Author Topic: First Rental property for Early retirement  (Read 10676 times)

Markywalberg

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First Rental property for Early retirement
« on: January 31, 2015, 03:06:19 PM »
Hello im a new user just found this site today and have read many blogs and really love the message as it seems to fit my lifestyle alot. So Ill throw my short term idea out there. So im 22 years old and have saved for a few years and am very close to reaching a goal of mine of purchasing a rental property for $80,000 market value is $100-120k but im getting it slightly cheaper because it is from a family member. (used to be landlord and now retired and looking to slowly get rid of properties). I could get house even cheaper for 60k but not trying to get handouts. Anyways i would purchase it outright all cash and basically all the money i have saved up except a emegency fund. Anyways my thinking is this for 80k it rents for 800-900 so i calculate 800  a month which is 9600 a year and im thinking after expenses that leaves roughly 6k a year left over which is about 7.5% ROI. My plan is to hopefuly buy house rent out and save up cash from current job and invest money from rental until i can get another house around same or below price. My question is does the math add up and seem conservative for expenses seem fair and whether or not i should think of maybe instead of saving another 80 or below to buy house if i should just invest in low cost index to ti have maybe 120-160k and then buy another house so im more diversified or just buy 2nd rental and then start throwing money in low cost index. Eventual plan is to have enough rental property income to retire off of and still have money in market and to grow that. Also loving the forum so far

Bicycle_B

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Re: First Rental property for Early retirement
« Reply #1 on: January 31, 2015, 03:11:36 PM »
A lot of real estate experts on this site and others (like biggerpockets.com) suggest the 50% rule these days.  As I understand it, you should expect 50% of your rent to go into various expenses that are not mortgage costs, such as taxes, repairs, marketing costs, vacancies, etc.  This implies that $9600 rent produces $4800 return, not $6k, reducing the ROI to 6%.


Markywalberg

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Re: First Rental property for Early retirement
« Reply #2 on: January 31, 2015, 03:21:02 PM »
thats great advice i will search web for these post if u have any links that would be great


fxsts12

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Re: First Rental property for Early retirement
« Reply #4 on: January 31, 2015, 04:22:21 PM »
I would not want to lose all cash in the property. You have a difficult  time even getting a Heloc  without a first mortgage.  Try to finance  at a great rate and use the cash to find another property to leverage. Owner occupant is the best rate even if you have to move into it for a year. Rates are low and that has an impact  on future investments when you need more money.

Markywalberg

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Re: First Rental property for Early retirement
« Reply #5 on: January 31, 2015, 04:40:27 PM »
Well in this scenario i dont have a mortgage i pay all cash and save up for money to contribute to market or for next house so im not sure why i would try to get low rate mortgage for this house and buy 2nd one with left over money. Im trying to be conservative this will be my first investment property and id rather not have any debt and for someyone who has no experience i think just taking it one house at a time is what i want if i get this house and it works out then after a year or 2 i will have saved enough to pay all cash for sencond house or can think of getting a mortgage then.

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Re: First Rental property for Early retirement
« Reply #6 on: January 31, 2015, 06:23:45 PM »
As you read more about real estate investing you will find that you do NOT want to tie up all your cash in one place. Short version is this, why make only $800 on $80k when you can put 20% down on 4 to 5 of them and make all that much more. Think of it a real estate's version of compound interest (but not really).

I always thought I would own my home and I will eventually, but not before I use the equity to purchase real estate (I just did this in June for our third rental property). The notion of delaying mortgage-free home ownership took me a few years and two rentals to warm up to, I liked the cash flow enough to pull the trigger on a HELOc for rental #3 which we just closed on in June.  As noted above, once your money is in that property it is often very difficult to get it back out (if it is not your primary residence).

This all makes sense because of the historically low interest rates. Not sure how long they will stay around!

Sure you can be very careful and conservative and buy one unit outright at a time, but it will take alot longer to do so... Good Luck!

GuitarBrian

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Re: First Rental property for Early retirement
« Reply #7 on: January 31, 2015, 09:58:23 PM »
Well... here's my opinion.

I would buy the rental with cash.

But, you didn't say where the cash came from. Is the cash you have from savings? Or from somewhere else? That could change things... Do you already own a place you are living in? If not, then do you have rent? (the evil of building net worth) or some other situation. If you don't already have a home, I would say buy this even more, since if things don't work out down the road, you have a fall back, free and clear place to live. Or you can keep it rented and prolong survival until things come around.

