My Goals For Easy Rentals and Passive Income - Feedback Please

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My Goals For Easy Rentals and Passive Income - Feedback Please

Julie MarquezPro Member
Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes

My husband and I work good W2 jobs in construction (me in project management, he is a carpenter). We love real estate and want to have more rentals in our area of rural Seattle Skagit County. We have one rental house purchased last year that cash flows zero because it is on a 15 year loan. We like our jobs now and work is fine, giving us great income and great borrowing abilities, and the ability to save around $50,000 a year. 

We are investing for our retirement (or early retirement) and want easy rentals for passive income. By 2030 (in 14 years), we would like to retire and have few properties with high cash flows. For example, I don't want 150 units that cash flow $100 each, I want 15 units that cash flow $1000 each. Or even better, 7.5 properties that cash flow $2000 each. So we want to pay them off quickly.

We want to buy one property a year for the next 15 years (hopefully some small multifamily soon) with a 15 year loan and our saved money as a down payment. For the short term (first couple of years), we are okay with the cash flow breaking even. In terms of purchase price, I just want to (almost) make the 1% rule. We live in a high appreciation area, not that I'm counting on that, but we plan on holding these properties forever. We want to invest in areas of good school districts, and B or better neighborhoods. We don't want to deal with problem tenants, and we will pay a little premium for that luxury. We also target homes built 1990 or newer, as we are just more familiar with this construction, the issues, and hopefully lack of issues.

I know there are a thousand way to invest in real estate, but these are my goals. I'd appreciate any feedback or comments about anything else I should be thinking about. Thanks BP friends!

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Account Closed
Rental Property Investor · Everett, WA · Member since 2013 · 389 posts · 222 votes
10y

@Julie Marquez kudos on having a well defined, attainable plan. My only question is why are you so eager to pay down 4% loans? If you took 30-year mortgages and decent cashflow, this year you could save $60,000 and next year after another property you could save $72,000 and then $85,000 and so on. Then once you are out of acquisition mode and have the 8-15 units you want you can start paying them down. That is the route my wife and I are taking and it has been in this cumulative growth or "snowball" effect that we have seen the most power. 

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  • Account Closed
    Rental Property Investor · Everett, WA · Member since 2013 · 389 posts · 222 votes
    10y

    @Julie Marquez kudos on having a well defined, attainable plan. My only question is why are you so eager to pay down 4% loans? If you took 30-year mortgages and decent cashflow, this year you could save $60,000 and next year after another property you could save $72,000 and then $85,000 and so on. Then once you are out of acquisition mode and have the 8-15 units you want you can start paying them down. That is the route my wife and I are taking and it has been in this cumulative growth or "snowball" effect that we have seen the most power. 

    6Reply
  • Julie MarquezPro Member
    OP
    Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes
    10y

    @Account Closed Thanks! So even though you get 30 year loans, your plan is to pay them back in 15- 20 years? All while cash flowing and saving through the years? So even though you plan to pay them off quickly, you still like the flexibility of the 30 year loan and are okay with the rate (I know, I know, it's not that much more)? You bring up a good point that I've thought about. Because I know for future mortgages, the bank likes to see that the rentals cash flow on paper (better on a 30 than 15). Thanks for the point of view. I'd like to hear more on this 15 vs 30 year loan based on my goals, I'm still pondering....

    1Reply
  • Greg Harriman
    Investor · Bothell, WA · Member since 2016 · 38 posts · 21 votes
    10y

    @Julie Marquez That sounds like a great plan and very similar to what my wife and I are doing.  Since you asked for feedback, here are a few things that come to mind:

    1)  Most lenders that I've worked with will want you to put 25% down on an investment property.  If you plan on buying 1 property each year with $50k down, you may be able to find properties for $200k now but will that hold true 15 years from now?  I'm sure your $50k annual savings will increase over time as well, but this is just something to keep in mind.

    2)  The lenders I've dealt with typically only lend up until you have mortgages on 10 properties.  Once you're past that number you'll likely have to deal with lenders that have higher rates.  One thing you could do is save up in year 11 and then payoff property #1.  Then when you save up in year 12 you'll have mortgages on 9 properties and be able to get another mortgage.  However, just keep in mind that lending practices change over time and it's anyone's guess what that'll look like a decade from now.

