Hello from JimK, seeking not-so-early retirement advice

[JimK]

Hi, I'm 54, have had my head buried in my career, and am just starting to think about retirement, now that I have earned tenure. Salary 60K, have a very large student loan, still renting. I started my prof job pretty late in life, at 48. Have thought about nothing but science, publishing, tenure. As it stands, my TIAA-CREF retirement plan will have me at about 35K after taxes per year annuity retirement plan if I retire at 70. I can live on that but it will be tight. I am looking to significantly enhance my retirement income.

Since I will now buy a place to live, and am single, I have been looking hard at buying a fourplex on an FHA loan and living one apartment; I've been looking at properties, and reading books. I'm concluding that here in Las Cruces, NM, it seems impossible to find one that will cash flow without paying much more down than I can (30-40K). The list of multi-family homes available in this town of 100,000 has not changed in a month, none of them will come close to cash flow at their prices. Plus, the property won't become a source of income until the loan is paid off when I'm 84. I don't understand well how it can be financially beneficial in a shorter time if it's barely cash flowing. Appreciation? Is that a sure thing? Tax benefits? Just don't know enough to put it all together.

So maybe this is the wrong place to put my retirement energies and funds. Perhaps just contributing more to my retirement account, an IRA, stocks, or some small business would be smarter. I just don't know, as I've never known anybody who did any of these or talked to me about it. I feel completely in the dark. I'm trying to educate myself, but from various google searches have seen good discussion here, so thought I'd visit here and see what advice more knowledgeable folks might have.

Thanks,
Jim

 

[SarahW]

Hello Jim and welcome. There's a lot of good info here; take time to do some reading! I'm sure someone will be along soon with some insight on the rental property plan.

 

[Bestwifeever]

Welcome to the boards--and congrats on the tenure, too.

I don't know anything about the costs/benefits of being a landlord. How does Las Cruces fall in terms of cost of living for retiring purposes?

 

[HpRyder]

Hi JimK
Landlording is not for the faint of heart, its a business. Unless your properties cash flow from the get-go, you've a challenge on your hands.

Do some in depth research on:
Mrlandlord.com Landlord Discussion Board

Good luck and don't hesitate to come back here or go there to ask questions.

 

[NW-Bound]

Welcome aboard, Jim. Our resident expert landlord is Calmloki, and there may be others who can help. Perhaps they will be here shortly. Congrats on the tenure.

 

[Rambler]

Hey Jim, I am an ex-slumlord. Everyone has their own opinion, but I will say that when I had mine (four single family units), I could never keep really good tenants...the good ones all went away and bought their own homes. And, as I was working long hours, in the opposite direction of the units from my own home, all repair work that I did myself had to be done on the weekends. That meant that often I had no days off. In my young days, the rentals were my plan for retirement...I was going to have a bunch of them. Well, after about 6 years, I threw in the towel because it wasn't working for me. I swore I would never do it again, but I guess I should never say never.

My advice is to gather the opinions and experiences of lots of folks, especially Calmloki, see how those opinions and experiences match up with your abilities (time and talent wise), and then make your decision. Don't just jump feet first, as you may regret it down the road.

Good luck to you.

R

 

[calmloki]

Maybe check this thread: http://www.early-retirement.org/forums/f28/anyone-successful-with-real-estate-investments-43691.html

The link Accountingsucks posted,
http://forumserver.twoplustwo.com/30/business-finance-investing/ask-me-about-real-estate-investing-99351/
reads pretty true to me. The Spex x poster there sounds like he plays a cannier game than i - but there are lots of ways to live a life, lots of ways to manage property. I'm really curious about his assertion that buying mobile homes in mobile parks and flipping them is a great plan - suspect it works for him because he owns a mobile park - betcha he's buying units in that park only. Parks i know of up here don't allow mobile owners to rent out their units, only sell them - result is that the $375 space rental keeps chewing along and unit owners are just desperate to unload them. I wouldn't touch buying a mobile in the hopes of flipping it!

Our small joke is that we didn't have kids - we had rentals. The hope was that our rentals would support us in our dotage as other's kids would care for them. Thus far, looking at other people's children, i'm thinking that the rentals were a better bet. Others who look at our landlording probably are far happier with their kids... An owner occupied four-plex could work well for you as long as you don't mind living your work - there are economies of scale in having multiple units under one roof. Also great time savings if showing an apartment is a matter of opening the door down the hall rather than getting in a car, driving 10 minutes, waiting for the potential tenant to show or not, and driving home. Potential to be a very responsive landlord w/ regard to problems - and often seeing a problem is less stressful than hearing what dire thing someone else thinks a problem could be. Probably greater likelihood of prompt rent payment if Mr. Landlord 's door has to be walked by on the first of the month. None of our rentals are more than 20 minutes away from home - as we divest the farther units are going to be sold first.

I view our tenants as our customers and feel that we are in a service industry - if we can exceed our tenant's expectations our relationship with them will be a happy one and our reputation will spread. Right now our rentals aren't a huge amount of work, but they do require that tenants can reach me at any time, seven days a week, 365 days/year. I've had a tenant call me as i was on the beach in Sayulita Mexico - got her sewer problem fixed from there. Sorta cool, sorta a bummer. Mostly i stay close to home and field calls. Now this is after 25 years or so of doing the business - at one point early on the gal and i were working on a place and it dawned on me that we had physically worked on the rentals every single day for the last three years. Was younger and more enthusiastic then.

