Real Estate Retired Early--strategy used

[brucethebroker]

+1 RISP.

Leverage is the key word here, very risky but requires little equity to begin with.

I respectfully disagree on both points.

Keep 'em rented, and there is very little risk. When RE blew up in 07-08, prices went down, but not rents. There were more people looking for rentals than ever before-a landlords market as it were. And, sure, there will be a few repairs along the way, but rarely anything that will bankrupt you.

It actually requires more equity now than ever before. (Single Family Residence, (SFR) not commercial). The typical SFR investment mortgage requires 20-25% down. The underwriter doesn't want to see borrowed cash for your down payment, but some investors take a loan against their 401-k (I can hear the screams of anguish!!) since it does not show up on your credit. All the more reason for rookie investors to rent out their current home, THEN get a mortgage for a new personal home. Easier underwriting, and you can go 5%, 10%, down, FHA, etc. I wish I would have started that way, and that's what my kids are doing.

 

[CaliKid]

I like residential real estate. Have had good luck/success with it. I love a tax deductible trip to visit my rental properties on occasion also.

 

[Luck_Club]

It sounds to me like you haven't done much reading here.

A post that starts out with "Golden Path" and "fast track to ER", is like a porch light to bring out the moths who feel that balance is important. Then throw in "preaching", and I'm surprised you haven't seen rougher treatment.


It is a path. It may be a fast track for some, but it has been a fast track to BK for others. And it can be hard work, like most anything else.

Cut the hype. If you have serious questions/comments and want serious discussion, just deal straight. That's all.

-ERD50

On the contrary, I knew many had used real estate as a vehicle on this forum, and it is my vehicle as well. I was seeking general ideas on what worked didn't work from like minded individuals.

To be honest I'm aware and envious of those who have shown an incredible ability to be a stock picker as well, and wish I knew how they did it.

Index guys/gals not so much. It takes too much of your own money in such a low rate environment. From 1998/1999 (when I started to earn money) to today it just barely doubled. IN ALMOST 20 YEARS! In my back of the envelope type math, that is barely keeping pace with inflation, so at the end of the day you have the buying power of what you "invested/saved".

Pre 1980's earners might have vastly better results.

 

[Aiming_4_55]

Real estate was good to my family. Our situation was more of house hacking, i.e. buying something needing repair but served as shelter for us. This was all we could afford. After repairing and living in the house, I saved up another downpayment and made another purchase every few years without selling the previous property. We would rent them.

It was a path. No high appreciation as we were in the Midwest, but it was steady appreciation, performed as much maintenance as I could, and saved the rent income.

Now, rental income can cover our expense budget or made us FI. I'm still working (age 48), considering semi-RE in a few years, but also thinking about investing more into turnkey and Notes funding. It's just asset allocation %.

 

[Markola]

Index guys/gals not so much. It takes too much of your own money in such a low rate environment. From 1998/1999 (when I started to earn money) to today it just barely doubled. IN ALMOST 20 YEARS! In my back of the envelope type math, that is barely keeping pace with inflation, so at the end of the day you have the buying power of what you "invested/saved".



Pre 1980's earners might have vastly better results.

Yes, heartily agree that this poster should stick to real estate, because, for starters, the US stock market has more than tripled since July 1998, inclusive of dividend reinvestment. My own back of the envelope calculation is that we bought our own stock and bond index shares for about half price, dramatically juicing our returns. How? We've simply been working, saving and investing since 1993 in low cost index shares bought pre-tax + an employer match in our 403bs. Over all those years we have enjoyed a taxpayer-subsidized, employer-subsidized use of a much safer type of OPM than debt leverage, all on autopilot and while sleeping soundly. DW and I have simply done our weekday (nonprofit) jobs, only spent the odd weekend beautifying our own residences, and parked as much as allowed in our 403bs. Today we have a self-replicating through dividends army of stock and bond index shares that work harder for us than we can. I haven't spent time researching a stock in 20 years, yet all of the research indicates that our low cost index returns have crushed virtually all professional money managers' returns on Wall Street over that time, including hedge funds (see Warren Buffet's 10 year wager with a hedge fund manager that the S&P 500 index would do better. Hint, Buffet is way, way ahead). Our current 12 month investment returns are up more than our combined salaries. I love to lay in my hammock on the weekends and think of the millions of people working hard for little ol' DW and me around the world, sweating it out 24/7 in many thousands of corporations - all to grow the value of our index shares and pay me to sit there relaxing, drinking my paid off ice tea in my paid off glass. As some here demonstrate, money can certainly be made in real estate as a second or third job, and it can be made through day trading penny stocks, gambling on the FOREX and shorting derivative beaver cheese futures sitting in one's underwear but our experience is that a common career and a simple index fund, bought cheaply in the black and then ignored completely, can also be a very powerful financial tool that gives a whale of a lot more than it asks for in valuable time and attention. YMMV but don't be hatin' on my index funds, y'all. They are making us rich.

