Pay off investment properties or buy new ones - what would you do?

[Anonymous]

Anonymous wrote:

What is the total value of the properties? What is your rate of return? If it is over 10% after expenses, you are doing phenomenal. Compare to the rest of your portfolio--stocks, bonds, etc. Unless your real estate returns are doing great, and this is your specialty as an investor, I would advise you to diversify.

Also, what kind of mortgages do you have? Any ARM's? If so, given the uncertainly in the coming years, I would advise you to pay them off before the rates potentially skyrocket. If you have a 30-year fixed at 3.5%, making excellent returns, and real estate is not disproportionate in your portfolio, then by all means, go buy some more.

But isn't long distance management a major pain? Who wants to hire and pay a plumber when you are miles away?

OP here, thank you - these are great questions.

Total estimated value of the properties (equity): 1.25 million (2.85 million before mortgages are taken into account). The mortgages are all fixed - one is 30/year at 4.5 and the rest were just refinanced to 15/year at 4 (good rate for investment properties I think).

Rate of return: I'm honestly not sure how to calculate this. We make 20K in rents/month, pay $13,500 in mortgages, and pay the property manager $1,600. Repairs and improvements probably take 2-3K/month on average (just installed a new kitchen in an older property, replaced a roof, etc. We try to make sure the properties are in great shape so we can expect great tenants.)

This is absolutely our specialty. We do it ethically and well. We really feel strongly about running a solid business.

That said? We really have very few other investments - we have about $175,000 in retirement accounts and $40,000 in 529s for our boys who are both younger than 10. My husband is now a State Dept employee and we're maxing out the retirement account there but that's really it.

Long distance management isn't ideal. We lived within 15 blocks of all the properties for 10 years, then we joined the Foreign Service! So off we went. The property manager is good, not great, but things are going pretty well. He's finding new tenants quickly, managing the bills well, and agrees with my philosophy of keeping the places in very good shape so that we can attract, and keep, very good tenants. I'm home on R&R at least once a year and do a sneak inspection to make sure he's keeping things in good shape.

I really appreciate your advice! Based on what I wrote, would you pay down or continue to add? Thanks again!

[Anonymous]

No way. I do t think you need to sell what you have, but you defn are already overinvested in real estate as a proportion of your portfolio, so I would not add to it.

[Anonymous]

OP, I agree with the PP. You do not have enough saved/invested outside of realestate. I assume your plan is to sell a property if you need money, but if something should happen with the housing market, you would be out of luck.

So you had these properties pre-foreign service. What did you/your DH do before to have so much money? Perhaps you are older and bought pre-boom.

[Anonymous]

Anonymous wrote:OP, I agree with the PP. You do not have enough saved/invested outside of realestate. I assume your plan is to sell a property if you need money, but if something should happen with the housing market, you would be out of luck.

So you had these properties pre-foreign service. What did you/your DH do before to have so much money? Perhaps you are older and bought pre-boom.

OP here, and the advice is sound. I will definitely talk it over with DH.

We bought three houses in 2000-2003 (using an equity line from one to pay for the down payment for the next, twice). We bought the other two in 2009 when the boom was dying down - we had saved enough for one down payment and bought the last as a primary residence with very little down. They have all appreciated which is nice but not something we planned for or counted on. As long as the tenants pay the mortgage each month, we will be happy with whatever they're worth when they're paid off. We subscribe to the "slow and steady" approach.

Thanks all for your guidance. I think it's really smart to think about diversifying.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

What is the total value of the properties? What is your rate of return? If it is over 10% after expenses, you are doing phenomenal. Compare to the rest of your portfolio--stocks, bonds, etc. Unless your real estate returns are doing great, and this is your specialty as an investor, I would advise you to diversify.

Also, what kind of mortgages do you have? Any ARM's? If so, given the uncertainly in the coming years, I would advise you to pay them off before the rates potentially skyrocket. If you have a 30-year fixed at 3.5%, making excellent returns, and real estate is not disproportionate in your portfolio, then by all means, go buy some more.

But isn't long distance management a major pain? Who wants to hire and pay a plumber when you are miles away?

OP here, thank you - these are great questions.

Total estimated value of the properties (equity): 1.25 million (2.85 million before mortgages are taken into account). The mortgages are all fixed - one is 30/year at 4.5 and the rest were just refinanced to 15/year at 4 (good rate for investment properties I think).

