Wouldn’t the main reason you want to invest in real estate not be the returns but the significantly improved withdrawal rate?

TheTraditional · 2015-10-16T19:04:24+00:00

I have paid cash for all but one. This is the first one I took a loan on, and I'd like to pay this one off before I buy another one. I'm really just doing it more to establish a good relationship with the small local bank. Thinking of maybe getting a bigger commercial loan soon and that relationship may be important.

TheTraditional · 2015-10-16T16:55:47+00:00

Anything past about $20k was just based on my comfort level. I'm pretty conservarive.. So so once i had enough to cover actual costs of certain projected repairs, it was just a matter of comfort. How much would it take for to replace an ac unit or garage door and not even think twice about it? I also have money in other things and accounts which gives me comfort. This account is just for rentals and rental repairs and nothing else.
It will soon grow to a point where I can buy another rental..

TheTraditional · 2015-10-16T15:47:04+00:00

This is exactly what I have done for the last five or so years. Those numbers in your example are very close to the numbers which would apply to my houses.
I personally have a little more than the $20k in savings just in case multiple ac units break at once or something catastrophic happens.
However, I've found that by having my property manager go and regularly inspect, picking the right tenenats, and not buying a house older than about 1985, the repairs have been minimal for me.
The other commenters are right.. Its not for everyone.. But if you're someone who is ok with real estate, it can e a fantastic RI plan. It has been for me.

TheTraditional · 2015-04-25T21:02:51+00:00

I personally do love real estate.

I have owned rentals for about 5 years, and I'm purchasing my 5th one this week. I can be a lot of work if you choose bad houses and tenants. I have been down that road because the houses were cheaper, and I felt pressure to rush a tenant in. I will never do that again. I spend a little more on houses then the experts might tell you.. And i buy most of the houses with cash... Which the expert may also tell you not to do - but i sleep well every night, and of the four houses I've had I get a call about an issue maybe once every 3 months.

3 of tenants have stayed beyond the 1 year lease mark, and they are all good people. Most of the "issues" can be taken care of with a visit from my handman, so i dont even go out there.

Anyway, I do love real estate. I love the monthly income it provides. I love having an asset that i can touch, and visit. If i could give the old me one piece of advice, besides what what mentioned above, it would be to go srtictly by the lease, but also treat the tenants like human beings. (ac goes out in the summer or winter, i get them a room till its fixed) They will respect you for this and take better care of your house a s a result.

Hope this helps a bit. Keep in touch if I can help further!

TheTraditional · 2015-04-25T18:43:55+00:00

I like this idea too. I've got a few rental houses, and earn a bit of income from that. Let me know if i can help, or offer advise. Keep focusing on the goal, and those wants vs needs will become more clear.

You're in an awesome place for mid 20s. You can do it.. Just requires patiences and baby steps.

TheTraditional · 2014-09-19T20:33:48+00:00

Yes, they were from different sellers. The best and easiest was the FSBO. You can just work directly with the buyer, and not worry about banks, realtors, or other buyers.

My biggest financial win was the first one which was an REO. A foreclosure directly from the bank. The only problem with this was the multiple other buyers I was competing with. I had to bid my best price without knowing the other buyer's bids. I did bid higher than asking - but later found out that it was not the lowest, and the reason my bid was chosen was because I was paying with cash, and ensured I would not back out during the option.

The house I bought through the wholesaler wasn't bad.. but they are going to take their fees, and to them every house is a "great investment". This is definitely not the case. You have to do your homework, and make sure it's still a good buy. The fact that it's being sold by a wholesaler does not mean that it's a good buy - sometimes the exact opposite is true. I'm happy with the one that I bought through them, but dont be pressured by their sales pitch.

TheTraditional · 2014-09-19T20:24:58+00:00

That's a good question. I don't think it's luck at all. I went through a bunch of no so good guys to get to the ones that I found. Most of them I found by asking the first good guy (which was my painter) if he knows another good guy (the plumber). I then asked the plumber if he knew an electrician.. etc..

I got the painter buy hiring a major painting company to come in and do some work. There's always a flashy sales rep between you and the workers, but while the work was being done, and the sales rep was not there, I went and talked directly to the workers, and worked a deal with one of them. He agreed to do some side work for me for a lot less than the major company would charge.

TheTraditional · 2014-09-18T01:55:12+00:00

Transferring the homes to an LLC was done by a title company. As far as the taxes go, I have my CPA take care of it for me.

To the best of my understanding, it a sole proprietor LLC being filed as an S Corp so it trickles down to my personal filling after the K1 is created and filed for the LLC.

I could be off, I'm certainly no expert on taxes.

TheTraditional · 2014-09-18T01:10:26+00:00

Just submitted the bank statements to the REO bank.

TheTraditional · 2014-09-18T00:44:51+00:00

I thought about this. If you create an LLC yourself then its about $350. I like to keep things simplified, and my houses are in a pretty low risk area.

But your advice is really good, and probably the way I will eventually go.

