Renting Real Estate: Worth It?

[biophase]

Biophase--I'd be curious to know what your thoughts are on owning residential real estate. I know you mentioned that you have (or had) some rentals in a post many moons ago. Given that your focus seems to be mainly ecommerce these days, would you even consider touching RE?

I've been chatting with someone recently about this. What it boils down to is your knowledge in making money. We obviously all want to learn easier and easier ways to make money. As we do so, we drop the harder ways to make money as we learn.

I remember the first Richdad meeting when those 2 Asian guys who were online guys showed up, they could not understand why everyone there was into real estate because it took $10k down to make $200/mo cashflow. They said that they could make $500/mo using $5000. I remember debating with them about that. This was my first intro into online businesses BTW.

Today, if I had to spend $25k to invest. I can find a much better return that real estate. Therefore, I would not do REI again. What I've found is that REI is very illiquid and income limiting. You are not agile with it at all.

I have rentals still and a great PM. I just collect checks monthly and have mortgage rates below 3% with very good cashflow. I do like getting checks, but honestly the cashflow is only $1500 and I have $50,000 of down payment tied up in there. With $50,000 I could create an online business that would do who knows how much. Probably $3000 minimum profit and pay an employee $1000 a month to run it. Granted online business is not passive, but it can be made to be very close.

I personally do like the thought of owning real estate. I sometimes do like remodelling things. I probably will end up with real estate sometime in the future. It will not be the best ROI investment that I can make. I would probably pay all cash so I can have all the cashflow and not worry about payments. I would not be investing as others are here to generate maximum ROI and cashflow. It would be a place to park my money.

• I would never personally do a fix and flip anymore because I can spend that time more efficiently just clicking away on a computer.
• I'm sure MJ would never do an online store because he can think of ways to make way more money online without shipping products.
• The Shark Tank guys would never manufacture a product themselves because they can make way more money licensing.

So it basically comes down to knowledge and the most efficient way for YOU to make you money. If you can only flip burgers, then you flip burgers. Once you learn to remodel bathrooms, you don't go back to flipping burgers.

 

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[Rickson9]

Excellent post bio!

It is true that investing in and of itself is not Fastlane. However, if one is good at it, it can easily be changed into a Fastlane via LP or JV. I ran an investment LP awhile ago and all I needed to do was sell and allocate capital. With this method you not only benefit yourself, but you get a slice of everybody else's gain. And if you can compound well, then the multiple streams of income from each investor can add up quickly.

So the analogy is more like, if you can only flip burgers, then you flip burgers. Once you learn how to mass market your burgers, you don't go back to flipping burgers.

The negatives are regulation/SEC/OSC/etc. and dealing with customers. I hate dealing with customers.

 

[Qjet50]

Sure, but you don't have to paint every 3-4 years, no roof to replace, driveways don't require sealing, insurance is cheaper as you only insure the interior walls and elements. I thought the elimination of those expenses might allow you to pay 6x or 7x for a property.

This is true. But honestly, these expenses would normally be incorporated into your monthly maintenance fee. The upside is you do not have to actually do the maintenance to common areas of the condo unit. The downside is when the condo board either does not do their job right or gets hit with something unexpected, you get the special assessment referenced by Biophase.

Boards can be quite useful, or maddening. Some of these boards run by retirees have no clue how to run an apartment complex. I have a condo now with a board that is quite remarkable, hijinks aplenty. Would be hilarious, if I was on the outside looking in...:nonod:

 

[PopEmersen]

Great thread, I am actually in the REI business myself. Just started and this thread is great.

 

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[Dirk Pitt]

Excellent discussion! I like how 40000 mentioned how to measure the ROI (return on investment) of rental income, and how to value properties based on their rental income. It has opened my mind to comparing real estate investing to investing in stocks. It seems to me that RE is the more attractive choice between the two.

