Can you live off of positive cash flow rentals

Rehabbing, Fix and Flip, Rental Properties
1

Since 2011 I have been trying to purchase SFH and rent them out. To date I own 4 and am under contract on a 5th. Each one generates a few hundred dollars a month and I usually put the money back into the mortgage.

I am buying low, for example I recently purchased one for 72k and rent it out for 1,000. My management fees are 75 a month, taxes 2K and insurance is 400. According to that formula without a mortgage I would be making 8,700 a year without my mortgage which is pretty small as the home was cheap. Once that is paid off wouldn’t I be making somewhere from 7,000 to 8,700 a year? The rental market is strong so vacancies aren’t much of a concern and the home is low maintenance. I have found with homes in this price range that the tenants usually make any repairs and across 4 homes my repairs average about 500 to 1K a year.

According to this formula is there any reason not to buy say 10 or 15 similar homes and then I can bring in with passive income approx. 100k a year once they are paid off? With my monthly prepayment it should only take 8 years or so to pay off. Am I missing anything? Why doesn’t everyone do this? Is due to the funds needed for a down payment? I wait till I get 20K or so saved up and then boom I am looking for another low priced home from a desperate seller. Am I missing something?

All my homes are financed and I get a 7 to 10 year balloon so I am not so worried about a hike in interest rates that will blow me away one day.

Looking for some outside perspective. Thanks!!

2

Keeping things really simple…

If you want a Net Operating Income of $100K a year from rental income, than you need to work at building a $200,000 Gross Scheduled Income.

This represents a simple 50% average annual overhead, which should include maintenance, management, and replacements.

Likely by the time your properties are free and clear, when this formula works especially predictably, inflation will necessarily require you to figure a GSI of something like $300,000, to achieve the equivalent of a $100,000 income.

Hope that helps.

Merry Christmas!

3

Thanks Javipa! Without a mortgage is it really reasonable to assume a 50% difference between the Gross scheduled income and the Net operating income or are you simply being conservative?

Merry Christmas to you!!

4

I’m not quoting something overly conservative. When you’re in retirement, you need financial insulation built up against hiccups, catastrophes, and mayhem. You might operate on a thinner margin during your accumulation/loan payoff years, and make up for these events by donating your time, energy, and money to the operation as needs arise.

However, in retirement, depending on how long you live, you will need/want your rentals to pay for themselves, and provide a reliable, predictable return (within a certain range). This will likely include handing the management off to a 3rd party, so that you’re actually able to literally retire from day to day management of your income portfolio.

The fact is, you’ll probably want to liquidate these properties at some point, and put your equity into something that provides a fixed return with no management whatsoever. A popular option for wealthy retirees, is to invest in commercial property, and lease it to long term tenants on a ‘triple net’ basis.

“Triple Net” just means that you lease space to a long term tenant that pays for everything himself, including taxes, insurance, management, and upkeep, etc., and sends you a check for rent every month …for thirty years.

An example of this is a La Petite Academy preschools. They typically lease space for twenty years, and offer to pay for everything, and mail the owners a rent check. There’s no calls for repairs, or hiccups. La Petite assumes responsibility for all operational expenses during the lease terms.

As an aside, there’s always adjustments built into the scheduled rent, so that, over time, the owner is not experiencing a dwindling return on his investment.

5

Jay gave you some good estimates about what to expect for income over the long term. Allocating 50% of your rent for operating expenses isn’t over conservative. It’s just being realistic. What I call Realtor math is when you see a listing where the monthly rent is 1% of the purchase price and they call it a cash flowing deal. Your numbers are around 1.4%. OK I guess, but we strive for the 2% and above range.

Back to your original post and questions… Why doesn’t everyone do this? Many people are scared of the risks. They hear about clogged toilet calls at 3am and things like that. The vast majority of people in this country have been taught: go to school and get a good education, get a good job, and they’ll be ok. Well back in the days of retirement pensions and people who worked for the same company for 40 years, that was probably ok. The shift to placing the retirement planning burden on the individual with IRAs and 401k accounts has left most average citizens unprepared for their own retirement.
Many people don’t want to be landlords. You can even see several people on here who do other forms of REI, but don’t want to own and manage rental properties.

Other limitations to how people doing rentals are the down payments required for NOO properties. Then there’s also the loan limits in place for the number of investment property loans a person can have. We get around that by using commercial loans by local banks who hold the loans for their own portfolio. Some people don’t want to deal with tenants calling on Christmas morning saying their heat isn’t working only for it to be the thermostat for the central hvac system wasn’t set properly or tenants who wouldn’t pay their rent on time and decided to try and start an argument on Thanksgiving because they’re getting evicted. I could go on and on with the not so good side of rentals too.

