AuthorTopic: Meanwhile back at the 'stead  (Read 208017 times)

Offline Nearingsfault

  • Sous Chef
  • ****
  • Posts: 1031
    • View Profile
Re: Meanwhile back at the 'stead
« Reply #1020 on: May 02, 2018, 03:56:53 PM »
I am a living descendant of someone who had a very similar portfolio to you eddie. 18 months after he past we are still trying to figure it all out. I never built my plans around getting anything from it but it would have helped. One property used to provide collateral for another with a sort of grey exit date. All of it was based on continued health and market stability. then 2008 happened and the careful exit strategy fell to shit. Then he lost his sight. He held on waiting for a rebound to pre crumble prices so as to not have to deal with a "loss". Sickness, market turns, demographic trends can all skuttle the plan. Im in a pretty dark mood sorry to pee on the parade. Ill admit id sell it all consolidate and drastically simplify. Spend large amounts of time creating a dry climate permaculture paradise and sail. Work part time maybe even teach to pass on the gift. Im a squirrel though. I pack away nuts and expect the sky to fall... always have been.
Cheers,   David B
If its important then try something, fail, disect, learn from it, try again, and again and again until it kills you or you succeed.

Offline RE

  • Administrator
  • Chief Cook & Bottlewasher
  • *****
  • Posts: 38913
    • View Profile
Re: Meanwhile back at the 'stead
« Reply #1021 on: May 02, 2018, 05:33:47 PM »
There are alternatives to living at the Lake House, based on what you told me in the past.

One of your rental properties is in the neighborhood of the dental office.  You could move into that property and then also sell the Lake House, in which case you have REALLY deleveraged and also tremendously reduced expenses.  In this case you could alos buy a smaller piece of land closer to Austin to pursue permaculture, 12V Renewables and other sutainable living techniques.  Well, semi-sustainable.  You probably could also rent or buy a real nice twon condo in the fashionable part of town with all the music bars and restaurants.  Again, none of this requires your quitting your job or selling the bizness as of yet.

I'm not saying do this today, your SS would take a big hit.  But really only 3-4 more years you max it out, you don't need to go to 70 or 72.  Again, the process of selling out will take time by itself, finding buyers, getting contracts done, delaing with banksters and lawyers.  That shit does not happen overnight, and it's bad if it does usually.  You want to have good time to deal and not be in a rush to sell out.  Particularly if the market is crashing.

RE
Save As Many As You Can

Offline Eddie

  • Global Moderator
  • Master Chef
  • *****
  • Posts: 17502
    • View Profile
Re: Meanwhile back at the 'stead
« Reply #1022 on: May 02, 2018, 05:40:23 PM »
I am a living descendant of someone who had a very similar portfolio to you eddie. 18 months after he past we are still trying to figure it all out. I never built my plans around getting anything from it but it would have helped. One property used to provide collateral for another with a sort of grey exit date. All of it was based on continued health and market stability. then 2008 happened and the careful exit strategy fell to shit. Then he lost his sight. He held on waiting for a rebound to pre crumble prices so as to not have to deal with a "loss". Sickness, market turns, demographic trends can all skuttle the plan. Im in a pretty dark mood sorry to pee on the parade. Ill admit id sell it all consolidate and drastically simplify. Spend large amounts of time creating a dry climate permaculture paradise and sail. Work part time maybe even teach to pass on the gift. Im a squirrel though. I pack away nuts and expect the sky to fall... always have been.
Cheers,   David B

Sorry to hear of those unfortunate circumstances. I've tried to make it simple and safe for my partner and children. I think my portfolio is pretty solid. Nothing is without risk, of course. I carry a lot of insurance and put substantial equity into my properties to give some cushion. This is one of the best markets in the country, fortunately.

But we live in an unstable world where anything can happen. Cash is king. But property is a better inflation hedge.

The biggest financial loss to my partner if I passed suddenly would probably be the value of my practice. It would be worth pennies on the dollar the second I stopped breathing. I hope to live long enough to sell that for something. Because she runs my office, she has to be my executor of my will. Shutting down the practice will be a nightmare.  I don't wish that on her at all. I'd like to outlive the practice.

Makes me want to start exercising more. Think I'll go for a run.
What makes the desert beautiful is that somewhere it hides a well.

Offline Eddie

  • Global Moderator
  • Master Chef
  • *****
  • Posts: 17502
    • View Profile
Re: Meanwhile back at the 'stead
« Reply #1023 on: May 02, 2018, 05:58:24 PM »
There are alternatives to living at the Lake House, based on what you told me in the past.

One of your rental properties is in the neighborhood of the dental office.  You could move into that property and then also sell the Lake House, in which case you have REALLY deleveraged and also tremendously reduced expenses.  In this case you could alos buy a smaller piece of land closer to Austin to pursue permaculture, 12V Renewables and other sutainable living techniques.  Well, semi-sustainable.  You probably could also rent or buy a real nice twon condo in the fashionable part of town with all the music bars and restaurants.  Again, none of this requires your quitting your job or selling the bizness as of yet.

I'm not saying do this today, your SS would take a big hit.  But really only 3-4 more years you max it out, you don't need to go to 70 or 72.  Again, the process of selling out will take time by itself, finding buyers, getting contracts done, delaing with banksters and lawyers.  That shit does not happen overnight, and it's bad if it does usually.  You want to have good time to deal and not be in a rush to sell out.  Particularly if the market is crashing.

RE

Agree about the sale of the practice.The thing is that these corporate entities are buying up guys like me now for good money, but in seven years, who knows? I'd have to stay for two years, and eat their corporate shit, before being able to really bail. That shit eating part isn't appealing to me.

I just have to assume though, that continuing  to work will net me much more over the next seven years than I could ever net from the sale. I'd just have to show up to work to collect it. The sale I have to think of aa a possible bonus that might or might not occur. It probably will, but by delaying I'm taking a chance. But there is a demand for practices. At 70 I could still find a buyer if I were grossing what I gross now. I see a lot of patients. The practice is basically healthy.

Unless I were to become disabled. I'd have to pull the pin if that happened, of course.

