Wrapping it up

Lording the Land was a lot of fun for me, and I managed to blog for an entire year. During that time I got married, quit my job, moved overseas and started a new career. What a year!

However, with my new career demanding more of my time (though I enjoy the work, so it's not bad), I find it harder and harder to write. Blogging becomes a chore rather than a fun activity. So I think it's time to stop and focus my efforts elsewhere. For all 30 or so readers who read on a relatively constant basis, thanks for listening to my rants and raves.


The Landlord

Jeff's Saga: The Conclusion?

On this blog we've been tracking the tale of Jeff. For those of you just finidng this tale, here's a quick recap: Jeff decided that real estate can only go up, and bought 15 houses in 4 months to test this theory. Then, to further prove his courage, he began posting updates to a forum frequented by real estate investors. Despite getting some negative feedback, he continued to be extremely forthwright about his investments, his strategy, and his current status.

Part one of Jeff's saga - Jeff begins his real estate investment careeer
Part two of Jeff's saga - Jeff gets a little worried

Continuing with the good humor and extreme honesty that were becoming his trademarks, in August of 2006, Jeff posted his first expense sheet. This sheet detailed the properties he owned, what he paid for them, what they were costing him each month, and how much he thought he was making on them so far. This was a goodwhile after the last post that we responded to (from Janurary of 2006, but Jeff wasn't very vocal in between).

August 1st, 2006

O.K., now I am naked before you. Please be gentle, it is my first time...

Close date


Monthly Cost



Tax Gain


Rate 1st

Rate 2nd


Freddie Mac Appreciation

3853 Tierra Zafiro Dr.











8205 Reilly Court SW











8034 S. Knowley Rd.












19 S. Ridge Pointe Dr.












6005 Lourdes Road











4120 Queens Drive












809 Bonnie Court












1119 Makian Pl. NW











6731 Summit Drive












7227 Teypana Rd. NW











6966 W. Saw Timber Way

















The sheet is very telling. Jeff has mortgage payments of almost $14,000 a month! No wonder he alluded to having difficulties sleeping. Even though his rents help offset most of that, he's still getting killed. One or two bad tenants along with a vacancy would destroy him. He's playing a risky game, but at least so far it appears that he is winning. His appreciation is holding up strong netting him somewhere around a 9% return (remember, the properties are growing at 16% a year, but he's paying 7% of that value back to the lenders). But that 7% growth is on about $1.6 million of property.

A month later Jeff gives us the skinny on where his almighty appreciation sits when it takes into account the minimum appraisal amounts. Remember that appraisals don't nessecarily reflect actual value.

September 20th, 2006
There have been a few changes in how I am "tracking" my progress. First, I am no longer going to use the "midpoint" of the eAppraisal I get off of http://www.ditech.com/calculators/appraisal/form.do . Instead I am going to use the minimum value (I have reason to believe some of the values may be "overestimated"--more on this later).

The second change is that I am going to return to including the Cape Coral houses as I will be closing on two of them in the next week. This will make a total of 14 houses. [edit: highlighted in yellow]


Est. Min* Value

Min* gain

Total Min* Equity

Est. LTV

Tierra Zafiro Dr.





Reilly Court





S. Knowley Rd.





S. Ridge Pointe Dr.





Lourdes Road





Queens Drive





Bonnie Court





Makian Pl. NW





Summit Drive





Teypana Rd. NW





W. Saw Timber Way





NE 8th Terrace





NW 13th Street





NW 16th Place













Due to some cost over-runs by the builder (can you trust any builders?), plus 4-8 months over on the construction loan limits (I have to pay the interest!), plus some hidden costs on the modification to term loans, the final 3 houses will cost me 10k to 20k to close. If true, this will entirely wipe out my primary cash reserves.

Now the bad news...for you [critics]...even using this new conservative approach to valuing my homes (using the minimum value), I still come up with an estimate of an increase of $42k per house--or a total increase of $582k. Another way to look at it, I have turned my original $198k of equity (in my primary residence) into $706k of equity in 14 other houses. This is about a 350% return (albeit "on paper") in roughly 20 months of investing.

Let's start with the good news. Jeffs is looking like he's on track to break a million really soon. He has $706,000 locked up in equity already (according to his estimates), and only one house isn't growing. That's fantastic and very encouraging.

However the bad news is rather glossed over. Jeff is dangerously low in funds right now. This is a significatn disaster because we already know that he's in the negative every month. If that happens, he's going to need to figure out a way to tap into his equity somehow to cover his payments. The best possible plan might be to cash out some of thiose houses and use the money to make payments on the rest. Still, if he can weather the storm of costs, his number still look encouraging.