I have 2 rentals in your price range... value 65k and 150k rents are 700 and 1050. I don't find it expensive to keep them up at all. They have hovered around  (+/- $200) $1000 a year in taxes/insurance and $1000 a year in repairs.

First thing, are you willing/have the time, to do the minor (and major) repairs yourself? This saves a TON of money, and hassle, in my experience. Really techie stuff like A/C work... I hire out. I find that there isn't much to do, a random repair (faucet/toilet/electrical/etc) but a fair amount of work (3 days, sometimes more) when preparing to rerent.

Houses are not that complicated. Even major stuff can be done. I re plumed a whole house, pressure side from the curb in, for $800 in parts (60ft underground run, indoor piping, fixtures, sinks, toilet etc) plumbers all quoted over 2k for the same job. I just re roofed one of the houses. The estimates came in at $8k+. All said and done, $3,550 which was $200 more than what the insurance covered me (front of the house was damaged in a wind storm, back was OK, but in need or replacement) So if I had paid to have it done, I was looking at 4k negative... and dropping from 10k on the year to 6k... instead I got over there on the weekend and ripped the old roof off and got the felt laid. Then spent the next weekend roofing the patio (I did my own torch down roofing) next was the shingles, which I did hire a helper to muscle them up the ladder, $150 for 2 days help... I could go on. But I hope I got my point across. Depending on your outlook, most anything can be done, and it isn't that expensive. (Some things do just suck, new A/C system for example, no real way to save money there)

Second, you aren't likely getting any return on your cash. And if you don't already own a home, everyone should be so lucky to start with a house free and clear. Always have a place to fall back to.

Not sure there is much else to add... If I think of something... I will post.

Thought of something, if the house is valued at 120k then your family member will have claim the difference, 40k as a gift to you... Using the yearly cap plus his lifetimes cap, or have to pay gift taxes.
« Last Edit: January 31, 2015, 10:13:58 PM by GuitarBrian »

Markywalberg

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Re: First Rental property for Early retirement
« Reply #8 on: February 01, 2015, 11:51:39 AM »
I like the idea of putting down payment for the house and getting a second one but i also found it hard to get a loan for a fixer upper as the bank will only give me a loan if the house will pass inspection. Well obviously im looking to buy a house in poor shape in hopes to fix it up and rent so why would i get a loan for a house that already passes inspection. Kinda a weird place to be so i think they wanna see i have more assets and credit history since i have less then 6 months now but i figured with money saved and no debt that i would be fine for a loan well that didnt work. So now im thinking buy first house all cash give it a 6-12months to save more cash and start applying for loans again and hopefully with 2 years good credit history and a house already completely paid off i will qaulify

Mazzinator

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Re: First Rental property for Early retirement
« Reply #9 on: February 01, 2015, 02:46:16 PM »
For your situation, i think it souns like a good plan. As long as you have enough cash for the house, repairs/renovation AND an emergency fund (i'd suggest ~$10k)

Do you have access to a 401k at work? I'd start funding thiss too, at least up to the match. And an ira, for some diversity. Find your assest allocation, maybe 50/50 stocks/real estate, or whatever your percentages are, and start funding those.

Good luck! And keep us up to date!!

Dicey

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Re: First Rental property for Early retirement
« Reply #10 on: February 01, 2015, 08:11:53 PM »
Another reason to get a mortgage is to develop your credit history. At your stage in life, banks want to see that you have the discipline to make payments and paying cash won't give them that. Get a mortgage and lock in a low fixed rate. You can always pay it off early, but you may decide the power of leverage is too compelling to do so. I realize this may be a grey area, but I would absolutely say that it was going to be an owner-occupied property. Since there's zero chance you're going to default on this loan, I'd have no qualms about this approach. The reason non-owner occupied loans cost more is because they have a higher default rate and you aren't going to be that guy. Keep us posted, whatever you decide.

Markywalberg

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Re: First Rental property for Early retirement
« Reply #11 on: August 03, 2015, 03:21:35 PM »
Hey everyone its been awhile since i posted for this topic just wanted to keep people up do date with whats going on and what the plan is from here so here is a link to my other thread on the new property i got and plans for 2nd.
http://forum.mrmoneymustache.com/real-estate-and-landlording/need-help-with-investment-property/?topicseen
 
To sum it up i decided to do all cash for first preoperty and after a year of that ive decided to just finance a small portion of the 2nd one andonce that is paid of ill think of getting a bigger portion of a loan for the next property
1st property 60k cash down
2nd property 20k cash and 40k loan
3rd property idk yet but it probably mean a bigger loan like 70k-90k (depending on interest rates)

sammybiker

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Re: First Rental property for Early retirement
« Reply #12 on: August 03, 2015, 07:26:56 PM »
I'm glad you secured that first property for the best price (60k).