What makes the desert beautiful is that somewhere it hides a well.

Offline RE

  • Administrator
  • Chief Cook & Bottlewasher
  • *****
  • Posts: 38913
    • View Profile
Re: Meanwhile back at the 'stead
« Reply #1024 on: May 02, 2018, 06:38:55 PM »
There are alternatives to living at the Lake House, based on what you told me in the past.

One of your rental properties is in the neighborhood of the dental office.  You could move into that property and then also sell the Lake House, in which case you have REALLY deleveraged and also tremendously reduced expenses.  In this case you could alos buy a smaller piece of land closer to Austin to pursue permaculture, 12V Renewables and other sutainable living techniques.  Well, semi-sustainable.  You probably could also rent or buy a real nice twon condo in the fashionable part of town with all the music bars and restaurants.  Again, none of this requires your quitting your job or selling the bizness as of yet.

I'm not saying do this today, your SS would take a big hit.  But really only 3-4 more years you max it out, you don't need to go to 70 or 72.  Again, the process of selling out will take time by itself, finding buyers, getting contracts done, delaing with banksters and lawyers.  That shit does not happen overnight, and it's bad if it does usually.  You want to have good time to deal and not be in a rush to sell out.  Particularly if the market is crashing.

RE

Agree about the sale of the practice.The thing is that these corporate entities are buying up guys like me now for good money, but in seven years, who knows? I'd have to stay for two years, and eat their corporate shit, before being able to really bail. That shit eating part isn't appealing to me.

I just have to assume though, that continuing  to work will net me much more over the next seven years than I could ever net from the sale. I'd just have to show up to work to collect it. The sale I have to think of aa a possible bonus that might or might not occur. It probably will, but by delaying I'm taking a chance. But there is a demand for practices. At 70 I could still find a buyer if I were grossing what I gross now. I see a lot of patients. The practice is basically healthy.

Unless I were to become disabled. I'd have to pull the pin if that happened, of course.

You're going to have to eat the 2 years of corporate shit sooner or later if you want to get the most money possible for the bizness.  Get the Canyon House sold and then start negotiating on the bizness, eat shit for 2 years and GTFO of Dodge.

RE
« Last Edit: May 02, 2018, 06:41:05 PM by RE »
Save As Many As You Can

Offline Eddie

  • Global Moderator
  • Master Chef
  • *****
  • Posts: 17502
    • View Profile
Re: Meanwhile back at the 'stead
« Reply #1025 on: May 03, 2018, 08:22:45 AM »
I'd like to make a small addendum to the prior post, to clarify a few issues. Because David brought up a very good point. Real estate investments are cyclical. You can easily lose money in a falling market, just like a host of Americans did in 2008.

I can remember the first house I bought in the late 80's. I was lucky to get owner financing because --- believe it or not--- it was really hard for any young self-employed person to get a mortgage at all in those days. The house had been repossessed by the original owner after the previous buyers defaulted after a year, and I bought the place for 25% less than it had sold for only a year before.  The owners ended up carrying that note for me for a few years...until I bought the canyon house in the early 90's.

At that time, Austin real estate had collapsed big-time, and had I had lots of cash, I could have bought all kinds of valuable properties dirt cheap. But that's water under the bridge. The point is that real estate can and will fall hard in a deflationary collapse, just like equities. But there are differences.

Property is a tangible asset, and it never falls to zero. Most people get in trouble because they use too much leverage. Properties bought with low down payments become an albatross around your neck in a falling market. Lower leverage makes real estate a safer investment.

In my rental portfolio, I basically have a half dozen properties. Five houses and the storage rentals. Three of them are now fully owned outright. No leverage at all. The other three were bought with 30% equity and now sit at maybe 35% (and rising).

If you have decent equity, you won't immediately be upside down when the market goes south. You'll have time to adjust, theoretically. As long as you pay attention. I only have the three that are leveraged to worry about. The others are not likely to fall so far as to not cover the property taxes, even in the mother of all deflationary collapses. I could walk away from the rest if I had to. I also have a few other assets I didn't mention, which are also hedges.

You can't hedge everything, but maybe you can see that I've hedged pretty well.

Rental real estate is extremely sensitive to demographics. Location is key. I'm lucky to live in a fast-growing inland city of the size that's expected to clock record growth into the near-term future. As Houston sinks into the ocean and gets blown away by storms, Austin will likely continue to expand. (Until the water runs out, which it will.)

(Yes, in spite of collapse and blah, blah, yada, yada. It will all collapse, sure, but I give BAU here another 20 years. Guess what? By then I'll be dead or close enough that it won't matter much for me personally. )
 
In 2008 rents in Austin and surrounding areas didn't fall a single nickel. Not at all.

Demand is key. Property in Detroit is much cheaper than here, but there is no demand for it. Jobs here are plentiful and tied to the information economy. The big risk is a huge credit collapse. It's possible. I get that. That's why I keep my leverage at a very manageable level. I don't use one property's equity for collateral to buy another property. Ever. Never, ever.


Thirdly, the recent artificially low interest rates created an opportunity to lock in 30 year money for 4.5% interest or less. Real estate is a wealth building machine in times of inflation, if the loans are locked in at low interest, and enough equity is in the deal for the properties to flow cash.

 I just checked. My leveraged rentals (all three were financed 2-3 years ago and locked at 30 year fixed interest at 4.25%). I have roughly 250K equity and owe 400K on the notes. That's 62% equity. I know this because I took the time to review the deals, look at comps, and see how I'm doing. You have to keep score. The days of buy-it-and-forget-it are long gone.)

At a time when demand for housing is high, and home ownership is getting harder due to falling real income and rising interest rates and fewer people are buying, affordable rentals are still a decent bet. If the deals are done right, you can even have prices fall substantially in a market correction and still do just fine, because much of the advantage to ownership is on the side of tax abatement. Everyone "gets" capital appreciation. Everyone "gets" rental income. But almost nobody gets how important the liability side of the equation is. You have to have a great property. But you ALSO need a great loan. Low interest. Locked in. No call provision. 30 year money.