However, I worry about his understanding of taxes. As we noticed last month, he seems to have an overly optomistic view of how much he can "make" back in taxes. Simply put, you can't get back more in taxes than you pay. Sure losses can carry over from year to year, but in a cash-flow situation that's not much help to you. A short while later he posts again on the subject of taxes:

September 21st, 2006
The last three Cape Coral houses I haven't closed on--but I suspect when rented they will be significantly negative ($500?) before taxes. Of course, after taxes they could actually be making me 5k a month or more depending on how or if I can use the Go-Zone write-offs...so they are either terrible on cashflow (before taxes) or absolutely amazingly great on cashflow (after taxes). You pick!

In the very-likely possibility that you have no idea what GO-Zone is, it stands for Gulf Opportunity Zone. It's a package of tax reliefs and business incentives that was designed to boost the economy of the area of the Gulf Coast that was ravaged by Katrina (and other hurricanes).

I'm assuming that the $5k a month that Jeff is referring to is tied to 2 incentives. first the 50% bonus depreciation, which would allow him to depreciate the cost of his home by 50% in the first year of ownership. That means that he gets to take deductions of about $190k for his two Florida homes in the first year. The second was a Tax Loss Carryback. Essentially it allows businesses in the zone to claim deductions against taxes already paid. So you can actually claim a refund for last year's taxes. But this only qualifies through businesses, and I don't think Jeff can use it against his personal income from previous years.

You'll notice from the website that I mentioned though, that no Florida counties are listed as being in the GO-Zone. Google it yourself and you'll see that the only site that appear with "Florida Go-Zone" are real estate sale sites, not government information. I strongly urge that you see a lawyer before thinking about investing in an area with complicated incentives. Salespeople will promise you the moon, only to "forget" those promises after the sale is made.

Still, go back and look through his history. Taking the GO-Zone out of it, he was thrilled about Cape Coral before, and his numbers show more than 30% annual appreciation in that area. So why does he keep bad mouthing that area?

January 1st, 2007
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!
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. Except for them, I would say that I am batting a thousand. All my other houses have gone up remarkably and cost me very little each month.

Apparently Jeff is learning that NAR numbers don't tell you everything. In addition he's begun to learn that houses aren't like stocks. Where you can buy a stock, it goes up or down, and then you sell it (it really is as simple as that!) owning property can be a very complicated process. Especially when you are buying pre-construction. In February, Jeff finally let's us know why he's not been happy with 36% appreciation in Cape Coral:

February 15th, 2007
I am not batting 1000. 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...

And I would of bailed on these houses--took my loses--if I hadn't been given assurances by several professionals that I could get Go-zone depreciation bonuses on these houses. Turns out that is unlikely (not absolutely sure STILL), so sticking with them was an even bigger mistake.

So Jeff signed a contract that bought him the rights to the home, but where the construction company has no incentive to finish on time (Jeff is paying the interest on the construction loan). So without the incetive of payments hanging over their head, the construction company has discovered that (unsurprisingly) their initial projections are off and they'll be behind schedule. For more on this topic, read my post on Moral Hazards. The lessons is that you need to make sure that the people you are doing business with have a strong incentive to fulfill their role and do it well.

And remember how he thought it was extremely unlikely that +45% appreciation could swing into -5% appreciation? Well, his homes have grown by $50k and fallen by the same amount. His inability to sustain such large losses and maintina such a large portfolio is giving him problems with financing. And he took the word of far too many "professionals" (on whether he'd need to re-finance, if he could qualify for GO-Zone, etc.). Here's a handy hint, the more professionals you have to consult, the more you place your well-being in their hands.

Jeff lets us know how bad things have gotten a short while later:

February 27th, 2007
>> Just curious if you have changed your investment philosophy since
>> the 2005 post, now you are negative 3-5K + per month?
>> How many months can you hold on with your 14 investment properties
>> with such a large negative cash flow?

I am embarrassed/disappointed to report that I am well into my "back up" reserves. They will hold me for another year or so depending on vacancies. A sale of one of my SLC houses will hold me for another year or so...

Remember that Jeff's "backup reserves" is his $200k HELOC on his home. So he is now cash-poor, and going deeper into debt every month trying to cover his houses. This HELOC is going to be payable monthly, adding to his negative cashflow. Remember, a HELOC is fine if you have positive cashflow but need an infusion of cash (for a new roof, for example), but using a HELOC to offset negative cash flow is a recipe for disater, you are simply magnifying your cashflow problem.

