I couldn't agree more - egrp's breakdown in #7 above is a fair example. Im guessing that one should not buy resort property in SOWAL, or anywhere else with the expectation of positive cashflow.
Searcher,
It's not just about rentals in resort areas, although they are the worst.
I've been following a story on a RE "investors" message board for some time. The protagonist is "Jeff" who fancied himself a savvy RE investor...this portion of his story begins at the point the RE market is toppy:
(These comments are
actual "cut and paste" comments...Folks, you can't make this stuff up!)
(May 05):
JEFF:I would LOVE to tell you about how my investments are doing. Sadly, in order to do that I would have to KNOW how my investments are doing. This is next to impossible given the fact that I have only been investing for roughly 3 months and I am a "buy and hold" strategy guy. I have just done the "buying" part and haven't yet done the "holding" part--not by a long shot. In fact, I have only closed on three homes. Many of my homes won't be built until the summer/fall, and at least 5 won't be built for a year. The advantage, of course, is that I won't be losing any money (due to negative cashflow, a distinct possibility, especially for the Florida homes) on these homes, but they will be appreciating all the same.
(AUG 9, 05)
JEFF: I currently only have ONE SFH that is in that range. I bought a home for 212k in SLC (Salt Lake City) that I am L/O for around $1600. This MORE than pays for my total expenses per month. I put 0% down. Even so, I recommend to others that they try to stay in the 150k range or under. No mater WHERE you are renting, this price range is MUCH more likely to cashflow!
This is different than my Cape Coral homes which have NOT closed yet. The price on them is ~240k. I expect to be ~$300-$500 down on them each month. I am willing to do this though, as each will probably be going up 10k a month on average (my guess). On paper, is seems as if they can sit empty and still be good investments (like Phoenix a few months ago?).
(AUG 18, 05)
JEFF: I give all the credit for identifying Cape Coral to Adiel Gorel. I had hardly even heard of Cape Coral when he (or was it Dani, his assistant) told me about it.
The great thing is that I bought THREE houses there (a lot for me!). Their total value is around 750k. So if they continue to go up at 45% a year (doubtful, but an interesting thought), I could make over 300k in one year! All this on about a ~9k investment. Am I missing something? This seems too good to possibly be true!
If this works out as I am imagining, I am definitely quitting my job. Oh, wait! I can't quit my job, I am unemployed...
(NOV 15, 05)
JEFF: My "worst" investment is no longer SLC (appreciation-wise)--OKC is now lowest at 11%. Of course, I am MAKING $100-$200 a month on fully rented houses in OKC, while my SLC house remains empty on the market at ~$1000 for a 220k house (no takers?).
Holding costs (i.e. vacancies) were WAY higher than I budgeted for (often 5k a month), and I have significantly cut into my cash reserves.
To the degree that my houses are typical of the areas they are in, and hence these NAR numbers are representative, I could be making a weighted average of a 23% return on ~2.8 million in RE (if current numbers hold). Somehow, I just don't think I will be that lucky--it just seems too good to be true--however, I don't see why I shouldn't make half that...In fact, if I don't lose these houses to foreclosure due to vacancies...I could eventually make a significant bundle.
As described above, I have contracts on 15 houses, but I have technically only closed on 9. I signed the papers on another one in ABQ tonight though, so should "own" 10 by the week's end. Of course, when this one closes I will be back up to 3 vacant, and will be losing about 4k a month. Such is life (MY life anyway). I should have budgeted for more vacancies...good thing my wife stopped me from buying more when she did or I would REALLY be in trouble!
(NOV 21, 05)
OTHER POSTER: Jeff I hope you have a ton of liquid cash on hand to payoff the negative cashflow your many purchases are going to lead to.