For someone in my position, it's also key to make passing the properties to my heirs seamless and easy. That means a will that clearly states who inherits, so the investments don't get caught up in probate court. It means having enough life insurance to pay off  a lot of debt if the banks try to weasel on my wife after I'm dead.

But these investments work especially well for somebody like me, because I pay high income tax. My income from the practice is all "real" income. I don't get the tax perks a hedge fund manager does, or somebody who owns a C corp. I didn't get Trump's big tax gift.

I didn't really talk much about my rental portfolio in the last post. Just the non-cash-flowing stuff, like my house, the farm, and my cottage at the lake. The reason for that is that those are the ones I consider riskier, and I'm trying to figure out how to manage that risk. I do not regard those properties as investments, per se.

Did you get that? My house is not a true investment, because it doesn't meet the criteria to be considered a true financial asset. Assets feed you. My house does not feed me. It doesn't make a dime.

Capital appreciation over time is not a given. Fortunately it can be a nice bonus for home ownership if the timing is good and the demographics are good. I think I'll profit off my house, because of luck basically. But....owning any property that does NOT flow cash is a LUXURY. Unless it's your farm and you grow your own food. Investments are a different matter. Money in a completely different box.

My farm doesn't feed me. But its a hedge too. It COULD feed me. That's why I have a tractor and implements I don't use much. Even the lake house has some prep value. Unlimited water and unlimited fishing. But until they start feeding me, they aren't investments. They are luxuries.

Because they are luxuries, there is little advantage to financing them with 30 year money. As I said in the previous post, I have the two homes on 15 year notes. The cottage is at 3.25%. The canyon house is at 2.75%. It's pretty easy to build equity with those kinds of deals. Luck helps but I stacked the deck in my favor. Rates are going up now. The trend is my friend, at least for now.

The riskier loan is the farm at 5.5%, which is why I've worked hard and paid off 63% of the note in less than 8 years, even though it's on a 30 year amortization. When the note rolls over, I'll owe less than 100K on a loan that was over a third of a million.

(I know David knows this, but in case anybody else reads this, let me explain. A 30 year amortization means I pay a minimum payment as if I had a 30 year note. If I made that payment it would take 30 years to pay off the farm. But the note is a balloon, which has to be refinanced after ten years. So I've been paying an extra 900 bucks a month for over seven years to increase my equity. Because it's a slightly riskier loan, it gets retired first. It's my highest priority. Why do have such a loan? It's the best you can get for a farm here, and I didn't want to spend cash. I didn't have 350K in cash.)

I hope you can see my strategy. You have to think about this stuff. I've taken a lot of steps to hedge my risk.

I have one other hedge, and that's a small but not insignificant holding of physical metals. That's not an investment either. It's strictly a currency hedge against fiat dollars. It falls into the same category as life insurance. It's a store of some value, and in one particular circumstance it could be what saves my bacon.

The rentals, on the other hand, are assets and they are investments. They feed me. Right now they feed me about $3500-4000/month, depending on repair bills and taxes, which are always going up. But rents can go up too. I do not set rents on most of my properties. I have professional management for that. I manage the storage and the one house that sits on that property.

I hope you can get the nuances here, because they are not unimportant.


      -------------

More rant.

The big problem with retirement now is figuring out how to get some return. A million bucks cash savings won't generate enough income (25K.year) from bank interest for most people to live on. People begin to cannibalize their savings after a few years.

My current rental income now from my rentals is more than that (35K or better) and I have way less than 400K of my own cash tied up in the whole portfolio. (Of course, I've been accumulating and doing tax-free property swaps for 25 years or more now to get to this point.) Any capital appreciation over time that I can realize is pure bonus.

I remember just twenty years ago being told by a very successful dentist (who owned an island up in the Thousand Islands, totally cool off-grid place, btw) that I would need 1.5 to 2 million to retire comfortably. Now my tax advisor says 3.5 to 4 million. Because bank interest sucks now.

With higher returns come higher risks. My tax advisor wants me to fund a 401K (in stocks) to the tune of 3.5 million (instead of what I'm doing.). And this is a highly respected firm that manages billions of assets for dentists. The best advice money can buy, supposedly. I pay nearly 10K per year to sit down with him all day, once a year. Really. Tax returns not included. They're extra.

I think he's daft. No way do I want to risk my retirement money in stocks. In the current set of circumstances, I consider that much higher risk than my plan. I pay him because his company knows how to minimize taxes. I smile and listen, but so far I've managed to not put a dime in the 401K. Because I won't sell my real estate to do it. It'd be stupid, in my view.

You have to risk something to make something. Or have a huge nest egg. Or live like RE, which is fine. But most people struggle to live on that level of income.





« Last Edit: May 03, 2018, 10:09:06 AM by Eddie »
What makes the desert beautiful is that somewhere it hides a well.

Offline Nearingsfault

  • Sous Chef
  • ****
  • Posts: 1031
    • View Profile
Re: Meanwhile back at the 'stead
« Reply #1026 on: May 03, 2018, 09:19:05 AM »
I'd like to make a small addendum to the prior post, to clarify a few issues. Because David brought up a very good point. Real estate investments are cyclical. You can easily lose money in a falling market, just like a host of Americans did in 2008.

I can remember the first house I bought in the late 80's. I was lucky to get owner financing because --- believe it or not--- it was really hard for any young self-employed person to get a mortgage at all in those days. The house had been repossessed by the original owner after the previous buyers defaulted after a year, and I bought the place for 25% less than it had sold for only a year before.  The owners ended up carrying that note for me for a few years...until I bought the canyon house in the early 90's.

At that time, Austin real estate had collapsed big-time, and had I had lots of cash, I could have bought all kinds of valuable properties dirt cheap. But that's water under the bridge. The point is that real estate can and will fall hard in a deflationary collapse, just like equities. But there are differences.

Property is a tangible asset, and it never falls to zero. Most people get in trouble because they use too much leverage. Properties bought with low down payments become an albatross around your neck in a falling market. Lower leverage makes real estate a safer investment.

