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

    Ahh, I love Mount Vernon and Anacortes! The historic homes in Anacortes really call to me...

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

    @Steve Wynne I'm starting to understand the concept better. Somehow it got instilled in me that having a paid off house was the only way to go, but with today's market conditions (and liability risks), equity is not always better than cash flow.

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

    @Chris Egan I hear ya, I have the same goals and the same thinking about 15 year loans, because we want to fully "retire" from our good jobs in 14 years! I think you guy have a great plan! But here's what really got me convinced on 30 years loans (I have one rental already on a 15 year):

    1. Even with a 30 year loan, you can pay them off in 15 years. And now you have the flexibility to pay off the ones with higher interest rates first. Who knows what the interest rates will be in the future when you purchase your 8th, but they are dang good now. As someone mentioned before - why so anxious to pay off 4% loan (that's almost like free money, some will say)

    2. Cash really is king. For personal reason, future babies, maternity leave, vacation, family, etc., it might be nice to have 10 houses that cash flow. Since I will have a lot of my reserves tied up in the downpayments, a little extra cash on hand will give me piece of mind.

    3. Cash is king to the banks. Sure, our job incomes are great and will give us down payments, but the bank will see our 10 properties and want 3-6 month reserves for each one. Ummmm, that could be like $90k for me. Dang, that was a huge reality check for this small operation.

    But also the banks like to see ON PAPER that the properties cash flow. While the bank doesn't know my investing goals or care that my plan it to pay it off quickly, when they just see that I "cash flow" a mere $50 a month and my taxes say I lost money on it, they get scared. With a 30 year loan, the paper looks better for future loans and I can still pay it off early. I think that it is the biggest thing to help allow for future growth of my portfolio.

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

    @Libbie Grant Investor tip for Anacortes: find a house that is zoned R2 for duplex (most all of the old homes in the desirable Old Town and around the schools and hospital) and convert a garage or basement into a legal dwelling. This is a huge value add opportunity!

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    10y

    I have a mix of 15, 20 and 30-yr residential and commercial loans.  At the time of origination, I gauged each decision individually.  I am accelerating some pay-downs of my 8-14 yr old bank loans that are in the 6s.  The balances are too low to bother with the pain and costs of refinancing. It's an easy, risk-free and tax-free investment while I await an opportunity.  My acquisition account is still funded though. Always have reserves and funds to jump on a deal. 

    Most of my seller-financed loans are on 24-yr amort schedules at 5-6%. I hate dealing with banks that much and the sellers were happy to get a return on their equity. Without origination fees, appraisal fees or PMI, my effective rates are about 4%. Those have all been value plays, not cash-flow. I also didn't want to max out ol' fannie.

    In the past, like in 2012, 15-yr rates were WAY below 30s (30% less).  There was an arbitrage  I couldn't pass up so I locked in a few 15s.  I was converting 30-yr loans at 6.5% to 15s in the low 3s.  My payments hardly jumped.  Again, case-by-case basis.

    The difference between 3.5% and 3.75% is hardly anything.  I'd take the 30 there for the flexibility that is so important in our business.  It buys and allows our best friend - time.     

    Quick fact - most 30-yr loans are barely 25% paid off when a 15 is done.  That's right.  My 15 is paid off when the 30 has 75% to go.  Over time the couple hundred in missed cash-flow becomes a rounding error.  It just doesn't matter.  Having paid for real estate and it's corresponding cash-flow has never made me regret not taking a 30. "I wish I still had 75% to go still!" LOL

    Quick fact 2 - the word 'mortgage' is derived from the word 'muerte' which loosely translates to 'til death'.  Would you like your  'til death to last just 15 years, or 30?  Cheers and thanks for this discussion @Julie Marquez!

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

    @Steve Vaughan Something you mentioned that no one else has said yet - it is a case by case basis!

    Having the mindset that they all have to be 15 year might hurt eventually, but could be a good deal for one or two, or three. It depends on the lender, the rates, the situation, the market, the property, the deal, the goal.

    For this next property, I'm convinced that the 30 year is the way to go. Who knows about the next, we will see when we get there. I hope to find seller financing too, for all the reasons your mentioned and for the fact I despise doing the paperwork and fee hoopla with banks.

    Interesting fact about the word mortgage - my death or the lenders death? haha. Real estate is a tough go rooted in death.

    1Reply
  • Ryan Kennedy
    Oklahoma City, OK · Member since 2016 · 29 posts · 6 votes
    10y

    Lots of awesome wisdom here, loving this conversation!  I have to side-step a little with something that's been weighing on my mind as I plan to invest in our area.  Does the threat of this "impending" earthquake not stress you out?   I work in the insurance industry and my boss's retirement strategy is heavily based on rental properties (and the land beneath them).  They have a handful of properties around Seattle suburbs and I know for a fact that none of them are covered for earthquake (in fact they are ineligible for coverage due to age).  If the big one really hits Seattle they could lose all of those houses and insurance will pay $0 for it.   I can't imagine having all my eggs in one basket up here, have you thought about diversifying to other regions to hedge risk or am I crazy?

    1Reply
  • Joshua Sclafani
    Investor · Tampa, FL · Member since 2016 · 66 posts · 27 votes
    10y

    @Thomas S. great post and great plan, wishing you the best of luck. All I can add is there is no "right" way to do this. As a fellow PM, we know there is never a perfect way to run a project, different tactics, tools, and methodology are required every time. Do what feels right and allows you to sleep well at night and remember that it's expected that your plans will change over time.

    I'll leave you with this...when a ship sets sail across the ocean, the captain doesn't set the course and go below deck for 2 months. It is a process of constant corrections, all the while accounting for ever changing conditions (wind, currents, sails, storms, etc...) in order to arrive at the intended destination.

    1Reply
  • Libbie Grant
    Friday Harbor, WA · Member since 2016 · 47 posts · 14 votes
    10y
    Originally posted by @Julie Marquez:

    @Libbie Grant Investor tip for Anacortes: find a house that is zoned R2 for duplex (most all of the old homes in the desirable Old Town and around the schools and hospital) and convert a garage or basement into a legal dwelling. This is a huge value add opportunity!

     Holy crud, that's a great tip! Thank you! We are on the mainland this weekend for a friend's wedding, and as we drove through Anacortes this morning we talked seriously about making Anacortes part of our farm area. It's easy to get to from Friday Harbor, and I love the houses there. :)

    Just talked to my agent minutes ago and it sounds like we're pulling the trigger on our first house on Monday, when we're back in town. Exciting! And so nice to meet so many great people in the area who are doing the same thing.

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

    @Ryan Kennedy There are a lot of things that could go wrong, a tsunami, an earthquake, hurricanes, floods, market crash, car crash, airplane crash, mall shooting, heart attack, anything. I try to be healthy and proactive, but if I worried about everything I would never sleep. I'm not so worried about wood construction, and new build as some earthquake requirement in the buildings. This is the area I know, so I choose to invest here.

    @Joshua Sclafani True, every situation is different and requires a different strategy. And if I've learned anything from my latest project, the course changes every day! I just try to have good tools in place to make the process run as smooth as possible and get my to my goal with ease. Thanks for the feedback!

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

    Oh, forgot to add... like you, @Julie Marquez, my mom is a landlord, so I also grew up "in the business" and have done property management for her. (great to have that experience going in!) Mom's properties are mostly like what you describe in Old Town Anacortes: single-family units that she turned into duplexes or triplexes. fantastic returns! Hers are mostly down in Edmonds, though, with a couple in Cap Hill and one random one all the way down in Longview. I won't go that far afield. ;)

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