I am having a hard time deciding to rent or sell. I have been flipping house for 4 years now, and it has been ok. I have been thinking about getting into the rental game. 3 month ago I bought a single family home for 30k and put 7k into it. Now it is worth around 63k, so I could sell and walk away with 18k.
I got this to be a rental, and it seems like I could make about 3k a year with a 45k, 15 year mortgage.
What do you folks think. I like the idea of getting a bunch of these rentals to build up an ongoing base income. Flipping seems too inconsistent to be my only source of income. However I don’t seem to be able to make that much money renting
Don’t do a 15 year mortgage do a 30 year mortgage. You are not going to pay it off anyway and this increases your cashflow. You make money on rentals by having a bunch of rental units. You don’t need one or two. You need 15 or 20.
If you make $300/month on each house and you have 10 of them you bring home $3k/month. Since you depreciate the house at a rate of about $300/month per house that $3k/month is tax free so it is not like a paycheck. It may not fund your lifestyle but it provides a nice base for your lifestyle or a great augment to your lifestyle. My example is that the typical car payment in the USA today is $350/month and that car is a Honda Accord or Toyota Camery. Just 1 rent house yielding $300/month used to augment your car payment now has you driving a 5 series BMW. That is what rentals will do for your lifestyle. I don’t know your personal situation but if you have a house note of $1,500/month and you are living in a 2,000 sqft house what kind of house would you be able to put your family in if you bought a house that has a $4,500 house note? You now have a 5,000 sqft house in a great school district and you have changed your family tree. Your kids are now going to school with the kids of judges and senators.
So your opinion is if one wants to acquire as much passive income as possible on rentals, to buy them with as little down as possible as long as there is positive cash flow after all expenses? Is that correct?
Let me ask you this. How are REI getting funding to do this? If conventional financing is not available, rates on alternate means would kill your cash flow.
Im a newb, and have approx. 50k to put into REI in whatever way and am trying to decide which way to go.
IF you had 50k and a lot of time, would you wholesale, fix n flip, or try and acquire rentals?
You are right. You should be able to get conventional funding for up to 10 houses after that you may have to bundle the houses in groups of 5 to 10 into a blanket loan. That loan will be at 5% or so which will not kill your cash flow. The total of the houses in the bundle will have to have 80% equity. The bundled loan will be held by a “fresh” LLC controlled by you. It is important not to go to your local branch of Chase and ask what to do they have no idea. They live in the real world where you can’t finance more than 4 or 5 houses. You need to get your financing from a mortgage broker that works with investors. They know how to do this type of thing. It is also important from the very beginning even when your finances are relatively simple to use a CPA that deals with investment real estate. He will make sure you show the appropriate amount of income when setting up your rentals so you don’t run into a brick wall later on.
These are the kind of people you meet through the people you meet at the real estate investor’s club. I always say the people in the audience are no good to you. You want to talk to the guys putting on the club. They know the people that do this kind of financing, the realtors that find houses worth $100k for sell for $50k, the CPAs, the lawyers that know if you need an LLC or not etc. The team is in these guys heads. They live in Bazarro world where people can finance 50 or 60 houses that cash flow.
Didnt even think I could get conventional financing for something like this. I am self-employed, and talked to a friend at Wells and she said no way. So it’s great to hear your experiences and advice.
Lastly, what would you do with $50-70k if you were in my shoes. I am new to REI, however, I have some capital and another business which is on auto-pilot so i have time to perform due diligence, etc…
Purchase a bunch of rentals the way you have expressed? Look to fix n flip? Wholesale?
with $50k and using aggressive financing (hard money loan converted to conventional), you should be able to purchase several homes,you will 'hit the wall" with the reserve requirements on loans 5-10,
being self employed isn’t a problem as long as you show two years tax returns,and are actually reporting income
Yeah I see what you are saying, however my biz will not be 2 yrs until January. Also, “showing income” via 1040’s will be tough, although bank statements would work.
Maybe, I could do wholesaling for a year, get a bit of experience, build up the reserves and history of business and then transition into purchasing quite a few investment props via aggressive financing.
Bluemoon,
I like what you are saying. I am after 20 of these rentals. I work full time as an engineer and make an ok $ at that. Along with my flips I could use a way to make money without showing it. My goal it create enough of a steady income in the rental game to leave engineering and switch over to real estate fulltime. Flipping is what I really enjoy.
I wish I had some rules of thumb, to determine if it is better to hold on for the full mortgage term, or sell after 7 years. How does segregated depreciation affect me in the long run. Should I use a 30 for 15 year mortgage.
Any good books? What do you suggest I do to get there.
