Real Estate Investing: Another Day, Another Property

Another day another property

Those readers who’ve been around this blog for a while know that I rarely take a break from regularly scheduled programming.

In other words, I happen to be one of those (boring?) folks who like to stick to a schedule.

Thus, when I do take a hiatus, there’s a good reason for it.

Over the past 10 days, that reason was adding another property to our real estate portfolio.

The Background

It’s been more than a decade since we first got into the real estate game, buying a property with infinite returns.

Since then, we’ve been gradually increasing the cadence of our real estate purchases.

About a year ago, we gulped hard and bought a multi-unit, mixed-use commercial / residential property right at the outset of the pandemic.

But as soon as that deal closed, we knew another one is on the cards.

Our investment portfolio still had too much cash – and not enough real estate.

Banker On FIRE portfolio

This time around, however, we weren’t looking for a commercial property.

Instead, we wanted to add a single-family, detached home in the metropolis where I grew up.

Moving The Goalposts

Over the years, I’ve avoided buying single-family homes.

Prices have been going up consistently across the board, with rental yields coming down as a result.

Even at today’s mortgage rates, finding a cash-flowing property is nigh impossible.

In that context, you are really relying on just two drivers of investment returns:

  • Deleveraging, which can be quite predictable, and
  • Price appreciation, which can be anything but predictable

Now, the strategy of avoiding single-family homes may have been very sensible.

However, the result of that strategy is that we don’t have any detached houses in our portfolio.

The other complication is that my wife and I would like to move back across the pond at some point. When the time comes, we would like to buy our dream family home there.

A single-family property would give us a near-perfect hedge from further price increases in the local market.

Cue in the change in strategy.

The Journey

I’ll spare you the details of bidding for a house in an overheated market. You can forget about things like home inspections or conditional offers.

Being overseas made it even more challenging, what with remote viewings and late-night bidding wars.

On multiple occasions, I stayed up until 4 am just to find out we’ve been outbid yet again. Suffice it to say that the mornings after weren’t joyful.

What saved the day here was having a fantastic agent. Our guy also has quite a bit of building experience and doubled up as an on-the-spot inspection agent.

It also didn’t hurt having family around who could do viewings and extra due diligence on the houses we liked.

I know a lot of folks who talk a good game about remote real estate investing.

My take on it is that it might work under “normal” market conditions, but certainly not the ones we’ve seen over the past six months.

The real pitfall, however, lay elsewhere.

The Cost Of Being Disciplined

If there was one misstep along the way, it was failing to anticipate the sheer velocity of housing market recovery post-Covid.

We screened our properties, did our research, and bid “market” prices.

However, those “market” prices were informed by sales over the precedent few months.

In the meantime, buyers flush with cash and buoyed by all-time-low mortgage rates kept raising the bar.

As a result, we’ve missed out on a fantastic property in October 2020.

Then another one in January 2021.

And one more a few weeks later (which really hurt).

In the meantime, prices just kept ticking up – and the properties we missed out on looked more and more of a bargain.

Worried about a traditional spring “melt-up” in the market, we finally decided to bully our way into the game in late March.

The Juicy Details

Here’s the lowdown on the latest addition to our (real estate) family.

It’s a four-bedroom bungalow on a nice 60 x 120 lot.

Renovated just nicely and recently enough to attract good tenants – but not nicely enough to make it cost-prohibitive.

We picked it up for $1.6m and will finance it with an 80% LTV mortgage.

It will likely rent for about $4.5k a month, and with a conservative set of financial assumptions, will likely be cash negative to the tune of $25k a year.

Yep, you read that right.

In essence, it means I will need to set aside another $125k to cover the running costs over the next 5 years.

All in, my cash outflows will total about $500k (there’s also a meaningful chunk of fees and taxes involved).

However, it will also de-lever rapidly.

Assuming a price increase of about 4% a year, I’ll be able to take about $390k off the table when I refinance in 5 years.

Set aside another $125k (to cover running costs for the next 5 years) will leave about $265k in net capital release, equivalent to about $53k/year.

All in, that adds up to an IRR of about 9%.

But now, let’s consider the most important question:

What Could Possibly Go Wrong?

A number of things.

To start with the most critical one, the anticipated price growth might not materialize. For all I know, prices might actually come down.

I’ve got a reasonable conviction they won’t, based on local macro prospects and demographic outlook.

