Real Estate Retired Early--strategy used

[Luck_Club]

Real estate investors: what has been your strategy for investing? Primarily interested in what has worked for you to gather and manage real estate assets to fund your retirement. I am a big fan of rental properties as a way to build wealth, and think it is often dismissed as being a risky way to save as compared to Vanguard index funds etc.

There are quite a few on this forum who have utilized rental real estate to allow, or soon allow, them to retire early. We as investors know real estate is all local, and you have to look hard to find the "right deals" that provide positive cash flows. So for those of us who have found this GOLDEN path and want to inspire others post your journey as well as any specific niches you have found worked well. Lets show the young dreamers how rental real estate offers a lower cost option to cash flow in retirement that requires less initial investment than the heavily promoted balanced index fund from Vangaurd.

My story:
When initially entering the rental real estate world we wanted only single family homes figuring they offered a fall back position, and are easier to sell. We would only buy in area's we would be comfortable living, and tried (within the limits of the law) to only rent to people who weren't degenerates. As we gained experience we switched into duplexes, but still stuck with nice clean safe area's.

We bought our first rental property a single family at a foreclosure auction in 2002, very high risk, with very low price. That initial purchase, after being repaired, was held for 1 year and sold using a 1031 exchange, resulting in about a $70K gain. The 1031 exchange property provided about $500 month positive cash flow, and at present has a negative $35K in cash invested. In other words I pulled my cash out plus an extra $35K in a refinance. As of today this property has an equity position of about $70-90K

We bought our second property another single family in the winter of 2006, putting about $60K in cash into the property and repairs. This left a positive cash flow of again about $500 a month. This property also is still in my holdings and has an equity position of about $100K-140K.

We bought our 3rd and 4th properties both duplexes and both in 2009. We invested about $100K between the two of them between repairs and cash down. They were both duplexes and net a positive cash flow of about $2500 a month. That is when we stopped due to the inability to get additional mortgages.

So in total we have invested a total of about $90K of our own money into the real estate, had positive dividends from day one, roughly $470K in fire sale equity, and my gross cash flow upon debt elimination will be $7600 a month at today's rents, clearing about $6,000.

If instead of pursuing the rental real estate route we took the initial $35K I started with and added $2000 additional per month for 15 years I would have contributed $390,000 of my own money. Assuming a steady dividend type investment paying 5% and reinvesting the dividends, I would have to wait another 15 years to get the a large enough stash to get a nice safe $6000 a month payment at a safe 5% interest rate.

I'm pretty sure there are many others on this forum that have similar or better results to report. The point for young dreamers is this can be a fast track to retiring early.

 

[hesperus]

So for those of us who have found this GOLDEN path and want to inspire others

Or dissuade others?

 

[Blue Collar Guy]

In my former life, I was never "invited" to help celebrate success stories such as yours. I was called upon for a few real estate investment deals that turned sour. Including homicide. Seeing an small time investor, crying about being ruined by a tenant is a sobering sight. In my city, any sized real estate landlord is viewed as the devil. I tell anyone that will listen to rent the movie Pacific heights. If you can live with that,then you have the constitution of a landlord. Sort of like can you live with a certain AA. You will only know that when the stock plunges. The movie itself made me cringe, I knew i was not cut out to be a landlord. Seeing it in person made it a reality.

 

[OldShooter]

For young dreamers: There is no magic. There is work, skill, and luck in varying degrees. Luck is probably the most important of the three. It sounds like the OP here has done well in real estate. You will find a lot of stories like this in various places on the internet and in get-rich-quick books that people want you to buy. What you will not see is that stories of people that have completly failed with real estate or who are slogging along with zero or negative cash flow and hoping for a miracle to bail them out.

I'm not trying to put down the OP in any way. I'm also not saying that residential real estate is a bad deal. I did it for 25 years myself. But it is not a sure thing and it can involve both a lot of hard work and a lot of risk. So ... don't just read the success stories.

Maybe spend a couple hours driving around inner-city Detroit or looking at some of the online photo galleries.

And ... regarding the books ask yourself this: Why would an author who really did know how to get rich waste his time writing and hustling a book?

 

[travelover]

My index funds never call me on a Sunday night with a plugged toilet. But then again, I wasn't able to retire until I was 54.

 

[calmloki]

GI bill got me into my first house; also had an undeveloped block of coastal property from a tax sale purchase while in the Navy. Hooked up with a woman who had 1/2 a house. After some time we bought a house that was going to be a practice burn - read cheap. Spent 5 years making it something special and claiming it was a rental so we could write off the expenses. When complete we had to rent it out. Started buying houses and multi-units by borrowing against the first place we did together to make down payments. This was the mid 80s, interest was over 9% at best, we were buying rough places on owner carry contracts. Stuffed any income from the rentals as well as our paltry work incomes into fixing the places up and paying them down.

