Investing strategy...

Hi - My wife and I have been discussing investment strategies lately. First let me give you some background about our situation:

1 - we have approximately $150k-$160k equity in our current home.
2 - current mortgage payment $1,000.
3 - we have a 7 year ARM @5%. The 7 year fixed period will expire in April 2010.
4 - we have approximately $25k in savings.
5 - I have a full time job.
6 - My wife is currently out of work because she decided to take care of our newborn baby.
7 - I have a real estate license that is currently inactive.

Our plan - sell our home and buy a townhouse with the $150-$160k (free and clear). This would help us save the approximately $850 we are currently paying in mortgage ($1,000 - escrow). I can activate my license and save on part of the commission from selling the house and getting the commission from buying the townhouse.

Use the 25k as a down payment for an investment property and rent it. The idea is to use PropertyManager’s formula (50% for operating expenses, remaining for mortgage+escrow + $100+ cash flow). Even if I make a mistake and get the wrong house and can’t get tenants to pay what I want I can still pay the mortgage with the $850 that I will not be paying to my home mortgage.

My wife can manage the property.

Every year I would take the profit from the rental + my work bonus + savings and buy another property. This would increase my portfolio every year. By the time I am ready to retire, I will have enough passive income to leave off the properties.

And if my plan fails - I will still have my home free and clear…

What do you think?

By the way - my wife seems excited about this approach. She was not too crazy about buying and flipping…

Thank you and have a nice day!

I think your basic plan is EXCELLENT! However, I would leave as much of that $25K savings in the bank as possible and certainly not spend it all on one downpayment. The key to success is to BUY at a huge discount, not putting a lot of money down. By doing it this way, you won’t be limited to buying only one property each year, unless you want to do that. By increasing the pace a little, you should be able to retire considerably faster. Please understand that I’m not advocating buying a bunch of properties every year - growing too fast adds to the risk. However, even increasing the pace to 2 properties per year will make a big difference. In any case, it is especially important that you get a GREAT deal if you are only planning to buy 1 or 2 properties per year. With that much time between purchases, I would really look for a FANTASTIC deal.

Good Luck,

Mike

PropertyManager - wow… Thank you for the encouragement. And thank you for the suggestion about looking for a fantastic deal. I believe the idea is to start small. My wife never managed property and we don’t know if she will like it (or be good at it).

The other concern my wife has is that I have a full time job (actually a very demanding job that requires 50 or 60 hours per week - sometimes more). I like to fix stuff myself. She is concerned that I may try to resolve all the problems of the investment property myself which will take longer than if we hire someone to do it. And if we don’t address the problems quick enough we may end up looking like bad landlords. Our agreement is that we will hire out most of the maintenance work.

The other thing we had to discuss was if we are ready to move from a house (with a nice backyard and swimming pool, etc.) to a townhouse. We listed the pro’s and con’s. In the end of the day we felt it was worth the change because we will be living in a home free and clear. And we also realized that we don’t use the backyard that often - we end up going to the park or waterpark so my 3-year old can play with other kids.

So come next week I will activate my real estate license - 1st step of the plan. :biggrin

Have a nice day!

Definitely hire people to do the work. And I agree that you shouldnt limit yourself. You never know what the market will bring. Maybe in a few years you can sell that rental and make enough dough for a down payment on a 4 plex, or 8 plex, and earn even more a month. It may become larger than you think after you get in the business and like PropertyManager said, you may be able to retire earlier.

I second Mike’s comments. I would like to see you flesh out the plan a little more with clearly defined goals. Goals are specific, measurable, and have a finite timeline.

Since your dream is to have enough passive income to support your lifestyle, how many rental properties will it take to replace the take home pay you are making now?

Just for illustration, let’s say your salary is $75K which probably makes your take home around $40K per year. If your average cash flow per property is $100 per month, then you will need to acquire 34 properties to have enough cash flow to replace your salary when you are ready to retire.

Next step is to establish a time line. At one property per year, you will need 34 years to achieve your goal. This might be easily achievable if your retirement is 34 years away. If you want to retire in ten years, then your acquisition rate has to accelerate to 3 or 4 properties per year.

