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Old 06-04-2017, 07:31 AM   #1
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Hi, I Am Already Retired!

My name is Ashley and I am a 33 year old married mother of two from North Carolina. I am actually already retired, but I feel like I really need to diversify our income stream. I was an English teacher, but after I had our two boys, I realized I didn't really like that whole working thing. Luckily I have a partner who supported me in drastically downsizing our lifestyle and investing his income into a rental real estate portfolio. I happened to buy super low-end rental properties (most were from $13k to $50k) at the best possible time (starting in low point of recession), and just recently tipped our income over the threshold where I had replaced my husband's income. We have a property manager who takes care of all the properties, so we are now both completely retired.
We own 10 properties (total portfolio value probably just shy of $1M) and have about $100k cash savings. We bring in about $6k/mo in rent and have about $4k in regular expenses (which will decrease as we pay down our 3 mortgages). The reason I am here is twofold: I want to diversify our investments and income stream more and create generational wealth for our boys. I had planned to buy another rental or two with the cash we have saved, mostly because I don't really know what else to do (I'm a bit of a one trick pony). Any advice is welcome!
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Old 06-04-2017, 08:59 AM   #2
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You have a property manager and for that you pay ~10%? or $7200/yr? Do they find tenants and do background checks? If not you may consider doing the management yourself to increase money (and look into the tax situation since you no longer work you can define yourself as working the real estate profession and take advantage of different tax laws).

I think you may get better returns from real estate than stocks but that markup isnt free - you usually have to work for it in time dealing with repairs, contracts, and people. It also depends - did you luck out on timing and location? Had you lucked out by picking the right stock you might have made more.

I like equities because I don't have to work to manage them. If I look at returns it makes even more sense: My stocks increased by a factor of 1.46 and my rental increased by roughly 1.45 in the last 3.5 years (based on net house value change and rents - although property prices are down this year 13% due to oil and rents have dropped 15%) That was me buying a house in the bottom of the market 2011 (originally to live in) in a developing high demand urban area so some significant appreciation was factored in there.

I would look at your loan terms and if you interest rates are low, I might invest my profits into stock market rather than paying down the loans.

Forgot to mention some specifics with rentals - you may end up with $2mm in house value in 30 years but your tax bill at sale could be based on $2.3MM because you were required to include depreciation. Rentals look attractive because they accelerate benefits and delay costs. Even though they are delayed, you will eventually have to pay for them.
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Old 06-04-2017, 09:19 AM   #3
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Hi! Thanks for replying! You've given me some things to think about! Our property manager does everything for us (background checks/finding tenants/repairs/maintenance/evictions if necessary) for 8% a month. They are awesome! Honestly, I am not interested in managing them (that sounds an awful lot like work). All our rentals have at least doubled if not quadrupled in value since we bought them, but are still cheap properties if you look at their absolute value. Most of them are in outlying areas of Charlotte that benefit from the proximity of a growing city but still have low real estate prices. It would take a lot for me to sell one since I am getting such a high return on my investment.
I guess I'm wondering what I should do now that real estate in my area is costing more. I'll get an ok return still, but what else could I do with $100k that will be more diverse?
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Old 06-04-2017, 09:41 AM   #4
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Old 06-04-2017, 09:57 AM   #5
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You are 100% in real estate in a focused area. Keep in mind house prices and interest rates are inversely proportional. Payment stays the same but interest eats more.

