Its been a while since I’ve posted about my real estate investing. As we approach the end of the year I like to assess all my investments and set a plan in place to adjust allocation if necessary so I felt it as a good time for an update.
Assessing My Economic Outlook
Every investor should begin by understanding their worldview and economic outlook. Personally, I don’t have much confidence in our anemic economic growth and “bubbly” stock market. The stock market growth is not based on the growth of businesses but QE printing by the fed and lack of interest paid in savings accounts. Essentially, there are few good safe investments so the default is the stock market. The market is booming now but when the punch bowl is removed it’ll pull back. In my area of North Texas, the population is booming as Dallas/Fort Worth is one of the top relocation spots in the country. All that said, I believe real estate is a good place for my investments.
My Current Real Estate Investments
I currently own three rental properties and one prestige condo development in the Keller/North Fort Worth area that profit roughly $1,200/mo combined. Two of the units are smaller 3 bedroom, 2 bath homes that rent for $1195 and $1295. One of the units is a larger 3,000 sf 4 BR home that rents for $1495. The units come available about every 18 months but lease quickly. I purchased all these in the 2008-2010 for $95k-$120k each when the real estate market was at rock bottom. Since then the markets have recovered so I now have roughly 50% equity in the properties. Granted, this includes the 20% down required to purchase the properties.
What Would I Have Done Differently?
One mistake was deviating from my successful record of purchasing smaller, 3/2 units. I assumed that I’d generate more profit from the larger 4Br, 3000 sq ft home. In reality, everything is more expensive – mortgage, taxes, insurance, paint, carpet, etc.. so the profit is roughly the same but more headaches. Also, it is a bit harder to lease the larger, more expensive unit than the smaller units.
Where Do I Go From Here?
I’m a contrarian investor so when the masses are coming in to real estate it is generally my sign to get out. I won’t likely be investing in more real estate at these higher prices. I enjoy the cash flow generated from these investments, especially since my debt levels are relatively low. I am considering selling the larger home to the currently tenant. This would allow me to use the proceeds to pay off the loan of one of the smaller units, keeping my cashflow a roughly the same but reducing my debt by about $160k between the two units. Otherwise, I’ll stay on the sidelines and wait for the next downturn.
Should You Invest in Real Estate?
Overall I believe real estate investments are a good addition to any portfolio as long as you follow these simple guidelines:
1. Don’t get over-leveraged. If the prices are too high to generate great cashflow then don’t make the investment. Currently I believe the numbers are tight in our area unless you are willing to put down a big chunk of cash.
2. Invest in growing areas. If you live in an area with a weak economy or shrinking population then don’t invest in real estate. Nobody wins in real estate when people leave – just look at Detroit. Also, only invest in areas you know.
3. Expect volatility. One thing is certain in this new world economy – volatility. The fed is experimenting with new switches and levers to adjust the U.S. economy with little historical reference that it’ll end well. The stock market crash of 2001 and real estate/stock crash of 2008 will happen again, probably about every 7 years or less. If you’ve missed the boat on this run up then wait for the next one. Just make sure you have the cash (and confidence) to invest when the market is down.
4. Expect the Headaches. Real Estate investing is not a passive investment even with a management company. HVAC units fail, people leave mid-lease, HOAs complain about tenants. It is all just part of owning real estate. Personally, I enjoy the ownership of bricks and mortar so it is worth the hassle for me. That said, If I were making $100/mo then I’d be out of it in a heartbeat.
Now it is your turn. Tell us how are you are doing with your real estate investments!