BiggerPockets

Hi guys,
I am new to this forum and a little new to the industry. My husband and I have been slowly sinking more and more money into rentals over the last 4 yrs. We have been able to purchase a lot with cash, and our most recent purchase has been through a private investor. Overall, we are very cash heavy in real estate with very little mortgages.

It seems a little too easy. Buy a property, minor repairs, rent it and collect an income.

I am aware of nighmare variables that can arise, nothing catastrophic has happened to us yet.

My questions is...out of all our friends, my husband and I are the only ones doing this. We are the only people we know buying and renting. We know only a handful of people in Real Estate at all (agents, contractors, ect).

Do they know something we (I) dont know?

I'm in my early 30's, and my parents generation did very very well. My parents held onto their 1st condo for 35 yrs and just sold it for a $300k profit from initial purchase price. They rented it for 25 yrs and I figure they probably brought in $275k in rental income over the years that they had it. That is about half a million dollars produced from a condo.

Would I be setting myself up for a situation like that buying and holding too?

The people around me are just not interested. They are afraid of the market, or say they could never be a landlord.

Is Real Estate something some people have a knack for (an interest in), while others just dont have that interest? Does the financial committment weed out a lot of people from getting into the business? Or do people get more interested as they get older?

Or does everyone know something I dont know?

My husband lost his job and wants to make rentals and a few flips a year his career. I am tempted to go that route myself. But I am holding back due to my inexperience. I dont know what I dont know. And right now I'm trying to see the downside to this.

Asking a bunch of people who are in real estate might not be where I find a cautionary tale, but I dont know anyone else in real estate!

Molly, I have a similar situation where my close network of friends also want nothing to do with real estate investment for a myriad of reasons. I'm the lone investor in my group charging ahead with buying rentals. I still have a full-time job, but I'm getting extremely close to having the ability to support my family from rental income and other related investments if I lost my job.

I tend not to talk about RE investment with friends not in the business, but recently one of my friends did ask me why I put so much at risk buying rentals. He said it definitely wasn't for him. The funny thing was that this friend recently purchased a new truck for $40K. In 3 years that truck will have a value of about $18K. It's a mindset that some people will never have or get. Maybe they didn't have a mentor at a younger age to teach them cash-flow, or maybe the RE bubble scared them. Who knows, but it all makes sense to me, and over the past 6 years of buying rental property I haven't regretted any of my purchases. My only regret is that I didn't get started at a younger age.

We have not had any catastrophic events happen either, other than one or two bad tenants that have cost us a few thousand in repairs/rent, but these are lessons learned and were completed expected to happen at one point in this business.

Good luck, and I wouldn't let the lack of interest of your friends question your strategy and long term goals. Mitigate your risk by purchasing smartly and incorporating solid layers of protection from catastrophic and liability events and you will be fine.

Historically, real estate has been a steady investment. No dramatic improvements, other than this stupid recent bubble, but no drastic losses, either. You have to be somewhat careful that you're not buying in an area that's vulnerable to some macro change that kills your value. Had someone bought a bunch of houses 20 years ago in Detroit and was still holding them today, they would have lost a lot of money.

One way to avoid that is to diverisify geographically. That has other challenges, though.

Realize that fix and flips are much more of a business than rentals. The amount of labor required, either your own or hired, is much higher than with rentals. But the returns can be much higher, too.

Now, in this, you've fallen into a common fallacy

My parents held onto their 1st condo for 35 yrs and just sold it for a $300k profit from initial purchase price. They rented it for 25 yrs and I figure they probably brought in $275k in rental income over the years that they had it. That is about half a million dollars produced from a condo.

You've looked only at the income side and completely neglected the costs. Over that same term they would have paid interest, taxes, insurance, maintenance, HOA fees, and who knows what else. I'm sure they did some significant updates. You don't buy a property, then sell it unchanged 35 years later. Not impossible, but I'd suspect they redid kitchens and baths, painted numerous times, replaced carpets and the like. Over the course of 35 years, a SFR would require new a new roof (if not two), new furnace and AC, and may have required other major improvements. In my neighborhood of 1940's ranches we have all either replaced our sewer lines at a cost of several grand or its a coming expense. That works a little differently for a condo, but all those same expenses occur and go into the HOA fees and special assessments. And they would have had significant costs for buying and selling, though I think you've accounted for the selling side in what you wrote.

