902 as profit to get back your initial investment. But won't you then be paying on a $101,500 mortgage? That extra money each month in your mortgage payment would then negatively effect your monthly cash flow and you may lose money each month.

One factor you forgot to calculate is that taking out $38,902 after refinancing (+ the passive income of $20,710 received) would allow me to get all of my money back (+more). This means that even if I only make a $100 per month passive income this will equates to $1200 for a year which then equates to 1200% profit. Why, that is because I already got my initial investment back in my pocket. I am now playing with pure OPM.
Now, as for the new $101,500 mortgage with new 7% APR 30 years would come up to about $676 + 100 (insurance per month) + $40 (property tax) + $140 (maintenance fee) = $955 per month. With the projected rental of $1200 there is a passive income of $205 x 12 months = $2,460 per year or $2,460% return for every year there after since my investment on this is now zero (0) since I already got my money back. [/QUOTE]

Lastly, on all of the properties, maybe I am just missing something on your profit %. For example, on house 2 30 year, your initial investment is $17,700, your passive income is $20,710, your 5 year profit is $3,010 and your cash on cash return on investment is $3,010. You indicate your profit is 117%. Why isn't the profit 17%? You got back your $17,700 plus $3,010 profit on the deal. Shouldn't it be figured $3,010 profit made on your $17,700 investment, which is 17%? Wouldn't 117% profit be getting back your $17,700 investment, plus 100% of that -another $17,700, plus $3,010?

117% vs. 17 percent, that is the question. The money really never went anywhere and it is sitting as equity so the calculation would be money invested divide it by passive income received. The money I will be getting back (cash in my pocket) will be $20,170 but the money i put in ($17,700) is sitting as equity in the house. So if we really want to be technical, we have to put in $20,170 + $17,700 (sitting as equity) which will equal to$37,870. That will be a 117% return.

;-) Pyriel

 

[colonialmike]

Thanks P,

My thoughts are below, which prompted the questions:

RE #1: I meant to say the "cost" of taking the money from where it was...savings acct, money market, HELOC, etc. For profit calculations, I usually calculate the HELOC interest when I use it for my downpayments...14K downpayment at 7% (avg for the last year) = $82/mo x 12 mo. = $984/yr. I would take this $984/yr "cost" and subtract it from the total profit.

RE #2: That is great that your REFI mortgage payment is still lower than the rent payment!!!

RE #3: FYI - In my profit calculations, I have not used the amount I put into the property (down payment, renovation, and assoc costs) to be included in my profit %. I usually use all funds and equity that I did NOT contribute in my profit % calculations.

Good Luck in your purchases and keep me (all of us) updated.

Colonialmike

 

[Gilligan]

Went surfing at the MLS a couple of days ago. I found several properties that I would like to research. I called my RE agent and we looked at 2 of them. Both are selling for 135k. One was foreclosed by the bank while the other one was VA owned. The lender of the VA owned is willing to finance 100%. The problem is that there is a setback issue. The back of the house only has 8 feet instead of 10 feet. It would probably take 10k for each house to be renovated + throw in closing cost of about 7.5k each. On the other house, i have to put in 30% downpayment since it will be assessed as investment and there is no setback issue. I've done the numbers and the VA owned is coming up with good returns but with a problem. While the other one is coming up with ok returns but without a problem. What to do?
Pyriel

Pyriel,
30% down sounds like too much money. Commercial investment properties here on the mainland only require 20% down with a possibility of getting a second mortgage on an additional 10%; thus the investor only has to put 10% down. I’m looking at your cash on cash return, you would have to be out 3 times as much money for the non-VA deal.

On the setback issue, can’t that be grandfathered in?

 

[pyriel]

Pyriel,
30% down sounds like too much money. Commercial investment properties here on the mainland only require 20% down with a possibility of getting a second mortgage on an additional 10%; thus the investor only has to put 10% down. I’m looking at your cash on cash return, you would have to be out 3 times as much money for the non-VA deal.

On the setback issue, can’t that be grandfathered in?

