Author Topic: Small Real Estate Empire, Retire Now? HELP  (Read 6386 times)

mattd

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Small Real Estate Empire, Retire Now? HELP
« on: June 02, 2014, 08:11:01 AM »
Background: Married, Wife is a SAHM, 3 year old and one due any day, located in SW Missouri! 

MMM Sins:
Just turned 31 years old, I have a MBA, so a bit of student loans (12K between my wife and myself at 2 1/8% Fixed)
Car loan $16K at 0% (13 Honda Accord) I own a paid off 2000 Ford F150 and a 2005 Chevy Equinox
Real Estate Revolving Debt: (expenses I put on Credit Cards but pay off monthly for rewards, currently 5% Discover Cash back at Lowes and Home Depot, so I get about $400 a month cash back using them)
Home loan 180K owed, 19 years left


I work full time and my normal yearly salary is about $75K, however 5 years ago the company I work for sold and the new owners did away with the retirement plan.  I began buying a few foreclosure homes, fixing them up and renting them out to supplement the lost retirement plan.  I was able to have enough equity in the homes that I could borrow from a bank, after rehab, 100% of what I had in the home (purchase price and improvements) and then rented out the home.  Fast forward to today I am up to 70 Single Family Homes and 5 Farms (about 300 Acres) and since 2009 the prices of real estate have risen nicely and I have about $2.5M in Equity on the properties.  However on a month to month income, I do ok, but usually end up netting a few thousand after everything has been paid, so not great and the W2 income job helps supplement if I need to replace 6 Furnaces the same month.  I'm sure you guys are thinking RETIRE NOW YOU IDIOT, but I have 100% occupancy and am paying off about 15K a month down in equity, but I am highly leveraged and only have 3 properties paid off and with this many loans I am on 3-5 Year arm loans on 20 year amortizations.  I have a couple options:

Sell everything and end up with 1M - 1.5M left with no debt, quit the job and live the MMM lifestyle and do what I love (gardening, greenhouse nursery type stuff that makes very little $ but is amazing work)

Sell half and payoff about 15 homes free and clear and live off of the rental income (about 11-12K a month)

Continue with what I'm doing and payoff as much as I can with any extra month earned on month to month cash flows and left over W2 income.

Sorry for long message, I'm sure i'll post more info in replies, I value all of your opinions!! 



Another Reader

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #1 on: June 02, 2014, 08:42:05 AM »
Well played!  You have a heck of a good lender.  Must be a portfolio bank, lots of folks here would like the banker's name and phone number.

Is the equity gross, or net (minus selling expenses, including repairs)?

How quickly can you pay off loans and start extracting free and clear properties?  Is the $15k a month the amount of equity increase from the base amortization or are you paying extra?  If you are paying extra, are the payments going to specific properties or are you paying extra on all of them?

At 31, you can pretty much guarantee your future income for life.  However, I would not sell everything and pay off all debt.  There is not enough left over by doing that to live a comfortable life for 60 plus years.  In your shoes, I would probably stick it out long enough to pay off a number of properties, then re-examine.  At that point, it might make sense to pay off the keepers by selling the remainder.  But more information is needed.

How about some more information on the houses, the interest rates, the gross income, the expenses, etc.?  What's the interest rate on your house?

Mister Fancypants

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #2 on: June 02, 2014, 08:45:16 AM »
First off congratulations on having a kick ass real estate empire :)

You pretty much listed your options, keep the current path, sell some of the assets, or sell all the assets.

You know the finances behind all the options as you have figured them out and gotten yourself to such and awesome spot in life. So you are FI now, basically the choice is your on how you want to move forward, you will get lots of opinion here on what to do, in the end that's all they are and none are really any better than others.

You just have do what you think is the best choice for you and your family.

Now me I would probably evaluate the portfolio and see if you can cherry pick the properties see which ones are the least likely to appreciate more which ones are the least profitable on an income perspective and also which are the most leveraged. You might be able to take a hybrid approach of the staying the course and selling properties but I am sure you would have done that anyway if you were to sell some off.

Good luck, the problem you have is a nice one :)

-Mister FancyPants

lackofstache

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #3 on: June 02, 2014, 08:49:07 AM »
Congrats! I'd probably sell some, pay off some & invest elsewhere if this is the bulk of your retirement $. Selling 70 properties won't happen over night even if you decide to sell, so to futher others' opinions, sell the ones that make the most sense to get rid of now, & do w/ that $ what you feel is best, you obviously have a decent head about such matters to have found your way to your current spot.

mattd

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #4 on: June 02, 2014, 09:07:31 AM »
Thanks guys! 

lackofstache: I am considering paying off one or two at at time as they come open from renters, several I have I owe 55k-65k and market value is 120-130K.  So Selling one I could use the proceeds to pay off another.  Many of the renters I have had there have been there since I purchased, so I'm not in any hurry to have them leave! 

