get rich quick scheme - real estate

[97guns]

you need income to be able to walk from a job, real estate makes a great stream of income. my brother is looking to add another property heres the numbers

single family home for $95K

put down 20K

mortgage of $400/month

prop tax $100/month

insurance $30/month

rent for $950-$1000/mo.

works out to a positive cashflow of $420/mo.

in 4 years give or take he will have gotten his entire 20K investment returned to him and everything from then out is pure gravy do that a few more times and you have a self made retirement plan.


now i know these numbers are location specific, i am lucky enough to have a market that my tenants commute in 60 miles for work in a large metro area with a thriving economy in comparison to other parts of the country. i bought cheaper than the metro area and can rent for less also. with these kind of numbers getting 20K into a property is a no brainer and in my eyes a get rich quick scheme.

 

[Nords]

you need income to be able to walk from a job, real estate makes a great stream of income. my brother is looking to add another property heres the numbers
in 4 years give or take he will have gotten his entire 20K investment returned to him and everything from then out is pure gravy do that a few more times and you have a self made retirement plan.
now i know these numbers are location specific, i am lucky enough to have a market that my tenants commute in 60 miles for work in a large metro area with a thriving economy in comparison to other parts of the country. i bought cheaper than the metro area and can rent for less also. with these kind of numbers getting 20K into a property is a no brainer and in my eyes a get rich quick scheme.

I'm impressed with how adroitly your brother has reduced his maintenance costs, his repair expenses, and his vacancy rate to zero.

BTW the title of the "FIRE and Money" forum includes the caveat "(Get rich quick schemes belong in "other")". There's a reason for the rule...

 

[REWahoo]

... a no brainer and in my eyes a get rich quick scheme.

I see a lot of sad parallels between "get rich quick scheme" and the term "no brainer".

 

[Gumby]

BTW the title of the "FIRE and Money" forum includes the caveat "(Get rich quick schemes belong in "other")". There's a reason for the rule...

So let it be written, so let it be done.

 

[73ss454]

I have a friend of mine who owns 4 rentals. 3 out of 4 are not rented at this point. Do you think he's happy with the math?

 

[W2R]

I know some people thrive on extracting money from belligerent, truculent tenants, getting repairs done at inconvenient times, and all the other joys of landlording, but to me that's too much like work. No way, no how, not for me! Honestly I'm glad you found something you like to do, though, 97guns.

 

[97guns]

I'm impressed with how adroitly your brother has reduced his maintenance costs, his repair expenses, and his vacancy rate to zero.

BTW the title of the "FIRE and Money" forum includes the caveat "(Get rich quick schemes belong in "other")". There's a reason for the rule...

pure jealousy, i dont know what adroitly means, barely even graduated high school. never said theres no expenses or vacancies, reread my post, i said give or take 4 years.

and for the record i just glanced at the forum topic and did not see the "belongs in other", just saw the get rich quick.

for all the naysayers my RE portfolio of 4 properties has had 1 vacancy in 2 years, yes ive put 2 stoves in, did the floors on 2 units and have done numerous repairs but the fact is everything is tax deductable.

this place isn't very friendly, its a retirement forum and were suppose to talk about retirement, the few times i talked about my retirement it gets attacked like a pack of hungry dogs. am i coming off arrogant because im retired at 39? i thought everyone here is retired.

 

[Bestwifeever]

Is there popcorn?

 

[97guns]

wth everyone here is a mod and an admin? no wonder......

 

[arebelspy]

Standard calculation is 50% of your gross rent will go to expenses. 10% of that is management, so if you self manage, 40%. That covers vacancy, repairs, capital expenditures, insurance, taxes, etc. It's a rough rule of thumb, but one of the more accurate ones.

If he's renting for 1000, that leaves 500 after the 50% rule. Minus the 400 mortgage, and he's cash flow positive $100. (Another $100 goes in his pocket if he manages it himself. But that's a property management side job that's getting that extra $100, it's not a return on capital.)

That's good. Many experienced investors shoot for $100 per door.

That's a yearly return of 6% (100/mo x 12 mo/yr divided by 20k investment). Plus his principal paydown is likely adding another 2% or so to his return. And there's a potential for appreciation (will match inflation long term, IMO), plus potential for tax shelter via depreciation. So he's maybe earning 10% or a bit more maybe.

But it's not a get rich quick scheme, and it takes a lot of work.