GGGRRRR!!!! I know, I know, Iknow.... GRRRRRR!!!!
This is the only thing i hate about living here. The banks here created their own rule about lending. There is no 100% financing here except for one designated area and that is up north of Guam. First time homeowner must put down 10-20% downpayment to get a home unless you have a VA loan which is 100% but on higher interest rate. Commercial loan and investment property is set for 30%. Oh lets not even talk about all of the banks closing cost...
This is why it is hard for someone to get started here to invest with RE. But once you get started, you can pretty much start getting into increasing your net worth. I am noticing that my competitors here when i bid are always the same. The problem here is that they've been around awhile and they have deeper pocket than mine.
Happy thanksgiving to everyone...Pyriel

 

[Ghageman]

Pyriel et al,
How familiar are you with rules regarding selling rental property that you lived in previously? I have 2 rentals which I lived in first....one out on Whidbey Island which I lived in for exactly 24 months (but only owned 12 months) and a second in Virginia which I lived in and owned for 19 months. They are both good rentals and I'll probably hold them both for at least another 3-5 years, but have no intention on living in them again.

Didn't the tax law change in 2003 in favor of active duty members who move around? I know the "must live in 2 out of last 5 years" rule, but I thought the law was changed to basically extend that for up to 10 years. I understand that I can sell one or the other and claim the 500K exemption as a percentage of 2 years that I owned and lived in the house. I think I have to wait at least 2 years between the sales to claim a second exemption as well....true?

I'm not sure I have any interest in a 1301 exchange. We've been very comfortable landlords based on the fact that by living in the house, we know it's history, the problems, and the neighborhood. I don't think I could invest in a property outright like a 1301 would require.

I would roll the profit over into a regular taxable investment, unless there is some other vehicle...thoughts?

Thanks in advance...your insight is quite interesting.

r,
Ghageman

 

[pyriel]

Pyriel et al,
How familiar are you with rules regarding selling rental property that you lived in previously? I have 2 rentals which I lived in first....one out on Whidbey Island which I lived in for exactly 24 months (but only owned 12 months) and a second in Virginia which I lived in and owned for 19 months. They are both good rentals and I'll probably hold them both for at least another 3-5 years, but have no intention on living in them again.

Didn't the tax law change in 2003 in favor of active duty members who move around? I know the "must live in 2 out of last 5 years" rule, but I thought the law was changed to basically extend that for up to 10 years. I understand that I can sell one or the other and claim the 500K exemption as a percentage of 2 years that I owned and lived in the house. I think I have to wait at least 2 years between the sales to claim a second exemption as well....true?

I'm not sure I have any interest in a 1301 exchange. We've been very comfortable landlords based on the fact that by living in the house, we know it's history, the problems, and the neighborhood. I don't think I could invest in a property outright like a 1301 would require.

I would roll the profit over into a regular taxable investment, unless there is some other vehicle...thoughts?

Thanks in advance...your insight is quite interesting.

r,
Ghageman

Hello Ghageman, the rule of thumb is for you to own and lived on the property at least 2 years. I believe that the scenario you provided does not qualify you for the exemption when you finally sell your house. If you do decide to sell a property or two, your profit will roll into your overall AGI. So there is a probability that you might get hit with a higher tax bracket or higher payment based on your income tax placement.

As far as rolling the profit over to another regular taxable investment, real estate is what comes into mind. If you would like to know more about mutual funds or stocks, im sorry but i am not really very knowledgeable with those.

On another note, i've stopped my TSP and ROTH contribution. I met with my real estate agent and we are pursuing in buying the VA owned house that I can convert into a 5 bedroom. I like this property because of 100% financing and minimal repair. Tomorrow, we will be looking at 3 half acre lots that we plan to purchase and build a 4 bedroom 2 car garage on it. The plan is to pay everything up front, then once the house is complete and the house should appraise higher than the building cost, we will refinance it and get our money back. We figure that the going market NOW, a 4 bd 2 car garage and fenced will fetched us 230k for appraisal. We plan on spending $170k in building it. We also found a bank that will give us 80% loan financing. 80% of 230k is 161k. This means that after the refinancing our investment will only be $9k, we have a $60k appreciation, with a monthly payment of $1300 (including insurance and property tax) and we know that we can have it rented to military for $2400 a month. That is an $1100 a month passive income which comes out of 13200 per year.

This is called leverage using OPM. For me, this is less risky because I know my market. With 9k, I am able to have an asset worth 230k that provides me $1100 per month. Since I will be getting my 161k back, I am now able to get another deal to do this all over again. I thought about this and all I need is ten of these deals. 10 properties x $1100 = 11,000 per month or 132k per year. If I start getting this at age 45, I would be well ahead of everyone here and I will still have my assets with higher appreciation in the end. The main thing is that I am reaping the benefit now, and not later when I am older.;-)

More to follow later...;-)