Author Topic: RE degree of passivity and corresponding ROI  (Read 3223 times)

Hubbard521

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RE degree of passivity and corresponding ROI
« on: May 16, 2014, 12:40:53 PM »
I currently own one property, it's a 5-unit in Chicago.  I jumped in head first and purchased it last summer.  Yes, it cash flows very well, but it takes up a ton of my precious free time and is quite exhausting at times.

I had been building up a pile of cash that I had planned to use for another building something this spring / early summer, but I'm not really sure if that's the right choice for me.  I'm starting to realize that I'm spread too thin between my day job, my passion of performing music several nights a week, a girlfriend, and this building that unexpectedly consumes large chunks of time.  I canít see myself happily devoting MORE time to RE.

I know that many of you (Arebelspy) outsource varying degrees of your RE investments and I was wondering some of your strategies.  I'm currently doing almost all the work myself and have only outsourced a plumber for a burst pipe and a carpenter for a small job.

What degree of passivity/outsourcing do you have for your RE investments and what sort of returns are you receiving?

arebelspy

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Re: RE degree of passivity and corresponding ROI
« Reply #1 on: May 16, 2014, 12:49:28 PM »
I assume 100% outsourced work when I run my numbers, and then if I do any of the work it's not an additional return on capital, it's payment for my labor.

For example, let's say I would net 6k annually from a certain property if it was managed for me, which works out to a 12% return.  Then I manage it myself, and save myself 1200 bucks.  My return doesn't suddenly shoot up to 7200 net, and a 14.4% return.  My return on capital (i.e. the investment return) is still 12% (6k), and the return on my labor is $1200.

Some day I may not want to do work myself, so if and when the stuff I do is outsourced, my return shouldn't drop (the house isn't making less money, or having more expenses now), I just no longer have a side gig of paying that expense to myself instead of a property manager.

That being clarified,  I shoot for double digit returns with outsourcing everything (all maintenance, management, etc).  There is still of course some work of managing the manager in those circumstances.

Real estate takes me a few hours a month during the busy months, counting managing a half dozen myself, and having more managed for me elsewhere.

I also have paper real estate assets (i.e. notes - where I am the bank and hold the mortgage).  These are a lower return than my rentals, but WAY more passive.

It's the route I would take if I knew nothing about real estate - lend it to a smart investor who does, and collect paychecks from them.

You should be able to get a solid 8% return at least with very little work and lots of security (secured by a property).

tl;dr - Plan on outsourcing everything, get an investment that supports that with a good return still, then pick and choose what you want to do as an additional side-gig.
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 two 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.

Hubbard521

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Re: RE degree of passivity and corresponding ROI
« Reply #2 on: May 16, 2014, 01:33:18 PM »
Thank you for your response.

I know that you have several buildings.  Since youíre currently doing most of the work yourself, how much time do you find yourself investing into your properties?  I have a 5-unit building and in the one year since Iíve purchased it Iíve had a burst pipe, 2 replaced sinks, clogged drains, a broken closet rod, someone damaged the front door knob, occasional hounding of tenants for late rent, broken tiles in the bathroom, and a number of other issues that I dread popping up and stealing my precious free time.  Is this an unusual amount of labor required for 5 units?  If not, I certainly need to outsource my next property in its entirety.

How thoroughly did you research the properties you have outsourced out of state?  Did you purchase through a turnkey company or actively scour the local market yourself?

I'm also curious, how did you first go about finding people to lend to?  I occasionally see posts on BP for people looking for money lenders.  Iíve done a bit of reading into liens but havenít thoroughly investigated notes.

Hugh H

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Re: RE degree of passivity and corresponding ROI
« Reply #3 on: May 16, 2014, 05:26:07 PM »
Turbo Tax told me I can discount everything I pay out to people managing/working/advertising my rental property.

arebelspy

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Re: RE degree of passivity and corresponding ROI
« Reply #4 on: May 16, 2014, 05:46:40 PM »
I know that you have several buildings.  Since youíre currently doing most of the work yourself, how much time do you find yourself investing into your properties?  I have a 5-unit building and in the one year since Iíve purchased it Iíve had a burst pipe, 2 replaced sinks, clogged drains, a broken closet rod, someone damaged the front door knob, occasional hounding of tenants for late rent, broken tiles in the bathroom, and a number of other issues that I dread popping up and stealing my precious free time.  Is this an unusual amount of labor required for 5 units?  If not, I certainly need to outsource my next property in its entirety.

