Built a 6-figure profit with rentals. What's next?

18 Replies

Fast forward 20 years from first reading Rich Dad Poor Dad, I've built up a portfolio of 50 rental houses, a 10-plex, a couple office buildings, and a tax-free annual net profit of around $200k.  I've achieved my dream of leaving the rat race!  Or have I?  You see I manage my properties myself and my wife and I want to fulfil a dream of moving out of state to live somewhere warm and close to a beach but I'm realizing that if I hire property managers to take my place, my profit will be slashed in half or worse. :(

So it's back to the drawing board.  To move away, we either cut our lifestyle in half or figure out a way to give our portfolio a "make-over" to somehow squeeze more profit out of it while at the same time hiring management so that I don't have to work on it full-time..

I'd love to hear any success stories of others who have been in our shoes or advice on what direction to take.  Some ideas I've had are to start selling off properties and try to 1031 exchange into an apartment complex with management or sell off properties and 1031 exchange them into properties closer to where we want to move to.  I think maybe a mastermind class would be helpful if anyone has a suggestion for that..

Thank you!
  

A PM should cost around 10% of gross max, not 50% or worse.

If your doing repairs yourself then your not living your best life anyway.

Start interviewing PM's and turning over a few properties to start with.

You could also use multiple PM's and get rid of the lower performing ones over time.

I am not crapping on the dream but what you did was trade one rat race for another.  Difference is you own this one.  That is a major difference of course and one to be celebrated.  

No matter what route you go the only way to get more of your time back is to hire the work out.  Doesn't matter if you trade in properties for other properties, the only way out is to replace yourself.  

Given what you have you don't necessary need to go the PM route, you could always hire one internally and keep it all in house, you just are not doing the day to day, your staff is. But the only way to regain time is sell it all or bring in someone/hire a PM to manage for you.  

Congrats!  

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Congrats on your success. Hiring a PM and living in a different state would eat into your profit. You could sell the 50 units and buy say10 properties-airbnb maybe-and have that supplement your gains from the sale. You might find that too much lounging on the beach too becomes a bit sedentary. Doing deals gets into your blood! All the best!

A PM sounds like the Way to go in your case. I’m signing up pretty much my new rentals with a PM. Also a PM is not going to take 50% of your profit. If you’re willing to give a PM 50% of your profit I’m sure there would be lots of PMs fighting for your business. Why not start handing over properties as they come open on a test run.

Updated about 1 month ago

IMO Hanging out at the beach would get boring mighty fast. Maybe you need to simply take a few vacations.

Assuming only 50% of all rental income is profit, your properties gross $400,000 a year and a property management company would take 10% or $40,000. 

Be realistic with your numbers. If property management costs $40,000 or $80,000 per year, you have to ask yourself if you're willing to stay put and keep working for that amount or if the beach is what really calls you.

As others have said, it's a seller's market so you may want to consider selling at least some of the properties and investing in something that produces a better return with less effort. Maybe storage units?

Thank you for your advice.  I saw several posts questioning why hiring a property manager would cut my profits in half.  Here are the numbers:

Annual total gross rent received: $800,000

Annual cost of property management (10%): -$80,000

First month's rent goes to property manager as finder fee: -$66,666 / 2 year lease = -$33,333

Total cost of property manager: -$113,333

Current annual profit; $200,000

Net profit after paying property manager: $86,667

I like the idea of selling some properties to 1031 exchange to a larger self-managed property like an apartment complex but I don't know how feasible it is to try and sell enough properties simultaneously to time it correctly for a 1031 exchange.  I'm also thinking about hiring my own leasing agent to work directly for me to do most of the management work.  

Maybe I didn't purchase these properties correctly to make enough profit but I did the best I could.  Another idea is to refinance a lot of these to get the monthly payment lowered in order to offset the property management fee.  Still brainstorming.  Thank you again for your input!

@Erich Henson ,

Property management fee 10% plus finder fee is way too high for the portfolio that you have. You can always negotiate to lower the property management fee.

Refinancing is also a good idea since the rate is low now. However, i would not be comfortable with commercial loans balloning every few years in my retirement. May be there are commercial lenders out there that offer long term loans?

With the current hot market, i would select a few properties and 1031 to bigger, less management intensive ones, like multifamily or net lease. Just wouldn’t sell all at once.

Originally posted by @Erich Henson :

Thank you for your advice.  I saw several posts questioning why hiring a property manager would cut my profits in half.  Here are the numbers:

Annual total gross rent received: $800,000

Annual cost of property management (10%): -$80,000

First month's rent goes to property manager as finder fee: -$66,666 / 2 year lease = -$33,333

Total cost of property manager: -$113,333

Current annual profit; $200,000

Net profit after paying property manager: $86,667

What's the average annual income of a full-time property manager? Shop around and find out. I bet it's less than $60,000 a year which is half what you assume the property managers will charge you. Educate yourself on what a good property manager looks like, then shop around and compare prices. When they tell you management will cost 10% plus first month's rent for all new leases, explain that you could hire your own dedicated PM for $50,000. It's all a negotiation. I charge 11% and no leasing fee and drop it to 9% for Landlords with eight or more units. If you walked in my door with 60 that gross $800,000 a year, I would be willing to drop it to 6%. That would make enough for me to hire another full-time employee and that employee could manage your 60 plus 60 more, meaning the next 60 would be profit.

