Real Estate Investing: Why I’m Not Selling

by FI Fighter on February 7, 2016

in Real Estate Thoughts

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The most frequent question that I get from readers since I converted over to the “doom and gloom” camp is this: “Why don’t you sell one of your Bay Area rental properties if you think the markets will crash?

There’s no doubt that I think we are due for an upcoming market crash/correction…

But the order of magnitude?

I have no earthly idea…

The reason I’ve gone “so far off the deep end” is because I think it’s important for leveraged investors to be proactive as opposed to being reactive. In other words, “hope for the best but prepare for the worst.” That explains why I’ve been so fixated on gold and cash lately.

For new readers of this blog, you may think that I’m this crazy, pessimistic lunatic, but I assure you that hasn’t always been the case! 😉

As long-time readers of this blog know, I was a quintessential permabull from about 2009-2014.

When it comes to selling off a golden goose?

I’ve thought about it, but i’m not THAT “doom and gloom”. No, there are no bunkers, canned goods, or ammo for me… well, not yet anyway!

Truth it, I think the world will continue on, and my outlook for the future is pretty bright. Yeah, there will probably be some bumps in the road (which I’m trying to minimize as much as possible), but for certain I don’t see a Mad Max scenario unfolding.

 

Why I’m NOT selling any of my 5 Bay Area properties:

  • Properties are all cash flow POSITIVE with decent margin.
  • Wonderful long-term tenants in place (some instances, 3+ years).
  • My rentals are all priced below market. The two refi properties are each $400 to $500 below market rate (I have some buffer in the event of a downturn that forces all landlords to reduce rents).
  • Class A properties located next to: high-tech employment centers, freeways, good school districts, etc.
  • 30 year fixed low interest rate loans for each property.
  • Too many: fees, taxes, commissions, etc. when it comes to real estate transactions… It ain’t exactly as easy as selling stocks.
  • If I quit my job, I may not be able to secure loans and buy back in later.
  • If things do somehow end up Mad Max, I have over $400,000 in liquid assets, uncorrelated to real estate to hopefully bail me out. If that fails, then I’m moving to Chicago to live in one of my basement units to escape the impending zombie apocalypse…

 

That’s about it… You will ALWAYS have your critics and haters no matter what, but really, I’m not sure what more I can do to get my ducks all lined up in a row as much as possible… I’ve done just about the best that I can do, so if SHTF still, oh well, life happens, I guess…

 

What was meant to be, will be… I ain’t tripping out about it!

 

And, here’s one more exceptionally good reason why I am not selling:

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Super Bowl 50 is gonna put Santa Clara on the map! 🙂

 

Well, maybe not…

 

But I hope you all enjoy the BIG GAME today!

 

You might even be able to catch a glimpse of my properties on camera!

 

Fight On!

{ 15 comments… read them below or add one }

1 No Nonsense LandlordNo Gravatar February 7, 2016 at 5:08 am

If the Real Estate properties are cash flowing nicely, keep them. As long as they can continue to produce, and the mortgage gets paid, there is no reason to sell.

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2 MartinNo Gravatar February 7, 2016 at 1:18 pm

Exactly. As long as they generate income, FF will be in good shape. And even if he has a 400k in liquid assets not related to the real estate, he will do good even if the properties stop generating income.

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3 FI FighterNo Gravatar February 7, 2016 at 9:31 pm

Martin,

I hope so! The $400k is my safety net, hopefully I won’t be needing it!

Take care!

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4 FI FighterNo Gravatar February 7, 2016 at 9:30 pm

Eric,

Yup, that’s the plan! Let’s hold on and see what happens!

Cheers!

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5 Midwestern LandlordNo Gravatar February 7, 2016 at 12:06 pm

Obviously I agree. You have set yourself up to weather storms if they present themselves with substantial liquidity reserves. Housing is a basic need. It is not going away! Plus the risk on the side hustle deals (and upside) is spread out over multiple investors.

Real estate isn’t exactly the easiest thing in the world to acquire so when one buys class A property with favorable long term financing, it makes sense to me to keep it for the long term. Like you have said, when not working a traditional job anymore, it may be difficult to acquire more property. Plus when property is sold, there are considerable closing costs / tax ramifications which waters down the one time return.

Question on the side hustle deals. Given multiple owners, how do you determine who is responsible for management, leasing units, etc.

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6 FI FighterNo Gravatar February 7, 2016 at 9:35 pm

Midwestern Landlord,

Definitely, that’s one of the comforts I take with these investments — everyone needs a roof over there head. Stocks can go bust, but there is a peace of mind you get from owning hard assets.

Great point about the tax consequences, I’ve appended that bullet point to the original post.

