Rental property as retirement?

[santoball7]

I'm 36
Self employed and looking for a solid retirement. I have 3 properties (8 units) I am thinking that I am going to take the plunge an try to get to12-15 units as my retirement

Any thoughts..... good or bad idea?

 

[Major Tom]

If you like owning rental property, it might work for you. Bear in mind that, unlike equities, real estate requires maintenance, and there is also the ongoing issue of finding tenants and dealing with their various issues. If you like managing them and doing the maintenance yourself, you can save some money, otherwise you will have to pay someone to do it for you.

I owned 3 rental properties (all of them 3-bedroom houses) which I bought in a swiftly rising market about 10 years ago. They were managed for me by a small company, so the amount of work I had to do was minimal. After a year or so, their value had increased so swiftly that I decided to sell and take my profits. In retrospect it was a good move for me, as I prefer to have have all my money in index funds (no work and no stress.) For a while though, I got a kick out of knowing that I "owned" 3 houses.

The downside to owning anything is that with ownership comes responsibility and liability.

I'm sure that others will be able to give more of a detailed analysis of the relative advantages of real estate as opposed to equities or other investments, but my feeling is that you shouldn't allow ownership of rental property to stop you from building up a position in stocks and bonds (or similar investment instruments).

 

[obgyn65]

This is the main reason why I do not plan to rent property as retirement. Too much hassle.

The downside to owning anything is that with ownership comes responsibility and liability.
\

 

[foxfirev5]

Since you already own properties I assume you are aware of the risks and rewards. Personally owning anything of this nature in retirement kind of defeats the purpose of retirement. Will you really be retired? I know at 57 I feel a lot different about the subject than I did at 36. I would rather have my present job than all the responsibilities that would go with owning a fair number of rental units.

 

[imoldernu]

For a different reason, I would like to ask is anyone knows of, or has experience with, a large home rental management company. Management costs, insurance, maintenance including lawn care, bill payment, accounting etc.

The question stems from knowing a little bit about retirement communities, where, because of lower housing values, many houses end up being literally given away, because when the resident dies, the family is forced to sell at fire sale prices.

We have seen $250,000 houses sell for under $100,000 (and even less) simply because the heirs were forced to sell to settle estates, simply because they lived too far away to effectively protect their interests.

I have researched some (supposed) management companies in our area, but found that they are just law firms, with extremely high fees, and no incentive to protect the property values.

The basic problem, is the remoteness of the owners.

By example... a very good friend decided to move back to Illinois, from a $300,000 home in southern Florida, and turned the property over to a "reputable" agent. A year and a half later, after paying thousands to evict the non-paying renters, they found that the home had been totally trashed, to the tune of $60,000.

From this case, and others that we've seen, the rental agency contracts are written to "save harmless" any agent liability.

A second, allied problem, is that retirement communities, and Home owner associations commonly have association agreements that limit rentals to either 10% or 20% of total units in the complex. A different problem, to be sure, but another part of the rental problem, as in... what happens when a "permitted" renter leaves.

Somewhere in this mess, is a solution, and an opportunity. So... anyone know of a good company... Maybe a website?

 

[rbmrtn]

I think I would rather own REITS or funds that invest in real estate. Managing property in retirement sounds too much like a j*b. You sound like you already have experience with it so you know the issues.

 

[susswein]

I currently own a 4-plex, and in the past owned a 16-plex. I think multi-unit property is a GREAT path to ER, and you can really mitigate the work required by following a few simple rules:

1) NEVER buy property more than 15 minutes away from where you live, and preferably live in the rental property yourself. I currently live in one of the units of my 4-plex, and when I owned the 16-plex I combined 2 of the units into a single large owner's unit and lived there. In the case of my current 4-plex the other 3 units cover all the building expenses (PITI, utilities, maintenance, etc) so I'm essentially living rent free, and my time investment averages out to well under 5 hours/week (in spurts). At one point I had no move outs and no maintenance calls whatsoever for 2 years straight.

2)Buy property in an area you'd like to live yourself, not the cheap side of town. At one point all of my tenants were either post docs or grad students.

