Real estate vs. a business - Posted by john


#61

Wish we had a “like” button. - Posted by Jeanne

Posted by Jeanne on August 25, 2011 at 24:47:23:

Maybe soon ;->


#62

Re: Real estate vs. stocks - Posted by Chris in FL

Posted by Chris in FL on August 24, 2011 at 23:29:49:

What you need to factor in as part of your ROI…
1 - positive cash flow after all expenses
2 - tax benefits (depreciate the house)
3 - principal paydown on the mortgage
4 - appreciation (long term, houses go up in value)

Additional boost - you can buy houses with lots of leverage. As a RE investor, 20% down… Sometimes, nothing down. Try figuring your ROI with that one. Also, you can pull money out of RE, with a mortgage, to use for other things, and it is not even a taxable event. Sell your stocks, and you give up 30% or whatever to the tax man. Also, little thing called a 1031 exchange - sell one house, planned and done properly in advance, buy another, and you defer paying tax on the profits until you sell the new house. Stocks let you do that? I have done the math - I promise, if you know what you are doing, there is no comparison with stocks - not even in the same ballpark.

As far as comparing to a business - well, those can be all over the map. Some fail. Some perform at a stellar level. Most struggle in mediocrity - small businesses… Even act a lot like a job - owner is self-employed, earning an income based on his/her labor.

I started out in RE when I was making $8/hour, working full time… I bought my first rental zero down - put the 30% down payment on my credit card, and got a mortgage for 70%. Put in a weekend of sweat equity. The rents covered both payments and all expenses, plus a little. One year later, I bought another, then two more. The positive cash flow from some was used to gather down payments to buy more. I started on a shoestring… If they didn’t make money from day one, I couldn’t buy them if I wanted to - didn’t have the means. I couldn’t have even considered buying stocks - any broker would have laughed at me if I asked him to help me buy stocks on my budget. I didn’t have the knowledge/ability/idea to start up a business. But, armed with some good books, persistence, and the idea that I could overcome growing up poor, RE was a perfect solution.
My wife quit working when our first son was born 9 years ago. We have two sons, a good life, bought our dream home, and 4 years ago I quit my full time JOB, at age 38, because RE part time provided more income. Also, it only gets better as I buy them cheap now, and every year our debts get smaller, and income gets bigger. I decide how much or little I work… Plus, the whole thing can be put on autopilot much easier than most businesses. Hire a property manager and step back if you so desire. However, for now, I love doing it, and my 9 year old is beginning to study and love it, too… He was just telling me tonight how he explained to a classmate about RE investing, and how he is going to take it over from his father one day. God willing, he and/or his brother will be the ones to manage it all next, and hopefully grow it even bigger and better. Of course, we will need to set up some stop gap management, too, because this family has lots of extended vacations in its future (thank to RE)!

Best wishes,
Chris in FL

P.S. - I had a 401K at my JOB… Invested the max in it for 13 years ($8/hour when I started; $40K salary when I quit)… When I quit working it had about $40K in it. Then I lost that trying stock options. I have been doing RE since 1998 (13 years!). Suffice it to say, it has performed much, much better than the stocks (with a smaller total investment)!

P.S.S. - Stocks… LOL! I just have to smile and shake my head when people tell me I should invest in stocks instead of RE! ROFL!!!


#63

Re: Real estate vs. a business - Posted by arlanj

Posted by arlanj on August 23, 2011 at 16:03:25:

I agree that is different in every city. Either more or less. In my area - Oklahoma - houses are cheaper, but the rent is less. In other areas the houses are higher but the rents are higher. Where I can make it on the rent of 30 cheap houses averaging $360.00/mnth, in a higher priced market you may need only 15 houses at $750/mnth. The total price of purchase may be the same.

Most of the houses are in the older areas, actually the places that my family and grandparents lived in the 60’s and 70’s. Just houses. Houses for people who work for a living. Some would call them poorer people. But that is where the money is. I can make 2% a month or better renting cheap houses, where 1% would be good for a pretty house.

I also agree that some markets are not good for this type of investing.

I will tell you that I have a brother-in-law and nephew that told me that I could never do the same in their area - Charlotte NC. In fact my nephew spent over $10,000 taking courses on house to get into REI. He has never bought a house. I started looking in there area and within a week I bought a house. I flew out there and started looking and if I would have had the money, I could have bought several houses for less than $30,000 that would have made great rentals. With the way the economy is now I could propably buy many more in that area. It is however difficult to buy and rehab and rent 1100 miles from home.

Also, once I started buying foreclosures and other distressed properties, got in the business, the word gets out and deals seem to come. I got a call a few months ago from an old aquaitance that found out I buy houses and long story short I bought the house for cash because he needed to move. 1/2 what the house is worth.

Move to Oklahoma, or Texas, Kansas.


#64

Re: Real estate vs. a business - Posted by john

Posted by john on August 25, 2011 at 21:29:16:

Okay, so how are you not paying your taxes on your profits? My CPA and
I would like to know?


#65

Re: There Will Always Be Doubting ToMmies - Posted by John Little

Posted by John Little on August 23, 2011 at 17:40:16:

You missed your calling – stand-up comedy. As to your fantasy, show us some proof. Don’t worry – I won’t be holding my breath.


#66

Re: Plugged toilets and 2am phone calls… - Posted by john M

Posted by john M on August 29, 2011 at 11:00:55:

What do you do regarding landscaping? Do you pay someone to do it or
does the tenant do it? Do you charge the tenant for landscaping? How
many properties do you manage on a full time basis and what is the
biggest challenge?