Don't forget, keep an eye out for a good local commercial lender.  Find a good one and you can perform repeated cashout refis using the funds from your first couple of purchases.

Markywalberg

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Re: First Rental property for Early retirement
« Reply #13 on: January 02, 2016, 11:58:53 PM »
Hey guys been awhile since I posted ill try to keep everyone up to date and use this as a good reference point for me. So finally got my first place (kinda) I ended up forming an LLC which I own half and my uncle owns the other half. We bought a townhome ended up costing roughly 120k so I put in 60k cash and he did as well so we own it with no mortgage. So far the experience has been great we get 1400 rent every month and bills are very limited 1. $175 for HOA AND $80 property taxes so after everything is said and done we split the rent money and any expenses that come up we both throw in half of what it cost to fix or do it ourselves we got some good renters in there as well. So making good progress also getting an extra $6-7,000 a year from rent will help me a lot with saving for the next place. The bad news: places im looking at that offer good ROI are all in the $110,000-130,000 range which I don't really have that much saved up yet to go all cash. Im thinking of getting a place pretty much the same as the first.
$120,000 Townhome                                                     Rent  a month (low end)    $1200

-$42,000 Down payment                                                Housing association fee   -$200

$78,000 loan @4.25% = $315 interest /year                  TAXES                                -$200

                                                                                        INTEREST PAYMENT       -$277

                                                                                                                            $523 LEFT OVER (every month)[/b]
These are the number im looking at for the 2nd place if I got a loan for it. This doesn't include the principal payment of around $300 in it which im not to concerned about because I would be rolling all proceeds left over into paying it off asap anyway. To my question is this being to aggressive or more then reasonable? Thoughts?

arebelspy

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Re: First Rental property for Early retirement
« Reply #14 on: January 03, 2016, 03:38:43 AM »
Search on the 50% rule, and read more about how to evaluate a rental property here: http://forum.mrmoneymustache.com/real-estate-and-landlording/evaluating-a-rental-property/
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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Markywalberg

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Re: First Rental property for Early retirement
« Reply #15 on: January 12, 2016, 02:25:58 AM »
Alrighty well doesn't quite follow 50% rule and I don't like having debt right now anyway so I think ill just do another deal like the last one put down 60k and get 6-7ka year back in rreturn

zephyr911

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Re: First Rental property for Early retirement
« Reply #16 on: January 12, 2016, 09:42:34 AM »
Alrighty well doesn't quite follow 50% rule and I don't like having debt right now anyway so I think ill just do another deal like the last one put down 60k and get 6-7ka year back in rreturn

I understand your aversion to leverage, but you'd do well to at least understand how it can increase your returns - dramatically, if used well.
 
Don't make the mistake of assuming just because things have gone OK for you so far (which is great), that the same approach will always work, or that you couldn't achieve greater success by refining it. I've been a landlord for almost a decade, running an LLC doing it in a serious and systematic way for 2 years, and I still learn new things all the time. There are a shit-ton of smart and experienced people here whose free advice is worth real money. :)

Markywalberg

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Re: First Rental property for Early retirement
« Reply #17 on: January 22, 2016, 09:58:15 PM »
I definitely think leverage would help a lot in the future just right now im dipping my toe in so to speak. If I got the loan I would only bring in an extra 1-2k a year. If I put down 60k no loan I get 4-5k ROI every year if I get the loan I get 5-7k a year which is more but these are with very minimal turnover times and with the loan im strapped with about 900-1000 a month bill which is taken care of with the rent and all but the possibility of an extra 2k a year I make with the loan isn't worth it to me for the risk I would be taking. Im thinking put down for another  1/2 townhome (60k) then I should be making 10-12k a year after all bills in rental income then next time get a loan and that way im taking very little risk since I would have a small 60k-80k loan and be bringng in 25-30k a year in rental income and 14- 19k after expenses to cover the loan. At that rate the place would pay itself off in about 3 years.
******also think property values are a little high right now and I would like not to take out a loan so if prices do drop a decent amount then I can step in and get a loan on a property that is cheap.

sammybiker

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Re: First Rental property for Early retirement
« Reply #18 on: January 23, 2016, 12:19:07 AM »
@Markywalberg

You're overshooting your net profit by a long shot.

You're not including the following:

- Maintenance/Repairs/Turnover Costs
- Vacancy during Turnover
- Property Management (if you manage yourself, fine - but you should be paying yourself)

I own properties free & clear - I assure you, the above costs always hit you.

