Keller, TX · Member since 2015 · 49 posts · 25 votes
So I have been reading and reading about REI and wanting to get into it. Read ABC of Real Estate Investing and now on Cashflow Quadrant, to be followed by BP's UGB. From all the podcasts and all the reading I have done here, I just dont see how people are truly cashing in as small to mid size REIs.
$100/door would put me at 30 units a month just to cover my bills. Im assuming appreciation and cashout can help with some but then you just owe more money and have higher NOI on that property. You can offset that with more properties generating $100-200 cashflow but it seems cyclical. Long term (once your investments are paid off) there is large money to be made but until then...what is everyone doing?
I have a lot (2.5acres) in the DFW area of TX that I bought foreclosed for $90k. I think I can sell it in the $300-350k range. I have had multiple letters wanting to buy but Im not sure if I should cash in now and start with landlording. Honestly would rather get into commercial properties ($1M or so) with NNN and not have to deal with small stuff. Not sure if that would happen or not.
So where does the "now Im making more and Im going to quit my full time job" money come from?
Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
11y
I would add to some of the previous advice that the key is to target homes that cash flow more than $100/mo. That seems very tight to me. I have a total of 39 homes right now and am closing on #40 this friday and #41 in another 2 weeks.
For all 41, my gross profit (Rent minus PITI) is $450/mo. If you figure 200/mo for vacancy, repairs and capex, you're at 250/mo net or even at 250/mo for the above, 200/mo net profit.
And every penny of that is tax free. So even at 200/mo, I'll be at 8k a month in my pocket. No taxes. Thats like making 120k/a year if you were to equate that with someone with a regular job (which I have one of those too).
And I actually have another buddy that is doing this and he's got an average of 600/mo gross profit. He's putting more money into his deals than I am (I'm putting very little if anything on some). But thats how you get to that safety number where you don't care if your company lets you go or not. You no longer have to worry about losing your house if you lose your job.... And then you'd be surprised how much more you enjoy your day job without having that fear.
One other thing I'd mention though. You don't necessarily have to wait 20 years before you see a boost in your net income.
Keep in mind that rents are going up and property taxes are staying relatively flat. So you should be getting more income per house every 2 years or so. Even at $25/mo increase in rent per house, that adds up when you have 10 or 20 houses.
And in, say 10 years, you can always refi your remaining balance into another 20 year loan and reduce your payments that way as well.
Lets say you buy a house and your mortgage is 100k as a 20yr loan at 5% - which is pretty typical for my local banks these days. And lets say you're making 200/mo with the payments of 649/mo. In 10 years, you will owe roughly 61k. Now lets say you turnaround and refi that at 6% as a 20 year amortization again. Your new payments would be $437
Thats a boost of 210/mo right there. Multiply that by 20 homes and you're talking about a raise of 4k a month! In 10 years......
So you can see that, yes, it may be tough to quit your job today based on 20 or 30 homes if you're only making 100/door or 200/door. But the true wealth building opportunity is in the buy and hold.
If you owned 30 homes and made 100/mo today. Then refi'd all 30 in 10 years and started the amort clock back at 20 yrs again, you'd be going from 3k a month net income to 9k a month net income.
And thats not including any rental increases that occurred during that time period either. Another 100 to 150 in additional net income from those? And now you're looking at 12k to 14k in net income from those same 30 homes.
So my advice would be not to think of real estate investing as a way to set yourself up for today. I view it as a way to set myself up for a phenominal way to built real wealth over time. And a way that will easily provide me with a lifestyle that I could have never achieved any other way.......
Heck. Even if you were to buy 3 or 4 houses, those 3 or 4 homes could truly change the type of lifestyle you can lead both now (the added rental income) and in the future (as those things really kick off cash flow).
Yet another beautiful thing about real estate. It pays you today. And it pays you even MORE tomorrow. :-)
Thanks again guys...just did some calculating (bankrate.com actually did). Been talking with my dad who just retired and was looking to get me to invest in mutual funds or something along that lines with a 7% return or so.... so here are the numbers:
$300,000 invested over 15 years at 7% equals $827,709
$300,000 invested into 15 houses ($100k each, $20k down, 4.5% for 20 years) = $806PITI (here in DFW area of Texas). Say it rents for $1100/mo but we round down to $200 cashflow due to vancancy and what not.
$200/house * 15houses * 12 months = $36000/yr income * 15 years = $540,000 with each house having a balance of $27k. So $100k house - $27k balance = $73k in equity * 15 houses = ~$1.1M + $540k income = $1.64M after 15 years...