Net rental income can be directly compared to stock dividend yields. Stocks yielding a annual dividend of 3% and higher are considered "high yield". Compare that yield to a SFR purchased for $80k with gross rent of $1k per month with a projected net income of $500/month. That is a yield of 7.5%. I'm not a tax professional (but I have stayed at a Holiday Inn Express) but I believe most of that rental income can be sheltered from income tax by depreciation on your Schedule E, thereby further boosting your "dividend". Stock dividends are taxed as earned income, lowering their net yield.

A conservative yield of 7+% while waiting for my properties to increase in market value sure beets stocks.

Just my own observation and "ah ha" moment. Your mileage may vary

 

[Rickson9]

I'm not a tax professional...Stock dividends are taxed as earned income, lowering their net yield.

Stock dividends are not taxed as earned income. That is why CEO/owners like The Buckle's Dan Hirschfeld pay $2 per sh "special" dividends when they control 16,000,000 shares.

The Buckle Special Dividend

He's been paying this "special" dividend for like half a decade now.

Having become a millionaire separately with stocks as well as RE, stocks are slightly better with regards to rate of return. Approximately 15% annualized to 10% annualized respectively. My experience only.

The biggest difference between the two asset classes is not in the return, but in my purpose for them. I use stocks for tax-deferred compounding and I use RE for cash flow. They serve different purposes. One is not better than the other - for me.

Speaking for myself, before I compare two asset classes I usually want to have experience investing in both before making comparisons, but that's just me.

 

[The-J]

Don't mind me, I'm just copy-pasting all of this stuff into a Word document and naming it 'realestatereference.doc'

 

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[CPisHere]

Having become a millionaire separately with stocks as well as RE, stocks are slightly better with regards to rate of return. Approximately 15% annualized to 10% annualized respectively. My experience only.

Does the 10% for real estate consider the equity that you build up over time?

 

[andviv]

It would be a place to park my money.

I see it just like that. I believe RE is the best asset to park your money. Rep++

 

[Rickson9]

Strong endorsement of using property management. I happen to agree. 7000 units is crazy.

[video=youtube;JTK3lPOFvnk]http://www.youtube.com/watch?v=JTK3lPOFvnk[/video]

[video=youtube;HfRKWfRgTxU]http://www.youtube.com/watch?v=HfRKWfRgTxU[/video]

 

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[andviv]

That is one of those 'magic numbers' that I'd like to get more info about...

I know it depends on many things, but...

what is the rule of thumb for cashflow per unit?

In this guy's example, if he is making $100/unit per month then he would be doing around $70K per month.

Is that reasonable?

 

[Rickson9]

That is one of those 'magic numbers' that I'd like to get more info about...

I know it depends on many things, but...

what is the rule of thumb for cashflow per unit?

In this guy's example, if he is making $100/unit per month then he would be doing around $70K per month.

Is that reasonable?

Just going to give my opinion. It may or may not be relevant.

I have heard the oft quoted rule of having a positive cashflow of $100 per door on any RE investment, but I never liked this rule because anybody can selectively omit expenses to show a positive cashflow of $100 per door.

Oftentimes Sellers use far less than 50% of revenue for expenses to show "positive cashflow" so I was never really comfortable with this rule so I never use it. Entrepreneurs who are selling their business also gloss over expenses so it's not just confined to RE. A prospective buyer may have to dig awhile through 5 years of statements to find it (if they find it at all).

Sometimes in older buildings with deferred maintenance expenses can eat up far more than 50% of revenue for a significant period of time until everything is fixed up. Anything less than 50% of revenue for expenses makes no sense - for me.

With regards to how much David Lindahl brings in per month. I have no idea. With 7000 doors he's probably running some kind of giant JV or LP with probably hundreds (or thousands) of (limited/money) partners so his personal take is likely known to himself, his accountant, and the IRS.