In my rental portfolio, I basically have a half dozen properties. Five houses and the storage rentals. Three of them are now fully owned outright. No leverage at all. The other three were bought with 30% equity and now sit at maybe 35% (and rising).

If you have decent equity, you won't immediately be upside down when the market goes south. You'll have time to adjust, theoretically. As long as you pay attention. I only have the three that are leveraged to worry about. The others are not likely to fall so far as to not cover the property taxes, even in the mother of all deflationary collapses. I could walk away from the rest if I had to. I also have a few other assets I didn't mention, which are also hedges.

You can't hedge everything, but maybe you can see that I've hedged pretty well.

Rental real estate is also extremely sensitive to demographics. Location is key. I'm lucky to live in a fast-growing inland city of the size that's expected to clock record growth into the near-term future. As Houston sinks into the ocean and gets blown away by storms, Austin will likely continue to expand. (Until the water runs out, which it will.)

(Yes, in spite of collapse and blah, blah, yada, yada. It will all collapse, sure, but I give BAU here another 20 years. Guess what? By then I'll be dead or close enough that it won't mater much for me personally. )
 
In 2008 rents in Austin and surrounding areas didn't fall a single nickel. Not at all.

Demand is key. Property in Detroit is much cheaper than here, but there is no demand for it. Jobs here are plentiful and tied to the information economy. The big risk is a huge credit collapse. It's possible. I get that. That's why I keep my leverage  at a very manageable level. I don't use one property's equity for collateral to buy another property. Ever. Never, ever.


Thirdly, the recent artificially low interest rates created an opportunity to lock in 30 year money for 4.5% interest or less. Real estate is a wealth building machine in times of inflation, if the loans are locked in at low interest, and enough equity is in the deal for the properties to flow cash.

At a time when demand for housing is high, and home ownership is getting harder due to falling real income and rising interest rates and fewer people are buying, affordable rentals are still a decent bet. If the deals are done right, you can even have prices fall substantially in a market correction and still do just fine, because much of the advantage to ownership is on the side of tax abatement. Everyone "gets" capital appreciation. Everyone "gets" rental income. But almost nobody gets how important the liability side of the equation is. You have to have a great property. But you ALSO need a great loan. Low interest. Locked in. No call provision. 30 year money.

For someone in my position, it's also key to make passing the properties to my heirs seamless and easy. That means a will that clearly states who inherits, so the investments don't get caught up in probate court. It means having enough life insurance to pay off  a lot of debt if the banks try to weasel on my wife after I'm dead.

But these investments work especially well for somebody like me, because I pay high income tax. My income from the practice is all "real" income. I don't get the tax perks a hedge fund manager does, or somebody who owns a C corp. I didn't get Trump's big tax gift.

I didn't really talk much about my rental portfolio in the last post. Just the non-cash-flowing stuff, like my house, the farm, and my cottage at the lake. The reason for that is that those are the ones I consider riskier, and I'm trying to figure out how to manage that risk. I do not regard those properties as investments, per se.

Did you get that? My house is not a true investment, because it doesn't meet the criteria to be considered a true financial asset. Assets feed you. My house does not feed me. It doesn't make a dime.

Capital appreciation over time is not a given. Fortunately it can be a nice bonus for home ownership if the timing is good and the demographics are good. I think I'll profit off my house, because of luck basically. But....owning any property that does NOT flow cash is a LUXURY. Unless it's your farm and you grow your own food. Investments are a different matter. Money in a completely different box.

My farm doesn't feed me. But its a hedge too. It COULD feed me. That's why I have a tractor and implements I don't use much. Even the lake house has some prep value. Unlimited water and unlimited fishing. But until they start feeding me, they aren't investments. They are luxuries.

I have one other hedge, and that's a small but not insignificant holding of physical metals. That's not an investment either. It's strictly a currency hedge against fiat dollars. It falls into the same category as life insurance. It's a store of some value, and in one particular circumstance it could be what saves my bacon.

The rentals, on the other hand, are assets and they are investments. They feed me. Right now they feed me about $3500-4000/month, depending on repair bills and taxes, which are always going up. But rents can go up too. I do not set rents on most of my properties. I have professional management for that. I manage the storage and the one house that sits on that property.

I hope you can get the nuances here, because they are not unimportant.


      -------------

More rant.

The big problem with retirement now is figuring out how to get some return. A million bucks cash savings won't generate enough income (25K.year) from bank interest for most people to live on. People begin to cannibalize their savings after a few years.

My current rental income now from my rentals is more than that (35K or better) and I have way less than 400K of my own cash tied up in the whole portfolio. (Of course, I've been accumulating and doing tax-free property swaps for 25 years or more now to get to this point.) Any capital appreciation over time that I can realize is pure bonus.

I remember just twenty years ago being told by a very successful dentist (who owned an island up in the Thousand Islands, totally cool off-grid place, btw) that I would need 1.5 to 2 million to retire comfortably. Now my tax advisor says 3.5 to 4 million. Because bank interest sucks now.

With higher returns come higher risks. My tax advisor wants me to fund a 401K (in stocks) to the tune of 3.5 million (instead of what I'm doing.). And this is a highly respected firm that manages billions of assets for dentists. The best advice money can buy, supposedly. I pay nearly 10K per year to sit down with him all day, once a year. Really. Tax returns not included. They're extra.

I think he's daft. No way do I want to risk my retirement money in stocks. In the current set of circumstances, I consider that much higher risk than my plan. I pay him because his company knows how to minimize taxes. I smile and listen, but so far I've managed to not put a dime in the 401K. Because I won't sell my real estate to do it. It'd be stupid, in my view.

