Greetings Everyone,
This week I had a very insightful conversation with a real estate investor. It wasn’t just any real estate investor, rather it was a real estate investor who had been investing in real estate for 20 years.
This conversation that I had was particularity important to me, as most of the real estate investors that I know, and network with, have not been investing as long as 20 years. The investors that I know mainly have been investing for under 5 years.
As a result of this, the perspectives of the real estate investors with under 5 years of investing experience are quite different than the 20 year investing veteran.
Here are some key takeaways from my conversation with this very experienced real estate investor.
1) He had a partner
When this real estate investor purchased a property 20 years ago, he had an investment partner. He still has the very same investment partner today. What I learned from him is that pooling your efforts and partnering up truly can have benefits. If both people in the venture are equally committed to invest long term, you can achieve more together, than you could achieve alone.
2) He paid his mortgage down
After 20 years, his investment property was free and clear with no mortgage. He had the same tenant in the rental property over those 20 years. As you can see, the tenant had paid off the mortgage for him. I can honestly say that this is the first one on one conversation that I have had with a real estate investor who has had a tenant pay off his mortgage.
Now days, it is very common for real estate investors to obtain mortgages with extended amortization periods. It is not uncommon to have a mortgage on a rental property amortized over 35 years. This tactic is used so that the payments on the mortgage are less, and thus, the monthly cash flow on the property is greater.
The majority of the real estate investors that I know that have been investing for 5 years or less have 35 year amortization term mortgages.
It seems that the modern day real estate investor is a fan of the longer amortization periods, whereas the ‘old school’ real estate investor is a fan of the shorter amortization periods, such as 25 years or less.
There of course is no right or wrong answer as to which amortization period is better, as they both have certain upsides.
However, this veteran real estate investor got me thinking…
I would much rather pay off my mortgage sooner, with less cash flow than pay my mortgages off slowly with higher cash flow. What do you guys think?
3) He had property management
This investor bought a bunch of properties all over Southern Ontario over the past several years. He had quite a busy portfolio, and as a result, opted to use property management to look after his properties.
Many old school investors understand that hiring property management is a part of the business of real estate investing. In addition, many current day investors, try to ‘do it alone’ with no property management. This can only work when you have a limited number of properties. The more properties you start to accumulate, the greater need you will have for property management.
4) He purchased properties in many markets
Another observation that I made was that he did not buy just in one specific area, rather, his investments were spread out across many different real estate markets.
Many real estate investors that I know with under 5 years of real estate investing experience feel that you have to stick to one particular area, and buy all of your rental properties in that area. These investors feel this way because their theory is that you have to master a single geographical area. When you master that area, you will know what the values of the homes are, what rents are being obtained. You will also know the good and bad areas to invest in.
Clearly there is no right and wrong answer here. As a real estate investor, you can purchase all of your rental properties in the same geographical area, or you can buy them in many different markets. The choice is yours.
In summary, I really enjoyed my conversation with this veteran real estate investor.
As humans, we can fall victim to doubting ourselves, and possibly doubting our actions. As the saying goes, “It’s human nature.”
Anyone that tells you that they have never doubted themselves is lying to you.
The conversation that I had with the veteran real estate investor made me realize that despite MY doubts, I am definitely on the right path. The path to success!
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The next question you should ask him is where he found that 20-year tenant – that’s a rental investor’s dream!
Hey Mark,
Amazing, eh?!
20 years.
The investor also mentioned that at one point the tenant was evicted for non-payment. They then came to an agreement and the tenant moved back in. Amazing turn of events!
Thanks for stopping by Mark!
I bought my first house in 1999 as a principle resident, then moved for a job the following year and kept the house as a rental. Wow, just realized that! It’s been 10 years! Made the mistake of doing a cash-out refi to go buy in an area that I didn’t know anything about and got my butt handed back to me. I’ll be paying for that mistake for a while, at least the underwater loan is fixed rate and the tenant pays most of it. 🙂
In the town I moved to (Fresno, CA) I bought a house, then bought the duplex across the street. It was a little weird living across the street from my tenants but they were cool people and I was using property management anyway so when I was chatting with the neighbors it was not landlord/tenant stuff. Still have that duplex that I bought in ’02. One of the tenants there had been there for year already, and is still there now, so probably been a tenant for 15 or so years. That was a fixed loan, finally just paid it off in chunks with tax-returns, bonuses, etc over the years.
Definitely something to be said for knowing your market, but if you move around then you can be an “expert” in multiple markets.
Hi Erik,
Great feedback. Thanks very much for your input on this discussion.
If you were do things over, would you still do the re-fi, and invest in an area that you were more familiar with? Or would you just continue to pay down the mortgage.
Thanks again for your comment!
Regards,
Neil.