    Hopefully this is what you were looking for and helpful!

    2Reply
  • Julie MarquezPro Member
    OP
    Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes
    10y

    @Greg Harriman Great thoughts, thank you!

    1. Yes. And hopefully our salaries and savings increase too! But maybe that is a good reason to do 30 years to have more cash? Maybe fuss-free multiunits?

    2. We plan on doing the loans separately, and even worst case of 4 per person, we can have 8 total. We want to do duplex to four-plex to get more units per in case we can't easily get more loans. And I like the idea of paying off properties, so I'm cool with that idea.

    So what are your strategies to making this type of investing work for you? Do you do 15 or 30 year loans?

    0Reply
  • Mark W.
    Investor · Longmont, CO · Member since 2016 · 19 posts · 21 votes
    10y

    @Julie Marquez, great plan!

    I really admire the discipline for wanting to pay the loans off quickly, but fortunately you have the flexibility to do that with traditional home mortgages which typically don't have a prepay penalty.

    So, I've done 30-year loans on all my rental properties.  I realize the extra cashflow, and I can always make additional principal payments.  Even better...once you acquire several properties, you can take the extra cashflow from all of them and rapidly pay down one mortgage at a time.  By then, you will likely have several different interest rates, so start with the one with the highest rate, and pay that off first.

    As you eluded to, the bank will like to see your properties are cash-flowing, which will make them more comfortable with you as you scale your portfolio.  Also, keep in mind, we often times fall into the trap of thinking rents will always go up.  What if they go down in a couple years?  It's good risk management to have the 30-year mortgage and the flexibility in case your rents ever go down, or you have a really large capital expense (e.g. you have to replace an entire HVAC system).

    Lastly, seek out a portfolio lender (a.k.a. balance sheet lender).  Essentially, some very reputable banks (often times a state or local bank) keep non-owner-occupied loans on their own books.  They don't sell the loans on the secondary market after they originate it.  So, they are not subject to the same Fannie Mae underwriting guidelines.  That doesn't mean they won't have similar qualification criteria, but they will be much easier to scale with after you've crossed the 4-loan (sometimes 10-loan) barrier.  So, as you are talking to lenders, ask them if they are a portfolio/balance sheet lender.

    Mark

    4Reply
  • Chris T.
    Investor · Downers Grove, IL · Member since 2015 · 1k+ posts · 955 votes
    10y

    Great plan @Julie Marquez ! 

    I agree with the others here with 30 year vs 15 mortgage. 

    You can always pay more towards principle on a 30 years mortgage to shorten the term. But if for some reason, money gets tight, banks don't let you pay less on a higher-per-month mortgage payment on a 15 year loan. 

    1Reply
  • Julie MarquezPro Member
    OP
    Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes
    10y

    @Mark W. Thanks for your feedback? I like your sentiments about 30 year mortgages. Especially the idea of choosing what loans to pay down faster, that makes them sound very favorable. Right now I'm using Washington Federal, I great bank in my state that only does in-house portfolio loans.

    2Reply
  • Julie MarquezPro Member
    OP
    Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes
    10y

    @Chris T. Thanks for the votes! Makes sense about the 30 vs 15. I'm all about caution in the meantime.

    0Reply
  • Greg Harriman
    Investor · Bothell, WA · Member since 2016 · 38 posts · 21 votes
    10y

    @Julie Marquez I think the whole 15 vs 30 year mortgage argument is similar to the Roth 401k versus Traditional 401k one... I think there are benefits to each and it really depends on your goals.  I have a mix of 15 and 30 year mortgages on the properties we own and that's because I just can't make up my dang mind.  One year I'm all gung ho about getting things paid off and the next I'm all excited about cash flow.  I think in the end, as long as I'm measuring where I stand in relation to my overall goals, then I'll be just fine.  To me, it's really a matter of just getting the properties under my belt and knowing that they're getting me one step closer to where I want to be.

