I've appreciated this thread a lot. Most of the time I've thought about buying rentals, I just can't help but think that the added return just isn't worth the work. Especially for the prices that most real estate is at now.
However, I have thought that maybe I would strategically like to own a rental or two in areas that I would enjoy living at. (Something either like a 6 months on; 6 months off kind of deal). At least that way I could consider the work/ smaller return I get on the property more of a luxury rather than trying to find a property that is a 100% investment purpose.
Every time I think about buying rental property, I just can't overcome the additional labor and risk. Then again, I'm more of the MMM route of making a good salary where I'll be FIRE at around 9 years of total work with no need to be a property manager afterwards. Perhaps I could've done it faster if I played my cards better or didn't make a dumb investment or two early on. But all-in-all I can't complain to only being done after 10 years.
I think your post regarding lifestyle is a huge consideration. Yes, for VTSAX, it's all about the numbers. However, for rentals there are many other things to consider besides return. These rentals have the opportunity to positively and/or negatively impact your life beyond the returns and those things should be considered and weighted. Below are some pros and cons.
One, I really enjoyed live-in flips that that were slow (6 months) and mostly cosmetic. I like the convenience of working on your own house. You don't have to travel anywhere. Additionally, for a live-in flip, I would not enjoy living in a construction zone. Full disclosure, for the Kauai house, I did gut the basement mother in law suite down to the studs. It was a construction zone. However, this was completely separate from our living space, so it didn't negatively influence our lifestyle, in my opinion.
Two, when you live in the house for 1-4 years and then convert it to a rental, you fix as much as possible before it becomes a rental. If you fix everything, repairs are going to be very minimal for the next 5-10 years as a rental. You get rentals with less headaches, in my opinion.
Three, I fly to Florida twice a year to see my parents. On each trip, I typically do 1-2 days of landscaping and updates, 4 hours each day. I think the winter trip typically has more value than the summer trip. Both are fun, but we really enjoy getting a few days of warm weather in December/January, now that we are back in Colorado full-time.
Four, I fly to Kauai 2-3 times a year to surf with my friends. I typically do 3 days of landscaping and updates, 4 hours each day.
Five, I drive to Fort Collins, CO about 3-4 times a year for repairs and updates. The house was built in 1967. Based on it's age, it does have more stuff that breaks. However, the juice has always been worth the squeeze. The rental demand for this house is off the charts. It's about half a mile from Colorado State University (35,000 students). Small homes on big lots are getting demolished and replaced with apartments. Single family homes near campus get premium rent because of high demand and low supply. It's a 3 hour drive from my house, but only 45 minutes from additional family, so I plan my trips to Fort Collins when we are visiting family. It is very common for my wife and son to join me in Fort Collins after I'm done at the house. We typically go to a park and then a brewery. My son took his first steps in the grass at New Belgium Brewery in Fort Collins, CO on a perfect summer afternoon after I got done with some minor repairs at the rental house. It was one of the best days of my life and it included 2-3 hours of work at a rental.
I purchased a primary home in June 2018 for 603K. I put in 50K of repairs and 7K of furniture. My mortgage is $2675/month with a rate of 4.5%. It's now a rental that gets $4450/month in rent. After GE tax ($180), utilities ($120), vacancy ($225) and repairs ($250) I get around $1,000/month of cash flow. I do get $700/month in principal pay down, but this deal is still very short of the 1% rule. Most people would tell me that this rental sucks, right?
Rent: $4450
Mortgage: $2675
Expenses: $775
Cashflow: $1000/month
Down payment (20% of $603k): $120,600
Closing costs: $5,000
Improvements: $57,000
Cash invested: $182,600
Cash on cash return: 6.5%
Rent: $6700 (1% rule)
Mortgage: $2675
Expenses: $775
Cashflow: $3,250
Down payment (20% of $603k): $120,600
Closing costs: $5,000
Improvements: $57,000
Cash invested: $182,600
Cash on cash return: 21%
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This is really helpful. I was really struggling with the math. Thank you for providing. This definitely solves everything.
Clarkfan, I appreciate your response. I really do. We do seem to be going in circles.
The cash out refinances definitely helps explain why your cashflow is lower. With that new information. I would say you have done a fine job.