So roughly double the 7% investment... sounds like a no brainer? Hopefully pulling more per door and reinvesting into more properties to compound the earning on real estate. After the 5 more years, the income would be $15k a month as passive income. Just wished I started this earlier
.... wait you missed a number in there: Appreciation Let's assume 2% for the next 15 years, which adds another 38,543 to the value of each home * 15 = $578,145
Add that to you original number $1.64M+578k = $2.22M. And then as you stated, that's assuming no compounding of the interest (which of course is the most powerful tool in the universe!)
But Let's just simplify it: your IRR is 8.44% based solely on an annual rent of 36k. That makes it a simple Apples to Apples calculation. 7% vs 8.44%? + $3M in assets in 30yrs.
The lament of many Real Estate Investors, including me.
The IRS allows you to play catchup on your retirement funds after a certain age. Well, you can play catch up in real estate by employing multiple strategies at the same time. Wanna play a little catch up? Find NO-Money Down deals, Sell your properties to capture more equity and deploy more to add more units! Wholesale a deal, or sell the entire portfolio and take down a $3M Apartment Complex, or a $3M strip mall.
warren, OH · Member since 2015 · 49 posts · 5 votes
11y
Ok i thought that one could only get so many loans, so how many loans can one have? I see people talking about refinancing 30 or 40 homes How is that possible?
Ok i thought that one could only get so many loans, so how many loans can one have? I see people talking about refinancing 30 or 40 homes How is that possible?
In reality, there is no limit to the loans you can get. Some people think it's 3-4 (traditional banker), some 10 ( non-traditional home mortgage brokers), DTI requirements (traditional commercial bankers). You just need to be prepared to not be limited by what you hear.
Ok i thought that one could only get so many loans, so how many loans can one have? I see people talking about refinancing 30 or 40 homes How is that possible?
In reality, there is no limit to the loans you can get. Some people think it's 3-4 (traditional banker), some 10 ( non-traditional home mortgage brokers), DTI requirements (traditional commercial bankers). You just need to be prepared to not be limited by what you hear.
You can get up to 10 conventional loans for investment property, provided that you qualify and meet the other requirements - which is not easy as you get more properties, mainly due to DTI issues and reserve requirements.
The bank originating your conventional loan underwrites to Fannie Mae or Freddie Mac guidelines. Google fannie/freddie "selling guide" for the exact requirements (and a couple hundred pages of great bed-time reading!!)
Protip for the house hackers - if you're buying a property as your primary residence, you can have more than 10 loans! No personal experience with this, but here's the quote straight from fanniemae.com:
If the mortgage being delivered to Fannie Mae is secured by the borrower
For all 41, my gross profit (Rent minus PITI) is $450/mo. If you figure 200/mo for vacancy, repairs and capex, you're at 250/mo net or even at 250/mo for the above, 200/mo net profit.
For all 41, my gross profit (Rent minus PITI) is $450/mo. If you figure 200/mo for vacancy, repairs and capex, you're at 250/mo net or even at 250/mo for the above, 200/mo net profit.
I second this...rental income is NOT tax free. You not only have to pay taxes on the rental income, but any paydown of mortgages as well. Depending on the cost of your property compared to your net income, some or all of this tax liability can be DEFERRED (note, this is not eliminated) by depreciation. Even depreciation does have to be paid back at some point (again you can DEFER this with a 1031 exchange but the liability does not go away).
If you are not paying taxes on your rental income then I wouldn't broadcast that on a public discussion forum!
Brighton, MI · Member since 2013 · 14 posts · 2 votes
11y
I bought a duplex, once I move out of the one side and have both rented out, it will cashflow almost 1k per month.. I think there is a lot more money in multifamily properties than in SFH.
Hmmm. I guess there is a bit of a miscommunication there and maybe Mike's model is different than mine.
But after I hit about 5 or 6 rentals I think, my depreciation has exceeded my rental income so my rental income has been completely tax free for about the last 7 years. In fact, I still have a carry forward loss of somewhere around 100k on the books.
When I suggested that rental income was tax free, I meant that depreciation is covering that income. At some point, the profits will exceed the depreciation and some of it will start to become taxable.
But where in you are correct you are technically deferring it. The fact is you can not only defer it forever (either by never selling the homes or by 1031). But even if you do sell it, you'll only pay taxes on that money at the long term capital gains rate which is far better today than what most people's tax rate would be if it were taxes as regular income.
