9-10% Return & Peace of Mind

Buying & Selling Real Estate
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9-10% Return & Peace of Mind

Andre O.
Member since 2021 · 30 posts · 15 votes

Hello everybody. I understand the concept of controlling properties to build wealth and the benefits that come from finding a deal and using the banks money. Given you had 250,000 liquid why wouldn’t one:

1) Purchase a 3 Bedroom 2 Bath Condo

2) Rent out two rooms for 900 monthly each 

3) Take the third room “effectively removing your rent payment you will need anywhere”

Result - 2700 x 12 = 32,400 minus 10,000 for HOA and Yearly Property taxes. This leaves you with approximately and essentially 22,400 liquid profits per year. Plus peace of mind you own the place free and clear. That's effectively a 9% return on your money, and now you can aggressively invest your income from your business and this extra money with really no risk at all. You have the freedom in life to start another new business and can take your time to build one.


What am I missing here? This plan seems like a no brainer. In the future with a wife and family the finances change a bit, but the peace of mind of even renting the whole thing out which finances a house with the future family seems like a better decision than to bank on extra returns. Thoughts please?

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  • Brendan Miller
    Rental Property Investor · Gilbert, AZ · Member since 2020 · 210 posts · 163 votes
    5y

    @Andre O., it's definitely a great strategy for beginners to get started, it's called househacking and you'll hear it referred to quite often on BP podcasts and within the forums. I don't think it's quite a 9% return but still may be a no brainer if it covers your living expenses. For the 9% calculation, you're using 2700 which would be $900 for all 3 rooms. If you're going to be living in one, then you'll only be getting 1800 in rent, not 2700. As for other expenses, you'd need to account for vacancy, maintenance repairs, and CapEx expenses to find your true return %. Regardless of the return, I think this strategy is a no brainer for most new investors, especially if you're single and don't own a property currently. You're either paying rent to someone, or having others pay your mortgage for you - sounds like a no brainer to me!

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  • Andre O.
    OP
    Member since 2021 · 30 posts · 15 votes
    5y

    Thanks for the reply @Brendan. The extra $900 per month added to the 1800 to make 2700 assumes that we all have to live somewhere and pay rent. Am I thinking about this incorrectly? Assuming all 3 rooms were rented for 2700 you’d have closer to the 9% return. Taking into consideration this would be ones first property, living elsewhere would still yield an expense and so I am accounting for this money saved into the above equation. 

    As far as I understand about the condos in South Florida, you are really only paying for HOA and property taxes if the place is free and clear. There is always a risk of getting hit with a special assessment however. Vacancy as you mentioned, was not accounted for and neither were repairs. So the return on investment is looking to be somewhere closer to 7% taking those into consideration.


    Still makes more sense to me to take this route which then allows one to be extremely aggressive in risk taking and investments.

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  • Nick C.
    Investor · Tampa, FL · Member since 2011 · 2k+ posts · 3k+ votes
    5y

    It's not a bad strategy, you had me until the "no risk at all" part of the post. Just off the top of my head - tenant(s) stop paying, tenant(s) injure themselves and sue you, major repair in your unit, major repair in another unit damages your unit, HOA decides to not allow rentals anymore, market could tank and you may need that $250k for something else at the same time, etc.

    I'm not trying to dissuade you, but an investor needs to think of the risks of any investment, and figure out if the return justifies those risks. 

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