Why become a Landlord if it take 10 year to recoup cost?

10 Replies

Hi everyone, I am beginning to start investing in real estate. I've been doing my research, watching youtube video and looking on forum. Couple thing I've been trying to do is to find property to flip and possible look at houses to rent out. However, I am trying to figure out what is the benefit of renting a property out. I know that you can get cash flow, but in the end it seem to me that it can take upward of 10+ years until you are in the green to pay off your property. I will just like to get a general understanding and see what are the pros and cons. Thanks! I also live in philadelphia, what are some good places to look for? 

Hi Edward, I don't know anything about real estate in Philly, but in general my opinion on acquiring rentals;

Save up enough money to have 25.0% down 

Only buy on a 15 year loan where the rent you can realistically expect, at least breaks even with that payment (don't buy if it's a negative cash flow). 

Repeat this process as many times as humanly possible. 

At year 15, which will come whether you like it or not (so you might as well make it awesome), an avalanche of wealth via income producing assets will start, you likely be a self made millionaire and there's a good chance you'll never have to work again. In my opinion, all you will have really paid for the assets is the initial 25.0% down and tenants pay off the loans from that point forward. 

My take is different from most on the forums, I want to own the assets and create my own income, I'm not really going after cash flow. 

Depending on situation, I know it could take years to come up with the 25.0% down. 

Buying rentals on 30 year loans going after $200.00 monthly cash flow is not exciting to me, I want a rescission proof plan to build long term wealth via assets I control. 

@Edward Shen

Newbie + flip = HIGH risk . If you believe what you see on HGTV or what anyone who has an interest in you starting out as a novice flipper (contractors, project manager, lenders) tells you, you are serious risk to lose money and sleep. For every house in the Philly market with numbers that work, there are hundreds of experienced guys ahead of you to get those under contract. You are left with the homes whose numbers do not work. Add to that your inexperience...  Of course you have the ability to become an amazing flipper. And there is no better way to learn than to just do it. But keep in mind that your first one will not go well unless you have the most incredible fantastic luck. If you can accept likely loss and big headaches as your real estate "tuition" go for it. I would also consider new construction - much easier than flips in many ways. Easier to do the numbers, no surprises, better contractors.

MY business is buying houses, fixing them and then renting them.  I pay cash.  No loans, no refi.  My goal is to earn more through the net rent than the same money would get in other investments such as stocks, etc.  So if I invest say $100,000 and have $12,000 net annually from the rent, then my return is doing well...12%.  It adds diversity to my investments.

@Edward Shen  My approach is to have a house paid for under 7 years . The first property took a bit longer . When the first was paid for , I used the profit to pay down the second , when 2 were paid for those profits paid off the third . I started that in my early 30's . Now I can pay off a new rental in less than 4 years if I want to . 

I am looking at University area (thinking that the school will most definitely be there for over 20 year and grow). If I were to buy a building and create 6 units in which allow me to get rent for maybe 5k total a month... How much should I spend total for purchase and renovation? 

Originally posted by @Dennis Folk :

Hi Edward, I don't know anything about real estate in Philly, but in general my opinion on acquiring rentals;

Save up enough money to have 25.0% down 

Only buy on a 15 year loan where the rent you can realistically expect, at least breaks even with that payment (don't buy if it's a negative cash flow). 

Repeat this process as many times as humanly possible. 

At year 15, which will come whether you like it or not (so you might as well make it awesome), an avalanche of wealth via income producing assets will start, you likely be a self made millionaire and there's a good chance you'll never have to work again. In my opinion, all you will have really paid for the assets is the initial 25.0% down and tenants pay off the loans from that point forward. 

My take is different from most on the forums, I want to own the assets and create my own income, I'm not really going after cash flow. 

Depending on situation, I know it could take years to come up with the 25.0% down. 

Buying rentals on 30 year loans going after $200.00 monthly cash flow is not exciting to me, I want a rescission proof plan to build long term wealth via assets I control. 

If you're building a recession proof plan, 30 year loans are a lot more recession proof than 15 because they give you a lot more cushion in the event of vacancies or rent drops.

By paying off the loan early you're essentially making a bet than you can't earn more than the interest rate (4% to 5%) on that extra money you're putting towards principal. 

By doing 15 years you're also limiting how quickly you can acquire rentals.

All things to think about anyways.  I liken it to traveling on the interstate.  If you take the interstate (akin to 30 years mortgages, lots of leverage) you're going to get to your destination a lot faster most of the time.  However, sometimes there are major accidents and the interstate gets backed up...so sometimes the alternate routes are better.  All up to personal preferences.
 

 

@Edward Shen why do anything?

There are no fields you will go into that have an immediate pay out. Everything has a time component. You must decide how your time is best spent, how you can employ others time in trade for something of value that your offer.

The world is real estate, there's no other field where you can start with such a low barrier to entry, that also is a complete necessity to the human species and with such profits as can be made.

Originally posted by @Account Closed What price point do you buy your rentals at? Do you rehab them or are they ready to rent when purchased?

 I buy at an average of $150K . Class b areas . Some have been total guts some were just clean and paint . I am a contractor so the work isnt a problem

Originally posted by @Edward Shen :

Hi everyone, I am beginning to start investing in real estate. I've been doing my research, watching youtube video and looking on forum. Couple thing I've been trying to do is to find property to flip and possible look at houses to rent out. However, I am trying to figure out what is the benefit of renting a property out. I know that you can get cash flow, but in the end it seem to me that it can take upward of 10+ years until you are in the green to pay off your property. I will just like to get a general understanding and see what are the pros and cons. Thanks! I also live in philadelphia, what are some good places to look for? 

I bought a house with 20% down and put a 30 year mortgage on it and then rented it out. The rent covers the mortgage cost and gives me a little cash flow. I wait for 5 years and now I have not only significant appreciation, but also 5 years of debt pay down. I then refinance the property pulling out cash. The new mortgage payment is still low enough that all expenses are covered by the rent and I still get cash flow. 

I have done this several times and pulled out tens of thousands of dollars. Next year I will refinance another property and hopefully be able to pull out $75,000. I always use the proceeds to pay off debts and buy more real estate, furthering the cycle. 


Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you