Author Topic: Should I get into rentals? or stay side gig?  (Read 7197 times)

Rmt

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Should I get into rentals? or stay side gig?
« on: April 17, 2015, 09:52:38 AM »
Hi,

Iím considering the possibility of becoming a part-time landlordÖ however, does it make sense for me to get into this type of investing at the expense of having less time to do my side gig which pays $100/hr (after self-employment taxes)? Or should I just do my side gig and put the money in the market?
If itís still better to buy rental property, should I take a mortgage out of my mortgage-free primary residence to buy the rental or get a investment property mortgage?
Thanks!

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Re: Should I get into rentals? or stay side gig?
« Reply #1 on: April 17, 2015, 10:50:09 AM »
Great post.  I have similar questions.  My work is independent, flexible and high hourly wage, but I am always tempted by doing a rental.  For now, it would just make more sense for me to work and save (and then set up rentals later), but I want to start setting myself up for the future, now and get some rentals in place for income.  It is still a ways out for me, but a great question, and one that I ponder often, but never thought to ask advise on. 

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Re: Should I get into rentals? or stay side gig?
« Reply #2 on: April 17, 2015, 10:58:49 AM »
We had a rental property, and we had fabulous tenants.

It was the most incredible headache to ever happen. The house was fine for the years we lived there and seemed to just implode as soon as we moved out- it was nothing but constant repairs.  My husband still has nightmares when he hears the song that was his ringtone the day the basement flooded.

If you have a $100/hr side gig, I'd do that first!

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Re: Should I get into rentals? or stay side gig?
« Reply #3 on: April 17, 2015, 11:03:54 AM »
To clarify - are you wanting to be a property manager in your spare time, or just invest in rentals? If the former, just keep your side-gig, it pays way better. But if the latter, I think you can do both at the same time. Buying a rental takes some time upfront, but then you can hire a PM (for a lot less than you make at your side-gig) and it's 95% hands-off from there. The bulk of the work is in the research and purchase - which is one-time work for years of pay.

As far as the mortgage goes, if I were in your enviable position I would take a HELOC on the primary residence, use the funds to purchase rentals in cash (get a better deal), fix whatever was needed to get the rental into financable condition, then take out a mortgage on the rental and pay back the HELOC. Rinse and repeat as desired.

The house was fine for the years we lived there and seemed to just implode as soon as we moved out- it was nothing but constant repairs.  My husband still has nightmares when he hears the song that was his ringtone the day the basement flooded.

A PM would take care of this. The call you get is "here's the cost" rather than "come fix it now!"

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Re: Should I get into rentals? or stay side gig?
« Reply #4 on: April 17, 2015, 11:05:55 AM »

A PM would take care of this. The call you get is "here's the cost" rather than "come fix it now!"

Not doing the labor ourselves would have eaten most of our profits.  Not to mention having to pay a property manager.

I think a PM makes sense if you have multiple properties, but not just one.

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Re: Should I get into rentals? or stay side gig?
« Reply #5 on: April 17, 2015, 11:10:55 AM »

A PM would take care of this. The call you get is "here's the cost" rather than "come fix it now!"

Not doing the labor ourselves would have eaten most of our profits.  Not to mention having to pay a property manager.

I think a PM makes sense if you have multiple properties, but not just one.

When you purchase an investment property, you have to factor in repairs at market cost (if you choose to do them yourself as a side-gig, great, but you run the calculations as if you'd be paying a professional). If you can't make a profit paying market rates it is not a viable investment property.

We paid PMs when we only had a single property and it was absolutely worth it. It makes sense to self manage if a) the rate you'd pay your PM is more than you make per hour, and b) it is something you enjoy.

waltworks

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Re: Should I get into rentals? or stay side gig?
« Reply #6 on: April 17, 2015, 11:26:05 AM »
Investing is not the same as working. If you have a great side gig, awesome. Keep it. When you *invest*, you can invest in anything you want but it's just using that money you made and putting it to work. So if there is a great rental property you want to buy, awesome. Compare your expected returns to what you'd get in other investments, compare the risks, and pull the trigger (or not).

If you want to manage the property yourself, that's a whole different question because now you're talking about a *job* (one which you can hire out to someone else if you want to). If doing it yourself pays better than your side gig (and you like it), then do it. If not, hire it out.

So, separate questions, really.