Mister Fancypants/Another Reader: Yes, many of my 2 bedroom homes cash flow the best ($200 payment, $600 rent) , but also have the least amount of future appreciation potential and also cause the most headaches for me.  I was considering selling a basket of them off and concentrate on keeping and paying down aggressively the 3-4 bedroom homes in nicer areas. 
I use about 5 local small banks and give the deal to whoever wants it or I have advisory line funds left.  About every loan is at 4.25% 20 year amortization. 
The 2.5M Equity is gross, so I was guessing with carrying cost, rehab, realtors I might have 1M-1.5M left if I sold everything. 

totoro

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #5 on: June 02, 2014, 09:26:18 AM »
If you sell half and payoff about 15 homes free and clear you can live off of the rental income (about 11-12K a month) easily and it is more than your 1 to 1.5 million SRW by quite a bit. 

This would let you retire asap and give you room to grow further if you wanted by borrowing against equity to invest.

I guess it depends how motivated you are by ER vs. accumulating wealth.  If you are motivated by the latter then keeping on keeping on seems a better plan. 

Arebelspy might have some ideas for you as he has done something similar.  I believe he may be considering whether to offer a rent to own program for some tenants in order to manage taxes and stagger dispositions.

Another Reader

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #6 on: June 02, 2014, 09:48:25 AM »
Totoro raises a point I forgot, the taxes.  You will have some significant capital gains plus some depreciation recapture that must be considered.  Staggering dispositions would help with that.  Do you have any unused, stored depreciation?  Probably not, with your earned income level and the cash flow, but worth using if you do.

Properties that are headaches with high turnover and high turnover rehab costs would be on my sell list. 

The 4.25 percent, 20 year amortization loans are very helpful.  Do you have any adjusting in the next year?  Will any rates go up?  Anything on my sell list would probably get bumped to the top if the interest rate was going to go up significantly.

mattd

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #7 on: June 02, 2014, 09:50:52 AM »
I have a few resetting this year, but they will actually be going down with the reset :-)

Another Reader

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #8 on: June 02, 2014, 09:59:57 AM »
I thought that might be the case.  I dunno, I would probably just throw money at the loans, sell a couple of bad performers, and give it six months or a year to see where I was.  The more properties you can keep that are free and clear, the better off you are.  Paying these things off is a snowball process, you really gather speed as they get paid off.  With 70, my guess is you have already automated a lot and have systems in place to manage the properties, but I would see what else I could do to eliminate the headaches. 

EricL

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #9 on: June 02, 2014, 01:18:21 PM »
Congratulations!  I would drop that real estate like a live grenade.  I could live like a king in SW Missouri on 4% of 1.5 million - and in a most unmustachian manner.  But I'm not you.  It kind of sounds like you like the real estate business and minding it keeps you meaningfully engaged.  So maybe the best thing for you is to sell off enough to reduce your more stressful liabilities so you don't get hosed if the economy tanks and free up time for hobbies and home projects.  (Missouri's economy seems kinda fragile to me.)  But keep enough to keep you busy and make some scratch on the side.  Pretty much your Plan B.  Awesome anyway you look at it though.

arebelspy

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #10 on: June 06, 2014, 11:16:50 PM »
You're doing amazing!  Would love to hear more of your back story.

In my mind the biggest question is: What do you want to do with your life?  And is the real estate further moving you towards that, or is it preventing that?

You did mention gardening.. is that it?  You're 31, you'd like to garden for the next 50-60 years and be done?  That's cool, if that's the dream.

But I think someone who has accomplished what you have in the past decade should slow down for a minute and take some time to do some navel gazing about what you want to do for the next five decades, given what you love and what you've been able to do with this last one.

Congratulations on your success.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

theconcierge

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #11 on: June 07, 2014, 04:29:26 AM »
70 houses wow!

If you do decided to sell some, maybe find out if any of the renters want to buy the house and sell those? Nice thing to do!

chasesfish

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #12 on: June 07, 2014, 05:13:35 AM »
I would start carving down that portfolio and take some money off the table, you've had a great 3-5 year price run.  See if you have a way to roadmap out having 10-12 of them free and clear in the next couple years, then retire.

The equity is a gross number, you have selling expenses and capital gains taxes.   You didn't say how much you had in gross value and total debt, so I don't know if you have enough to retire.

10-12 units would also be a nice part time job as you leave the current F/T work


ch12

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #13 on: June 07, 2014, 08:02:38 AM »
1. Sell everything and end up with 1M - 1.5M left with no debt, quit the job and live the MMM lifestyle and do what I love (gardening, greenhouse nursery type stuff that makes very little $ but is amazing work)

2. Sell half and payoff about 15 homes free and clear and live off of the rental income (about 11-12K a month)

3. Continue with what I'm doing and payoff as much as I can with any extra month earned on month to month cash flows and left over W2 income

If you sell half and payoff about 15 homes free and clear you can live off of the rental income (about 11-12K a month) easily and it is more than your 1 to 1.5 million SRW by quite a bit. 

This would let you retire asap and give you room to grow further if you wanted by borrowing against equity to invest.

I guess it depends how motivated you are by ER vs. accumulating wealth.  If you are motivated by the latter then keeping on keeping on seems a better plan. 