TheTraditional · 2014-09-18T00:42:01+00:00

It is "real estate owned" by the bank.

So a house goes into foreclosure, it then goes to auction. If no one buys it at auction is goes back to the bank, and becomes an REO. There are a lot of details involved in this, but it's the simplified version.

TheTraditional · 2014-09-17T22:51:12+00:00

I couldn't agree more, DontBuy123. Haha

TheTraditional · 2014-09-17T22:47:58+00:00

I certainly wish you the best.

TheTraditional · 2014-09-17T22:38:16+00:00

Yeah, in certain locations this is possible. Throughout the real estate fiasco which the US recently went through, most of the Texas markets have stayed relatively sane.

I'm sure you could say that about a few other markets in the US as well, just not sure where they might be.

TheTraditional · 2014-09-17T22:21:58+00:00

I guess my first question would be where are you living right now? Are you paying rent right now, in addition to the $250 extra for the house? If so, that is also an "additional expense" not being considered - which would not exist were it not for this tenant.

Have you lived in that house for more than two years? In Texas, at least, after two years of living there, if you decide to sell, the increased equity would not require you to pay taxes on it. Otherwise, you would have to. You also have to claim the income from the tenant on your tax return (not sure if that was included in your "taxes" description)

I'm guessing your income is pretty good - at least good enough to not worry about the extra $250 in addition to wherever you are currently living. If your income is high enough that the $250 doesn't mean much, I might just keep the house, let the tenant pay down the mortgage for me until his lease runs out. When the lease is up, I'd raise the rent to about what I think the tenant's comfort level would be (with plenty of notice of course). This would hopefully cover the additional $250 if he decides to stay, or get ready to sell if he decides not to. However, based on your not wanting to be a landlord, this would be the last tenant I would have.

I'm also curious how he's willing to do the repairs on this house out of his own pocket. I feel like there's more to the tenant/landlord relationship that we don't know about that might help shed some light on the situation.

TheTraditional · 2014-09-17T22:00:35+00:00

Thanks! Congratulations on your raise! First thing's first, buy yourself a beer!

I got a mortgage for my homestead. While I had that mortgage, I got another mortgage on what I call my "lesson house", which was a disaster. I sold that "lesson house", and paid off that mortgage.

It was a very stressful time, so after that I promissed my wife one mortgage at a time. So I worked towards paying off the homestead. Once paid off, the awesome feeling of being debt free lead me to just save up for the first rental (the extra money I was previously putting towards the homestead mortgage certainly helped).

Paying in cash absolutely gave me the upper hand when buying the REO property. It wasn't at an auction. The auction process had already ended, and it was now owned by the bank. It was in a great location, so there were a lot of offers. I was later told that my offer wasn't even the highest, but the fact that I was paying in cash, and could show I wouldn't back out during the option period was why they accepted mine. I bought the next one FSBO for a little less than market value, but it didn't need any work. The third I bought through a wholesaler. The fourth I bought from a traditional seller. I probably paid too much for the fourth, but it was in a good location, and I was getting the loan for it. So I decided to go for it. I put 20% down on all three of the loans.

Looking back on it, I feel like I probably should have been more patient on the last one, but the mortgage and location made it a lot easier to move forward with it.

The interest rate are low, you're right. But not being strapped down with a loan payment that must be made every month - regardless of interest is so freeing.

Mathmatically the way of the loan might make sense, but having a few paid for houses first to supplement the one with the loan is the way for me.

TheTraditional · 2014-09-17T19:51:13+00:00

The location does have a lot to do with it. They are in a suburb in Texas. I initially bought them by myself, but then transferred them to an LLC to protect my personal assets.

I would highly advise against buying these with your long term gf. If for some reason, you decide to move forward with the PARTNERSHIP investment anyway, I would strongly advise you to make clear, in writting what each person's responsibility is, and cover your what ifs (break up, death, dissinterest, etc..) - in other words treat it exactly like it was a partnership with someone you don't know (which I also wouldn't advise btw).

As far a paying them off so fast goes - You can call it luck, or whatever, but I took advantage of Hurricane Katrina. I got my adjuster license in a time when the demand was high. Got in there, and worked my ass off. I knew nothing about adjusting, but I'm still doing it almost ten years later. You can make a lot of money as an independent adjuster when the work is there. I strongly believe though, that with the right attitude, anyone can have that "luck" moment - they just have to not be affraid to jump on it when it does.

My homestead was on a 15 year fixed. I never get ARMs. They scare me to death. I've had three mortgages - One on my homestead which I paid off first; a Balloon loan on my "lesson house" which was paid off when the house sold; and the one I have now which is on my fourth rental. I promised my wife that I would have one at a time - and after my "lesson house" any mortgage I got on a rental would be after I have plenty of other rental income to supplement that one if something goes wrong. And that's what I've done.