So, no, maybe I should add the full context when I say rental income is tax free. But ultimately, if you're doing buy and hold and don't intend to sell or decide to 1031 the house into something bigger/better, then it is! And even if you just sell, then the fact that you deferred it for so long and get to pay the tax rate for long term capital gain instead of as regular income, its still such a huge tax advantage its silly.
And if you want to set your properties (must be done at acquisition) to use accelerated depreciation, then you can negate even more income in the early years. So even if your profits are significant, you can definitely offset them with depreciation so you pay no taxes.
Now if you pay cash for your houses with no mortgages and/or are making 1k a month income, then no, your rental income will not be tax free. Depreciation won't eat up that much. But if you have a more typical net income (say 250/mo per house or so), then you should be good to go. It also depends on the prices of the homes too. If you're making $300/mo income and you're all in on the house for say 40ik, then no, it won't cover it all.
But, as a general rule, most typical investors pay little to no income tax on their rental income because of the the little friend we call depreciation.
Has nothing to do with not reporting. If you don't report the income on your tax returns, you won't qualify for any loans with the banks. And that is far worse than what the taxman could do. If you can't qualify for loans, you can't even get in the game.
Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
11y
Real estate has many advantages, positive cash flow is just one. It takes a long time before positive cash flow will make you enough to live off of, but 1) real estate is a get rich slow scheme and 2) there are many other advantages. I write more about here if you're interested: http://www.biggerpockets.com/renewsblog/2015/05/13/buy-and-hold-ideal-investment/
I think a lot of people miss that when looking at real estate investing as a way to get out of a job.
I've got 39 houses (with 2 more closings in the next few weeks) and I still would never think of quitting my full time job.
I could definitely manage it if I were to lose my job and wouldn't have to worry about losing my house. But the reality is you really have to make a lot of money as a buy and hold investor to be able to retire yourself.
Financing would be one issue. If I quit my full time job, I don't think the local banks I'm using will be as likely to lend to me on my end loans. Some might but some might not. And I don't want to stop growing my portfolio. One because I want to grow my income and two because I love doing this too much to want to stop. :-)
So, in my mind, the only want to retire yourself with real estate is if you're doing some flipping too. But then you're not really retiring yourself. You're simply getting another job - albeit one a lot more fun. :-)
2) Healthcare. If you are currently making 50k a year and you built up rental income to 50k a year, you can't just retire and have the same lifestyle. You're going to need to pay for healthcare.
3) Growth. If you are making 50k a year today and quit after getting to 60k a year in rental income, how are you going to grow that income? Increase rents will definitely help. And, at some point - say 10 years, you could refi the 20 year mortgages (5 yr balloons but amortized over 20) again into new 20 yr mortgages and give yourself another nice raise. But unless you can continue growing your income with more rentals, are you really going to be ok with that?
4) Trouble years. The other thing you have to figure is that you are going to get hit with a really bad year at some point. Where instead of making 60k or even 70k, you are going to have a year where you only make 40k. Now that also means you should have some years where you make 70k or 80k too so it should even out. But if you don't account for that, I think you might be in trouble there too.
But at some point, the bottom line in investing in real estate for me is always the same. Its going to make me good money today so that I'm still young enough to really enjoy it. And its going to make me even more money in the future so I never have to worry about some big company letting me go when I hit 50 or 55 or something.......
And no matter how you run the numbers, there's no way anybody could ever convince me that you can make more money from any other investment on the planet than you can if you invest in real estate. You're going to have to work a lot harder when investing in real estate than any other investment too.
But you can build true generational wealth in real estate with relatively modest investment. I was able to get to 40 homes in 8 or 9 years with a 43k heloc as my total starting capital...... And in 20 or 25 years when these homes are all paid off, what will that 43k heloc look like? 12 million? (they're 150k homes today so figure the homes double every 20 to 25 years historically). And they'll be generating 40k a month if not more in rental income?
Come on...... Even if you did 3 or 4 rentals, you can significantly change your net worth thru real estate.......
I second this...rental income is NOT tax free. You not only have to pay taxes on the rental income, but any paydown of mortgages as well. Depending on the cost of your property compared to your net income, some or all of this tax liability can be DEFERRED (note, this is not eliminated) by depreciation. Even depreciation does have to be paid back at some point (again you can DEFER this with a 1031 exchange but the liability does not go away).
I wanted to clarify the above post. The capital gain, depreciation recapture and medicare surcharge taxes are deferred, but can be eliminated, too. The investor merely has to keep 1031 Exchanging throughout their lifetime and then when they pass on their heirs will receive a step up in cost basis and the taxes mentioned above all go away. So, they do not have to be paid or paid back eventually with proper planning. You only pay if you decide to sell and cash out and not complete another tax-deferred exchange.