    I can tell you this though... I like seeing my mortgage statement for a property that I've own 2 years with only 13 years remaining much more than the property I've owned 8 years and still have 22 years to go.  I save enough from my W2 income to not worry as much about cash flow but I totally understand why the argument is made that you should free up cash to acquire more properties.  For me, I think we're nearing a top and I'm not as interested in acquiring new properties (at a higher cost) as I am paying off the ones I already have.

    4Reply
  • Michael Henry
    Real Estate Consultant · Brookfield, WI · Member since 2014 · 873 posts · 350 votes
    10y

    Julie,

    I believe your plan to be sound. 15 v 30 is really a matter of preference. Given your PM background I'll take on time, under/on budget and a satisfied customer (YOU!!! in this instance) anytime over what could go wrong in an attempt to be too fast and reckless in the process. 

    Thanks,

    MH

    0Reply
  • Bryan O.
    Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes
    10y

    @Julie Marquez I agree with getting the 30-year loans. What is the time difference in paying them off? NOTHING if you pay extra on the 30-year. You still look good on paper (cash flow), you can still pay it off in 15 years if you want, you have risk mitigation if the market goes down, and banks like to see profit rather than losses. In my opinion a 15 year loan is a poor business decision.

    Otherwise it is a great plan and it looks like you are doing things right!

    2Reply
  • Julie MarquezPro Member
    OP
    Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes
    10y

    @Greg Harriman I'm with you here, they are both good and get me to my goals. I'll probably end up doing a mix of both in my career. The idea of having only 15 years of payments is so pleasing! I have one 15 year, so the next will be 30 year. Mix them up and see what works best and how I feel with each one. It sounds like you have a good plan. I like the idea of paying them off instead of acquiring more in this economy.

    @Michael Henry I am a very cautious person, and I like to plan out everything beforehand (hence this conversation!). But I'm also frugal - save .5% interest on a 15 vs. 30?! Sign me up. But in the long run, the peace of mind with a 30 will let me sleep at night.

    @Bryan O. In the long run it's almost nothing, especially with the cash (cash is king, right?) I can have from the 30 year loan, and how it looks to banks as I plan to acquire more. Thanks for the feedback!

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    As a investor you need to get your head around the business. Paying off mortgages, especially today when mortgages are practically free, on a rental income property does not increase cash flow it reduces cash flow. The equity, which invested is worth 10%+ in todays market, is lying dead in a rental property. 

    As a business rental properties have two separate cash flow streams, the property itself and the income generated by the equity lying dead in the property. If you have equity you first deduct roughly 10% return on the equity before you calculate any other cash flow on the property. This equity return in a property usually turns the income stream from the property itself into a very poor investment. 

    Best policy would be to have no equity in a positive cash flow property. At a minimum if a property can not cash flow calculated at 100% financing the property itself is a poor investment. 

    With your method of paying off the properties it would be foolish to keep them once they are paid off as their cash value wisely invested elsewhere, in a truly passive form at retirement, will far exceed any income the properties themselves generate.

    Rental properties can not be considered as a passive investment by any stretch of the imagination.

    1Reply
  • Julie MarquezPro Member
    OP
    Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes
    10y

    @Thomas S. Interesting, thanks for the feedback. I completely understand having a home with no equity and lots of cash flow, that sounds great. I'm also getting on board with the 30 year mortgages.

    My only experience in real estate is 33 years of the rental business (thanks mom and dad for making it an entire family affair), so I fully understand what it means to have rentals.

    What's your investing strategies and what do you suggest for a better (easy, passive) return for our retirement?

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    I am in effect retired from my 9-5 but the likely hood is I will never really "retire". 

    My plans will be to turn my properties over to my children, they also invest in rentals, and have them pay me a monthly income or sell and invest in a guaranteed income fund. Not fancy and not high return but I already have more money than my wife and I will ever need so ultimately it will all go to my children anyway. All I need is enough to pay our monthly retirement home and nursing expenses.

    1Reply
  • Julie MarquezPro Member
    OP
    Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes
    10y

    @Thomas S. Sounds like a good plan! That's all I want, enough money and some legacy wealth for my future kids. Thanks for getting me thinking....

