Buying More Real Estate + Cash Flow?

[refi]

TL; DR - FIRE'd comfortably recently, should I buy more RE that will take some work and grow cash flow?

I recently FIRE'd . Currently, I have enough for my lifetime ("won the game"), but given my drive, I want to continue to pad what I have b/c it's actually interesting for me, though adds a little stress.

So current approx stats:
NW: 6.8M
Equities = 45%
RE = 45%
Cash/Liquid = 10%
Burn Rate around 70-80k
HCOL

I have a deal on the table for SFHs in the midwest for 480k which rents around $7500/mo. This is in Class C/C- neighborhoods in a pretty flat appreciation city, but a large metro area. Given these numbers, I should yield over 20% CoC return. I'm currently holding MFHs in the West Coast w/ similar renter types with much higher appreciation, so would not be that foreign to me, but it's a new market.

PROS
Great Cash Flow
Tax Benefits - Depreciation
Lowish Risk

CONS
Onboarding and management
Ramp up time til stability
Long term prospects of property
Not a ton of value add

OPTIONS
1. Buy the deal
2. Look for other deals, but given current debt rates, cash flows are limited in the RE space, though there are other options with higher value add.
3. Put the cash in a broad market index fund and call it a day.

I'm leaning towards #1, Numbers work, seems low-ish risk, and I like doing real estate type things.

 

[aja8888]

Class C property rents for $7,500/month? Really? A $480,000 property?

That doesn't sound right.

 

[refi]

Class C property rents for $7,500/month? Really? A $480,000 property?

That doesn't sound right.

it's for portfolio of multiple properties.

 

[aja8888]

it's for portfolio of multiple properties.

Oh, that was not clear to me.

 

[Route246]

If you enjoy the challenge then it should be fine. I view being a landlord, even a passive one as being a headache and time sink, usually at the worst possible times, so I opt for #3.

 

[Another Reader]

Have you actually SEEN these properties? Who will manage them? Are they Section 8?

Hop on a plane and go look. In daylight. Post some pictures when you get back.

 

[Aerides]

Right now the SFH rents are crazy. But buying SFH's is crazy. When mortgage rates come down over the next year, I can easily see that reversing.

Maybe give yourself sometime to be retired before scratching this itch?

 

[calmloki]

We like real estate as well and I keep looking at it. Midwest prices are cheap; I know some people who transitioned from Oregon back to that area of the country because they were growing their RE empire fifteen years or more ago - they have mass quantities of places back there now. I started trying to bail out at 60 or so when we were at 53 doors and nine places or so. Getting rid of them is hard. Still have two rentals/19 units. Gotta say - exit strategy is a b*tch. At 74 I am not as capable as I was - don't have the fire either. Can't even run herd on workers as was my wont. I self managed mostly, having managers is both more expensive and does not result (IMO) in the happiest tenants or the best care of the units or the optimal and most efficient use of repair dollars.

Up to 60 all was ok, by 67 there was a noticeable diminishment - what's your time frame?

 

[Kork13]

Hmm, I don't seem to share your sunshine & rainbows outlook ... Class C (or below) is not particularly attractive to me... I err toward Class B/B-. I understand that you have experience in that range, but that experience might also be blinding you to the realities of the risk this property set poses.

My concerns:
- With the current rate environment & your NW, plus my personal debt aversion, I would only consider doing this deal outright -- no debt. What is your expected net profit from the $7500/mo (including realistic irregular cost estimates like mx/repair/eviction/etc.)? How long would it take to double your $480k investment? If you can double within 5-6 years, I'm interested. 6-8 yrs, meh. 8+ yrs? Hard pass, just stay invested in the stock market.
- Dig into your risk assessment some more for me ... Why do you view a Class C/C- multi-unit property as "low-ish risk"? Obviously I don't know the neighborhood, profile of current residents, or state of repair for the properties... But each of those factors could be hiding a variety of landmines. Tenant quality could be an issue, and paired with that is both lower rent reliability & higher eviction risk, as well as higher turnover & repair costs. At face value, Class C properties look great on paper (20% CoC is definitely attractive), but
- Have you talked to property managers & other investors (all of whom handle similar property types) who are actually from the area and know it well? They'll be your best resource for better understanding what risks you face.
- Look into the future. What does the exit strategy look like? 5, 10, 20 years? What are the prospects for an advantageous & timely resale for exit?
- Do you (or a trusted friend/associate) have any contacts with a high-quality property manager who can/will take on this property set? More than others, this type requires an attentive, proactive PM to prevent excessive loss/damage. If you go forward, definitely find/vet them prior to closing on this deal.

