My 1st Million At 33 – yes, you can do it too

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  • Archive for the 'Real Estate' Category

    My rental portfolio

    Posted by Frugal on 23rd May 2013

    Housing market in most area of the California has experienced 15% to 30% price increase in just the last year. I have bought about 1.3 million worth of real estate in the last year (through mortgage leverage), and caught onto the ride. I am managing all of five rental properties myself. To get everything fixed up and rented is quite a lot of work. My real estate investment portfolio brings in about $60K income (before mortgage interest and depreciation deduction). The actual rental income however is less, due to all the mortgage interests that I need to pay.

    After the big rise in the housing market, it’s close to impossible to find any investment property that will give you an ROI of 6%. Even for what I bought, the average return was not more than 6%. However, if I didn’t lower my ROI target a little bit, I wouldn’t be sitting on several hundreds of thousands from capital gain right now. I didn’t expect the price to rise so quickly. I’m still shopping for deals but it’s about 1 in 100 homes that you may find a deal, and possibly 1 out of 50 deals you may get. So the chance is about 0.2% or less for you to actually get some deal. I go through about 100 listings online myself on a daily basis. That obviously take effort and time. The fact is that if there is a deal, your real estate agent would buy it before you do. So either you find them yourself, or you don’t. Nobody is going to give away something to you.

    Even if you don’t have a lot of money, you can still invest in real estate. My smallest acquisition was just $60K, and the ROI is 10.1%. Obviously far better than 1% for the idle cash in the bank.

    What makes real estate investment better than other investment besides its stability and leverage? What I’ve learned from sifting through tens of thousands of homes is that real estate market is not an efficient market, and there are always deals that are priced below-market. If you try often and hard enough, those are some potential gains that you can get. Your competitions are going to be as crazy as you are. 99.5% of the good deals that I found get sold in the first two days, if not the first day. This is not a game for the guys who sit back and relax. If you don’t make a move, somebody else will.

    Posted in Real Estate | Comments Off

    I bought 4 homes in the last 9 months

    Posted by Frugal on 6th February 2013

    Housing market has temporarily bottomed last year. Chasing up the market, I bid on probably over 50 homes, and I got 4. Basically all of the homes that I put in a bid are sold within the very first week. Some homes I bid with all cash over the listing price in the very first 30 minutes, and I still couldn’t get them. Those that get sold in the first hour appeared to be structured illegally by the listing agents as insider deals.

    I have been so insanely busy with everything. It takes so much more than just cold cash to get the homes. Markets are hot, and the listing agents are kings. Most of the time, if I can get a return call from the listing agent, I call that a good success already.

    I will detail the housing market strategy in the second part of my eBook, but for now, I’m just too busy to write it up.

    All of the homes that I bought are basically in-the-money on the first day, if not a good 15% profit. I actually only bought “3″ homes, because two of the four homes that I bought, I got a 50:50 partner who was lucky to ride up the housing market with more than $70K profit with me already. I had to get a partner because I didn’t have 1.5 million cash in the bank to bid on every terrific deal without financing.

    I used to dislike housing flippers, but I will become one by buying these homes. After seeing how this lawless country is, with all the Wallstreet people not even indicted, and all those “home” owners or rather loan mowers who signed with perjury on their loan docs, still squatting in homes for free, I have to say that I’m disappointed about ethics in general. For now, I’m just going to grab the profits if they exist.

    I have a lofty goal of donating at least half a million in my lifetime for charitable causes. I really would love to donate one million, but I will be realistic for now, and set my goal to $500K. It’s a lot of money, and I wish I could reach my goal. And there is no other way to reach my goal besides by becoming rich. Actually, let me take it back. It’s not me donating any money, but rather I’m just “re-distributing” the money from God to the poor.

    Posted in Real Estate | Comments Off

    California real estate markets are RED HOT!!