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Re: Should I get into rentals? or stay side gig?
« Reply #7 on: April 17, 2015, 11:37:16 AM »
When you purchase an investment property, you have to factor in repairs at market cost (if you choose to do them yourself as a side-gig, great, but you run the calculations as if you'd be paying a professional). If you can't make a profit paying market rates it is not a viable investment property.

We paid PMs when we only had a single property and it was absolutely worth it. It makes sense to self manage if a) the rate you'd pay your PM is more than you make per hour, and b) it is something you enjoy.

Fair enough. Ours was more of an accidental rental property.

We had amazing tenants. I lived in a neighborhood with too many bad tenants to want to do that again. (The property manager of the place next door seemed to be clueless to the amount of damage being done. And he's a highly recommended one in the area... so the idea of a PM worries me too.)

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Re: Should I get into rentals? or stay side gig?
« Reply #8 on: April 17, 2015, 02:55:50 PM »
Getting a rental property and outsourcing the work doesn't preclude the side-gig, if that's making you more money, and may make it worth outsourcing.

I make $100/hr or more being my own property manager (and think of it as a side-gig), but that's separate from the rental investment and cash flow itself, that's a return on labor, not investment.
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Rmt

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Re: Should I get into rentals? or stay side gig?
« Reply #9 on: April 17, 2015, 10:49:28 PM »
Thanks everyone for the responses...

I guess it sort of varies on what the effective hourly pay would be to get into rentals...
I see it as a type of business endeavor so it comes with some risk of losing money... while working the side gig is guaranteed money and its only risk is losing money on the wrong investment.

are your calculations including possible property appreciations or tax benefits for higher W2 income earners (if any)? our w2 is gonna hit around $210K this year + the side gig...

Rmt

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Re: Should I get into rentals? or stay side gig?
« Reply #10 on: April 17, 2015, 10:57:28 PM »
To clarify - are you wanting to be a property manager in your spare time, or just invest in rentals? If the former, just keep your side-gig, it pays way better. But if the latter, I think you can do both at the same time. Buying a rental takes some time upfront, but then you can hire a PM (for a lot less than you make at your side-gig) and it's 95% hands-off from there. The bulk of the work is in the research and purchase - which is one-time work for years of pay.

As far as the mortgage goes, if I were in your enviable position I would take a HELOC on the primary residence, use the funds to purchase rentals in cash (get a better deal), fix whatever was needed to get the rental into financable condition, then take out a mortgage on the rental and pay back the HELOC. Rinse and repeat as desired.

Hi AJ,
Thanks for this tip. I was thinking about this too to get good cash deal. but since I don't think I would be getting several props, i was thinking about difference in rates of owner-occupied mortgage and investment property, and also any tax deduction benefits of having the owner-occupied mortgage.

money_bunny

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Re: Should I get into rentals? or stay side gig?
« Reply #11 on: April 18, 2015, 06:02:04 AM »
I would also want to mention that if you are getting that much an hour to consider looking into some of the Self-Employed IRA / Retirement options to hide away more money from the government until you FIRE. One of them I think maxes out at 52K.

Rmt

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Re: Should I get into rentals? or stay side gig?
« Reply #12 on: April 18, 2015, 07:01:49 PM »
I would also want to mention that if you are getting that much an hour to consider looking into some of the Self-Employed IRA / Retirement options to hide away more money from the government until you FIRE. One of them I think maxes out at 52K.

mb,

have you found a way to stash more? I've found that SEP IRA limits to about 25% of gross... ideally I'd like to contribute 100% of side-gig to an IRA or 401K...

iamlindoro

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Re: Should I get into rentals? or stay side gig?
« Reply #13 on: April 18, 2015, 07:07:57 PM »
I would also want to mention that if you are getting that much an hour to consider looking into some of the Self-Employed IRA / Retirement options to hide away more money from the government until you FIRE. One of them I think maxes out at 52K.

mb,

have you found a way to stash more? I've found that SEP IRA limits to about 25% of gross... ideally I'd like to contribute 100% of side-gig to an IRA or 401K...

Well, I'd like a pony, but we gotta work with what we have!

The best you can do on self employed retirement plans is the Individual 401(k).  That's 18K of employee contribution, and 25% of profits after self employment tax up to 35K more of "employer" contribution, for a total of 53K.  If you're over 50, you can put even more in, and you can have your spouse participate too.  For married couples with very high self employment income this means up to 118K in tax deferrals per year.  Obviously that number requires a very large income and a spouse, but 53K is doable on about 180K of self employment income as a single sole proprietor.  You can make slightly less than that if your business is structures as an S-corp.