On the positive side, Jeff is keeping a postive mindset, because he's not sunk yet:

February 27th, 2007
You guys (and others!) seem far too gleeful about my losses on the Cape Coral homes. Try and keep in mind that I bought 14 homes that year, Cape Coral is only 3 homes. My other 11 homes have an average equity position of over 25k for a total equity position on those homes of 370k. And I no longer have to pay any Federal income tax...

Am I sad about the Cape Coral homes? Yes.

Am I sorry I took the plunge and did something crazy? No way. I will cry all the way to the bank.

That's good news, but there is some alarm in there as well. His estimated equity position of $370k is about half of what he estimated 5 months ago. That's a stunnnig drop, and there's still no guarentee that he will be able to sell at his estimated prices (it is entirely possible that he could sell for higher than his estimated prices, although given the mood of the market in 2007 is seems less likely).

Shortly after this post he comes clean on how he felt he was taken advantage of by the other parties involved (brokers, builders, PMs, etc.):

March 11th, 2007
[...]they told me:

1. This property will be built in less than 12 months
2. There will be no cost to refinance the loan, the cost of construction to perm is already built into the cost of the original loan
3. There will be no out-of-pocket holding costs, these also are built in the original loan
4. This property will rent for roughly $300 a month negative cashflow (I never believed this of course)

Basically, they promised that I would close on this loan in less than 12 months, and that I would have to bring no money to closing. Instead, because the builder went over the 12 months (it has been 25 months on one house that has about three more to go). I am paying about $1700 a month holding costs on a house under construction, and I will have to pay about 8k-10k for a refinance on this loan. Times three houses.

Ouch. Sadly, if the builder DID build as he promised, because of the nature of the market, I could of sold these puppies for a slight gain at that time. But because he is a year OVER his promised time, the market has lost 50k or so in that time and I am left holding three losing assets...

The first thing that I want to point out is that Jeff's stated philosophy is to never sell. In fact, at the end of 2005 he came up with this answer as to his philosophy "Holding good... selling bad". So I'm not convinced that he would have sold those home for a profit if the builders had completed on time. I don't feel horrible about the delays either because builders and contractors are known for delaying. It appears that the 12 month period was "promised" but not put into contract. Jeff, never believe any salesman's promise unless he'll put it in writing. It's a good lesson for us all.

I have slightly more sympathy about his loan situation, but not much. I come from the old-school of thought that says "If you are an investor, then you should known what the hell you are investing in". I'd feel horrible if Jeff were just a normal Joe who wanted a home to raise his family in and was getting killed by payments he didn't understand. But an investor who doesn't understand the terms of his loan? That's inexcusable to me.

Unfortunately, it's killing Jeff too. A month later he comes back and shares this with us:

April 25th, 2007
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.

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.

Jeff is beginning to learn his lesson on why buying 15 properties with No Money Down can be a gamble, and the type that hurts you. He's also learning that an apprasal really doesn't mean anything. And while he wants to claim that he was taken advantage of, I'd say that unless they broke laws, his ignorance is his own fault. Getting into a loan that he didn't understand and paying interest on the builder's loan is just silly, but he let himself get into it. As a real estate professional, I can't buy his argument.

Later on he comes forward with information that a class action suit is forming against the builders in Cape Coral. I was going to brush over this, but it raises an interesting point:

April 25th, 2007
There is a class action suit with 100 more investors (in addition to the already existing 100 suits) being brought against those responsible for the illegal acts. To join this suit cost $2500. The lawyers don't promise anything, but claim they have a very strong case based in a large part on the illegal contracts. They say it is possible to have the original contracts "set aside." That is, the builder will get the house back...and I will get my money back as if nothing ever happened.

Is joining this class action suit (and coughing up $2500 more dollars--per house) a no-brainer? Or is this class action idea simply throwing more good money after bad.

I'm not a lawyer, but this looks a bit fishy to me. Typically in a class-action suit, the lawyer will get involved for a piece of the reward. They typically don't ask for money up front (or at least not much). In this case, the lawyer running the class action suit has already raised over a quarter of a million dollars for this case (100 homes at $2,500 a piece). That's a hefty war chest over a builders lawsuit.

Does that mean that this isn't legit? Of course not, I don't know much about this type of legal action. However, before I joined a suit like this I would go to an independant lawyer and pay him a consultation fee to have him look the suit over. If he thought it was legit and would be productive then I'd consider it. But mostly I'd be looking for information that this would be a un-winnable case or that I'd be very unlikely to get anything out of the builders (in which case that only person who goes home happy is the $250,000-richer lawyer).

Jeff also lets us know that his other properties might not be as picture-perfect as he had originally thought:

April 26th, 2007
I am moving forward on my eviction in West Jordan [Utah]. When the nice tenant is out, can I just pay a flat fee for a MLS listing and then offer 3% to the buyers agent? Is that what is happening in the market right now (do you know)? Or how should I try and sell this house from a distance?