Despite my concerns.... I'll give you a positive consideration as well. I wouldn't worry too much about the flat/low value appreciation, as long as it provides strong income returns. On other properties, part of your ROI is value growth ... but if the income can make up for the missing appreciation, no worries in my book.

 

[pjigar]

At your burn rate, I would divest from RE. I still have RE but my plan is to divest as I come closer to winning the game. I want all my investments to be completely hands off when I reach FIRE.

 

[NgineER]

I also like real estate for cash flow and diversification.

Class C could work if you were familiar with the area, neighborhood and property.

I would stay away from something like that if it is not the area I’m familiar with. The only way I’d do a remote real estate deal would be something turn key in a nice area with higher income/higher rent scenarios.

I’d look for other deals.

 

[LateToFIRE]

I'm with the folks looking to simplify once the game is won, hence will be selling all r.e. except primary home over next couple years. Don't need or want the headaches.

 

[street]

I would buy the deal #1. It would be around 7% of your NW and would use your liquid/cash to buy it outright. You would have income of about 90K a year you could replenish your cash stash.

Of course, there will be work involved but for me that would be some of the things that go along with being involved in anything in life. You can always sell and the income coming should easily off set if for some reason markets went down.

I'm interested in more land and have some opportunities in the coming year to increase my footprint at the ranch. I hope I can get it done at sometime.

 

[refi]

Just an update on this one, I did go and check out the properties, a quarter of the properties in the portfolio needed some serious work (e.g. - foundation issues, open sewer pipe), the others were fine. The cash flow was there, but some of the deferred maintenance looked hairy. I offered on the portion of the portfolio I liked, but they didn't bite on my aggressive offer. So overall, since I like real estate and doing these deals, I will probably pick up a few units out here, BUT this is definitely not passive in the beginning.

 

[frank]

what do What do you consider to be A, B, or C properties? Is there some kind of system that defines the area or cost of living in the area you consider?

 

[pb4uski]

But IMO managing an extensive real estate portfolio isn't retirement... it's self employment with flexible hours... but if it's makes you happy then great but you are FI but you're not RE IMO.

 

[Fermion]

But IMO managing an extensive real estate portfolio isn't retirement... it's self employment with flexible hours... but if it's makes you happy then great but you are FI but you're not RE IMO.

It is unearned income though I think?

 

[frank]

so rental income isn't subject to self employment tax?

 

[calmloki]

Rental property is unearned income (uh hunh. no, really..) and thus one does not pay into social security. Sez the guy who is keeping his cat fed, but not much else with his SS check.

 

[NgineER]

Just an update on this one, I did go and check out the properties, a quarter of the properties in the portfolio needed some serious work (e.g. - foundation issues, open sewer pipe), the others were fine. The cash flow was there, but some of the deferred maintenance looked hairy. I offered on the portion of the portfolio I liked, but they didn't bite on my aggressive offer. So overall, since I like real estate and doing these deals, I will probably pick up a few units out here, BUT this is definitely not passive in the beginning.

Thanks for the update! Wise decision on passing IMO!

 

[refi]

But IMO managing an extensive real estate portfolio isn't retirement... it's self employment with flexible hours... but if it's makes you happy then great but you are FI but you're not RE IMO.

Agree and disagree.

Disagree - Almost all my current units are property managed, so my involvement is usually a 15 minute phone once a week, which I can take anywhere in the world and I just have it to let my PM know I'm there and watching. They handle all my bills, taxes, and utility payments.

Agree - If you're self-managing and trying to maximize gains, then this is certainly self-employment. When I was younger (and poorer), this was for me, but now, no way I want to field any calls to fix toilets and light switches. I have one remaining unit that this is the case which I'm planning to sell this year.

 

[pb4uski]

Agree and disagree.

Disagree - Almost all my current units are property managed, so my involvement is usually a 15 minute phone once a week, which I can take anywhere in the world and I just have it to let my PM know I'm there and watching. They handle all my bills, taxes, and utility payments.

Agree - If you're self-managing and trying to maximize gains, then this is certainly self-employment. When I was younger (and poorer), this was for me, but now, no way I want to field any calls to fix toilets and light switches. I have one remaining unit that this is the case which I'm planning to sell this year.

I agree and had self management in mind when I posted that and should have been clearer.

 

[MRHARDROCKCAFE]

Hard to be hands off. I like to be in the game.