Rmt

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Re: Should I get into rentals? or stay side gig?
« Reply #14 on: April 18, 2015, 11:35:32 PM »

Well, I'd like a pony, but we gotta work with what we have!

The best you can do on self employed retirement plans is the Individual 401(k).  That's 18K of employee contribution, and 25% of profits after self employment tax up to 35K more of "employer" contribution, for a total of 53K.  If you're over 50, you can put even more in, and you can have your spouse participate too.  For married couples with very high self employment income this means up to 118K in tax deferrals per year.  Obviously that number requires a very large income and a spouse, but 53K is doable on about 180K of self employment income as a single sole proprietor.  You can make slightly less than that if your business is structures as an S-corp.

Great! I was waiting for someone to explain this individual 401K a little more...
The differences I see are the extra time and costs associated me having to run payroll, do some calculations and file employer taxes, withholdings, etc.
also, I think there's an extra FUTA tax for employer not usually paid in self employment taxes
is that correct?

*update*
I found out there's a employee contribution limit of $18K for ALL the jobs a person has... so I don't think this will work.
« Last Edit: April 19, 2015, 12:09:49 AM by Rmt »

NoNonsenseLandlord

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Re: Should I get into rentals? or stay side gig?
« Reply #15 on: May 03, 2015, 12:32:09 PM »
I handle 25 tenants, and do all my own maintenance and turns.

I also work full time, am an HOA president, property manager for the same Association.  I ran a small lawn/snow business too.

Why is it an either or situation?  Do both.  Unless you can put in unlimited hours at $100.  Of course, rental property is letting your money work for you, not just swapping hours for dollars.

Rmt

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Re: Should I get into rentals? or stay side gig?
« Reply #16 on: May 05, 2015, 12:32:03 AM »

Why is it an either or situation?  Do both.  Unless you can put in unlimited hours at $100.  Of course, rental property is letting your money work for you, not just swapping hours for dollars.

you are right... I want to do both... especially since the side-gig is not so interesting since it's the same type of work as my w2 job.
but I don't know much about how to buy a good rental, especially there are none in my area that passes the 1% rule... so should I look into "turnkey properties" else where?... why would people sell a perfectly good positive cash-flow rental?

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Re: Should I get into rentals? or stay side gig?
« Reply #17 on: May 05, 2015, 06:20:08 AM »
why would people sell a perfectly good positive cash-flow rental?

Because they need cash to do the next deal.  And, they bought the property wholesale, and made a deal happen.

Look for your own wholesale deals.  It will make your $100 per hour seem like a pittance.

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Re: Should I get into rentals? or stay side gig?
« Reply #18 on: May 05, 2015, 07:42:17 AM »

I make $100/hr or more being my own property manager (and think of it as a side-gig), but that's separate from the rental investment and cash flow itself, that's a return on labor, not investment.
Maybe I misunderstood this but how can you manage your own properties as a paid side-gig as well as keeping it separate from the rental investment and cash flow?

If I am to pay myself for doing, say $500 worth of work on my rental property, the logical way to do it would be to transfer that cash from the account that is related to rentals and over to my personal salary account. This would affect the cash flow of the rental investment negatively, hence you can't separate it from the investment. No?

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Re: Should I get into rentals? or stay side gig?
« Reply #19 on: May 05, 2015, 11:10:00 AM »
Why is it an either or situation?  Do both.  Unless you can put in unlimited hours at $100.

Because at some point you have enough money, and would rather have the time.

I wouldn't work for $100/hour now that I'm FIREing, so why would I on my rentals?
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Re: Should I get into rentals? or stay side gig?
« Reply #20 on: May 05, 2015, 11:13:54 AM »

I make $100/hr or more being my own property manager (and think of it as a side-gig), but that's separate from the rental investment and cash flow itself, that's a return on labor, not investment.
Maybe I misunderstood this but how can you manage your own properties as a paid side-gig as well as keeping it separate from the rental investment and cash flow?

If I am to pay myself for doing, say $500 worth of work on my rental property, the logical way to do it would be to transfer that cash from the account that is related to rentals and over to my personal salary account. This would affect the cash flow of the rental investment negatively, hence you can't separate it from the investment. No?