Regarding buying. As i'm sure you are aware, an asking price is just that. Your offer could be quite different. Our early purchases were mostly owner-carry contracts - we didn't have to pay the banks a bunch of fees and buying was simpler. We were buying places that were pretty sad - thinking back, probably no way they would have been financible through a bank, so we were (without being aware of it) in a great bargaining position. When we were buying the places it looked like they would just barely cash flow - by dumping all our spare time & money into them we were able to raise rents. We weren't very sharp - didn't do spreadsheets to see if we were beating any income figure - just pushed our available cash & time & work at them and hoped for the best. Worked out ok for us.

Appreciation has been our friend. The low interest rates sure seem like they could be yours.

 

[Coach]

Jim, welcome to the forum! And congrats on getting tenure. I think I could hear your sigh of relief up here in Colorado

TIAA-CREF would be happy to work with you on retirement planning. It's no charge -- if you haven't consulted with them, it might be worth the investment of your time.

I envy you. I think Las Cruces would be a nice place to live, and it was on my short list of possible cities to relocate to in retirement.

Coach

 

[Bestwifeever]

Oh, and here is a FAQ that will answer many questions you may not realize you might have about real estate as an investment--it will direct you to many threads about owning investment property:

http://www.early-retirement.org/forums/f47/faq-archive-landlording-real-estate-investment-43700.html

 

[JimK]

Hi all, thanks warmly for the welcomes, and the congrats on my tenure. It's been a long tough road. I have identified a property, I want it, but the asking is 288K and by my figures, at $225K it will work and not demand too much more than I lay out now for my apartment's rent. Anyway, there are several dumps that have sat on the market since I started, 2 months ago. This one is nice but overpriced, as is one other one (even more overpriced). I want to be sure not to let the short supply press me into buying at too high a price though. Should I only go for it if it pays for itself (including my mortgage payment with 5% down)? Can I count on appreciation over the next 10 years? I'm 54 and need it to benefit me before the 30 year note is paid.

Bestwifeever, LC is one of the top retirement destinations in the U.S., rated first or second by Forbes and AARP a few times. So for people in California or Florida now retiring, their money can go a long way here. Thanks for the link(s...everyone).

HpRyder, when you say cashflow, do you mean including your mortgage payment? Should one expect to make a very large down payment, to get the mortgage payments low enough to cash flow?

Calmloki, thanks for sharing your wisdom. Yes the low rates now are very enticing. I listened to Nightly Business Report tonight, they say credit markets are unfreezing, I wonder if this means the low rates will rise soon? Freddie Mac's rates for the month come out in the morning.

Coach, I had a planning session with TIAA-CREF on April Fool's day (hope that's not an omen). Changed my attack quite a bit, into more aggressive trading and moved my bonds into stocks. So far so good on that last bit, but keeping my eyes out. LC is a nice place to live, I love the climate, low traffic, and riding my bike from my apartment on a one hour carless cruise through pecan orchards every morning. But I'd like to have Colorado-sized mountains.

Thanks again, and thanks for the reading links.

Jim

 

[HpRyder]

the asking is 288K and by my figures, at $225K it will work and not demand too much more than I lay out now for my apartment's rent.

You rent doesn't include a whole lot of costly factors.

Should I only go for it if it pays for itself (including my mortgage payment with 5% down)? Can I count on appreciation over the next 10 years?

No, I don't think you should count on appreciation. That's just frosting on the cake, if indeed it ever happens.

cashflow, do you mean including your mortgage payment? Should one expect to make a very large down payment, to get the mortgage payments low enough to cash flow?

cash flow = rent - PITI - maintenance costs- vacancy factor * monthly PITI - legal eviction fees - rehabilitation costs

Don't forget your purchase expenses. Here in CA the pricing structure for non-owner occupied loans has worsened. The best pricing is for buyers putting down more than 30%.

There are some pricing penalties you ought to know about. Fannie Mae and Freddie Mac both impose them. There is a standard fee for non-owner-occupied loans of 1.5 to 1.75 points. That applies even if you buy a single-family home. But if you buy multi-unit properties there are additional fees over and above that. For a duplex, a 2-unit property, there is an additional fee of 1 point and for a 3-unit or 4-unit property, the fee is 1.5 points. So if you buy another 4-unit property, the total points are as follows:

Loan origination: 1 point
Non-owner: 1.75 points
4-unit: 1.5 points
Total: 4.25 points.

With these costs, your price had better be really low. Additionally the loan interest rate is in the 5.5 - 6 % range. So you had better be very sure of your estimated rents, rental pool and have a substantial cash reserve. Or you are going to quickly become a statistic.

Again, read those reference URLs to learn what you don't now know. I urge you to use others experiences. You'll make enough of your own mistakes. There is no need for you to repeat theirs.

Again good luck and come back if you have any questions.

