39 yr old hoping to rely on rental real estate for ER income

[sunsnow]

Hi Everyone --

I just discovered this site, and am really blown away by all the great advice and life experience here. I thought I'd share my own story and situation, and see what ideas people might have. Please forgive what will probably be a very long post!

I'm 39, have been employed for 17 years (school took a while, with advanced degrees). I love the work I do (solving technical challenges, helping people), but I hate the stress and deadlines that come along with it. If it wasn't for those aspects, I'd keep working forever. Maybe I just want to know that I can ER whenever I want, and that will help reduce the pressure of the job. I'm not sure.

I've been married for 16 years. My husband is in the same line of work I am in, and we both have been living below our means for a long time--although we are not totally frugal. We own two homes, which is definitely a luxury. But they are paid off, and the maintenance costs are low on both of them.

I'm looking to be able to ER in three or so years. We have saved about 2M in investable assets. I had always thought, before the big crash in 2008, that the best investment plan was a diversified holding of stocks and bonds. Buy and hold, get the average market return, and plan to withdraw about 4% per year.

However, with the scandals that happened, I became worried that there is not enough oversight of the financial markets, and I just don't trust the system enough to have a lot of my money tied up in it. So, my investment allocation now looks like this: 15% stocks, 60% rental real estate, 25% cash/CD's. All the stocks and cash are in a Roth IRA. We have no debt.

Over the past three years, we've bought several rental properties for cash. We totally renovated all of the properties, so that there are no deferred issues. Wiring, roofs, plumbing, HVAC, windows, flooring, everything is new and of a quality that should last for a very long time. We pay for professional management, and the return after all expenses is about 7%

I chose rental property as the main way to obtain income for a few reasons: 1) it's somewhat indexed to inflation 2) I have more control over it than over the stock market 3) the costs are more transparent. I have chosen properties in established neighborhoods that have rented quickly. Of course, there's always risk. The neighbodhoods could decline, the towns could become less desirable, earthquakes can happen, someone could decide to manufacture meth in one of the units etc.

There's always risk.

Right now, the net income from the rentals is $3500/month. We have two properties we're in the process of purchasing/renovating. If those both pan out, and the renovation is successful, we should see about $7000/month which is more than plenty for us. It will probably take 9 months or so to get these projects finished. My plan is to continue to work through that time, and then for another year or so to build up a cash cushion outside of the Roth to cover repairs on the properties, and emergency stuff.

Well, that's a lot of info -- and it feels very good to write it all down. Thanks for reading and I would be so grateful for any ideas, questions, or criticisms.

 

[Texas Proud]

Not to sidetrack your original question... but I will

You say that your job is great except for the stress and deadlines, but you do not say what kind of job it is... if you say you would work for the rest of you life without these issues, then why not work on getting rid of these issues

IOW, talk to the boss etc. and see what can be done.... if you are good at what you do and propose a reasonable accomodation, most will do something to help you...

Not all jobs can be changed... IOW, if you are an emergency room doctor or an EMT then it is part of the job... but if you are not, see what else you can do...

As for the rentals, there are many others who can answer your question better than me... but it sounds like you have it covered....

 

[haha]

Hi Everyone --

I just discovered this site, and am really blown away by all the great advice and life experience here. I thought I'd share my own story and situation, and see what ideas people might have. Please forgive what will probably be a very long post!

I'm 39, have been employed for 17 years (school took a while, with advanced degrees). I love the work I do (solving technical challenges, helping people), but I hate the stress and deadlines that come along with it. If it wasn't for those aspects, I'd keep working forever. Maybe I just want to know that I can ER whenever I want, and that will help reduce the pressure of the job. I'm not sure.

I've been married for 16 years. My husband is in the same line of work I am in, and we both have been living below our means for a long time--although we are not totally frugal. We own two homes, which is definitely a luxury. But they are paid off, and the maintenance costs are low on both of them.

I'm looking to be able to ER in three or so years. We have saved about 2M in investable assets. I had always thought, before the big crash in 2008, that the best investment plan was a diversified holding of stocks and bonds. Buy and hold, get the average market return, and plan to withdraw about 4% per year.

However, with the scandals that happened, I became worried that there is not enough oversight of the financial markets, and I just don't trust the system enough to have a lot of my money tied up in it. So, my investment allocation now looks like this: 15% stocks, 60% rental real estate, 25% cash/CD's. All the stocks and cash are in a Roth IRA. We have no debt.

