Author Topic: Time to switch gears? Contemplating rental property investment.  (Read 6556 times)

Adam Zapple

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Hi All,

I am considering switching gears with our retirement savings strategy.  My wife and I are doing pretty well with retirement savings and max out our savings plans to the tune of $36K a year.  Between our 401K/457 and Roth IRA plans, plus a modest pension I am due to receive at the age of 55, I'd say we're about 1/4 of the way to our retirement savings goal.  I am hoping we will be able to retire in 13 years at the age of 48 and I'm just coming to the realization that we will not be able to access much of our retirement savings at that time. 

I've always worked two jobs, my first in public safety then I have a very small home renovation company (just me and my tools) that I run as a side gig for extra cash.  My ultimate goal with this company was to begin purchasing rental properties and fixing them up to hold onto long term but I've let fear and uncertainty delay this transition.  I'm thinking now(ish) is the time to start to switch gears and follow this goal.  This would mean giving up on contributing to our 401K/457/IRA for about 3 years to save up for a nice down payment on our first income property.  Has anyone had success with investment properties?  Any personal horror stories?  I'm really looking for advice and encouragement to take the leap.

StockBeard

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #1 on: June 01, 2015, 10:49:20 AM »
There's actually lots on the subject from MMM himself on the blog. And he has a good mix of success and failures too.
3 years without saving sounds like a leap of faith to me though... that's a tough decision

Miss Prim

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #2 on: June 02, 2015, 06:24:22 AM »
Maybe some of the people here who own a lot of rental properties will post soon, but I can give you a little insight into rental property as I own one and have for over 30 years.  If you have to save up 3 years at $36,000 a year for a down payment, the cost of property must be very high in your area.

You really want to buy in an area where you can get between 1 and 2% of the purchase price in rent per month.  For example, the area my rental is in, you can find houses that go for around $40,000 to $50,000 and I can get $800.00 - $900.00 per month in rent which is well between 1 and 2%.

You might want to post this in the landlord section.  There you will get more answers from people who do this on a larger scale than me.

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RoadLessTravelled

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #3 on: June 02, 2015, 09:09:07 AM »
Investing in real  estate is not limited to buying a house and renting it out.  Being an actual landlord is a pain in the butt.  If you want to look at alternatives in real estate than look at ALL that is available to you, not just buying a residential property and becoming a landlord.


M4111

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #4 on: June 02, 2015, 09:30:23 AM »
For example, the area my rental is in, you can find houses that go for around $40,000 to $50,000 and I can get $800.00 - $900.00 per month in rent which is well between 1 and 2%.

Are you serious? I'm shocked to see these figures, that's a yearly return of 19-27%!

Europe really sucks when it comes to the rental business. My rate of return for a flat I rent out in Poland is just shy of 6% and I consider it to be a great deal, since most people get between 3 and 5%.

Miss Prim

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #5 on: June 03, 2015, 05:51:46 AM »
Yes it is possible.  If you read any of the advice out on the internet and also in the landlording section of this forum you can see that that is what rental property owners are looking for- 1-2% of the sale price per month.

We do not live in the city that we have our rental.  We used to as it was my husband's house before we got married.  We can not get that kind of return in our own town, but there are lots of cities in Southeast Michigan that are not Detroit that you can find houses under $100,000 and easily get $900.00 to $1000.00 rent per month.  I would be an income property mogul by now if not for my husband who was not interested in having more than one rental!  My plan years ago was to buy one every 5 years.

As to the percentage of return, I can tell you that we do have taxes, insurance and repairs to pay for, but it is still a good way to make some money.  We also rent out our basement apartment of our own house for $600.00 fully furnished and that has been the most lucrative deal yet because we had zero initial expenses as it was already finished for years. 