As an aside, you should note that each property does not have to generate $100 monthly cash flow, nor does each property have to do it from the first day. By the time you are ready to retire, you just need the cash flow from all your properties to average $100 per month.

Now, what is your initial goal and your timeline to achieve it?

If you are on a 34 year plan to retirement, some of your first acquisitions will be owned free and clear within this timeline. The free and clear properties will produce much more than $100 monthly cash flow, so you may actually need fewer than 34 properties to eventually replace your salary.

That’s great – you achieved your goal on a faster timetable. You can choose to continue on the same timeline to retirement and keep growing your wealth by acquiring more real estate, or you can choose to retire early once you don’t need your salary any more to support your lifestyle. Maybe combine both, retire early and set new investment goals to increase your cash flow and your wealth.

Got it - hire people to do work… It will be hard but I will do it. I am like PropertyManager - I hate paying someone to do work that I can do myself. Besides I love working around the house. My 3-year old loves following me around when I am fixing stuff. She is fascinated by my tools. But the problem is that I would be able to do it mostly on weekends - can I tell the tenant that I will get to it during the weekend? The leaking faucet can wait… Who needs an air conditioning working during the week? :O) Just kidding - I will hire out most of the work.

I will work on my goals and objectives this weekend. Your suggestions will help me be specific. I guess the plan will look like something like start slow (1 house - see if we like it) and then increase the pace. We don’t want to bite more than we can chew. Your comments around paying off the other mortgages is also very appropriate. I guess I need to account for changes over time. For example, when I have 10 properties cash flowing, I will have an additional $1,000 per month (10x$100 per property) that will build my savings even quicker and will allow me to buy more properties per year… Is this the magic of compounding that we hear all the time? :O)

Hey - have a great weekend! I am off to a nice weekend away with my family. Be back on Monday. This time away will give me the opportunity to work on the plan/goals.

Talk soon!

I still don’t get this “hire all the work out” attitude…haven’t you guys been raped by contractors enough yet?

You are the boss, not the labor. Isnt that why you got into investing, to get out of the crap? Delegate, so you can spend more time and energy finding another investment that will earn you even more money to do whatever you want, not fix leaks.

Look up the post “First Single Family Home or Duplex-Help!”.

In my opinion a duplex, or 2-on 1 is a much better idea than a townhome. My niece. her husband, and daughter just sold their 2800 SF dream house and moved the money into a 3-on-1. They now live in a 1200 SF 2 bedroom, 1 bath house, and their adjacent duplex PAYS THE MORTGAGE.

They live free. They have a smaller house to clean, and my niece could stay home with the daughter. Smart move. Now they are fixing everything up and planning the next owner-occupied loan move. Probably a bigger, nicer duplex or triplex. The bank will lend as they’ll have a track record of managing their rental properties.

FurnishedOwner

Delegate, so you can spend more time and energy finding another investment that will earn you even more money to do whatever you want, not fix leaks.

RIDICULOUS! I have several dozen rentals and do all of the management and almost all of the maintenance myself. That typically takes 12-16 hours per week. There are 168 hours in a week, so after “fixing leaks”, I still have at least 152 hours to find more deals. Do you really think that I need more than 152 hours per week to find deals?

Mike

It would take most landlords way longer than 12-16 hours a week to do both management and maintenance on dozens of rentals. Here we have grass, trees, shrubs, flowers, fences, plus all the buildings to maintain. Propertymanager must have very low-maintenance buildings on concrete lots or it would not be remotely possible.

j1dias: If you live in a fairly desirable area, I can also recommend to you that you fully-furnish your new purchase. Your wife can deal with that. You can get DOUBLE OR TRIPLE the rent by renting it out to traveling doctors, nurses, executives, managers.

The advantages are that you get a high quality of tenant who doesn’t have a lot of visiting friends and relatives like locals. Your tenants have money. Your wife can easily handle check-ins and check-outs. You should get enough income to hire out lawn maintenance and cleaning.

I still can’t understand that more people aren’t interested in doing furnished upscale rentals. There is so much more money to be made if your area can handle it.

FurnishedOwner

It would take most landlords way longer than 12-16 hours a week to do both management and maintenance on dozens of rentals. Here we have grass, trees, shrubs, flowers, fences, plus all the buildings to maintain. Propertymanager must have very low-maintenance buildings on concrete lots or it would not be remotely possible.

