How can I go wrong? ( retiring early )

16 Replies

Experienced investors, please explain if I'm being unrealistic.

I'm middle aged, and my home is mortgage free.

I also have 3 rental houses in Las Vegas, which I purchased at the ideal time a few years ago. Those are running smoothly with a good property manager, but they have appreciated to a point where the rent to value ratio now looks low.

This might sound like I've been relatively successful, but frankly I'm miserable. I desperately want to stop wasting my life worrying about how I'll make money in the future. The methods I've used in the past are no longer working well. My current income is low.

My plan is to sell the Las Vegas properties, netting approximately $400K. I would then reinvest that by purchasing eight <$40K (after repair) middle America houses renting for >$800 month. Leaving $10K in reserve for each house.

Assuming 50% expenses, those should cashflow approximately $3200/month before tax. Not sure what tax would work out to; 20% maybe? That would leave me $2560/month to live on, which is enough for my modest lifestyle indefinitely. 40+ years I hope.

At this point, I could consider myself "retired", in the sense that my only job would be managing the managers of my proprieties.

So, am I dreaming? Don't hesitate to tell me if I'm being foolish. I am seeking any constructive advice or criticism, as well as recommendations on the best places to purchase these sort of properties. My inclinations would be to get a good geographical spread, maybe two each in four markets. Or would you just stick to one city for easier management?

Thank you.

Are you going to move to wherever you decide to buy the houses? If so, I'd concentrate on that one area and keep the option to do all the PM myself (you still have the option to contract that out, but if they're in 5 different markets, counting the one you live in, you don't really have that option).

I think you could even consider doing 9 and keep a single $50K contingency fund, or even 10 if you have access to very good line of credit that isn't likely to be pulled. (Take a HELOC on your primary residence as an example.)

If you self-PM, you will be buying yourself a job, but it makes for a better income story for sure.

Also, how are you going to get healthcare? That might be the biggest sticking point in your plan, by far. Make sure you have that sorted out first, IMO.

Originally posted by @Mike Holmes:

Experienced investors, please explain if I'm being unrealistic.

  but they have appreciated to a point where the rent to value ratio now looks low.
 

THERE IS NOTHING WRONG WITH A LOW RENT TO VALUE RATIO!.. It is actually meaningless by itself. Some of the lowest price to rent ratio's areas are the most profitable REI areas. You should be looking for appreciation and rent growth for long term investments.

You should look at some inflation calculators to see what the purchasing power of $2.560 will be in 10-20-30-40 years.

I would rather have all my properties in one good area and monitor that economy instead of 4 so-so areas.

I own one SFR in Vegas that I bought in 1994. Stucco/tile roof construction in Vegas will have less maintenance than most properties in the mid west.

@ Bob Bowling, presumably rents will also rise relative to inflation.

@ Jim Sokoloff, my wife probably wouldn't enjoy living anywhere you can buy $40K houses. Healthcare is a concern. My $2500 "minimum cost of living" number includes our current premiums plus some set aside each month for deductibles. Worst case, I'm lucky to also have dual citizenship to a country with free universal healthcare. So, cost of a plane ticket covers any non-emergency.

@Mike Holmes  

Everyone is different of course, but $2500 a month sounds awfully thin to me for a couple who can't see themselves living in "an area where you can buy 40K houses". Does that mean your wife has income also and perhaps you own your current residence outright already? If so, then you may want to think about the HELOC suggestion made by @Jim

@Jim Sokoloff  undefined

 above

Originally posted by @Mike Holmes:

@ Bob Bowling, presumably rents will also rise relative to inflation.

Ha Ha Ha Ha....  haven't run the numbers for Vegas.  I did buy in 1994 so 20 year history.  Off the top of my head I would say rents HAVE NOT matched inflation over that period but I also haven't been tracking market rents since I've retired. 

I have no interest in living in Vegas or investing there again so I really don't keep track.  I think Vegas will slowly lose gaming appeal as gaming is allowed in more areas.  How long can it maintain being a "party" destination?  I would be worried about a slow contraction of the population. 

I am betting on rent growth and appreciation for 30+ years but I'm betting on SF and Honolulu.  Both areas have a strong history and other than some catastrophic event there is nothing in the foreseeable future that would change that.

You also seem to be wary of Vegas long term.  But, a $40,000 today market!!!   I'm familiar with Ohio, Ky and IN and would NEVER invest there unless I was living there and even then it would ONLY be for the convenience of having properties close.

How could you go wrong?

You could buy in areas you are not familiar with and overpay, you could wind up buying in areas that are in steep decline, You could have bad luck with tenants and/or property managers., etc. etc.

On paper I think you plan works.  If your basic living expenses are covered anything you do above and beyond that only builds safety, net worth and increasing lifestyle for the future.

THERE IS NOTHING WRONG WITH A LOW RENT TO VALUE RATIO!.. 