I am an engineer also. I won’t leave my job because I get paid for exhibiting the behavior that I would do if I worked or not. Basically I get paid for being who I am. What I do is I start selling any houses that I have owned for 5 years. Originally I planned to get 20 houses that cash flowed about $200/month. I started and ended up getting houses that were cash flowing $500 to $600/month. That is why I always ask you to define why you are buying these houses. Once you meet your goal there is no need to just keep buying and the goal should not be a set amount of houses like 20 houses but a set amount of income like $3,000/month. More is not better; better is better. So I stopped at 15. I want to always own 15 houses but not the same 15 houses. After the house has been on my books for 5 years I do an evaluation of the house. I look at the condition of the house, the neighborhood and the tenant. All things being equal with the next lease renewal I offer the tenant to buy the house. If they don’t want to buy it I give them 30 days to move. Fix the house up for sale and put it on the market. Once I get a buyer I do a 1031 exchange into the next house which means I roll the capital gain forward into the next house instead of paying it. I then do a full rehab on the new house (I finance those repairs into the new house) so I won’t have any capital repairs for the next 5 years. That is why I always pick 30 year mortgages. That increases the cash flow and I am not going to own the house for 15 years or 30 years anyway. You have to recapture the deprecation when you are calculating the price for the 1031 exchange.
bluemoon and I have the same thinking (we both know the expert in this model),and honestly when I am looking at houses you get when you know what house would be a great rental, and which ones won’t.
A house that will make a good flip and a house that would make a great rental aren’t always the same thing,a good flip may be a house too expensive to fit into the rental model I use,I have one rental with a pool,it may be my last unless I budget changing out every piece of equipment when I rehab the house,but for a flip, that maintenance isn’t my headache
Engineering is easy money and works well with my part time investing.
Regarding depreciation, if I take your approach with the 1030 should I run just straight 27.5 year depreciation, or segmented depreciation?
In my case, I have 37k into the house. My mortgage is for 46k, and thus my home appraised for 59k. Can I depreciate based on 59k or am I stuck with 37k?
Is the following true?
If I bought a house for 10k and after 5 years had depreciated 5k. Then did a 1030 and sold it for 20k, I would not pay the 5k capital gains.
Is this true?
If I did this twice over 10 years with the same house, then sold it, I would owe 10 in capital gains. Over 20 years it could accumulate to a considerable cost.
It seems depreciation is not a real expense. It helps with cash flow but eventually has to be accounted for when you attempt to get out of the business.
Don’t get me wrong, I understand its better to pay later and the money now to make more money.
most people I know that use segmented depreciation own multi-family, not single family,
if you bought a house for $10k, depreciated it to $5k, and sold for $20k, if you did not do a 1031 exchange you would owe $10k in capital gain and $5k in appreciation recapture
depreciation is based on your cost, less the value of the land
I’m not a cpa, but this is my understanding after many discussions with my CPA,and yes, unless you hold the rental properties until you die, you will owe a large tax bill at some point down the road if you continue to do the 1031 exchange
Thanks Andydallas for the info, although news is not that good.
I would expect that the segmented depreciation would always be a good thing cause after 5 plus years a lot of those items would have to be replaced prior to you selling.
I think I understand this approach. I like it and it make sense, but what about holding on to the property for the long haul. I am thinking that interest rates and inflation are going to go up. Buying a home with a fixed rate mortgage could be a good thing. Especially when inflation goes up. What are your thoughts?
Seems these are the 2 prevailing approaches. Is that true?
let’s say you buy a house now, with the right financing, etc you have $20k in equity in the house, and it cash flows $400 a month,24% on your equity,but you hold the house for 10 years, now its value has gone up, hopefully a lot, and you’ve paid down the note some, now your equity in the house is $100k, and it cash flows $600 a month,but thats only 7.2% of equity,that doesn’t look nearly as good,so to get more out of your equity you have to refinance to pull cash out or sell to invest in another property
your return on equity goes down as your equity builds,unless your in a crazy rental market
nothing wrong with holding long term, but just think about what your goals are
When considering whether to rent or sell it is important to look past the numbers on paper. Being a property manager involves much more than just collecting a check once a month. There are oftentimes significant expenses involved in attracting the right renter, cleaning up the place after the wrong renter and maintaining the property when you do not have a renter. If you choose to outsource the property management role than you are looking at yet another cost to being a landlord. On the upside if you hold onto the property for the life of the 15 year loan it is likely to increase in value.
The question you should ask yourself is whether or not that increase in the value of the home in 15 years is greater than or equal to the value of investing the $18K in the market today and taking it out after 15 years. There are numerous financial calculators available online to help you calculate various rent/sell scenerios.