However, hope is not a strategy.

What gives me ultimate comfort is the fact that I have a natural “offset” in the reduction of the price of our dream home.

Then there’s the risk that interest rates might go up, but I’m hedging that risk by taking out a fixed-rate mortgage.

Are we about to buck the trend? 

Some of the more customary risks include rental rates coming in below expectations, dealing with horrible tenants, or not being able to rent the home out in the first place.

All valid concerns.

Then again, the beauty of real estate investing is that it’s a skill that accrues over time.

By now, I’ve got enough experience to have confidence around both my projections, as well as my ability to handle any curveballs.

More importantly, I’ve got enough experience to know that things can and will go wrong.  After all, there’s a reason they call them risk assets.

And the only way to mitigate this risk is to hold enough liquidity to prevent me from becoming a forced seller.

Time and market will be the ultimate judges of our latest investment. I will make sure to provide regular updates along the way.

But in the meantime, I hope today’s post is a helpful reference point for anyone considering making a real estate investment of their own.

In the meantime, I’m about to go downstairs, open up a cold beer, and cross one more item off my 2021 to-do list:

Buy another investment property

Thank you for reading – and have a great weekend!


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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.

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22 thoughts on “Real Estate Investing: Another Day, Another Property”

  1. Congratulations Damien!

    Buying from afar isn’t much fun, having a reliable and experienced pair of eyes on the ground locally makes a huge difference. I hope you swiftly attract one of those rarely spotted in the wild dream tenants: who pays in full, on time, treats the house as their own, and never complains.

    Providing the USD$25,000 subsidy to your tenants annual living costs is an interesting behavioural device. From a cashflow perspective, each year you delay relocating now “costs” you roughly 60% of a UK median household disposable income. That makes the default position of no change an expensive one, when added to your existing lifestyle costs. A devious way to overcome inertia!

    1. Banker On FIRE

      Thanks indeedably!

      I like the analogy. Our possible relocation is an equation with multiple unknowns, both professionally and personally, and this certainly adds another one.

      As you say, inertia also plays a role, what with having to re-establish our network and also (importantly!) yank the kids out of the schools it’s taken so long to get them into. Possibly a topic for a separate post!

      Putting my finance hat on, I could easily turn this into a cash-flowing investment. Increase the down payment to about 60%, and the property starts spinning off cash every year.

      That, however, takes my returns down to about 5.7% courtesy of significantly lower leverage – and reduces my liquidity reserves. I’d rather hold a bigger cash reserve, “fill the gap” every year, and give myself enough room to buy another commercial property over the next 12 months (but only once I take a proper breather!)

  2. Hi BoF. I’m still loving this blog so keep it up! Couple of questions please: 1) how long is your fixed rate mortgage for and what rate did you get? 2) Is there any chance you could put your numbers into a spreadsheet and share? – don’t worry if 2 is too much to ask, but I’d love to see some basic modelling as we are thinking about buying a house that we may end up renting out.

    1. Banker On FIRE

      Thanks Ian.

      On question 1, we locked in a 5-year rate at 1.64%. Who knows whether rates actually will go up, but I’d rather derisk the downside here.

      On question 2, no problem at all. I’ve actually uploaded a simplified version of the model I use previously. Here it is: https://bankeronfire.com/wp-content/uploads/2020/02/Real-Estate.xlsx

      Here’s a detailed post I wrote about people getting rich with real estate, in which the model was referenced. Have a look – might be helpful to you: https://bankeronfire.com/how-people-get-rich-with-real-estate

  3. Man that takes some guts to buy a negative cash flow property, but the plan is sound. I think because you have the experience and priced in appropriate appreciation returns you have the confidence to do it. Every time I look at properties I roll with a conservative 2% appreciation, but the reality is in my area it could be 10% per year for awhile…

    1. Banker On FIRE

      Yeah, not exactly my cup of tea, hence I avoided properties of this sort before.

      That being said, this situation is quite unique and hence I felt comfortable with the setup.

      I’ll be in the market for a more traditional (i.e. cash flowing) commercial property in a few months, once I get this one tenanted and have a chance to catch my breath!

  4. Another interesting post, BoF. I thought trying to buy a property 3 hours away was bad enough – got involved in a dreaded ‘chain’ but fingers crossed we’ll get the deal done.