    1Reply
  • Libbie Grant
    Friday Harbor, WA · Member since 2016 · 47 posts · 14 votes
    10y

    I have nothing of value to add here, except thanks for all the great insight in this thread! I'm also just starting out and live in the same region, so this is instructive.

    Julie, you mentioned Skagit...have you thought of going a little farther north to Bellingham? Bham and Tacoma seem to be the two places where people are fleeing to as Seattle gets more ridiculously expensive with each passing month. (Seriously, we moved up to the Islands when we realized it would be less expensive to live here than to remain in Seattle.) Bellingham is just another 20 minutes up I-5 and has some killer deals on houses, with more renters than ever before. Everett really seems to be turning itself around, too. Many of its depressed areas are making some pleasant changes, and it's still relatively commute-able to Seattle, so it should also be very in-demand with renters.

    Good luck! I'll keep an eye on your blog to see how your adventures turn out. :)

    0Reply
  • Evan Thomas
    Rental Property Investor · White Plains, NY · Member since 2016 · 57 posts · 39 votes
    10y

    @Account Closed Those are fantastic pros to sticking with the 30 year mortgage. Not only does it give you downside risk management (lots of podcast guests, as well as Bloomberg and other news sources have been talking about weakness or coming weakness in RE markets), it also saves you money by giving you more cash which you can use to pay the loan off early. 

    I've been thinking about the pros and cons of longer vs shorter debt, and you've sold me on longer. Especially while rates are still so low. 

    1Reply
  • Julie MarquezPro Member
    OP
    Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes
    10y

    @Libbie Grant Welcome to the wonderful world of real estate investing where there are a million ways to skin the cat, all depending on your goals.

    My family has been in the Mount Vernon area for 20+ years now, so that's my farm area, while Anacortes is my place of work and hopefully live soon. So I'm getting really familiar with Skagit, as it is becoming a bedroom community to Everett and Boeing. Bellingham is a great place, I've heard of investors being priced out of that area too. Though the rental market is very strong up there.

    Thanks for the support and feedback!

    0Reply
  • Julie MarquezPro Member
    OP
    Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes
    10y

    @Evan Thomas Aren't there just such nice and wise people here on BP!?! I learn so much every time I ask a question or read a forum. I'm definitely convinced of the 30 year loan now. I just talked to my bank and the 15 year is 3.5% and the 30 year is 3.75%, not much of a difference either.

    1Reply
  • Luke Redford
    Investor · Seattle, WA · Member since 2013 · 18 posts · 2 votes
    10y

    @Julie Marquez is that investor or owner occupied? If investment what bank/LTV?!

    0Reply
  • Julie MarquezPro Member
    OP
    Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes
    10y

    @Luke Redford This particular loan is with Washington Federal (a portfolio lender only) for a construction loan for the purchase of an owner occupied home in need of rehab with 20% down.

    0Reply
  • Nick Rice
    Real Estate Agent · Dallas-Fort Worth, TX · Member since 2016 · 35 posts · 3 votes
    10y

    Phenomenal plan @Julie Marquez and great discussion here!

    1Reply
  • Steve Wynne
    Investor · tampa, FL · Member since 2014 · 38 posts · 11 votes
    10y

    I love the idea of paying off debt early but, when rates are so low, your money could go a bit further outside of paying down a low-rate mortgage. Also, having a lot of equity built up does put a big target on your back from a liability standpoint if anyone should want to sue you (or an LLC). Also, cash is king in hard times where you can use cash at will rather than relying on changing bank standards to gain access to your equity. If your debt/income ratios aren't right for the bank your only choice becomes a sale to gain that access which may not be ideal in that market cycle.

    0Reply
  • Chris Egan
    Real Estate Agent · Omaha, NE · Member since 2016 · 43 posts · 46 votes
    10y

    I have a very similar investing plan as yours. I have always been told never to take out more than a 15 year mortgage and get it paid off as soon as possible. I like the idea of having my properties paid off as soon as possible. I work as a realtor and my wife is a teacher so we don't need the cash flow now. Our plan is to save money out of our income and put 25% down and buy them on a 15 year mortgage. We plan to buy 1 a year. I understand that with the low rates its probably better to take the 30 year but I think having them all paid off when I am in my 40's will make me a happy guy.

    1Reply
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