You have to risk something to make something. Or have a huge nest egg. Or live like RE, which is fine. But most people struggle to live on that level of income.
Thank you Eddie,
I find the best nuggets from the diner are about mindset. Circumstances are local but mindset is transferable. I know the economic terms well enough but upon analysis most of my financial plans are what you would call hedges. Non income generating just savings and cost control measures. I'll have to give this some thought. I think I will wait for the great Canadian correction before investing in rental real estate. We never had our housing crisis event and property is at insane values here right now. Mortgage interest is tax deductible in the US is it not? Not here. I have been dancing with a land owner about a woodlot but I already have more wood growth on property than I use in a year so its probably aspirational and wish fulfillment. I am going to install a net metered array on the house this year though. I'll move the off grid array to the ground and put 3.6 kW grid tied on the roof. Probably another hedge against future cost increases but a safe way to park 6000 and make 10 percent return on it better than 2 percent in the bank.
Cheers,  David
If its important then try something, fail, disect, learn from it, try again, and again and again until it kills you or you succeed.

Offline RE

  • Administrator
  • Chief Cook & Bottlewasher
  • *****
  • Posts: 38913
    • View Profile
Re: Meanwhile back at the 'stead
« Reply #1027 on: May 03, 2018, 09:42:49 AM »
At the moment I wouldn't consider the properties to be very risky in terms of a market crash, that's not the problem.  The risk is if you get njured and can't service the debt.  Say you fall while working at the Toothstead and break your wrist. Or fall out of a tree you climbed. lol.  Now you are minimum 6 weeks without income.  The properties are illiquid, so now you have to borrow against something to meet your monthly bills until you can start drilling teeth again.  Worse of course if it turns out to be a more permanent disability.

You also did not figure into your total monthly income your SS along with the current cash flow.  You wouldn't be living on $25K, more like $60K since your wife is also eligible for her own SS.

RE
Save As Many As You Can

Offline Eddie

  • Global Moderator
  • Master Chef
  • *****
  • Posts: 17502
    • View Profile
Re: Meanwhile back at the 'stead
« Reply #1028 on: May 03, 2018, 10:12:14 AM »
I added some numbers to the post after you guys read it. I think it makes it even clearer. Gotta catch lunch. I will respond to RE's point when I come back.
What makes the desert beautiful is that somewhere it hides a well.

Offline Eddie

  • Global Moderator
  • Master Chef
  • *****
  • Posts: 17502
    • View Profile
Re: Meanwhile back at the 'stead
« Reply #1029 on: May 03, 2018, 11:31:12 AM »
At the moment I wouldn't consider the properties to be very risky in terms of a market crash, that's not the problem.  The risk is if you get njured and can't service the debt.  Say you fall while working at the Toothstead and break your wrist. Or fall out of a tree you climbed. lol.  Now you are minimum 6 weeks without income.  The properties are illiquid, so now you have to borrow against something to meet your monthly bills until you can start drilling teeth again.  Worse of course if it turns out to be a more permanent disability.

You also did not figure into your total monthly income your SS along with the current cash flow.  You wouldn't be living on $25K, more like $60K since your wife is also eligible for her own SS.

RE

Becoming disabled is without a doubt the greatest risk of all, and hard to hedge. I do have disability insurance, that I got more than 30 years ago, which is better than what you can buy now. So many physicians have taken disability as a way to bail out of practice...it's all changed.

But disability insurance is a drop in the bucket for somebody with a core business like my practice. My business overhead is over 50K/month. That's a lot more than my debt service. No way you can afford enough insurance to cover that. Not possible.

A temporary condition would not be a deal-breaker, but it'd hurt. A permanent disability would end my career and make retirement a lot less rosy. I'd have to immediately sell the practice (for a huge discount) and sell at least two of the luxury properties asap, although I could make the debt service long enough to avoid a fire sale situation. Hopefully, that would net enough to pay for the third. Then I could sell the house last and at least net the proceeds of that into my retirement cash nest egg.

I could even declare bankruptcy and keep the house, although it's highly doubtful it'd come to that. But I could. I've done it before. :)

I'd have to take early SS bennies, no doubt, and live on what I ended up with. With a bit of luck I'd end up with maybe a million cash and the properties. I might still be able to have a retirement income of about half what I make working, I think. Not what I want, but I'm not stupid. I know it could happen.

But....does that mean my plan is bad? Not really. Unless I did have to go BR, I could still keep the cash flow real estate and the $3500-4000 that generates. If, sometime later, the market crashes, I'd still have my best three properties, which are flowing most of the cash anyway. They're paid for. The other three could be sold or even abandoned if necessary.

You make adjustments. I wouldn't starve. I could still afford a house of some kind.

What makes the desert beautiful is that somewhere it hides a well.

Offline BuddyJ

  • Bussing Staff
  • **
  • Posts: 35
    • View Profile
Re: Meanwhile back at the 'stead
« Reply #1030 on: May 03, 2018, 01:04:02 PM »
I'd like to make a small addendum to the prior post, to clarify a few issues. Because David brought up a very good point. Real estate investments are cyclical. You can easily lose money in a falling market, just like a host of Americans did in 2008.

I can remember the first house I bought in the late 80's. I was lucky to get owner financing because --- believe it or not--- it was really hard for any young self-employed person to get a mortgage at all in those days. The house had been repossessed by the original owner after the previous buyers defaulted after a year, and I bought the place for 25% less than it had sold for only a year before.  The owners ended up carrying that note for me for a few years...until I bought the canyon house in the early 90's.

At that time, Austin real estate had collapsed big-time, and had I had lots of cash, I could have bought all kinds of valuable properties dirt cheap. But that's water under the bridge. The point is that real estate can and will fall hard in a deflationary collapse, just like equities. But there are differences.

Property is a tangible asset, and it never falls to zero. Most people get in trouble because they use too much leverage. Properties bought with low down payments become an albatross around your neck in a falling market. Lower leverage makes real estate a safer investment.

In my rental portfolio, I basically have a half dozen properties. Five houses and the storage rentals. Three of them are now fully owned outright. No leverage at all. The other three were bought with 30% equity and now sit at maybe 35% (and rising).

If you have decent equity, you won't immediately be upside down when the market goes south. You'll have time to adjust, theoretically. As long as you pay attention. I only have the three that are leveraged to worry about. The others are not likely to fall so far as to not cover the property taxes, even in the mother of all deflationary collapses. I could walk away from the rest if I had to. I also have a few other assets I didn't mention, which are also hedges.