I own several rentals, and am in the process of purchasing more. I'm very bullish on real estate right now, because of where we are in the real estate cycle. That being said, it's not for everyone. It has plusses and minuses. Real estate is my plan to transition to semi-retirement. Then I plan on exiting from it at some future unknown date for full retirement.

I'd be glad to chat more about it, but the problem is your numbers aren't realistic.

In the short term, sure. My expenses were low this year. But over the long-term average, they'll approach the 50% rule.

And the people around here can be hard on people sometimes. Don't take it personally, but enjoy the spirited discussion.

 

[Gumby]

Actually, we're a very friendly group. I'm glad that you have posted about your real estate operation and your brother's plan. Although, I suppose that naming your thread "get rich scheme" was bound to draw some negative attention. Don't take any of the comments or questions personally. We have many members who have found success in rental real estate, and some who lament the experience. You may hear from both. I would simply advise that you take what you find useful in their comments and leave the rest. I would also note that by responding to them you may provide an education to those lurkers who don't have experience but are interested in the topic. I, for one, don't know the first thing about rental real estate, so I would welcome a full and frank discussion between you and those who have questions about your plans. So, jump right in, and know that we welcome you.

 

[WestLake]

When you get the rentals paid off then you make good money. Many of mine were on killer 5 and 7 year notes.

 

[97guns]

my numbers are realistic, i know what my numbers are. this rental market im in is very hot, my brothers most recent vacancy was down only 2 weeks. in the 2 years ive been in it 3/4 of my tenants are original.

if your putting 50% or even your calculated 40% towards your expenses thats way too much and your running your business incorrectly. i have a manager for 8% and my brother manages his own.

 

[arebelspy]

To continue the discussion, in the hope you don't get yourself banned or get the thread locked in an awesome rant...

FWIW, the numbers on some of my latest properties are very similar to yours.

Purchase prices have ranged from 69k to 77k. I put 25% down. Principal and interest payments average to about 270.

My "all in" costs (down payment, closing costs, and minor clean up/rehab, mostly paint and carpets) average to 27k.

Rents are for 995-1150.

So mine are cash flowing about 225/mo. Each pay down an average of 72/mo of the mortgage (growing over time, naturally).

Cash on cash ROI is about 10%. Principal pay down adds another 3%. Tax depreciation is being taken advantage of to shelter some of my W2 income, but I haven't calculated how much that is. May ask my accountant to do it sometime.

Managing it myself, so that's adding another $1200 or so per property per year to my pocket, but that's as a side job as a landlord, and isnt included in these calculations. Will pay property management companies to do that at some point.

No appreciation. In fact, prices are still dropping in my area. I'm okay with it, as I'm still buying.

So I'm seeing similar numbers. And I do agree it's a good investment right now. But not "get rich quick," and it does take work, and it's not for everyone. YMMV.

Hope this helps.

 

[REWahoo]

97, this definition may help explain the reception you are getting. The title of this thread is the online version of taping a "kick me" sign to your back:

A get-rich-quick scheme is a plan to acquire high rates of return for a small investment. The term "get rich quick" has been used to describe shady investments since at least the early 1900s.

 

[arebelspy]

my numbers are realistic, i know what my numbers are. this rental market im in is very hot, my brothers most recent vacancy was down only 2 weeks. in the 2 years ive been in it 3/4 of my tenants are original.

if your putting 50% or even your calculated 40% towards your expenses thats way too much and your running your business incorrectly. i have a manager for 8% and my brother manages his own.

/shrug

Say what you will. I'm telling you, long term, that's what expenses generally work out to be. There's a large land lording forum called "BiggerPockets" - go there and run a search on the 50% rule. You'll find dozens (literally) of threads with more information.

Also, some vacancy can be good. If you have no vacancy, your rent is too low. If you have too much vacancy, your rent is too high.

If your properties are in such a hot rental market, try raising your rents a bit.

As it is, you may be giving away some profits for the sake of saying you have low vacancy (instead of letting it sit vacant for a few extra weeks and then getting a higher rent).

In any case, vacancy is only a part of the 50% rule. I have vacancy at about 8% pro forma (1 mo/yr) though it has been less as of late. Your brother's "two weeks" is 3.8%... So you're maybe shaving off 4% (though again, likely not actually in the long term). The 50% rule is still valid. Seriously, instead of blindly arguing against it, go read about it for an hour, then sit and actually look seriously at your numbers. I'll share mine if you want. I think you'll see it's pretty valid, and good to know.

