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]

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]

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.

 

[Letj]

(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?

Milton, thank you so much for your response. For some reason I had not these responses until today. You've raised some interesting questions that quite frankly I haven't thought about. Indeed, the rentals concentrated mostly in the same area. I think the rental market will remain strong given that this is an urban area where at least half of the properties are rentals. Needless to say, I don't hope for much in appreciation. The reason why the business has taken off recently is because foreclosures have flooded the market (mostly from real estate speculators) which allowed me to more than double my holdings.

Relying on rentals to make a living is quite tricky, especially when dealing with low quality tenants. Our tenants tear up the place and we constantly have to renovate when a tenant moves out. Luckily, my DH does most of it. I plan on doing this for no more than 10 years.

 

[Letj]

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.

Thanks for your response!! Unfortunately, I work in a very traditional environment that would not allow sabbaticals. If they did, I would have long done that. What I didn't mention in my post was that my situation was compounded by the worst boss I've ever had in my entire working career. While I enjoy the nature of the work, the added pressure my boss puts on made the situation unbearable. Shortly after posting here, I decided that I just could not continue working under those conditions given the manic nature of my boss and his conflicting and frequent demands. Before doing so, I carefully summarized all my concerns in a letter to him and met with him to discuss. As a result, things have eased up a bit. Most of the problems with the job was created by boss because of the constant pressure and when this is combined with a demanding analytical role it makes for a very bad situation. I am hoping that the change in his attitute would be permanent and would provide me with some time to build my business so I can leave at the right time. I go over in my head every day how I can just quit to focus on my business and my family but I get cold feet which I consider the volatility of the rental business. The trick for me is to acquire a sufficient number of properties to sufficiently cover my living expenses even if cash flow drops off significantly.

BTW, I am thrilled with the healthcare bill although it fell short of what I think it should be but I am all for eliminating discrimination against those with pre-existing condition and making the cost more affordable.

 

[HpRyder]

Letj: I also partially live off rental income and until recently had a job. It's tough I know, but hang in there, its well worth it in the long haul. Cash flowing $10K/month with another anticipated $6K/month is a great position to be in. Based on my experience, you should easily be able to accommodate virtually any simultaneous double major repairs.

You introduced your self as “I am very risk averse…”. I disagree with you. You have started a business which is very risky. Look what happened to real estate values recently. You bought well and rode out most of the current downturn. You deal directly with the public, which is very risky and includes a great deal of potential liabilities. You are considering further purchases in this field. This shows you are NOT risk averse, but are an investor capable of, to date, properly evaluating risk. You just think your risk averse, but your not, don’t kid your self.

As pointed out by Milton, I would diversify your property locations. Additionally, you should consider slowing down the number of your purchases. Having too many rentals too soon may overwhelm your husband in keeping them repaired. Perhaps you should slowdown, at least until you find a repair handyman you can trust to do a good job. How is your umbrella policy? Is it about 1 – 1.5 times your net worth?

Also based on my job layoff, I would allow your company to lay you off rather than quitting, you then get unemployment. As for “I am reluctant leave because of my concern over the cost of health insurance”, that’s what COBRA is for. While it will cost you 105%, the federal subsidy substantially reduces this. Then you just get a 9-5 job with dramatically less pressure and medical benefits. Your clearly don’t need the money, nor do you want to have it taxed away.

Oh by the way, if you are doing a purchase money loan, absolutely don’t loose or change your job before the loan closes. Freeze your situation, at least on paper, until the loan is funded. Also check out Bank Of America, while their loans take a long time to complete, they have a free 1 year buyer protection insurance plan which pays loan PI if you become unemployed. A very handy feature now a days. It also pays loan PI if you become disabled due to your migraines.

For further education about rental real estate you should join your local apartment association and a local large real estate investor group. I’m sure VA has many of these. They will provide you with an extensive knowledge base specific to your locality. Also cruse the landlord forums for your area at
h t t p ://bbs2.mrlandlord.com/ and to a lesser extent
h t t p ://www.askthelandlord.com/forum.