You can't hedge everything, but maybe you can see that I've hedged pretty well.

Rental real estate is extremely sensitive to demographics. Location is key. I'm lucky to live in a fast-growing inland city of the size that's expected to clock record growth into the near-term future. As Houston sinks into the ocean and gets blown away by storms, Austin will likely continue to expand. (Until the water runs out, which it will.)

(Yes, in spite of collapse and blah, blah, yada, yada. It will all collapse, sure, but I give BAU here another 20 years. Guess what? By then I'll be dead or close enough that it won't matter much for me personally. )
 
In 2008 rents in Austin and surrounding areas didn't fall a single nickel. Not at all.

Demand is key. Property in Detroit is much cheaper than here, but there is no demand for it. Jobs here are plentiful and tied to the information economy. The big risk is a huge credit collapse. It's possible. I get that. That's why I keep my leverage at a very manageable level. I don't use one property's equity for collateral to buy another property. Ever. Never, ever.


Thirdly, the recent artificially low interest rates created an opportunity to lock in 30 year money for 4.5% interest or less. Real estate is a wealth building machine in times of inflation, if the loans are locked in at low interest, and enough equity is in the deal for the properties to flow cash.

 I just checked. My leveraged rentals (all three were financed 2-3 years ago and locked at 30 year fixed interest at 4.25%). I have roughly 250K equity and owe 400K on the notes. That's 62% equity. I know this because I took the time to review the deals, look at comps, and see how I'm doing. You have to keep score. The days of buy-it-and-forget-it are long gone.)

At a time when demand for housing is high, and home ownership is getting harder due to falling real income and rising interest rates and fewer people are buying, affordable rentals are still a decent bet. If the deals are done right, you can even have prices fall substantially in a market correction and still do just fine, because much of the advantage to ownership is on the side of tax abatement. Everyone "gets" capital appreciation. Everyone "gets" rental income. But almost nobody gets how important the liability side of the equation is. You have to have a great property. But you ALSO need a great loan. Low interest. Locked in. No call provision. 30 year money.

For someone in my position, it's also key to make passing the properties to my heirs seamless and easy. That means a will that clearly states who inherits, so the investments don't get caught up in probate court. It means having enough life insurance to pay off  a lot of debt if the banks try to weasel on my wife after I'm dead.

But these investments work especially well for somebody like me, because I pay high income tax. My income from the practice is all "real" income. I don't get the tax perks a hedge fund manager does, or somebody who owns a C corp. I didn't get Trump's big tax gift.

I didn't really talk much about my rental portfolio in the last post. Just the non-cash-flowing stuff, like my house, the farm, and my cottage at the lake. The reason for that is that those are the ones I consider riskier, and I'm trying to figure out how to manage that risk. I do not regard those properties as investments, per se.

Did you get that? My house is not a true investment, because it doesn't meet the criteria to be considered a true financial asset. Assets feed you. My house does not feed me. It doesn't make a dime.

Capital appreciation over time is not a given. Fortunately it can be a nice bonus for home ownership if the timing is good and the demographics are good. I think I'll profit off my house, because of luck basically. But....owning any property that does NOT flow cash is a LUXURY. Unless it's your farm and you grow your own food. Investments are a different matter. Money in a completely different box.

My farm doesn't feed me. But its a hedge too. It COULD feed me. That's why I have a tractor and implements I don't use much. Even the lake house has some prep value. Unlimited water and unlimited fishing. But until they start feeding me, they aren't investments. They are luxuries.

Because they are luxuries, there is little advantage to financing them with 30 year money. As I said in the previous post, I have the two homes on 15 year notes. The cottage is at 3.25%. The canyon house is at 2.75%. It's pretty easy to build equity with those kinds of deals. Luck helps but I stacked the deck in my favor. Rates are going up now. The trend is my friend, at least for now.

The riskier loan is the farm at 5.5%, which is why I've worked hard and paid off 63% of the note in less than 8 years, even though it's on a 30 year amortization. When the note rolls over, I'll owe less than 100K on a loan that was over a third of a million.

(I know David knows this, but in case anybody else reads this, let me explain. A 30 year amortization means I pay a minimum payment as if I had a 30 year note. If I made that payment it would take 30 years to pay off the farm. But the note is a balloon, which has to be refinanced after ten years. So I've been paying an extra 900 bucks a month for over seven years to increase my equity. Because it's a slightly riskier loan, it gets retired first. It's my highest priority. Why do have such a loan? It's the best you can get for a farm here, and I didn't want to spend cash. I didn't have 350K in cash.)

I hope you can see my strategy. You have to think about this stuff. I've taken a lot of steps to hedge my risk.

I have one other hedge, and that's a small but not insignificant holding of physical metals. That's not an investment either. It's strictly a currency hedge against fiat dollars. It falls into the same category as life insurance. It's a store of some value, and in one particular circumstance it could be what saves my bacon.

The rentals, on the other hand, are assets and they are investments. They feed me. Right now they feed me about $3500-4000/month, depending on repair bills and taxes, which are always going up. But rents can go up too. I do not set rents on most of my properties. I have professional management for that. I manage the storage and the one house that sits on that property.

I hope you can get the nuances here, because they are not unimportant.


      -------------

More rant.

The big problem with retirement now is figuring out how to get some return. A million bucks cash savings won't generate enough income (25K.year) from bank interest for most people to live on. People begin to cannibalize their savings after a few years.

My current rental income now from my rentals is more than that (35K or better) and I have way less than 400K of my own cash tied up in the whole portfolio. (Of course, I've been accumulating and doing tax-free property swaps for 25 years or more now to get to this point.) Any capital appreciation over time that I can realize is pure bonus.

I remember just twenty years ago being told by a very successful dentist (who owned an island up in the Thousand Islands, totally cool off-grid place, btw) that I would need 1.5 to 2 million to retire comfortably. Now my tax advisor says 3.5 to 4 million. Because bank interest sucks now.