Our GOLDEN path involved a bunch of hands on care - at one point we were working on a place and realized it had been over 2 years that we had had a single day in which we didn't work on the rentals. After a couple decades we were at 52 units. Somewhere in there we had everything paid off. Since then we have been selling a few places, gave a multi away, and only bought a single house in the real estate crash. Divesting is tough, not made easier by rents going up substantially the last couple years. Real estate is great - it did amazing things to our net worth - but very very few have the dogged put your head down and keep your shoulder to the traces persistence our path required. We did not take the Tom Vu skyrocket path to success - got there anyway even though our golden path looked more like a furrow.

 

[Senator]

I have always purchased distressed properties. Most off the MLS. I have put a liens on them and redeemed as a junior lien-holder (where the large second mortgage goes away), purchased mortgages from a bank, bought at a sheriff's sale, and even bought a contract for deed (extinguishing a federal tax lien).

Real estate can get you very rich, and very fast if you put in the work. I worked 100 hour weeks for about 5 years between rehabbing and my real job. It does get me a very good income now, and plenty of tax benefits.

I am going to purchase a few rentals, via a 1031, in warmer climates and have them managed. Maybe even a 1031 eligible REIT. Or maybe not.

It's hard to give up a large income stream.

 

[Senator]

My index funds never call me on a Sunday night with a plugged toilet. But then again, I wasn't able to retire until I was 54.

You just have the renters call a plumber. That is a chargeable expense.

 

[Fedup]

I just bought them as residence and then didn't sell. Luckily they are in HCOL in California. I'm not sure I would just buy and rent as the original intent.
All appliances are brand new, tenant sign contact that they have to pay something before calling the property management, IIRC. One thing I did right is hire the right property management company and got the guts to fire the not so good property management company. In hindsight that is.

 

[WithAPurpose]

Real Estate has been a shortcut to FIRE for me as well. Our first flip in the run-up to the bubble did well enough to make us come back for more. The next flip turned into a rental when the RE bubble burst in 2009 and we couldn't sell. Since then we added another 19 rental units. Every one went through foreclosure along the way. There was definitely a year where we did not have a single day of relaxation (2 months going on right now), and those can ratchet up the pressure, on a person or a marriage. But if you have the skills (perseverance, home maintenance skills, tenant-interaction patience, and stamina (mental and physical)) to do this, Real Estate really can be a GOLDEN path. I feel like I can completely leave my MegaCorp job any day I want. I'm just 44. Of course, I readily admit to my luck of finding a partner (DH) with the technical skills and the ability to identify the diamonds in the rough of foreclosure sales. Hard work is the only path I have found, and Real Estate got me here to FI. It's not for everyone, and it certainly doesn't feel passive. Deep self-reflection is needed before jumping into any such commitment. I wish any new landlord luck

 

[Letj]

Real estate is a sure way to FIRE quickly. I acquired almost 50 distressed properties during the real estate crash, nearly all foreclosures. While I never in my wildest dream could have imagined the fortunate financial situation I am in today, mostly through cash out refi, it requires long hours and very hard work and at times stomach churning work. Granted most of my properties are low income rentals so you have to be the type of person who is handy, patient and is willing to get your hands dirty and that means literally cleaning up human waste at times. I don't think we could have acquired so many properties nor increase our networth so quickly if my DH was not handy and did/managed most of the renovations and repairs himself. Bottom line, if you buy right with the right acquisition cost to rent ratio and increase value, you can become wealthy in a much shorter period of time than investing in the stock market.

 

[Blue Collar Guy]

I see many people in this thread bought foreclosures. That means some other real estate empire builder lost their shirt. Just want to give the flip side. If I was handy, had more patience and thought i was lucky I would have tried it. I know im the guy, that would have lost my shirt.

 

[Fedup]

I tried to buy foreclosures but they were snapped up buy investors too quickly here. The most I saw was 20% down in my city and that property was snapped up too.

 

[Blue Collar Guy]

I was in my 20's I bought the Carlton Sheets no money down deluxe cassette tapes and work book. Another loser investment for me. Hahahaha. I scoured the papers looking as per his advice zippo,. Yup Im a loser.

 

[Bruceski44]

Any rational investment strategy requires an allocation to real estate. This could be via a REIT, but there are tax and cash flow advantages to direct ownership.