 

[Letj]

Letj: I also partially live off rental income and until recently had a job. It's tough I know, but hang in there, its well worth it in the long haul. Cash flowing $10K/month with another anticipated $6K/month is a great position to be in. Based on my experience, you should easily be able to accommodate virtually any simultaneous double major repairs.

Thanks HpRyder. I can see from your response that you have considerable experience in this area. This is my gross cash flow and because I am still acquiring I haven't seen much of that. The money goes right back into renovating properties for rental. Since I am still in the acquisition phase, I am not yet able to gauge what my net cash flow would really be.

You introduced your self as “I am very risk averse…”. I disagree with you. You have started a business which is very risky. Look what happened to real estate values recently. You bought well and rode out most of the current downturn. You deal directly with the public, which is very risky and includes a great deal of potential liabilities. You are considering further purchases in this field. This shows you are NOT risk averse, but are an investor capable of, to date, properly evaluating risk. You just think your risk averse, but your not, don’t kid your self.

Believe me, I didn't do this easily. I kind of resorted to this out of desperation. We have two small children and my husband has been working part time since my schedule is often punishing. Real estate just seemed like the easiest way to compliment our income. I agree with you, maybe I am not as risk averse as I think just obsessed with security.

As pointed out by Milton, I would diversify your property locations. Additionally, you should consider slowing down the number of your purchases. Having too many rentals too soon may overwhelm your husband in keeping them repaired. Perhaps you should slowdown, at least until you find a repair
handyman you can trust to do a good job. How is your umbrella policy? Is it about 1 – 1.5 times your net worth?

You are quite insightful because we are having exactly this problem. My husband is a bit overwhelmed with all the work to be done. We have three projects on the ground and two vacancies that need substantial work. In fact, we talked about not acquiring anything for a while which of course would prevent me from meeting my goal for this year. While I don't want to pass up the opportunity to get a cheap rental, I also recognize that I am losing money the longer these projects are on the ground. Since the monthly rents around here are not high, we cannot put a lot of money into these projects and still be profitable hence my husband does most of the work with per diem contractors as needed.

I don't have umbrella insurance. I have commercial insurance on each and a separate liability policy covering all the properties in each LLC. I will look into it. The good thing is I live in Virginia and from what I can tell, it's not that easy to be successful in frivolous lawsuits. For example, you can't sue a landlord just because you fell on their property. You definitely can't sue for falls related to the weather unless it's due to the landlord's negligence. Even so, you need to look where you're stepping.

Also based on my job layoff, I would allow your company to lay you off rather than quitting, you then get unemployment. As for “I am reluctant leave because of my concern over the cost of health insurance”, that’s what COBRA is for. While it will cost you 105%, the federal subsidy substantially reduces this. Then you just get a 9-5 job with dramatically less pressure and medical benefits. Your clearly don’t need the money, nor do you want to have it taxed away.

Good advice. Thanks!

Oh by the way, if you are doing a purchase money loan, absolutely don’t loose or change your job before the loan closes. Freeze your situation, at least on paper, until the loan is funded. Also check out Bank Of America, while their loans take a long time to complete, they have a free 1 year buyer protection insurance plan which pays loan PI if you become unemployed. A very handy feature now a days. It also pays loan PI if you become disabled due to your migraines.

Thanks for the tip on BOA. I have been working with a local bank and they provide loans to me in the name of the LLC and I personally guarantee the loans. I have secured a significant amount from them which allowed me to make all these acquisitions. I only use the loan to buy and use my monthly cash flow to renovate. I started the business with my own savings and I recycled the money a few times acquiring more property each time. The last cycle I did, I got all of the money I originally put in so I have none of my original investment tied up in the business.

I have decided to stay put on my job unless the company decides to "lay me off". They've already gone through one round of layoffs. I hope my boss doesn't get off his meds again -lol.

 

[walkinwood]

If your current rental income more than meets your expenses, maybe it is time to invest the excess in something other than rental properties. Start putting money away in a balanced fund - something you're comfortable with. The returns will be less than what you'd get if you were to buy more properties, but it would be a diversified stream.