Unfortunately, the last thing that we hear from Jeff is a very upsetting farewell:

April 30th, 2007
>> Where are you Jeff?

I have been ill...

I can't sleep, I can't eat, when I do eat it comes up. This morning I started the day with a shower and threw up in the shower...

I am barely functioning, I try to read everyone's posts...

To those of you that insist that these houses were a mistake, you were right.

To those of you offering constructive advice and support, thank you.

I try to read everything but the words are just swimming, I'll try again later...

It was one hell of a ride. And given Jeff's good nature and honesty on this site, I can't help but feel horrible for him. His situation is his fault, he basically took out a huge loan and put it all on black. But I can't begin to imagine the despair he must feel now. The wreckage from these homes will loom over his life for years. Even the properties that are worth more than he originally paid for them might not sell for many months. His personal residence is heavily leveraged with a $200k HELOC that's mostly maxed out.

The worst part is that events like this can tear a family apart. Jeff made is perfectly clear that the real estate investing was his idea, his "job". His wife clearly didn't approve, but trusted him to take the risks that he did. Jeff took their future, gambled it, and lost. Even in an open and communicating relationship, that sort of event can destroy trust, and potentially the relationship.

I wish the best for Jeff, I realy do. I hope that he can sell all of his properties and make enough back to cover his loans and losses. I hope that he can get his life back on track, and I hope his marriage survives this.

But I think his tale can be a great caution to us all. Go back and re-read the story. It's 90% elation and excitement and growth, followed by 10% crushing defeat. And that's all it takes. When you are playing with that much leveraged money, one small event can cripple you and bring you to your knees.

If you are serious about real estate, don't be Jeff. Start small. Study, read and learn about what you are getting into. Read the fricking loan documents. Take your time. And move forward at a pace that your finances can survive. I can't retell the same story over and over again enough. Do not over-leverage yourself. Please.

If I see any more updates from Jeff, I'll post them, but I doubt he'll return.

Social Outrage

On Saturday afternoon I was returning from a day of shopping with my wife and we took a detour home through Soho. Soho in London is a place with a seedy past, but today is a bright and vibrant center of London's West End. We practically had to shove our way throught crowded streets just to get closer to home. That's when we heard the scream.

At first my wife thought it was a movie production. Moving closer we saw a crowd staying far back from some hooligan and what appeared to be his girlfriend. We quickly realized that this was no harmless shoot, and that the woman really wanted to get away from the man, and he wasn't going to let her. She was sobbing "Please just leave me alone", and he was forcefully not allowing her to leave.

People were staying away from this, some watching with horror and other hurriedly walking the other direction, and I can understand why. The guy was about 6'1", 250lbs, and was sporting a short, bright-red mohawk. He looked like a guy who'd be comfortable in a bar-brawl, and in this sort of situation no one likes to be the first one to apporach. But my parents raised me well and I couldn't walk away from that sort of problem. So I walked up to the (not-a-) gentleman and said, calmly, from about 4 feet away "Sir, if she wants to go, you should really just let her go".

This is not the first time that I've intervened in this sort of situation, and typically at this point the guy will realize that he has an audience, mumble something, and walk away. Not our jackass, he looked at me with blood in his eyes, lunged at me and grabbed me by the front of my shirt. Screaming obscenities that would make a sailor blush, he threatened to "knock [me] the **** out", amongst other things.

I'm proud to say that I stayed relatively calm and simply told him politely that he needed to relax. At which he raised his other fist up to my face and repeated his threats. But by threatening me with his fists, he had to let go of the woman, and she started to walk away. He let me go and chased after her.

At this point it's worth pointing out that still no one has come to help either me or the woman. My wife is standing on the sidelines yelling at nearby men "That's my husband, please help!", and they would stare at her as if she were speaking Swahili.

To make a long story short, I again intervened, and when the guy let go of the girl to threaten me again she took off with a purpose. A minute later, the guy gave up threatening me to leave as well. I survived relatively unscathed.

I wonder if members of the crowd later went home and recounted the tale to their friends and family, ending it with a lament that the world is going to hell. I wonder if they even begin to realize that they are the problem! THEY are the reason that people like our hooligan can exist.

Jackasses like our mohawked-friend deserve to burn in hell, but they exist. It's simply a fact. What's really devastating is the sheer number of people who were unwilling to help. A woman was being abused right before their eyes, and they sat and watched. No one called the police. No one showed the slightest bit of outrage. They watched. They enabled that abuser.

