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Author: Phmerc One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 13972  
Subject: Las Vegas house Date: 12/28/2012 3:38 PM
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Hey everyone

I was hoping to get some advice on a Las Vegas investment home I am considering on purchasing.

The house costs 100,000 and I need to spend about 6,000 in upgrades. The house is 1500 sqf.

I live in Canada so I would hire a property Management company to handle tenants. They charge 10 percent of the monthly rent and I can rent the home for approx 1000 a month.

Other expenses include:

Insurance: 480/year
Taxes: 950/year
Maintenance fee: 100/month

Tenants pay hydro, gas, electricity

I'm 26 years old, with no dependents and live with my parents. I do not want to spend my savings on a large down payment because I'm still saving to move out on my own in 2-3 years. I can take a line of credit for 106,000 for 2.69 percent.

Do you think it's worth borrowing this money to do this? I figure I can put about 750/ month towards my Line of credit and pay about 400-500 from my own pocket a month. I make 4000/ month net but I purchase a lot of stocks per month and figure I can let the tenant build most my equity and if I need to sell the house in 3 years that I can sell the house for a little more than I bought it. Sorry for the rant, any advice is appreciated!

Phmerc
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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13659 of 13972
Subject: Re: Las Vegas house Date: 12/28/2012 4:45 PM
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Hi Phmerc,

Initially, before I got to the bottom, I was going to encourage you not to become an absentee landlord (especially for a single unit.)

NOw.... you say you have the ability to finance it 100% @ 2.69%!?! OK, I definitely want to know how you are going to swing that....

But let's run the numbers assuming its true;
$237.61/month = $106,000, I/O credit line @ 2.69%
$40/month = $480 insurance
$79.16/mo = Taxes
$100/mo = maintenance
=======
$396.33 hard costs of carry

$100/mo = property management
$166.66/mo = 2 months annual vacancy cost contingency, spread over 12 months
$83.33/mo = typical 1-month's worth of rent fee for unit turnover & marketing
=======
=======
$647.32 all-in costs of overhead...
- $1,000 Gross monthly rent revenues
=======
$352.68 monthly pre-tax margin

THE NUMBERS look good...
*HOWEVER* there is still a LOT MORE to it than just the numbers.

I'm still not a fan of long-distance long-term landlording (the exception being vacation rentals.) There are so many nuanced things that can start small and quickly, silently, secretly eat away your equity & cashflow when disinterested 3rd party management is being used (and you don't personally have a property management experience background from which to manage the managers.)

*EVERY* market has local opportunities... would you be willing to begin your landlording career by doing the hard work of hunting out the desperado sellers in your own neighborhood to do this from?

Dave

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Author: Phmerc One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13660 of 13972
Subject: Re: Las Vegas house Date: 12/28/2012 5:17 PM
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Hey Dave

Thanks for the reply.

I am getting the line of credit from my father, which is why it is so cheap. I don't have any collateral, so it would have been 8.65 percent! I'm thankful for that.

In terms of the property management, they were recommended to me by family, who live in Vegas, who have been using them for many years and have had no issues. I'm also not a big fan of long-distance, long-term land lording, but considering the size and price of the house, it would probably take me another 4-5 years if I wanted to do something like this in Toronto, where I live, because it is crazy expensive! I guess I just need to have some faith...

I would definitely be willing to do hard work of hunting out the desperado sellers in the community. I must be honest, I wouldn't really know where to start. Is this something I can do on my own, or would need to hire a real estate event for?

Phmerc

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Author: inparadise Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13661 of 13972
Subject: Re: Las Vegas house Date: 12/28/2012 5:44 PM
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...and if I need to sell the house in 3 years that I can sell the house for a little more than I bought it.

Dave has addressed the numbers, so I won't go there, but this concerned me. How well do you understand the Las Vegas market? Are you really confident that it is rising enough that in a small 3 years from now you would be able to sell at a profit? Transaction costs are pretty high, and inventory was pretty darned high at one point as well, so unless it has hugely reduced or there are some reasons why it will reduce, I would tread lightly. I thought it was more distressed than that.

BTW, if you are looking to do a vacation rental in Las Vegas, it is my understanding that local legislation puts roadblocks in your way.

Any time I look at real estate investments I ask what is the fall back position if my original intent doesn't work. Since your dad is financing the property, in this case you would be screwing him over if it did not work out. You really want to take that risk?

IP,
probably more conservative than most

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Author: JonathanRoth Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13662 of 13972
Subject: Re: Las Vegas house Date: 12/29/2012 12:17 AM
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Borrowing from family, a good way to cause deep family problems. Be careful. What happens to your relationship if something goes wrong? Is this his retirement money or play money?

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13663 of 13972
Subject: Re: Las Vegas house Date: 12/29/2012 1:58 AM
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Hi Phmerc,

IP & Jack added very valuable concerns...