Be prepared and be realistic.  You took action and I think that is the most important part of your young story - but be sure to prepare yourself and align your future plans to reality.

Bearded Man

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Re: First Rental property for Early retirement
« Reply #19 on: February 09, 2016, 01:54:13 PM »
@Markywalberg

You're overshooting your net profit by a long shot.

You're not including the following:

- Maintenance/Repairs/Turnover Costs
- Vacancy during Turnover
- Property Management (if you manage yourself, fine - but you should be paying yourself)

I own properties free & clear - I assure you, the above costs always hit you.

Be prepared and be realistic.  You took action and I think that is the most important part of your young story - but be sure to prepare yourself and align your future plans to reality.

My sentiments EXACTLY. Wasn't it nononsenselandlord that said to never mistake deferred maintenance for profit? OP is doing "OK" by a standard he is incorrectly calculating. Dangerous, you could really be losing money and not know it, or, you could be working a part time job with a lot of risk that pays less than an index fund. Learn how to calculate an accurate cash on cash return.

Markywalberg

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Re: First Rental property for Early retirement
« Reply #20 on: February 13, 2016, 09:02:31 PM »
well for the math I end up up paying off minimum $300 a month principal which is to slow for me and I have over $200 left over after all expenses. I did forget to mention the maintenance but I thinkif I throw that in there maybe $100-150 a month is reasonable. Since the place in realatively new built 2002-2005 timeframe and 2nd HOA covers landscaping,siding,deck, roof and driveway pretty much everything outside and all I cover is the inside so im thinking 1200 is reasonable maintenance to cover that and if I have bad tenants then I require a decent amount deposit. One more thing is I would have a decent size amount of cash on the side to cover any period it isn't currently rented out or any major fixes. This would be my second  rental so I would have other rental income going to paying this place off sooner and obicouldy as I pay it offless money goes to interest payment and more towards principal so after 1-2 years not unreasonable to think that interest payment is only $150-200 a month leaving an extra 100-150 a month after paying everything off. Hope these numbers seem more realistic?

 In the end ive decided not get another place until I can put a down payment down of 60k or placed get cheaper and ill only need a loan for roughly 50k-60k max. Mainly because doing all this just to only have an extra 100-200 a month left over.

Markywalberg

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Re: First Rental property for Early retirement
« Reply #21 on: July 17, 2016, 05:13:07 PM »
Hey everyone, I always like it when people follow up on there investments so you can get the game plane before they invested and how it is doing during. That said I decided to follow up on my own post.  Its been a little under a year since I got the first property It cost $120,000 and we asked more towards the high end in rent $1400 (1,100-1,400). We got good renters in within 2 weeks after renovations. So far no problem with getting rent and only made 2 house calls for minor problems that cost me nothing but an hour of my time. As for expenses i have $175 HOA and $80 for property taxes so im looking at $1,150 after all IMMEDIATE expenses. I have not had any repair or maintenance expenses so far so i cannot comment on how much that will be but im hoping security deposit covers most damages or maintenance. Im gonna throw and un-educated guess and just say all other expenses $150 a month leaving $1000 left every month but this doesnt cover months in between finding new renters. So far this investment I feel has worked out very,very well. I cant think of anything really that I would do differently going forward, but i am hesitant to buy another property in this market.

I have finally saved up another $50-60k to possibly get another property like this one, virtually the same deal (same county ,sqaure footage, HOA fee's, taxes).  Like i said i am hesitant to buy another property similar to this for the same price, the reason for this being that i think housing prices might be at or close to a peak and we are 7-8 years into a bull-run and even though it is great to get $1400 a month rent im not sure this will be realistic if the market has a correction. Im thinking I would like to post-pone buying a property for now in hopes that prices will come down significantly within the next 2 years. Instead of getting another townhome for $120,000 I could get the same property for 80-100k.

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Re: First Rental property for Early retirement
« Reply #22 on: July 17, 2016, 05:32:59 PM »
You do not appear to be listening to the advice you are being given.

That's your privilege.

I buy run-down rental properties for 1/3 of what they ought to be worth because landlords did not keep the property in good repair.  They did not keep it in good repair because they spent the rent money thinking it was profit and then got hit with some big repair bills.  Because the money has been spent (and, being regular Americans, they are in debt for consumer sucker spending too), they can't afford to repair the property.   That pisses off the good tenants so they move out. 

Repeat that a few times on a property and you get substandard tenants who trash the place.

