35 Yrs Old Building a Rental Portfolio - Overcoming Doubt

39 Replies

Had breakfast with a close friend of mine this morning and I explained that my goal was to eventually have minimum of $5,000 month coming in (after taxes) from rentals in low income / working class neighborhoods.  And I have ZERO today and recently got married. 

His response:

1. You will have a hard time doing that given you'll soon have a family and kids.

2. You have significant student loan debt so don't do anything silly

3. Make sure you really know what you're doing and the tradeoffs for doing that vs the stock market.  (Note: he is very very experienced in investing in stocks, works for a hedge fund)

Left the breakfast meeting feeling a bit deflated...but where there is a will ..there is a way. He made some very valid points.  Now my quest is to find a MENTOR who has done this..

I don't have a mentor for you, but I do have another way for you to look at this.

To get $5,000 / month net, you basically need $6,000 / month gross or $72,000 year of gross profits.

Using a buy and hold strategy, I've found that I can get 7% yield on my unlevered real estate investments in single family homes.  This will be area dependent, but 7% seems consistent with what large institutional investors are targeting too so I'm comfortable with that assumption.

So then the question becomes, how long will it take you to own about $1 million of real estate free and clear?

Maximize the difference between your income and expenses, invest your savings and assume you can grow it at 7%.  How long will it take you to hit $1 million?  It's simple math that will let you see what's necessary and if it's possible.

Buy and hold is just one approach (the one I'm using) and I'm sure others will point out other ways of getting a higher return than 7%.  But I think you can use 7% as a conservative and realistic return.

I celebrated the 6th anniversary of my 29th birthday back in May... have a wife and 4 kids... about $200k in student loan debt... and own 4 multifamily properties (well, the bank might have a say in that "own" word).

The stock market versus real estate question doesn't have a right answer, the question is what works for you.  My view on it?  I don't understand the stock market.  Factors I can't see, touch, taste, or control cause wild oscillations in the market that are completely irrational.  As such, it feels a bit like gambling to me.  Real estate?  Hey, everyone needs a place to live.  Location is fixed.  They aren't building any more land.  It has real intrinsic value that I can understand, estimate, and evaluate.  I go with what makes sense to me, in my brain.

Just like stocks, the sooner you get into real estate the better... especially as a buy and hold investor.  Even a property that you rent that just breaks even for the 30 years you've mortgaged it results in a property you own free and clear in 30 years at which point it most certainly cash flows.  There's inflation every year, we all feel it.  Much like the mortgage on your primary home feeling smaller and smaller each year as your salary rises... those rental mortgages feel smaller and smaller as rents increase over the years.  Lastly, interest rates remain at historic lows.  There has never been a better time to leverage into the market.  Who knows when that will end... but once it has passed, it will be unfortunate.

Just my thoughts... there's a lot of 55 year olds here wishing they started at 35... lots of 35 year olds wishing they started at 22.

Hi @Lafontant Cherilus  ,

First of all, don't surround yourself with naysayers and negativity.  They will only tell you about the problems, you need to focus on the solutions.  Now for your specific points:

1.  Family and children:  All the more reason and motivation for you to pursue your dreams.  Anybody that says you can't do something because you have a family has a warped view on life in my option.

2. Student loans: Again, all the more reason and motivation for you. REI can be a solution to this problem, it depends on your mindset.

3. REI vs. Stocks: Do enough reading and studying on the topic and you will find this answer. My view is that diversification is great, so try and invest in both. However based on my research, I would choose RE if I had to choose just one.

My best advice for you is to draft a business plan around your REI goals. If you can draft a business plan seriously and accurately you will find 99% of your questions get answered. Maybe your plan is a home-run, maybe the numbers don't work out, but you owe it to yourself to find out.

Good luck and happy investing,

Mike

My loans are all amortized over 30 years... one is a low fixed rate the other is variable and something I'm targeting to pay off over the next 4 years.  I think the fixed one is on a ramp too minimizing the payments now and growing every 2 years.