Taking the decision to quit work is difficult. Take your time, be 100% sure, then 'sleep' on it for a few more months.

All the best.

Edited to add:
Don't assume that you won't get affordable private insurance. Price it out on ehealthinsurance.com.

 

[Letj]

Thanks Walkinwood. I've have thought of that too. As you can imagine, making your living with rentals is not as easy as the guru would like you to believe. Dealing with tenants is not for the faint of heart. The stories I have would make you cringe.

 

[youbet]

It sounds like there are two questions here:

1. Should I leave my current job and devote 100% of my time to my rental business?

2. Can DH carry on with a heavy load of maintenance and rehab work for an extended period of time?


Because you are nicely compensated at $six figures + benefits, I'd think twice about leaving your current job. While it gives you headaches (literally), running your rental property business with the added pressure of needing that income for day to day living could cause some headaches too. I know little about the business so take my comments with a grain of salt, but it does sound like escaping one stressful situation to jump into another.

DH's stake as the rehab man and general maintenance guy is key too. Have you done some estimates as to what the business would look like if you needed to pay someone else to do all the work he is doing? Would you still be OK if he broke a leg tumbling off a ladder and was unavailable for duty for months? If you're counting on him to be "Mr Handyguy" for the long term and the business wouldn't meet expectations otherwise, that's another variable/risk to dial in.

 

[Letj]

It sounds like there are two questions here:

1. Should I leave my current job and devote 100% of my time to my rental business?

2. Can DH carry on with a heavy load of maintenance and rehab work for an extended period of time?


Because you are nicely compensated at $six figures + benefits, I'd think twice about leaving your current job. While it gives you headaches (literally), running your rental property business with the added pressure of needing that income for day to day living could cause some headaches too. I know little about the business so take my comments with a grain of salt, but it does sound like escaping one stressful situation to jump into another.

DH's stake as the rehab man and general maintenance guy is key too. Have you done some estimates as to what the business would look like if you needed to pay someone else to do all the work he is doing? Would you still be OK if he broke a leg tumbling off a ladder and was unavailable for duty for months? If you're counting on him to be "Mr Handyguy" for the long term and the business wouldn't meet expectations otherwise, that's another variable/risk to dial in.

You've actually hit on exactly what gives me pause. There's a lot to think about. While the business is doing good now, it's heavily reliant on the expertise of my husband. Without him, profits would be significantly diminished. God forbid, he can't do this! While my job does present some challenges for me, I am now inclined to stick with it for now although I do not feel fulfilled. It's shame to spend one's life tied to a job when there are so many more fulfilling things I would rather do (needless to say, they are not associated with earning a lot of money if any at all) but then again, it's the way of the world. I think many people like me get to middle age and start questioning their purpose which makes your tolerance for BS quite low indeed.

 

[Fantasm]

Would you be willing to share your formula for picking houses and what rents you usually get for them?
I am looking to do the same thing you are out here in California (so it shouldn't pose any threat to you in Virginia ).

In what shape are the homes usually in at purchase? Are they short sales?
What is the average price you are paying per home? How much $ do you invest in rehab?
What is the average rent you get for them afterwards?
What are some of the biggest 'gotchas' or things to look out for both in potential properties and potential tenants?

 

[Letj]

Would you be willing to share your formula for picking houses and what rents you usually get for them?
I am looking to do the same thing you are out here in California (so it shouldn't pose any threat to you in Virginia ).

In what shape are the homes usually in at purchase? Are they short sales?
What is the average price you are paying per home? How much $ do you invest in rehab?
What is the average rent you get for them afterwards?
What are some of the biggest 'gotchas' or things to look out for both in potential properties and potential tenants?

