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URGENT TO LANDLORDS: This is "Conventional Wisdom"... And It Can Be DEADLY For Your Portfolio | Episode 128
FromSelf Directed Investor Talk: Alternative Asset Investing through Self-Directed IRA's & Solo 401k's
URGENT TO LANDLORDS: This is "Conventional Wisdom"... And It Can Be DEADLY For Your Portfolio | Episode 128
FromSelf Directed Investor Talk: Alternative Asset Investing through Self-Directed IRA's & Solo 401k's
ratings:
Length:
8 minutes
Released:
Sep 9, 2015
Format:
Podcast episode
Description
Conventional wisdom says that you’ve got a good rental property deal if your rent equals 1% of the purchase price. Sure, go ahead… but it’s a dangerous smokescreen that could thrash your portfolio. I’m Bryan Ellis. I’ll tell you exactly why RIGHT now in Episode #128.-----Hello, SDI Nation. I’m still sounding awful, but starting to recover from my bout with pneumonia and bronchitis, thankfully. And do you know what? There’s NOWHERE I’d rather be than RIGHT HERE with you on the podcast of record for savvy self-directed investors like YOU!I feel the need to gush over you guys again and how amazingly well you’re supporting this show. I’ll just summarize that by saying… THANK YOU! You people are awesome.So, I had an interesting experience recently that I wanted to tell you about.I had a great rental property investment available, and called one of my clients who had expressed an interest in acquiring new cash flow deals. Now, who is named Cathy, is a very smart lady. I respect her opinion. So when she rejected the deal I offered to her rather abruptly, I was surprised.Why did she reject it? It’s because she has a rule… her rule is that she only wants rental properties that collect rent that’s equal to at least 1% of the purchase price of the property. So in other words, if she pays $100,000 for a house, she wants to collect rent of $1,000 per month from that house.For the sake of simplicity, let’s call that the 1% rule, ok?Now, before I go on, I’d like to say that Cathy is smart enough that I have no doubt that she has criteria beyond just that one, and so Cathy, if you’re listening, please be aware this is NOT a response to you, as I’m well aware that your evaluation criteria is much more substantive than that one rule alone. I know you’re a successful investor and I very much respect your opinion.But your response absolutely set me to thinking about that criteria, because it is such a common notion, and one that is accepted as gospel by so many people.But is that actually a good guide?If that’s the primary factor in your evaluation process, the answer is NO… it’s a TERRIBLE standard. And I’ll prove it to you right now.Imagine you have that house that you bought for $100,000 and that you are, in fact, collecting $1,000 per month in rent.Well, that’s great! It’s a good foundation to start from.But let’s throw in a few very REAL-WORLD considerations.Let’s imagine that that house is 50 years old. It’s structurally sound and should last many more years. But… it’s old. Isn’t it likely that a house that’s that old will likely require significant repairs or upgrades during the course of your ownership period? The answer is YES, absolutely. Even if those issues aren’t yet apparent, it’s the nature of older property that these risks are more frequently realized than with newer properties.Ever heard of that website called Angie’s list? It’s designed to help people find high-quality service providers in your local area. According to them, the actual average cost of replacing a roof for their customers has been in the $11,000 to $12,000 range.And just like that, an ENTIRE YEAR of cash flow is gone.Same deal with air conditioners. I know this one all too well as we’ve got to replace one of the 3 units in my family’s home. Pricing for that covers a wide range… around a low of $3,000 up to $8,000 or more. I’d say $4,000 is a reasonable average…And POOF, just like that, another 4 months of rental income disappears.Now, folks, we all know that there’s no way to absolutely prevent those kinds of issues. But is it rational that you’re less likely to have those problems by purchasing newer, high-quality homes versus very old homes? Yes, of course that’s rational. And a great way to show respect for your capital.But those kinds of issues, as expensive as they are, may never materialize… and that’s why it’s so easy to ignore the risk and move forward with overly simplistic judgment criteria like the 1% rule. So what are so
Released:
Sep 9, 2015
Format:
Podcast episode
Titles in the series (100)
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