j1dias,
If you live and will be doing rentals anywhere close to a military base, contact the base housing office and let them know. They are a referral service and most of the time people are required to check in there when they arrive to the base. If you develop a good reputation with them, they will certainly pass that on to people looking for housing. It’s a way to make your listings stand out among a list of other units. You can search online to see what the military member makes for housing allowance. Search for military BAH. It stands for Bachelor’s Allowance for Housing. The amount varies based upon rank and is scaled (supposedly) for the market rent in the area. If the service member is getting stationed there for a few years, they will receive this amount.
Here’s a link for BAH: http://perdiem.hqda.pentagon.mil/perdiem/bah.html
There are also some people who will get sent to a base for a shorter period of time (say 3 - 6 months) for training. These people will be on per diem. This would more closely resemble Furnishedowner’s business with traveling medical personnel, etc. Here’s a link for the per diem: http://perdiem.hqda.pentagon.mil/perdiem/perdiemrates.html
People on short term trips can generally stay on base for about $35 a night (sometimes cheaper), but you generally don’t get much more than a microwave and small fridge. If you have something better than that and it’s within the per diem allowance, it’s no out of pocket expense for the person.
There are some good benefits to renting to military personnel. They have job security and steady pay. Generally pretty responsibile. We all have our bad apples, but if someone damages your place you will get your money back. I’m sure there are exceptions to that, but if you contact their unit…their supervisors will make them pay.
About a fourth of our business is government per diem. The per diem (means per day) rate was just increased another $10/day last November. A happy day, we went out for lunch!
The government per diem varies according to the cost of living in your community. This is the rate the government employee can pay in a hotel. Apparently this is evaluated every year or two and then adjusted for your area.
We charge the same per diem no matter what the size of the house, as the tenant can leave with almost no notice like in a hotel. Also we don’t charge a security deposit.
Yes, good point Furnishedowner. The point to realize here is that the service member can stay anywhere up to that lodging per diem amount and not pay out of pocket. If the max lodging per diem is $100 and you only charge $50, the person does not get to keep the extra $50. Some people charge more than normal to military people because of this. I had a hotel try to do that to me. Imagine walking into a hotel and asking the room rate only to have them to ask you how much you make. This differs from the per diem for meals. The person gets the full meal amount regardless of how much they spend. If you want to buy bologna and bread to pocket the rest of it, go ahead.
I think you are misinformed. You are looking to buy a SFR or a duplex that you will use for your primary residence, and another residential dwelling that you will use as an investment rental. No reason you should not be able to get a residential mortgage for an investment property with a 30 year fixed rate at or below 7% with 20% down. Especially if you have excellent credit.
For an alternative approach, consider this strategy instead.
Pay cash for your investment property and finance your primary residence. If you have the option of purchasing a duplex for your primary residence, then you will have two rental units generating income.
You should be able to get a 30 year fixed rate primary residence mortgage with an interest rate at or below 6% right now. If you are able to get a duplex for your primary residence, you could probably use the rental income from the second unit to pay your entire mortgage loan amount – or your out of pocket expense of home ownership wil be the same as if you owned the property free and clear.
The investment property that you purchased free and clear, will generate a lot of excess cash flow. Use the cash flow to build up a reserve fund for the unexpected emergencies – I suggest at least $10K. After that you can use the excess cash flow to pay down the mortgage on your primary residence or save it to invest in your next rental property purchase.
Meanwhile the mortgage interest rate on your primary residence should be lower than the interest rate you might have been charged if you financed your investment rental instead. Translation – higher cash flow.
Hey guys - you have to stop giving me new ideas… How many times will I have to go back to my plan and adjust it… :O) I will stop reading your posts… :O) Just kidding.
Dave - interesting approach. I actually applied it to my financial model. See below the results:
Alternative 1 - my original approach - buy my home free and clear and buy investment properties with 25% down. I would need 85 properties generating an average of $100.00 per property to get $100,000 of passive income per year. Based on my model I would get there in May 2027.
Alternative 2 - Dave’s “crazy” idea of financing my home and buying investment properties free and clear. I would need approximately 21 properties generating an average of $410.00 cash flow per property to get the $100,000 of passive income per year. I would get there by June 2025. Almost 2 years earlier.