I love London. I really do. But on saturday I was, for the first time, truly ashamed to consider myself a Londoner. Today, when I walked to work, I found myself wondering if the people I walked by were decent human beings, or spineless cowards. And I hated myself for wondering that.

Maybe I was wrong. Maybe I shouldn't have interfered. Maybe I should have sold popcorn to the speculators instead. Some people will tell you that you shouldn't get involved in that sort of situation. I say, if that woman was your daughter and she was being abused in public, you'd hope that there'd be at least one person like me in the crowd.

God I'm furious.

Parents, please teach your children to do the right thing. And that means having the courage to do it yourself.


It's been crazy and again I will delay the continuing saga of Jeff while I make excuses. Debt Kid is a guy who speculated wildly and unresponsibly. He got his act together and now he's trying to pick up the financial wreckage. He recently has begun looking for an apartment (since his home just sold in a short-sale), and is realizing how tough it is when your credit score begins with a 4.

He wrote (post is re-ordered my own purposes):

"You seem so happy to see me when I meet you to look at a place. I’m well-manicured, fit, friendly…the perfect tenant. You even get excited when I say, “Sure, I’d love to take the place”. But then you rely on the 3rd party company to make your decision. It’s as if meeting me didn’t matter at all.

It’s really too bad. I’ve had an office lease for 2+ years. My business is booming, and my personal debt will be gone (read: bankruptcy filing) very soon. And yet you still can’t look at me as a whole person.

All you see is my past. Foreclosure. Bankruptcy. Late Payments.

None of those words explain me now, or where I am headed, but that is how you define me."
Here is the comment I wrote to him defending landlords:
"I know that you are frustrated. I know that you’ve gone through a lot and it’s been emotionally and physically draining on you. I’ve been following your story and I feel for you, I really do.

But speaking as a landlord, it’s unfair to cast us all in a bad light. Your credit score is pretty important to us and I’ll tell you why. We don’t know you. Yes, you show up to meet us well-dressed and spoken, but so does the alcohic who’s been fired three times in the last two years and is likely to be out of income again soon. And the geeky guy in a wrinkled shirt with long hair who mumbles just happens to be a computer programmer who earns a fair salary every year and pays his bills on time.

You see, renting out property isn’t a charity to us. It’s a living. When we get a bad tenant it can easily destroy a year’s worth of profits. First we have to wait for non-payment. Then we have to evict, which can take months (depending on the tenant’s sob-story). Then we usually have to pay for costly repairs because a person facing eviction doesn’t tend to care for a property. And during all of this time, we still have to make mortgage payments, because our credit scores are important to us too.

A professional landlord could be potentially be financially ruined by only one or two bad tenants. And history shows us that people with low credit are far more likely to be bad tenants than people with good credit. It’s not much and it’s certainly not true in all cases, but we don’t have anything else to judge by.

I know you’d be a great tenant. And I feel horrible for your plight. But if you take away a landlord’s use of credit scores, what’s left to help us make a good decision? What you really need to do in your situation is either get someone to co-sign on a lease for you, or find some people who are looking for a roommate."

And I really do feel for him. But let's be fair. His credit score is horrible because he made some very un-wise financial desicions that have, in the very recent past, led to him not being able to pay his debts. Yet he wants a landlord to trust that he will pay his rent on time based on what? The fact that he grooms himself?

The fact is that while he rebuilds his credit, he has options. If I were him, I'd go on craigslist and look for someone people who were looking for a roommate. Yes, as a white, middle-class, business owning, former home owner, it may be a bit of a hit on his pride to share his living space with 2 or 3 other people. But it's simply the consequence of his desicions. And it's cheaper.

And yes, I agree that the poor and homeless face a serious up-hill struggle in finding living, but as I mentioned before, landlording is not a charity. I give lots of money to various causes, but my business is simply a business. Please don't place the burden of social inequalities on the individual property owner. That's a problem for our tax dollars to solve, not some independant landlord trying to get by.

All that said, I continue to be a big cheerleader of Debt Kid and his struggles to right the wrongs his gambling caused. And if he lived in Virginia, I've rent a place to him, but that's because I've read his blog and feel like I can judge his character to some level. Without the blog, he'd just be another guy who didn't pay what he promised...

Jeff see storm clouds...

Work is still hectic, so this portion of the story may not be as well-edited as the one before, or the ones to come, but still it's here. As promised.

When we last left Jeff, he had purchased (or put under contract) 15 houses in just a few months. These houses ranged all over the country, from Florida to Arizona. At the end of our segment he had just posted the new NAR numbers for the areas that he had invested in. After 6 months of investing, it sure sounded like everything went spectacularly. One of his areas, Cape Coral, FL, appeared to have gone up 45% over the last 12 months! It was so spectacular that he wrote this during the next few days:

August 18th, 2005

>> 45% in Florida, you have got to be kidding!! Nice call on that one 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...