Well it is an indication of a bad investment via over leveraging or in your case a poor return on equity. Equity in a property does you no direct good. (It can provide indirect benefits, like a lower loan to value ratio) The properties will appreciate or not regardless of the equity. Restructuring your portfolio to get a better return on your equity is what good portfolio management is about.  

One thing you left out in your analysis is the capitals gains tax  when selling the LV properties.   A 1031 exchange may eliminate that.

Medium crab1 copyNed Carey, Crab Properties LLC | http://baltimorerealestateinvestingblog.com/

You didn't mention your cashflow / rents on the Vegas properties. 

I currently have several <40k properties. Some perform well and some do not. It's driven by the area, but also by the tenant. I'm looking to trade some in to move into the 50-60K range. Slightly less income for the capital, but less dramas.

For that small number of houses, I would stick with one or two markets. If two, I'd also look for an area where your two markets are separate, but where there can be some overlap for referrals.  You'll need good contacts, and the good ones often know good ones in nearby cities too. For example, (Dayton and Cincinnati)

Additionally, even though you are "retired," that by no means says you can't still do something to create some additional income. It does give you the opportunity to do something you enjoy, instead of worrying about whether it will pay enough.

Medium dayton rei networkDarrin Carey, Dayton Real Estate Investing Network | [email protected] | (937) 458‑3303 | http://www.DaytonCapitalPartners.com

Lots of options, more than one source to me is always appealing.  There are pros and cons to each area and ups and downs with different streams.  I have about a half dozen streams either started or progressing toward the finish.  So find something you are comfortable with and will reach your goal.  Best of luck in working through some options, plenty of tool and advice on this site when you narrow down your possible solutions!

Originally posted by @Ned Carey:

How could you go wrong?

You could buy in areas you are not familiar with and overpay, you could wind up buying in areas that are in steep decline, You could have bad luck with tenants and/or property managers., etc. etc.

On paper I think you plan works.  If your basic living expenses are covered anything you do above and beyond that only builds safety, net worth and increasing lifestyle for the future.

THERE IS NOTHING WRONG WITH A LOW RENT TO VALUE RATIO!.. 

Well it is an indication of a bad investment via over leveraging or in your case a poor return on equity. Equity in a property does you no direct good. (It can provide indirect benefits, like a lower loan to value ratio) The properties will appreciate or not regardless of the equity. Restructuring your portfolio to get a better return on your equity is what good portfolio management is about.  

One thing you left out in your analysis is the capitals gains tax  when selling the LV properties.   A 1031 exchange may eliminate that.

@Ned Carey  I can agree that price to rent ratio will indicate an immediate lower cash flow and should be considered by a novice investor but any seasoned INVESTOR should understand leverage/overleverage and that cash flow OVER TIME and appreciation is the true indicator of PROFITABILITY. 

People that overleverage don't have BAD investments, they are BAD investors!  Please don't confuse the difference.

Poor return on equity? Who's equity?  I have $2,000 of my money in on a property that has appreciated over $400,000.  Am I losing money on that?  How would I access it?  Where would I invest it?  If I sell to get the equity it will cost $30,000 in transaction fees and I'll lose the $24,000 in annual rents AND the #36,000 in appreciation!!!  Show me an investment that will make up that IMMEDIATE $100,000!  Heck, I just lost the value of 3 Memphis investments!  $100,000 divided $100 per door.............

BUT, I did access that equity when a property came up in 2008 because the first purchaser couldn't finance.  I was able to use my equity to pay cash for the property.  Any bank would discount the "cash flow" on Indiana properties if I'd moved my equity there.  I'm up over $200,000 on the new property at the sacrifice of some cash flow on my equity! 

Originally posted by @Bob Bowling:


@Ned Carey  I can agree that price to rent ratio will indicate an immediate lower cash flow and should be considered by a novice investor but any seasoned INVESTOR should understand leverage/overleverage and that cash flow OVER TIME and appreciation is the true indicator of PROFITABILITY. 

Agreed that appreciation can be a significant factor in the total return of an investment. However the property appreciates at exactly the same rate  whether you have 100% equity or zero equity in the property.  IF you can tap that equity to use in other investments there may be a net gain.  Each situation needs to be evaluated separately and in your example below it would clearly be foolish to sell. However it might make sense to borrow against the $400K and invest it in something new.

People that overleverage don't have BAD investments, they are BAD investors! Please don't confuse the difference.

Agree totally, that is a good way to put it.

Poor return on equity? Who's equity? I have $2,000 of my money in on a property that has appreciated over $400,000. Am I losing money on that? How would I access it? Where would I invest it? If I sell to get the equity it will cost $30,000 in transaction fees and I'll lose the $24,000 in annual rents AND the #36,000 in appreciation!!!

Bob if I understand your numbers you are getting a 15% return on your equity.  

$24,000 +$36,000 = $60,000/ $400,000 = 15%

That is an exceptional return and good portfolio management would say to keep it because you are making an outstanding return on your equity. 