It sounds like you keep your loan amortization pretty short too. I prefer 10 year loans on rentals. I want them paid off asap. You’ve had pretty good luck so far with no major repairs on your properties. That’s great, but at some point you’ll have some expensive repairs to do. That’s why you estimate 50% for all operating expenses. We had one month where about five families decided to move out at the same time. Not a huge issue because we have several properties, but for you at this point that would mean no rental income for that month.

The hard part is setting up your systems in the beginning. After you get started, adding another property is just replication. You’re on a good path, but it’s a path many people won’t go down. Don’t think you’re wrong for doing it.

6

Thank you Justin0419 and Javipa!

I am actually not involved with the rental and management aspect of my properties. The first one I still manage as I became friends with the tenant, and when I started out I was very stingy about hiring a manger. I gave him a slight discount on the rent and he is the manager himself who fixes everything himself. (He works in construction). Now I have a great manager who charges me 50 to 75 a month and collects the rent, she also takes any phone calls etc. from the tenants. I never even met or dealt with the tenants so it’s pretty easy.

I started off small buying one in 2011 when I was 24 and another in 2012. This year I bought 2 and am about to close on my 5th. I guess I saw things going well and figured I would continue, which is why I wanted the input here on the forum.

What is the amount of loans I can get? I work with 2 local banks, who l have a good relationship with and never give me any trouble. One of them even offered me a 100K line of credit on 1 of the homes which has a lot of equity, although for now I didn’t set it up. I don’t want to over extend myself.

Also how in the world do you find a home that rents at 2% monthly of the purchase price? Is it apartments and condo’s? I have so far only purchased SFH as I feel they can appreciate better. Plus they are easier to sell giving me an exit strategy in the worst case scenario. Do you guys buy out of your area? Like somewhere where you would need a long drive or flight to get to?

Thanks again, I am loving this forum.

7

You’re off to a great start at your age. We didn’t even start out til we were in our early 30s. Congrats on that.

Are your loans with the local banks held in their own portfolio? If they’re not dealing with Fannie Mae and keeping your loans for their portfolio, the only limit on the number of loans is their comfort level with you and what you’re doing. If you’re going the other route, there are more stipulations once you finance 5-10 properties like six months of cash reserves for each property. When our bankers said they couldn’t loan on any more properties at the time, we just found another bank to do more loans.

Our deals where we’re getting 2% or better are sfhs too…just cheaper houses than you are buying. Your 72k example price would be a nice solid working class neighborhood in my area. I’m talking about us buying houses for 20k and renting them for $500/mo. These aren’t in war zones here…just the result of the housing crash and inability for most people to get financing. The result has been houses selling for less than decent used cars. The last several years have been some of the best for buying property at great prices because other people couldn’t and they were scared of the market.

We mainly own sfhs. No condos. We do have an out of area property. Just realize that for every new market you enter you have to find new people to handle repairs of all types and someone new to show the properties and handle legal issues like evictions. It isn’t always easy to find people you can trust and that aren’t going to charge you $200 to plunge a toilet.

8

Not sure what the banks did with my loans. I work with 2 banks. 1 of them has given me 10 years at 5.25 and the other offers 5 years at 4.75 or 7 years at 5%. The benefit of the second bank is that all their closing fees are about 1100 dollars including appraisal so it lowers my entry cost, plus they finance my closing costs as well.

Interesting how you are purchasing homes for 20K and renting them out for 500 a month. Certainly hard to argue with such a return, that is incredible.

Would you say though that there is a benefit in having a slightly smaller return, such as in my case of 72K for 1000 or another which I bought for 106 and rents at 1400 but a smaller volume of houses and things to deal with at a higher price point? For example on the 72K home my positive cash flow after all my costs including financing is about 435 a month before ammortization.

You have a good point about out of state. At my stage I can’t see the risk being worth it. I don’t even own a home myself yet as I rent, which is kind of ironic I guess.

9

Given those numbers, it looks like you have the same type of loans as we do. We’ve got a few loans on a straight payout - one is four years, two others are seven years. All the rest of ours are fixed for either three or five years and then get renewed at the current interest rate when the fixed period is up.

You’re probably dealing with more working class tenants than we do. They’re supposed to be easier to deal with than really low income. Sometimes I feel like I’m a father to a bunch of children. Most of ours are good. We try to whip the non-conformers into shape. When they don’t play, they have to go find a new place to live. Low income tenants are synonymous with drama, extra repairs, and extra work. That’s why the cash flow is better on the low end…it has to be as a hedge against all the BS that can go wrong. I’ve wanted to venture into some more expensive properties, but it’s hard to convince myself to pay so much more than what we’ve been paying for the past several years.