Over the past three years, we've bought several rental properties for cash. We totally renovated all of the properties, so that there are no deferred issues. Wiring, roofs, plumbing, HVAC, windows, flooring, everything is new and of a quality that should last for a very long time. We pay for professional management, and the return after all expenses is about 7%

I chose rental property as the main way to obtain income for a few reasons: 1) it's somewhat indexed to inflation 2) I have more control over it than over the stock market 3) the costs are more transparent. I have chosen properties in established neighborhoods that have rented quickly. Of course, there's always risk. The neighbodhoods could decline, the towns could become less desirable, earthquakes can happen, someone could decide to manufacture meth in one of the units etc.

There's always risk.

Right now, the net income from the rentals is $3500/month. We have two properties we're in the process of purchasing/renovating. If those both pan out, and the renovation is successful, we should see about $7000/month which is more than plenty for us. It will probably take 9 months or so to get these projects finished. My plan is to continue to work through that time, and then for another year or so to build up a cash cushion outside of the Roth to cover repairs on the properties, and emergency stuff.

Well, that's a lot of info -- and it feels very good to write it all down. Thanks for reading and I would be so grateful for any ideas, questions, or criticisms.

You two must have huge energy to work all day at demanding jobs and then go to work rehabbing. No doubt it will work, it's a very solid but also demanding approach.

Good going!

Ha

 

[sunsnow]

Texas Proud, thanks for the alternative perspective. It's probably worth thinking about how this job could become less stressful. The main problem with it is that I'm responsible for fixing whatever issues come up for a team of about 40 people, and it feels like I'm constantly on-call waiting for the next emergency. The work is engaging, but the feeling that everyone is urgently depending on me is not fun. As I write this, I wonder if I just need to adjust my own attitude and be a little more laid-back. Anyway, again thanks for helping me question my assumptions.

Haha -- thanks for the encouragement.

BTW what do people think about the safety of the stock market?

 

[unclemick]

Hmmm - I went the other way. The stock market that is, having owned rentals (duplex and and a manufactured home) for 15 years. My personality fits the stock market. I always 'felt' on call by the tenants day and night - even though I had good ones and made money over the years. Sold the RE early in ER as I felt it was WORK!!.

heh heh heh - over the decades I've have several friends who went rental RE and poo poohed stock market efforts. More than one way to skin a cat.

 

[kcowan]

I think you have a solid plan. You seem to enjoy keeping things working, both at work and in your rental properties. When you attain $7k/mo, go for it.

(You can always go back on contract if it wears you out.)

 

[brianinsf]

I think the main thing you need to do is make sure you have enough of a cash cushion to support going a few months without a tenant in the units or major repair costs. Murphy's Law says that everything that shouldn't break will all break at the same time resulting in poor cash flow.

It seems like your rents are priced on the higher end of most rental markets (not sure where you are so don't know if this is true or not). Down the road it could take more time to find new tenants than you are currently experiencing.

The 7% seems like a nice return with the extra cost of professional management. Paying for the management adds to the costs but also removes the late night calls and hassle of finding new tenants. I'm assuming the manager is someone you trust to find good tenants and not try to fill the unit with a warm body. Ending up with a bad tenant can take a lot of time and expense (again depending on your location).

Best of luck and welcome to the boards.

Brian

 

[tightasadrum]

I've owned rental property since about 1981. I added new property whenever I found a really good deal. But I only paid cash for one once. Rent payments allowed me to stop "working" when I needed to. I do the management of the rentals myself. It allows me to get to know the tenants better. I feel that is important.

The biggest difference between you and me is that I see real estate rentals as just another part of diversification of my assets. Rental real estate represents probably 40-45% of my net worth, depending on how it's valued. I wouldn't want only rentals. Yes, the financial markets may be suseptible to graft and corruption, but real estate can also be risky. But, life is a risk. A broad, non-correlated asset mix let's me sleep at night, that and a fat cash cushion just in case.

 

[SpencerM]

Hi Everyone --


I chose rental property as the main way to obtain income for a few reasons: 1) it's somewhat indexed to inflation 2) I have more control over it than over the stock market 3) the costs are more transparent. I have chosen properties in established neighborhoods that have rented quickly. Of course, there's always risk. The neighborhoods could decline, the towns could become less desirable, earthquakes can happen, someone could decide to manufacture meth in one of the units etc.

There's always risk.

Sunsnow,

You are right there are always risks, but as someone who has a rental that I live far from, I will add a few cautions. You seem very hands on and I think it will work fine for you if you plan to be close to your properties. However as having a distant rental for more than five years I can tell you that unexpected things do come up. Not being able to get in the car and drive by the property, even though we have a good property manager, is a downside. Replacing a roof while on the other side of the world is not the best. If you plan to always live close, do the work yourself, etc., no problem. I do not, and even if I did, I am not a handyman. With more than one rental, make sure you also have a good lawyer on standby.