 

[JimK]

cash flow = rent - PITI - maintenance costs- vacancy factor * monthly PITI - legal eviction fees - rehabilitation costs

Thank you HpRyder.

I don't understand the

* monthly PITI

I understand subtracting all costs from rent. Those costs are monthly PITI, maintenance, vacancy, legal fees, rehab costs.

But I don't understand why you multiply vacancy by monthly PITI. It seems like you have already included subtraction of PITI.

Thanks...

 

[HpRyder]

But I don't understand why you multiply vacancy by monthly PITI. It seems like you have already included subtraction of PITI.

Typing too fast, slip Of the fingers. The vacancy factor is applicable to reducing the rental income. Thus:
cash flow = rent - PITI - maintenance costs- vacancy factor * monthly rent - legal eviction fees - rehabilitation costs

Sorry for the typing mistake.

 

[JimK]

Typing too fast, slip Of the fingers. The vacancy factor is applicable to reducing the rental income. Thus:
cash flow = rent - PITI - maintenance costs- vacancy factor * monthly rent - legal eviction fees - rehabilitation costs

Sorry for the typing mistake.

Thanks. It there a standard figure for eviction fees people use in figuring this?


Thanks,
Jim

 

[calmloki]

not that i know of - trick is to avoid evictions through screening or bribery/threats or any other means. In Oregon the court allows $185 for costs, which covers cost of filing, court costs, and service fees. The real cost is in lost rent as the legal system works it's ponderous ways and frustration and time waste as you go back & forth to court, sit and wait for your 5 minutes in front of the judge, get & fill out forms. Think i did 2-3 last year for 52 units - hadn't done 3 in the prior 20 odd years. Tenants are getting shame free about free rent while getting evicted and less worried about the effect of an eviction on their Permanent Record.

 

[HpRyder]

Thanks. It there a standard figure for eviction fees people use in figuring this?

No. And therein lies part of the problem. This is very court district dependent, very eviction situation dependent and extremely lawyer dependent. Here in Ca., an attorney not specializing in evictions can cost $1.5K+ and take 2 - 6 months to complete, using your case for OJT. While one who does specialize can do it for $150 - 200 + court and server costs of about $600 and get it done in 30 days. If the tenant contests, costs go up, it takes more time and damage costs goes up. Don't forget most tenants are virtually uncollectable or extremely hard to collect from. They don't have a lot of money and do their best to not be found after an eviction.

If you go into this business, be absolutely sure to join a local landlord/apartment owners association. There you will have a network of others in the business.

As part of your research, go read the URL I previously posted.
Mrlandlord.com Landlord Discussion Board

Good luck.

 

[NW-Bound]

I ran across an interesting article on the subject of becoming a landlord. With the housing prices so low, you would think buying a home as a rental property with mucho down payment would be a piece of cake. Not so, as told in the linked article, "The Making of a Landlord".

Excerpts follow.

I began my search in my Los Angeles neighborhood, but even with a big down payment, prices hadn't fallen enough to produce positive cash flow for a rental property. So I searched Realtor.com for homes in suburbs a train ride away that seemed likely to have job growth...

I figured getting a loan would be easy. I have good credit, no debt, cash in the bank, and a job. I was pre-approved for hundreds of thousands of dollars...

In my one-year search, I came to expect surprises and to realize that even a good credit score doesn't get you far...

I had to put down more than planned: 25%. And I'm paying 6.2% and one point in fees ...

At one point, I was scraping and painting a house I didn't own because the lender wanted damage repaired...
​

The author finally got his place bought and rented out. He paid $125K for a house that sold for $345K four years ago.

In the end, my total cash investment was $47,000. Payments—taxes, insurance, everything—will be $750 a month (plus any repairs). If my tenant pays me for a year, I'll get a 9% return, not including tax advantages or price appreciation. If being a landlord is a hassle, the hope of a 9% return will ease the pain.​

The Making of a Landlord - BusinessWeek

 

[Enuff2Eat]

hi jimk, welcome to the club. You will learn a lot from the people here. Anyhow, to answer your question. Landlord is work not a hobby or a "wonderful" retirement plan like everyone said. I believe that in order to have a chance in real estate investment you must do a ton of homework so you can buy RIGHT. Money is made mostly from knowledge and a lot from luck. Some area in the US it's just doesn't make sense for people to rent if they have an average or above average job, therefore most of your tenants are short timer and trouble makers.

Good luck to you and remember, buy RIGHT is the key. (for example, $300k house bought at $300k is not that good but $300k house bought at $220k is a bargain).

enuff

 

[DFrancis]

Hello Jim

Hello Jim,

Welcome to the forum.

 

[boont]

Rental Management

Jim,

Welcome to this site.

If you are thinking about doing your own work on a rental, please keep this in mind...

Even if you put this property in an LLC, if you do your own repair work you will be fully liable should something go wrong. Think about that.

If you repair a stairway and it fails and kills someone or if you repair the electrical and someone is hurt of killed you a fully liable.

However, if you put your rental in an LLC and hire someone to do the work, you have no liability, beyond the property in the LLC.

The last thing in the world you want to do is to try and "save" by doing the work yourself.

b.