Real Estate Retired Early--strategy used

[Luck_Club]

Work is a common concern and theme among the real estate investors and non-real estate investors alike. Real Estate investing is considered a passive activity by the IRS. Many I included would disagree. It is another chore on the to do list. This is how I consider the time commitment on rental properties:

Acquiring a property is the largest of the time investments required. As some have said you need to kiss a lot of frogs to find a prince. No where is that more true then buying investment real estate. I estimate that the finding portion of real estate investing may require upwards of 100 to 400 hours of time. that includes looking through ads, driving bye the place, viewing, submitting offers, arranging finances and insurance, closing etc. I view that as a passive hobby, and discount it greatly.

The second largest time commitment is the initial repairs. This can be upwards of 320-480 hours depending on the condition and how much you are subbing out. For those that can get paid around the clock god bless em. But most people in the real world run out of billable hours long before they run out of week, so this mainly eats into free time. Tough on those who have long commutes and rigid hours. They will probably need to sub out most of the work, which will cost more and diminish your returns.

Once it is repaired and sort of on auto pilot you are talking normal tenant turn over and repairs between and during tenancies. This can be very minimal during tenancy, with the biggest time commitment occurring during a turnover. The typical time is less than 20-40 hours total depending on painting.

 

[Luck_Club]

Strategies to reduce time investment between tenants:

Over the years, I've devised a few ways to cut down on time required between tenants.

1) I ask current tenants to show the place to prospective tenants only meeting if they truly want it and have been pre-screened. I'll typically throw a $250 bucks or so at the current tenant to handle this task.

2) I use the same color pain in all the units.

3) I don't list my number in advertising and instead put it on a sign in the window, instructing them to drive by to get the number. Cuts out the lazy tire kickers, and un-needed showings.

4) I have all units end the lease in a two month period of one another. This allows me to up sell or down sell prospective renters.

Just a few ideas.

 

[Another Reader]

You don't have investments, you are the sole proprietor of a business. Your income is in no way passive, even if you can't qualify as active for the IRS. If you look at your true net income, your hourly rate might not be as good as you think.

 

[FlaGator]

You don't have investments, you are the sole proprietor of a business. Your income is in no way passive, even if you can't qualify as active for the IRS. If you look at your true net income, your hourly rate might not be as good as you think.

+1

I'm glad to see another person successful at this, as this road is littered with corpses of those who couldn't make it work.

A few thoughts for those considering this:
I worked in real estate finance and related businesses for nearly 30 years. That means 2 full market cycles, and I've seen some successes, and failures every way you can imagine. The successes were never linear, either.

The people that made it "work", as in a reasonable rate of return, were very hands on, doing most the rehab/refurb themselves and dealt with tenants directly. They either did it full time (and they had more than one spell of lean years) or had jobs that were basically 8-5 with no travel and had their weekends open. This became a second job for them. All things the OP is doing.

Leverage is another issue - the outsize returns often claimed result from higher amounts of debt, and that kills the less-capitalized players when the cycle turns down. It will happen again, and one doesn't want to get caught out believing they are smarter than the cycle.

This wasn't a viable option for me, as the requirements of my job didn't allow the extra time, I don't have any interest in the home maintenance skills required, nor any desire to deal with tenants after working with dozens of employees all day.

This approach clearly works, though, for some people. Be thoughtful in determining if you're one of them before you sign that first purchase contract.

 

[Senator]

Strategies to reduce time investment between tenants:

Over the years, I've devised a few ways to cut down on time required between tenants.

1) I ask current tenants to show the place to prospective tenants only meeting if they truly want it and have been pre-screened. I'll typically throw a $250 bucks or so at the current tenant to handle this task.

2) I use the same color pain in all the units.

3) I don't list my number in advertising and instead put it on a sign in the window, instructing them to drive by to get the number. Cuts out the lazy tire kickers, and un-needed showings.

4) I have all units end the lease in a two month period of one another. This allows me to up sell or down sell prospective renters.