I have come to the conclusion that property is as unpredictable as the stock market in many ways. Some you mentioned (bad tenants) but others like general market decline or market fluctuation of rental rates or NO tenant for a period can dramatically affect a financial plan. Also, even with a property manager there are always decisions and attention you must direct in that process. In my experience and research the only private persons that do well long term placing a large percent of their assets in rentals are those that are very hands on and are able to sell them later at a good time in the property price cycle. Most other of my colleagues that have tried this route eventually tired of nagging aggravations.

Normally, in the past thirty years when many people get out of the market, that means it is poised for a rebound. My comfort level is with the one rental, that is paid off, but with most of my investments directed toward a very broadly diversified portfolio that actually requires much less attention. Most of the time I can then concentrate on other things and other places more important to me.

Good luck with your planning and forward thoughts!

SM

 

[l2ridehd]

I own two rentals and am actively seeking a third. Today I keep high mortgages on them due to current income. I am about to retire and will start to pay them down and convert the rents to income vs equity build. I manage my own, hire a handy man one day a week to take care of them plus my home, and so far have been successful with them. He mows lawns, trims shrubs, paints, minor repairs, pest control, and other stuff. I may do the work myself once retired. I also use a very passive investment strategy from lazytraders.com for other investments.

I would not rely on rentals as my only source of income. However I agree that they make an excellent way to generate positive cash flow with minimal downside risk. If you have the personality to manage rentals then they should be a part of your portfolio. It is not for everyone though.

 

[Fishingmn]

I made the plunge into rental real estate as well and in the past year I've acquired 4 townhouses and have a 5th under contract. I'm buying newer townhouses with a goal of less maintenance and hope they are more attractive to renters. I'm finding stuff with more like 9-10% returns but I don't pay a management company as they are all very close to my house and I'm handy. Of course, I did spend almost 2 hours yesterday replacing a dryer that went out but it only cost me $100 to find a good one on Craiglist and get it over there.

I am actively looking to buy more. If I start using loans instead of cash my return will go up (using leverage) and it's possible I could retire in 2 years instead of 5.

 

[sunsnow]

Thanks again for the awesome feedback

A couple of common threads are emerging: diversification and property management.

Diversification: My portfolio is overweighted in real estate. All my income will be from that source, and about 60% of my investments will be in it. This concerns me a little too. One possibility is to ease into retirement, taking some contract work from time to time, or going to part time, for 2-3 more years and using those funds to buy more stocks.

Property Management: Sounds like a lot of folks have tried the rental real estate thing, and are saying that if you are handy and manage it yourself, you'll do better. That makes a lot of sense, but concerns me because I am hoping to retire, not become a full-time property manager. I guess I'm thinking that because the properties are in good shape, and were cheap enough to allow a 7% return (including professional management and building up a reserve fund for future repairs) -- that my situation will be an exception to this general principal.

As kcowan said, I can sell if it doesn't work out. I would be surprised if I lose money on these purchases, because the average return I see in rentals on the market around here is around 4%.

I agree, brianinsf, a cash cusion is essential. It's pretty daunting to consider all the properties I'll be responsible for maintaining, as well as the potential lags in income. I'm hoping to have around $150K outside of the retirement plan, and then another $400K in the Roth when I actually pull the trigger. It would be nice to have more...

I definitely agree i with unclemick, there IS more than one way to skin a cat, and it's really helpful to hear what other are doing. Thank you so much for taking the time to consider my situation

 

[Huston55]

I own two rentals and am actively seeking a third. Today I keep high mortgages on them due to current income. I am about to retire and will start to pay them down and convert the rents to income vs equity build. I manage my own, hire a handy man one day a week to take care of them plus my home, and so far have been successful with them. He mows lawns, trims shrubs, paints, minor repairs, pest control, and other stuff. I may do the work myself once retired. I also use a very passive investment strategy from lazytraders.com for other investments.

I would not rely on rentals as my only source of income. However I agree that they make an excellent way to generate positive cash flow with minimal downside risk. If you have the personality to manage rentals then they should be a part of your portfolio. It is not for everyone though.

I made the plunge into rental real estate as well and in the past year I've acquired 4 townhouses and have a 5th under contract. I'm buying newer townhouses with a goal of less maintenance and hope they are more attractive to renters. I'm finding stuff with more like 9-10% returns but I don't pay a management company as they are all very close to my house and I'm handy. Of course, I did spend almost 2 hours yesterday replacing a dryer that went out but it only cost me $100 to find a good one on Craiglist and get it over there.