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CashFlowDiaries

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #6 on: June 03, 2015, 09:25:42 AM »
I personally have 5 investment properties and I am making an average of 20% returns on all of them so yes it is very possible to make awesome passive income from rentals.  Its not easy though to get a good quality income producing property.  You have to put in a lot of research, get a set criteria and stick with it.  Treat it like a business.  Dont let emotions or your heart be tied down to a specific property.  Make sure you factor in all costs and expenses when running calculations. Even future expenses like vacancy and repairs.

I think Miss Prim is right, you really need to see what the properties in your local area are like first and if it even makes sense to own rental properties there.  I know where I live that ship sailed a long time ago and because the market is so hot, im no longer able to purchase cash flowing houses here.  Which is why my last 3 rentals have been out of state.  Buying out of state is not for the faint of heart and you really need to understand all the ins and outs of owning rental properties before you dive into out of state rentals.

Anyhow, i know the first investment property you purchase is always the scariest.  If you come across one, feel free to let me know and ill by able to run some numbers and tell you if its a good investment or not.   

sisto

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #7 on: June 03, 2015, 12:29:49 PM »
I've been wanting to buy a rental property for quite some time now, because I have the skills to fix up a place myself. The reality for me is that I live in a HCOL area. Rent would only be around .5% instead of the recommended 1 -2%. If I was willing to move often buying and flipping would be a much better option for me, but I'm very settled in the house I live in and plan to retire there so it's just not really an option at the moment. I would love to hear of people that own rentals out of state and what that experience is like. I've heard many horror stories about, but at the same time these were people that really shouldn't have been investing that way in the first place. So I'd like to hear stories from people here.

arebelspy

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #8 on: June 03, 2015, 12:48:46 PM »
Are you serious? I'm shocked to see these figures, that's a yearly return of 19-27%!

I personally have 5 investment properties and I am making an average of 20% returns on all of them so yes it is very possible to make awesome passive income from rentals.

Yup.  Same here.

Admittedly timing was quite good on those--my new purchases I expect to see only 12-14% unleveraged cash on cash from.

It's not something you should just jump into though.  It takes a lot of knowledge to do it right.  It took me years, and I'm still learning all the time.

Each investment will, hopefully, be better than the last (with your knowledge and experience increasing rapidly over your first few purchases, then slowing but continuing to rise, like a log graph):


So go slow, learn a lot, but it's definitely something worth doing, IMO.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
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sisto

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #9 on: June 03, 2015, 01:50:23 PM »
Arebelspy,

I'm so jealous. Unfortunately I live in CA and not NV. I may need to consider trying to buy some properties in NV and take time off work to fix them and then pay someone to manage them. Sounds like a viable option and way better than trying to buy in CA.

arebelspy

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #10 on: June 03, 2015, 02:01:36 PM »
Arebelspy,

I'm so jealous. Unfortunately I live in CA and not NV. I may need to consider trying to buy some properties in NV and take time off work to fix them and then pay someone to manage them. Sounds like a viable option and way better than trying to buy in CA.

I haven't bought in NV for over two years--got too expensive after the hedge funds came in.

It's definitely worth finding a good market to invest in though, IMO.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

WaRpBeast

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #11 on: June 03, 2015, 03:26:31 PM »
We have 5 rental units, a mix of good and not as good. 3 years of landlording with one year of managing everything ourselves. 

Biggest advice I can give you is, if the property is subject to an HOA go down that rabbit hole before you buy.  We have two condos in one building and the HOA (really just one guy on the board) is making our lives a living hell.  We are considering selling those condos after only a year given the stress and counting the transaction fee as a lesson learned.  Attend a meeting, find out the group dynamics, know what you are getting into.  I have been having fight or flight adrenaline rushes during HOA meetings, yes, really.

Financially these condos make a lot of sense, but the reason to have FU money is to not have to deal with bullshit stress.

I can also say that there will be hand holding involved with tenants and they'll do stupid stuff no matter how smart they are.  (Throwing away the glass panel of the security door, if ants are getting in asking how to resolve that...)