It sounds like you’ve got a pretty good gig working out now.

10

Hard to imagine properties selling at 20K in my area. Does the bank mind financing properties at such a low price point? When I brought one of my banks a loan of 72K they complained it was so small and asked if I would prefer a line of credit for 100K.

Do you bundle all your properties under 1 LLC or do you create a new one for each property? As of now all are under 1 LLC, however I was wondering what other people do. My attorney told me it doesn’t really make a difference in terms of liability and the first bank I went to, where I financed the 1st 3 properties asked me to keep it under 1 LLC to keep it simple.

11

We have one banker who has told us to buy more properties at the same time to get the amount up. I just say ok and go make more deals. I have financed all the way down to 11k for a house before. This is only thru local banks. You can’t do this with bigger banks.

We currently have all of our properties under one LLC. We will probably establish another one before we get much bigger though.

12

I love it when the bank says go add some more properties to make the loan bigger!

We think that lines of credit should be established against all our properties if and when it’s possible.

It can discourage equity-lawsuit predators.

Meantime, we don’t have to borrow on the equity, but it does allow us to give life to otherwise dead equity, if the money is used to control more real estate.

13

I find that my biggest difficulty, aside from having available capital is finding homes that meet my criteria for sale. How do you guys go about location properties?

I have 1 agent who brought me 3 deals and another who brought me 1.

My current unit I asked my original agent to send me all homes in my county under 100K and the one I liked I made a no contingency offer for 75K and shockers they accepted my offer without even countering! This was the first time I had been aggressive in finding something, as I had asked the agent for a list, instead of him reaching out to me on one of his listings.

How do you guys locate good properties?

14

Many of our deals have come straight off the MLS just like you and anyone else could view. For the longest time, I was scanning the MLS pretty much daily looking for our next deal. I could narrow down the list of properties by looking at the addresses and knowing what areas of town I wanted to avoid. If some properties looked interesting, I’d sometimes go drive by them before even bothering my Realtor to show them. I figured I’d save us both time like that. So when I contacted our Realtor, he knew we were serious and would likely buy one or more houses he showed us. If that sounds like the boring and unsexy way to do things, well it probably is but when there are multiple houses listed on the MLS for 30k and under why would I want to build a marketing campaign when there are easy targets listed already?

That’s really how we got most of ours. Then there was the time I found an ad on craigslist of someone looking to sell their portfolio. This seller was the biggest PITA to deal with because he basically backed off after we got really serious about buying a bunch of his properties. He wouldn’t return phone calls or anything. I had a hard time even getting to the point where we could come to an agreement on price. This was a guy who lives about 45 mins away and had a somewhat shady guy here locally that was his “manager.” He bought a bunch of properties and just threw anyone in them. Then they sucked the money off them until the houses got to the point where they had to spend money on them. That’s when they went up for sale. Oh and the last couple years of taxes were paid by the bank holding the mortgage. So what do you do when a seller wants to be a douche bag and not follow thru after all your effort to put together a deal? You go to the bank that holds the mortgages, show them your solid financials, and get the banker to basically force the deal which gives you cashflow & equity from the start, gets the bank working with you so they don’t have to pay property taxes on the houses anymore, and gets the seller to walk away empty handed after running the properties into the ground.
And while you’re there, the banker tells you about several of his other foreclosures which you also make part of the big package deal to buy which once again gives you equity and cashflow from the start.

So that’s what we’ve done. It’s worked for us. There isn’t a ton of competition here on the low end properties. A few people buy a couple houses to rent out, but that’s about it. There’s another company here that has a bunch of low-income rentals, but most of their portfolio is in the really rough south part of town where we don’t buy. The guy who established that company died and now his sons don’t want to screw with it. So they’re no buying competition for us.

I haven’t had to drive for dollars or anything like that. People have even come up to me when we’ve been working on houses and offered other houses for sale. As your name gets out there, deals start finding you instead of the other way around.

15

Wow awesome story with the Bank and the guy from Craiglist. I like the way you forced him into unloading the properties, he really seems to have deserved it.

In my area there is a ton of competition, and home values are high. It’s hard to find a 3 bedroom for under 125K and a 2 bedroom for maybe a bit less. When I find something I jump right into it as if you stall someone else will get it. 2 years ago it was way easier but now prices are higher. It’s not practical for me to buy anymore in my township, as after the 1st two homes I bought every house results in a bidding war. The next town over the competition is not as stiff so that is where I am now focusing. The rental market there is strong as well. The furthest one I own is a 40 minute drive away!

I am going to get more aggressive now as I want to lock into a few more before the interests rate rises and while homes are still on the market at my price point.