Just a few ideas.

if you have good tenants to start with, and keep up with maintenance, you will have very little vacancy.

I have had about the last dozen turns and no vacancy since last March where I took 60 days to do a remodel.

 

[brucethebroker]

Many good points. Let me add a few.

You don't need 10, 20 or 100 properties to "make it" in real estate investing. 2-5 will do the trick IMHO. Look at current rents, imagine that SFR (single fam. residence) paid off, and the net cash flow, and multiply it by 2 to 5 times. A nice, solid income. An addition to SS, savings and equities on the path to FIRE.

Think of buying distressed houses (foreclosures, diamonds in the rough, etc.) as the Warren Buffet real estate handbook: buy for great cash flow first and foremost. And repay the financing as soon as possible. Then, should the real estate market crash you are OK. None of our rents "decreased" during 07/08, they continued much like dividends. Values went down, values went back up. Ho-Hum.

When you are an experienced real estate investor/landlord, you do not fear downturns in the RE market, nor having to rent out your personal residence in an emergency situation. We had to unload two properties during the great recession/RE crash. One sold, but we still made money due to buying right 7 years earlier. The other property did not sell, our personal residence (we relocated to a foreclosure), so we rented it out for 3 years, then sold when the market came back. But we also bought 4 properties during the downturn: one rental, one personal residence, one "flip" and a vacation home. We have since sold the rental and flip.

DW has always been right by my side; cleaning, painting and working the entire process with each property. My marriage would not have survived otherwise.

Many here had jobs with great pensions. We did not. Many had 6 figure incomes for 20 or 35 career years. We did not. Many have had inheritances. We did/will not. But rentals/investing have given us an above average standard of living. Hard work, sure, but we currently only put in about 20 hours a year since our renters are long term. The hard work was mostly 20-25 years ago.

I also had evangelistic RE investment fervor and would try to "spread the good news". I gave up trying to convince others about RE being a good deal. Many were too busy boating on the weekends to paint a flip-or worried about "plugged toilets, haha", they would laugh. And many of those now complain they can never afford to retire. My DW finally convinced me to shut up: "Real Estate/being a landlord isn't for everyone". How true.

By the way, we have only bought (except for the vacation homes) in the Midwest, where values normally increase about 2% a year. I joke that we would be jillionaires if we had moved to and invested in coastal markets 25 years ago.

 

[brucethebroker]

I also wanted to add that we have had problems too. 1 eviction (over 30 years). One semi-trashed property (see eviction, above). One 3 1/2 month stretch with an un-rented property. Maybe 3 plugged toilet calls (over 30 years). Also had a tree fall into a roof, 3 roofs replaced due to hail damage (thank you, Allstate) and one renter who was chronically late with payments, but did pay the late penalties without complaining. My one kid (each owns rentals) had a tenant burn down a rental (we think arson, but the FD was not convinced.....) Was that a horror story? No, kid collected "lost rent" from ins. co. while they ran the numbers on replacement, then collected a fat replacement check, then had dad sell the vacant lot. It worked out very well.

 

[Luck_Club]

Many good points. Let me add a few.

I also had evangelistic RE investment fervor and would try to "spread the good news". I gave up trying to convince others about RE being a good deal. Many were too busy boating on the weekends to paint a flip-or worried about "plugged toilets, haha", they would laugh. And many of those now complain they can never afford to retire. My DW finally convinced me to shut up: "Real Estate/being a landlord isn't for everyone". How true.

+1
I thought this forum would be more supportive to the preaching.

 

[Bamaman]

I have a close friend that was a CEO of a medium size office manufacturing company. He has friends that are also CEO's. Jim and I were talking the other day, and he said that virtually every very well to do person he knows also owns rental property of some kind--rental houses or office complexes.

He basically said it was nice getting other people to invest (and pay) for part of your retirement plans. Jim has scaled down and sold his rentals since he retired. He went to work for Merrill Lynch for awhile in order to learn the investment business--and has since made a fortune day trading equities.