In your shoes, I'd probably do option 2. Option 1 seems like the most freeing, but I don't see any plans for you to just jaunt around the world with your young children. Option 3 seems to say that you'd be staying in a job that you do not remotely need with a $2 million housing empire.

If you want to be a gazillionaire real estate tycoon, then you can keep doing what you're doing (option 3). If you want to FIRE and hang out with your family/garden, then take door 1 or 2. 2 seems to be a good place, because from it you can transition to 1 or go back to doing 3.

Fishingmn

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #14 on: June 07, 2014, 08:08:51 AM »
One other thing to consider.

If you do decide to sell some or all I'd encourage you to get your real estate license. You'll see a payback on the time/cost almost immediately.

Mr Mark

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #15 on: June 07, 2014, 11:16:42 AM »
Looks like you are feeling the exposure and leveraged risk you're taking.

Maybe a tax managed strategy for reducing leverage, and securing some equity elsewhere is in order? Figure out where you want to be in say, 5 years, and transfer/ 'rebalance' to your new more diversified asset allocation essentially.

+1 on rationalising your portfolio and seperating the keepers from the rest.

But as said, congratulations! You are FI!




Nords

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #16 on: June 07, 2014, 02:40:07 PM »
Fast forward to today I am up to 70 Single Family Homes and 5 Farms (about 300 Acres) and since 2009 the prices of real estate have risen nicely and I have about $2.5M in Equity on the properties.
Wow.  I'm impressed.  I've never met anyone who could single-handedly crash the local real estate market!

You need to diversify.  I'd sell off your marginal performers and get the workload/cash flow more in balance with many fewer homes.  However you'll probably want to spend several years getting there gradually so that you don't depress your own comps-- as well as get hammered with taxes.

Cassie

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #17 on: June 07, 2014, 05:44:28 PM »
I would do option 2.  What a great dilemma to have!

Cpa Cat

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #18 on: June 07, 2014, 07:07:37 PM »
You've gotten some great feedback here, so I want to second it and sum it:

1) Consider getting a realtor's license or otherwise minimizing your selling costs.

2) Option 2 is an attractive option. Not only due to the monthly income, but also because if you get halfway there and decide you'd rather dump everything, you still can.

3) Stagger the sales over several years in order to minimize capital gains tax.

4) Cherry pick and keep your best properties (ranked either by income production or headache score).

5) Some of your renters may be interested in buying from you. Send out letters and gauge interest/timeframe.

SDREMNGR

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #19 on: June 07, 2014, 08:46:37 PM »
Maybe sell off in batches and 1031 exchange up into bigger properties that give more cashflow?  Do as needed to convert equity into cashflow.  Older investors love NNN leased commercial buildings for that reason.  Also low maintenance and management.

Another Reader

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #20 on: June 07, 2014, 09:54:02 PM »
Ah, the myth of coupon-clipper, single tenant NNN leased properties.  What could go wrong a credit tenant with a 20 year lease with 5, 10-year options with inflation increases built in?  How about that percentage of gross sales rent as an inflation hedge?  Wouldn't you want one of those on a 5 or 6 percent cap rate?

The trouble is these properties sport low yields and are much riskier than they appear.  Want to know which major retailer occupying single tenant properties is on the ropes and in jeopardy of filing BK?  Look at which companies have multiple properties in multiple states listed for sale on LoopNet, especially if they are sale-leasebacks.  Think K-Mart, Blockbuster Video, Circuit City, Rite Aid, and a host of others.  Drive around the area where your potential coupon book is located, see how many similar spaces have gone dark and where your potential investment is positioned in the market before you sign up for one of these.  Even solid companies have a plan for minimizing losses if they close a location.  Yeah, that Walgreens may have 10 years left on the lease, but if they build another one at a better intersection half a mile down the road and shutter yours, you will get base rent for 10 years and a poorly maintained vacant building at the end of the lease, options unexercised.  You will be lucky to lease it at 20 percent of what the name tenant was paying, and you may have to pay some of the property operating expenses to get that.

I have seen many small apartment investors reach their 60's and 1031 their units into these to get out of actively managing their units and "retire."  A lot of them got badly burned.  Be very careful and do a lot of research before you sign up for one of these.


mattd

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Re: Small Real Estate Empire, Retire Now? HELP
« Reply #21 on: June 08, 2014, 06:55:45 PM »
Wow guys, thanks so much for the responses! 

So what I did last week, I offered the current tenants the option to purchase their homes.  I chose the ones that I felt like they could legitimately purchase their homes in the next 3 years via FHA loan.  About half showed interest and we added lease to own options to their homes where they pay an extra $100 a month with their rent to put toward purchase price until they can get their 3.5% down.  Full market price and I would pay most of closing costs.  Most were all over it when we ran the numbers and they found out how much less their payments would be than the rents they have been paying.  I'm still buying properties too, fyi.  I put 2 under contract last week.  A mostly rehabbed 3 BR 1 Bath, Basement and garage for $20.5K (probably worth 60-70K with a bit of finishing rehab) and a 2/2/1 built in 2007 in perfect shape for 39K, both will rent for $625-$650 pretty easy.  The old VA loan foreclosures are starting to price and get off the books and they have been pricing them terribly low.