Retiring from a portfolio of rentals

12 Replies

With a buy and hold strategy accumulating SFR rentals into a portfolio for retirement, let's say you cash flow an average of $300/mo per house (after all expenses/mortgage).

If I was to generate like $9k/mo in order to "retire", that means I need 30 houses, correct?

Don't want to sound negative, but I've talked to investors with a large portfolio of houses and they complained to me that profits were eaten up by costs such as replacing roofs, replacing AC's, vandalism or other issues from tenants, evictions, etc.  They even advised me "not" to do this.  Well, I've also heard from others in this forum that this is "the way to go".

My question is for those who have a portfolio of houses if you are truly able to retire even with the high ticket maintenance costs such as roofs, AC's, etc.? How do things look for you?  

(side note: I've even considered venturing into multi-family units instead so 30 houses won't seem so daunting)

If people are complaining about CAPEX, repairs, and vacancies eating up their cash flows, they weren't budgeting properly for expenses that EVERY rental has. That's like Walmart saying "our cashier's salaries are eating up our profits" or "having to pay those darn Chinese for the products we put on our shelves is killing our margins!". Every company/business has expenses... in the rental world, what you described is the cost of doing business.

Look up the 50% rule... see if it makes sense in your area (often dependent on vacancy rates, class of property, and taxes).  Assuming it does, figure out what your financing costs are going to be if any.  Now it's pretty simple math to see how much income the properties will need to generate in order to cash flow what you want.

If your properties are owned free and clear and generate $18,000 a month in rent, you should cash flow about $9,000 a month on average over the long term.  If you have financing in place then the rent has to go up 2 for 1 over the top of that ($3,000 in financing would require $24,000 in rent to create $9,000 of cash flow).

How many properties is that? Impossible to say. You could buy SFH's that rent for $450 a month or Duplexes that rent for $2,200 or vacation properties that rent for $6,000 a month. No right way to do it, some have better returns on equity then others, but many ways to skin the cash flowing cat and they all work.

Robert,

I was taught to work backwards on your retirement numbers.  So if $9k  is your desired monthly cashflow, then figure how to get to that number and not concern yourself with the number of rentals.  By doing this you focus on maximizing cashflow which will ulltimately get you to your goals.  BP has tons of information that should be helpful and I just bought and read Landlording on Autopilot by Mike Butler and highly recommend it.  It provides many strategies for managing your rental business and I found it quite helpful.

As for your concern with large cap ex items such as roof replacement, HVAC etc, as long as you budget for those items and still cashflow, you should be ok?  Brandon Turner has some great info on analyzing properties that should be very helpful to you.  Learn to use the 50% rule when you start your analysis of any deal.  As they say, you make your money when you buy, not when you sell.  If you buy them right you can always weather even the large cap ex items and still cashflow as long as you are also run a tight ship with your rentals.

Oh, and unit turnover often hurts your cashflow so download and read the utilimate guide to tenant screening from BP.  If you follow the guide you will fill your units with better tenants and make more money! 

Hope this helps and good luck

Garth

This is why it's best to own the houses free and clear and get rid of the debt service on them.   I know the prevailing mantra on here is to leverage and borrow against what you have.  But I'd much rather have that money in my pocket than going to the bank.  I have a good friend that owns about 30 free and clear at average $1000 a door.   Do the math.   Would you rather be making that or $9000 a month before repairs? 

@Robert L.  I believe that if you calculate for capex, repairs, vacancies and PM when you purchase each and every property, you will do fine. If each purchase meets your requirements ($100 per door net, etc) after looking at these numbers, then your portfolio as a whole will be strong. 

The people who are complaining could possibly fall into three groups

1) they never equated for these expenses, only looked at rent - mortgage = profit (which will come to haunt you some day)

2) or they just complain about spending money because they are so used to the cash flow that they think it is all theirs. I know people in all areas of business that complain about business expenses as if it isn't just part of the game. Sometimes you have to step over dimes to pick up dollars, pay the expense and move on. Expenses are not amortized and prepaid, you go 20 years without doing a roof or furnace and then you do 3. Over the 20 year period, this is perfectly normal, people just feel it more (emotional reaction) because of the timing.