 

[hesperus]

What I hear from many here who own rentals is a common thread - work. If that's the case, at what point do you consider yourselves 'retired'? If my retirement cash flow requires more than passive work, is it truly retirement, or just a job that has varying levels of difficulty?

 

[Fedup]

My brother knows somebody who's director level at a large chip company in San Diego, the one that is suing Apple. He has 6-7 properties in California. While there maybe work but certainly less than 40-60 hours. I think he isn't preparing to do nothing in retirement. I'm sure he is not doing the work, just manage the people who will work for him.

 

[Scuba]

I agree that owning rental property can be a good way to generate cash. DH & I looked into it years ago and decided we were in the category of people who shouldn't own rental property because:
- neither of us is handy with DIY repairs
- we didn't want to spend our time servicing tenants
- we aren't realtors

Given the above, we figured that most of the profit to be made would be eaten up by hiring property managers, realtors, and other people to do the things we aren't good at. Basically we don't have the qualifications to do this.

A truly passive activity that can generate decent cash flow is lending to successful real estate investors who rehab and flip properties (i.e., hard money loans). This has been a better fit for us. No physical work or tenant interaction required.

 

[calmloki]

I agree that owning rental property can be a good way to generate cash. DH & I looked into it years ago and decided we were in the category of people who shouldn't own rental property because:
- neither of us is handy with DIY repairs
- we didn't want to spend our time servicing tenants
- we aren't realtors

Given the above, we figured that most of the profit to be made would be eaten up by hiring property managers, realtors, and other people to do the things we aren't good at. Basically we don't have the qualifications to do this.

A truly passive activity that can generate decent cash flow is lending to successful real estate investors who rehab and flip properties (i.e., hard money loans). This has been a better fit for us. No physical work or tenant interaction required.

A'yup. A lot of clear eyed perception in this comment. We also do hard money loans as well as ride the rental herd. Been stung a few times, but learned from that and enjoy the remove from in the trenches property restoration. Comfortable driving by a potential investment and seeing the ugly but also the swan beneath the mud, then seeing the swan emerge without having to wrestle it through a makeover.

 

[timemoveson]

I agree that owning rental property can be a good way to generate cash. DH & I looked into it years ago and decided we were in the category of people who shouldn't own rental property because:
- neither of us is handy with DIY repairs
- we didn't want to spend our time servicing tenants
- we aren't realtors

Given the above, we figured that most of the profit to be made would be eaten up by hiring property managers, realtors, and other people to do the things we aren't good at. Basically we don't have the qualifications to do this.

A truly passive activity that can generate decent cash flow is lending to successful real estate investors who rehab and flip properties (i.e., hard money loans). This has been a better fit for us. No physical work or tenant interaction required.

Excellent insight. We did pretty well with a series of low maintenance rental properties and then observed that our local market calculus really didn't support good investment returns and that our good luck as landlords was unlikely to hold. And we don't like leaving our financial futures in the hands of luck. The real estate was a material component of net worth at the time. We sold all of it in due course.

By virtue of still owning in a very HCOL area, our personal use real estate is very significant and affordable. At about 25% of total net worth, we feel we are still very much in the market. We just are not depending on it for income or capital appreciation as part of our future retirement cashflow. A small allocation to REITs takes care of income in this investment segment.

 

[pjigar]

Rental real estate needs lot of luck and hard work. But it can be lucrative. I have few properties that I bought at the right price with positive cashflow on everyone of them. The trick is to go by the cashflow number and not by future appreciation. I don't buy unless I get 8+% cashflow on my downpayment from day one.

 

[Winemaker]

Real estate investing has been very rewarding for me and my family for the past 18 years.

I originally bought a duplex when my DD was in college. She wanted to live off campus and was literally driving DW up a wall while she was commuting. ( About 3 miles, and only 5 turns of the car steering wheel away.) DW had an aunt who was a widow, in another state, and had a very successful real estate rental and realty business. DW was very supportive of my adventure; but I did it to save her sanity.

I have three buildings; a duplex, a 4 unit town house building and a single family home.
With a multi unit building, there is always someone, paying something.