Speaking of Adiel, I can't help but think of him telling me about his EIGHTY houses in Phoenix. He estimated their total value at about 16 million. It almost makes me lightheaded to think about it, but since Phoenix went up almost 50% last year, he made ~8 million in one year (in one town, he owns in many towns...).

Wow, are things going beautifully for him or what? We've also learned that he's not working anymore, but with the way real estate is going up, who needs a job! Right?

We don't really hear much from Jeff for a few months, but he comes back in November with more updated numbers.

November 15th, 2005

Albuquerque, NM


Cape Coral-Fort Myers, FL


El Paso, TX


Oklahoma City, OK


Pensacola-Ferry Pass-Brent, FL


Salt Lake City, UT


The continuing saga...

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.

Other than that, I feel that my "cut and paste" strategy has served me well. 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.

Albuquerque is the next Phoenix! El Paso is the next Tuscon!

And the first crack appears in the fascade. Holding costs have continued to get higher and he's not prepared for it. In my last post I mentioned that you can very rarely rent out a 100% financed home high enough to cover payments, and you should always allow for at least 5% vacancies. Jeff told us in the last post that he intended to put away $50k in cash to cover holding costs and emergencies, but those funds are somewhat depleted.

An important lesson in real estate is that if a house is vacant, you still have to pay the mortgage. Since Jeff is nowhere near most of these houses, he's relying on property management companies to find him tenants, and while they don't make money if no one is renting, they don't lose money either. So there's nothing he can really do to speed up the tenant locating process, besides deluge the PM's with calls all day.

However, at the appreciation rates he's experiencing, he could always just sell a couple of houses to cover payments and then keep the rest, right? Everything is going really well. Later the same day he gives a little deeper look into where he sits financially on a cashflow basis:

November 15th, 2007

In El Paso, I had several months of vacancies...I finally rented the third one for about $200? below market (and only a 6 month lease). But in Pensacola (Milton) I rented right away at about $150 below market.

A week ago, I had 4 vacant properties...ow! But just in the last week I rented two of those, so now I am down only about 3k a month...still ow. I hate vacancies...

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!

I hope all is well with you...may your days be happy and your vacancies low.

I agree with you Jeff, I hate vacancies. but they are a known risk in real estate investing. Every landlord has them. But things are taking a turn for the worse, aren't they? Back in August he told us that he was positive $250 a month after closing on 5 houses. Now he's closed on 4 more and he's fallen to negative $3,000 a month.

I also noticed that he mentioned that his wife"stopped [him] from buying more". Everyone's marriage is their own business, but remember in the last post when I mentioned that he was a little too eager to buy homes?

Later in the month he gives us even more in-depth data on his current situation (as with most other posts, reformatted for better clarity):

November 21st, 2005
I must admit that my confidence in my numbers is shaken. However, here my numbers are nevertheless. Technically, I have only closed on 9 houses, one is vacant. Including the vacant house, I am losing $2,396 a month (before taxes).

[...] it is impossible to give an accurate prediction of just how much money I will be “losing” next year…it all depends on vacancies (to a large extent at least). So let’s look at a “best case” scenario where all my houses are rented (which they will be, eventually).

When I close on my 15th house, and it rents along with the others, I will be “losing” $3,656 a month or $43,872 a year (before taxes). Now this DOES sound like a lot of money, in fact, it will entirely wipe out my cash reserves in ONE year. But it is a BEFORE taxes estimate. My very conservative estimate of what I will be saving in taxes (depreciation plus loses) is $37,764. So, to the extent that my houses are completely rented, and to the extent that my estimate of taxes is accurate, I will only be “losing” $6,108 a year (a value that my cash reserves can cover for several years). (I am hopeful that, by “compartmentalizing” my houses and using accelerated depreciation schedules a la Albert Aiello, I can get this $6,108 down to around zero, but I am not counting on this.)

Now we start to pierce the veil, look beyond Jeff's shell and into his numbers. Let's start with his cashflow. Before he seemed confident that he'd stay positive before considering taxes, now it appears that taxes will be his salvation. But not so fast.

Let's assume that, for the sake of math, all of Jeff's losses are deductable. They aren't in real life, because some of those expenses go to paying off principal on his homes, which is non-deductable. He wants to claim a loss of $43,872 plus his depreciation. Now if he is considered a real estate investor, then he's limited to claiming $25,000 a year in losses. the other losses aren't gone they are simply rolled forward to next year (and so on until you sell the property).

