Perils of retirement

[ultrarunner]

In High School I worked after school and weekends at a restoration shop... lots of comfortable individuals with classic cars...

I was just the shop kid and would listen a lot... seemed just about everyone had Real Estate... some it was the property they owned for their business and sold the business but collect rent... others had invested in income property, etc...

Most were very generous with their time and advice... without exception, they all said they wished they would have got busy earlier and just about all said that meant buying property.

This is a big part of my motivation to own... and finally settled on the least expensive home on the MLS...

Fast forward to today and managing rentals is 100% a job... at least to do it right with Rent Control, Just Cause Eviction, Business Licenses, City Inspections, etc...

I would very much like to cut back and move into that perfect forever spot... but with property doubling or more... the property tax would be a huge nut to overcome...

2009-12 was the buy opportunity of a lifetime... especially with Prop 13 and reasonable interest rates...

A lot of talk about how California will be impacted should the tax overhaul happen... no doubt the ability to deduct State Income and Mortgage Interest is huge... stay tuned.

 

[RedNeckRacin]

Could you guys explain a little bit more about financing rentals instead of just owning them outright? I think I missed something in the discussion. I'm currently building my own house to save money and the idea of fixing up a house to flip is a much smaller deal in my mind now, but I like the thought of long term income, just not playing landlord.

 

[ultrarunner]

I was unable to finance anything starting out... the threshold was much higher... 3 years in the same line of work, 2 years on the job, the property had to meet FHA standards, etc... even if not going FHA... I was 22

My work around was to pick up my first property basically for the cost of the lot as the structure was so bad...

I moved in, and made repairs as I could afford to pay... took a better part of a year in my spare time.

Once the home was finished, I applied and took out a new First Mortgage with payments my future rental income could cover...

I then took this money and paid cash for my next property and repeated every 12 to 18 months... mortgage rates back then were as high as 13.5%

This worked well until I hit the wall of a limit of 5 loans/mortgages... in order for loans to be positioned well to sell the rule was a borrower was limited to 5 loans...

I never did the Line of Credit others use and some have done very well using their home for collateral but lines of credit usually required owner occupant.

Several properties I was able to buy with Seller Financing... I put down anywhere from 20 to 40% and made my payment to the seller... always a win/win and every seller has thanked me immensely... the home I am in now was one of the these... it needed some work but nothing serious... the owners were moving to a retirement home and I wrote up my offer with a large down at 5%... we had several meetings... their Broker was skeptical but said with a large down it would work...

So my sellers were getting 5% return or 2k each month and their friends that sold were getting 1% at the retirement home... I had the chance to refi when rates dropped and my Sellers asked if I would stay with them if they lowered to 4%... and that is what we did... the rate I could have got was under 4% but then there are costs, appraisals, etc... we became good friends and I dropped of the mortgage payment in person each month at the retirement home.

The only exception to the above is I once was able to assume a FHA loan with only about 2% down/closing... the family had just bought and was being transferred several weeks after closing... they didn't have money to pay a Realtor Commission so I basically went through the motions and took over their loan... not very common today if at all.

Edit... the SF Bay Area is highly competitive with as many as 40+% being all cash sales... and the after the buy the new owners would refi.

 

[ultrarunner]

I've helped several friends get into Real Estate by finding them a duplex to four-plex to buy as owner occupant... live in one and collect rent on the others... I did this too.

None of them own income property anymore but ALL were glad they did it in the 20's and early 30's because it enabled them to build up equity and live where they want now with only one spouse working.

 

[California]

After college I didn't want to start cubicle life. I joined the Carpenter's Union. The most hours I ever worked in a year was 1300 hours. That was just right to allow Hawaii, Caribbean, etc vacations and more important, gave me time to work on renovating property with the tools that I already carried on my pickup.

All the old Carpenters advised this, live in a home that needs renovation then sell at a profit after you brought it back up to match the quality of the neighborhood. Don't waste money exceeding the average quality of the neighborhood, you won't recover that excess cost upon resale.