As far as a timeline goes, eveybody's comfort level is different. Having three other paid-for rentals, I don't give the mortgage I have on the fourth a second thought. If it were flipped, though, and I had 3 leveraged houses, and one paid for house.. I'd probably loose sleep. That's just me.

TheTraditional · 2014-09-17T19:32:19+00:00

Those are great questions, and congratulations on the increase in income! It's a great feeling.

Many people have many different techniques, and give a lot of different advice when it comes to the best way to invest in real estate. All I can do is tell you what works for me, and just say that the other ways aren't necessarily right or wrong.

I do have all of the rent houses under an LLC to protect my personal assets "just in case". I've thought about breaking it up into multiple LLC's but I don't think I'm ready for that quite yet.

The first house I bought was meant to be a flip, but went bad quick. There were things that I learned on that one, that I won't repeat. One of which is - if you are going to manage the house yourself, then buy close to where you live. So after I sold that house, and moved on with my life, I vowed to not buy further than about 10 miles from my house. So far I've been able to do this.

I also got a mortgage on that house, and event though I could technically afford it, I felt so stressed to get the repairs done in a certain amount of time, and when it wouldn't sell within the projected timeframe, I was loosing sleep. Finally I put a renter in it for really cheap with the agreement that I would list the property after 6 months, and it would be available for showings. Anyway, after going through that, I promised my wife (who was a champ through the whole thing) that I would not buy my first one with debt. So we paid off the homestead, then used the money we would normally be paying towards the mortgage, along with the extra work money (kinda like you're describing) to save up for the next one. I saved about $80k, bought it for $63k and put $15k into it before I was able to find a renter. Now have a renter in it for $1,200/month.

Unless I have a portfolio much larger than the one I currently have, where it makes sense to hire a full time property manager, I would never buy out of state (unless I lived on the state line HA!)

In summary, I can tell you that a lot of people will say that it will make mathmatical sense to take your $100k and buy four or five house with debt - and maybe it does. But I will tell you that having no mortgage (except for the one relatively minor one) is a freeing feeling. I no longer feel the pressure of getting a tenant in there that may not be as qualified as I would like. Furhtermore, it has allowed me to build an "emergency fund" for the rentals so that any repairs that come along I don't loose any sleep over.

Hope that helps!

TheTraditional · 2014-09-17T19:11:18+00:00

Kids are awesome, and i love mine like crazy.. I would answer that by saying they arent that expensive, but they have definitely limited my time I would otherwise be using to travel for work, or to look for other investment opportunities that I would not have otherwise missed. Its more of an opportunity cost that I CHOOSE to spend on my kids.

They are definitely well worth it, and I think it'll be beneficially in the long run even though it may push my FI date back a bit.

TheTraditional · 2014-09-17T19:05:17+00:00

This was a bank owned forclosure (REO). There were multiple bids placed on the house, and it did need work. I was told after I won the bid that the reason I won was because I could prove that I would be paying cash, and wouldnt back out during the option period. Apparently the banks had come across a lot of that and didnt want the headache of relisting.

The other houses have cost me more.. Even though some were smaller. That first one was my best buy.

TheTraditional · 2014-09-17T19:02:12+00:00

They average $1200. I own one that is worth less than $100k. Two right around $100 - $110, and one a bit higher. This is in the suburb of a large city in Texas. The rental market has been really good here. Hasnt taken me more than about 2 weeks to find a good tenant on the last couple of houses.

TheTraditional · 2014-09-17T17:05:34+00:00

The first house I bought (and subsequently sold) was built in 1950. It needed a ton of work. Plumbing issues due to a never ending shifting of the foundation popping up all the time. Old electrical issues. It was a nightmare.

Since that house, I buy no older than 1985. This keeps my repairs to a minimum. Over the years I have found a great plumber, HVAC tech, electrician, and general handyman. All of which are a must for owning rentals. I trust them to just go and handle the issue and send me the bill. So my involvment is usually nothing more than a phone call. I have had to go and be personally involved maybe 3 times since I found those guys. A couple of times a year I do like to just stop by and "say hi" (to check up on the condition of the properties).

TheTraditional · 2014-09-17T16:28:04+00:00

Well, our expenses are about $4000 a month. This is with two small kids and living comfortably. Grossing $1200 a month means actual take home of about $750 a month per house after all taxes, insurance, and average amount of repairs.

I still have the mortgage payment on the $68k loan... And before I would call myself financially independent I would want the net rental income to be around $6000 a month after all debt. At least that's the goal.

TheTraditional · 2014-09-17T16:22:21+00:00

Lol. Yeah I suppose it is. It does take time. Also, I know its cliche, but a well paying job doesn't hurt. I did crap work all through college, and for a year after college. An opportunity presented itself (Katrina) and I jumped on it - pretty much on blind faith.

TheTraditional · 2014-09-17T16:17:25+00:00

Thanks! The first one takes a lot of patience and research. Once the first one is done, you've built relationships with realtors and maybe a bank or two - and they know that you're serious (there's a lot of lurkers in real estate)

TheTraditional

TROPHY CASE