Real Estate Rental Property SH #3 Under Contract! (December 09, 2014)

by FI Fighter on December 10, 2014

in Real Estate Updates

In the last post, I did some reflection and concluded that I needed to be more careful with my investments as I try and navigate through the last stages of early FI.

And just like it is my nature, I then go around and do something the complete opposite of that (explanation below)! This week, I put in an offer for another Bay Area rental property, and just learned that the seller accepted the bid!

So, just like that, I am now under contract to secure my fourth rental property this year. Since this property is located in the Bay Area (and I’m trying to be more conservative!), it will be another partnership deal. However, unlike the last few rounds, I am going into this deal with just one other partner.

As we wrap up 2014, the following has taken place this year:

Oh boy, and this year was supposed to be marked as Year 3: The conservator… As is life, things don’t always go quite as planned…

Thought Process

When 2014 first began, I had a strong inkling that this would be my final year in high-tech. I was just about ready to check out of the game, so I knew that in order to make early FI possible, I would need to ramp up my cash flow production. In securing Rental Property #5, I was able to increase my passive income to about $3,000/month on a perfect month. With vacancy/maintenance issues, I’m guessing the net cash flow is closer to about $2,000/month (so far)…

After winning Rental Property #5, my strategy was to try and pick up some more cash flow rentals out-of-state. I was originally thinking that maybe another few cash flow properties would just about do it and allow me to exit stage left for good.

As the year progressed, I thought about all sorts of things. From 1031 exchanges to buying a commercial apartment building, I entertained many different investment strategies…

In the end, I realized that I wanted to stay close to home and try and win some more Bay Area properties. Everywhere I looked, I saw development and growth. From the new 49er’s stadium, to the Bart extension through to Berryessa, to the new Samsung and Apple campuses, etc. There is just so much money pouring into the Bay Area these days! Further, land is scarce here and demand has never been greater for Bay Area real estate.

Bay Area Experience

Yes, cash flow in the Bay Area is almost NIL to begin with on Day 1 with a conventional 20% or 25% downpayment. But there are other things to consider outside of just pure cash flow, or cash-on-cash returns.

For starters, appreciation does matter and it is something that can have a HUGE impact on your long-term returns. I know everyone likes to clamor about how appreciation is just speculation and ultimately “wishful thinking”… That is, until you actually experience it for yourself and realize its true potency… In fact, the only way I can even close SH #3 is to tap into equity courtesy of a cash out refi.

I would never suggest to invest purely for appreciation, as it is never assured, but it also isn’t extremely difficult to try and figure out which locations are better suited to experience such gains. When in doubt, go to where you can find the following in quality and abundance: jobs, schools, weather/lifestyle.

Also, in my own experience, my best tenants are the local ones. There is a great deal of peace of mind knowing that you can locate tenants that are responsible and will pay rent on time each month! Around here, it isn’t difficult at all finding: 700+ credit scores, dual income families grossing $200k+ salaries, etc.

Further, we can debate all day long about the future demise of Silicon Valley if high-tech were to ever leave, but my own take is that the Bay Area is resilient (more than just high-tech), and even more importantly, people CHOOSE to live here (despite the enormous cost-of-living disparity with most of the rest of the country). Much of the big money and venture capitalists are also stationed here. Really, the only real fear I have with Bay Area real estate is the next big earthquake…

Balancing Act

Investing is a balancing act. You have to know your own risk tolerance, and ultimately make decisions that you are comfortable with! For myself, my real estate investment portfolio now looks like this:

Bay Area: 5 properties (2 partnerships at 25% and 1 partnership at 50%)
Chicago: 2 properties
Indianapolis: 1 property

Granted, if we are able to close this latest deal, I will have ownership in 8 properties, and 10 units in total. Effectively, I would own 3 properties (3 units) in the Bay Area and 3 properties (5 units) out-of-state.

And that’s an allocation that I’m comfortable with, moving forward. The out-of-state rentals cash flow better today, and the Bay Area properties will appreciate much more rapidly in the future.