Just investing in stocks (say put in 70% of your 100k and any profits beyond the minimum mortgage payment) into stocks. Stocks have generated around 7% per year after inflation over long term. You could build assets to take out 3% annually when you need additional income.
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Old 06-08-2017, 07:06 PM   #6
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Hmmm, I guess I wouldn't say you were making such a high return..... ignoring your tax situation which would require more details, you are netting 24k on your 1 million portfolio. That looks like 2.4% to me. Future appreciation may be less than you previously experienced given your description. I wouldn't be buying into that deal today....
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Old 06-08-2017, 07:29 PM   #7
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Hmmm, I guess I wouldn't say you were making such a high return..... ignoring your tax situation which would require more details, you are netting 24k on your 1 million portfolio. That looks like 2.4% to me. Future appreciation may be less than you previously experienced given your description. I wouldn't be buying into that deal today....
I didn't say, but I paid about $300k for all of it, mostly during the recession.
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Old 06-08-2017, 07:58 PM   #8
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Congrats on your early retirement. It's good that you want to diversify. Good as your real estate/rental income has been, you can't count on that for the long term. Moving into other asset classes will be tricky since you are so concentrated (you may have to sell something which you are, not surprisingly, reluctant to do.) Diversifying using only your spare income might be too slow to prevent the effects of an eventual down-turn in your concentrated asset class (real estate/rental.) YMMV
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Old 06-08-2017, 08:19 PM   #9
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Congrats on your early retirement. It's good that you want to diversify. Good as your real estate/rental income has been, you can't count on that for the long term. Moving into other asset classes will be tricky since you are so concentrated (you may have to sell something which you are, not surprisingly, reluctant to do.) Diversifying using only your spare income might be too slow to prevent the effects of an eventual down-turn in your concentrated asset class (real estate/rental.) YMMV
Why can't you count on the rental income for the long term? People rented before the stock market existed. Mine has held up (and increased) over the last 20 plus years. Did great in the downturn of 2009-2012, when no one was buying besides us investors and a lot more people were looking for rentals.
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Old 06-08-2017, 09:49 PM   #10
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Why can't you count on the rental income for the long term? People rented before the stock market existed. Mine has held up (and increased) over the last 20 plus years. Did great in the downturn of 2009-2012, when no one was buying besides us investors and a lot more people were looking for rentals.
That's kind of what I was wondering! Especially since the real estate market in Charlotte is booming, and rents are rising even faster. I have what I call my "stupid number" at which I would sell any given property, but I think that my rentals will weather an economic downturn because they are lower end, and are the kind of place someone would move into if the economy went south. I just don't want to be stupid and have ALL my money in real estate.
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Old 06-09-2017, 06:50 AM   #11
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Why can't you count on the rental income for the long term? People rented before the stock market existed. Mine has held up (and increased) over the last 20 plus years. Did great in the downturn of 2009-2012, when no one was buying besides us investors and a lot more people were looking for rentals.
I'm glad rentals have been good for you. Lots of folks here use rentals as a part of their ER portfolio. I did it too, back in the day.

To answer the question: No asset class is always "good" which is why diversification is the recommended approach to all of investing. In OPs case, there is little diversification. It's all dependent upon good rental income. When (not if) there is a downturn in rentals, it could be a problem. Diversity (not rentals in general) was the issue I was addressing. Naturally, you have had good luck with your rentals so YMMV. Cheers.
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Old 06-09-2017, 07:06 AM   #12
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The only time I would sell a rental to buy stocks would be if stocks were significantly undervalued and real estate was significantly overvalued. Transaction costs and capital gains/depreciation recapture make the exchange of asset classes very pricey.

I don't disagree with diversifying, but I would invest excess income into whatever asset class makes the most sense at the time you receive the income. "Investing" in debt payoff may at times be the best use of capital, especially when capital markets are in nosebleed territory because of too much money chasing too few assets. Unlike others here, I believe collecting cash when asset prices are high is not a bad strategy. Yes, Warren Buffett hates cash, but he does not invest it unless the investment numbers make sense.

In the next downturn, the OP may want to consider using stored cash to move up the quality of the properties she purchases. Better neighborhoods are generally easier to manage. I would also look at commercial and small light industrial properties if the prices ever drop to the point they become bargains.
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Old 06-09-2017, 11:14 AM   #13
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I didn't say, but I paid about $300k for all of it, mostly during the recession.


I'm glad that you have done so well and I hope the future will be as bright, but it is a common cognitive error to consider your return based on the purchase price of your real estate..... you currently have $1,000,000 ( if that is the value) invested in real estate earning 24k, not 300k earning 24k. Further appreciation definitely should enter into your consideration of potential return, but keeping your $1,000,000 in this current portfolio is a decision to accept 2.4% plus the expected appreciation.....
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Old 06-09-2017, 12:00 PM   #14
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Even with the recent run up in prices, OP is likely going to get at least the inflationary increase in value. Maybe more, as her market is pretty strong. Rents will likely increase over time as well. Plus, she probably pays minimal income tax on the income, thanks to the non-cash depreciation expense.

I think real estate, bought right, is a good way to establish a solid income stream relatively quickly. In this case, the purchases allowed these folks to retire on the income. Once the basic income needs have been met, excess income can be invested into paper assets that are more volatile. In my view, OP is on the right track.
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