    How does remortgaging work? Have you written about this before? We are going for a 40% LTV as I want it paid off in under 10 years. Mortgage is 1.7% fixed for 5 years which is OK. We are just planning to pay off ASAP but you have mentioned remortgaging a number of times before and I’m wondering if I am missing a trick.

    1. Banker On FIRE

      Best of luck portlygent! Chains are never fun as you say.

      For my property investments, I refinance the properties every few years to release additional cash (which I can pay myself as a tax-free dividend). I then use that cash to buy additional properties.

      There is a tax advantage here whereby I:

      (i) increase my interest expense (which is tax-deductible stateside);
      (ii) defer my taxes until the time I sell the property (which will be very far down the road, as I’m a long-term holder), and:
      (iii) when I do pay taxes, they will be taxed as capital gains as opposed to at income tax rates

      Let me know if that makes sense and I can elaborate if unclear.

      Cheers
      BoF

      1. BoF, great post. Thanks for doing this. One question: whenever you pull money out of a property that increases the mortgage expense. So if the rent doesn’t go up by the same amount, this could create lower cash flow or even negative cash flow. Am I thinking about this correctly?

        1. Yes but when you’ve released a few hundred k, you can always put some money aside to cover the difference.

          The big advantage of refinancing is that it reduces your taxable income and taxes due to an increase in interest expense as you point out.

          I’d rather take a tax-free lump sum every couple of years than get taxed at much higher ordinary income tax rates along the way.

          Let me know if that makes sense – can elaborate more if not!

      2. Thank you BoF. We’ve chosen not to hold in a company/corporation so I see the situation is different. I’m thinking now is the time to get some proper advice.

        1. It depends how many properties you’d eventually like to hold.

          We always knew we would be scaling up meaningfully, so taking the time to explore all options and get professional advice was certainly worth it.

  5. One question that I’ve struggled with for non-UK property is how you deal with the UK tax given you have to declare the rental income here and also get hit with the limitation on interest deductions … I mean that sort of (as in not at all) works in the UK where everyone is having to play by the same rules working out the financing when looking to buy for investment but in the US or another market aren’t you having to do your sums on a different (and more restrictive) basis that those you are competing against to purchase?

    1. Banker On FIRE

      You need to hold the property through a corporation (registered in the US). That corporation is subject to US tax laws.

      You, as a shareholder, are only taxed on dividend distributions out of that corporation.

      It’s like owning shares in a US REIT. Just because the UK government has put in place some silly rules about BTL here in the UK doesn’t mean US businesses investing in US property need to comply with them.

  6. Congratulations on the purchase! I’ve been wanting to go into the real estate game for so long now. I suspect I”ll say that this year, the next year, and for years to come as well. When will I ever break the curse?!

    The steady cash flow that you’ll receive will not only benefit you in terms of cash but on terms of another passive income source to rely on. Diversifying income sources is never a bad thing.

    1. Banker On FIRE

      Thanks David.

      At some point, you just need to take the plunge, otherwise you’ll end up sitting on the sidelines forever!

      It’s never comfortable, but pays massive dividends in the long-run.

  7. $1.6 million!? 😮
    Holy moley! Where is this again?
    And how much were those other properties you missed? :p

    Its very interesting whats happening with real estate at the moment, and its happening everywhere (it seems).

    5-year fixed I assume is to get a point in time where there’s going to be a “natural” option to refinance?

    I’m torn right now between fixed and “flex”. It seems we’ve seen the bottom for now – so now I’m just annoyed that I didnt lock in that 0.5% 30-year fixed rate that was open in DK 3 months ago. Oh Well :p
    Where do you see the interest rate in 3-5 years? (Just curious).

    Thanks for sharing the details with us! Always interesting to read your thoughts and ideas 😉

    1. Banker On FIRE

      It’s a punchy price no doubt, but the reality is that this is how much nice houses cost in the area. Think one of the top 5 metropolitan areas in North America.

      I’m not really taking a few on interest rates to be honest. Agree with risk likely to the upside but then again, people have been saying that for a decade now.

      Instead, I focus on de-risking my overall property portfolio. I’ve got quite a bit of mortgage exposure at a variable rate so was keen to lock this one to have more visibility to my debt service costs.

      Let’s see how well this one works out – on a ten-year basis, I’ve got a pretty good feeling about it!

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