    Posted by Frugal on 21st September 2012

    I would think that you’re crazy if you tell me this statement six months ago. Frankly, RED HOT is not even enough to describe the current market. Here are some of my personal anectodes, based on my bidding in the market:
    1. Most listings go into pending on the first two days, or after the first weekend.
    2. ALL homes have multiple offers at or WAY above listing prices. It’s getting common to have some 20 to 40 offers if the listing doesn’t get pulled down in the first month.
    3. If you don’t work with listing agents, it’s end-of-story for you.
    4. Grand opening at new home sites are PACKED!!
    5. The bidding frenzy is extending some 60 miles away from the center of the metropolitan area.
    6. Even handyman or contractors for flooring/carpeting, etc. won’t answer or return your phone calls. I tried to call a handyman for flooring. Not only that he doesn’t return the calls, he has requested his carrier to post a message: “On the request of the subscriber, this phone number does NOT accept incoming calls.” Frankly, that is just NUTS! And this is not just an isolated experience on one handyman, but my experiences with several handymen are like this as well.
    7. MLS inventory was 40% down year-to-year several months ago. I wouldn’t believe this if I didn’t see this myself, but MLS listing inventory is going down to essentially absolute ZERO probably in the next one or two months within the 60 miles radius of my search. Just go to redfin.com, and punch the city names. On the upper-right corner, you can see the inventory plots. It’s a straight line heading down to zero, since last October/November.

    With Fed buying 40 billions of MBS mortgage securities every month thru QE3, which will tend to close the spread between treasury bonds and mortgage bonds, it is possible that mortgage rates may go even further down. FHA also may waive the 3-year waiting period after short sale/foreclosure. If that happens, in conjunction with even lower mortgage rate, the housing markets can easily go up by another 20%. FHA down payment is only 3.5%. That is basically nothing, and won’t even cover the transaction cost of buying and selling. Taxpapers are essentially subsidizing all the future defaults (again)!

    So where do we go from here? I’m a long-term bear on the housing market, and I have called the short-term bottom five months ago this year. I’m not changing my view (yet). But it is surprising that how much intervention can do to the housing markets. I expect the next short-term peak at about 2016, and the next bottom to come at about 2018 to 2020, but that is at least 6 years away from now. If you need a home, but you cannot wait for 6 years, it may still be better to buy now rather than later. I think the prices at the next bottom may be slightly higher than the bottom that was made in 2011/2012. But you would have saved on rents for sure. Given the current pricing, with the exceptions of being right at the center of metropolitan area, it is certainly cheaper buying than renting.

    Best luck on your housing hunting trip, because you will need A LOT of that.

    Posted in Real Estate | Comments Off

    I bought my second real estate property

    Posted by Frugal on 3rd June 2012

    Putting the money at where my mouth is, I bought my second real estate property (besides my primary residence). I actually bought several months ago, and just in a couple of months, the real estate has gone up by about 5% to 12%. Based on the speed of rally, it is obvious to me that the secular bear market in housing is not over. Hope springs eternal. As long as the participants are still full of hopes, the bear market won’t be over.

    Based on the current conservative valuation of my second property, I’m already at least $40K in positive territory. I always marked everything including real estate to market prices, but in this case, I will choose to be conservative due to my long-term bearish view on housing market. My first real estate property which gained me $300K at the housing peak has been marked down by about 45% to the current market price, including a 5% off that I would need to pay real estate agents if I ever decide to sell it. I obviously should have sold it near the peak, but let’s not go there because it involved some unpleasant family feuds. Sometimes, you not only need to out-smart the market, but also need to convince your family as well.

    I have been extremely busy lately, due to publishing of my Kindle book, and also becoming a landlord for the first time. Running through credit checks on various applicants, I shake my head on how financially fragile these potential tenants are. I wish more people would take my advice and live under their means.

    My property is rented out already, and I’m only about cash flow even on a 30-year mortgage, due to the fact that I have cashed out before and refinanced several times. My tenants will be paying down the principal for me, and so the net profit would grow as the principal is paid down.

    If you’re still sitting on the sideline, at least you should wait till the slower winter season. Hopefully, prices will pull back somewhat at that time. Have patience. Housing market won’t come back before year 2026 (or 2006+20 years for a bubble to deflate). Every time I say this, people won’t believe in me, and would shout at me, but we will see. If you buy any houses, make sure you are positive monthly in respect to equivalent rental.

