I'm totally new to Real Estate Investing. But after reading so many times that $100 a month profit is the goal, I'm left wondering how can this be good? By my estimation I'd need 40-50 houses to make a decent living. I know I'm probably totally missing something, so can someone explain this to me. And how can someone get to own that many homes? And how long would this take? Just keep refinancing the previous loan? I would lose my head trying to keep track of that many homes even with a property management company!
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
It's only $100/month until your tenants pay off your mortgage, at which point it could be $500/month, $1000/month or even much more.
Many long-term investors buy several properties that have just a little cash-flow (again, about $100 or $200 per month), and then plan their retirement for when the properties are paid off -- 10, 15 or perhaps 30 years in the future, depending on how they structure and amortize their loans.
If you have 10 houses generating $1000 per month in 15 years, that can replace a typical corporate salary.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
Agreed...you can also do things that will pan out over the long haul while reducing taxable income and amortizing debt for free. Appreciation doesn't really matter a whole lot if you don't plan to sell or monetize the asset in the short run. Many people are in the game for the long haul.
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
15y
Originally posted by RobTheHouseGuy1:
I will probably be alone on this, but I think that is a very dangerous number! You will be heading to bankruptcy in a hurry with a bunch of homes cash flowing only 100 bucks per month! You need a lot more juice than that!
The $100/month touted as a guideline here comes AFTER assuming the 50% "rule". IOW, if you subtract your debt service (P&I based on 100% financing) from half your rent AND wind up with $100 or more, then the rental is deemed "good to go". It's an average, not an absolute monthly cash-flow figure.
Otherwise, you're right, if $100/month in GROSS cash flow is all you're getting from a property, your reserves are going to get wiped out covering the eventual big ticket repairs.
The $100/month is NET cash-flow over the long haul. That's why I keep saying this approach isn't going to make anyone rich unless you have at least 100 of these properties in your portfolio or get about 10-20 of these babies in your basket and wait 30 years to pay them off.
Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes
15y
Originally posted by Bryan Hancock:
There is a ton of great advice and commentary in this thread already. The 50% rule of thumb gives a greatly warped sense of reality to me because it COMPLETELY IGNORES 3/4ths of the value centers of real estate. Tax advantages are real, especially with large incomes. Appreciation is real when you buy prudently in the right locations. Amortization of loans is real and builds thousands of dollars in our portfolio every month.
The "only getting $100/month" thing is hogwash. Cash flow is not the end-all-be-all item with investing. Many large fortunes have been built making zero or even negative cash flow while enjoying the other value centers while owning.
Bryan
The 50% rule had NOTHING to do with appreciation, tax advantages or amortization. As a matter of fact, the 50% rule has NOTHING to do with the INCOME side of owning Real Estate. You yourself posted a study of over 1,000,000 apartment units that showed EXPENSES equaled 50% of the SCHEDULED MARKET INCOME (not the ACTUAL INCOME). For instance, if I have a rental that would rent for $1,000.00 a month and rent it for only $500 a month, my expenses will not be 50% of $500, but 50% of $1,000.
As my rich uncle said, "I made an INCOME from rentals but made WEALTH from selling them."
But while it is a rental, a wise investor will use the 50% rule of thumb for RENTAL EXPENSES.
But once you SELL IT, you are CASHING OUT your investment and you will have a TRUE RETURNS of the TOTAL INVESTMENT.
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
15y
Tim B, explain to me how the $100/month the OP talks about... the topic is How is $100/month Profit Good?... how is this exactly bad? For $100 profit, the cash flow on a property may be $250/month if the depreciation is $1,800/yr, which is typical of a $60K house ($10,500 land, $49,500 improvement). We have a house just like this. The mortgage happens to be for $72,800. Yes, I'd prefer to have financing at or above our basis, but the property must be profitable... even $1... after full depreciation. Generally I use 2 or 3 months as vacancy and historically this rate is conservative. So to recap, $100/month profit means $250/month cash flow, almost all tax deferred cash flow. At the end of the first 12 months, $3K cash... no taxes due... many times $0 net invested (some times a few $K returned.)
Regarding "leave rental properties to the pros"... Absurd. REITs? These are stocks. Apples and Oranges.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
Yeah....I realize that Mike and I did post a study reinforcing that "expenses" average out to 50% over the long haul. However, that is not the only value center for owning real estate as has been pointed out endlessly across hundreds of threads. People never cease to pound the "it must cash flow or it is a bad investment" drum though when this is patently ludicrous.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
Originally posted by Bryan Hancock:
So what is the real difference between being "rich" and "wealthy"? This has puzzled me for some time.
From an article I wrote on my website on this very topic:
-------------------------------------------------
Being rich is a function of how much capital (cash) you have. Someone who is rich — in theory — has enough money that he can do whatever he wants to do today. Perhaps he has a job (or a business), but he also has enough money that if he wanted to take some time off (or quit), he has that option. Someone who is rich is can choose to fly to Paris on-a-whim for a weekend getaway, or can buy a new car without thinking twice. The rich guy has the ability to do today what many non-rich people don’t have the option to do, because the non-rich don’t have the money to afford it.