 

[FIREmenow]

Yes, heartily agree that this poster should stick to real estate, because, for starters, the US stock market has more than tripled since July 1998, inclusive of dividend reinvestment. My own back of the envelope calculation is that we bought our own stock and bond index shares for about half price, dramatically juicing our returns. How? We've simply been working, saving and investing since 1993 in low cost index shares bought pre-tax + an employer match in our 403bs. Over all those years we have enjoyed a taxpayer-subsidized, employer-subsidized use of a much safer type of OPM than debt leverage, all on autopilot and while sleeping soundly. DW and I have simply done our weekday (nonprofit) jobs, only spent the odd weekend beautifying our own residences, and parked as much as allowed in our 403bs. Today we have a self-replicating through dividends army of stock and bond index shares that work harder for us than we can. I haven't spent time researching a stock in 20 years, yet all of the research indicates that our low cost index returns have crushed virtually all professional money managers' returns on Wall Street over that time, including hedge funds (see Warren Buffet's 10 year wager with a hedge fund manager that the S&P 500 index would do better. Hint, Buffet is way, way ahead). Our current 12 month investment returns are up more than our combined salaries. I love to lay in my hammock on the weekends and think of the millions of people working hard for little ol' DW and me around the world, sweating it out 24/7 in many thousands of corporations - all to grow the value of our index shares and pay me to sit there relaxing, drinking my paid off ice tea in my paid off glass. As some here demonstrate, money can certainly be made in real estate as a second or third job, and it can be made through day trading penny stocks, gambling on the FOREX and shorting derivative beaver cheese futures sitting in one's underwear but our experience is that a common career and a simple index fund, bought cheaply in the black and then ignored completely, can also be a very powerful financial tool that gives a whale of a lot more than it asks for in valuable time and attention. YMMV but don't be hatin' on my index funds, y'all. They are making us rich.

Awesome.

 

[Winemaker]

Yes, heartily agree that this poster should stick to real estate, because, for starters, the US stock market has more than tripled since July 1998, inclusive of dividend reinvestment. My own back of the envelope calculation is that we bought our own stock and bond index shares for about half price, dramatically juicing our returns. How? We've simply been working, saving and investing since 1993 in low cost index shares bought pre-tax + an employer match in our 403bs. Over all those years we have enjoyed a taxpayer-subsidized, employer-subsidized use of a much safer type of OPM than debt leverage, all on autopilot and while sleeping soundly. DW and I have simply done our weekday (nonprofit) jobs, only spent the odd weekend beautifying our own residences, and parked as much as allowed in our 403bs. Today we have a self-replicating through dividends army of stock and bond index shares that work harder for us than we can. I haven't spent time researching a stock in 20 years, yet all of the research indicates that our low cost index returns have crushed virtually all professional money managers' returns on Wall Street over that time, including hedge funds (see Warren Buffet's 10 year wager with a hedge fund manager that the S&P 500 index would do better. Hint, Buffet is way, way ahead). Our current 12 month investment returns are up more than our combined salaries. I love to lay in my hammock on the weekends and think of the millions of people working hard for little ol' DW and me around the world, sweating it out 24/7 in many thousands of corporations - all to grow the value of our index shares and pay me to sit there relaxing, drinking my paid off ice tea in my paid off glass. As some here demonstrate, money can certainly be made in real estate as a second or third job, and it can be made through day trading penny stocks, gambling on the FOREX and shorting derivative beaver cheese futures sitting in one's underwear but our experience is that a common career and a simple index fund, bought cheaply in the black and then ignored completely, can also be a very powerful financial tool that gives a whale of a lot more than it asks for in valuable time and attention. YMMV but don't be hatin' on my index funds, y'all. They are making us rich.

I agree, they have made DW and I, multimillionaires. Faceless people controlling my millions, and yours.

The rental real estate is another leg in the income/asset stool. Another form of diversification, it too, has made DW and I, multimillionaires. DW and I have control over this portion of our lives, we pick who we want to pay us, and when. I control my expenses, and therefore, my income. People who have grateful faces, and I enjoy providing quality housing for a fair price, smiling my way to the bank.