Rate of return: I'm honestly not sure how to calculate this. We make 20K in rents/month, pay $13,500 in mortgages, and pay the property manager $1,600. Repairs and improvements probably take 2-3K/month on average (just installed a new kitchen in an older property, replaced a roof, etc. We try to make sure the properties are in great shape so we can expect great tenants.)

This is absolutely our specialty. We do it ethically and well. We really feel strongly about running a solid business.

That said? We really have very few other investments - we have about $175,000 in retirement accounts and $40,000 in 529s for our boys who are both younger than 10. My husband is now a State Dept employee and we're maxing out the retirement account there but that's really it.

Long distance management isn't ideal. We lived within 15 blocks of all the properties for 10 years, then we joined the Foreign Service! So off we went. The property manager is good, not great, but things are going pretty well. He's finding new tenants quickly, managing the bills well, and agrees with my philosophy of keeping the places in very good shape so that we can attract, and keep, very good tenants. I'm home on R&R at least once a year and do a sneak inspection to make sure he's keeping things in good shape.

I really appreciate your advice! Based on what I wrote, would you pay down or continue to add? Thanks again!

This is Cheese Lady. OK, so you make roughly 5% return, after all expenses. Are you sure you are taking into account months when some units are vacant? that would bring down your return even more. This is a respectable return. What are the prognoses for long-term appreciation? Some places have good growth potential, some are just saturated, already had their golden years, and won't skyrocket further.

And this property manager, what does he do? Just collect rent checks? I mean, you still have to deal with leaky pipes and cutting checks to repairmen, no?

I love real estate. So, I get you when you basically say you feel its your calling. You enjoy it more than watching passive investments in the stock market, eh? You would probably make more money if you had a *touch* more of the slumlord in you--you probably put in very nice fixtures rather than the cheapie "rental" versions.

BUT, you are definitely overinvested. RE is a great hedge in some ways, and depending on location, can really cushion any market freefalls. But RE can also start to tank too, and with few exceptions, won't have great growth in the long run compared to stocks. Since you guys seem relatively young, I would recommend investing in equities and broadening out. If you are not that psyched, you can take the conventional wisdom and invest in an array of broad index stocks (domestic, international, growth, big companies, medium companies, small companies) and just ignore them. Avoid trying to play the market and invest in individual stocks. Great way to lose a bundle. Try to steel your nerves and invest regularly, not just at market peaks--that can really eat into your growth. Invest regular amounts in regular intervals, doing so even when the market is tanking and people are divesting like rats off a sinking ship.

At the end of your working life, hopefully you will have a very sizable goose that will continue to spit out eggs that you can live on comfortably til your dying days and secure the futures of your children and children's children for years to come.

Best of luck to you and your prosperous future!

[Anonymous]

And this property manager, what does he do? Just collect rent checks? I mean, you still have to deal with leaky pipes and cutting checks to repairmen, no?

If OP has properties here and has been in the foreign service, I can almost guarantee that her property manager is not just collecting rent checks.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:People have tons of different answers to that question. One I have heard multiple times is real estate should be 20% excluding your primary residence. Another common one is 33%, presumably including your primary residence.

This is almost exactly where we are - real estate is 22% of our portfolio without our primary residence, and 33% with it. The rest is in stocks and bonds with a small amount (less than 5%) in cash. Our net worth is about $1.5M total

Your primary residence is CHEAP. wow.

No, whatever you calculated in your head is their equity in their primary residence, not the value of the actual house. For all we know, their residence could be $800,000 with $150,000 down and just starting to pay the mortgage.

Very close. Primary residence was $725K with a $460K mortgage. I estimate equity at about $220K because I subtract estimated costs associated with selling.

Small downpayment for such a rich guy.
Pay down that massive mortgage.

[Anonymous]

Anonymous wrote:

This is Cheese Lady. OK, so you make roughly 5% return, after all expenses. Are you sure you are taking into account months when some units are vacant? that would bring down your return even more. This is a respectable return. What are the prognoses for long-term appreciation? Some places have good growth potential, some are just saturated, already had their golden years, and won't skyrocket further.

And this property manager, what does he do? Just collect rent checks? I mean, you still have to deal with leaky pipes and cutting checks to repairmen, no?