Right now, one of my partners and myself handle the PM, leases, etc… For the first 2 years, we did it for free for the benefit of the greater good. Now that the cash flow numbers are improving, we have enough cushion for a PM fee. It’s only fair… But I’ve got great partners who understand that these rentals are long-term plays… Each property has appreciated by $100k already, which is always nice, but we are focused on the big picture.

Best wishes!

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7 MartinNo Gravatar February 7, 2016 at 1:15 pm

I have read a saying that luck is with those who are prepared. It may be scary or devastating of the crisis arrives but if you have a cushion of 400k I think you will do well. If really things turn into an apocalypse you can always negotiate with the banks and try to reduce payments for some short period to get over the crisis (just guessing now). But how much do you pay monthly for all the loans right now? 5k? 10k? Even if you pay $10,000 monthly and have no income whatsoever, with 400k padding you should be able to survive for the next 3 years and that’s a quite good safety net IMHO.

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8 FI FighterNo Gravatar February 7, 2016 at 9:39 pm

Martin,

Yup, luck is when preparation meets opportunity… And sometimes, it’s better to be lucky than good.

For the 5 local rentals, the mortgages are about $10,000/month, but I do have 3 deals with partners, so that’ll help out as well.

All the best!

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9 Financial SamuraiNo Gravatar February 7, 2016 at 2:41 pm

Any thoughts on why Super bowl city is here in SF and not Santa Clara or San Jose? SF is 45 miles away!

Sam

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10 FI FighterNo Gravatar February 7, 2016 at 3:19 pm

Sam,

You are a buzzkill 😉

I was speaking for and representing the entire SF Bay Area. 🙂

The fun is in the city but the game will be played in Santa Clara.

Next time around, Santana Row 2.0 will be built and ready to go for all the pre-game festivities!!!

http://www.mercurynews.com/sports/ci_29487701/super-bowl-city-santa-clara-grabs-spotlight-plans

Enjoy the game!

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11 Financial SamuraiNo Gravatar February 7, 2016 at 6:24 pm

Only, I was just wondering why SF gets the attention when SC should!

It is crowded as heck here. I’m hopefully traffic etc will be more relaxed this coming week. Santana Row would be a great venue for entertainment for sure.

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12 FI FighterNo Gravatar February 7, 2016 at 7:36 pm

I’m just messing with you buddy, but yeah, you can’t really beat the city for festivities. It’s the place to be!

But for sure SR 2.0 will help the south bay out in the future:

“City Place” planned next to Levi’s Stadium — and which ultimately could be five times bigger than San Jose’s upscale Santana Row and include major department stores, entertainment zones, apartments and just about everything else.

Great game, what a weekend for the Bay Area!!

And congrats to Peyton and the Broncos. What a way to go out!

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13 Rental MindsetNo Gravatar February 8, 2016 at 9:51 am

I think it makes sense not to bail out of the market entirely, even if you think there is a dip coming. Too many people make that mistake in the stock market and miss out on big gains.

But you can diversify your real estate or switch markets. Prices in the Bay Area is very volatile compared to the rest of the country – during a recession prices might drop 33%. Lower prices cities in the midwest and south might drop a third of that, around 11%. [of course these numbers are rough, but the idea holds]

Even though you currently get cash flow in the Bay Area, it likely doesn’t compare to cheaper areas. I would imagine you could get at least 2x the cashflow by switching to a cheaper market as well. Say from 4% to 8%.

I would think selling 1 or 2 of your Bay Area properties into a small apartment building or 4-plex in the midwest would really help diversity and offer better protection from a crash. You can 1031 exchange to not pay taxes and still get a cheap 30 year loan. And given you are now using a property manager, doing the same from a thousands miles away isn’t all that different!

-Brian

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14 LarryNo Gravatar February 14, 2016 at 12:28 pm

You’ve built a great site here. I appreciate the discussions. I got a great deal on a 4-plex in 2009 for $285k. It was a fixer with great “bones” in a good area, which is what I was looking for. I’ve renovated it, increased rents, found great tenants and it is now cash flowing $1800/mo. But the cash flow is just a part of the benefit. I get a great tax deduction on depreciation which saves me about $180/mo on my income taxes. It has appreciated about 60% and I am paying down principal and gaining equity. Those are the four ways Real estate pays. I think 4-plexes are the best investment out there. I am now patiently waiting to buy another. Except for cash reserves everything else is in gold mining stocks — not for the faint of heart!

I would like to pull some equity through a re-fi and lower my rate as rates seem to be tumbling down again. A question to anyone who has has done a recent non-owner re-fi with cash out. I know the rate will be higher for investment property and that there may be an additional increase if I take cash out. Does anyone know what those increases in the rate might be?

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15 Rental MindsetNo Gravatar February 15, 2016 at 8:38 am

I am looking into this for one of my properties. The rate will be roughly 5% and you will be able to finance up to 75% of the appraised value. The general rule of thumb for investor rates is +1% over owner rates.

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