Can I do It? Advice Please

[Letj]

Hi All - I have been thinking long and hard about this but like a lot of people on here, I am very risk averse and still don't know if I should take the plunge. About 5 years ago, I started a home based real estate rental business which has really taken off in 2009. This business currently generates approximately $10K/month after all expenses including mortgage payments but before estimating for vacancies and repairs. By the end of this year, I am anticipating adding another $6,000 to that number (again before estimating for vacancies and repairs). With the downturn in the real estate market, I've been able to pick up quite a few rentals at low enough price to get a really good return. My husband does all the property maintenance except for major electrical, heating and plumbing. If a major repairs is required (like roof replacement), we'll hire someone for that. We've not had to replace any roofs so far.

I also have a full-time job with mega corp with great benefits and a six figure income. However, there's been some layoffs last year and I have been reassigned to a very demanding position. This is an accounting role which I am not too fond off, mainly because this brings on severe migraines which affects my thinking, memory and concentration (the migraines are caused by an old injury). However, I am reluctant leave because of my concern over the cost of health insurance (my SO takes medicine for higher cholesterol and high blood pressure). I am also concerned that I would not look as attractive on paper to continue to borrow money to expand my business. If the company were to lay me off or offer a package, I would have a significant severance, almost a year of pay. If I were able to focus on the business exclusively, I can see much opportunity ahead.

We are both in our 40s (very early 40s for me) and while we have not done as well as most people on this board, we've probably done fairly well for age. Most of our networth of almost $2MM is tied up in our business (many of the houses are owned free and clear). We recently sold our house and now rent a bigger house for a fraction of what it would cost to own. We have enough cash to buy an average middle class home in a good school district outright. Our current expenses of $7,000 are quite high due to a beach front home that was bought for investment, extracurricular for our two children, and expensive organic only foods.

Please give me your thoughts. I truely paralyzed by fear of the unknown.

[traineeinvestor]

You could try living off your investments for a year first and see how your income/expense ratio works out. Vacancies and repairs are a normal part of owning investment properties, and they will take a bite out of your free cash flow.

On the bank financing, you are right. I asked one of the banks I use for mortgage financing whether they would lend me money if I quit my job to become a full time investor and was told the loan to value ratio on new loans would be limited to 50% unless I was classified as an institutional investor.

Living with an uncertain and unknown future is just part of life. Quite frankly, I would feel bored and unmotivated if everything about the future was known. That said, having income from both employment and investments is a great confidence booster.

Sounds like being laid off would be a great outcome for you. Is there anyway you can encourage that?

[Letj]

Quote:

Originally Posted by traineeinvestor Sounds like being laid off would be a great outcome for you. Is there anyway you can encourage that?

Thanks for you advice. I wish I wasn't so worried about my own security and was one of those people that would do what they wanted to do without overanalyzing everything. As for the lay-off, I could encourage it but it wouldn't be pretty. My name would be mud.

[Milton]

If you are very risk adverse, it is not surprising that you are experiencing 'paralysis by analysis'. It is likely part of your makeup, and nothing to beat yourself up over; just do the best that you can.

I have several concerns about relying on your rental business:

(1) you need to allow a reasonable amount for repairs / depreciation. Houses do wear out, especially rental properties.

(2) assuming that all of your properties are within a relatively small area, you could be quite vulnerable to adverse changes in local economic conditions (e.g., plant shutdowns, base closures, etc.). I don't know if that applies or not, but it could be worth considering.

(3) you say that the business, which currently generates net monthly earnings exceeding your expenses by $3,000, is five years old and has "really taken off in 2009". What was the story in the previous four years? Are the current earnings sustainable, or is there a good chance that they will go back down as quickly as they went up?

[kyounge1956]

Quote:

Originally Posted by Letj Hi All - I have been thinking long and hard about this but like a lot of people on here, I am very risk averse and still don't know if I should take the plunge. About 5 years ago, I started a home based real estate rental business which has really taken off in 2009. This business currently generates approximately $10K/month after all expenses including mortgage payments but before estimating for vacancies and repairs. By the end of this year, I am anticipating adding another $6,000 to that number (again before estimating for vacancies and repairs). With the downturn in the real estate market, I've been able to pick up quite a few rentals at low enough price to get a really good return. My husband does all the property maintenance except for major electrical, heating and plumbing. If a major repairs is required (like roof replacement), we'll hire someone for that. We've not had to replace any roofs so far. I also have a full-time job with mega corp with great benefits and a six figure income. However, there's been some layoffs last year and I have been reassigned to a very demanding position. This is an accounting role which I am not too fond off, mainly because this brings on severe migraines which affects my thinking, memory and concentration (the migraines are caused by an old injury). However, I am reluctant leave because of my concern over the cost of health insurance (my SO takes medicine for higher cholesterol and high blood pressure). I am also concerned that I would not look as attractive on paper to continue to borrow money to expand my business. If the company were to lay me off or offer a package, I would have a significant severance, almost a year of pay. If I were able to focus on the business exclusively, I can see much opportunity ahead. We are both in our 40s (very early 40s for me) and while we have not done as well as most people on this board, we've probably done fairly well for age. Most of our networth of almost $2MM is tied up in our business (many of the houses are owned free and clear). We recently sold our house and now rent a bigger house for a fraction of what it would cost to own. We have enough cash to buy an average middle class home in a good school district outright. Our current expenses of $7,000 are quite high due to a beach front home that was bought for investment, extracurricular for our two children, and expensive organic only foods. Please give me your thoughts. I truely paralyzed by fear of the unknown.

Hi Letj,
is there any chance you could take a sabbatical from your job? Depending on how long you have been working there and the conditions set by your employer, your health insurance benefits may be continued through part or all of the sabbatical. If it's possible, you'd have time to test drive living on the investment income only, the health insurance situation for your husband might change significantly (depending on what happens with the health care legislation), and you'd avoid the headaches, both literal and metaphorical, of your accounting position.

Based on the numbers you provide, your real-estate business is bringing in about $3000 a month more than your household expenses of $7000, and you expect the $3K a month to be $9K a month by the end of the year, and increase still further if you can focus on it. You did not say whether your husband also has a job outside of your rental business, but even if not ISTM you have an ample (and expected to expand) income cushion. You also have enough cash reserve to buy a house free and clear. Is there some specific potential bad outcome in the rental business that you are concerned about? Take this with a grain of salt, because I know hardly anything about rental real estate, but these figures look to me like you are sitting in the catbird seat.