I was just reading about the first two expeditions to the South Pole. The one group planned everything and only did 15 miles a day, regardless of weather. The second group pushed on good days, struggled on bad days to make up ground and ended up all dying. 

Bottom line, your expenses will probably be around 50%, calculate for that on every purchase and your portfolio will not disappoint you. Have unrealistic expectations and it will, possibly breaking your spirit and pushing you out of the asset class, which is a shame because it was all self induced. And it happens all the time.

Why not focus on properties that cashflow $600 a month so you just need to acquire 15 to reach your goal? Maybe I just think that way where I am located because SFR investing is not really possible a large majority of the time.

I can see someone that's frustrated with 30 separate houses in 30 different locations with 30 types of construction complaining to ya. Hey, I complain too.  Someone may have 30 rentals bringing in $30k/mo and will complain to whomever is listening about the $6k 20-yr roof they had to replace.  As it's been said above, each property functions as it's own little business.  Factor the condition of the major mechanicals and budget for them.  If I had 30 houses, I would expect to replace 2 roofs a year.  Have it set aside and bust em out.  What happens when you've been in the game a while, and now your 30 rentals don't have any debt?  You're making $20k/mo with management.  If you believe you can or you believe you can't, you are right!  

I totally agree that there will be naysayers and negative people in anything.  I won't let the complaining investors get me down.

For those who are generating money from rentals who can "retire", I was more getting at how they were doing it.  @Michael Noto I would love to get $600/mo cashflow AFTER expenses--to do that with SFH is tough--so that's why I was looking at perhaps multi-units instead.

I've got 3 rentals right now, but looking at the "end-game" to create a solid plan to $9k/mo.  I shiver at the thought of 30 rentals so I really prefer smaller number but higher yields and a good strategy of achieving that...(planning for the new year :-) )

I like the multi-families, as you point out @Robert L.     It takes about the same amount of time and trouble to purchase a multi as a single-family.  I barely have 10% of my portfolio in SFRs anymore.  I like to seller-carry or lease option homes.  With multi's you can add value by managing the property and tenants better, cut expenses, increase income and find sellers not so emotionally attached to name a few advantages.    Good job on obtaining your first 3 rentals!  

When those investors complain to you about how tough they have it - offer to take the troubling properties off their hands and see how they react to that. <g>

stephen
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Originally posted by @Robert L. :

With a buy and hold strategy accumulating SFR rentals into a portfolio for retirement, let's say you cash flow an average of $300/mo per house (after all expenses/mortgage).

If I was to generate like $9k/mo in order to "retire", that means I need 30 houses, correct?

Don't want to sound negative, but I've talked to investors with a large portfolio of houses and they complained to me that profits were eaten up by costs such as replacing roofs, replacing AC's, vandalism or other issues from tenants, evictions, etc.  They even advised me "not" to do this.  Well, I've also heard from others in this forum that this is "the way to go".

My question is for those who have a portfolio of houses if you are truly able to retire even with the high ticket maintenance costs such as roofs, AC's, etc.? How do things look for you?  

(side note: I've even considered venturing into multi-family units instead so 30 houses won't seem so daunting)

Re: the suggested made by @Garth Kukla  

Here's a link to the tenant screening blog I believe he's talking about:

http://www.biggerpockets.com/renewsblog/2013/01/27/tenant-screening-the-ultimate-guide

Actually, looks like this is the correct link:

http://www.biggerpockets.com/renewsblog/2013/01/27/tenant-screening/

@Robert L.  I definitely see the logic in looking at multi-family. When I was studying the financial aspects of real estate, I determined that that had the greatest potential for long term consistent growth with the least amount of input (time/miles) over an investing career. This hypothesis doesn't not take account the fact that you might want to stay semi local and that simply isn't possible in your market in multi-family. 

I believe I read that Serge said somewhere that you have to take what the market gives you at different times. Whether this is rehabbing foreclosed homes, building because things are too expensive, etc. Sometimes the market or economy provides restraints, sometimes your life or time provides others.

I believe you can build a 9k/mo retirement income with both, either or any. The timeline you are working with with dictate your options based on the compound growth rate required to get where you need to in time from where you are.

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