I love real estate. So, I get you when you basically say you feel its your calling. You enjoy it more than watching passive investments in the stock market, eh? You would probably make more money if you had a *touch* more of the slumlord in you--you probably put in very nice fixtures rather than the cheapie "rental" versions.

BUT, you are definitely overinvested. RE is a great hedge in some ways, and depending on location, can really cushion any market freefalls. But RE can also start to tank too, and with few exceptions, won't have great growth in the long run compared to stocks. Since you guys seem relatively young, I would recommend investing in equities and broadening out. If you are not that psyched, you can take the conventional wisdom and invest in an array of broad index stocks (domestic, international, growth, big companies, medium companies, small companies) and just ignore them. Avoid trying to play the market and invest in individual stocks. Great way to lose a bundle. Try to steel your nerves and invest regularly, not just at market peaks--that can really eat into your growth. Invest regular amounts in regular intervals, doing so even when the market is tanking and people are divesting like rats off a sinking ship.

At the end of your working life, hopefully you will have a very sizable goose that will continue to spit out eggs that you can live on comfortably til your dying days and secure the futures of your children and children's children for years to come.

Best of luck to you and your prosperous future!

Cheese Lady, you rock. This is OP. I don't have a catchy name - maybe "slumlord wannabe?"

Your advice is wonderful. I am going to sit down after kids are in bed and really research your advice about funds. I admit that since I love RE so much I've really neglected learning about other parts of the market. I'll put and end to that soon (I just find it so intimidating!) But you're definitely helping.

As far as vacancies, I am not exaggerating when I say that it rarely ever happens. Three properties are within 2 blocks of the Shaw metro and the other 2 are in Columbia Heights in good locations. Generally I have new tenants lined up before the old ones depart, and have it vacant for merely days while I re-paint and make repairs in-between. In 11 years, I can think of one time that one apartment went vacant for 1.5 months. Really, it's been wonderful.

The property manager is full-service; he handles repairs, inspects every few months, and even facilitated replacing that old kitchen. I don't do the slumlord thing but I don't install granite either - "builder grade" and "decent quality" are my buzzwords when making repairs and improvements. I do insist on making repairs immediately and replacing worn-out fixtures and appliances. A little money spent goes a long way towards getting, and keeping, excellent tenants. I recently lost a tenant that had been in one of my group homes for 7 years!

Since you've been so generous, can you tell me what you would do with the added info that I am 39, DH is 52, our kids are 6 and 8 and although we've been trying for another kiddo it looks like we may be done. Anything you would do differently with that info?

Again, thank you. I really appreciate the guidance. Some people would be too nervous to be landlords but I find it easy - the investing stuff is what I find totally intimidating! That and health insurance stuff.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

This is Cheese Lady. OK, so you make roughly 5% return, after all expenses. Are you sure you are taking into account months when some units are vacant? that would bring down your return even more. This is a respectable return. What are the prognoses for long-term appreciation? Some places have good growth potential, some are just saturated, already had their golden years, and won't skyrocket further.

And this property manager, what does he do? Just collect rent checks? I mean, you still have to deal with leaky pipes and cutting checks to repairmen, no?

I love real estate. So, I get you when you basically say you feel its your calling. You enjoy it more than watching passive investments in the stock market, eh? You would probably make more money if you had a *touch* more of the slumlord in you--you probably put in very nice fixtures rather than the cheapie "rental" versions.

BUT, you are definitely overinvested. RE is a great hedge in some ways, and depending on location, can really cushion any market freefalls. But RE can also start to tank too, and with few exceptions, won't have great growth in the long run compared to stocks. Since you guys seem relatively young, I would recommend investing in equities and broadening out. If you are not that psyched, you can take the conventional wisdom and invest in an array of broad index stocks (domestic, international, growth, big companies, medium companies, small companies) and just ignore them. Avoid trying to play the market and invest in individual stocks. Great way to lose a bundle. Try to steel your nerves and invest regularly, not just at market peaks--that can really eat into your growth. Invest regular amounts in regular intervals, doing so even when the market is tanking and people are divesting like rats off a sinking ship.

At the end of your working life, hopefully you will have a very sizable goose that will continue to spit out eggs that you can live on comfortably til your dying days and secure the futures of your children and children's children for years to come.

Best of luck to you and your prosperous future!