I also have a solid 6 figure salary.

And I worked with a local credit union versus a bank which makes the rules a bit different. They were more willing to take into account the proposed income from the properties and were actually showing my DTI improving with each property I purchased.

Lafontant, 

Never give up hope.  Start small and grow to reach your $5,000/month goal.  The earlier you start investing, then better.  Being a real estate investor is a big commitment, so if you do get involved, then realize that it is a career.  

If I were you I would pay off my student debt as soon as possible - whatever makes sense for you.  This will improve your credit and increase the amount banks will let you borrow for real estate investing.  Most lenders require 25% down payment for investment real estate, which is a significant amount of cash.  There are other options available to you though. 

Are you set on buying in low income/working class neighborhoods?  Do you want to do this because properties are cheaper in these types of neighborhoods?  I would recommend buying a primary residence in a better neighborhood that you are comfortable living in.  If you can afford to buy a multifamily or a duplex then that may be best.  When you buy a primary residence, then the lending requirements change - if you are a first time home buyer then you may quality for 3.5% down payment, but most lenders will require between 5-15% down payment.  This allows you to purchase a lot more real estate with much less cash down.  Also, the reason why I suggested multifamily or duplex, is so that you can live in half of the property, and rent out the other half.  This will cut your mortgage payment down a lot.  Furthermore, even if these types of property are above your budget, the lender will include the anticipated rental income you will get into their guidelines for lending, so you may very well qualify for a much more expensive property than you thought.  

Of course all of the advice above assumes that you are financially responsible and are good with how you spend money.  I understand your friend's concern about adding debt to your student debt.  

I have experience with investing in stocks and real estate.  I definitely like real estate a lot more because you have something tangible and can manipulate so many factors such as what you charge for rent, how you can improve the property, how to market the property, etc. You have much less freedom with stocks and I personally think stocks are much riskier.  Agree with Michael Germinario about diversification.  

Jay

Lafontant,

I would recommend avoiding low income areas given your situation.  I would not want to be juggling low income properties if I had a young family.  I would also recommend reading Buy and Hold Forever by Schumaker for an interesting perspective.

Your post led to my husband and I having some interesting dinner conversation, thanks for that.  When we were starting our family, we didn't notice the expenses.  We are noticing them now as they are in high school and gearing up for college.  Our situation is a bit unique, though, we made drastic changes when our kids were born to move to a low cost area and live on one income.  Luckily the income grew as expenses grew, so we didn't feel strapped.  Not sure what your income potential is or how much you will need to fork over for daycare, a big expense.

If I had things to do over again, though, I really would have wanted to buy as many properties as I could before the kids were age two or so.  If we had bought a few properties in solid neighborhoods that were slightly cash flowing, we would have the 15 year mortgages paid off right about now and we would have significant cash flow to fund the added expenses we are now noticing.

Leverage as much as you can and buy as nice as you can and it will pay off in the long run.

I really like the advice given on this thread so far!  @Nathan Emmert  ,is spot on: once people finally get comfortable with real estate, which doesn't take too long mind you, they all wish they had started sooner!  Even the ones who had major obsticles/mistakes.  It is truely an incredible way to build wealth.  Additionally, @Michael Germinario stated, diversification can be a good thing when considering REI vs. stocks. I do both as well, and I've like the results. I wish you luck. The worst thing you can do is let naysayers get you down. Keep your head up. All you have to do is take one step at a time, and before you know it, you'll be right where you want to be!

Thank You All. Michele to answer your question

Having grown up in a low income/working class community (Newark NJ / Irvington NJ). I know first hand how the neighborhood has changed. I also know that despite the stereo types , there are plenty of hardworking people who would like a safe neighborhood to raise their children but can not afford the rich suburbs that people in my financial situation can afford. I went to Wharton to get my MBA seeking to make a change in this world while also earning money. 