Many ways to take the journey, YMMV.

 

[Luck_Club]

We've simply been working, saving and investing since 1993 in low cost index shares bought pre-tax + an employer match in our 403bs. Over all those years we have enjoyed a taxpayer-subsidized, employer-subsidized use of a much safer type of OPM than debt leverage, all on autopilot and while sleeping soundly. DW and I have simply done our weekday (nonprofit) jobs, only spent the odd weekend beautifying our own residences, and parked as much as allowed in our 403bs.

Not everyone has these luxuries.

If I had a generous or even an employer matched investment I would have certainly scooped up the 100% or 50% instant yield as well. But I didn't so I sought alternative paths.

The thread was aimed at starting a discussion on different real estate options and paths people took, not to start a debate over indexes vs real estate, though I took the bait earlier.

For the most part, I think all who responded were in residential units.

Anyone invest in storage units? Commercial, strip malls, laundry mats? These border on businesses in some cases. Talking to an acquaintance the other day, and he built a storage facility, and sold it for big bucks. Now is building another. He said that he had two partners in the deals, but the cash flow was huge.

 

[CaliKid]

Not everyone has these luxuries.

For the most part, I think all who responded were in residential units.

Anyone invest in storage units? Commercial, strip malls, laundry mats? These border on businesses in some cases. Talking to an acquaintance the other day, and he built a storage facility, and sold it for big bucks. Now is building another. He said that he had two partners in the deals, but the cash flow was huge.

We are primarily invested in residential with one small (single tenant) commercial building. I want to get into storage units. I know a few people that have made very good money with them. I might invest next time they have storage lockers on one of the real estate crowdfunding sites. Would be an easy way to test the waters.

 

[Scuba]

Not everyone has these luxuries.



If I had a generous or even an employer matched investment I would have certainly scooped up the 100% or 50% instant yield as well. But I didn't so I sought alternative paths.



The thread was aimed at starting a discussion on different real estate options and paths people took, not to start a debate over indexes vs real estate, though I took the bait earlier.



For the most part, I think all who responded were in residential units.



Anyone invest in storage units? Commercial, strip malls, laundry mats? These border on businesses in some cases. Talking to an acquaintance the other day, and he built a storage facility, and sold it for big bucks. Now is building another. He said that he had two partners in the deals, but the cash flow was huge.

We made the mistake of investing a REIT that owned retail shopping centers 25 years ago. Sold it at a loss when major retailers started going bust (remember Circuit City? Mervyns?). Have from time to time invested in REITS that own healthcare facilities, office space, etc., some of which worked out really well. Have done this through REITS to get diversification and professional oversight.

 

[Another Reader]

The trouble with growing your wealth through the stock market is that most people, even those with upper middle incomes, cannot accumulate enough assets to live well on the 4 percent SWR. That's especially true in HCOL areas. If you accumulate $2M, you are a "multimillionaire" The SWR on that $2M yields $80,000. Unless you paid off your house and have a pension or substantial Social Security, you will be living a fairly modest lifestyle, particularly in the HCOL areas. Even with no mortgage payment, with a pension and/or Social Security, you will pay a lot of your income in taxes.

There's also risk using the SWR. It's based on historical market performance, and past performance is not guaranteed in the future. There is reasonable concern about market earnings multiples and whether the economic growth of the last 60 years is sustainable. I'm not willing to put all my eggs in that basket, even with small pensions and Social Security as a backstop.

If you leverage your way into income producing real estate, you can create a lot more cash flow over the same time period. If you play your tax cards right, a substantial portion of that income is not subject to income tax. I'm writing off six figures of depreciation now, an expense that in no way affects my cash flow. The federal tax policy also assisted me in the acquisition phase by allowing me to write off the mortgage interest as an above the line expense. My asset growth was accelerated as the result of these factors.

Yes, real estate is not passive and it's not for everyone. It's a combination of skill, hard work, and some luck. However, I'm in a much better position in both net worth and income than I would be if I had simply accumulated pension credits and maxed out the available retirement accounts and dumped the excess into taxable accounts.

 

[ERD50]

On the contrary, I knew many had used real estate as a vehicle on this forum, and it is my vehicle as well. I was seeking general ideas on what worked didn't work from like minded individuals. ...

There's nothing 'contrary' about it. I said it is a path. Getting info from those here who chose that path is great. It is the hyperbole and attitude that I was addressing.

To be honest I'm aware and envious of those who have shown an incredible ability to be a stock picker as well, and wish I knew how they did it.