On the other hand, wealth is not just a function of having capital. It is a function of having capital plus having an ongoing income stream to ensure that capital needs are met far into the future. A wealthy person not only can fly to Paris tonight for a weekend getaway, but could stay there for the next 20 years without having to be concerned about running out of money in the meantime. A wealthy person can quit her job this year, and not have to worry about how she’s going to pay for that new car 10 years from now. The wealthy person has the ability to do what many non-wealthy people don’t have the option to do (even what most rich people don’t have the option to do), because the non-wealthy don’t have the *ONGOING* income stream to afford it.
While the rich have enough money to do whatever they want today, the wealthy have enough money to do whatever they want forever. And that’s an important distinction. Many non-rich people admire the rich, thinking, “That’s my goal!†What they don’t realize is that the rich are looking at the wealthy thinking, “That’s MY goal!â€
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
Thanks J....That definition of "wealth" is quite different than how it is used colloquially though. Many people I know use "wealth" to mean that someone is "not quite rich."
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
15y
Originally posted by J Scott:
Rental real estate will not make you rich; it may, however, make you very wealthy.
J, I would tend to agree. Rental property is not a get rich strategy at all. It is a strategy that can build wealth over time. Having had rental properties for 15 plus years now I have seen a nice accumulation in capital over that time.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
Originally posted by Bryan Hancock:
Thanks J....That definition of "wealth" is quite different than how it is used colloquially though. Many people I know use "wealth" to mean that someone is "not quite rich."
That's funny...and interesting...
I guess it just goes to prove that you have to be careful how you use terms like that, since not everyone is going to get the same meaning. When I think wealthy, I've always thought Warren Buffett, Bill Gates, Thurston Howell III, etc... :)
Investor and Architect · Ramsey, NJ · Member since 2010 · 305 posts · 84 votes
15y
Cash on Cash Return related to this...
Doesn't the amount of cash you have in the deal compared to the debt come into play here?
As you increase your cash thereby reducing your debt you can increase the dollar per door amount,....
I think we could all agree that $100 per month with $5,000 in the deal is a good return (24%). While $100 per month with $30,000 in the deal is maybe not such as good deal (4%)
Real Estate Investor · Elgin, IL · Member since 2009 · 135 posts · 9 votes
15y
Originally posted by J Scott:
Originally posted by Bryan Hancock:
Thanks J....That definition of "wealth" is quite different than how it is used colloquially though. Many people I know use "wealth" to mean that someone is "not quite rich."
That's funny...and interesting...
I guess it just goes to prove that you have to be careful how you use terms like that, since not everyone is going to get the same meaning. When I think wealthy, I've always thought Warren Buffett, Bill Gates, Thurston Howell III, etc... :)
I beleive the definition of wealthy to be similar to J's.
If you stop "working" today, how long before you would run out of money. As J pointed out, those with ongoing income streams that are greater than their expenses will never run out of money. That is my goal...when can I retire, see my asset base continue to grow and never run out of money. I am pretty sure that Bill Gates and Warren Buffett are "wealthy. I am also pretty sure...I am not YET wealthy! :cry:
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
Originally posted by Larry Kriz:
Cash on Cash Return related to this...
....
I think we could all agree that $100 per month with $5,000 in the deal is a good return (24%). While $100 per month with $30,000 in the deal is maybe not such as good deal (4%)
Should this be factored into consideration?
Absolutely.
To take this into account, I think a lot of investors here assuming a 100% LTV on the loan (in other words, completely financed with no cash outlay), and look to see $100/month under that scenario.
Of course, they don't really get 100% LTV loans, but that is the modeling they use to determine if they're getting $100/month.
SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
15y
For me, "wealthy" is strictly a measure of somebody's financial position. It says nothing about the level of fulfillment in their life. For example, a wealthy man may simply be a miserable miser, living alone in a huge mansion, without any friends or family to share his life with, but lots of cash, jewelry, assets, collectibles, etc.
To be "rich", is to have it all: money, health, joy, etc. A rich man, will have a loving family, plenty of friends, life-enriching experiences, and the bank account that allows for all of it.
Ever been to a memorial service or a funeral for a successful person? What do they say about the deceased: They lived a "wealthy" life or a "rich" life? Which would you rather they say about YOU? :-)
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
Great post Mitch! There are always tradeoffs in life and it is hard to have it all. I have erred on the side of having more freedom recently and haven't been disappointed. Time spent with my daughter while she is young is time I will never be able to duplicate.
Wholesaler · Salt Lake City, UT · Member since 2009 · 1k+ posts · 401 votes
15y
Mitch
Amen to that. Many years ago I could have retired at 34 on a big pile of real estate but I took a shot at the jet set by providing the capital for a start up company with another investor.
Well we both lost everything and ended up in a big hole. Funny thing the failure was the result of starting it to early, live and learn.
We went out to dinner one night with our wives to plan our new futures. I was down but he smiled and I know he was serious when he said he would rather have health then wealth so we were still rich. He was right.