    Of course, the lowest bottom of the housing market in the nominal price will be different from the bottom priced in the inflation-adjusted price, and will be different as well as in the bottom in terms of monthly payment. Ideally, when you buy your home at mortgage rate of 8% instead of 4% now, your housing price should be low, while your monthly payment will be high (assuming that you can still get a mortgage).

    Posted in Real Estate | Comments Off

    Housing market making a short-term bottom

    Posted by Frugal on 3rd April 2012

    It looks like housing prices may find a short-term bottom this year, assuming a stable low interest rate environment. The primary reason that I’m saying this is because of an ultra-low inventory of homes on the market, about some 30% to 40% lower than last year or the year before. Furthermore, there are a couple of programs that may reduce the number of foreclosures or short sales to come to the market:

    1. Bank of America converting foreclosures to rentals to delinquent borrowers.

    2. Fannie Mae implementing bulk sale of REO to investors to convert to rental.

    The bottom line is that in majority of the US housing markets, it is becoming cheaper to own than to rent at the prevailing mortgage interest rate. This is bringing many big or mom-and-pop investors to invest in the housing market. However because of the low interest rate, I do NOT believe that this will be the final bottom before a sustainable rise. Eventually, the real bottom will be made near the peak of a bond market interest rate. With a rising stock market for the next several years, the mortgage interest rates will be rising as well, putting a cap over whatever advances that the housing prices can make.

    If you want to invest, make sure that it is both net P&L positive and cash flow positive on a 30-year fixed rate financing. The action of mortgaging will reduce the potential impact from the downward pressures of the falling bond market and therefore the rising of interest rate. With a rising rental market everywhere, it is a good time to invest in real estate as long as you can make the math works.

    Posted in Real Estate | Comments Off

    Get 3.5% back (in closing costs) for your new home purchase

    Posted by Frugal on 16th September 2011

    Fannie Mae has this program since June 15th. It will end at the end of October. It has been extended once already a month ago. I’m guessing it will be extended again.

    The 3.5% must be in the form of closing costs, which you can use for any settlement costs, and buy down the (already-low) interest rates. You do have to buy one of the foreclosed property from Fannie Mae, and it’s pretty to search through their properties online.

    You can find the details of home path program here.

    Freddie Mac also has a “home steps” program for extra home warranty and $1500 condo association credit. But it’s most likely less than 3.5% unless the property is extremely cheap.

    I still expect the home prices to drift down further, but if you are ready to buy for non-financial reasons, by all means, you should take advantage of this offer.

    Posted in Real Estate | Comments Off

    US housing market has a long L bottom ahead

    Posted by Frugal on 23rd February 2011

    This is just my personal opinion which I have been saying since 2007 housing market peak:
    I am fairly certain that US housing prices will not recover its inflation-adjusted price until 2027 at the earliest. In terms of nominal prices, I am less certain but I also tend to think that housing prices will not recover its nominal prices until the same time-frame. My reasoning is fairly simply. Every financial bubble in human history will NOT repeat itself for at least 20 years. Usually it’s AFTER 20 years have passed that the same asset class can have a new chance to begin to rise in prices.

    The two main negatives that have not been priced in by the current buyers are
    1. Bond bubble bursting causing rise in interest/mortgage rates, AND shortening of the duration of the mortgage term. This will cause the domestic US buyers to decrease their offering prices.
    2. Increasing deficits will most likely result in increase in property taxes. This will increase the holding cost of houses and therefore decrease the home ownership benefits.

    The third negative that has not been priced in by the foreign cash buyers is that the current US housing price can possibly become 50%-off, once US dollar drop another 50% against the stronger Asian(Japan-excluded)/commodity currencies. These buyers will probably not flock into US after 50% off because the relative political/economical stability across regions can change in detriment to US, and that these “savvy” businessman and “corrupted” government officials won’t probably be throwing good money after bad.

