Author Topic: Buying 4 houses that pay themselves off in 15 years?  (Read 2125 times)

webguy

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Buying 4 houses that pay themselves off in 15 years?
« on: February 08, 2020, 08:27:22 AM »
Hey guys, I havenít done any RE investing in the past but I have a large amount of additional cash and wanted to invest it in something productive.

My thoughts were to take $300k and buy 4 rentals worth around $250k each and putting $75k down on each.  I donít need them to cashflow, just to rent out enough to pay all the expenses (mortgage, insurance, taxes, management fee, repairs, etc) with the goal of them being 100% paid off in 15 years. Apart from the initial purchase Iíd like them to be as hands off as possible. I have 2 young kids and plan to have 2 more so the idea would be that we would probably sell these homes in 15-20 years time to pay for their college education and/or more. Putting down $75k and having it pay itself off over 15 years and then hopefully being able to sell for more (perhaps 350k) seems like a pretty good return.

Is this a feasible plan? Is anyone else doing something similar?

waltworks

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #1 on: February 08, 2020, 08:39:45 AM »
It's a feasible plan, but also a crappy one. Just covering expenses is going to compare unfavorably (even with the 15 year mortgage paydown) to just a boring index fund. Remember that your historical nominal index fund return is 10% a year. You should be aiming to beat that handily - because RE is much, much riskier, especially if all the properties are in the same area.

Honestly, also, it's never really going to be hands-off. A management company is a great thing, but they will still be calling you about repairs to get your ok, having you sign off on stuff, etc. It is never going to be set/forget like an index fund.

Read about the 1% and 50% "rules" a bit and you'll have a starting point for doing it right.

-W
« Last Edit: February 08, 2020, 08:57:02 AM by waltworks »

Papa bear

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Buying 4 houses that pay themselves off in 15 years?
« Reply #2 on: February 08, 2020, 10:34:18 AM »
It's a feasible plan, but also a crappy one. Just covering expenses is going to compare unfavorably (even with the 15 year mortgage paydown) to just a boring index fund. Remember that your historical nominal index fund return is 10% a year. You should be aiming to beat that handily - because RE is much, much riskier, especially if all the properties are in the same area.

Honestly, also, it's never really going to be hands-off. A management company is a great thing, but they will still be calling you about repairs to get your ok, having you sign off on stuff, etc. It is never going to be set/forget like an index fund.

Read about the 1% and 50% "rules" a bit and you'll have a starting point for doing it right.

-W

Can I just automate a +1 response for any waltworks reply in the real estate forum?

Edited to add:

A friend just found a management company for an out of area 2 unit.  He now has to manage the management company as his owner payouts arenít  calculating right.  You still have to pay attention and double check this stuff even if you outsource or you could end up being taken advantage of.


Sent from my iPhone using Tapatalk
« Last Edit: February 08, 2020, 10:37:33 AM by Papa bear »

bearman

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #3 on: February 08, 2020, 11:43:01 AM »
It's a feasible plan, but also a crappy one.

Literally LOL'd. Can you start a call-in radio show or something?

webguy

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #4 on: February 08, 2020, 09:47:28 PM »
It's a feasible plan, but also a crappy one. Just covering expenses is going to compare unfavorably (even with the 15 year mortgage paydown) to just a boring index fund. Remember that your historical nominal index fund return is 10% a year. You should be aiming to beat that handily - because RE is much, much riskier, especially if all the properties are in the same area.
Hmm. I respect your opinion, but 75k compounded at 10% over 15 years is 313k. I have strong reservations that the stock market will return 10%/yr for the next 15 based on its current valuation. Iím not even at all confident that itíll be up 50% in total over that period based on its current price. It seems like having a house pay itself off over that period instead and then most likely also appreciate in value (but if not then still be an almost 4x return) has more potential to succeed.

MrThatsDifferent

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #5 on: February 09, 2020, 03:28:18 AM »
I think, financially youíd end up almost even, probably a bit better off with the index investing as Walt mentions, a main difference is the time and effort finding the properties, doing all the paperwork, managing the managers, then selling the property. RE is good for people without a lot of money, who want to build wealth. Generally they make that work by doing a lot of the work themselves. Youíve got a lot of money that could be earning you so much.