However, assuming that he brings in $100 per door of profit per month, that means that his business is bringing in $700,000 per month in profit. Again, keep in mind that he only 'owns' a fraction of this depending on what is outlined in the JV/LP subscription agreements. This is a big (and likely incorrect) assumption as he has been doing this for awhile and many of his RE are in different stages of mortgage pay down, maintenance requirements, etc.

 

[andviv]

I did not know that was an often quoted rule... but makes sense at that volume, to target something like that.

Yes, you are correct, probably a lot of LPs own these units.

In the LPs I am part of, I "own" 3% or 5% of the deal. If it is a 100-unit building, I "own" 3 to 5 of those units.

This arraignment makes sense to me. A lot.

My work now is to find more cash in my business and park my money in deals like this.

Of course, the GM for the LP makes money but that is great, as he/she is finding the deals and managing the operations.

Having a great property management company is the whole difference in this type of deals.

Rickson, I really admire your model.

I also had quite a few SFHs remote, and they were fine while I had a good PM. Once I lost her (she moved to another area) I struggled from PM to PM and positive cash flow became loss after loss every month.

 

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[Rickson9]

Phoenix, AZ is no longer a sure bet.

"'It feels like 2005 all over again,' said Nick Bastian, a real-estate agent with Realty Executives ... 'I cannot find single-family homes within a half-mile radius of a light-rail station; I've literally got waiting lists,' he said.
AZCentral.com

“'Phoenix-area home prices are climbing so quickly in some areas now, due to such low inventory, it’s hard to keep up,' said Tom Ruff, real-estate analyst with online foreclosure service AZ Bidder and a founder of the Information Market, which supplies data for The Republic’s Valley Home Values report. He said the prices on sales closing now, which were started 90 days ago, are outdated. So to find comparable sales, buyers and real-estate agents need to look at sales negotiated last week."
TusconCitizen.com

When investing, two's a crowd. It is a game that is best played when there is nobody else around (to bid against you).

 

[garyfritz]

My ex-wife and I rented her former house for 20+ years, and we added a second house about 10 yrs later. We had almost zero vacancies in 30 house-years of renting, and only one deadbeat renter, last year. Our tenants generally stayed 2-5 years. When we needed to turn a house, I'd place an ad (first in the paper, then later in Craigslist), and anyone who called I'd say I was holding the house open 2-4 on Saturday. We generally had at least 2-4 people who wanted the house and we could pick our tenant.

However you can't touch 5x gross in this town. A 3-4 BR house costs at least $200k (we only bought in decent family neighborhoods, no slums for us, which was why it was easy to rent and we had very little trouble with our renters), and you can only rent it for about $1300-$1500. So we had to work with 10x gross or more.

We kept the costs down by doing our own management. 98% of the time that was absolutely no hassle at all. Occasionally I'd have to find a new renter or fix some minor problem (or more often say "yup, I need to call somebody to fix that"), but that was well worth the $100-150/mo a mgmt company would have cost.

We never had anything *close* to 50% expenses, even when we had to replace a furnace or paint or replace carpet. Last year we were near 50% on one of our houses because we had to replace the roof, but insurance covered nearly all of that. So net expenses, even with taxes &etc, were nowhere near 50% of our gross. You'd lose your shirt with 50% expenses when you have to buy at 10x gross or more.

A realtor just sent a link to some houses in Florida. I was astonished by the prices -- you CAN get 5x gross there! E.g. there was a 5-yr-old 3BR 2Ba 1300sf condo in a nice neighborhood selling for $69k. Similar condos in the same neighborhood rent for $1200-1300. You could put down $150k, buy 10 units like that with 20% down on a 15 yr loan, cover your loan, taxes, insurance, mgmt fees, etc, and show $5k/mo net before repairs &etc. That's tempting. I'm not crazy about remote management but obviously it CAN work.

 

[DustinCA]

I see the biggest advantage to turning the houses into notes is that you don't have to worry about maintenance anymore, just if they pay or not. I know the foreclosure process is much longer than eviction, but if you get a big enough down payment, that helps mitigate the potential loss. So that is why there are much fewer headaches, you technically don't even need property management.