    Regardless, if the home ownership cost is way below the current rental cost, it obviously makes sense to buy. You could use my Rent vs Buy calculator to see if it would make sense.

    Posted in Real Estate | Comments Off

    Surprising resolution of mortgage paper fraud coming?

    Posted by Frugal on 10th October 2010

    There is a serious mortgage paper fraud bubbling to the surface. I was aware of this several years ago, but I was not aware of the magnitude. It is so serious that I think it can easily turn the whole world up side down (for the second time, I guess).

    Some background first. The US bankers and Wallstreet or more properly called “fraudsters” first selling all the worthless “mortgage-back” securities back by phantom 100% financing loans from 2005 to 2007, cheating the entire world out of savings. They turned the world up side down with the financial crisis, and then had Paulson from Goldman Sachs being the US treasurer at that time, saving their ass with taxpayers’ money, transforming or rather downloaded all the worthless mortgage paper onto Fannie Mae, Freddie Mac, and AIG. Of course, everyone thought that was a great mission accomplished.

    Now, when they try to foreclose homes, but lawyers demand to see the promissory notes, they find out, “Damn, where is that piece of crap?” Imagining all the homes that cannot be foreclosed on, due to missing documentations for the promissory notes? All the mortgage-back securities now will be truly back by NOTHING!

    Here is what I will venture to guess the potential outcomes.
    1. The only way to foreclose these homes will be through non-judicial foreclosures (including California, the home fraud center). Rather than getting nothing for the mortgage paper, it’s far better than getting something for it. Once the avalanche starts rolling, every bank will start scrambling to sell the homes out of the flood gate. Home prices will fall by another 20% in the coming 2/3 years. Or at the minimum, the shadow inventory of the homes on bank’s balance sheet will dramatically rise.

    2. If this is not resolved through Congress passing a new law, back-patching the shoddy works by bankers, and the news start to spread around the whole world, US dollar will drop to a new dramatic low. Imagine another 3 trillions loss (out of 11 trillion) on Fannie Mae/Freddie Mac backed debts, all USA government owned? By the way, if this event unfolds, stock markets will panic first, but later will reverse to break 52 weeks high. Bonds will plummet for sure. Real estate will go into extended nuclear winter.

    3. New laws get passed through Congress to save the bankers’ ass. Congress initially side with home squatters in the name of protecting voters, until all the law-abiding citizens take the street, demanding fairness. Then Congress realizes that it’s too late to stop the revolution by the majority of the law-abiding citizens, turning to lawless resolutions everywhere.

    Just some crazy ideas. But certainly less insane than what has been going on in US real estate markets. And all of the rotten apples (Wallstreet bankers, home speculators, and all the mortgage “consultants”) are still in there unbelievably.

    Posted in Real Estate, Stock Market | 2 Comments »

    Housing bubbles everywhere

    Posted by Frugal on 5th March 2010

    I thought that what happened in US since 2007 (and in Japan back in 1990) would have taught people some lessons. But human greed knows no bound. Either they don’t read news, or they’re too greedy. There are still booming undying bubbles in China, Taiwan, Canada, Australia.

    It is apparent that most participants recognize the value of housing investment in protecting assets against inflation. It has been the preferred financial instrument, especially in Asian culture, to buy real estate because
    1. It won’t go to zero, because it’s “real” estate, and you will always have it.
    2. It pays out dividends in the form of rent.
    3. It always “goes up” in the long term.