And I buy it for a song.  :)

So, your partner and you will cough up any repair costs 50-50.   Will your partner actually have $4000 on hand to cover their half of a new HVAC system replacement?   And a new water heater at the same time?  (Murphy's Law, my friend, Murphy's law.)  That's another $500 out of his pocket.  Or maybe it's the roof for another $4000 apiece...

Because if your partner cannot cough up that cash (and pronto!!!), what are you going to do?

You need to build up reserves to handle that situation.

You NEED to understand how to run the numbers.  The REAL numbers.

I suggest you get this book and read it cover to cover, and do all the math exercises in it, too.

https://www.amazon.com/Estate-Investor-Financial-Measures-Updated/dp/1259586189/ref=sr_1_1?ie=UTF8&qid=1468797791&sr=8-1&keywords=gallinelli+real+estate

FYI, there are VERY good reasons for buying a property with a mortgage.  There are also very good reasons for paying cash.  (And then after a year or three, pulling money out of the property with a HELOC and buying another property with cash.)

Without a real understanding of how to run the numbers you won't make the best decision.  Or, worse, you'll make a bad decision.

I'm glad you're doing well so far.  Best of luck.


arebelspy

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Re: First Rental property for Early retirement
« Reply #23 on: July 17, 2016, 08:00:46 PM »
Thanks for the update!

Glad to hear it's going so smoothly.

Make sure you're setting cash aside for the eventual vacancies/repairs/capital expenses/etc.

Keep reading, and learning.  Good luck! :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, 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.

Markywalberg

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Re: First Rental property for Early retirement
« Reply #24 on: July 17, 2016, 09:25:14 PM »
Well it appears i have left out some info. I do have extra money on the side to cover expenses on my own and more then enough that being said my partner is in the same boat.  Im not counting deferred maintenance as profit im giving a simple month by month list of expenses and cost with the obvious notion that bigger expenses will come up and i have sufficient funds set aside for said expenses. That being said all i have to cover is the inside of the house which i wont say cant get expensive but we just renovated it so i think over the next couple of years are upkeep coat will be lower then most landlords. Not a stretch to say the least but reat assured like i have said i do have funds set aside for any emergency that should arise
You do not appear to be listening to the advice you are being given.

That's your privilege.

I buy run-down rental properties for 1/3 of what they ought to be worth because landlords did not keep the property in good repair.  They did not keep it in good repair because they spent the rent money thinking it was profit and then got hit with some big repair bills.  Because the money has been spent (and, being regular Americans, they are in debt for consumer sucker spending too), they can't afford to repair the property.   That pisses off the good tenants so they move out. 

Repeat that a few times on a property and you get substandard tenants who trash the place.

And I buy it for a song.  :)

So, your partner and you will cough up any repair costs 50-50.   Will your partner actually have $4000 on hand to cover their half of a new HVAC system replacement?   And a new water heater at the same time?  (Murphy's Law, my friend, Murphy's law.)  That's another $500 out of his pocket.  Or maybe it's the roof for another $4000 apiece...

Because if your partner cannot cough up that cash (and pronto!!!), what are you going to do?

You need to build up reserves to handle that situation.

You NEED to understand how to run the numbers.  The REAL numbers.

I suggest you get this book and read it cover to cover, and do all the math exercises in it, too.

https://www.amazon.com/Estate-Investor-Financial-Measures-Updated/dp/1259586189/ref=sr_1_1?ie=UTF8&qid=1468797791&sr=8-1&keywords=gallinelli+real+estate

FYI, there are VERY good reasons for buying a property with a mortgage.  There are also very good reasons for paying cash.  (And then after a year or three, pulling money out of the property with a HELOC and buying another property with cash.)

Without a real understanding of how to run the numbers you won't make the best decision.  Or, worse, you'll make a bad decision.

I'm glad you're doing well so far.  Best of luck.

Markywalberg

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Re: First Rental property for Early retirement
« Reply #25 on: February 12, 2017, 08:51:14 PM »
Alrighty everyone its been awhile since I have given any updates but not much has happened since previous post since I got some decent tenants they fell a month behind so currently dealing with that. The first place we got has since gone up in value and is worth 140-150k now which is a nice 20-30k increase in value but also made it harder to save for another place. So to keep everyone updated we havnt had any repair cost so far and no big loss of money besides the 1month of rent so far. With almost an entire year renting the place out we have saved up another to do another cash offer for another place that we just got. This one cost us 120,500 and is 200sqaure feet smaller and only a 1 car garage so we will only be able to get 1200 a month rent instead of 1400 but not a huge deal. Just to make sure we will have sufficient funds left over after this purchase to cover any repairs or lost rent.