I don't do any labor myself.  I manage the property, which means I screen tenants, and I call a handyman, plumber, electrician, etc. when something breaks.

My management consists of: Get a text from tenant that the fridge broke.  Text handyman the issue and phone number of the tenant so they can set up a time between them to do the repair.  Get a text when it's completed.  Total time: 10 minutes, if that.

I'll eventually pass it off, but right now it pays about $100/hour to deal with minor stuff like that.

I don't do any work myself.

Those sort of issues and if they're abnormal or not will depend on a few things, primarily the age of the building and its deferred maintenance, as well as the tenant quality.

My properties are newer and my tenants are good.  My maintenance issues are rare.  (My out of state ones are lower on both of those factors, and have more maintenance.  Luckily I don't deal with that.)

How thoroughly did you research the properties you have outsourced out of state?  Did you purchase through a turnkey company or actively scour the local market yourself?

Quite thoroughly.  No, not through a company.  Started watching the MLS through daily Realtor emails for my criteria, then getting potential ones checked out.

I'm also curious, how did you first go about finding people to lend to?  I occasionally see posts on BP for people looking for money lenders.  Iíve done a bit of reading into liens but havenít thoroughly investigated notes.

Vet the people and the project.  If they're active in real estate, make sure they know what they're doing.  Find them through networking, basically.
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 two 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.

SDREMNGR

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Re: RE degree of passivity and corresponding ROI
« Reply #5 on: May 16, 2014, 06:52:48 PM »
Find a good handyman.  Just go through Yelp or Angie's list and try out various guys and keep 2 or 3 of the ones that you like the best.  It'll make management relatively doable.

I own a property management company with almost 200 properties and a staff of 5.  So we outsource all maintenance issues to a stable of professionals.  I outsource the repairs on my personal properties as well as my family's (unless it's super easy and I can do it at an inspection).  I wouldn't be able to leverage our management otherwise.

arebelspy

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Re: RE degree of passivity and corresponding ROI
« Reply #6 on: May 16, 2014, 08:16:13 PM »
I own a property management company with almost 200 properties and a staff of 5.  So we outsource all maintenance issues to a stable of professionals.  I outsource the repairs on my personal properties as well as my family's (unless it's super easy and I can do it at an inspection).  I wouldn't be able to leverage our management otherwise.

How are they paid and treated tax-wise?
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 two 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.

SDREMNGR

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Re: RE degree of passivity and corresponding ROI
« Reply #7 on: May 16, 2014, 10:57:08 PM »
The vendors?  They are paid by check and 1099ed for those paid above $600, which most are.

All properties (even mine) are treated as investment properties.  Even though they belong to me, it's managed by a separate entity that is a professional management company.

Hubbard521

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Re: RE degree of passivity and corresponding ROI
« Reply #8 on: May 17, 2014, 02:20:02 PM »
I greatly appreciate the responses. Thank you.

The bottom line is that I need to find a good handyman.  I've been meaning to for a while.  The experience I've gained in the first year, fixing everything myself, has been invaluable.  Now it's time to outsource, expand, and go about living my life!

arebelspy

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Re: RE degree of passivity and corresponding ROI
« Reply #9 on: May 17, 2014, 04:41:29 PM »
I greatly appreciate the responses. Thank you.

The bottom line is that I need to find a good handyman.  I've been meaning to for a while.  The experience I've gained in the first year, fixing everything myself, has been invaluable.  Now it's time to outsource, expand, and go about living my life!

Absolutely!  :D

(It is easier said than done though, generally.  It's a scenario of: inexpensive, quality work, reliable... pick two.)
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 two 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.