I was told that the post I wrote about my investment/retirement plan contains questions about rental/real estate that I should ask here instead, so here I am.
For the sake of context, the original post details the entire plan, which also includes our incomes, expenses, lifestyle/life goals, and stock investments. If you need to see the bigger picture to assess our plan below, you can read the original thread here:
http://forum.mrmoneymustache.com/ask-a-mustachian/reader-case-study-opinion-on-this-financial-independenceretirement-plan/Current house we live in: - Placer County area, Northern California, single-family house, purchased in 2012 for $255k (now valued at $355k). We paid 20% ($55k) on a 30-year loan at 3.625% interest rate.
The plan: - We're thinking of selling our current house, since the mello-roos at $3k a year is too high, and also we can use the money to split into two cheaper houses for greater equity gain (I think this is logical, if the market condition is similar for the two cheaper houses? Am I wrong?). The house should net us about $140k in total gain.
We'll use the money from selling the house ($140k) and add about $205k from our assets in stock, then buy approximately 6 rental properties, all in the Placer/Yuba area within 30 minutes driving distances from each other (with one of them as our new home) at roughly $230k each, all with 25% down payment, 30-yr loans, around 4.87% interest.
The 5 rentals should fetch around $1,430 on average for rent each. They will pay for their own mortgages, without much left, so we're mainly looking at the long-term equity gain, which is roughly 7% yearly gain on average (based on the past 50 years, though in the last couple of years, it's been about 20% gain each year, but then again, California is crazy like that).
(To put things in perspective, the houses in the area we want to buy, the average price was around $345k back in 2005~2006, and they're now around $230k, slowly recovering from the crash. Using the same historical average of 7% gain per year, they should be about $39.1k ten years from now. If we just look at the Bay Area, the housing prices are now already back to where they were pre-financial crash, and it only took about three years. Many houses are now getting dozens of buyers competing with cash. Our area isn't that crazy, but we're close enough to ride a little bit of that coattail. Our current house in Placer County went from $255k in 2012 to $355k currently. That's 39% increase in just two years, right after a severe financial crash.)
In ten years, we'll still owe $825k mortage on all six properties (including the one we'll be living in). If we sell off two of them (estimated to be worth around $391k each by then), we can take the $782k and also another $43k from our stock investment to pay off the $825k mortgage we owe on all six properties. So now, two of the six properties are sold and the other four are paid off. One we live in, three are still being rented out. At that point, the total value of all four properties (three rentals and the house we'll live in) should be about $1.564 mil.
The rent from the three properties should be around $1,881 each (estimated for inflation ten years into the future, using the rate of 3% rent raise limit per year as a basic guideline), so that's $5,643k total a month ($67,716 a year), and if we subtract $20k of expenses a year, we'll be left with $47.7k net income a year from the three rentals.
Does the real estate/rental part of our plan look sound? Did we overlook or misjudge anything? We are new to investing in the U.S. (though we've done it abroad for about ten years), so we're learning as we go.