So I've committed myself to finding a way that I can invest in quality working class neighborhoods...be an active investor, build up the community, neighborhood association so that working class families can find a decent place to live. These families do not qualify for section (8) / public assistance but they deserve someplace to live 

And if the widening gap / disappearing middle class is any indicator...all of us on Bigger Pockets could leverage our talents to provide quality housing to the disappearing middle class as in the years to come they may go to working class. 

@Michele Fischer  I'm exactly in that position you are looking back on.  My twins are two, and I refinanced two rental properties when they were babies, one into a 15 year and another in a 20 so that they will be paid off when the girls are in college.  I have two other properties, one is already paid off, and the other has about four years left.  They bring in a total of $5550 right now, so once they are all paid for, I should have a decent amount of additional cash flow to fund college, weddings, down payments for their homes, retirement, etc.

Medium buysellinvest.2Dawn Brenengen, Trailwood Realty, LLC | 919‑840‑8692 | http://www.trailwoodrealty.com | Podcast Guest on Show #101

If  you find the right model, you can build that income. 

I started out with a 43k HELOC. Thats all I had. I bought 3 rentals a year for roughly 6 or 7 years. Then the stars aligned right around November of 2013 and I've been able to buy 13 houses in the last 13 months.

I now have 32 rental properties. And I am easily over that 5k number. No flipping. I did cash out 53k of my 401k last year to help me get these 13 homes this year.  But ultimately you just have to start small and continue to work at it.

When it comes to investing there is one rule I liked to follow - slow and steady wins the race. At some point, once you've kept at that pace you're comfortable at (1 a year, 2 a year, etc), you'll reach a point with lenders, contractors, and yourself that you'll be so locked in to your system that you'll be able to grow to any goal you set.

The keys are:

1) Set your goal and stick to it. You'll be shocked at how fast your portfolio grows in 5 or 6 years when you stick with a modest goal.
2) Learn as much as you can.
3) Protect your credit like its the most important thing on the planet - because it is.

As someone who has surpassed that cash flow number after 15 years since starting out I have two pieces of advice for you:

1) don't buy junkers if you plan on retiring on their backs - they will not appreciate in price or rent compared to desirable places. Instead by near new construction so that you won't get hit with heaps of maintenance when you are retired on them

2) RE is a get rich slow scheme

Hi I agree don't listen to the naysayer. If this is your goal dream and passion go for it
You can reach out to me I can help you with the mentoring thanks

Medium logoAnthony Crecco, The Crecco Companies | [email protected] | 914‑861‑3535 | http://www.TheCreccoCompanies.com

Lafontant, investing in working class areas that have some upside potential for revitalization or some sort of increase in neighborhood desirability is a solid plan.  I admire your desire to add social responsibility to your investing goals.  Landlords do play a role in making the world a better place and providing housing to all income groups.  We work to provide affordable housing to low income as an alternative to slumlords.  My point was that if you cater to the lower ends of the spectrum, you will be spending more time and money than your desired lifestyle supports.  So think solid working class, not barely getting by working class.

That's a good point @Michele Fischer  . I agree. Solid Working Class. Basically I'm targeting individuals that may not earn a LOT of money, but they have stable jobs and are looking for quality housing for their families. 

@Anthony Crecco  - I will definitely take you up on your offer!

@Lafontant Cherilus  

My wife has school loans, for us, rental property will throw off enough profit when self managed to cover her debt payments.  The 20-25% down payment on a home is way less than her school loans so even though we have a debt with interest, it can be offset and we wouldn't be able to make that investment without continuing to carry the debt vs paying it down.  It would take more cash to make the same money consistently in the stock market and it would be a much steeper learning curve (for me) to really know what I'm doing.  At the end, we have an asset vs a zero balance on an old loan.

Having a wife and kids is a great motivator. Married couples with or without children on average have higher individual income average than singles http://www.familyfacts.org.... I think extra motivation is a reason.