JEFF:I don't know what you would consider to be a "ton," but I do have what I consider to be significant cash reserves--as outlined elsewhere on this board. In addition, I have a pretty good HELOC to turn to in REAL emergencies. Though my reserves are currently lower than I projected, they seem adequate for the time-being--as long as I don't buy more
I am not embarrassed to say that negative cashflow is scary--even risky. I MAY run completely out of money in 2-3 years or less...but ALL investment is risky. In this case do the numbers not justify the risk? Where is the error?
(APR 4, 2006)
JEFF: Well, it is officially my one year anniversary of investing. It would of passed entirely unnoticed except for one thing.
On Monday I received a check from my first lender on my first house for $3000. It appears that there was an "overpayment" of escrow--in my favor.
I probably wouldn't of thought anything more about it...except that today I received another check for $1700 from my second lender on my second house! That's $4700 that I wasn't expecting (almost as good a surprise as my 27k tax refund...).
(*Shelly thinking out loud: "overpayment" = Mortgage Lender Cashback Kickback?)
POSTER: Wow, how did you get 27K back in taxes?
JEFF: That's easy, just follow these three steps.
Step 1--be stupid enough (or should I say have poor enough tax planning) to OVERPAY your taxes by 27k in advance through withholding. This is the most important step, without it step 3 becomes very difficult.
Step 2--start a business and be "bad" enough at it that you accumulate losses of 100k (or more?).
Step 3--Find a way to apply the 100k loses from your business to your w2 income and ask the IRS for your overpayment of 27k back.
Works for me...
If you are having difficulty getting large sums back from the government, perhaps you need to work on step 1...
FAST FORWARD: (JAN 1, 07)
JEFF: I am having difficulty renting two properties. One in ABQ (slow time of the year) and one in Cape Coral (too much competition or bad PM, I can't decide). These two houses alone are costing me ~3k a month. Ouch!
Can anyone connect me with someone in Cape Coral who can rent/LO my homes out?
My equity position is listed earlier in this thread--no significant changes. Basically I have turned a 198k equity position in my personal residence into a 300k to 500k equity position in 14 rental houses--plus the right to never pay Federal income tax again. This new equity position is currently costing me 3k a month, when I rent my houses it will only be costing me about 1k a month (or less?).Debt juggling is just fine, I have had to hit my "back up" cash reserves twice lately to cover vacancies--each time for 5k. Ouch. Without those darn vacancies I would be about break even...
Change in perspective or approach? I can say that I adamantly wish I hadn't bought any houses in Cape Coral! If only I would of known that they were going to be the worst performing.
(FEB 15, 07)
JEFF: I didn't really expect to, but admitting it anyway was hard. My three houses in Cape Coral are going to end up being HUGE mistakes...they have lost thousands of dollars in equity and are losing $1000 a month while I rent them. While all mistakes are mine, in my defense I was clearly the victim of some pretty unscrupulous "businessmen." The builder took over two years to build my house (ONE isn't even done YET!). Now normally that wouldn't be a problem on pre-construction, but according to the contract I signed as an absolute beginner I have to pay the construction interest while they sit on their butts. Dang. Also, these houses actually went UP 50k each in the first few months I owned them (if I coulda sold), but over the last year have lost greater than 50k. If the builder would of built on time, I could of made 100k or more. Also, the lender said I wouldn't have to re-qualify my construction to perm loan, but since the builder went over the 12 month period, I DID have to re-qualify and couldn't...so that cost me ANOTHER 10k (times 3). And so on...basically I am going to lose a LOT of money these negative cashflow houses...
(APRIL 25, 2007)
JEFF: Well...as many of you know I own three terrible houses in Cape Coral Florida. Through a series of misjudgments and being taken advantage of (and lied to), I am losing ~$1000 on month on each of these houses when they are rented. I am just sick about them and often cannot sleep--like now.
Anyway, what should I do?
I have been hitting my personal residence HELOC for the negatives, but can only take that so far. I would just like to "walk away" from these homes but of course I am too embarrassed to do that (so far) and I suspect it is not an option anyway...
What are my options? These houses appraised at ~315k (closed in last year) but might only sell for 230k right now. I owe 264k.
THE END?