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Re: First Rental property for Early retirement
« Reply #26 on: February 13, 2017, 06:18:05 AM »
Alrighty everyone its been awhile since I have given any updates but not much has happened since previous post since I got some decent tenants they fell a month behind so currently dealing with that. The first place we got has since gone up in value and is worth 140-150k now which is a nice 20-30k increase in value but also made it harder to save for another place. So to keep everyone updated we havnt had any repair cost so far and no big loss of money besides the 1month of rent so far. With almost an entire year renting the place out we have saved up another to do another cash offer for another place that we just got. This one cost us 120,500 and is 200sqaure feet smaller and only a 1 car garage so we will only be able to get 1200 a month rent instead of 1400 but not a huge deal. Just to make sure we will have sufficient funds left over after this purchase to cover any repairs or lost rent.

After 30 years, you are only getting a 6%-7% compounded return a year.  That's not that a good investment.

Use this calculator and you can find the return in 30 years.  http://www.calculator.net/rental-property-calculator.html

arebelspy

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Re: First Rental property for Early retirement
« Reply #27 on: February 13, 2017, 06:28:18 AM »
Use this calculator and you can find the return in 30 years.  http://www.calculator.net/rental-property-calculator.html

I averaged my properties together (to get the average purchase price, average rent, property tax, etc. etc.).  10% management, 5% vacancy, 2% annual rent increase with 3% annual expenses increase. 3% annual appreciation.  Real details on the rest.

Did a 50 year holding period.

Result:
Internal Rate of Return (IRR): 19.39% per year for the 50 years invested.
Return on Cash Invested: 1,762.21% for the total of 50 years invested.
Capitalization Rate: 25.53%

Sounds within the ballpark, so the calculator seems reasonable.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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andysandp

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Re: First Rental property for Early retirement
« Reply #28 on: February 13, 2017, 07:40:40 AM »
Use this calculator and you can find the return in 30 years.  http://www.calculator.net/rental-property-calculator.html

I averaged my properties together (to get the average purchase price, average rent, property tax, etc. etc.).  10% management, 5% vacancy, 2% annual rent increase with 3% annual expenses increase. 3% annual appreciation.  Real details on the rest.

Did a 50 year holding period.

Result:
Internal Rate of Return (IRR): 19.39% per year for the 50 years invested.
Return on Cash Invested: 1,762.21% for the total of 50 years invested.
Capitalization Rate: 25.53%

Sounds within the ballpark, so the calculator seems reasonable.

Arebelspy, if you only got 1,762.21% Return, thats only about 6% Return Compounded each year for 50 years.

That's not too good either!

Internal Rate of Return is not Compounded Return.


arebelspy

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Re: First Rental property for Early retirement
« Reply #29 on: February 13, 2017, 07:46:08 AM »
You are assuming I'll take the cash flow and leave it in cash for 50 years, and not reinvest it?

Simple return is not compounded return.  No one would do what you are suggesting, and your return number is irrelevant.  Even if you don't reinvest at the same rate so it doesn't fit the IRR but at a lower rate (say, the stock market), you'll still end up with double digit CAGR.
« Last Edit: February 13, 2017, 07:47:45 AM by arebelspy »
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, 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.

andysandp

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Re: First Rental property for Early retirement
« Reply #30 on: February 13, 2017, 08:02:45 AM »
You are assuming I'll take the cash flow and leave it in cash for 50 years, and not reinvest it?

Simple return is not compounded return.  No one would do what you are suggesting, and your return number is irrelevant.  Even if you don't reinvest at the same rate so it doesn't fit the IRR but at a lower rate (say, the stock market), you'll still end up with double digit CAGR.

Yes if you reinvest the cash flow, the final return will be much higher.

I think it's important to show the Compounded Return if you don't Reinvest the cash flow.  Just like the Stock Market if you don't Reinvest the Dividends you also get 6-7% return.

I think a lot of Investors don't reinvest their cash flow, and either just spend the extra cash, or put it the extra cash into a Savings account for Repairs.  The OP even said he will just pay for Repairs as they happen, from the extra cash flow.




arebelspy

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Re: First Rental property for Early retirement
« Reply #31 on: February 13, 2017, 08:17:51 AM »
You are assuming I'll take the cash flow and leave it in cash for 50 years, and not reinvest it?

Simple return is not compounded return.  No one would do what you are suggesting, and your return number is irrelevant.  Even if you don't reinvest at the same rate so it doesn't fit the IRR but at a lower rate (say, the stock market), you'll still end up with double digit CAGR.