I 1031'd out of a SFR into several commercial DST structures. These are in multifamily and necessity retail, totalling about 30 different properties in a dozen states. This diversity gives me peace of mind and we make more money now than we did with the SFR, with NO involvement on our part at all.

I also made several cash purchases into LLC structures which are paying as much as 12% regularly, again in commercial assets like hospitality and multifamily.

Commercial leases are much better for the landlord than residential leases. There's a CVS store on the strip in Vegas we own, where CVS closed the store, but continues to pay the rent and will have to do so until the lease expires in 2020. They can sublet it, which is a don't care for me, as long as the rent continues to come in.

Most of these investments were reserved for accredited investors, but many new investments are popping up now under the RegA+ structure which will be available to anyone.

Withinterest rates (still) so low, it makes good sense to lock in long-term financing now on real properties.

Just to clarify, an investor can buy shares in a property via the DST or LLC structures, we don't own the entire property and a manager is part of the deal.

 

[Luck_Club]

Oh boggers. Wanted to start a nice thread for alternatives, but once again spammed by the dismissive. Only 4 of the 13 responses are helpful to the core topic.

Those helpful posts alluded to a few of the keys.
1) Resourcefulness and handyman skills.

The intent wasn't to sell anything but show a path to those who aren't fortunate enough to have pensions, stock options, or other generous retirement benefits.

Glad some have 0% withdrawals because of a generously funded pension.

 

[Blue Collar Guy]

Oh boggers. Wanted to start a nice thread for alternatives, but once again spammed by the dismissive. Only 4 of the 13 responses are helpful to the core topic.

Those helpful posts alluded to a few of the keys.
1) Resourcefulness and handyman skills.

The intent wasn't to sell anything but show a path to those who aren't fortunate enough to have pensions, stock options, or other generous retirement benefits.

Glad some have 0% withdrawals because of a generously funded pension.

That would be me. I wanted to show how this path could be deadly to some. It reminds me of the guys who always claimed they made a mint in the market, and laughed at me when I told them I took a beating. I was the only loser. My intent in this thread was to show that this alternative isnt paved with gold. I wasnt all negative, I said if i was handy, lucky, and had more patience I would have tried it. And thank you for complimenting me on my pension. Im reminded every month by direct deposit that as a second generation American, I live in the greatest country in the world. That as the grandson of illiterate people I am living a dream.

 

[Luck_Club]

I 1031'd out of a SFR into several commercial DST structures. These are in multifamily and necessity retail, totalling about 30 different properties in a dozen states. This diversity gives me peace of mind and we make more money now than we did with the SFR, with NO involvement on our part at all.

I also made several cash purchases into LLC structures which are paying as much as 12% regularly, again in commercial assets like hospitality and multifamily.

Good tip- Strategy. care to elaborate on how you go about finding these structures?

This is intriguing. My wife has been begging me to buy commercial, but usually the risk is too high in my opinion.

When I 1031'd my initial investment the cash was parked in something that sounds like what you are talking about. It had about a 6% rate, and had liquidity obviously. Is this the type of thing you are talking about with the DST? To me a DST seems like it would be smaller, with less liquidity, but maybe stronger cash flows?

 

[Fedup]

I like SFH because if worst comes worst, my kids can live in them. Low property tax for years too.

 

[Bruceski44]

Good tip- Strategy. care to elaborate on how you go about finding these structures?



This is intriguing. My wife has been begging me to buy commercial, but usually the risk is too high in my opinion.



When I 1031'd my initial investment the cash was parked in something that sounds like what you are talking about. It had about a 6% rate, and had liquidity obviously. Is this the type of thing you are talking about with the DST? To me a DST seems like it would be smaller, with less liquidity, but maybe stronger cash flows?

I worked with a broker who I was very pleased withhttp://www.kpi1031.com

More properties can be viewed here, a company I am also pleased with http://www.capitalsquare1031.com

Periodic distributions of 5-6% are reasonable with DSTs, because the risk is low, but they are not liquid. A liquid real estate investment is hard to find outside of a REIT. IMO, you pay for liquidity through lower returns. The IRR via a DST will be 10-12%, but monthly income will be less; you'll earn more once the property is liquidated. The continuing 1031 rollover is a part of our strategy and estate plan.

 

[Another Reader]

"So in total we have invested a total of about $90K of our own money into the real estate, had positive dividends from day one, roughly $470K in fire sale equity, and my gross cash flow upon debt elimination will be $7600 a month at today's rents, clearing about $6,000."