I am actively looking to buy more. If I start using loans instead of cash my return will go up (using leverage) and it's possible I could retire in 2 years instead of 5.

I was going to start a thread to ask this question but, searching found this excellent thread so, I'll hitch hike, if you don't mind.

I quoted the posts above because theyre from two existing landlords. Pls give me your thoughts on this potential situation.

Invest $100k, $25k down on four small single family homes in eastern TN, each ~$100k purchase price. My discussions with prop mgr (I'd have them managed) says $900-$1,000/mo rent. My rough estimate says ~$200/mo/property clear, which is ~10% ROI. And, that income should be tax free due to depreciation.

Does this sound feasible to you?
What am I missing?
What could go wrong?
How do you determine optimum amount to invest; is it up to income covered by depreciation?

Thanks for any input.

 

[Parr0thead98]

Hi Huston:

Your #'s seem about right, but that's only based off what's in your e-mail. I just put a bid in on a second rental property yesterday that's a Fannie Mae foreclosure. If needed, you can qualify for lower down payments using their Home Path financing.

I am in the military, so when I retire, I will have my military pension, healthcare, what I put away in my TSP (a gov't 401K), and my plan is to add at least 1 rental property a year to my portfolio for the steady income. I have 1 property so far that clears $140/mo before tax/depreciation. The one I bid on yesterday is listed at $102K, but I bid $76K due to the amount of work it will require (when you're being foreclosed on, you don't exactly leave the property in pristine condition).

I use property managers at this point...as Rich Dad Poor Dad says, investing is a team sport! You do need to assess your personal cash flow to ensure you can cover the mortgage pmt when the house is vacant...maybe stockpile any cash flow from the rental in a side account for those vacancies??

V/R,

Parr0thead

 

[Pradhu]

Hello Sunsnow!

I was thinking along the same lines. I am 31 years old, and plan to retire very early (or semi-retire, but without any pressure of earnings) in around 2 years time. I know I may probably postpone it for another couple of years, but definitely plan to retire before I turn 35.

Since our post retirement horizon period is more than 50 years, stock markets assume great risks. Unless you actively manage your stock portfolio, in these uncertain and fast changing times, many companies may not survive for another 50 years. Frauds, excessive management payouts, weak corporate governance all accentuate the problem.


Moreover, when you are talking about a 50+ year horizon, having investments strongly linked to inflation makes great sense. Expenses projections down the horizon are extremely sensitive to changes in inflation - So the same should be for your income. USA has enjoyed low inflation rates since the past couple of decades, which may not hold in the coming decades. In the long run, real estate rentals and real commodities are best linked to inflation.

Another thing I would like to brush upon for very early retirees, is basic need for improvement in lifestyles. It would be better to plan for a gradual increase expenditure much more than the expected inflation. Living the same level of lifestyle for 50+ years can be very boring. So even if you can afford a better lifestyle, restrict yourself to lesser means for the early period. It also acts as reducing the risk of premature corpus erosion.

Another way of allocating is to invest in low-risk real estate (real estate in prime locations with high occupancy rates) to the extent that the net rentals meets your current budgeted expenses (probably 120% as an added cushion). Assuming that the rentals would be more or less linked to inflation, this would ensure that your current lifestyle would be taken care of. The rest could be a mix of stocks, sub-prime (currently its priced attractively), Fixed income, with differing risk profiles, based on your risk apetite, and inclination.

Anyhow, if you are investing in stocks, you would need to relook into your portfolio regularly. For me, I'm work in the finance domain, this is what I am programmed to do, so it wouldn't be much of a burden. Infact, I plan to actively manage a small portion of my equity portfolio as a hobby.

All the best!!

 

[l2ridehd]

Based on your numbers it sounds like a good plan. My difference is that I do not hire a property manager but do it myself. They hire professionals every time to fix every minor item and that really eats into your cash flow.

I placed an ad on craigs list for a handyman for one day a week. I got 160 responses. Culled that down to about a dozen for a phone interview, met 3 in person and hired one. He was a retired person, very capable, looking for some extra spending money. I was able to fire my lawn service, my pest control, and shrub trimming service. Just those 3 more then pay him for one day a week. Plus he does all minor repairs. painting, and many other services for me. My homes are in Florida, I live in Virginia, so he handles my two rentals there plus my retirement home located there. As an example, this winter when lawn mowing drops to once a month, he will use the extra time to paint the outside of our home. He likes the work, does a great job and lowers my expense. Win win for both of us. Might not work as well in a different employment environment, but for now it works well.

