Building wealth through real estate buy and hold

[BlueChips]

Hello everyone,

I would like to know if there is anyone here who has been able to actually build long term wealth by buying and holding real estate property for the long term. the basic idea is this:

1. You find a nice property (apt, single family, etc) which can be easily rented out
2. You put up a down payment and finance the rest
3. You rent the property and use the rents you collect to pay off your mortage

The goal here is to basically break-even on the investment until the underlying mortgage is paid off. in theory, the property should pay for itsself IF you are able to always keep it rented out.

Is this feasible? I'm not talking about real estate flipping crap. I'm talking about long term real estate buy and hold.

thanks

[aiki14]

Originally Posted by BlueChips

Hello everyone,

I would like to know if there is anyone here who has been able to actually build long term wealth by buying and holding real estate property for the long term. the basic idea is this:

1. You find a nice property (apt, single family, etc) which can be easily rented out
2. You put up a down payment and finance the rest
3. You rent the property and use the rents you collect to pay off your mortage

The goal here is to basically break-even on the investment until the underlying mortgage is paid off. in theory, the property should pay for itsself IF you are able to always keep it rented out.

Is this feasible? I'm not talking about real estate flipping crap. I'm talking about long term real estate buy and hold.

thanks

I've been doing just that for years, along with flipping when the market will bear it.
I have a slightly different slant on it though. We only buy beachfront property and rent it for short term vacation rentals. We use a management company to maintain the property and provide maid service, and a separate company that arranges for rentals. We do it in places we enjoy going, so we can write off two one week trips a year per property (including travel costs). We have several places on Maui, 2 in Ft Lauderdale, one in Costa Rica and in Sept we acquired a property in Myrtle Beach. All currently generate a small positive cash flow after all expenses including of course mortgage.
The reason we have chosen this method is we don't want to be landlords, and when the real estate market tanks, there are always people who want to be in paradise, my wife and I especially. This is me at our place in Spreckelsville, Maui.

DSCN0009.JPG

[Leth]

that looks relaxing jim. any rental discounts for TL members?? ... j/k

[Alchemist]

I might be interested in that too!

seriously, I'm interested in discussing this wealth accumulation technique with you. let's keep the discussion in the forums, so others can benefit from it as well. bluechips, thanks for bringing this up.

let's start.....

I have several questions relating to this subject. I like your idea of getting more bangs for your buck by investing in vacation properties. now, what kind of properties are you talking about? I'm assuming you own single-family style residences, correct?

I would prefer to stick with apartments as I believe they need less maintenance and upkeep. the technique bluechips mentioned in his first post basically summarizes what I would like to accomplish: to build a portfolio of rented properties which pay for themselves over several years.

Now, my main questions are regarding mortgages.

• can you get multiple mortgages on different investment properties, assuming you don't have a regular "day job" but are a "financially independent" person?
• can you use the properties as the sole collateral?
• would it be wise to buy each property under a different corp/llc to minimize risk?

I have several more questions regarding picking the right property, renting it out, etc, but let's start with these first.

thanks for your time, Jim

[aiki14]

Originally Posted by Alchemist

I might be interested in that too!

seriously, I'm interested in discussing this wealth accumulation technique with you. let's keep the discussion in the forums, so others can benefit from it as well. bluechips, thanks for bringing this up.

let's start.....

I have several questions relating to this subject. I like your idea of getting more bangs for your buck by investing in vacation properties. now, what kind of properties are you talking about? I'm assuming you own single-family style residences, correct?

I would prefer to stick with apartments as I believe they need less maintenance and upkeep. the technique bluechips mentioned in his first post basically summarizes what I would like to accomplish: to build a portfolio of rented properties which pay for themselves over several years.

Now, my main questions are regarding mortgages.

• can you get multiple mortgages on different investment properties, assuming you don't have a regular "day job" but are a "financially independent" person?
• can you use the properties as the sole collateral?
• would it be wise to buy each property under a different corp/llc to minimize risk?

I have several more questions regarding picking the right property, renting it out, etc, but let's start with these first.

thanks for your time, Jim

You assume correctly, we use single family type properties, but they can be condo's or stand alone houses. The critical factor is a local management company since we live outside Philly and the properties are fairly distant.
We haven't had any problems getting mortgages, and here's a secret. If you have 20% down and you can show that you have enough cash flow from the other props to pay it, the banks will fall over themselves to get you the money. We never put our primary residence into the mix, such as using home equity for the down payment.
We are an LLC, but just one for the properties, it may actually be a good idea to do it as 1 LLC for each property when your beginning and the equity in the property is low. The problem with this may tie into your second question, if you want to use the equity from 1 prop to finance 2nd prop, you're not going to be able to use a second LLC to get the mortgage.
Let me jump ahead to your "picking the right property question.
We like beachfront because thats where we like to go, but others have ski resort or golf course as well. Maui is great because it get's visitors 365 days a year.
Look for a view like this and you're in fat city, this is the view from our condo in Napili, on the Ka'anapali coast of Maui, that's Molokai across the strait.
napili bay beach-2 copy.jpg

napili bay beach-1 copy.jpg

sunset napali lania-2.jpg

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[Alchemist]

first of all, congratulations on having properties with such beautiful views. When I grow up, I wanna be like you

what do you mean exactly when you say if you want to use the equity from 1 prop to finance 2nd prop, you're not going to be able to use a second LLC to get the mortgage.