Index guys/gals not so much. It takes too much of your own money in such a low rate environment. From 1998/1999 (when I started to earn money) to today it just barely doubled. IN ALMOST 20 YEARS! In my back of the envelope type math, that is barely keeping pace with inflation, so at the end of the day you have the buying power of what you "invested/saved".
....

You need a better envelope, and/or better data (are you looking at NAV or Total Return?), and/or a more open mind.

No stock picking required. The broad based index, SPY, is up over 3.7x in the past 20 years. And that includes a couple historical dips.

... I'm writing off six figures of depreciation now, an expense that in no way affects my cash flow. ...

Correct me if I'm wrong, but while that helps cash flow, it will increase your taxes when (OK, if) you sell (w/o an exchange). So it's more like tax deferral, right? That's still a good thing probably, but I get the impression that some people (not you) read that 'write off' as some sort of freebie.

... Yes, real estate is not passive and it's not for everyone. It's a combination of skill, hard work, and some luck. However, I'm in a much better position in both net worth and income than I would be if I had simply accumulated pension credits and maxed out the available retirement accounts and dumped the excess into taxable accounts.

Yes, I'd agree there can be advantages for those with the right aptitude/effort for it. Sounds like it worked well for you.

-ERD50

 

[Bruceski44]

Real estate is nothing more than an alternative asset class. Other alternatives are lending, precious metals, commodities, hedge funds, limited partnerships, art, wine and other collectibles. Some exposure to alternatives is necessary to achieve more complete diversification. You may diversify your stock portfolio by sector, cap size and geography, and add a bond safety cushion, but your risk-adjusted return would still be higher if you added some exposure to alternative assets. This is not just my opinion, this is well-documented fact by any number of experts going back as many as 60 years. Perhaps you're prepared to accept a 30% - 50% reduction in your portfolio in the next bear market, but wouldn't it be better to protect some of your wealth in uncorrelated alternative assets?

If you think the only way to invest in RE is by buying and managing properties yourself, you have not been paying attention. There are many new opportunities arising from the passage of the JOBS Act in 2012. Crowdfunding, RegA+ offerings, peer lending, LLC structures are all available to regular investors in most states. You may think crowdfunding is a scam, and everyone is losing their shirts, but that's not entirely true. Sure, maybe some people chose badly, but if everyone was losing out, the uproar would prompt numerous investigations and we would be reading about it daily. I guarantee you that most investors are making good money in CF RE, while achieving true diversification through alternative asset exposure. I have only a small exposure to CF RE, and am not affiliated with it in any way so please don't think I'm a shill.

There have been many changes recently, between Fed policies and new legislation. This is the new normal, at least until the gov't. mucks it up again. If you are still clinging to your outdated notions that RE involves only toilets, tenants and trash you really should get caught up.

 

[Luck_Club]

We are primarily invested in residential with one small (single tenant) commercial building. I want to get into storage units. I know a few people that have made very good money with them. I might invest next time they have storage lockers on one of the real estate crowdfunding sites. Would be an easy way to test the waters.

If you see one pop up please start a thread. Or private message me.

 

[Blue Collar Guy]

You need a better envelope , hahahah

 

[Another Reader]

Depreciation is for a set period. For residential rental properties, the expense is taken over 27.5 years. I expect to outlive the depreciation periods on some of the current properties. I expect to buy more in the next major downturn. Exchanges are only of use early on, because you don't reset the depreciation clock in an exchange. The basis is reset and the clock starts again when you die, so your heirs benefit tremendously from inheriting the properties. No recapture and no capital gain if the heirs sell.

 

[brucethebroker]

Depreciation is for a set period. For residential rental properties, the expense is taken over 27.5 years. I expect to outlive the depreciation periods on some of the current properties. I expect to buy more in the next major downturn. Exchanges are only of use early on, because you don't reset the depreciation clock in an exchange. The basis is reset and the clock starts again when you die, so your heirs benefit tremendously from inheriting the properties. No recapture and no capital gain if the heirs sell.

Well stated.

 

[ghh101]

First rental at 27 and now have 15

It has been a journey. I am not as lucky or skilled as the poster. I acquired my properties at about 75-80% LTV. I have had to evict 5 over 15 years and had two tenants do about 4000-5000 in damages. My first 2 properties are mortgage free and the other 13 range from 12-15 years left. I hope to start plugging away at those. I am 41 and hope to be free of the rental home mortgages at 52. Currently rents are $11,825/month and mortgage payments of $8667/month. T&I is about $1333/month. So about $3158/month left over.