Another Reader

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #6 on: February 09, 2020, 04:54:59 AM »
Hey guys, I havenít done any RE investing in the past but I have a large amount of additional cash and wanted to invest it in something productive.

My thoughts were to take $300k and buy 4 rentals worth around $250k each and putting $75k down on each.  I donít need them to cashflow, just to rent out enough to pay all the expenses (mortgage, insurance, taxes, management fee, repairs, etc) with the goal of them being 100% paid off in 15 years. Apart from the initial purchase Iíd like them to be as hands off as possible. I have 2 young kids and plan to have 2 more so the idea would be that we would probably sell these homes in 15-20 years time to pay for their college education and/or more. Putting down $75k and having it pay itself off over 15 years and then hopefully being able to sell for more (perhaps 350k) seems like a pretty good return.

Is this a feasible plan? Is anyone else doing something similar?

About all I can say about this plan is that it's people like you that will create the foreclosures that I will buy the next time the housing market tanks. 

beltim

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #7 on: February 09, 2020, 04:58:06 AM »
It's a feasible plan, but also a crappy one. Just covering expenses is going to compare unfavorably (even with the 15 year mortgage paydown) to just a boring index fund. Remember that your historical nominal index fund return is 10% a year. You should be aiming to beat that handily - because RE is much, much riskier, especially if all the properties are in the same area.

This is a funny, glib response, but frankly a bad one.  Despite your reputation, it doesn't look like you actually considered OP's question or did any math.  The OP specifically said covering expenses would include paying off a 15 year mortgage, taxes, management fees, and maintenance.  Let's look at what that would look like:
PITI on 175k mortgage on 250k house: $1668 / month
Maintenance @ 1% of home value/year: $208 / month
Management fees @ 10% of rent: $208 / month
10% vacancy: add $232 / month
Gross rent: @2316 / month

This, by the way, is 0.93% of the purchase price - pretty close to the 1% rule!  And if the OP used a 30 year mortgage, the PITI would be $1124 / month, so it gets pretty close to the 50% rule too.

Basically, because the OP didn't use the terminology that you're used to, and you didn't do the math, it looks like you acted like a jerk.  Am I missing something?
« Last Edit: February 09, 2020, 05:00:53 AM by beltim »

Paper Chaser

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #8 on: February 09, 2020, 05:05:23 AM »
It's a feasible plan, but also a crappy one. Just covering expenses is going to compare unfavorably (even with the 15 year mortgage paydown) to just a boring index fund. Remember that your historical nominal index fund return is 10% a year. You should be aiming to beat that handily - because RE is much, much riskier, especially if all the properties are in the same area.
Hmm. I respect your opinion, but 75k compounded at 10% over 15 years is 313k. I have strong reservations that the stock market will return 10%/yr for the next 15 based on its current valuation. Iím not even at all confident that itíll be up 50% in total over that period based on its current price. It seems like having a house pay itself off over that period instead and then most likely also appreciate in value (but if not then still be an almost 4x return) has more potential to succeed.

You're talking about investing 300k into an asset class and selling after 15 years.

Asset class A, is a low fee fund that tracks the general market. If we assume historical average returns around 8%, and you never added another dime, you end up with 950k after 15 years. You did nothing for 15 years, and can easily and quickly sell exactly the amount you want when the kiddos are ready for college. Selling fees are minimal.

Asset class B is a handful of rentals. They're riskier than an index fund, and require some work from you. They'll need money occasionally in the form of maintenance and repairs and to cover times of vacancy. Insurance and property taxes are unpredictable, but generally climb over time. The rentals are going to complicate your taxes every year. When it comes time to sell you'll get whatever the market will bear at the time, subtracting realtor fees along with any depreciation recapture, closing costs, etc. If you're lucky and they're priced right, the fastest they're likely to close is 30 days.

If you're not confident that the stock market is going to see historically average returns over the next 15 years, then how can you be confident that the housing market will continue to climb? Seems like prices can't climb forever or everybody gets priced out. Incomes can only support so much/ month on housing. It Seems even riskier to me to tie that money up into a handful of rentals in the same area, (counting on them to appreciate faster than the stock market) than it is to invest in thE hundreds or thousands of companies that make up the index of your choice. And it requires a bunch more work, risk, and hassle over the years than a single transaction at the beginning and another 15 years later.