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I think you guys are making the right choice focusing on the beauty of cash flow. That's why lots of investors are willing to look out of state. I lived in China and investing in Beijing was a completely negative cash flow game. The Midwest is a different story
In regards to your (paraphrased) "There is no way I would quit my job and receive income solely from Real Estate" thoughts, at some point in your growth couldn't you just 1031 exchange all of your properties to cover the 25% down payment on a large commercial property -- say, a 75 unit commercial property cash flowing $200 a door? You would cash flow $180K annually on that. On a $3M commercial investment, you would only need $750K to cover a 25% down payment by pulling the equity out of your 41 houses on sale with a 1031...many of these properties would presumably have appreciated decently since purchase, given the length you've held them for and paid the mortgage down. Additionally you could realize any of the forced appreciation you've been able to create through renovations/improvements as well as any appreciation gained at purchase by receiving a discount against market.
This is not meant to be a prying question here. I assume your answer will be a simple "That's not the business model I want to have" which I 100% respect and understand. If that is the case, I guess I am just looking to spot check that my understanding of the proposed theoretical is accurate and feasible?
Ha. Funny thing is I have never answered my phone after 9pm even if I see its from a renter. :-)
And here's my funny story on that. This was probably 5 or 6 years ago. It was a friday night. My wife was downstairs in the basement cutting someone's hair. Got a call from the fire dept in one of the villages nearby. I had just donated some money to some fireman thing so I assumed it was another ask - and I was playing halo at the time so I didn't pick up.
They called again. I let it go to vmail again.
About 15 minutes later, I get a knock at the door. This time, I stop playing and go answer. It was my town's local police. "Are you Mr. Hasemann?" Yep. "Do you own house xyz in town ABC?" Yep. "There's been a fire at the house and the fire dept there has been trying to get a hold of you. Could you give them a call?". SURE.....
Didn't have the heart to tell em I didn't answer because I was playing Halo. :-)
The tenant's little kid was playing with a lighter or something and set his room on fire. Everybody got out fine. But the fire dept did a number putting it out. Got a brand new upstairs, electrical, and kitchen out of the deal so it all worked out.
But thats kind of the story I think of when I hear people say they don't want calls at 2am. If you don't want em don't take em. I've had a house catch on fire and it didn't stop me from playing halo. :-)
Halo? Really? LOL
Great post. Personally, my goal is to hire a property management company (yeah you take some $ off the table) so that I won't even have to get the call from the police / fire dept.
Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
11y
I've actually thought about the commercial thing. It is definitely something I would be interested in doing. But I don't think it would be as easy as that. To un-wind 40 and hopefully it'll be more like 50 or 60 homes, in one fell swoop probably won't happen in a way that would allow me to 1031 them all.
To be honest though, I would have no problem paying the taxes.
My bigger concern would be that I don't know commercial real estate and to let it all ride on one big investment would be a little scary - even for someone as aggressive as myself. :-)
I just don't think I could risk all the effort we've put in to building this portfolio on one deal.
What I would like to do eventually is build up enough of a stake at some point to go into a multifamily deal and learn the ropes. The other real drawback though is that Illinois is just not as good a market for multifamily returns.
I don't see the money there that single family offers - no even close.
I think the only way I'd do multifamily is if it were out of state and that opens up a whole other can of worms there.
But definitely a very a good scenario that I've considered. Just need to balance the risk somewhat before I were to throw everything I had into commercial - something I know nothing about adding value to.
Makes perfect sense, man. Partnering to learn the ropes on the first commercial deal is a great call. I appreciate the response, and good luck with the continued growth!
Thanks for explaining that. You are such a seasoned investor with a huge wealth of knowledge that I always value your opinion and postings. I also really like that you take the time to write a response that explains in detail what you are trying to say, insead of just a 1-2 sentence response. It really makes understanding your point very easy... so thanks!
Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
11y
Ha. Here I thought I was just being long winded all the time. :-0
But thanks. Yea. Sometimes, I think it helps when you can put some numbers to stuff too. It probably makes it less likely to be read by some people. But for someone to really get a sense of whats going on, I think the extra background would make it more useful.
And even if the short sentence response is understandable, its always nice to see some additional info so there is that much more info to reinforce the point.....
Although I'd still be there are at least a couple of regular BPers that probably wish my posts were much shorter. :-)