Cheese Lady, you rock. This is OP. I don't have a catchy name - maybe "slumlord wannabe?"

Your advice is wonderful. I am going to sit down after kids are in bed and really research your advice about funds. I admit that since I love RE so much I've really neglected learning about other parts of the market. I'll put and end to that soon (I just find it so intimidating!) But you're definitely helping.

As far as vacancies, I am not exaggerating when I say that it rarely ever happens. Three properties are within 2 blocks of the Shaw metro and the other 2 are in Columbia Heights in good locations. Generally I have new tenants lined up before the old ones depart, and have it vacant for merely days while I re-paint and make repairs in-between. In 11 years, I can think of one time that one apartment went vacant for 1.5 months. Really, it's been wonderful.

The property manager is full-service; he handles repairs, inspects every few months, and even facilitated replacing that old kitchen. I don't do the slumlord thing but I don't install granite either - "builder grade" and "decent quality" are my buzzwords when making repairs and improvements. I do insist on making repairs immediately and replacing worn-out fixtures and appliances. A little money spent goes a long way towards getting, and keeping, excellent tenants. I recently lost a tenant that had been in one of my group homes for 7 years!

Since you've been so generous, can you tell me what you would do with the added info that I am 39, DH is 52, our kids are 6 and 8 and although we've been trying for another kiddo it looks like we may be done. Anything you would do differently with that info?

Again, thank you. I really appreciate the guidance. Some people would be too nervous to be landlords but I find it easy - the investing stuff is what I find totally intimidating! That and health insurance stuff.

Has your husband been married before?

[Anonymous]

Congrats to you OP! You've accumulated a nice portfolio. I would keep acquiring properties. In this area, we seem to be recession proof. If you look at the jobs forecast (50,000 new jobs a year for the next 10 years), there will be a demand for housing. We are also at historically low interest rates so I think in 10 years you'll be very thankful that you invested with fixed rates around 4%.

You mentioned you come back once a year for R&R. You probably already do this, but be sure to write off the cost of the trip and hotel when you come back b/cs you're inspecting the properties and it's a legitimate tax deduction. Good luck to you!

[Anonymous]

OP, if you could recommend your property manager in the appropriate thread in the Real Estate forum, I'm sure a lot of people would appreciate it.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:People have tons of different answers to that question. One I have heard multiple times is real estate should be 20% excluding your primary residence. Another common one is 33%, presumably including your primary residence.

This is almost exactly where we are - real estate is 22% of our portfolio without our primary residence, and 33% with it. The rest is in stocks and bonds with a small amount (less than 5%) in cash. Our net worth is about $1.5M total

Your primary residence is CHEAP. wow.

No, whatever you calculated in your head is their equity in their primary residence, not the value of the actual house. For all we know, their residence could be $800,000 with $150,000 down and just starting to pay the mortgage.

Very close. Primary residence was $725K with a $460K mortgage. I estimate equity at about $220K because I subtract estimated costs associated with selling.

Small downpayment for such a rich guy.
Pay down that massive mortgage.

Rich girl

And no thanks. Investments have gained 20% in the two years since I took out my 3.5% mortgage.

[Anonymous]

Anonymous wrote:

Cheese Lady, you rock. This is OP. I don't have a catchy name - maybe "slumlord wannabe?"

Your advice is wonderful. I am going to sit down after kids are in bed and really research your advice about funds. I admit that since I love RE so much I've really neglected learning about other parts of the market. I'll put and end to that soon (I just find it so intimidating!) But you're definitely helping.

As far as vacancies, I am not exaggerating when I say that it rarely ever happens. Three properties are within 2 blocks of the Shaw metro and the other 2 are in Columbia Heights in good locations. Generally I have new tenants lined up before the old ones depart, and have it vacant for merely days while I re-paint and make repairs in-between. In 11 years, I can think of one time that one apartment went vacant for 1.5 months. Really, it's been wonderful.

The property manager is full-service; he handles repairs, inspects every few months, and even facilitated replacing that old kitchen. I don't do the slumlord thing but I don't install granite either - "builder grade" and "decent quality" are my buzzwords when making repairs and improvements. I do insist on making repairs immediately and replacing worn-out fixtures and appliances. A little money spent goes a long way towards getting, and keeping, excellent tenants. I recently lost a tenant that had been in one of my group homes for 7 years!