I have a friend here in Vegas that would buy up properties and turn around and sell them OWC, with a modified "wrap around". If he was getting a 5% interest he would turn around and sell the property and hold the financing for 30 years @7.5% interest with 10-20% down. He was making great cash flow every month with no maintenance costs or issues. However i noticed him having a lot of issues. First off, he was not getting any equity, just cash flow. Then whenever there was a big drop in rates, all of his buyers would just refinance their properties and he would get cashed out, meaning he would now have to go buy another property just to make up that cash flow again. He also had a lot of people giving the homes back with no worries because they weren't worried about their credit.

Right now in Vegas there are quite a few of sketchy investors that are buying up properties cash for $100k and trying to sell them for $200k with $20k down and will hold the owner financing for 5 years. The investor knows that the property will not be worth $180k in 5 years, the buyers gives the house back, and they got years 5 years of cash flow , the $20k down payment, and their property back. Very shady practices going on again.

 

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[TheDolphin]

I have been doing research on becoming a landlord as an opportunity for the future. I can honestly say my mind is blown. Never before looking into this would I have believed the sheer headache this venture could cause nor the lack of rights you have to your own property. The only idea I've seen that avoids a lot of these issues is renting on a transient status for vacationers and other temporary residents.

I'd like to hear from the landlords on this forum. If you were to do it over again, would you?

OK, listen, I own a considerable amount of SF rental homes. I purchased 90% with cash. I borrowed money to make money only after I had ample equity that I could afford to play the game of financing to gain a return. To start investing this way is very difficult, why, return is too low to justfy effort. Explain? buying a 10 unit apartment headache to maybe clear 2K per month will drive you absolutely nuts, social issues, maintenance issues, taxes, insurance. Buying a 10 unit apartment building cash to make 10K per month, acceptable headaches. My advice, start small, buy one house cash that is a total disaster, fix it inexpensively, even if it takes you a year (it's cash it's not debt), then be able to rent it for in excess of at least 5x the monthly debt service (taxes, insurance, maintenance) example 250 in debt service, $1250 per month, clear $1000 per month. Then do it again, it's the old school slow way to a fastlane lifestyle.

Better advice, read MJ's book ten times, start a fastlane business, generate 1Million a year profit, use real estate as an investment strategy for passive income (taxed less) and diversified investment.

I did it this way, Bust a#% for twenty years brokering in the financial services industry, then investing in real estate becuase I mistrusted the volatility of the market, go figure. good luck!

GO Internet Fastlane!!!, Real Estate is what Fastlaners play with when they have secure MASSIVE income.

 

[andviv]

Better advice, read MJ's book ten times, start a fastlane business, generate 1Million a year profit, use real estate as an investment strategy for passive income (taxed less) and diversified investment.

I did it this way, Bust a#% for twenty years brokering in the financial services industry, then investing in real estate becuase I mistrusted the volatility of the market, go figure. good luck!

GO Internet Fastlane!!!, Real Estate is what Fastlaners play with when they have secure MASSIVE income.

Rep++

This is another of those advice worth a couple million dollars. Thank you sir.

 

[Pete799p]

I did it this way, Bust a#% for twenty years brokering in the financial services industry, then investing in real estate becuase I mistrusted the volatility of the market, go figure. good luck!

GO Internet Fastlane!!!, Real Estate is what Fastlaners play with when they have secure MASSIVE income.

I agree with what you are saying but it seems like there are lots of ways to make money in real estate without a massive fortune although much closer to building a business then just investing. It seems like real estate developement or fix/flipping SFH or multis could be very fastlane. I know these businesses can be difficult to scale in comparison to the internet but they definitely have magnitude on their side.

There is alot of commenting on needing significant capital and I was wonder what you would consider to be a large enough bankroll to really start earning income with real estate. I recently read an article by a SFH rehaber who holds all of his properties. He has about 150K invested and is earning about 55K NOI with the majority of the homes that have mortgages with terms at 20yr or below. At that rate I could comfortably retire with 300k invested. I could even retire with just the 150k invested.