Interesting… I wonder if a hybrid approach would work even better… Like financing the investment properties for a shorter term. I will play with the model a little bit…
One thing though that I don’t like about Dave’s alternative - I would not own my home free and clear… :O( and I can’t tell you how exilariating it is to think about owning your home free and clear… I know, I know… I would own investment properties free and clear… And that should be enough to make me happy… :O)
Actually I was surprised by the results of Alternative 2 - I though leverage was one of the things we wanted to do in Real Estate. That it would be better to own 4 properties with 25% equity in each one than to own only 1 with 100% equity. I guess I was mistaken…
A side benefit of alternative 2 is that I would have to manage only 21 properties as oppose to 85 in alternative 1 to generate the same amount of passive income.
I will have to think a little bit more about the alternatives… Thank you all for your comments/ideas…
You don’t want to replace your income, you want to cover your expenses (unless you are living paycheck to paycheck). Pull the last 3 months of your bank statements and that will show you how much it costs you to live. That is your target, not your income.
You have $150K in equity on your house…Your payment is $1000/month which probably means your mortgage is around $100,000.
The question I haven’t heard you ask is…How are you going to REPLACE a home that you owe less than HALF it’s value on???
If I were in your shoes I would be out there EVERY DAY looking for an absolute STEAL on a single family home. THAT’s the business, FINDING DEALS!! CASH FLOW, interest rates, or 2% rules, NONE of that matters if you don’t BUY IT RIGHT!! Mike will be the first one to tell you this.
So…with that in mind…Why not just SELL the first SCREAMING deal you find??? Your talking about $100K/year in income with 21 properties. Cripes I can make, (and have ALREADY made) OVER $100K this year buying and selling just 2 homes!!! It took 4 months!!! I CAN NOT imagine dealing with 20+ NIT WIT tenants and waiting an entire year for the same results. The BEST part…NOT ONE of these buyers EVER called me after the sale!!! NOT ONE!!
Think about this…Let’s say you follow your plan and sell your home. You plan on saving $800- $1000 /month or $10K to $12K / year.
With JUST ONE, well bought, single family home, you will BLOW that number away!!! You could EASILY make 3 to 4 times that on JUST ONE TRANSACTION. Once you build your cash reserves, DO WHAT YOU WANT. By rentals, pay off YOUR HOME, at that point you have built a CASH MACHINE!!
Listen…NO ONE…NO ONE…thinks this market sucks more than me…But…People are STILL BUYING homes. You find yourself a real STEAL, and I mean something that you can buy for 50 cents on the dollar OR LESS… IT WILL SELL!!! It will sell because you can price it at 85 cents on the dollar relative to that neighborhood!!!
Think about it…The rental business is a great LONG term plan, BUT YOU NEED SHORT TERM RESULTS. The problem for YOU will be REPLACING a home that you owe very little on. Ask yourself if you could buy your home for LESS than half it’s value (or what you owe)??? YOU CAN’T!!
That $150K in equity is a GOLD MINE. I know, I know…it’s SCARY using that equity to buy and sell a home. You wanna know what else is scary??? Dealing with all the LOSERS your going to be on a first name basis with when you become a landlord.
Here’s where I see potential problems for you…As your child gets a little older (3-4 years from now) your WIFE is going to start to REALLY miss your old house. Then… the pressure will start to build. She’s gonna want OUT of that condo. YEA, I read your post…she’s ON BOARD…Yea, she’s on board NOW!! Wait until the NEVER ENDING BS starts with your rentals. She’s going to start wishing you NEVER sold that house. And…she’s RIGHT!! That home is a pressure RELIEF valve for your family!! YOUR GONNA NEED THAT!!! Believe me.
Read Propertymanagers book…It’s the most honest, realistic look inside the residential rental business EVER written. I’m not saying abandon your plan to GET INTO the rental business. I’m just throwing out a WARNING…If your wife and child would be better off STAYING in a house that would cost you 2 1/2 times what you owe on it to REPLACE…STAY THERE!!! Use the equity and BUILD your cash by buying and selling homes that are such great deals that your CHILD wouldn’t be able to pass on them. You want HOME RUNS, Steals…something that you can DUMP, and STILL make $20-30K on.
They’re out there…ESPECIALLY NOW!!!
Keep your home…go find a single family home you can make $30K on by just giving it away. THIS is the BUSINESS. FINDING DEALS!!! You need to learn THAT. Once you learn how to FIND deals, THEN you just cheery pick the ones you want to keep as rentals vs the ones you want to make $50K on. AS your capital GROWS so will your business.
Been there, done it!