Since you've been so generous, can you tell me what you would do with the added info that I am 39, DH is 52, our kids are 6 and 8 and although we've been trying for another kiddo it looks like we may be done. Anything you would do differently with that info?

Again, thank you. I really appreciate the guidance. Some people would be too nervous to be landlords but I find it easy - the investing stuff is what I find totally intimidating! That and health insurance stuff.

I assume that your husband probably does not want to work much more than another 10 years. And during that time both of you will be pulling salaries? And presumably, will have some sort of pension? I would be even more diversified, then, and focus on limiting risk. I would suggest you do some reading on bonds as well. They can be very nice for income stream generation.

What you are doing with the rental income? Plowing it back in to investments, or using it for living expenses? If you are using the rents for living expenses, I would gently suggest that you are living beyond your means, since, you are living beyond your salaries.

Also, you should have some sort of plan for your kids' college educations. I am guilty of not having done this, but you should look into some tax-advantaged ways of socking away cash for college. You can say how sensible state school can be, but then when that Brown admissions packet shows up at your door, you are going to sell your door mat off to try to pay for it. You can't delay when they turn 18, so you are going to need some liquid and conservative funds (cash-like) for that first tuition bill. In the worst case scenario, you are going to have a couple of years where you could be paying $100,000 a year in today's money. Stocks and real estate are not the best for deadlines the closer you get to the date.

Are you thinking private school for your children? Can you carry this on your salaries only? I am not necessarily a private-or-bust! person. There are very good public schools, and I think an excellent public trumps a mediocre private, no questions asked. You would think that would be plain as day, but it's not. But I would recommend paying for private school, if going that route, by trying to swing it with your salaries and not dip into the the real estate return money. Save that for further investment. Compound interest is a beautiful thing!

After you have done enough research on your own and are comfortable enough to tell pro from shyster, you can consider hiring a financial consultant on a fee per hour basis (rather than commission basis) and getting a second opinion. I am a big fan of hiring the right specialist rather than doing everything yourself, and a good financial consultant would be well worth the money. However, you can be comfortable managing your portfolio on your own at this point, if their fees seem daunting to you.

It also doesn't hurt to have a nice stack of cash on the side too. I would hold a year's worth of expenses (everything) in cash at a minimum. Six months for paycheck-to-paycheck, but you can afford a bigger cushion.

With your rentals in a dependable, stable area, solid bonds for further cash flow, and stock holdings for growth, I see a good future for you.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:People have tons of different answers to that question. One I have heard multiple times is real estate should be 20% excluding your primary residence. Another common one is 33%, presumably including your primary residence.

This is almost exactly where we are - real estate is 22% of our portfolio without our primary residence, and 33% with it. The rest is in stocks and bonds with a small amount (less than 5%) in cash. Our net worth is about $1.5M total

Your primary residence is CHEAP. wow.

No, whatever you calculated in your head is their equity in their primary residence, not the value of the actual house. For all we know, their residence could be $800,000 with $150,000 down and just starting to pay the mortgage.

Very close. Primary residence was $725K with a $460K mortgage. I estimate equity at about $220K because I subtract estimated costs associated with selling.

Small downpayment for such a rich guy.
Pay down that massive mortgage.

Rich girl

And no thanks. Investments have gained 20% in the two years since I took out my 3.5% mortgage.

What number wife are you?
How many other kids does he have?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:People have tons of different answers to that question. One I have heard multiple times is real estate should be 20% excluding your primary residence. Another common one is 33%, presumably including your primary residence.

This is almost exactly where we are - real estate is 22% of our portfolio without our primary residence, and 33% with it. The rest is in stocks and bonds with a small amount (less than 5%) in cash. Our net worth is about $1.5M total

Your primary residence is CHEAP. wow.

No, whatever you calculated in your head is their equity in their primary residence, not the value of the actual house. For all we know, their residence could be $800,000 with $150,000 down and just starting to pay the mortgage.

Very close. Primary residence was $725K with a $460K mortgage. I estimate equity at about $220K because I subtract estimated costs associated with selling.

Small downpayment for such a rich guy.
Pay down that massive mortgage.

Rich girl

And no thanks. Investments have gained 20% in the two years since I took out my 3.5% mortgage.

What number wife are you?
How many other kids does he have?

Wife #1, married 11 years. We have one child together. Why would you assume otherwise?