 

[97guns]

im not normally a ranter but when my buttons get pushed i turn into one but its all good now, been to a ranting counselor.

my properties have gone up 10-15% since i bought in 2009, my market is los banos california, 60 miles from san francisco bay area.

also dont know if anyone has noticed but there has been a lot of building going on, actually see a large track of homes coming in near me.

 

[97guns]

/shrug
There's a large land lording forum called "BiggerPockets" - go there and run a search on the 50% rule..

just reg'd looks like a good forum, thanks

 

[arebelspy]

just reg'd looks like a good forum, thanks

Cool, glad to help.

They're a little "too" real estate. I enjoy the company here more. Much more breadth of knowledge. But it's a great resource.

 

[Aiming_4_55]

For what it's worth (FWIW) - I've found this forum to be open and friendly for the year I've been here.

My comments:
- if the numbers work for you, stick with it
- we all have different thresholds to define retired and/or FI
- landlording/part time handyman is part time work and some level of responsibility. Landlording and handyman has varying degrees of commitment. Some may consider me a slumlord, but others don't.
- from the numbers you shared, I don't view it as get rich quick by any means, but income is income

Full disclosure - I still work for megacorp and real estate investing has been "good" (as I define it) to me and my family, but it's still work. I dream of not lifting a finger and having $$ to live life the way I want too. I feel I'm on track to reach this target by age 50 for a modest life for me and my family. YMMV

 

[capngeo]

I’ve been a landlord for years while working as a firefighter/paramedic. I’ve had very low vacancy rates and many tenants stay for years. Even in “retirement” I still plan to manage and be the handyman, but in my experience it isn’t much of a burden... The trick is screening your tenants real carefully and not jump at a tenant just to fill a vacancy. Other than the mortgage (I have none) my numbers work out about where 97 says. I will not borrow money even at today’s cheap rates, as outright ownership is the only way for me to keep the principle secure. My only exposure really is hurricanes, as I am self-insured there.

 

[traineeinvestor]

Another happy landlord here.

Short and long term maintinance, vacancies, rates, management fees and other outgoings will chew up a reasonable chunk of the rental income over the years. That said, I'm still happy with real estate as a form of investment - positive cash flow (most of the time), not too many hassles, the ability to use leverage and the possibility of protecting against inflation (to a greater or lesser extent). Maybe I've been lucky (only one real lemon over the years), but its worked for me....so far.

 

[RetireBy90]

97 - I registered on the forum in '09 and was put off by the replies like you. After a while I lurked and find most of the responses helpfull. Your not alone with a flame at your post

I've been into rentals off and on since 84 and find they have ups and downs like every investment. I currently have a place in Reno (just up the street from your places) where older folks from Calif come to retire. I hired a manager, since I don't live there and it works well for me.

My first place I was doing well for 2 years, then raised rent by $25/Month and had it vacant for almost 6 months. Finally got my raised rent but with a note of $500/Month guess how long it took to recover that vacancy period. I'd rather have slightly reduced rent and no empty house.

IMHO or In My Experience (IME?) investments go through cycles, and the best buy is normally the most hated one. Right about now, that may be a tough call but realestate is up there on the list

Congrats on early early early retirement. You done great !!! 39 !!! Hang around and some times share the realestate tales.

 

[Fishingmn]

I close on my 5th rental property next week and my 6th in 2 weeks. Arebelspy hit the nail on the head with actual realities/costs and the 50% rule. I self manage and am very close to 40% expenses on my estimations. If you have no vacancy and low repairs for the year you'll do better but I like to plan conservatively. I always plan for 5% vacancy and 1 months rent/year in repairs/maintenance. I also factor in an extra landlord insurance policy on each property ($100/yr) to give me $1M in liability insurance on each in addition to my umbrella policy and I factor in a budget for legal actions in case I need to do an eviction (which costs about $800 in MN).

I do find that even being conservative that it's pretty easy to find 9-10% cash on cash returns in this market and think it's a great way to build my own pipeline of retirement cash flow. I do like going to the bank each month to deposit checks!

 

[Chuckanut]

I am jealous that he can buy a single family house for $95,000 and rent it for about a $1000. In my area a house that rents for $1000 a month would cost at least double that price even in today's depressed market. Taxes would be 50% higher also.