I think that management is the most over-paid profession on the planet. What is really involved?

  1. Answering the phone - I have a bluetooth so I can continue whatever I’m doing while I talk to people. Net effect on my day - ZERO!

  2. Showing apartments to potential tenants. I phone screen all callers and usually show two or three rental per day. At 10 minutes each, that’s maybe 20 minutes per day.

  3. Schedule maintenance. Since I do the maintenance myself - again ZERO impact on my day. I just say to myself, “hey, I better go fix that leaking faucet later this week”.

  4. Collecting rent - I do this the 1st through 4th of each month. Nothing to do the rest of the month.

  5. Bookkeeping and paperwork - I pay bills once a week, a lot of them on-line. That accounts for 2-3 hours per week.

Then there’s the maintenance. I have mostly older houses, many more than 100 years old. However, even with older buildings what is there really to fix? Most of the calls I get are for little things like a leaking faucet or some other little thing. Time to fix a leaking faucet - 15 minutes. The vast majority of my time is spent rehabbing units when we first take them over and when they are vacant. A lot of that time is spent patching drywall, painting, and laying carpet. There’s just not that much to do. One of the bigger projects I’m doing this summer is painting my new apartment building. I do that whenever it’s sunny and when I don’t have something else to do. It may take me all summer to paint this building, but who cares? I’m not in a hurry, am I?

We do have grass here in Ohio also. The tenants mow the grass in my SFHs and side-by-side duplexes. I mow the grass in my apartment buildings. However, most of these buildings have very little grass. I don’t have more than 15 minutes worth of mowing at any building and some of them have less than 5 minutes. Total time spent mowing: maybe 2 house every 10 to 14 days. I don’t have ANY FLOWERS or shrubs at multi-unit buildings unless the tenants plant them and take care of them. If my rentals have them when I buy them, I cut them down. I’m not sure what you do with the trees, but the only thing I do with trees is cut them down. If I had my way, I would cut every tree down on every one of my properties. I’m working on it.

I still can't understand that more people aren't interested in doing furnished upscale rentals. There is so much more money to be made if your area can handle it.

I don’t think that people aren’t interested. As I said in one of my early replies to your threads, I would do it in a minute if it would generate significantly more income per unit for me. I am not married to any one business model, my goal is to MAKE MONEY! Unfortunately, my market simply won’t support the “furnished” model that you use. I have looked at this issue from every angle and talked to other investors here that have furnished rentals, and the numbers simply won’t work here. Yes, you can get two to three times the rent, but you must furnish everything and pay the utilities. Utilities can be very expensive, especially when the tenant has no reason to conserve and when the utility prices are rapidly increasing. Without a steady supply of traveling professionals like you have, I would be stuck with normal tenants of furnished units. They would be the same lower and lower-middle income tenants that I have now, but they would just have more of my stuff to destroy and steal. It’s not that every tenant is bad, in fact quite the opposite (most are good). However, the small percentage of bad tenants are enough to offset a lot of good tenants.

In addition, we have a significant supply of bed and breakfast facilites in our area which are basically the step between motels and rentals. They are doing the fully furnished, short term business model in our area.

I think you’ve got a great niche going, but the question is whether it will work outside your niche market. I think that’s why you are not seeing significant interest.

Mike

Mike,
Thanks for your input. Yes, I am understanding more and more that this may be a niche market and I’d better enjoy it while it lasts. There are 4 suite hotels scheduled to be built here in the next couple of years. I will still have a market but will have to work harder at advertising and my dog yards.

I think you are wrong on the cutting down of trees. We just planted 2 lace-leaf elms, 1 on the south and one on the east of a little cottage this week. Trees provide shade, windbreak and tenants love them. I plant them whenever there is a stark, unshaded house.

There was a book written some years ago by a Real Estate guru called something like “Greenbacks from Greenery”. If I remember right it showed the standard 10-plex, 2-story apartment/motel type building that has an open balcony running along the upstairs. The owner increased his rents hugely after adding climbing vines, palms, and blooming shrubs and flowers all over. That standard ugly rectangle of a building was unrecognizable afterwards. Charm sells.