For me, the moment we found out we were having a kid my motivation to invest went way up.  We make enough money to be fine with kids but it made me remember that I want to be more than fine and I want my kids to be able to learn from my success rather than failure or mediocrity.  

I have close family that looks at landlords as slumlords unless the properties are high end and perfect.... what I do is worse th.  So I just don't talk to them about it and I continue with my plan because it works.  You don't need to second guess yourself just because it's not how somebody else makes there money.

Thanks Tim! You're absolutely right!  This morning I was practicing my visioneering exercise (where after reading, or prayer.. I then begin this process of visioning a goal and releasing it).  I wrote my wife a "short story" while she slept, detailing our future (kids, real estate business, barbershop/mentoring center , health/fitness) and the impact we'll have on our future children and the community as a whole.  I'll keep pressing on! Inch by inch! 

     If you were to purchase a $500k property with $5k in rent (or combo of properties), that broke even on a 15 year loan with all costs in included, you'd own the property outright in 15 years.  

    Assuming 4% annual rent increases, you'd be clearing $8,658 per month in rent in 15 years.  With no mortgage payment in at that time, you'd likely be clearing something like $5k per month in profit.

  

John D., Palm Vacation Rentals | [email protected] | 4155195039

Can anyone give me an example of a property that they bought for $500k (or today's equivalent) that is now getting $5000+/month in rent. You make it sound easy. I'd love to see one or two examples of such a property.

     A $500k property that gets $5k in rent, is by definition, a "1% rule property" because the monthly rent is 1% if the purchase price.  While there is often debate as to whether 2% rule or 3% rule properties are out there or how hard they are to find, 1% rule (or close) are not that uncommon in many markets.

   This one just one of a number of properties I bought this year that hit the 1% rule or greater.  

http://www.zillow.com/homedetails/12922-Shady-Cree...

  Search these forums for lots of 1% rule discussion.

John D., Palm Vacation Rentals | [email protected] | 4155195039

@Lafontant Cherilus  lots of great advice stories here, but I just wanted to add that people have always told me things are too difficult/complicated/unattainable. I don't have a list, but I'm pretty sure I've accomplished every single thing people told me were too difficult to do. Make a plan and achieve it. Ditch the naysayers. 

[email protected] | 215‑490‑4851 | http://www.atanosmanagement.com | PA Agent # RS314542, NJ Agent # 1221341

Great advise from everyone here. Like @Nathan Emmert  I have way too much student loan debt, but a good paying job, so am now finding the ability to purchase properties. 

I would not heed the advise of your friend. If he's not an investor in real estate, he really has no basis for judgement.  Being knowledgeable of the stock market does not mean you know a lot about anything else (even if it is a helpful and lucrative skill). 

If REI is what you are interested in. Jump in. I'm on my first rental property now, and while it is not the worlds best deal, I am so glad to have taken the plunge (it's not a bad deal either, and should cash flow nicely). I'm learning a ton, and I hope to use this knowledge to keep going and ramp up to exceed the point that you are talking about in the next few years.

Good luck. I hope to see your success stories on BP as they come...

@Andrey Y.  Not sure if you are asking for an example of a single family $500k property that makes 1% or more in rent! or of you just want to hear of a 1% property... My first property (bought 3 weeks ago) was purchased for $66k. I'm putting $10k in in repairs, and shooting for $1200/month in rent - a little better than 1%. Assuming that there are many more deals like this in the market (I must assume this as a newbie is unlikely to get the best deals) then I can see where you can easily get to $500k "worth" of property in 5 purchases or so (total cost of my property is ~$75k, but total market value is around $110 or $120 with the improvements I am making and the quickly rising prices in the neighborhood). Have you not seen this in your markets? ...it sounds like many on BP do even better - hitting 2 and even 3% on their investments.

@John D
I am well aware of the 1% and 2% rules ;) Read what I wrote exactly as stated, that was what I was looking for! Thanks.

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