3) Be very selective about choosing your tenants, and charge below market rents to encourage them to stick around. In the case of an owner occupied 4-plex (and smaller) the fair housing laws don't apply, so you can choose your tenants. Even in the case of the larger building I was able to come up with legal policies that weeded out potentially problem tenants (like no smoking, strict quiet hours, etc)

4) Multi-unit buildings (duplex and larger) cash flow better than single family homes, and have reduced maintenance costs (there's only one roof, one yard, etc). A single vacancy is also less of a crisis, so you can be patient and not jump on the first questionable applicant

5) Don't use a management company. They have no incentive to find "good" tenants or to reduce maintenance expenses. I give reduced rent to one person/couple in the building to take care of day-to-day tasks and do all the tenant screening myself. If I'm going to be gone on a long trip I make sure that no leases are expiring while I'm gone.

 

[haha]

I currently own a 4-plex, and in the past owned a 16-plex. I think multi-unit property is a GREAT path to ER, and you can really mitigate the work required by following a few simple rules:

1) NEVER buy property more than 15 minutes away from where you live, and preferably live in the rental property yourself. I currently live in one of the units of my 4-plex, and when I owned the 16-plex I combined 2 of the units into a single large owner's unit and lived there. In the case of my current 4-plex the other 3 units cover all the building expenses (PITI, utilities, maintenance, etc) so I'm essentially living rent free, and my time investment averages out to well under 5 hours/week (in spurts). At one point I had no move outs and no maintenance calls whatsoever for 2 years straight.

2)Buy property in an area you'd like to live yourself, not the cheap side of town. At one point all of my tenants were either post docs or grad students.

3) Be very selective about choosing your tenants, and charge below market rents to encourage them to stick around. In the case of an owner occupied 4-plex (and smaller) the fair housing laws don't apply, so you can choose your tenants. Even in the case of the larger building I was able to come up with legal policies that weeded out potentially problem tenants (like no smoking, strict quiet hours, etc)

4) Multi-unit buildings (duplex and larger) cash flow better than single family homes, and have reduced maintenance costs (there's only one roof, one yard, etc). A single vacancy is also less of a crisis, so you can be patient and not jump on the first questionable applicant

5) Don't use a management company. They have no incentive to find "good" tenants or to reduce maintenance expenses. I give reduced rent to one person/couple in the building to take care of day-to-day tasks and do all the tenant screening myself. If I'm going to be gone on a long trip I make sure that no leases are expiring while I'm gone.

Interesting post Susswein. I have always wanted to do this. Most of the time I either did not live where it was practical, or more recently in a market where selling prices left room for adequate operating margins. Truly big buildings, yes, but they were far out of my league both financially and in terms of experience.

I have a nephew who does this quite sucessfully on small capital, in a profit allowing market, by putting together deals and selling participation to limited partners. He follows your rules well, although in larger buildings. Stays very close to the home base, in his case one established high rental demand city market with many universities, hospitals, research laboratories etc. And buy solidly middle class but not luxury units, in sound buildings.

One thing I have noticed is that all over the world, residential real estate when bought at reasonable prices seems to do well eough under good economic conditions, bad economic conditions, good governemnt, bad government.

But to me this is for a young person, who may be retired in name only. Most older people I know are handing off this kind of operation, or if they are active in real estate it is mostly tinkering with a small property to have something to do.

Ha

 

[Letj]

I'm 36
Self employed and looking for a solid retirement. I have 3 properties (8 units) I am thinking that I am going to take the plunge an try to get to12-15 units as my retirement

Any thoughts..... good or bad idea?

Excellent idea. I own 24 single families. Be prepared to be very hands on. It's not a passive activity but it's surely better than working for someone else. Make sure you follow the 2 percent rule. Also, class C properties can also have a place in your portfolio. The returns are better but the require more management.