Then one winter day browsing in a used book store I found:
How I Turned $1,000 into a Million in Real Estate in My Spare Time - William Nickerson
It was outdated than and is really outdated now but the core of the book is timeless wisdom - he lays out a simple blueprint for bootstrapping one property into a collection of rentals that soon provide a nice income. While he remained a full time employee of Pacific Bell! His rentals were just a side job.

If you read that book, set aside the 1950's culture. Just focus on how he compounded equity from one property into the next more expensive one. That advice is timeless. I think this book was the first ever guide to what is now called 'flipping houses' and I think it remains some of the best advice available.

After a couple of years working construction then a couple more part time combined with rentals renovation, I went back to school for an MBA with emphasis on finance, investment, and economic forecasting. I saw Nickerson had got it right, what grad school provided was the formal economists' analytical tools to do what Nickerson had done by instinct. Years later I see that foundation has served me well.

 

[ultrarunner]

My go to bible is the book called Landlording by Leigh Robinson...

Practical and philosophical advice for scrupulous Landlords...

Home

I did not know Leigh when I bought his book but we became friends over the years...

 

[check]

I was involved in a RRSP* scheme through my employer. I put in a minimum of 5% with the option of increasing it to 10% and the employer put in 5% as well. There were some years that I made a killing wage wise and increased my portion to 10%. You had to hold it for 12 years to be able to get the employers 5%. It was tied up in mutual funds. After 12 years I got pissed at the employer and quit. When I quit I moved the RRSP to a 'self directed RRSP' and bought bank stocks. Those stocks split 2 for 1, I held onto them and continued working. (I went back to the very same employer after 360 days so didn't lose my seniority) but could never again get into the employer funded pension plan. Such is life. The stock dividends were reinvested in a DRIP* plan up until I could draw on them at age 65. At which time I stopped the DRIP plan and let the dividends pay into what I call a cash cow. Basically a cash account within the stock account. Those stock dividends paid for a drilled well, $12,000.oo plus a $10,000.oo down payment on my Kioti (paid off as of last July) and I have still never touched the principle. CPP* and OAS* pay me about $1200.oo/month and that is more than enough for me to live on and then there sre the stock dividends after that which are pure gravy. I am not 'loaded', but I do live comfortably. If I had to do it all over again, I would have started at age 21 instead of age 39. My Uncle the retired accountant for Imperial Oil told me to save for my retirement starting at 21, but I was way too busy partying to do that. *RRSP = Registered Retirement Saving Plan *DRIP = Dividend Re Investment Plan *CPP = Canada Pension Plan *OAS = Old Age Security That is my story and I am sticking to it.

Knowing what I know now I would have put my kid's RESP money into Royal Bank stocks. Would have made a killing.

 

[check]

Here in Canada it's all about the taxes. If you buy a house and live in it, it is called your principal residence, and you don't have to pay tax on any capital gains. Ever. On a rental property, however, half of any capital gain is included in your normal income and taxed at your marginal rate (which gets up to 50% very quickly).

 

[PILOON]

Here in Canada it's all about the taxes. If you buy a house and live in it, it is called your principal residence, and you don't have to pay tax on any capital gains. Ever. On a rental property, however, half of any capital gain is included in your normal income and taxed at your marginal rate (which gets up to 50% very quickly).

So what happens often is a real handy guy buys a 'fixer upper', updates it while living in it and after a year flips it tax free.
Heck often construction workers that do the update thing while laid off seasonally. Great since they get the UIC finds while building up their asset.
I have been aware of some folks that do this year to year always tax free as it is always their 'principal dwelling'.

However it takes patience as well as knowledge and a good real estate agent to keep this scheme going. (also a good credit rating)

The main key to determine 'primary residence' is your driver's license and car registration and naturally the address to which the tax bills are sent to.

 

[Old Red]

Lots of people out there talking about real estate. Heck even my cab driver in Orlando this summer was telling me his opinions on it. It is something easy to understand and it is a booming industry right now. All the sheep......