With higher returns come higher risks. My tax advisor wants me to fund a 401K (in stocks) to the tune of 3.5 million (instead of what I'm doing.). And this is a highly respected firm that manages billions of assets for dentists. The best advice money can buy, supposedly. I pay nearly 10K per year to sit down with him all day, once a year. Really. Tax returns not included. They're extra.

I think he's daft. No way do I want to risk my retirement money in stocks. In the current set of circumstances, I consider that much higher risk than my plan. I pay him because his company knows how to minimize taxes. I smile and listen, but so far I've managed to not put a dime in the 401K. Because I won't sell my real estate to do it. It'd be stupid, in my view.

You have to risk something to make something. Or have a huge nest egg. Or live like RE, which is fine. But most people struggle to live on that level of income.

I agree with David, thank you.

I am forced to notice however that it sounds all so...complicated? Advisers of various sizes and shapes, undoubtedly there are lawyers and papers and $$ exchanging hands at every change point. Avoiding taxes, amounts of debt balanced against changing asset value based on macro level economic events, the vulgarities of location and timing and whatnot.

Without any understanding of any of the processes you have gone through, without any advice from anyone really, all I have ever done was put money into tax deferred accounts, almost exclusively a 401k. Tried not to worry about it much, certainly with less thought over my working life than you might have put into a single transaction.

Is there anything I need to worry about with 401k's, you seem to dismiss them out of hand even when discussing it with experts I could never hope to afford, who sound like they are advocating something similar to my main retirement nest egg.




Offline Eddie

  • Global Moderator
  • Master Chef
  • *****
  • Posts: 17502
    • View Profile
Re: Meanwhile back at the 'stead
« Reply #1031 on: May 03, 2018, 01:08:04 PM »
Thank you Eddie,
I find the best nuggets from the diner are about mindset. Circumstances are local but mindset is transferable. I know the economic terms well enough but upon analysis most of my financial plans are what you would call hedges. Non income generating just savings and cost control measures. I'll have to give this some thought. I think I will wait for the great Canadian correction before investing in rental real estate. We never had our housing crisis event and property is at insane values here right now. Mortgage interest is tax deductible in the US is it not? Not here. I have been dancing with a land owner about a woodlot but I already have more wood growth on property than I use in a year so its probably aspirational and wish fulfillment. I am going to install a net metered array on the house this year though. I'll move the off grid array to the ground and put 3.6 kW grid tied on the roof. Probably another hedge against future cost increases but a safe way to park 6000 and make 10 percent return on it better than 2 percent in the bank.
Cheers,  David



Yes, here, mortgage interest on the home and 2nd home are DEDUCTIONS and mortgage interest on investment properties is an EXPENSE  item. That's an important distinction. Business expenses are a way better write-off than deductions, which are worth (to me) about 40 cents on the dollar.

I'm not sure, but I'd guess you can expense interest on investment properties in Canada. If you know the answer to that, I'd be interested in finding out. I'll check myself, after work.

I think you're very wise to do that grid-tie...of course it's your area of expertise. You know better than any of us that it's a great investment.

I am trying to figure out how I can come up with the money for a maxed out grid-tie on the canyon house. I hate it on the one hand (very anti-DIY rules here that necessitate professional installation, not that I'd want to do a roof-top install anyway, but it pisses me off).

I used to think I'd go parallel....but from a financial stand-point I think the grid-tie is a very good investment, (and easier to explain and market when I do sell out eventually than a parallel set-up, which most people don't understand). Suburbanites aren't good with batteries.

Hell, I'm not that good with batteries.

I think that's my next big investment too. When the time comes I want your advice on all aspects. :)

« Last Edit: May 03, 2018, 01:14:40 PM by Eddie »
What makes the desert beautiful is that somewhere it hides a well.

Offline Nearingsfault

  • Sous Chef
  • ****
  • Posts: 1031
    • View Profile
Re: Meanwhile back at the 'stead
« Reply #1032 on: May 03, 2018, 02:42:57 PM »
Thank you Eddie,
I find the best nuggets from the diner are about mindset. Circumstances are local but mindset is transferable. I know the economic terms well enough but upon analysis most of my financial plans are what you would call hedges. Non income generating just savings and cost control measures. I'll have to give this some thought. I think I will wait for the great Canadian correction before investing in rental real estate. We never had our housing crisis event and property is at insane values here right now. Mortgage interest is tax deductible in the US is it not? Not here. I have been dancing with a land owner about a woodlot but I already have more wood growth on property than I use in a year so its probably aspirational and wish fulfillment. I am going to install a net metered array on the house this year though. I'll move the off grid array to the ground and put 3.6 kW grid tied on the roof. Probably another hedge against future cost increases but a safe way to park 6000 and make 10 percent return on it better than 2 percent in the bank.
Cheers,  David



Yes, here, mortgage interest on the home and 2nd home are DEDUCTIONS and mortgage interest on investment properties is an EXPENSE  item. That's an important distinction. Business expenses are a way better write-off than deductions, which are worth (to me) about 40 cents on the dollar.

I'm not sure, but I'd guess you can expense interest on investment properties in Canada. If you know the answer to that, I'd be interested in finding out. I'll check myself, after work.

I think you're very wise to do that grid-tie...of course it's your area of expertise. You know better than any of us that it's a great investment.

I am trying to figure out how I can come up with the money for a maxed out grid-tie on the canyon house. I hate it on the one hand (very anti-DIY rules here that necessitate professional installation, not that I'd want to do a roof-top install anyway, but it pisses me off).

I used to think I'd go parallel....but from a financial stand-point I think the grid-tie is a very good investment, (and easier to explain and market when I do sell out eventually than a parallel set-up, which most people don't understand). Suburbanites aren't good with batteries.

Hell, I'm not that good with batteries.

I think that's my next big investment too. When the time comes I want your advice on all aspects. :)
im pretty sure investment property interest is a business expense. As to grid tie have your cake and eat it too... if you use the new micro inverters we use they can AC couple with an off grid inverter down the road. Grid connect while it pays for itself and go off grid using the same gear down the road.  Your economics might not work well. The way my electric rates are structured I pay about $.26 a kilowatt with delivery. Im in a rural low density aarea so delivery charge is half my bill. About half of the delivery charge is tied to consumption so I can end up with a 25$ bill instead of 100. Yes its money but that $25 is the cheapest back up generator there is. Ill probably convert to an electric dryer and electric hot water to use up all those credits.
If its important then try something, fail, disect, learn from it, try again, and again and again until it kills you or you succeed.