Furnishedowner

PropertyManager - I agree with you in regards to Property Management. This is why we are planning to have my wife do that job. We will still hire out the actual work to fix stuff - however she will manage that herself. With a full time job that requires a lot of my time I don’t think I will be able to do much of the fixing myself (unfortunately). Maybe later, when I have enough going on to retire from my regular job.

FurnishedOwner - there is an interesting area close to where we live that has 1 big hospital, 1 university and 1 graduate school. That is the area we are targeting for our 1st investment property. In our way back to town (from our weekend away) we decided to drive through the area to check it out. There are tons of apartment complexes in the area. If we decide to buy there to rent to students or hospital staff we would be competing with apartment complexes. Do you have the same situation where you invest? How do you compete with them?

I am working on my business plan. More to come…

Have a nice Sunday night!

PS: I live in Phoenix, AZ.

I created the first draft of my financial plan/cash flow. Here is a snapshot of it:

1 - November 2008 - we will seel our house and take the equity to buy a townhouse free and clear. We will start saving the mortgage (approximately $850 per month) in December 2008.

2 - I will use the commission from the sale of my house to pay for closing costs… :O)

3 - Today I have $25k in savings. In January 2009 I am expecting to have close to $29k. We will buy our first investment property then:

  • Purchase Price: $50,000 (we are looking for townhouses or condos - 2 bedrooms and 1+ baths.
  • Down payment: $10,000 (20% to avoid the mortgage insurance and get a better rate)
  • Loan: $40,000 ($50,000 - $10,000)
  • Mortgage payments: $266.12 (@7% - I believe this is a conservative number.)
  • Based on the mortgage payments, I will need to buy a property that I can rent for $732.14/month (50% for operating expenses - $366.12 + Mortgage - $266.12 + cash flow - $100.00).
  • Closing costs: $3,000 (not sure if this is a good number. I got it from Bankrate.com as an average for Arizona transactions. Any thoughts???)
  • Commission I will receive from the transaction: $1,500 (3% of the purchase price)
  • Fixing costs - I am planning to buy this first house without much fixing costs. I want to start with something simple. Any repairs should come from the operating expenses. (not sure if this is realistic or not… Appreciate if you have any thoughts/opinions…)

4 - My wife will do the property management, which should save us some money.

5 - The plan is to everytime our savings reach $20k we will do another transaction similar to the above. The number of investment properties we will buy per year will increase over time.

6 - We are planning to buy close to major hospitals - we feel this will be easier to rent and if we rent to hospital staff we may get better tenants.

FurnishedOwner - we will try your approach and depending on the property potential we may decide to try to do some furnished rentals.

7 - I will keep my job until I can replace my income with passive income from our real estate business. According to my projections, it should happen somewhere around May 2024. These are our initial estimates.

8 - Yesterday I did some research to find a good broker that would hold my real estate license. I am calling him today and hopefully will have my license activated by the end of the week.

9 - Next step is to start looking for properties so we can have a feel for prices and condition. I read somewhere in this forums that the best way to know the area is to look at 100 houses… :O)

10 - And do some minor stuff in our home so we can list it…

Thank you all for your comments and suggestions. Have a great day!

Your intended purchase price is close to what we paid for our building so I’ll offer you some numbers based on our experiences. You may find it hard to get financing for the rate and length of term you have listed. We put down 25% (required by the bank) and financed $38,625. It was what our bank required in order for us to secure the loan. We got 8% for 15 yrs. Payment about $370/mo. Your rate may be slightly higher than 7% for NOO. I would expect a bank to go out to a max of 20 yrs for NOO on such a small amount. It’s $334.58 for $40K @8% over 20 yrs. It only goes up to $382.26 to chop that down to 15 yrs. I would shoot for 15 yrs on this small amount if you could. Our closing costs were about $1200 (purchase price was $51,500). I would go look at some rentals and see what you can get for between $650-800/mo. That will help you when you’re looking for properties in the $50K range. I would also just plan on spending about $2000 or so on a property at that price. There will probably be something the seller didn’t disclose and you didn’t find or something that kinda worked, but you want to fix prior to renting. You may also want to change some things, update fixtures, etc. We found we could do a lot in our apartments by spending a couple grand in there. Our building is older and was converted to apts in the 60’s. No updating had been done, so it needed some attention. You have a good plan laid out. Try to be specific as to how much income you want each step of the way. That will help you determine if you’re on track or not. I commend you on making sacrifices to make it happen!