Another Reader

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #9 on: February 09, 2020, 06:23:11 AM »
It's a feasible plan, but also a crappy one. Just covering expenses is going to compare unfavorably (even with the 15 year mortgage paydown) to just a boring index fund. Remember that your historical nominal index fund return is 10% a year. You should be aiming to beat that handily - because RE is much, much riskier, especially if all the properties are in the same area.

This is a funny, glib response, but frankly a bad one.  Despite your reputation, it doesn't look like you actually considered OP's question or did any math.  The OP specifically said covering expenses would include paying off a 15 year mortgage, taxes, management fees, and maintenance.  Let's look at what that would look like:
PITI on 175k mortgage on 250k house: $1668 / month
Maintenance @ 1% of home value/year: $208 / month
Management fees @ 10% of rent: $208 / month
10% vacancy: add $232 / month
Gross rent: @2316 / month

This, by the way, is 0.93% of the purchase price - pretty close to the 1% rule!  And if the OP used a 30 year mortgage, the PITI would be $1124 / month, so it gets pretty close to the 50% rule too.

Basically, because the OP didn't use the terminology that you're used to, and you didn't do the math, it looks like you acted like a jerk.  Am I missing something?

Where do I start?

Nowhere does the OP state what market rent is for these $250k houses, nor the amount of taxes and insurance.  That alone invalidates your math.   Over 15 years, the rent could go up, down or stay the same.  OP provides no information about the history of rents and expenses in the local market.  Nor is there any indication of the value trend in the market.

OP has zero rental experience.  Never vetted a tenant, paid for major repairs for tenant damages that are not recoverable, or managed a capital improvement project.  OP has no understanding of the difference between acceptable property management and bad property management.  An acceptable property manager will create frictional losses.  A bad property manager will destroy your investment returns.

When rents and values decline, which they likely will at some point in a 15 year holding period, OP will likely be the "weak hands" and will be relieved to dump the "albatross."  I have bought such properties and expect to buy again when the market turns.

When OP finds that $250k property in the local market that will rent for your $2,368, can write up a realistic operating statement and can demonstrate substantial cash reserves to carry the property during a downturn, then I might agree the plan could be successful.  Of course, an extended downturn in the market at the date he must sell to pay for the college educations might spoil things, and the OP needs to understand that risk.
« Last Edit: February 09, 2020, 06:25:04 AM by Another Reader »

beltim

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #10 on: February 09, 2020, 07:56:21 AM »
It's a feasible plan, but also a crappy one. Just covering expenses is going to compare unfavorably (even with the 15 year mortgage paydown) to just a boring index fund. Remember that your historical nominal index fund return is 10% a year. You should be aiming to beat that handily - because RE is much, much riskier, especially if all the properties are in the same area.

This is a funny, glib response, but frankly a bad one.  Despite your reputation, it doesn't look like you actually considered OP's question or did any math.  The OP specifically said covering expenses would include paying off a 15 year mortgage, taxes, management fees, and maintenance.  Let's look at what that would look like:
PITI on 175k mortgage on 250k house: $1668 / month
Maintenance @ 1% of home value/year: $208 / month
Management fees @ 10% of rent: $208 / month
10% vacancy: add $232 / month
Gross rent: @2316 / month

This, by the way, is 0.93% of the purchase price - pretty close to the 1% rule!  And if the OP used a 30 year mortgage, the PITI would be $1124 / month, so it gets pretty close to the 50% rule too.

Basically, because the OP didn't use the terminology that you're used to, and you didn't do the math, it looks like you acted like a jerk.  Am I missing something?

Where do I start?

Nowhere does the OP state what market rent is for these $250k houses, nor the amount of taxes and insurance.  That alone invalidates your math.   Over 15 years, the rent could go up, down or stay the same.  OP provides no information about the history of rents and expenses in the local market.  Nor is there any indication of the value trend in the market.
No, the OP doesn't state what market rent is, but they state that they would buy houses that rent for "enough to pay all the expenses (mortgage, insurance, taxes, management fee, repairs, etc) with the goal of them being 100% paid off in 15 years."  It's even the title of the thread.  If you actually do the math for what that means, like I did, then you find it's not so far from the guidelines.  You and waltworks didn't "invalidate my math" - you simply didn't do any.