So even handling the property remotely has not been a problem for me. I do the advertising, contracts, collect rents, and other minor stuff. A management company costs about 10% plus any work required, my way costs about 7% and I get my home done and any work required plus a lot more.

This allows me to have extra cash flow that I can use as income or mortgage pay down. (equity build) I am still looking to buy a third rental in the same area and may go to a forth at some point.

This way of doing the rentals improves my ROI by keeping the expenses low. I have owned rental property in some form many times and management companies really eat up profits. If your goal is to ER and use these properties as income, the more you can do yourself or hire someone as I did, the sooner you reach your goals.

 

[tightasadrum]

I2ridehd,
I loved your method of hiring a handyman to do weekly maintenance rather than hiring a management company. Right now I do most of it myself, but sometimes it can be very inconvenient. For example, I was getting dressed for the football game on Saturday when I received a call from a tenant claiming she had water all over the floor of her apartment! (Water! The landlord's enemy.) So, I had to immediately change my plans and deal with the problem. Still made it for kickoff.
Is your Handyman available for unscheduled emergencies like this one? And would it be an additional charge? I've even considered increasing my investment real estate holdings to a level that I could hire someone full time to handle everything. But I haven't seriously made that move yet?...Tight

 

[l2ridehd]

So far yes. He has handled a couple emergencies for me. And yes he charges me by the hour so if he works extra hours I pay him more. So far (about a year) it has worked beyond my expectations. And if for some reason he decides to quit, I will run another ad and do it again. I just gave him a raise as he is doing much better then I expected and I would prefer to keep him and not need to replace him. I buy all the tools (had most already) and supplies. But supplies I was paying for anyway through the service companies. I built a check list for each home of everything that needed to be done and a schedule of when to do it. All the way from spraying for pests to washing windows to checking post lamps. Changing batteries in smoke detectors, furnace filters and much more. Each home has a list of about 50 things and a schedule with some being done weekly, others monthly, quarterly and annually. He just reviews the list and fills his 8 hours every week. I review the list and make sure the necessary supplies are available.

I also have a list of "special projects" like painting the house, pressure washing the homes, painting the pool deck, tighten all the nuts and bolts on the garage doors and a few others. Just think about everything you need to do to maintain a home in good condition and build the list.

When we used to go to our home about once a month, I always had a long list of things I had to do that I could not easily hire, to the point we dreaded our trips. Now we go and just have fun.

 

[Parr0thead98]

L2rdhd: thx for your post, good ideas in there! The house I just put a bid on is going to require some work, but is only 1 mi away right outside of the base. If we get our offer accepted, the plan is to do the work as a family on weekends...as far as we can tell, the work is all cosmetic. Will still gte a home inspection, just to make sure.

The week is filled w/ travel, swim, gymnastics, meetings, etc. I have the c/f to cover the mortgage and fix up costs until we can get it ready for next summer. Wife & I are wanting to try out our skills/"family fun" concept on this house to see if dreams somewhat mirror reality!

Should hear back from the realtor today. We'll see what happens.

 

[WestLake]

I will post again later when I can get to a PC. I have 11 rentals with 12 tenants (1 is a duplex). I bought on short notes (5 and 7 years) killer payments (forced LBYM) but now I have paid off all but 2. Also my home and a lake cabin are mortgage-free.

Still w*rking and pouring everything I can into 401K and Roth. More forced LBYM.

I decided that since stocks are on sale I want to have as much as I can before I pull the ER trigger.

I am looking at it as diversification. I plan to retire in 2014 just before I turn 56. I am hoping I don't have to touch the 401K and IRA until 70 1/2 but that's very optimistic. I have some taxable stock which pays dividends of about $9,000 per annum which I hope will cover health insurance. Speaking of that I am in the process of buying an umbrella policy.

* I will not have a pension.

 

[Parr0thead98]

The agency for Fannie Mae called back and countered our offer...we're still $22K apart. Maybe they need the extra $$ to pay out those Executive Bonuses, poor folks! Having the agent go back and explain how I arrived at my numbers due to the amount of work the house requires. If they don't come down, I told her I was in no rush and could wait since anyone paying their price for that house probably "deserved" it I'll just keep putting $$ away each month and there'll be more foreclosures to be had.

FWIW, I personally have enjoyed reading books by Harry S Dent, his most recent being The Great Crash Ahead. Although not all his economic forecasts have been accurate, I gleen a lot of insight on his study of demographics and how spending patterns affect the economy. Factors into my interest in starter home rental properties as the echo boomers (kids of Baby Boomers) begin entering the workforce, start having families, buying first homes, etc. No indorsement intended, just shedding light on factors behind my thinking.