I would definitely be willing to do hard work of hunting out the desperado sellers in the community. I must be honest, I wouldn't really know where to start. Is this something I can do on my own, or would need to hire a real estate event for?

You need some education for sure, and possibly a good guide/coach/mentor eventually.

Start off at your local library. Check out "Nothing Down for the 2000's" by Robert Allen (the title is dated, but the content is solid & timeless.) Also read his book "Creating Wealth." Between the two, they cover close to darn near every private & creative deal structuring strategy.

Then, attend your local real estate investors' association;
http://www.preigcanada.com/
http://www.canadareic.com/
http://www.worldwealthbuilders.com/

An absolutely *OUTSTANDING* contemporary real estate investor/trainer/mentor/coach I know is Greg Pinneo;
www.ReachReturns.com

Of course, there's a broad and deep base of archived info here, and some generous, live & real experienced landlord/investors that hang out here ready & willing to field even the craziest, rookiest, greenest questions... so don't be shy!

Dave

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Author: qazulight Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13664 of 13972
Subject: Re: Las Vegas house Date: 12/29/2012 10:31 AM
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Phmerc,

If you don't have any money. Cash in hand, stuff that belongs to you. Money that you can take to the casino, spend on options in the stock market, bet on the horses, then do not do it.

You said you would buy the house and maybe it would go up in value.

That set off all the bells and whistles in my mind. What you are doing is

SPECULATING

Now, don't get me wrong, I speculate all the time. I hold a small Canadian Energy Company and have a bid out on a faltering European telecom. But I understand, it is a speculation.

Way back in the 1960's the states of Louisiana and Texas got together and decided to build Toledo Bend, my father, an electrician for the local power company a 100 miles south of the lake, decided to buy some land and build a marina. Now, you have to understand, he was a wage earner with 4 children. Few assets from a low income background. No college and no business training.

He bought 15 acres where the lake would be when the dam was completed. The only problem was, he borrowed money, paid a premium and the surveyor was off of his mark by six feet. The land eventually was worth what he paid for it, but he used leverage to speculate. A lot of work and a lot of years was spent trying to make it work.

We, and I do mean all of us, tend to think that just because something is tangible, and it is respectable to own, like a house, that buying one to make a profit is less of a speculation and risk than buying equities that are little more then bits in the cloud.

However, when you are leveraged, you own nothing but right to future profits.

In today's world, the beauty of real estate is not the real estate. It is the leverage. With interest rates low, real estate lets you speculate on rising interest rates by selling long bonds, (A long bond and a long mortgage tend to behave the same way, so while YOU cannot sell a long bond, when you create a mortgage, someone else sells a long bond.)


In your case you are asking your father to buy a long bond. If everything works out, the best thing that can happen is your father gets creamed on the falling price of the long bond.

It would be far better to look for Fannie May repos and let them provide the long bond. If you cannot afford the down payment. Consider not entering in. You cannot afford it.

You would be way better to enter into a limited partnership with people you trust.

http://www.homepath.com/listing/search?q=Las+Vegas%2C+NV&...

Leverage is a lousy way to learn. The game is too short and the recovery is too long.

Personally, I have one rental property, it is paid for cash, after expenses it pays the taxes on my home, that is it. Dave cringes when he sees that the 70 grand is yielding about 5 percent or so.

But I see it as a learning situation.

Cheers
Qazulight

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Author: Phmerc One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13666 of 13972
Subject: Re: Las Vegas house Date: 12/29/2012 3:15 PM
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Hey everyone

Thanks to all those who replied, I appreciate your feedback.

I understand that there is a risk of there being no tenants and me having to cover the expenses, but I do have a secure job and make a reasonable income, especially considering I live at home and my expenses are very low. So, in a case like that, I would be able to cover expenses and paying my line of credit. So I would never run into the risk of "screwing" my dad over.

I just figured that with such a low interest rate, I don't really need to make a down payment. I could, but I would rather leave that money for stocks and let someone else build my equity. My intention isn't to sell in three years, I can afford to keep the house forever and just collected rent payments. I was just hypothetically thinking that IF I got married and had like 3 kids in 4 years And needed to sell the house, I could and maybe reep a little profit. But that's a massive IF and won't happen cause its not what I want. My plan is to slowly pay the house and keep it for as long as I can, until the housing marker in Vegas does bounce up a reasonable amount, but I would be I'm no rush and still be able to afford to move out on my own in about 3 years. Maybe I didn't make myself that clear. But there is always a risk of something happening, but I have made sure that I am minimizing it to its smallest degree, I guess the biggest one is have a secure job that pays well.

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Author: Phmerc One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13667 of 13972
Subject: Re: Las Vegas house Date: 12/29/2012 3:18 PM
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Oops, wasn't finished, accidentally submitted.

I do see many of your points and it is making me think twice, I am going to look into this decision with more caution, making sure I am a plan B for all my risks. I do appreciate all of your feedback and I would love to hear more. Thanks again

Phmerc

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