Best of luck.
« Last Edit: June 03, 2015, 03:29:06 PM by WaRpBeast »

sisto

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #12 on: June 03, 2015, 03:48:05 PM »
I've read that the best place to buy a rental property right now is Detroit, Michigan. Wondering if anyone here has experience with the market there?

arebelspy

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #13 on: June 03, 2015, 03:57:50 PM »
I've read that the best place to buy a rental property right now is Detroit, Michigan.

Where have you read that?

Wondering if anyone here has experience with the market there?

Some, yes.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

surfhb

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #14 on: June 03, 2015, 03:59:18 PM »
I'm in the same boat.....Looking into the Midwest. 

The 2 main issues I see are:

1.   Making damn sure the home is turn key with all the guts working well.

2.   Finding a property manager who does their job well

No easy task I'm guessing?

Check out Cash Flow's blog....it's worth a read for those starting out.
« Last Edit: June 03, 2015, 04:10:19 PM by surfhb »

sisto

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #15 on: June 03, 2015, 05:27:19 PM »
I've read that the best place to buy a rental property right now is Detroit, Michigan.

Where have you read that?

Wondering if anyone here has experience with the market there?

Some, yes.
That's a great question, I'm not 100% sure. I remember looking at what areas had the highest ROI and it came in at the top of list. The site I found listed property prices and rental amount details.
Have you had good experiences in that area?

purplish

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #16 on: June 03, 2015, 06:18:05 PM »
I would start out small and see how it goes first, you don't want to start buying them up then realize you hate being a landlord.  Personally I own 2 properties- one is a rental property, the other I live in and get rent from 2 others living with me.  If you do it right, it can really jump the amount of return you get vs return from investing.  With just these 3 rents, they pay for the properties and I live for free :)  Also one of my properties has gone up $70k, I'm thinking if it makes it up to 100k over original sale price I will sell, buy another and invest the extra 100k.  Some of this is luck (my other property's value is stagnant), but some is paying close attention to where is the next big area around you.  Oh, and both of mine are condos, I find it much easier to maintain working my full time day job, while having the condo assoc. take care of things.  Not everyone likes being a landlord though, as I said above.  Also people do have bad experiences.  IMO a lot of times the people who have bad experiences, didn't do things exactly as they should legally (didn't use a lease, let friends stay, etc).  The MOST important thing you can do, is put a ton of effort into finding really good tenants.  This will save you tons of grief.  Use a broker to find renters- they're expensive but worth it, trust me.

kpd905

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #17 on: June 03, 2015, 06:22:06 PM »
I am hoping we will be able to retire in 13 years at the age of 48 and I'm just coming to the realization that we will not be able to access much of our retirement savings at that time. 


First of all, are you aware that you can withdraw money in a 457 early without penalty?  You can also withdraw all of your Roth IRA contributions at any time.

For the 401k, you can access all of that penalty free by doing Roth IRA conversions or using 72t.

rachael talcott

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #18 on: June 03, 2015, 06:40:01 PM »
I own 3 single-family rentals in the town where I live, manage them myself, and average about 12% return, if you don't count the increased value of the property (I buy distressed and fix them up myself, so that I could have sold for more than I invested).  I estimate closer to 20% return over five years if I rent and then sell.  I'm really glad that I took the plunge three years ago.  I don't have the stomach for the stock market, and this gets better returns with less volatility. 

It does take work, both to renovate and to manage, but I enjoy it. YMMV. 

It's easy to underestimate cost of upkeep.  When you do the math, remember that houses need new roofs and new HVAC every 15 years or so, depending on climate.  Also, factor in some vacancy. 

Something to consider:  if your employer offers a 1:1 or even 1:2 match for your 401K, rental properties will probably not make that much return, and it would make more sense to take the employer match. 