I do 95% of my own maintenance, leaving carpet and flooring to professionals, although I have done it myself. I have used "forced labor" with the 2 kids when they were teenagers, but it showed them the virtues of hard work. The education my son learned has allowed him to do home repairs and he also has a condo that he rents out.

I have been cashflow positive since Day 1. I don't pay someone to live in my units, they pay me! As a successful ( I think!) manager for 35 years in various coal mines, supervising maybe 4000 men and women over the years, I have a good sense for picking out a$$holes. I've been burned for maybe $3500 over the years, but I have put over $300,000 in my bank account. The properties, priced at the low ball end would fetch $500,000 and our equity is $400,000. All started with a $15,000 margin loan for a down payment in 1999.

I have met all kinds of folks, some down on their luck, some professionals. Very rewarding, socially and financially. I still laugh of the time when I met the code enforcement officer and he complimented me on the new Jag in the driveway. He commented about it was nice to afford such a sweet machine, and I told him to ask my tenant, mine pickup was across the street.

Pacific Heights was a very entertaining movie; no comparable story here other than I have one tenant who has been with me since 8/2001, she is on her 2nd husband.

I don't fix stuffed commodes unless it happens in the first week. It was working great when you moved in, it is a hole in the center of a pipe, and if it gets plugged, you plugged it so you get it unplugged, on your dime, like it says in the lease you signed.

I am around every 7-10 days to cut grass, I'll schedule any concerns, drips you may have and promptly fix them. I usually don't have issues, if you take care of small issues early, they don't become BIG PROBLEMS later.

YMMV, but it put me in a very good place. Currently, I'm considering a 1031, but haven't found the right location. I'm in Kona right now, and I'm too relaxed to look hard .

 

[NgineER]

So far so good. Looking for additional properties.

Picked up a tax foreclosure for $50k, being the only bidder made me a little nervous. I spent about 2x that on renovations. Gutted it completely, expanded bathrooms and improved kitchen layouts.
New furnace in one unit, 10 year old in other unit, new electrical, plumbing, water heaters and windows. Drywall and flooring new as well. All new kitchens and baths.

Cash-out refinanced and have $2k of my money invested, but 35% equity. Cash flow $200/unit with 15 year mortgage assuming 50% of income goes to long-term expenses.

On top of a quarterly walk through, I have spent a total of three hours with issues that have come up since I started renting the duplex out. I think it paid off to have all new components as I expect less of a hassle the first couple of years.

Tenant selection is key, so far so good. Looking for additional properties to buy with the cash I got out, not planning to add more money to RE other than what I have committed plus cash flow. If I had 10 of these paid off properties, I would replace my current salary. I currently live on about half of my salary, the rest goes to savings and taxes, so in reality I would need five to get to FI even without my investments.

 

[RISP]

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.

That sounds like a job. Why would I want ANOTHER one of those?

Social schmoozing, back stabbing, fixing broken walls, and even just keeping your mouth shut when you see inefficiency and waste.

That makes four things I'm not good at. If I wanted that (minus the wall-fixing), I'd put more effort into getting promoted at megacorp.

On a more serious note, RE is a high-risk, high-reward way to FI because of leverage. With the extremely tenant-friendly legislation in my jurisdiction (Germany), I wouldn't touch investment RE with a ten-foot pole. But then, I won't be FI for many years, and I'm glad it worked out for you.

 

[Totoro]

+1 RISP.

Leverage is the key word here, very risky but requires little equity to begin with.

 

[LRDave]

I guess this is one of those emotional issues akin to paying off a mortgage. The idea of being a landlord makes me throw up in my mouth a little bit.

 

[Blue Collar Guy]

I guess this is one of those emotional issues akin to paying off a mortgage. The idea of being a landlord makes me throw up in my mouth a little bit.

I know my tenants would do it to me every month.

 

[FlaGator]

I guess this is one of those emotional issues akin to paying off a mortgage. The idea of being a landlord makes me throw up in my mouth a little bit.