When rents and values decline, which they likely will at some point in a 15 year holding period, OP will likely be the "weak hands" and will be relieved to dump the "albatross."  I have bought such properties and expect to buy again when the market turns.
When OP finds that $250k property in the local market that will rent for your $2,368, can write up a realistic operating statement and can demonstrate substantial cash reserves to carry the property during a downturn, then I might agree the plan could be successful.  Of course, an extended downturn in the market at the date he must sell to pay for the college educations might spoil things, and the OP needs to understand that risk.

This is a far more useful comment and not jerk-like like the one I originally responded to.  You're adding additional considerations that the OP needs to think about before investing.  I also agree with you that the types of properties that actually fit the description of what the OP is looking for might be difficult to find, and that is also a useful comment - but again, not one that was in the post I responded to.

Another Reader

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #11 on: February 09, 2020, 08:10:51 AM »
It's a feasible plan, but also a crappy one. Just covering expenses is going to compare unfavorably (even with the 15 year mortgage paydown) to just a boring index fund. Remember that your historical nominal index fund return is 10% a year. You should be aiming to beat that handily - because RE is much, much riskier, especially if all the properties are in the same area.

This is a funny, glib response, but frankly a bad one.  Despite your reputation, it doesn't look like you actually considered OP's question or did any math.  The OP specifically said covering expenses would include paying off a 15 year mortgage, taxes, management fees, and maintenance.  Let's look at what that would look like:
PITI on 175k mortgage on 250k house: $1668 / month
Maintenance @ 1% of home value/year: $208 / month
Management fees @ 10% of rent: $208 / month
10% vacancy: add $232 / month
Gross rent: @2316 / month

This, by the way, is 0.93% of the purchase price - pretty close to the 1% rule!  And if the OP used a 30 year mortgage, the PITI would be $1124 / month, so it gets pretty close to the 50% rule too.

Basically, because the OP didn't use the terminology that you're used to, and you didn't do the math, it looks like you acted like a jerk.  Am I missing something?

Where do I start?

Nowhere does the OP state what market rent is for these $250k houses, nor the amount of taxes and insurance.  That alone invalidates your math.   Over 15 years, the rent could go up, down or stay the same.  OP provides no information about the history of rents and expenses in the local market.  Nor is there any indication of the value trend in the market.
No, the OP doesn't state what market rent is, but they state that they would buy houses that rent for "enough to pay all the expenses (mortgage, insurance, taxes, management fee, repairs, etc) with the goal of them being 100% paid off in 15 years."  It's even the title of the thread.  If you actually do the math for what that means, like I did, then you find it's not so far from the guidelines.  You and waltworks didn't "invalidate my math" - you simply didn't do any.

When rents and values decline, which they likely will at some point in a 15 year holding period, OP will likely be the "weak hands" and will be relieved to dump the "albatross."  I have bought such properties and expect to buy again when the market turns.
When OP finds that $250k property in the local market that will rent for your $2,368, can write up a realistic operating statement and can demonstrate substantial cash reserves to carry the property during a downturn, then I might agree the plan could be successful.  Of course, an extended downturn in the market at the date he must sell to pay for the college educations might spoil things, and the OP needs to understand that risk.

This is a far more useful comment and not jerk-like like the one I originally responded to.  You're adding additional considerations that the OP needs to think about before investing.  I also agree with you that the types of properties that actually fit the description of what the OP is looking for might be difficult to find, and that is also a useful comment - but again, not one that was in the post I responded to.

The OP is clearly not knowledgeable about rentals.  I'm not going to waste time figuring out what rent could make his requirements feasible.  Either his market can produce that rent or it can't.  If it can, the property is likely not to be in a market that consistently appreciates.  Those markets are almost always dominated by owner occupant buyers, who pay no attention to market rent.  They pay the amenity value premium over the value indicated by the capitalized income stream.  If and when he finds that unicorn that produces close to 1 percent per month in rent and will appreciate at a reasonable rate, he might consider buying it.

beltim

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #12 on: February 09, 2020, 08:16:06 AM »
The OP is clearly not knowledgeable about rentals.  I'm not going to waste time figuring out what rent could make his requirements feasible.  Either his market can produce that rent or it can't.  If it can, the property is likely not to be in a market that consistently appreciates.  Those markets are almost always dominated by owner occupant buyers, who pay no attention to market rent.  They pay the amenity value premium over the value indicated by the capitalized income stream.  If and when he finds that unicorn that produces close to 1 percent per month in rent and will appreciate at a reasonable rate, he might consider buying it.