Cash flow + Appreciation. That’s my recipe for sustainable early FI!

Moving Forward

Where do we go from here? As of today, my line of thinking is that this will most likely be my FINAL real estate purchase prior to declaring early FI.

I’m over-leveraged and have no desire to take on any more loans! From here on out, I’m just going to stash cash and invest in stocks. Although I may elect to attempt another cash out refi to obtain even more cash as a security measure (another $100,000 in liquid funds would do A LOT for added peace of mind!).

If everything goes smoothly, I will use ~1/2 of the cash out refi money (~$100,000) to fund this deal. The other half, I will park in cash reserves, or dividend growth stocks/index funds.

So, although 2014 was supposed to be a year of conservation, it didn’t quite work out that way. As I’ve explained before in the past, my insistence on winning deals has a lot to do with the fact that I won’t be able to qualify for any more loans once I walk away from the 9-5.

For me, the time to act has to be NOW. I can purchase dividend growth stocks for the remainder of my life, but real estate is something that is much more difficult to buy without the use of financing… especially in expensive locations.

Also, it doesn’t hurt that interest rates are still near historic lows! With 3% financing now becoming available, this should only push prices up even further as well… Well, until the next bubble burst…

It’s been a pretty eventful year… More details to come as they emerge. Now, I need to go find me a lender! 🙂

Fight On!

{ 16 comments… read them below or add one }

1 Financial SamuraiNo Gravatar December 10, 2014 at 9:03 am

Love the guts!

If you did a $100,000 cash out to leverage up more, what exactly is your cash balance now after closing?

If you had $500,000 in cash now after this latest property, what would you do with it?

Cheers

Sam

Reply

2 FI FighterNo Gravatar December 11, 2014 at 8:21 am

Sam,

I wouldn’t use the entire $100k to fund this deal. A 50/50 split, so that would leave me about $50k or so in cash.

After this deal, I think I’ve had enough excitement for now… With $500k in cash, I would keep it mostly in cash/safe stocks, and prepare for the next crash…

I think I’ve partaked in enough deals this round… You can always chase for more, but I think I have enough.

Cheers!

Reply

3 Dave @ The New York BudgetNo Gravatar December 10, 2014 at 1:37 pm

Very impressive. I’m not sure I have the guts to leverage quite as quickly as you do! I actually may be done until the next housing crash. I feel as though I caught the tail end of some decent real estates this round, but I learned a lot and will be ready for round 2, years down the line!

Reply

4 FI FighterNo Gravatar December 11, 2014 at 8:24 am

Dave,

Yeah, I hear you, the good deals are mostly gone now. I realize I am paying a premium for this next deal, but since my strategy is likely buy and hold, I can afford to wait out until the next boom cycle…

In the meantime, I know my time as a wage slave is running out, so financing would become a major issue later on… In that sense, I decided to just go ahead and act now.

Take care and I’ll see you Round 2! 🙂

Reply

5 Income SurferNo Gravatar December 10, 2014 at 3:54 pm

You are certainly going for it Fighter. We have different styles but I wholly appreciate your ambition. I’m curious what you’ll say about Sam’s comment above. I don’t honestly know in your position what I’d do with the extra money. For that matter, I am dramatically less leveraged that you, and I still keep a large cash cushion because I haven’t seen many opportunities in the last year.

Best wishes buddy
-Bryan

Reply

6 FI FighterNo Gravatar December 11, 2014 at 8:26 am

Bryan,

Yeah, I agree that I’m over-leveraged at this point, no question. It’s very much a high reward/high risk scenario. So, the only way I can mitigate risk is to keep stashing cash.

I was very much conflicted on what to do, but decided to roll the dice one last time and try and lock down one final Bay Area property. Hopefully the future is bright and this will look like a smart decision many years down the road.

We’ll see!

All the best!