1. Obviously I'm asking about stocks because having 100% of your net worth in real estate would be concerning to me.
2. All we are saying is that if you would have bought another home in Florida or Colorado or even Kauai that was closer to the 1% rule, you would have had the same exact appreciation, but with higher cashflow. You seem to think that the homes you purchased were somehow magical and the best possible ones. No, all they have in common is that they appreciated (but so did every single other home in those areas) and you were able to cash out refi. This will not continue forever.
3. You keep refusing to answer what your end goal is and this is big imo. Appreciation on paper is a nice psychological boost, but if you aren't going to sell, then it means nothing. All that matters is cashflow. Curious, are you looking to buy more?
4. And yes, I believe like arebelspy, there are others who stocked up during the downturn with 1%+ homes that now cashflow 10K plus.
1. Yes, stocks matter to overall portfolio, but I don't think they are relevant when comparing different types of real estate.
2. No one is perfect and you can always do better. About 5 years ago, I looked at the comps for my Fort Collins house based on tax records. I bought at 182K. Out of 50-100 sales, I only found one other person who bought lower than me and it was at 177K. I'm pretty confident that I bought in the top 10% of best deals. Yes, I could have maybe gotten a tiny bit closer to a 1% deal, but I was still pretty far away from 1% deal because my 182K house only rented for $1300/month at the time. A 1% deal for a single family home hasn't existed in that neighborhood for 20 years. There were times were you could get close to a 1% deal with a condo/apartment in that neighborhood. However, those have appreciated less and with HOA fees, it kills your cash flow.
To get to the 1% rule, you would have to go to a different neighborhood and those neighborhoods have less appreciation. I agree that the neighborhood appreciated the same. I can actually buy 1% rentals today in my home county (Pueblo County). I can buy something with 60-70K cash, put in 10-20K worth of work and rent for 700-900/month. However, these homes do not appreciate because they are in high crime areas with bad schools. This would be a major hit to my lifestyle.
One more thing regarding my Fort Collins house that is relevant. My lot size is 12,007 sq. ft. You can subdivide the lot at 12,000 sq. ft. Only about 5% of the lots in that neighborhood are greater than 12,000 sq. ft. In about 10-15 years I am going to knock down the house and build two. I'm not sure how you calculate that in your numbers, but I think it's relevant.
3. I avoided answering many questions on this thread because I thought we were going into circles. I thought it was better to try to stay focused on one debate at a time. I am probably not going to do a good job of answering your question, but this is my best attempt. In 2007, my original plan for an "end goal" was 4 rentals at 250K each that each cash flowed $500/month. I would use the money for retirement and international travel. I was going to buy one rental every 7 years with cash flow and be done by age 50. Due to larger appreciation and lower interest rates, I deviated from the plan and did cash-out re-fi's. I got to my goal of 4 rentals and $2000/month of cash flow about 10 years earlier than I thought. Technically, I have achieved my end goal. I pretty much have my perfect life and I am not looking for any major changes. The only thing I am lusting after right now is getting a vacation rental in the mountains. I love to snowboard and I think a vacation rental near Breckenridge would be fun. However, I am not willing to accept headaches. As a result, I will probably be super conservative and wait until I have more than enough money to pull it off.
4. Yes, arebelspy just said he put 300K of his W2 income into his rentals. My original investment was 50K. It would make sense for his cash flow to be higher because he allocated 6 times as much capital.
I'm sure many of you make more money than us at your W2 jobs and would prefer to put it into VTSAX. This probably makes rentals less appealing to you. However, I make 52K /year and my wife makes 13K/year, so our combined W2 income is 65K/year. I am not complaining. When you add the rentals (cash flow, appreciation, principle pay down and tax advantages), we have more than enough. I am just saying that this makes more sense for us. We also have the time to do it. I work 1,100 hours/year and my wife works 780 hours/year.
I will admit that the 1% rule has it's place. Looking back, I could have done a better job of acknowledging it's value before I attacked it. However, I personally think we put too much emphasis on it at times and that is why I am pushing back. It's relevant, but it's not the only way. I don't want to guide newbies into bad neighbors to achieve the 1% rule. Is that really the end goal? Yes, some people might do very well with bad neighborhoods. I could see that being a niche. However, you would have to have some major systems in place to deal with the problems that come up.