However, since Jeff has no other job, he can qualify to become a real estate professional (in the eyes of the IRS) by putting at least 750 hours a year into his real estate. From that he can get unlimited paper losses to offset other income. Of course, that's the next kicker, he has to offset other income in order to have tax savings.

He hopes to get a tax savings of $37,764. Using some back-of-the-envelope calculations, his household income will need to be at least $153,800 before he'll be paying enough taxes to claim that entire refund. Considering his personal income is negative, his wife will have to be pulling in over $150,000 to make these loses materialize into cash. (NOTE: Actually she'd need to be earning more, since I was using the single tax brackets numbers, not the married)

In addition, to get a return as large as he is claiming to want, he'd need to offset all of her income. That means claiming $7,328 per house in depreciation on top of his losses. That depreciation number is actually quite reasonable, but the income expectation is high (also bearing in mind that it's not easy to qualify as a real estate professional if you are holding down another job).

So what he's hoping for is probably a bit unreasonable, though he does corerctly point out later that if his losses push his income below zero, those losses aren't lost but are rolled into the next year. And as the month rolls on, Jeff gives a us a deeper look at his long term goals

November 22nd, 2005
My "plan" is to buy these 15, and then each time a house reaches a LTV of ~65%, I will cash out re-fi back to 80%. All re-fied funds will then go to the purchase of MORE homes, never selling the old ones. Eventually I expect to own 50 (or 100? 200?) homes, doubling every ~5 years (or less? depending on appreciation--65% LTV comes pretty quickly at 45% appreciation a year!). So 30 homes total in 5 years, 60 in 10 years, 120 in 15 years, and so on...until I get to the point of "enough."

In case you are unaware, LTV means Loan-to-value. For example, if your house is worth $100,000 and you have a loan for $87,000, then your LTV is 87%. Typically if your LTV is over 80% on a single loan, you will be charged PMI (Private Mortgage Insurance).

I have to admit that most of this plan makes sense. Let the homes build up in equity, then tap some of that out to purchase more homes. So why am I still worried? Because that plan is not the same plan that he's on now. Jeff owns his own home (he mentions it in other posts), and probably could have re-fied to 80% LTV and bought a single home, or maybe two, and began there. Instead he wanted to jump-start his investing by borrowing 100% on 15 homes. So while his long-term plan seemed to be solid, his short term plan was nothing more than a gamble.

Jeff begins to realize this as more and more people point this out:

November 22nd, 2005
>> What if prices start going down 5% a year in Ft. Myers, Pensacola and Albuquerque?

That would be bad...
Do you think that such a thing is possible in the absence of some economic or natural (worse than a hurricane!) disaster? For appreciation to go from 45% to 30% is expected, from 45% to 15% disappointing...but from 45% to NEGATIVE 5%--I really don't see that as a reasonable possibility for Florida. Even Las Vegas, after it "popped" and went down significantly--it is still appreciating at 10%. 10% is still a GREAT return! If I average 10% on my investments I will SKIP all the way to the bank...

Someone points out a possibility of his properties declining and Jeff realizes that such a thing would be disasterous. But he swiftly changes gears and mentions how such a thing would be impossible, quoting his Cape Coral figures. But what he's claiming doesn't quite make sense. Going from 45% to -5% seems far more likely than going from 45% to 30%.

You see, in basic economics you learn that when something is hot (and 45% appreciation is definately hot!), it's unlikely to slow down. Because of the psychology involved, it's far more likely to speed up until it "pops", and sharply reverses itself. But Jeff further explains:

November 22nd, 2005
I have good reason to believe appreciation rates in Cape Coral will remain high including:
a. projected employment highest in nation
b. Foreign investor demand high
c. CC is 20 minutes from Naples, also appreciating at >40% but ALREADY 100k more than CC
d. Projected population increases high
e. Commercial interests high (Home Depot, Publix, etc.)
f. Baby boomers have to retire somewhere and they want a tan

Looking at it from a personal point of view, I can tell you that I'd ignore the foreign investors (investors are investors and while foreign ones, probably European, are more likely to get caught standing up when the music stops, they'll want out just like everyone else). I'm also skeptical about the baby boomers claim. That claim has been made for a very long time, but retirement is changing. People are working later into their lives and sticking closer to family. Still the population numbers, employment numbers and commercial interest are all fairly significant positive indicators.

But worst of all, I think at this point Jeff is starting to lose some faith in himself. His loss of confidence came through when someone pointed out out that what goes up, must come down:

November 23rd, 2005
>> Robert Campbell instructs us that appreciation always eventually reverts back
>> to the mean. Unfortunately, when prices have gone way over average, they have
>> to go below average for a time in order for the mean to re-establish itself again.