A 40% appreciation over 20 years is inflation-level.

waltworks

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #13 on: February 09, 2020, 01:35:56 PM »
Let me do a little clarifying. There are several problems with the plan.

Problem 1 is the return. Yes, this will be at least close to a 1% rule property (setting aside actually finding the property to buy). But the 1% rule, historically, is the *mininum* acceptable level to match or beat stock returns.

Why do you need to beat stock returns? Because of risk, and because of transaction costs.

First risk. A house is one thing in one location. You can insure against lots of things (fire, theft of contents, tree falling on the roof, hail damage, etc) but there is also lots of stuff (earthquake, flood, terrorism/military action, assets seized because tenants were making/selling drugs, etc) that you cannot (at least cheaply) buy insurance for. In those cases you might have the feds step in and bail you out, or you might not.

You also run risks that are social/economic. Your area might not be as up-and-coming as you think. Big employers might pull out. Climate change might render the area undesirable. Think Detroit suburbs.

$75k of index funds isn't very risky. It could go down some. But it isn't going to go to zero unless we're talking zombie apocalypse or asteroid impact or nuclear war. And at that point money is irrelevant. It's composed (at least in most cases) of a wide slice of the entire economy.

You want a return premium in exchange for the extra risk with RE, especially if you are just investing in a few properties in one location.

The next problem is transaction costs and time/effort.

I think it took me about 10 minutes to set up my account with Vanguard, and that was probably 20 years ago. I can buy or sell funds in a few minutes. Buying a rental property is a totally different story. It could take you weeks, months, or years of scanning listings and calling contacts every day. You'll need to inspect the property, inspect the neighborhood, and interview and hire managers/repair people/etc. And that's just to get *started*. It can easily take hundreds of hours of work even if you find a desirable property quickly! That's time you're not getting back in this life.

It also costs a LOT of money to buy and sell real estate. You'll pay closing costs up front when buying, and you'll pay closing costs and title insurance and commissions (at least in most cases) when selling. You can rage and tear your hair out and curse the Realtor (TM) lobby and their squid-like stranglehold on the market - but when all is said and done, you'll probably have to give them their money. Between buying and selling costs, you're probably talking close to 10% off the top on your returns.


This is why the 1% and (more importantly, IMO) the 50% rule exist. As methods to separate the (potential) wheat from the chaff when first considering properties. RE has a number of advantages (leverage, micro-markets where locals have an information advantage) but it also has huge disadvantages - especially for someone who anticipates having 4 kids to take care of.

Those disadvantages mean you need to be *crushing* stock market returns to make it worth doing. OP's plan will probably not do that, so it's not a good plan. Lots of people have a plan like it, because they came of age since 2007 or so and think that RE always goes up at double digit rates. If that party continues for 15 years, OP will indeed have killed it. But I wouldn't bet on that.

I own zero rental real estate now. Prices are too high everywhere in the US. I'll buy again (if I feel like bothering, I'm not at a point where I need to be chasing new investments) when the eventual reckoning comes.

-W

Jon Bon

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #14 on: February 09, 2020, 02:08:23 PM »
Maybe all of us posters have PTSD from the folks on here being "well I have a 1.5 million dollar house should I rent it for 3k a month?"

Give me some actual numbers on a real property and we can talk about it. But generally: Revenue = Expenses = Bad Rental


webguy

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #15 on: February 10, 2020, 02:12:25 PM »
The OP is clearly not knowledgeable about rentals.
OP has no understanding of the difference between acceptable property management and bad property management.

When rents and values decline, which they likely will at some point in a 15 year holding period, OP will likely be the "weak hands" and will be relieved to dump the "albatross."  I have bought such properties and expect to buy again when the market turns.
About all I can say about this plan is that it's people like you that will create the foreclosures that I will buy the next time the housing market tanks. 
You want a return premium in exchange for the extra risk with RE, especially if you are just investing in a few properties in one location.
...
Those disadvantages mean you need to be *crushing* stock market returns to make it worth doing. OP's plan will probably not do that, so it's not a good plan. Lots of people have a plan like it, because they came of age since 2007 or so and think that RE always goes up at double digit rates. If that party continues for 15 years, OP will indeed have killed it. But I wouldn't bet on that.