There’s an EASIER way!! and then there’s the BLL BREAKING WAY! I like easier, but as always…I learned this by using the BLL BREAKING way first. Just trying to save you and your family all the FUN :banghead.
Well, since we’re talking about investing strategies, here’s my plan.
Buy your properties at a huge discount (50% to 70% of market value). Keep your money in your pocket and stay in your home. Have the bank finance 100% of the purchase price of your rentals, with a very low LTV. You’ve need to find a couple of small, local banks who keep their loans in their portfolios to do this. I have bought almost all of my properties this way.
Do all the management and maintenance yourself (as much as you can). That will at least double the amount of spendable income you have each month and it takes VERY LITTLE WORK to do that. So, now we’re talking about a total of $200 per month per rental ($100 cash flow and $100 earned being the manager and maintenance man).
If your goal is $100,000 per year, you will need 42 rentals. If you could do about 8 per year, you could be free in 5 years! That’s 2013 instead of 2025. It will require hard work and sacrifice, but it can be done. Or step up the pace a little to 10 per year (that’s how I started) and you can be free in about 4 years.
As a bonus, since you are buying at a huge discount, you will have more than $840,000 in equity at the end of that 4 or 5 years, even if you only have $20,000 equity per profit at the closing of each property.
Bluemoon - thank you. I understand your point and you are probably right. I don’t need the $100k of passive income before I leave my current job. I could do it with much less. However if I am only replacing my current expenses than I will start living paycheck to paycheck because all I will be making would be to cover my expenses… This is why we set this goal. Having said that I guess we will monitor the progress and retire when we feel comfortable… Thank you for your thoughts. It made me think about the original goal and conclude that it is only a target. I don’t necessarily need to reach it before I retire. Thank you.
Fdjake - flipping properties was my original plan when I first thought about real estate. I love to work around the house fixing stuff. I thought that would be great to buy distressed properties at huge discount, fix them, and sell them for a big profit. Some problems with that strategy (at least from my perspective and situation):
(1) my wife was never onboard. She told me that she would support me, but her heart was not there. She didn’t feel it was the right thing to do.
(2) I don’t have much experience with big renovations and construction. I can do anything I put my mind to and I have learned a lot working on my own home. However it would be very difficult for me to estimate costs to repair homes before I make a purchase. I could have a contractor look at the property and give me an estimate. However I do feel that this is an area that the investor should have more control of/knowledge. What are your thoughts on this? How did you overcome this when you first started?
(3) risk - I didn’t want to be in a situation of having 2 mortgage payments and an investment property I could not sell for a profit because I made a bad purchase or estimated the fixing up costs wrong. If I made a big mistake in my first buy, it would take me years to fix it.
(4) time to fix the property - I simply don’t have time. I work 60+ hours per week in my job and have two yound kids at home that I want to spend time with. I know I can hire out the work. However, I would still need to supervise, etc… My wife could do that. So I guess this one is not really an issue…
In regards to dealing with tenants… This is an interesting point and I had the same perspective that you have. However now I have warmed up to the idea. I like to deal with people. They are all different and have their own stories. I can be a good landlord and treat them with respect. I may be able to have a positive impact on their lives. Who knows?
Thank you for sharing your strategy. One thing that I can do is start looking for distressed properties between now and the time that I sell my home and buy a condo/townhouse. If I find a steal that I feel comfortable with, then I can make an offer. I do have some cash reserves (25k) that I can use.
PS: one last comment - My wife and I grew up in apartments. I lived with my parents and 2 siblings in a 2 bedroom apartment. My wife lived with her parents in a similar apartment. My siblings and I shared 1 bedroom. And we were all happy there. We didn’t feel we needed one bedroom for each one of us… So I believe we can down scale our home and still be happy there. And if it doesn’t work out, I will still have my job and the equity. I can always sell it and buy a new home… :O)
Thank you again. Have a great day!
Propertymanager - thank you for the info re. cash flow (if I do the management and maintenance I can probably get $200.00 instead of $100.00). However I feel I can do the management (actually, my wife can). The maintenance will be hired out. So I should probably end up somewhere in between $100 and $200. I will keep the $100 in my estimate for now to be conservative.
In regards to the 100% financing… It is always a possibility. I guess when I am ready to do my first deal, I will talk with some lenders. Thank you for the tip about local banks. I do have a relationship with a local bank (they pay 6% on checking account… :O). I will talk with them. Not sure though if I would want to do 100% mortgage… This would probably make it difficult to get the $100-$200 positive cash flow. In addition I could end up upside down on the property and in a diffcult position if we decide that we don’t like this landlording business and want out… I guess if I find a good steal (50-70% less than market value) I would feel more comfortable going with the 100% mortgage. I will keep this option in mind.