WOW! NEWBIES!

I am really proud of all of you for stepping up to the plate and taking a swing! You all got a wake-up call.

As for me, I started posting on here as a newbie (those were new vocabulary words for me) just a few months ago.

This has become a valuable immersion Real Estate lesson every time I sign on. I have learned about wholesaling, bandits, short-sellers, and the whole U.S. market. It has made me think of the big picture, not just my small pond.

You forum buyers pushed me to make offers on 3 properties, one of which is gonna fly. Propertymanager told me to quit spending so much money on management. BLL enlightened me on my LLC; I am jealous as heck of fdjake and his all-cash offers. Soholingo inspired me with his struggles. All the rest of you have been great.

This can be a lonesome road and it has been nice to be able to talk to someone.

Thanks,
FurnishedOwner

jidais,

How to compete with apartment complexes?

Pretend you or your wife are a manager/trainee coming to work at the hospital/university. You need short-term furnished housing for 3 months. Now call all those apartments and hotels in that area–make lots (dozens) of calls–take lots of notes. You will then know your market, and if there are vacancies and if they will accept your cat, Muffy, and dog, Bloodfang. Go look at a few places like the potential renter that you are. Just like buying–know your market. If no one accepts pets, then you will learn to love dogs. If they have junky furniture, you have nice furniture. Put yourself in your tenant’s shoes.

As for this area, many of the apartments require 1-year leases, and only a few are furnished (bed, table, chair, stove, frig). Most don’t take pets. Some have scary parking lots not attractive to night nurses.

Good luck and have fun and keep us posted.
Furnishedowner

Hi everybody - thank you for the comments.

Justin - I had no idea that it will be hard to get 30 years mortgage on NOO and I thought my 7% assumption was conservative. It seems I will need to change my assumptions a little bit. I will see what will be the impact on my 16-year plan. Also, right now we are so excited that we don’t feel it will be a big sacrifice. The biggest thing will be to get rid of all my saws - my wife already told me that she doesn’t want
them in the new home… :O(

I went to the broker’s office today to activate my license and signed up with him today. I went to the Phoenix Association of Realtors to sign up and get access to the MLS and the magic key that opens doors to all houses… :O). If I sign up before July 1 I will have to pay approximately $362. If I wait until July 1st, the fee will go down to approximately $230 ($130 saving). I talked with my wife and we decided to wait until July 1st. So I still don’t have access to the MLS. :O( However my broker will help me do some comps for my current home. I am anxious to find out my home’s market value. I have a feeling that I will be shocked… I may not have all the equity I thought I have. We will see…

I have 20 days to prep my home so I can put it on the market on July 1st. My wife has already started a list of things we need to do… The scary ones are to work on the yard (she wants some new plants) and on the pool (we need to replace some tiles). I will need some help… :O)

FurnishedOwner - I did not realize you had leases for such short timeframes (3 months???). Anyway, we will follow your advice this weekend and call around to measure the competition. My wife and I like to drive around and look at properties. I also saw some of your earlier postings where you said it is a good idea to contact the HR department of big hospitals and tell them you have quality/furnished houses. We liked the idea… Thank you.

Thank you all for your comments. Have a great evening!

I have just updated my assumptions based on the information Justin provided (that it is difficult to get mortgage for investment properties for 30 years, they usually have a higher interest rate and the bank may ask you to put 25% down). I changed my assumptions as follow:

  1. down payment changed from 20% to 25% - Instead of putting $10,000 down I will need to put $12,500 down for each $50,000 house.

  2. changed interest rate from 7% to 8%.

  3. changed term from 30 years to 20 years.

Based on the new assumptions I will get to my goal of replacing my income with passive income 1 year later (June 2025)… Wow… Sounds far… :O)

But someone said that a journey of 1,000 miles starts with the first step… :O) I understand this concept - I like to ride my bicycle for long distances… Each ride starts with the first strike in the pedal… :O)

Talk soon!