Reply

7 DoneByFortyNo Gravatar December 10, 2014 at 10:12 pm

We’ve also contemplated a cash out re-fi on our primary residence, but have decided to keep trying to cashflow any properties we acquire instead. I don’t have your guts to pull the trigger. 🙂

But please keep us updated on how it goes, and best of luck, as always. Cheers.

Reply

8 FI FighterNo Gravatar December 11, 2014 at 8:29 am

DoneByForty,

I hear you… Maybe I do need to re-calibrate myself, as I tend to err on the side of risk too much…

Well, then again, my plans for early FI are wide open and my own definition is to just be able to walk away from the 9-5 grind… For me, it doesn’t mean never working again or earning money, so I’m just trying to get all the excitement out of my system while I’m still young…

I very much would welcome a more boring investing future! 🙂

Cheers!

Reply

9 LeighNo Gravatar December 10, 2014 at 10:19 pm

I’m pretty sure we are taking exact opposite paths towards FI 😉 I’m going for the no leverage route and you’re taking all the leverage you can get!

Reply

10 FI FighterNo Gravatar December 11, 2014 at 8:31 am

Leigh,

LOL! What a contrast, indeed… but hopefully these two divergent paths will converge and intersect and meet up in paradise.

No question, your path is infinitely less risky and most likely the wiser decision.

I’m a gambler, what can I say…

See you at the top!

Reply

11 NunoNo Gravatar December 11, 2014 at 8:03 am

Pretty impressive, as allways.
Really enjoy follow your path to FI.

Best of luck!

Reply

12 FI FighterNo Gravatar December 11, 2014 at 8:33 am

Nuno,

Thanks! I’m doing my best to get there one day at a time.

All the best!

Reply

13 Rat Race QuitterNo Gravatar December 11, 2014 at 1:03 pm

I’ve been following your journey here since post #1 and I’m eager to see how 2015 shapes up for you.

I’m on the other side of the country, Florida, and real estate prices in my part of the state haven’t moved that much in the past few years (which makes me sad because I bought my property in 2009!) I’ve had to focus my efforts on dividend stocks and P2P lending.

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14 No Nonsense LandlordNo Gravatar December 11, 2014 at 2:04 pm

I hope this works out for you, but I would never advise to include appreciation, or depreciation in any formula.

Best of luck!

Reply

15 O'brianNo Gravatar April 1, 2015 at 10:31 pm

Wow, congrats on all the progress! First comment on this blog, but I’ve always read your work and learn a lot. Keep it up!

I’m curious about how you set up your partnerships as I’m considering such a path myself. Conventional banks I’ve talked don’t lend to a partnership so either that leaves one of the partners to get financing exclusively or seeking out a portfolio lender of some sort that will lend to a partnership, though not at the low 30 year fixed interest loans that Fannie allows.

Also is title being taken as tenants in common or through LLC? Though if you’re doing LLC, then I suppose that rules out conventional financing.

Reply

16 FI FighterNo Gravatar April 1, 2015 at 10:46 pm

O’brian,

Thanks for the support, I appreciate it.

In regards to partnerships, to close a residential property, we’ve always gotten one, or a few of the partners together to take out a conventional loan under their names… I haven’t tried the portfolio lender route yet, but perhaps that works as well.

Sure, you could go directly the LLC route, I suppose, as well, but financing terms probably won’t be as favorable.

In regards to TIC, or JT, here’s how my agent described it to me once before:

JT is more common among married couples, just like Community Property. Both are absolute commitments to stay together for life. All partners need to agree on all decisions. If any partner dies, the surviving partner inherits the property. If anybody sells, that person’s share becomes a TIC and loses the right of survivorship.

Meanwhile, TIC is like dating. You may be together for a couple of years and if things don’t work out, you can easily find somebody else. There’s no commitment, just an understanding of a relationship. You don’t need all partners to agree, just a majority.

So, while you may stay friends for life, your personal situations may change. A TIC offers you more flexibility to adapt to those changes.

Cheers!

Reply

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