 

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[Rickson9]

Right now in Vegas there are quite a few of sketchy investors that are buying up properties cash for $100k and trying to sell them for $200k with $20k down and will hold the owner financing for 5 years. The investor knows that the property will not be worth $180k in 5 years, the buyers gives the house back, and they got years 5 years of cash flow , the $20k down payment, and their property back. Very shady practices going on again.

Why is that sketchy? That arrangement is legit as far as I can tell.

 

[Rickson9]

If I was built to be a Fastlaner I would definitely consider it. For better or worse, my personality is more suited to being a stock and RE investor. How do I know? Because I tried it, built a Vignette-based content management business, worked 70 hours a week for 5 years, sold the business, took the money and invested it. Since then I've avoided starting another business. Why? I didn't like it. Do I have tens of millions? No. Do I have millions? Yes. Do I want more? Not if it means working so the answer is no. I enjoy Starcraft 2, Diablo 3 (May) and working out. Good luck all and I hope you all find your most successful path.

 

[TheDolphin]

Yes, it's Possible, but....

Yes, that's why there are five thousand real estate gurus out there knowing the secret formula. It's made a lot of people wealthy, mostly from 1980 to 2006. A bankrupt bartender without any provable income could get a mortgage back then.

If you can develop and fix/flip for magnitude you can get fastlane money, no doubt, in the perfect market conditions this can be true. We had that for nearly three decades, ending in 08. Now we have a mini rebound, I believe fueled by manufactured low rates (buying our own bonds, different topic), and the resulting real estate semi rally. Unless the credit gods unleash some serious liquidity to everyday everyone again (probably not, Mortgage Backed Securities kind of wrecked the world economy recently) you better move fast.

True story, friend sold web company and made millions, invested in a development using mostly cash, 50% bank, in mid 2000's, wanted to double down, and call it a fortune made, retirement here I come, then when everything was done and speck homes built, the 07/08 crash hit hard, nearly lost everything, few had seen it coming, didnt seem risky, right.

Can it be done, yes, but know your market and know your timing is limited, my opinion. Otherwise, refer to my last post. I believe MJ's book nails it. The Web, the Massive Market you can reach is unrivaled in making rediculous money fast, if you have the will and motivation to do it.

I agree with what you are saying but it seems like there are lots of ways to make money in real estate without a massive fortune although much closer to building a business then just investing.

Would you agree or disagree that real estate developement or fix/flipping SFH or multis could be fastlane. I know these businesses can be difficult to scale in comparison to the internet but they definitely have magnitude on their side.

 

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[TheDolphin]

There is alot of commenting on needing significant capital and I was wonder what you would consider to be a large enough bankroll to really start earning income with real estate. I recently read an article by a SFH rehaber who holds all of his properties. He has about 150K invested and is earning about 55K NOI with the majority of the homes that have mortgages with terms at 20yr or below. At that rate I could comfortably retire with 300k invested. I could even retire with just the 150k invested.[/QUOTE]


Again, if you can invest 150K and get 55K back in one year, that's awesome. But, if your renting ten 15K homes, and dealing with some issues 15K homes can possibly have ( evictions, vandalism, crime ), then know the waters your swimming. I personally invest to gain a 15 to 20% return yearly (either cash or low rate financing) and only in parts of town that I would feel mostly comfortable taking a midnight stroll and my property will potentially appreciate in value every year! The math must always make sense, but the location also must make sense, my opinion.

True story, friend bought a house for 5k, excited, then it got vandalised after fixing it not once but twice, broken windows, stolen plumbing, you name it. He eventuallly sold it for 2/3K and lost probably 20K or more in materials and a year or so in time. Not fun!

 

[Rickson9]

There are a million ways to become a millionaire. There are exceptions to every rule. Whatever works, works. It's impossible to determine what will work or won't work for a person unless you are built exactly like that person.