Having some trouble with your gross to net calculation. Even free and clear properties have expenses. Vacancy and collection loss, property management, property taxes, insurance, repairs and maintenance, utilities when vacant, advertising, capital improvements (sinking fund for those?), etc. Are you collecting those "market" rents, or are current tenants below market?

21 percent expenses seems more than a bit low. My guess is you are self-managing and doing all the repairs yourself. That's a job for which you are being paid, not a return on the investment itself. Maybe you could post an income and expense statement with all the numbers?

We have divested three houses in the last 15 months and used the proceeds to pay off mortgages. Own over 20 still and over two thirds of the portfolio is free and clear. Looking to clear everything except the primary residence and maybe three sub-5 percent rental mortgages. Made our share of mistakes, but never serious enough to lose anything or not cash flow.

Not as good at this as Senator, but making money at it.

 

[hesperus]

Oh boggers. Wanted to start a nice thread for alternatives, but once again spammed by the dismissive.

Not intended to be dismissive, but anytime I read 'golden path' to riches I always brace myself. Happy for your success, but you have to expect this healthy skepticism in a forum populated with successful people who know how to weigh both sides of an issue.

 

[Souschef]

My only venture in the rental market was when I got married and moved from my condo. at That time the RE market sucked, so we rented it out. My DW and I busted our butts cleaning the place out, relining shelves, etc. I installed a new vent hood and replaced the gas range/oven.
I found a good management company, and they handled all the details. I had gotten a HELOC while I was still living there and used it to buy our new home. That way I could write off the interest against the rental income.
The first tenant was there 3 years, which was great, but the next 2 were shorter term.
At that point I decided to sell, as the market had improved. I listed it and had 2 offers in a week, and sold it.
I split the net proceed among my 2 sons and DW's 2 sons, as the place never figured in my AA.

 

[Luck_Club]

"So in total we have invested a total of about $90K of our own money into the real estate, had positive dividends from day one, roughly $470K in fire sale equity, and my gross cash flow upon debt elimination will be $7600 a month at today's rents, clearing about $6,000."

Having some trouble with your gross to net calculation. Even free and clear properties have expenses. Vacancy and collection loss, property management, property taxes, insurance, repairs and maintenance, utilities when vacant, advertising, capital improvements (sinking fund for those?), etc. Are you collecting those "market" rents, or are current tenants below market?

21 percent expenses seems more than a bit low. My guess is you are self-managing and doing all the repairs yourself. That's a job for which you are being paid, not a return on the investment itself. Maybe you could post an income and expense statement with all the numbers?

We have divested three houses in the last 15 months and used the proceeds to pay off mortgages. Own over 20 still and over two thirds of the portfolio is free and clear. Looking to clear everything except the primary residence and maybe three sub-5 percent rental mortgages. Made our share of mistakes, but never serious enough to lose anything or not cash flow.

Not as good at this as Senator, but making money at it.

I do self manage, and apologize for the gross back of the envelope math. I meant my net free monthly cash flow $7600-$1600 in taxes and insurance = $6000. 72000/5%= a stash of $1,440,000 required to generate that cash flow. Even if you figure another $12,000 a year in expenses (that is 2 new roofs every year on 4 buildings), it would still require a $1,200,000 stash at 5%. As mentioned in original post It would take a lot of cash invested to get the stash that high to return that rate.

For those of us not lucky enough to pick the Amazon out of the pets.com, this might be a path.

Again my thought in the posting was to start a safe place to teach young dreamers an alternative not to poo poo the frugal life style, or stop taking the company match.

Since you have invested and still hold many units. Would you agree the investment offers lower risk and higher returns than an index fund? What was your strategy that allowed you to accumulate so many units? did you find one niche more profitable than others?

 

[Luck_Club]

Not intended to be dismissive, but anytime I read 'golden path' to riches I always brace myself. Happy for your success, but you have to expect this healthy skepticism in a forum populated with successful people who know how to weigh both sides of an issue.

We are all successful, shrewd and lucky on this forum. The paths to our success varies greatly. Some worked mega corp climbed the ladder, got $$millions$$ in options, cashed them out and are clipping coupons. Some worked and received 1 or two good pensions. Some inherited. Some saved every penny. Some used rental real estate.

Contrary to popular belief they all require "WORK". Social schmoozing, back stabbing, fixing broken walls, and even just keeping your mouth shut when you see inefficiency and waste.

As far as "golden Path". Ours has been filled with trash. Even the kids know what the wife and I look for in a house. If we are driving in a neighborhood with beautiful homes, and happen across a tired old shack, they will pipe up that the house we would buy.