Thank you all for sharing your thoughts and helping. I wish you have a great day!
PS: we made a punch list of everything we need to do in our home before putting it on the market. There are 72 items on the list some small (like replacing some light bulbs), some medium (like replacing the shower door), and some big (like replacing some tiles in the pool). I killed 2 last night :O) 70 more to go… :O)
I will talk with them. Not sure though if I would want to do 100% mortgage... This would probably make it difficult to get the $100-$200 positive cash flow. In addition I could end up upside down on the property and in a diffcult position if we decide that we don't like this landlording business and want out... I guess if I find a good steal (50-70% less than market value) I would feel more comfortable going with the 100% mortgage. I will keep this option in mind.
Which is safer, buying a property at retail and putting down 25% or buying a property at 50% of market value and getting 100% financing for the purchase price? Think about it!
In regards to dealing with tenants… This is an interesting point and I had the same perspective that you have. However now I have warmed up to the idea. I like to deal with people. They are all different and have their own stories. I can be a good landlord and treat them with respect. I may be able to have a positive impact on their lives. Who knows?
I know that this is going to fall on deaf ears, but here goes anyway:
PLEASE don’t get into the rental game with this mindset. If you do, look at the money in your pocket now, because when you become a landlord with this mindset, you won’t have it for very long. This is personal experience my friend. I too, wanted to be the “good” landlord at first. Quickly I learned that being “good” and understanding will only get you BROKE fast. Be really good. Have a good lease with penalties spelled out clearly, and FOLLOW THEM TO THE LETTER, no exceptions.
The only “interesting” story that a renter will have is the one that convinces you to let them stay there another month without paying.
Case in point, last month had a tenant that had their identity stolen (third one in a year. Why is it that identity thieves only steal from people with no money and bad credit :rolleyes) and had to wait to get all their money returned before they could pay their rent last month. Got payment 2 weeks ago (just shy of 30 days late) with a promise of not another late payment ever. Guess what? No payment this month either. Guess where they’re going next week? Down to the local courthouse to explain to the judge.
Propertymanager - got the point… As long as I buy with a good discount to market value, it is safe to do 100% financing. Makes sense to me… :O) I will work really hard to find my first deal for a good discount.
I had lunch with a colleague today. He owns 2 rentals - one is doing fine. The other one is not. He bought both at market value, with 20% equity. He is now planning to sell the one that is not doing good. Made me think that you make or break the transaction when you buy the property.
Raj - I hear you. And actually this is probably the biggest risk my wife and I will face. We believe in being nice and fair. We will not change the way we are. We believe we can be successful with this attitude. If we don’t like the business, we will move on.
Propertymanager - by the way, I bought your book today. It should arrive Monday. I am curious to read it. I want to be an informed landlord…
Thank you all for the comments. Talk soon!
Update on my punch list to sell my home - I completed 3 more items today. Now I have 67 more to go… :O)
[[[[[…We believe in being nice and fair. … We believe we can be successful with this attitude. …]]]]]
I am very fair with my tenants, as long as they are fair with me. I treat them with respect, as long as they treat me with respect.
But when they start to lie to me, steal from me, cheat me, then I treat them like they are liars and cheats.
If tenants want to be treated with respect, then they should act like they deserve respect. If it is their choice to behave like lowlife scum, then they can go and live some place else and act like scum in someone else’s house.
There are decent tenants out there who will behave in a reasonable manner. There are also tenants out there who will spend a lot of time trying to figure out new ways to cheat their landlord. If you are not capable of differentiating and adjusting your relationship with your tenants to respond to the tenant’s behavior, you are going to run into a lot of problems with your landlord career.
We’re fair but firm with our tenants as well. We have clauses in the lease for late fees, fees for NSF check returns, and other general clauses to pass on expenses to our tenants if they cause an expense for us. We have one tenant who we originally had mixed feelings about. She wanted in before I rehabbed the unit. I’d already made all the travel arrangements and was set to do the rehab. She got mad at me on the phone when I told her she could rent it after I was done. We decided to rent to her. Her check bounced one month so I called her at work and said “we’ve got a problem.” I told her what happened and she told me the money was actually in the account and something was wrong with the bank (I know…likely story). Then I sent her a letter recapping our phone conversation (so it would be in writing) and also breaking down all late fees and NSF charges. Next thing I know, she changed accounts and sent me a check to make it right. So whether her story was true or not (I chose to believe her because of the new bank acct.), she made it right.