Yes if you reinvest the cash flow, the final return will be much higher.

I think it's important to show the Compounded Return if you don't Reinvest the cash flow.  Just like the Stock Market if you don't Reinvest the Dividends you also get 6-7% return.

I think a lot of Investors don't reinvest their cash flow, and either just spend the extra cash, or put it the extra cash into a Savings account for Repairs.  The OP even said he will just pay for Repairs as they happen, from the extra cash flow.

1) We're Mustachians, not ordinary idiots with money.  Assuming we won't reinvest is a poor assumption.

2) Even if you disagree, and say they won't be reinvested, but spent... okay?

 My "dividends" will be about 12% per year versus the stock market's 3%.

Even if I don't reinvest but spend it, I'm getting 4x the spending power each year, and the same terminal value.

Seems pretty good to me.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, 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.

andysandp

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Re: First Rental property for Early retirement
« Reply #32 on: February 13, 2017, 08:29:27 AM »
You are assuming I'll take the cash flow and leave it in cash for 50 years, and not reinvest it?

Simple return is not compounded return.  No one would do what you are suggesting, and your return number is irrelevant.  Even if you don't reinvest at the same rate so it doesn't fit the IRR but at a lower rate (say, the stock market), you'll still end up with double digit CAGR.

Yes if you reinvest the cash flow, the final return will be much higher.

I think it's important to show the Compounded Return if you don't Reinvest the cash flow.  Just like the Stock Market if you don't Reinvest the Dividends you also get 6-7% return.

I think a lot of Investors don't reinvest their cash flow, and either just spend the extra cash, or put it the extra cash into a Savings account for Repairs.  The OP even said he will just pay for Repairs as they happen, from the extra cash flow.

1) We're Mustachians, not ordinary idiots with money.  Assuming we won't reinvest is a poor assumption.

2) Even if you disagree, and say they won't be reinvested, but spent... okay?

 My "dividends" will be about 12% per year versus the stock market's 3%.

Even if I don't reinvest but spend it, I'm getting 4x the spending power each year, and the same terminal value.

Seems pretty good to me.

Sorry, I know you are a smart Investor and your numbers and Returns make sense and are great!

I was originally responding to the OP where he said he will get $1200 before Expenses on a $120,500 property and he's paying Cash.  His attitude was he will pay for Repairs with any Money left over.  So his Cash flow is low, and he needs to use that for future repairs. 

I think the Calculator shows his Return will not be that great.

arebelspy

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Re: First Rental property for Early retirement
« Reply #33 on: February 13, 2017, 08:54:58 AM »
I think the Calculator shows his Return will not be that great.

I think it's more likely the case you may not understand the calculator, more specifically the total return information.

For example, I just ran a scenario that had a 100% annual return.  E.g. I buy a house in cash, and the annual cash flow (rents minus expenses) is the same as the purchase price of the house.

Holding period, 50 years.

Total CAGR over that 50 years?  8%.

Explain to me why that 8% CAGR is more important than the 100% I'm earning every year, and the fact that the payback period is one year.

(Note: this is not a realistic scenario with real numbers, but used to show that if a calculator is telling you 8% and you're looking at that and ignoring the annual cash flow, you're probably focusing on the wrong thing.)

You may not get the IRR, but you're likely to get much closer to that than to the CAGR where you set fire to the rental profits each year.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, 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.

andysandp

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Re: First Rental property for Early retirement
« Reply #34 on: February 13, 2017, 09:40:58 AM »
I see what you are saying.

I guess I've been so fixated in looking at the Compound Interest Return and I forgot the main Goal.

The yearly return rate can be more important then the final number when you are trying to FIRE.

Makes sense now!
« Last Edit: February 13, 2017, 10:07:38 AM by andysandp »

arebelspy

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Re: First Rental property for Early retirement
« Reply #35 on: February 13, 2017, 03:52:02 PM »
Exactly!  :)

Total return is definitely an important number, but cash on cash return is the first thing I look at, not last.

I'm of the opinion real appreciation will be approximately zero (e.g. the house value will keep up with inflation).  You'll see some other benefits in taxes (see MadFIentist recent post) and principal pay down if you have a mortgage, but most of your return should come from cash flow.

If your cash flow is poor, it's either:
A) A poor investment, or
B) You are speculating on appreciation for your return.

B is not something I prefer to do (though some successfully do it, I'd rather not risk my ER on a gamble, despite evidence to the contrary), so I like making sure my investments have plenty of cash flow.

Rent checks rolling in every month means I never have to worry about my ER expenses, but instead can transfer money to Vanguard each month (yes, I overworked).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, 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.