If you honestly can't find anyone, just hire and train your own. There are plenty of people out there looking for a $60,000 job!

I just did a quick search and see First Service Residential has nearly 400 reviews and a 4.6 star rating. Shop around and see what you can find. Just remember: cheaper doesn't mean you'll make more money.

You can start by going to www.narpm.org to search their directory of managers. These are professionals with additional training and a stricter code of ethics. It's no guarantee but it's a good place to start. Regardless of how you find them, try to interview at least three managers

1. Ask how many units they manage and how much experience they have. If it's a larger organization, feel free to inquire about their different staff qualifications.

2. Review their management agreement. Make sure it explicitly explains the process for termination if you are unhappy with their services, but especially if they violate the terms of your agreement.

3. Understand the fees involved and calculate the total cost for an entire year of management so you can compare the different managers. It may sound nice to pay a 5% management fee but the extra fees can add up to be more than the other company that charges 10% with no add-on fees. Fees should be clearly stated, easy to understand, and justifiable. If you ask the manager to justify a fee and he starts hemming and hawing, move on or require them to remove the fee. Don't be afraid to negotiate!

4. Review their lease agreement and addenda. Think of all the things that could go wrong and see if the lease addresses them: unauthorized pets or tenants, early termination, security deposit, lease violations, late rent, eviction, lawn maintenance, parking, etc.

5. Don't just read the lease! Ask the manager to explain their process for dealing with maintenance, late rent, evictions, turnover, etc. If they are professional, they can explain this quickly and easily. If they are VERY professional, they will have their processes in writing as verification that it is enforced equally and fairly by their entire staff.

6. Ask to speak with some of their current owners and current/former tenants. You can also check their reviews online at Google, Facebook, or Yelp. Just remember: most negative reviews are written by problematic tenants. The fact they are complaining online might be an indication the property manager dealt with them properly so be sure to ask the manager for their side of the story.

7. Look at their marketing strategy. Are they doing everything they can to expose properties to the widest possible market? Are their listings detailed with good quality photos? Can they prove how long it takes to rent a vacant property?

This isn't inclusive but should give you a good start. If you have specific questions about property management, I'll be happy to help!

You could also start outsourcing the backend office stuff to remote workers for under $10/hour.

If you have trusted contractors, the remote workers can also run 80% of maintenance.

For well less than $80k you could hire a person as an employee to be your property manager. Then you can control the cost better too and train the person to do what you want.

Or just sell it all and time to become an investor in  EFTs or stock.

Thank you everyone for your advice.  I'm liking the idea of hiring someone and teaching them to manage the properties.  I have a gal who is a realtor that is interested.  I'll work on that and see how it goes.  In the meantime, I am looking into 1031 exchanging some properties in multi-family.  My hope is to find a built in property manager who I could add the single family management too and growing that person's team..  Just trying to figure things out.  Thanks again.

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@Erich Henson like others have said you can probably get the management for 50-80k a year rather than 100K plus.

The important thing to think about is that cashflow probably only represents about 50% of the return you make each year. Pay down and appreciate are likely sizable pieces if you are grossing 800K I’m guessing you have somewhere in the 400K range of loans and that 100-250K of that is pay down. To make up the extra 50-100k a year in life style you want you could likely either sell a unit and likely pay little to no tax on it if handled properly. or cash out refi some properties to get the extra money. The danger in this is if the market crashed for a bit and you no longer had the equity to pull or sell for a time. Cashflow isn’t the only way to get money out of properties.

@Erich Henson , Start with your stated goal - move someplace warm and have more time with your family.  The most powerful ongoing strategy I've seen (and used myself) is a combination of sec 121 and sec 1031.  1031 is for the sale and repositioning of investment real estate.  It is tax deferred.  Sec 121 is for the tax free sale of your primary residence that you've lived in for 2 out of the 5 years prior to sale.

We made this a two step process.

1. Use the 1031 to reposition your rental portfolio where ever you want.  And in whatever asset class you want (managed or not and in your new backyard or not).  But one of your replacement purchases is going to be something nice enough for you to live in and in the area you want to move.

2. After using that property for investment for a year or two you sell your current primary residence.  You will get the first $500K from this ta free.  That becomes your kicking around money along with whatever rental income you're generating.  Where do you move???  Into the former investment property that you picked out a couple years ago.  The conversion is not a taxable event.  And once you've lived in that property for the right amount of time you'll get a proration of that gain tax free as well.  And where do you move??? Into another former rental .  Rinse and repeat!!

With each transaction you are generating some tax free dollars, some dollars you pay tax on,  and ongoing rental income to live on.  And you do this without increasing your debt.  So with each transition you get money in your pocket and continued debt pay down and residual income.

Based on the numbers, it's either over-leveraged or the rates are too high.  Either way, I think the consensus is to get a PM and free up your personal time to enjoy your dreams.  You have earned it.

Originally posted by @Erich Henson :

Fast forward 20 years from first reading Rich Dad Poor Dad, I've built up a portfolio of 50 rental houses, a 10-plex, a couple office buildings, and a tax-free annual net profit of around $200k.  

 How do you arrive at a $200K net profit without paying taxes?