 

[sunsnow]

Rental real estate can be great or horrible, depending on the details. I'm not a fan of leverage, which is the typical way that people do this kind of investment. It seems to me that people will take bigger risks in leveraging real estate than they would ever do with using margin to buy stocks. It's hard to make a decent return, year after year, when you have to pay for the use of the money too. If you can pay cash, then I think the returns can be good, even after using a professional management company. While some of those companies are awful, others are great. As with everything, you have to do your homework.

 

[bondi688]

For me, the ER way of getting into rental properties is through mutual funds or special sector stock funds. By doing so, you have professional property management and safety in the number, size and location of properties the funds own.

 

[calmloki]

We've lived off the rental real estate earnnigs for 15-20 years now. Our exit plan, often revised, had us selling a property/year for ten years. Plan was to sell the most distant places first, ending up with shorter and shorter drives to care for the places. Managed to sell two contiguous houses in mid 2007, and another little house in late 2009 but nothing since then. We are down to mostly the multiples now and it just hasn't beeen a seller friendly time. Ah well - rents continue to come in and at some future point it will be worthwhile to sell. With luck that time will coincide with our manager's desire to give up management.

Bottom line: rental property has been very very good to us, but the exit plan is tricky and getting out of real estate is not something one can do in a day. or week. or month. or decade?

 

[tightasadrum]

There's some good information here, Santoball7. As an investment property enthusiast for around 37 years, let me add a few additional points.

1. Leverage - I've never seen a better time to purchase investment property using leverage. Prices are reasonable in most places, and interest rates are low. Of course commercial rates are normally about 2% higher than a home purchase, but you may find a seller who will finance some or all of it. If you want to aggregate enough property to float your whole boat, then ramp up the number of properties as quickly as you can. Keep a good safety fund.

2. Energy level - Being a landlord requires energy and attention. Working a full-time job PLUS managing property requires even more. At your age you can do it if you want to. The payoff comes after your day job ends, on purpose or involuntarily. You'll still have a good monthly cash flow that insulates your other savings from early depletion.

3. Type property - First, buy only in neighborhoods you would also live in. This is primarily because of the quality of tenant you want to rent to. There's no guarantee, but your odds are much better. Second, buy only in the town you live in. Distance is not your friend. Third, buy single family houses for growth and multi-unit property for cash flow. When you're still working, SF homes are less demanding. The tenant is expected to handle yard work and often will voluntarily do some of the routine maintenance. Later, when cash flow is more important, just sell a house using a 1031 tax free exchange to purchase the multi-unit property. And forth, live and buy property in a town with students and young professionals. That's your target market.

4. Taxes - Unless tax law changes, and it may, depreciation will save you a ton in taxes. Consult a CPA familiar with these issues for advice. And once you're in it, getting out can be taxing. My plan is to pass it on to DD. The tax basis resets, so she can then hold or sell as desired.

5. Management - I don't mind the management part, but I certainly understand why some people would find it distasteful. As time goes by though, I find that labor intensive projects I used to do myself (have you ever put on a new roof?) I now will call a trusted contractor to do. The challenge and sparkle for doing some things, once you've done it a few times, is diminished. Part of that is age. I like the idea of a live-in-the-property helper, but that may be hard to find. Driving across town to light a pilot while the game is on can be aggravating.

If you're the high energy type, investment property will give you lots of options. Good luck.

 

[santoball7]

I currently own a 4-plex, and in the past owned a 16-plex. I think multi-unit property is a GREAT path to ER, and you can really mitigate the work required by following a few simple rules:

1) NEVER buy property more than 15 minutes away from where you live, and preferably live in the rental property yourself. I currently live in one of the units of my 4-plex, and when I owned the 16-plex I combined 2 of the units into a single large owner's unit and lived there. In the case of my current 4-plex the other 3 units cover all the building expenses (PITI, utilities, maintenance, etc) so I'm essentially living rent free, and my time investment averages out to well under 5 hours/week (in spurts). At one point I had no move outs and no maintenance calls whatsoever for 2 years straight.

2)Buy property in an area you'd like to live yourself, not the cheap side of town. At one point all of my tenants were either post docs or grad students.