Markywalberg

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Re: First Rental property for Early retirement
« Reply #36 on: February 15, 2017, 01:39:56 PM »
I think the Calculator shows his Return will not be that great.

I think it's more likely the case you may not understand the calculator, more specifically the total return information.

For example, I just ran a scenario that had a 100% annual return.  E.g. I buy a house in cash, and the annual cash flow (rents minus expenses) is the same as the purchase price of the house.

Holding period, 50 years.

Total CAGR over that 50 years?  8%.

Explain to me why that 8% CAGR is more important than the 100% I'm earning every year, and the fact that the payback period is one year.

(Note: this is not a realistic scenario with real numbers, but used to show that if a calculator is telling you 8% and you're looking at that and ignoring the annual cash flow, you're probably focusing on the wrong thing.)

You may not get the IRR, but you're likely to get much closer to that than to the CAGR where you set fire to the rental profits each year.
Just to answer everyones questions right now i am paying all cash which means it takes me some time to save up for another property but I am taking all rent-expenses and reinvesting it into another property. The numbers for this property are as follow 120,000 purchase and i estimate $1200 a month rent times 11= 13,200 from rent (subtract 1 month for renters moving in and out etc..) now subtract HOA fees $200 a month time 12= $2400 so 13,200-2,400= $10,800 now take away another $1000 for taxes and i got $9,800 left and now. All else considered the security deposit is usually enough to cover anything but just to be safe ill put another $2,000 a year for maintenance and repairs so $7,800 left profit. I know there might be alot of debate on my $2,000 a year for misc expenses and some will think it should be lower or higher but it doesnt concern me that much since I always have enough cash on hand to cover anything. To give my reasoning for the smaller amount i would put that the HOA covers the roof,siding,deck,driveway,windows and property insurance so i only need to worry about the interior of the property. I think $7,800 is reasonable although it is a low rate of return i am okay with that because these are not high risk property investments they are in a good area with good renters and not hard to rent out. Another thing that could impact the rate of return is if i decide to get a loan out to buy my next property or not, i would keep the size of the loan smaller but it would help me grow faster and now I am getting a rate of return on money that isnt mine.

Markywalberg

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Re: First Rental property for Early retirement
« Reply #37 on: March 10, 2019, 09:05:44 AM »
And my journey continues, a few weeks ago we got another rental property all cash for this one as well. Im following up to give a rundown of the investment. This is a 2bed,2bath,2 car garage Townhome that we paid $170,000 for after all closing cost and repairs and looking to get renters into it now. Expecting to get anywhere from $1500-1700 a month and expenses are as follows:
$200 a month HOA
$100 a month for Property Taxes
$200 a month for upkeep/misc expenses

SwordGuy

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Re: First Rental property for Early retirement
« Reply #38 on: March 10, 2019, 01:32:16 PM »
And my journey continues, a few weeks ago we got another rental property all cash for this one as well. Im following up to give a rundown of the investment. This is a 2bed,2bath,2 car garage Townhome that we paid $170,000 for after all closing cost and repairs and looking to get renters into it now. Expecting to get anywhere from $1500-1700 a month and expenses are as follows:
$200 a month HOA
$100 a month for Property Taxes
$200 a month for upkeep/misc expenses

Did you ever read the real estate investment books we all recommended?

Markywalberg

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Re: First Rental property for Early retirement
« Reply #39 on: March 10, 2019, 06:03:31 PM »
Hello SwordGuy,
I ended up getting "The Book on Rental Property Investing"  by Brandon turner  and few other like rich dad poor dad instead.

SwordGuy

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Re: First Rental property for Early retirement
« Reply #40 on: March 10, 2019, 09:22:54 PM »
Hello SwordGuy,
I ended up getting "The Book on Rental Property Investing"  by Brandon turner  and few other like rich dad poor dad instead.

The Gallinelli book on Cash Flow and other Measurements is the best I've found on calculating real estate investment numbers.


I think you would benefit from it.  (And so would most anyone else investing in RE.)

GreenEggs

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Re: First Rental property for Early retirement
« Reply #41 on: March 11, 2019, 05:39:01 PM »
Hello SwordGuy,
I ended up getting "The Book on Rental Property Investing"  by Brandon turner  and few other like rich dad poor dad instead.

The Gallinelli book on Cash Flow and other Measurements is the best I've found on calculating real estate investment numbers.


I think you would benefit from it.  (And so would most anyone else investing in RE.)




I've seen you mention the book a few times, so I just ordered it.  I've never been a landlord, but it seems like a good way to diversify.