You don't need to actually transfer the money if you don't want, but you should absolutely account for those numbers separately.  If your property made (making up numbers to illustrate a point) $1000 for the year on a $10,000 investment, that's a 10% return.  Now say Dec 31 a $500 repair comes up.

If you pay a handyman, your profit for the year is $500, and you have a 5% return.  If you do it yourself, you still have $1000 in your pocket.  But you didn't get a $10% return--you got a 5% return, and saved $500 on the work by doing it yourself.  That second $500 is a return on LABOR, not capital.  It's silly to say your property returned different amounts based on work you did or did not do on it--that's not the property/investment doing that, but you.

The tax stuff is different (so don't do the following on your taxes), but for internal accounting purposes to calculate profitability, ROI, etc., you should record that $500 expense as a repair, so you can track it, not just pretend it didn't happen because you did the work.
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Re: Should I get into rentals? or stay side gig?
« Reply #21 on: May 05, 2015, 01:16:37 PM »
You don't need to actually transfer the money if you don't want, but you should absolutely account for those numbers separately.  If your property made (making up numbers to illustrate a point) $1000 for the year on a $10,000 investment, that's a 10% return.  Now say Dec 31 a $500 repair comes up.

If you pay a handyman, your profit for the year is $500, and you have a 5% return.  If you do it yourself, you still have $1000 in your pocket.  But you didn't get a $10% return--you got a 5% return, and saved $500 on the work by doing it yourself.  That second $500 is a return on LABOR, not capital.  It's silly to say your property returned different amounts based on work you did or did not do on it--that's not the property/investment doing that, but you.

The tax stuff is different (so don't do the following on your taxes), but for internal accounting purposes to calculate profitability, ROI, etc., you should record that $500 expense as a repair, so you can track it, not just pretend it didn't happen because you did the work.

100% correct.  All you are doing is saving money.  The expense should be accounted for when you buy, but your net goes up with a lower expense.  If you can save $30K a year, by working another 20 hours a month, it's not a bad gig.

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Re: Should I get into rentals? or stay side gig?
« Reply #22 on: May 06, 2015, 02:32:57 AM »
Quote
You don't need to actually transfer the money if you don't want, but you should absolutely account for those numbers separately.  If your property made (making up numbers to illustrate a point) $1000 for the year on a $10,000 investment, that's a 10% return.  Now say Dec 31 a $500 repair comes up.

If you pay a handyman, your profit for the year is $500, and you have a 5% return.  If you do it yourself, you still have $1000 in your pocket.  But you didn't get a $10% return--you got a 5% return, and saved $500 on the work by doing it yourself.  That second $500 is a return on LABOR, not capital.  It's silly to say your property returned different amounts based on work you did or did not do on it--that's not the property/investment doing that, but you.

The tax stuff is different (so don't do the following on your taxes), but for internal accounting purposes to calculate profitability, ROI, etc., you should record that $500 expense as a repair, so you can track it, not just pretend it didn't happen because you did the work.
Ok, now I get what you meant by "return on labour vs return on capital".

Strictly speaking I think one should also consider return on labour when calculating return on stock investments, or are there reasons not to? Most people spend quite some time doing research and managing their investments, just like I spend time working on my rental unit investment.

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Re: Should I get into rentals? or stay side gig?
« Reply #23 on: May 06, 2015, 07:38:11 AM »
Most people spend quite some time doing research and managing their investments, just like I spend time working on my rental unit investment.

Not around here they don't. If you're indexing, at most you might have to rebalance once a year. That *might* take 20 minutes.

-W

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Re: Should I get into rentals? or stay side gig?
« Reply #24 on: May 06, 2015, 08:17:06 AM »
Most people spend quite some time doing research and managing their investments, just like I spend time working on my rental unit investment.

Not around here they don't. If you're indexing, at most you might have to rebalance once a year. That *might* take 20 minutes.

This.  I'm sure I spend way more time analyzing a property purchase--even not counting any management time--than I do an index fund purchase.

I don't count up all the misc. time it takes to manage my properties, I just know that 10% of the gross rents that I keep are due to that time, and count that dollar amount (it's much easier to figure).

On my managed properties, I don't bother counting the time I'm dealing with the management, just like I don't count the time I'm rebalancing index funds.

But one could, and that's fine, I can see why.
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