There seems to be a lot of assumptions about me in this thread and a strange amount of animosity about this idea for some reason (especially from @Another Reader who sounds like they'd be a blast at parties).  To be clear, I don't want or need a premium return from this investment or any cashflow.  I already have enough cashflow from other investments.  If these properties increased $0 in value over the next 15 years I would not be disappointed as the initial investment would still be worth 4 times more than what I put in.  I would be more than happy with this return.  I would also be happy to pay a premium for a very reputable PM company to handle any day-to-day issues on my behalf.

I already have several million in index funds split between stocks and bonds and am not really looking to put any more of my net worth into those asset classes at the moment.  Due to selling part of my company I'll have about 1.8M after taxes to invest next month and am trying to think of other ways to put the cash to work rather than it sitting in my money market settlement account.  I thought this idea had merit, to be honest it's pretty much the same as buying a house with a 30yr mortgage which cashflows and then paying the mortgage down in 15 years with the extra cashflow, but this idea has a better interest rate due to the shorter term.

If you're not confident that the stock market is going to see historically average returns over the next 15 years, then how can you be confident that the housing market will continue to climb?
To clarify, I am not confident that the housing market will continue to climb, but it wouldn't need to climb at all in order to 4x my investment.  The stock market would need to climb considerably for me to get a 4x return there.  If the housing market kept up with inflation and increased 2%/year over that period then that $75k investment today would be worth $336k.  If it went down 2%/year for 15 years then it would still be worth $184k.  The areas I am considering are ones I am very familiar with, mostly suburbs of Minneapolis.
« Last Edit: February 10, 2020, 02:15:50 PM by webguy »

waltworks

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #16 on: February 10, 2020, 02:22:34 PM »
LOL, you've got $1.8 million *extra* sitting around to invest "next month" (!!) plus "several million in index funds" and you want to spend your time buying some inexpensive rentals...

Dude, do whatever you want. Unless you're partying with strippers on your yacht every weekend, you're not going to need to bother to do this to pay for your kids college. Heck, you can probably do the partying and still not really have a problem.

Put your money into something boring that requires no effort on your part (hint: not rental RE - if you want some RE exposure just buy some REITs), and use your time to be an awesome dad.

But hey, if you just want to do this for fun, go buy some $250k houses that rent in the ballpark of $2600/mo. That will indeed cover all your costs on a 15 year plus all the other expected expenses. You should indeed do fine. Let us know where/when you find them!

-W
« Last Edit: February 10, 2020, 02:52:20 PM by waltworks »

Another Reader

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #17 on: February 10, 2020, 03:44:21 PM »
The OP is clearly not knowledgeable about rentals.
OP has no understanding of the difference between acceptable property management and bad property management.

When rents and values decline, which they likely will at some point in a 15 year holding period, OP will likely be the "weak hands" and will be relieved to dump the "albatross."  I have bought such properties and expect to buy again when the market turns.
About all I can say about this plan is that it's people like you that will create the foreclosures that I will buy the next time the housing market tanks. 
You want a return premium in exchange for the extra risk with RE, especially if you are just investing in a few properties in one location.
...
Those disadvantages mean you need to be *crushing* stock market returns to make it worth doing. OP's plan will probably not do that, so it's not a good plan. Lots of people have a plan like it, because they came of age since 2007 or so and think that RE always goes up at double digit rates. If that party continues for 15 years, OP will indeed have killed it. But I wouldn't bet on that.

There seems to be a lot of assumptions about me in this thread and a strange amount of animosity about this idea for some reason (especially from @Another Reader who sounds like they'd be a blast at parties).  To be clear, I don't want or need a premium return from this investment or any cashflow.  I already have enough cashflow from other investments.  If these properties increased $0 in value over the next 15 years I would not be disappointed as the initial investment would still be worth 4 times more than what I put in.  I would be more than happy with this return.  I would also be happy to pay a premium for a very reputable PM company to handle any day-to-day issues on my behalf.