Can't I just have a setup like this:

• I form a master LLC which will hold individual properties LLCs
• I buy the first property for cash
• I then get a mortgage to get the second property using the first one as additional collateral
• repeat previous step on and on

in theory, one could create an endless property chain.

Most important risks I can pinpoint here are:

• vacancy rate risk. since you depend on your rentals to repay the mortgages, an increase in your vacancy rates on a couple of properties at the same time may cause you some troubles. This risk can be mitigated by having several additional income streams unrelated to real estate to fall back on should you experience periods of difficulty renting your properties. OR by picking properties with historically low vacancy rates i.e. vacation homes like you did.
• interest rate risk. if you choose adjustable rate mortgages or similar, you may experience an increase in your mortgage payments over extended periods of time.
• something bad happens to one of your properties. i.e. disasters, unforeseen maintenance expense, lawsuits, etc. Oh well, that can happen to any entrepreneurial activity...

anything else you feel like adding?

I'm planning on starting this wealth accumulation plan once I get back to the States in a year or so. Will you put me in contact with your banks, should I not find anything that suits my needs?

thanks

[aiki14]

Originally Posted by Alchemist

first of all, congratulations on having properties with such beautiful views. When I grow up, I wanna be like you

what do you mean exactly when you say if you want to use the equity from 1 prop to finance 2nd prop, you're not going to be able to use a second LLC to get the mortgage.

Can't I just have a setup like this:

• I form a master LLC which will hold individual properties LLCs
• I buy the first property for cash
• I then get a mortgage to get the second property using the first one as additional collateral
• repeat previous step on and on

in theory, one could create an endless property chain.

Most important risks I can pinpoint here are:

• vacancy rate risk. since you depend on your rentals to repay the mortgages, an increase in your vacancy rates on a couple of properties at the same time may cause you some troubles. This risk can be mitigated by having several additional income streams unrelated to real estate to fall back on should you experience periods of difficulty renting your properties. OR by picking properties with historically low vacancy rates i.e. vacation homes like you did.
• interest rate risk. if you choose adjustable rate mortgages or similar, you may experience an increase in your mortgage payments over extended periods of time.
• something bad happens to one of your properties. i.e. disasters, unforeseen maintenance expense, lawsuits, etc. Oh well, that can happen to any entrepreneurial activity...

anything else you feel like adding?

I'm planning on starting this wealth accumulation plan once I get back to the States in a year or so. Will you put me in contact with your banks, should I not find anything that suits my needs?

thanks

I may have been a bit hasty, you might be able to do the master LLC thing but you'd need an attorney to figure out the plusses and minuses. What I meant was the LLC that owns one property is going to be the one to get the loan on the next, then a second LLC could be the manager for the second property. That may or may not reduce your risk exposure, again an attorney should be your go to person for that info.
The market conditions now are making banks reticent to loan on equity in non primary residence properties, so you may need to infuse each step with some of your own capital.

Vacancy rate risk is indeed your biggest enemy. Look for properties with rental history, or condo's in buildings with really good rental histories. Then remember location is key. On the beach is better than beach view, beach view is better than not. You pay a premium for this, but in my opinion it reduces your risk substantially. Another thing is to have a reputable rental agency working for you, unless you intend to do it yourself, and then make sure you put in the time to insure your success.

We have never used ARM's, If your due diligence is good, you'll get a place that will pay off the 30 fixed. We have gone to 15's on a couple when rates/equity/income made that a possibility, and if you can that's a good idea.

Catastrophe risk is always out there, adequate insurance, especially when you don't have the funds to replace the property is an absolute essential. Security deposits, and relationships with local banks, attorneys, and management companies are also essential. The further you are from your property the more essential it is.

I would be happy to put you in touch with any of the various entities we deal with to help you in these things. We do try to use local financing and site management, rental agencies are basically web based entities and can be anywhere.
My biggest recommendation is to spend time evaluating the location, and be hypercritical. If you would spend your hard earned cash on a stay there, so will others, if you have doubts, again so will others.
Once you have the place, do as many little things as possible to make your place special. In Hawaii we arrange for a basket of local fruit and a couple bottles of wine to be sitting on the table when the customer arrives, we stock the place with snorkelling equipment and Surf and Boogie boards as well. The return on that investment is amazing word of mouth rentals and rerentals.
Hope this is of some value

[Alchemist]

thanks again for your precious info on the subject. I'm sure a lot more questions will come to mind sooner than later. I will post them here from time to time.

why would banks be more reticent when using properties other than primary residences as collateral?

thanks

[BlueChips]

I've been following this discussion on the sidelines. Pretty much most of my questions have been already answered by both of you.

aiki, you have properties in different states. do you use local banks to finance your properties? or do you use a bank in the state where you live?

I also posted this article on housing meltdown.....

http://www.trading-lab.com/forums/ho...=2284#post2284

[aiki14]

Originally Posted by Alchemist

thanks again for your precious info on the subject. I'm sure a lot more questions will come to mind sooner than later. I will post them here from time to time.

why would banks be more reticent when using properties other than primary residences as collateral?

thanks

Bottom line is people will take better care of their primary residence. Obviously equity is equity, but if you're living there the banks feel they have a tad extra leverage.