We stuck to our lease with the fees. We could’ve said “oh, no big deal. Just send your rent as soon as you can.” That would invalidate any of our lease terms from that point forward. She still sings our praises to others telling her friends we are the best landlords she’s ever had.
You can be cordial and nice, fix things in a timely manner, etc…but you must stand your ground and keep things on YOUR terms. THEY signed a lease to rent YOUR unit from you. It’s our building which we will run as we see fit within the confines of the law. The tenants can never forget that. If they don’t agree, they can find another LL to abuse.
Got it - I am sold on buying with a huge discount. I am in no hurry to buy. Righ now my plans are:
1 - Prepare my house to put in on the market on July 2nd. I want to have an open house during July 4th weekend. My punch list of things to do increased to 78 items - I have already addressed 10 items. 68 more to go… :O)
2 - I will have my real state license activated on July 1st. I will have access to the MLS then. I will start looking for a townhouse or condo for my family - so I can get the equity from my current home and buy a property free and clear.
3 - I will also start looking for our first investment property - I will look for properties with significant discount. My goal is to buy a property for around $50k. I will try to put nothing down but I can go as high as 25%.
This is the plan… I will keep you posted.
Thank you all for the advice and encouragement. Talk soon!
Quick update - I worked on the yard all day yesterday. Propertymanager - I really don’t know how you do all your yard work yourself… I was reading your blog and I was amazed (and a little bit envy) on how you manage to cut grass in 15 or 20 minutes in one of your properties. Any time I have to do any work on the yard it takes me at least half day… :O) 1 hour to find the tools, 1 hour to decide where to start, 1 hour to start the work, 1 hour spent going back and forth to the house to drink water. Yesterday I was glad when the sun went down and I had an excuse to stop… :O)
A colleague also stopped by to give me an estimate on the costs to replace some of the pool tiles. I am calling the pool company tomorrow to get the tiles. We will probably replace them next weekend. I could try to do it myself but they are really small tiles and I am afraid I will end up breaking more tiles in the process.
I hope you all had a great weekend and are ready for the week ahead… I know I am…
Propertymanager - I really don't know how you do all your yard work yourself... I was reading your blog and I was amazed (and a little bit envy) on how you manage to cut grass in 15 or 20 minutes in one of your properties. Any time I have to do any work on the yard it takes me at least half day... :O) 1 hour to find the tools, 1 hour to decide where to start, 1 hour to start the work, 1 hour spent going back and forth to the house to drink water. Yesterday I was glad when the sun went down and I had an excuse to stop... :O)
Yes, you have to be very organized to manage and maintain a lot of rentals. I have a pickup truck that has my tools divided into tool bags by task. One bag for carpet tools; one bag for electrical tools and supplies; one bag for carpentry tools and wrenches; one bag for painting stuff; one bag for plumbing tools and supplies; and one bag for miscellaneous fasteners. In addition, I have a case for all my saws, drills, etc. My wife complains that the truck is a mess, but I use everything in that truck on a regular basis.
As for the yards, the tenants mow the grass at my SFHs and side-by-side duplexes and the yards at my apartment buildings are small with no flowers or other nonsense (except flowers the tenants plant and take care of.
Hi - I wanted to give you an update on where we are with our investment plans.
I have just finished reading two books on LLCs and how to start a business. Both from NOLO. Good reading. I feel I know more about LLCs and small business. I am going to read a book on Operating Agreements.
We finished our Business Plan, Goals Worksheet, and Action Checklist.
Closed one of the items from the Action Checklist - obtain and review the Arizona Tenant & Landlord Law. Completed my review few minutes ago. Interesting reading. Will help me create my standard contract.
My wife and I drove around this past Saturday. We believe we identified the area where we want to invest. We want to learn about the area. We found that there is an area classified as Historic District within the area we are targeting. As we drove around we found several properties in very bad condition. I called three of the realtors selling homes in the area - unfortunately in all three instances they were selling refurbished houses for close to retail value. However one of them seemed really desperate. She said the house belonged to her son and he was ready to reduce the asking price by 25k. Still expensive…
I am still planning to activate my real estate license on July 1st. I will then be able to search the MLS and even enter some of the homes as they had the lockbox. I can hardly wait.