I already have several million in index funds split between stocks and bonds and am not really looking to put any more of my net worth into those asset classes at the moment.  Due to selling part of my company I'll have about 1.8M after taxes to invest next month and am trying to think of other ways to put the cash to work rather than it sitting in my money market settlement account.  I thought this idea had merit, to be honest it's pretty much the same as buying a house with a 30yr mortgage which cashflows and then paying the mortgage down in 15 years with the extra cashflow, but this idea has a better interest rate due to the shorter term.

If you're not confident that the stock market is going to see historically average returns over the next 15 years, then how can you be confident that the housing market will continue to climb?
To clarify, I am not confident that the housing market will continue to climb, but it wouldn't need to climb at all in order to 4x my investment.  The stock market would need to climb considerably for me to get a 4x return there.  If the housing market kept up with inflation and increased 2%/year over that period then that $75k investment today would be worth $336k.  If it went down 2%/year for 15 years then it would still be worth $184k.  The areas I am considering are ones I am very familiar with, mostly suburbs of Minneapolis.

Your assumption is that you are going to put your down payment in, the net income will pay all expenses, including capital improvements, and at the end you will net at least the original price of the home, correct?  And the property manager will handle all the problems and insulate you from your tenants, right?

I have been involved with real estate for over 35 years, and have owned investment properties for almost 25 years.  I currently own about two dozen properties.  Owning rental properties is just not that simple.  Your assumptions may be wrong. 

My suggestion is for you to get to know some landlords in your market.  Join a local investors' association.  Ask the real estate agents you know if they can introduce you to investors with multiple single family residences.  Ask these people questions.  Lots of questions.  Get a feel for what's involved in owning and managing a property.  Find out what the balance is between owner's rights and tenant's rights in your jurisdiction.  Ask what criteria you can use to select your tenants and how easy it is to remove a tenant that does not pay or destroys the property.  Ask what has happened to occupancy, rents, and values in prior recessions.  Once you have a better understanding of the risks and rewards, make your decision about moving forward.

If you still want to do this after doing the homework, buy one house. Engage your property manager and go for a test drive.  If you find you like owning and operating rentals, execute your plan.  If not, sell the one house and move on. 

webguy

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #18 on: February 11, 2020, 10:12:53 AM »
Thanks for the advice guys. I appreciate it.

Bobberth

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #19 on: February 11, 2020, 04:20:57 PM »
I know people do this-just want the property to break even for years to eventually have a paid off house. I'm not a fan of it but people do it.

One reason you need a premium return is think about what your question entails: 15 years. In most houses, owning it for 15 years means you have a pretty good chance of putting on a new roof during that period. There's a chance you won't, but if you do, it's going to be costly. For a rental over 15 years, you're looking at at least 2 flooring changes if not 4 or 5 if you go carpet. 2 hot water heaters. 3 fridges. 4 or 5 dishwashers. 2 air conditioners and a furnace. Repainting probably at least 5 times if not more like 8 or 10 times. Even new windows could be required. Potentially new counter tops. If you go to sell after 15 years, add one more of everything to get it ready to sell. This is all an average expectancy. This doesn't include a tenant that trashes the place and is uncollectable.

I know you said "all expenses covered" but all of this is work. Even if you have somebody else take care of it, you have to come out of pocket for it and expenses don't come nicely spread out. They are lumpy. The leaky roof has to be fixed NOW. And you tend to have these expenses-new floors and paint, while the property is also not bringing in rent between tenants. So you might have to come out of pocket to cover these items and cover the mortgage. Things that don't happen while owning stocks or REITs. So yes, you should look to ear a premium for the extra risk you are taking.

So sure. Buying a rental property in the hopes of just breaking even is something you can do. It might even not be the worst thing you can do. But I would not suggest being a landlord unless you are making money doing it.

M5

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Re: Buying 4 houses that pay themselves off in 15 years?
« Reply #20 on: February 28, 2020, 10:33:03 AM »
LOL, you've got $1.8 million *extra* sitting around to invest "next month" (!!) plus "several million in index funds" and you want to spend your time buying some inexpensive rentals...

This was my thought as well. If he truly does have this much extra cash to blow on real estate, why waste your time with SFHs, unless you can buy a large portfolio? With that kind of cash to put down, you could dabble is some serious multi-family properties.