    My colleague asked me whether I know how much real estate has gone up since 50 to 60 years ago. He told me it’s tens of thousands of percents. Well, but one must recognize the fact that since 1930, $US has depreciated 94% in buying power, according to government official statistics (and probably worse if using unofficial figures). The primary reason that real estate goes up in the long term is because of general inflation. Since a couple of decades ago, another factor that helps real estate price is that the financing costs/interest rates have been going down. However, over the long term, the average real estate prices cannot exceed inflation rate by too much and/or for too long. Why? If real estate simply returns 1% more every year than the general inflation, after 100 years, real estate price will be 270% higher than the general wages. After 200 years, real estate price will be 732% higher than the general wages. Well, the economic law of supply and demand will always balance things out. Eventually, either people cannot afford homes anymore, and younger generation stops forming families, resulting in reduction or stagnation in population, and therefore reducing demands for homes, or the home prices will simply FALL behind the general inflation rate. And I can bet you that it will happen before real estate prices are 732% higher than the general inflation rate. In fact, both Japan and Taiwan are already showing such signs of either declining population or stagnant growth. If you have so much money that you don’t need to worry about future, housing, employment, etc, and you have all the leisure time in the world, won’t you tend to have children? On the other hand, the opposite extreme scenario would probably be true also. So if the population is declining, who is going to fill up the existing housing space, not to mention that builders will always build more. Imagining a hypothetical scenario, where for every grand kid, he or she is inheriting at least 2 homes from both sides of the grandparents, and/or parents, and/or any unmarried relatives who have passed away, now won’t the housing and/or rent price go down because there are extra supplies versus demands? Of course, before long, economic law of supply and demand will kick in, and population would have increased.

    What I’m trying to point out is that it is simply IMPOSSIBLE for housing prices to stay higher than inflation rates for too long. Those that bet on housing prices will increase 10% above inflation rate every year are simply delusional.

    Posted in Real Estate | 9 Comments »

    A buying strategy for the current housing market

    Posted by Frugal on 1st March 2010

    Very infrequently I come across some articles that are so well written that I feel obliged to recommend them to people. And I found it at Irvine Housing Blog. IrvineRenter, the owner of the blog has written a couple of excellent articles that should be must-read for every home buyer.

    On “Valuation of Lots and Raw Land”, IrvineRenter explained in details how the valuation of an investment in raw land would work out. To sum it up, land investment works like a call option on the housing market.

    On “Loan Assumption is the Appreciation of the Twenty-Teens“, IrvineRenter gave his best advice (and I concur too) that the best bet in building your home equity is probably by buying with an assumable AND fixed-rate loan. Unfortunately, as far as I know, the only assumable loans these days are FHA loans, which have higher fees in general. Why is that? A good deal to the borrowers is always a bad deal to the lenders. The scarcity of such loans automatically tells you that assumable loans are not good for lenders.

    And at last, on “Fundamental Valuation of Houses – Part 1“, IrvineRenter explained in details about the math of home ownership cost. His article almost acts like a companion manual to my online java housing cost calculator. All of the factors that he has mentioned, I have included them in my online housing calculator, plus commute cost difference. But just one caveat, garbage in, garbage out. My calculator is only as good as the validity of your input assumption. If your assumption on the housing parameters such as rent/housing inflation or tax rate, are inaccurate, then the results will be inaccurate as well.

    So what’s the buying strategy for the housing market? In case you missed it, it’s using assumable fixed rate loan. On a longer term, I believe that the mortgage rates will be going up. Contrary to all the unscrupulous realtors, the best time to buy real estate is when the mortgage rates are at the highest, not when they’re at the lowest. Lower mortgage rates always cause the housing valuation to expand, while higher mortgage rates will rein in the price. Assuming a forward picture of higher than normal inflation, and mortgage rates trending higher, the inflation force may arrest and balance out the decline caused by higher mortgage rates. Nominal housing prices may stagnate for a decade or even two decades, but inflation-adjusted price will continue to decline. Such picture does not bode well for many participants. The renters will see their rents going up due to general inflation. The new home buyers may still see price declining if the nominal prices have not reached bottom. Worse yet, if the equivalent ownership cost of their home is higher than prevailing rent, then they’re effectively speaking draining any potential savings that they could have built without buying a home. In such picture, the only potential remedy would be to have an assumable fixed-rate loan, so that one could recover the price benefits between future higher mortgage rates and the current lower mortgage rates.

    And if you cannot find such loan, make sure you put the least amount of down payment, and borrow as much as you can for 30 years fixed. Forget about adjustable ARM. The only way to short the bond markets and US dollar simultaneously and safely without margin calls is to borrow against your real estate holding.

    Posted in Mortgage, Real Estate | 1 Comment »