Threshkin

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #19 on: June 03, 2015, 06:59:36 PM »

Biggest advice I can give you is, if the property is subject to an HOA go down that rabbit hole before you buy.  We have two condos in one building and the HOA (really just one guy on the board) is making our lives a living hell.  We are considering selling those condos after only a year given the stress and counting the transaction fee as a lesson learned.  Attend a meeting, find out the group dynamics, know what you are getting into.  I have been having fight or flight adrenaline rushes during HOA meetings, yes, really.

+100 on this.  We just sold our rental because of the situation with the HOA.  They have been essentially bankrupt for years and kept deferring preventative maintenance.  This policy is starting to catch up with them and we were anticipating major HOA fee increases and/or special assessments to cover the shortfall.  I was on the HOA board for a while so I knew the whole picture.  These issues were covered at the annual HOA meeting if you knew what to look for.  But these meetings were for property owners/tenants only.

Since I had been on the board, we disclosed everything we knew to prospective buyers.  We didn't want to get sued after the fact!  But it was amazing to see how many buyers of other properties were completely uninformed. Many knew nothing about the financial situation or the pending lawsuits.  Some listings even stated that the HOA fee was much less than what it actually was.

Do your research and listen carefully to what you hear and just as importantly, what you don't hear.  Verify everything.  Talk to other home owners in the complex.  Hire a good real estate agent that will tell you the truth, not just what they want you to know to make the sale. 

RoadLessTravelled

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #20 on: June 04, 2015, 09:21:31 AM »
Seems like no one does anything except rent out houses/apartments to derive income.  While that's fine, it is only one way to invest in real estate as I said.  I personally would not touch any real estate that required me to be a landlord with all the attendant work and hassle involved.  I prefer to invest in non-residential real estate.  Does no one else here do that? 

For example, a buddy from my high school days is a dentist and some years back he mentioned to me that he wanted to buy a property for his own practice but to also provide office space for several other dentists with a shared reception area etc. which would reduce costs to each dentist.  I put in 50% of the down payment and renovation costs in return for 40% of the income generated. 

That property generates a very good double digit return for me year after year with NO real hassle.  I am a silent partner and my old buddy is the landlord in terms of taking care of everything.  It has several interesting advantages over residential property.  There are 6 tenants all of whom are dentists.  That means low turnover (2 in 10 years) and very little chance of a deadbeat tenant who doesn't pay or trashes your property.  We actually make a profit on not just the rental income but also on the admin services we supply to the tenants and charge them for.  When there is a vacancy, it is very easy to find a new tenant for various reasons.  ie. location, purpose designed, attractive admin package supplied, etc.  That does not necessarily apply to all commercial real estate however and so just like any real estate, location, location, location is often the key.

I own a percentage of several other commercial properties as a silent partner as well.  One is a refrigerated warehouse, a couple are office buildings.  None of them require me to act as a landlord and all have lower turnover than residential properties have on average. 

While there are pros and cons to everything including commercial real estate, the key for me is the silent partner aspect.  I have no more interest in buying a commercial property myself and being the landlord, than I do in buying a residential property.   I see no sense in using any of my time working as a landlord when I can avoid it by being a silent partner.  It's passive income I want, not another job.

Adam Zapple

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Re: Time to switch gears? Contemplating rental property investment.
« Reply #21 on: June 04, 2015, 03:54:37 PM »
Really great replies.  I've contemplated investing out of my local area, the market is pretty hot at the moment and it is difficult (though not impossible) to find a local property that meets the 1% rule, though 2% is almost unheard of. 

I've talked to several RE investors and most of them really have not had the negative experiences you hear about with tenants.  They all say that if you take care of your property and screen your tenants, you should be fine.  Many of them say they can go a whole year with doing nothing other than cashing the rent checks.  On the other hand, there was one friend who bought a condo with the plan to rent it out.  He took the first tenant that came along, a professional squatter, who moved in and refused to pay rent.  Rather than go the legal route, this friend decided to go over to the condo and beat this gentleman mercilessly.  Although I would not recommend this, the squatter eventually left without damaging the house.  Unfortunately, my friend gave up on RE investing after that and sold the place.