3) Be very selective about choosing your tenants, and charge below market rents to encourage them to stick around. In the case of an owner occupied 4-plex (and smaller) the fair housing laws don't apply, so you can choose your tenants. Even in the case of the larger building I was able to come up with legal policies that weeded out potentially problem tenants (like no smoking, strict quiet hours, etc)

4) Multi-unit buildings (duplex and larger) cash flow better than single family homes, and have reduced maintenance costs (there's only one roof, one yard, etc). A single vacancy is also less of a crisis, so you can be patient and not jump on the first questionable applicant

5) Don't use a management company. They have no incentive to find "good" tenants or to reduce maintenance expenses. I give reduced rent to one person/couple in the building to take care of day-to-day tasks and do all the tenant screening myself. If I'm going to be gone on a long trip I make sure that no leases are expiring while I'm gone.

Thank you for that. I go by all of your rules except for living in them(wife and 2 kids). If I were single I would live there
I find that a lot of people think that it is an unbelievable amount of time to manage a property......like you said, it goes in spurts. Do you plan on selling them to fund retirement or use the monthly rent to fund it?

 

[santoball7]

Excellent idea. I own 24 single families. Be prepared to be very hands on. It's not a passive activity but it's surely better than working for someone else. Make sure you follow the 2 percent rule. Also, class C properties can also have a place in your portfolio. The returns are better but the require more management.

2% rule?

 

[susswein]

Thank you for that. I go by all of your rules except for living in them(wife and 2 kids). If I were single I would live there
I find that a lot of people think that it is an unbelievable amount of time to manage a property......like you said, it goes in spurts. Do you plan on selling them to fund retirement or use the monthly rent to fund it?

I'm already retired, and use the monthly rent. As someone else said, buy single family if you're looking for capital gains, multifamily if you're looking for income. I consider multi-family much lower risk, since it's less dependent on the vagaries of the housing market. Kinda like buying large cap dividend paying stocks vs. small cap growth stocks.

 

[Letj]

2% rule?

Your monthly rent should be 2 percent of your total cost, all in.

 

[santoball7]

Thanks so much for the advice. I've owned property for about 9yrs now
Just bought student housing which is great cash flow as well as increasing in value. I am concerned about collecting rents at 60yrs old but hopefully by that time I will be able to hire someone.
The main thing I wonder about is how fast to buy. I could buy 2-3 more this year( I have the financing) but don't want to go too fast.

 

[nun]

Too much of anything is a bad thing. I own a two family house and live on the 2nd and 3rd floors, renting out the first floor unit. The work and worry is minimal and I just deal with a single renter and it's easy to keep it occupied. More than that and having to deal with multiple renters would would be a pain. I can'y imagine dealing with more and paying a management company has a host of it's own issues. I like to be in personal charge of my money and investments and to minimize middle men. I'd rather have capital gains and dividends than a load of rental apartments when I retire. I get 1200/month rent ($1000/month after expenses) from it and if I need more I can move downstairs and rent out the unit I'm in now for $2100/month. I could always sell one of the flats too if I need the capital. The place is mortgage free so I figure I have enough in real estate.

 

[santoball7]

Your monthly rent should be 2 percent of your total cost, all in.

Gotcha. I like that

 

[arebelspy]

I plan to use real estate to early retire.

As noted above, interest rates are phenomenal right now, I'm locking in all the low interest debt I can.

I don't mind managing at this point, but it's like an extra job - I build management fees into all my numbers, so that I can pay to pass it off at some point.

Even at that point, I'll only consider myself semi-retired, as I'll just be managing the property managers instead of tenants.

At some point I plan to (mostly) exit real estate into a more traditional portfolio of stocks/bonds, but for now the returns are so exceptional that it doesn't make much sense for me to go with a traditional plan in my accumulation phase.

As far as amount of work required, I've found it's about 1 hour per month on average per SFR. That does go in spurts, so the median month is more like 5 minutes (deposit rent that shows up in mail - for me it's check online account to make sure rent is there, because tenants direct deposit into my account), then you'll have 10 hours one month during turnover getting it fixed back up, showing the property to potential tenants, etc. So it averages to 1 hr. per month, but it's more like no time for a long time, then 10 hours in a single week. If multiple properties hit this at the same time, it can take a lot of time at once.