If I had it to do over again I would still do the re-fi. I had purchased this as my first home with an FHA 1/1 adjustable loan and wanted to get rid of the MMI and annual adjustments. I still would have re-fi’d to a fixed-rate loan, I simply wouldn’t have done a cash-out. If I’d done that I’m sure I would have paid that off by now. My original loan was only about $57K, and even if I still had the loan I’d be cash flowing beautifully.
Investing out of area is something I have done a couple times. The point of failure was/is my lack of research/knowledge. Having grown up in California I was accustomed to ~1% property taxes (and prop 13 limits on annual adjustments).
My first out of area purchase was a condo on Maui. I’d been vacationing there for years and though I knew I had missed the bottom by ’03 there was still price appreciation at a rapid clip in 3/03 and I found a low-end long-term condo complex where I felt I was getting a good value. Problem is that Hawaii doesn’t have any limitations on their property taxes. As values shot up, so did property taxes, making neutral or positive cash flow forever elusive. Still have that condo, it’s still cash-negative, but at tax time after writing off the depreciation I figure it all works out. The other hitch about that Maui condo was that the association dues basically doubled in the first few years after an audit showed the HOA wasn’t properly accounting and saving for long-term expenditures like roofs, rebuilding stairways, etc. So the HOA increases ate into cash flow. Oh, and Hawaii has a 4% accommodation tax (GET=General Excise Tax) on gross rents for long-term rentals (higher rate for short term rentals). So seemingly every time I thought a market-based rent increase might bring me cash neutral, a HOA increase, or property tax increase, or the GET tax, or slice for property management seemed to eat that rent increase into a net nothing for me.
Still, in another 23 or so years it’ll be a paid for property and maybe we’ll retire there. If nothing else I do get to write off a portion of my “business” trips to Maui when I go to check up on the property and local market conditions. I did also at one point own a SFR on Maui for about 1 year. My co-owner ended up getting married and wanted out, the tenant was leaving anyway, so we just sold once the house was vacant. That ended up being profitable and luckily close to the end up the up-swing so timing was good for us. I only wish I’d sold my condo when it was up 2.5x purchase price. 🙂
The property that really hurt me was when I bought a duplex in San Antonio. Love the city and it was/is obviously growing. I chose the area poorly as I was looking for cheap end of the property price range. That meant older properties, which also means non-growth areas. San Antonio doesn’t rebuild like the bay area, it just sprawls further out, abandoning the old areas. Turns out that’s why I had such lousy tenants. Pretty little building, well-built, but simply not in an area that had a positive future. The neighborhood was stagnant, possibly declining. Also, Texas taxes! Where I really went wrong in my cash flow calculations was taxes. Texas has no state income tax. They make that up with property taxes! So again, thinking of a ~1% tax rate like CA I was unprepared for the ~3.5% tax rate.
Live and learn. I’ve done all right over the years and various properties so I can’t really complain. I also recognize that what I thought was personal brilliance at one time really was a large portion of luck. I do try to stick to areas I currently live in or visit frequently now. I currently have that first SFR in Riverside, CA (I went to UC Riverside and lived in Riverside for 5 years before buying). I have a duplex in Fresno, CA, where I lived and worked for 1.5 before buying the duplex. I bought the condo on Maui because I’d vacationed there frequently enough over the years to dream of owning/living there. When I lived in Eugene, OR I couldn’t bring myself to buy because 1) I didn’t have enough spare cash flow, 2) I believed properties were overvalued, 3) there was no cash flow. I should say that applied to investment properties. I couldn’t convince my wife we didn’t need a 4/3 house at the top end of our affordability range… (380K).
When we moved from Eugene, OR to Texas this year we lost about 65K on that 4/3 house. My wife recognizes mistakes too and we found a nice 3/2 for $145K. Now our incomes don’t all go to the principle residence and I’m starting to watch the investment markets. We might just keep this house as a rental when we move in a year since we obtained favorable owner-occupied financing. Or we might sell it and look in our next town.
Hi Erik,
Thanks very much for your detailed feedback. It is great to read about all of the experience you have investing, as well as the lessons that you have learned along the way.
Investing in real estate close to where one lives, is how I began myself as well.
Also, to hear that you would have done the re-fi, if you were to do things over is great to hear.
Leveraging our assets, in order so that we can buy more is a great strategy to use, in order to grow our portfolio.
It seems that the HOAs in the States, are quite unpredictable, when it comes to increasing the fees.
Further to your comments regarding the HOAs, I have also heard from other investors in the States, who are not fans of the HOAs.
Our equivalent in Canada, Condominium Corporations, are fairly good for the most part.
Mind you, some are terrible, so it is always good to excercise one’s due diligence.
Thanks for your comment Erik and thanks for following the blog!
Great cliff notes to a valuable conversation.
Thanks J-Fed. I appreciate the support!
Best Regards,
Neil.