Rates do not have to revert back to the mean...all one has to do is wave one's hands and repeat the following...

"things are different this time..."
"things are different this time..."
(don't forget the hand waving...its very important)

The astute amongst you will realize that things don't always have to revert to the mean at a micro level. For example, I'm fairly certain that Redmond, Washington grew signifacntly in value when Microsoft relocated there and is unlikely to depreciate anytime soon. At a micro level there can be any number of reasons why a local market could soar and not crash back down. Some of those are reasons that Jeff pointed out above (such as population growth and commercial interest). But at this point you have to wonder if Jeff really knows anything about these markets besides the numbers that NAR released.

Understanding a local market is not a simple thing, and requires a lot of attention. There is so much information to process and you must stay on top of new developments. There is a reason that professional traders on Wall Street specialize in specific industries or groups of companies. It's hard enough to stay on top of just a few companies, much less stay on top of the entire US economy.

Jeff then gets a series of warnings from other people about the riskiness of his strategy, culminating when a poster named JJ, pleads with him to be cautious:

November 26th, 2005
>> Jeff - I am not stating that your investment style will not work, I am just suggesting
>> that caution needs to be taken with this type of strategy.

Caution...I am in total agreement with your very good point here. Of course, the wisest investor will consider the price of all risks when he invests, including the risk of too much caution. Caution can be risky! Caution can be expensive!

Avoid the risk of too much caution!

Everyone think back over the last 5 years...don't you wish you would of bought MORE houses?

Yes, and 5 years ago you would have been wise to throw caution to the wind. Of course if you bought Amazon stock in December of 1999 at $100 a share because you wished you had bought more 5 months ago when it was trading at $44 a share, you would have lost money in the resulting crash and still would be 20% below your purchase price (excluding the interest from buying on margin).

But at this point it appears as though the fatigue of investing is wearing on Jeff (even when you don't manage the properties yourself, real estate can be a very draining investment), but at the beginning of January, he again updates the numbers that NAR has reported:

Janurary 1st, 2006
For those that are interested, NAR puts the cities I invested in at:

Metropolitan Area


2005 p

2005.III r

2005.IV p








Albuquerque, NM






Cape Coral-Fort Myers, FL






El Paso, TX






Oklahoma City, OK






Pensacola-Ferry Pass-Brent, FL






Salt Lake City, UT






For all of my properties, this works out to a weighted average of 24% using NAR numbers (which are now becoming more and more relevant as I pass the anniversary of my first contract signings). If only my actual houses are anywhere near the NAR numbers...

OFHEO was a little more conservative in their numbers (aren't they always?). They put the cities I invested in at:

Albuquerque, NM


Cape Coral-Fort Myers, FL


El Paso, TX


Oklahoma City, OK


Pensacola-Ferry Pass-Brent, FL


Salt Lake City, UT


St. George, UT


or a weighted average of 22%. Once again, if only my actual houses do half this well...

As for RE investing as a whole...I got into this hoping to catch the last year (2?) of the cycle...it looks like I have a pretty good chance of doing that. But inventories are going up nationwide (way up in some areas), and prices may already be seeing some drop. I think by investing in the Midwest areas that I did, I maximized the my chances of catching the very last of the nationwide up-cycle--I may see another year or two in the Midwest (cross my fingers). For example, SLC inventories are going down. Funny thing is, prices have not shot way up yet (how to explain that?). Maybe SLC needs something more than restricted supply to get up to 20%-30%, or maybe the buyers in that area are SO used to 4% gains that they psychologically will never pay for a 30% gain in one year?

Cape Coral is my one worry...Inventory is up around 150% in just the last few months!
(Lee existing-home sales, prices drop in January)
(Slowly, prices begin to drop as unsold homes sit longer)
Anyone else have Cape Coral homes? Other Florida homes?

So as we leave our hero, he's beginning to feel the pressure of such a large undertaking. And as his understanding of real estate grow, and the true weight of carrying costs becomes apparent, he begins to fear what even a minor market correction could do to him. Note at the end that his best investment, on paper, would seem to be Cape Coral, which has appreciated somewhere between 36% and 48%. Yet increasing inventory is still enough scare him.

It's been a long journey thus far, but try to visualise these homes as yours. You owe somewhere in the neeighborhood of $2.8 million on the homes and some aren't even built yet. Some months you've had to pay out as much as $5,000 to cover mortgage costs and you spend way too much of your time chasing down property managers, asking about collected rents and chasing them on finding tenants for your homes.

Hopefully 2006 will be good to Jeff and put him in a position to relax a bit more.