The hourly rate for the property manager, then, is around 50-100/hour. Enough that I do it myself now, not enough that I'll want to do it when fully ER'd.

Some good thoughts in this thread, thanks everyone for sharing.

 

[BreathFree]

I own 9 units. Two duplexes one quad and one single family home. I second what was said about having an exit strategy. Generally, single family homes are easier to sell than multiplexes, but I make more cash flow off of the multiplexes. Plus, your expenses are less since you only have to travel once to a quadplex and replace one roof for four units.

I use a property manager which allows me to pick which battles I want to tend to. Its nice to be able to tell the property manager to handle it if I am busy or don't feel like dealing with tenants personal problems. I don't think I would purchase rental properties again if I was unable to use a property manager.

I read every real estate book I could get my hands on before making my first purchase. I read somewhere that a 70 gross rent multiplier was the minimum for qualifying a property for purchase. For example, if your rents are 2000 dollars a month you should pay less than 2000 * 70 = 140,000 for the property. I believe I still overpaid for my properties but am still getting about an 8% return on my investment. My loans are at 5% so I don't plan to pay them off anytime soon.

In my area it is very difficult to impossible to find high quality rental properties in great areas with a gross rent multiplier of 70 or less. If you are in a great area with nice homes and professional renters a duplex will cost you about 155,000 but only bring in about 1400 a month total rent. That is a GRM of 110. I have been watching the market for the last ten years. I also have my property manager looking and I have yet to find these low cost, high appreciation, high rent rentals I hear about. Maybe it is just my area.

 

[traineeinvestor]

Rental properties are an integral part of our retirement plan. Buying at the right price, finding and keeping good tenants and keeping away from the really bottom end of the market have worked for us...so far.

 

[glippy]

I'm a real estate investor with 3 SFH's right now and am planning on another 3 in the next couple of years.

There are three bits of typical real estate investment advice I see tossed out a lot that I take issue with. One is the advice to only buy rentals that you yourself would want to live in or in neighborhoods you would want to live in.

I mean, I like my little cottage on my 1 acre lot in my small town. And the idea of moving into one of my rentals in the middle of a bustling downtown area in a nearby city doesn't entice me at all between the close/loud neighbors, tiny yards, endless traffic and street noise. I would never want to live in one of my rentals. But that doesn't mean they're a bad investment property.

And I take issue with the idea that it's hard to sell property. That's only the case if you don't price it right. I buy foreclosures with cash at rock bottom prices and do all the rehab myself, so I could sell all of my properties at less than 50% of current market value and still come out of it with a profit.

And thirdly, not everyone in real estate is leveraged to the hilt. I think that makes a big difference in your chances of success. When you pay cash, getting a tough tenant just means you eat more chicken and beans this month instead of steak and lobster. When you've got massive mortgages to cover, a few bad tenants can bring you to the brink of disaster.

 

[WestLake]

Agreed I have 12 ( all single family plus one duplex) and I am about to pay off the second to last mortgage. Most of mine I bought (spaced out purchases every 3 - 4 years) on 5 and 7 year notes. Killer payments but now I'm almost done.

I have a maintenance man who also collects rent and deals with most of the tenants - very lucky to have him.

I bought properties in an area I know like the back of my hand (East Dallas/Lakewood) - it has been on the upswing for a long time, close to downtown with good schools. Now I could sell most of the rentals for tear downs as new homes are being built all over the area. Still I keep them up (several new roofs lately) and have lived in 4 of them. I never paid over $100,000 and several are now worth $200K or more (one is about $350K - may sell that one after moving in for a few years - or may do a 1031 for a small apartment building).

Bought first property in 1983 when I was 25. Been maxing out 401K since 1987. Added Roths several years ago as mortgages were paid. Plan to retire in a year or so, the goal is to pay off the last rental first.