However I don't think your situation is typical. Over time the return on your initial investment tends to increase however because the value of your property is going up the return on your equity is often dropping. There comes a point when it is often advantageous to redeploy that  equity in a higher returning investment.

Medium crab1 copyNed Carey, Crab Properties LLC | http://baltimorerealestateinvestingblog.com/

Hi Mike!

I think this is possible, because it is very similar to what I'm in the middle of doing. I sold a Denver property that had seen some good appreciation and bought a small apartment complex in Ohio. I say "in the middle of" because the property I bought was pretty distressed and the turnaround is still underway. Cost to purchase and get it fully stabilized will be just under 400k out of pocket. So obviously, I can't say "whee! what a success!" just yet, but the end is in sight. After the property has seasoned at full occupancy for a while I should be able to refi and get most of my capital back out and still have at least the cash flow you are talking about. Now, I want to emphasize that this hasn't yet come to pass, so I'm not offering it up as proof that you should jump into something similar, just as a verification that your idea isn't completely nuts (or that I'm nuts too!)  People who know more about this stuff than me assure me that all will be well, but I'm a "believe it when I see it" kind of gal. Maybe I'm just trying not to jinx it, lol! 

As to your question "how can I go wrong"...

1) buying the wrong property, obviously. I analyzed a bazillion properties that I thought would be OK but bore down until I finally found one that I thought it would be pretty darned impossible to lose money on. And it's still taking longer and costing more than I had planned for.

2) buying in the wrong area. This was a town that, until I flew in to look at this property, I only knew from google-driving. I have since learned that, while the area my property is in is really OK, there are other areas in town that are a lot dodgier than my google investigations and initial drive  around town revealed. 

3) bad property management. Again, I was lucky here. Super lucky. I found a manager who has been in the biz for years, owns several similar properties, has managed a lot of turnarounds, and has very clear bookkeeping and organizational transparency. People like that are rare, you won't find one in every town. And it doesn't take spending much time on the forums here to  know that if you have bad management the whole thing can go to hell really fast.

Now, my strategy involves a multi, not SFR. One of the benefits to that is the ability to get some forced appreciation for a refi. That's hard to do with SFR, your ability to pull equity will be dependent on the values of the houses in the area and if you're buying in those 40k-50k neighborhoods you're probably out of luck. But you may have better luck with tenant stability (and therefore management costs) with SFRs.

Your idea of different towns sounds good in theory, but make sure you factor in the cost of getting out to see these properties, at least twice a years at first, until you have utmost confidence in your managers. Flying to four different cities will eat up cash flow. Finding four excellent managers will be difficult. So maybe one good city...

OK, this was kind of an epic-length response. And I didn't get to the part about  getting by on that income (IMO, no, you'll feel pinched. But you'll probably find something else that you want to do/be/learn that you can earn from when you get out from whatever job is oppressing you right now)

So good luck, and never say never...

Medium team zen logo vJean Bolger, 33 Zen Lane | http://www.solidrealestateadvice.com

I would go for it.  My Dad quit a job he hated and went to work retail and he was never happier.  Retire early, do something you like and enjoy your life.  

Just me .02

@Mike Holmes  

 Congratulations on posting a question we all will struggle with at one point or another. Not experienced yet, but I do believe you are on the right track when thinking of re-positioning your money that may have reached its peak in the Vegas homes and could be getting stagnant and considering the possibility of Vegas losing its uniqueness as other areas open up to the casino life, it may be wise to consider 1031 exchanges and move out of there.

@Ned Carey   I appreciate how clearly and detailed you make your responses. Helps us all learn. Thank you.

@Jean Bolger  

 Same as Ned, I thank you for the details and hope to soon read more of how this venture has turned out for you. Best wishes!

Pyrrha

@Mike Holmes  , I have done something similar. My strategy was a bit different. I focused on buying homes in the under $60K bracket in a city that I am very familiar with but live 2500 miles from. I put down 20% on each property with a 15 year ammortization. You could buy approximately 20-30 properties and still have a good nest egg left over for emergencies. You should be able to get them to cash flow a minimum of $200-$300 a door or more if purchased in the correct areas. That would give you a cash flow of around $4,000 on the extreme low end of each to $9,000 on a high end on each. Or maybe you could do even better! Just something to think about.

Happy Investing!

This is off topic, but for perspective: $2500+/month after tax, plus the value of a rent-free/mortgage-free house, is getting close to the median USA household income after tax. And nearly double what a quarter of American households earn. So those who suggest someone would struggle to survive on that are fortunate to suffer from the bias of being unusually wealthy. My wife could choose to get a job if she wants "fun money", but my priority now is freeing myself from the rat race. I personally have no material desires beyond a comfortable home, reliable transport, and internet access.

Back on topic, yes, similar cashflow could be achieved with $60K houses that rent for $1K/month. My impression is such deals would be a rare find anywhere in today's market, but if anyone can suggest some places where those deals are still common, I would be very grateful. Ditto on apartment blocks with real 10+ cap rates that aren't in warzones or depressing dying areas.

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