Offline Eddie

  • Global Moderator
  • Master Chef
  • *****
  • Posts: 17502
    • View Profile
Re: Meanwhile back at the 'stead
« Reply #1033 on: May 03, 2018, 02:58:30 PM »
Is there anything I need to worry about with 401k's, you seem to dismiss them out of hand even when discussing it with experts I could never hope to afford, who sound like they are advocating something similar to my main retirement nest egg.

No, and thanks for joining the conversation, Buddy. Nothing wrong with putting money in tax deferred savings accounts like a 401K.  I didn't mean to imply that.

Especially if you aren't self employed. If you have an employer or have had multiple employers over your career that offered 401K's, then participating is the best move possible, because they match your contribution. If one is self-employed, then you have to set the whole thing up, pay a yearly fee to a custodian, and also match your employees contributions within the rules of the plan. It's more costly for employers, in other words.

It's something employers do to allow them to contribute even more to their own accounts. The law says they have to do the matching thing for all the long term employees, usually anybody who has been with them more than a few months.

Still, it would have been a great thing for me to set up when I was younger. Even now, I'd do it if I had more free cash  to put into retirement. Right now the spare money just isn't there.

I do think you need to be somewhat leery of having all your 401K in the stock market. It's been great if you bought in after the 2008 crash and bought the usual FAANG's stocks (Facebook, Apple, Amazon, Netflix and Google) that everyone has piled into.

But a reckoning IS coming. Not sure when.

But your 401K can usually be in any number of various investments, including gold bullion and cash. You get to decide what your risk tolerance is. This is a VERY mature bull market that can't go on forever. I was predicting at least 2-3 more good years, but the Trump trade war is making me nervous in the service.

I would have done very well to have set up and funded a 401K many years ago. The tax deferred savings over the long haul is immense.  I missed the boat on that one.
What makes the desert beautiful is that somewhere it hides a well.

Offline RE

  • Administrator
  • Chief Cook & Bottlewasher
  • *****
  • Posts: 38913
    • View Profile
Re: Meanwhile back at the 'stead
« Reply #1034 on: May 03, 2018, 04:29:57 PM »
At the moment I wouldn't consider the properties to be very risky in terms of a market crash, that's not the problem.  The risk is if you get njured and can't service the debt.  Say you fall while working at the Toothstead and break your wrist. Or fall out of a tree you climbed. lol.  Now you are minimum 6 weeks without income.  The properties are illiquid, so now you have to borrow against something to meet your monthly bills until you can start drilling teeth again.  Worse of course if it turns out to be a more permanent disability.

You also did not figure into your total monthly income your SS along with the current cash flow.  You wouldn't be living on $25K, more like $60K since your wife is also eligible for her own SS.

RE

Becoming disabled is without a doubt the greatest risk of all, and hard to hedge. I do have disability insurance, that I got more than 30 years ago, which is better than what you can buy now. So many physicians have taken disability as a way to bail out of practice...it's all changed.

But disability insurance is a drop in the bucket for somebody with a core business like my practice. My business overhead is over 50K/month. That's a lot more than my debt service. No way you can afford enough insurance to cover that. Not possible.

A temporary condition would not be a deal-breaker, but it'd hurt. A permanent disability would end my career and make retirement a lot less rosy. I'd have to immediately sell the practice (for a huge discount) and sell at least two of the luxury properties asap, although I could make the debt service long enough to avoid a fire sale situation. Hopefully, that would net enough to pay for the third. Then I could sell the house last and at least net the proceeds of that into my retirement cash nest egg.

I could even declare bankruptcy and keep the house, although it's highly doubtful it'd come to that. But I could. I've done it before. :)

I'd have to take early SS bennies, no doubt, and live on what I ended up with. With a bit of luck I'd end up with maybe a million cash and the properties. I might still be able to have a retirement income of about half what I make working, I think. Not what I want, but I'm not stupid. I know it could happen.

But....does that mean my plan is bad? Not really. Unless I did have to go BR, I could still keep the cash flow real estate and the $3500-4000 that generates. If, sometime later, the market crashes, I'd still have my best three properties, which are flowing most of the cash anyway. They're paid for. The other three could be sold or even abandoned if necessary.

You make adjustments. I wouldn't starve. I could still afford a house of some kind.

Not really   Divestiture and dekeveraging ARE the hedge.

If you sold off the Canyon McMansion and moved into the property near the dental office, you could use the profit to pay off probably at least one of the other properties still mortgaged.  Your monthly debt service would drop tremendously, which gives you added security is there is a health issue to deal with.

Beginning the process of selling the dental biz is also a hedge.  You're not under pressure now to make a bad deal.  It's going to take probably a good couple of years to negotiate.  Yes you will have to work as a corporate dentist for another couple of years during the transition, but you do get paid for that time while you eat corporate shit waiting for your Golden Parachute.  Once that comes through, you are free & clear on everything with cash in the bank as well.  You are 62 now, this whole process gets finished about the time you are 65 or 66.

You can also start listing the Lake House as an AirB&B, so it's not a total money sink.  You can keep the Toothstead as your insurance policy against total Industrial Civilization Collapse as long as you want to, the taxes are low.  After you sell the dental biz, if you want to keep working a while longer I am sure you can hook on a couple of days a week at some dental office and get paid nicely.  You don't need to be a Greeter at Walmart here.

RE
Save As Many As You Can

 

Related Topics

  Subject / Started by Replies Last post
13 Replies
4003 Views
Last post November 12, 2012, 03:20:35 PM
by RE
16 Replies
4901 Views
Last post November 18, 2013, 10:39:53 AM
by Eddie
7 Replies
5607 Views
Last post January 24, 2014, 12:40:41 PM
by JRM