Guessing I was one of the 13 of 17 Debbie Downers the OP was lamenting above, so I'll keep going

For some people it is an emotional issue, but I wouldn't put it in the same category as paying off a mortgage. The mortgage payoff decision can be close enough financially that making it emotionally is as good a way as any to decide.

One "emotional" way to think about this it is like evaluating an alternative work assignment in a corporate environment. As a personal example, my mini-mega corp had sizable south Asian operations and the idea of having responsibility for those functions and having to travel there was something that, emotionally, I was unwilling to do. No practical reason to avoid it, but I didn't "like" the idea of spending a few weeks in a country that foreign to my preferences, so I declined those opportunities.

At the early to mid phases of an upcycle, it does look easy - prices and mortgage terms are better than they once were, and the forward outlook for prices is favorable. At the end of the cycle, the suckers arrive - prices have been rising for several years and financing terms are easy. The people that enter here are the first to get washed out, although not all of them do. At the bottom of the cycle it can be difficult to be a holder - there could be regional job losses that lead to extended periods of vacancy, and if disaster strikes then (death, divorce, owner's job loss makes it impossible to pay any shortfalls, etc.), gains could be wiped out. Great time to enter if you have the cash and patience.

One can be wildly successful over time, if you're willing to do the work and can manage your leverage through down turns. It is work, and as the OP acknowledges, financing as much as you would like can be difficult. Best to think of it as a start up business that will take hard work, patience, and capital in order to reap the rewards.

 

[dd564]

Real estate is a key part of my retirement plan.
My wife is turning 40 and she isn't retired, but only worked about 40 hours so far this year. She's a nurse and picks up shifts when she wants and hasn't had to thanks to rental income.


We bought our first house in 2001. We bought a foreclosure in 2008 which we rehabbed and moved into. Then rented out the old house instead of selling.
Bought another house in 2014 which is a long rehab project, and another one in 2015 and 2016.

It does take work, but I mainly hire out everything now. At worst I get a phone call that something isn't working, so I call or text one of my plumbers who I trust. Them sending me a $225 bill every six months sure beats me taking time away from the family to go tinker with something.

People always say, "Oh what about the bad toilet at 2:00 AM."
Toilets aren't a big issue. They seldom become an issue, and I actually don't remind doing that piece myself if the need arises, and it's not usually an emergency if there's more than one toilet in the house.

Goal now is to get enough income to off-set my paycheck which is do-able, but it's a process of patience.

 

[ERD50]

+1
I thought this forum would be more supportive to the preaching.

It sounds to me like you haven't done much reading here.

A post that starts out with "Golden Path" and "fast track to ER", is like a porch light to bring out the moths who feel that balance is important. Then throw in "preaching", and I'm surprised you haven't seen rougher treatment.


It is a path. It may be a fast track for some, but it has been a fast track to BK for others. And it can be hard work, like most anything else.

Cut the hype. If you have serious questions/comments and want serious discussion, just deal straight. That's all.

-ERD50

 

[brucethebroker]

Real estate is a key part of my retirement plan.
My wife is turning 40 and she isn't retired, but only worked about 40 hours so far this year. She's a nurse and picks up shifts when she wants and hasn't had to thanks to rental income.


We bought our first house in 2001. We bought a foreclosure in 2008 which we rehabbed and moved into. Then rented out the old house instead of selling.
Bought another house in 2014 which is a long rehab project, and another one in 2015 and 2016.

It does take work, but I mainly hire out everything now. At worst I get a phone call that something isn't working, so I call or text one of my plumbers who I trust. Them sending me a $225 bill every six months sure beats me taking time away from the family to go tinker with something.

People always say, "Oh what about the bad toilet at 2:00 AM."
Toilets aren't a big issue. They seldom become an issue, and I actually don't remind doing that piece myself if the need arises, and it's not usually an emergency if there's more than one toilet in the house.

Goal now is to get enough income to off-set my paycheck which is do-able, but it's a process of patience.

Well said, and well done!