 

[DustinCA]

Why is that sketchy? That arrangement is legit as far as I can tell.

Buying a house for $100,000 with a current market value of say $120k and then selling it for $200k with a 5 year owner financing balloon, and knowing full heartedly that the property will not appraise for that in 5 years IS SKETCHY. They are taking advantage of people that were just foreclosed on.

However, now is it the fault of the these buyers for paying waaaay over fair market? Yes, for not doing their homework on this big of a purchase. Thats not my point though. Im just saying that there are a lot of shady practices going on and for everybody to go beyond their normal due-diligence these days.

 

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[PopEmersen]

Guess I will drop my 2 cents in. I am an active flipper. I started in June with a out of US partner and we are now on our 3rd and 4th flip. 1st flip was entirely his money, we broke even. On the 2nd flip he used an investor and they made 17k profit. The 3rd flip is the one where he and I are going 60/40 on, he paid acquisition, I am paying rehab. We are using the investor on the 4th and we are splitting it 50/25/25.

I was unemployed and going to grad school full time last year when I decided to get into RE. I met my partner on the internet. We have been in constant communication damn near every day since June. There is money to be made and you don't need much capital. Honestly, I don't have alot of capital right now but I see an opportuntity. I built my credit up and acquired a few lines of credit which I use to fund this rehab. There are lenders that will fund your deal for you, you just have to have down payment/reserves.

If you have 50k laying around you could EASILY get into REI. You could leverage that 50k and finance 4-5 multifamily homes that can generate at least $500 monthly using the conservative 50% rule. I just visited a quadplex in my area on sale for 60k, unfortunately I don't have the non borrowed reserves to get on it but there is at least 1 of the deals that pop up every month in my are.

Now this may not be super fast lane, but its faster than 9-5 work which I currently do until I can flip about 2-3 more properties.

 

[Rickson9]

Buying a house for $100,000 with a current market value of say $120k and then selling it for $200k with a 5 year owner financing balloon, and knowing full heartedly that the property will not appraise for that in 5 years IS SKETCHY. They are taking advantage of people that were just foreclosed on.

However, now is it the fault of the these buyers for paying waaaay over fair market? Yes, for not doing their homework on this big of a purchase. Thats not my point though. Im just saying that there are a lot of shady practices going on and for everybody to go beyond their normal due-diligence these days.

I guess we agree to disagree. As far as I'm concered, if it's in the contract, in black-and-white for all to see, then it's legit. Just like the contracts people sign to get credit cards and pay day loans. I see no deception involved.

 

[PopEmersen]

Let me add that i am like Rickson, i like mass effect, skyrim, & other video games: i am a lover of leisure so I won't be flipping my life away. My goal is to live entirely off of passive , maybe as a landlord using PMs or as a HML or as a website owner (especially since there are some highly successful people on this board that currently do this). Either way the current market should be viewed as an opportunity to merge out of the slow lane.

 

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[danoodle]

I just finished my first flip and hope to make decent profits. Let me just say that I almost failed out of college because of Diablo 2! D3 may be the end of me...if I do decide to play, I would like your SN Rickson.

 

[garyfritz]

I guess we agree to disagree. As far as I'm concered, if it's in the contract, in black-and-white for all to see, then it's legit. Just like the contracts people sign to get credit cards and pay day loans. I see no deception involved.

Does the contract say "You're buying this house for 67% over the current market value, purely because you're so desperate for any kind of financing, and it's almost certain it won't appreciate that much so you won't be able to refinance it in 5 years when the balloon comes due" ? If so, then yes, that's full disclosure, and the buyer knows what they're getting into. I'd have no problem with that.

If you're relying on the buyer being too naive to know or find out the real value of the house, or to understand they're going to lose the house and the down payment in 5 years, then you're being deceptive. Maybe you could operate that way but I couldn't, and wouldn't.