If they bought for $50K and sold after 35 years for $385K (netting $300K after costs and the initial investment), the property had an annual appreciation of about 6%. That's actually quite good. If they bought for $200K and sold for $550K their appreciation was about 3%, which is more typical. OTOH, if they sold in the mid 2000's at the height of the bubble, they wisely took advantage of that situation. Unlikely any of us will get to play that game again.

Don't fall into this "if you could buy your parent's house..." line of hooie. For many folks, who have limited savings, owning a house is a forced savings plan. Assuming they pay it off and don't "pre-sell" it by repeated re-fi's and HELOCs, they end up with a big asset. But the price they pay for that asset is frequently close to the value of the asset.

If you've managed to accumulate rentals with a lot of cash and minimal mortgages, you're done well in general with your money. I suspect a lot of the folks you know aren't in that same position. Despite claims of no-money down investing, you really need some cash to invest in RE (or stocks, bonds or bank CDs). That holds back many folks.

Has anyone a link where soemone has comaperd all of this against the backdrop of monthly payments. I could do it but if someone has a link it would be great.

Also would be interesting to see Median housing charts for areas, even the US, based on payments, not price, giving us an idea the true long term gains/losses on housing relative to affordability.

Also, if Jon is saying 3%, how is that compared to inflation?

I think that Real Estate is a very easy thing to do. However, it is very difficult to do effectively. I have one or two friends and relatives that invested in either the wrong area or they were terrible at selecting tenants so they got in and out very quickly. I quote, "buying rental property is like buying a boat, the happiest day is when you buy and the next happiest day is when you sell". I think all it takes for a ho-hum investor to hear one or two of these stories to decide not to take the risk. Not only that, I don't think everyone knows or cares to know the true benefits that a portfolio of rental homes can deliver.

Molly, I'm in a very similar boat. With the exception of one of my friends, just about everybody thought I was nuts for buying into rental properties. It seems like the first reaction people have when they hear I invest in RE is "in this market, you're crazy." But the truth of the matter is that this is probably the best circumstances to buy into. The market is bottoming out and interest rates can't get any lower.

RE is one of the few investments that is a basic tangible necessity. People can live without stocks, gold, silver, oil, etc. Shelter is one of the few things that will always be in demand regardless of what happens to the economy or the world.

I think the biggest problem people have with real estate is the fear of the unknown. Not necessarily with the income or profits, but with the tenants and disasters (leaks, fires, etc). As long as you plan for these things and have a reserve set up, you shouldn't have to worry.

Thank you everyone! I do feel better hearing the stories of older investors who have no regrets, and younger investors who also get reactions calling RE investing "crazy".

I think for me, it is to stay a little diversified (dont put everything into RE), go slow (1 or 2 deals a year), and have multiple income streams.

My husband calls me "cautious" all the time, but I try to overcompensate for his blind enthusiasm. We are doing well right now. I just dont know whats around the RE corner.

Though it is very exciting and fun!

Molly, welcome to the BP site. You are correct that you will not get unbiased responses to your questions. But you will get honest answers, pros and cons. It's interesting that you and your husband work together on your REI but have different levels of risk. That is the beauty of a good marriage. You balance each other out. I am in the same position with my wife. I want to be more aggressive with our investments while my wife wants us to be more conservative. We've been married long enough to see that when we discuss our decisions with each other, we usually make wiser decisions.

I too am the only RE investor in my social circles. Most people I know are not open minded enough to see the opportunities or have the drive to learn.

I see you list yourself as a property manager. Between this and your REI experience, you and your husband are set to be successful in your REI journey, as long as the two of you agree and work together.

Albert, I lived in FL during the boom and got out of there after the bust. I have heard AZ, MI, CA are in the same state of huge declines in property value and mass exiting from the states. Your warning of how you bought in AZ and how you have seen so many people around you failing is a sobering thought. When I go to FL it's a completely different world than it was 5 yrs ago. This is a gental reminder that yes, I do need to go into work tomorrow. GA could be next.

Jon Holdman that was a good chart on median prices relative to inflation. What would an overlay of monthly payments, or even inflation adjusted monthly payments look like?

For example,

shows that even though, say a market has houses at 2002 levels, it may in fact be that your market has gone beyond that on the basis of affordability by 15%. I have looked for such a chart. I think it would help in understanding markets.