My formula is very simple but it might be hard to replicate in a place like CA. There's a glut of foreclosed property on the market right now and I tend to pick up the ones that other investors shun. Generally, the ones requiring a bit more work. However, we do not do any gut jobs and do not buy anything requiring a new roof. In reality, 99% of what we pick up requires only cosmetic work. We add a heat pump for heating and cooling in some properties depending on the location and the potential. We get anywhere from 800 to 1300 for rent and pay no more than 45K per house. Most of the ones we've been picking up are around 25-30K. We put about $20k into them but it would cost much much more if my husband did not manage the project and do the majority of the repairs himself. We do have an hvac company that we use for all our jobs and a window installation company. The ARV after repairs are approximately $150K. These homes are located mostly in low income and working class neighborhoods. We had some in middle income to high income areas but the cash flow was tight so we sold them all. They are located mostly in low to working class neighborhoods. I only buy 3 and 4 bedrooms or large two bedrooms that I can convert to 3 bedrooms. I rent mostly to section 8 tenants and I do some rent to own. For the rent the own, I require only a small deposit and sign a rent to own agreement and lease. If they don't pay, I use the lease agreement to get them out. If they buy within the stated time, I give them at closing a predetermined amount based on the terms of the rent to own agreement.

 

[se012101]

Hi Letj,
I think the big question to ask yourself is "am I sick of working at a conventional job period or am I sick of this specific job"? If the latter, have you thought about looking around and seeing about finding a different employer?
Either way, it's great that you've got the real estate business to the point where quitting to focus on it full time is at least an option, and I'm seriously impressed by how far you've built it up in only 5 years.

 

[Letj]

Hi Letj,
I think the big question to ask yourself is "am I sick of working at a conventional job period or am I sick of this specific job"? If the latter, have you thought about looking around and seeing about finding a different employer?
Either way, it's great that you've got the real estate business to the point where quitting to focus on it full time is at least an option, and I'm seriously impressed by how far you've built it up in only 5 years.

Thank you. I think I am just sick of spending my time they way I do with limited flexibility to live life on my own terms and do with my time what I wish. The reason why we were able to build up the business so fast is because I started the business with a significant amount of my own money that I made from selling two houses (one of them a primary residence). I have since taken all of it out of the business.

 

[Milton]

I am just sick of spending my time the way I do with limited flexibility to live life on my own terms and do with my time what I wish.

You and me both.

 

[HpRyder]

I rent mostly to section 8 tenants and I do some rent to own.

No wonder your re-rental fix up expenses are so high. At least in Orange County CA, section 8 tenants usually pay below market rents, cause lots of damage and are collection proof.

I hope your local HUD office is not pro-client as they are in LA.

 

[Letj]

No wonder your re-rental fix up expenses are so high. At least in Orange County CA, section 8 tenants usually pay below market rents, cause lots of damage and are collection proof.

I hope your local HUD office is not pro-client as they are in LA.

It really depends on the individuals; it's a bit different here because the tenants are required get a good standing letter from the landlord when the do vacate. At one time section 8 used to pay for tenant damages but they really don't do that anymore. The rents from section 8 are fairly high compared what I can get from a unsubsidized low income tenant. It's at least 300 more. I would rent to section 8 much quicker than I would to regular tenants because your rent is assured and the tenants have an incentive to pay their portion because they can lose their vouchers.

 

[HpRyder]

tenants are required get a good standing letter from the landlord when the do vacate.

Here, HUD could care less how tenants leave the landlord.

At one time section 8 used to pay for tenant damages but they really don't do that anymore.

They never did here. Tenants were responsible for damages, but since they have no job or much money to begin with, they are judgement proof.

The rents from section 8 are fairly high compared what I can get from a unsubsidized low income tenant. It's at least 300 more.

Here, they are typically 300+ below market level, and HUD has a hard time finding rentals, except in very very very poor areas.

the tenants have an incentive to pay their portion because they can lose their vouchers.

Here, HUD supplies free lawyers for tenants fight eviction, gets them new housing after eviction to other desperate landlords.

You've got a great situation going there and are on a roll. Renting on.

 

[Letj]

Let me clarify - since these are low income tenants, there are not that many places available for them to rent outside of the the inner city for obvious reasons. This means that what a landlord can get from an unsubsidized tenant in the inner city here is much lower than you can get from section 8. However, outside of the city or in better areas of the city, the rents are much higher and of course, there's no incentive to rent to a section 8 tenant since there's a better pool of qualified tenants.