#67

Re: Plugged toilets and 2am phone calls… - Posted by Chris in FL

Posted by Chris in FL on August 27, 2011 at 18:52:52:

Frank,

With positive cash flow, mortgage paydown (if applicable), and tax benefits, you probably only benefit about $5-12K/year on that property??? True, you could eventually get some appreciation again. It is hardly worth owning when you consider that you have to receive almost 5 phone calls a year!!! Plus, I am sure you have to deal with a little bit of paperwork, too! Perhaps you could save yourself the hassle and invest in stocks instead??? ROFL!!!

Nice post… Doesn’t it make you laugh on the inside when people give you that line, “Oh, I would never own rental properties, and have to deal with 2am phone calls and have to fix leaky toilets. It isn’t worth it.”???

Best wishes,
Chris in FL


#68

Re: Real estate vs. a business - Posted by Lee in LA

Posted by Lee in LA on August 23, 2011 at 22:13:13:

Hea arlanj

Check out
http://www.resales.usda.gov/sfhdirect/sfh_prop_main.cfm
there are several in OK but they are most likely to far for you.


#69

Re: Real estate vs. a business - Posted by Kansas

Posted by Kansas on August 23, 2011 at 20:47:55:

Great posts arlanj! I see you mentioned Kansas. Any
thoughts on the Wichita area?


#70

Re: Real estate vs. a business - Posted by Sailor

Posted by Sailor on September 03, 2011 at 17:03:26:

Look up 1031’s & owning properties in IRAs.

Tye
www.ShoeboxProject.org


#71

Re: Real estate vs. a business - Posted by arlanj

Posted by arlanj on August 26, 2011 at 08:21:46:

A couple of big items:

  • Depreciation deduction on the properties.

And the real big one – Passive income is not subject to the FICA Saves the 15.3% tax.


#72

Re: There Will Always Be Doubting ToMmies - Posted by Jeanne

Posted by Jeanne on August 25, 2011 at 24:45:36:

People are taking their time to help you, and you are so disrespectful. Nobody owes you anything.


#73

Re: There Will Always Be Doubting ToMmies - Posted by Sailor

Posted by Sailor on August 23, 2011 at 23:27:02:

There are a lot of us that do exactly that, & if you apply your rents to your mortgages they should be paid in full in just a few years. The folks that have been here & on the MH forum on this site are the ones w/the track records. If it didn’t work we wouldn’t still be here. It isn’t all easy, if that is what you seek, but it’s a heck of a lot better than a 40 hr. week doing what somebody else tells you. Check the Archives–

Tye
www.ShoeboxProject.org


#74

Re: There Will Always Be Doubting ToMmies - Posted by arlanj

Posted by arlanj on August 23, 2011 at 20:12:44:

John,

What do you want to know? It is basically exactly what I have done. Throw in a bunch of flips, and that is what I have. I admit, that I live in a market where I can by cheaper houses than some, but that is relevant only to how much rent one can get. My rents range from $200.00-600.00 per month.

The key is to be able to get financing or get the first couple of houses paid for so you can leverage them.

It also takes some work. In some respects a Landlord needs to be a Jack of All Trades.

By the way. I never took any courses or schools. I read 2 books. One was “Buy It, Fix It, Sell It” by Kevin Myers and the other was called ??? another book about buying cheap houses and holding or flipping.

I also watched alot of “Flip this House”

We just set up a website for our Landlords Assn. Needs alot of work but it will get there.

http://www.enidokrentals.com/about-enid-landlords-association.html


#75

Re: Plugged toilets and 2am phone calls… - Posted by Chris in FL

Posted by Chris in FL on August 30, 2011 at 22:38:31:

I will throw in my perspective, too… I managed 15 easily for quite a while, but up to 30 now and still buying. It is still very part time, to be sure, to manage 30 (I spend more time buying, repairing, and renting the 8-10/year we are buying, than managing the ones I already own). Mine are mostly SFH, with residents responsible for yards, but the two duplexes I have a lawn guy take care of. Easily, the biggest issue is turn over. I estimate that my average resident stays 5 years, so 30 units means about 6/year turnover. Some vacancies only take a day or two of cleanup, while others may take a month of repairs. Two keys to keeping vacancies from sucking the life out of you… One - screen applicants well, and put the right people in… Good residents make property management a joy, and bad ones make it a nightmare. Best tip - before moving an applicant into your house, go see how they live now - your place looks like their current place in one year. Also, look for signs of job and home stability - not applicants with a history of moving every 12 months. Two - don’t defer maintenance. Do repairs promptly, and do them right the first time. Keep the places nice all along, and there won’t be big repair jobs on empty units. If my resident’s pay on time and keep the place nice, I like to give them a bonus every year on their anniversary… New ceiling fans, maybe upgrade an appliance, new carpeting if the existing carpet is getting old… Often it is something that should probably be done anyhow, and doing it without making them ask keeps the residents feeling appreciated as they sign on for another year… Plus always getting something new keeps them liking the house, and more likely to stay longer. Plus, the upgrades are a small price to pay compared to a vacancy.
Hope another perspective adds to the mix.

Best wishes,
Chris in FL

P.S. - My plan is to get too many units!!! I want some to sell if and when I choose (for great vacations; put two boys through college if they choose; etc.)… Plus, my 9 year old loves the business so far, and I am hopeful that in a few more years his first real job will be taking on some property managment! Also, most of mine will be free and clear in 7.5 years, and too many is a far better problem to have than too few (I can always hire out some property management)!


#76

Re: Plugged toilets and 2am phone calls… - Posted by Frank Chin

Posted by Frank Chin on August 30, 2011 at 09:02:58:

John:

I still have this one SFH left that I had landscaping done on and off, and I owned the place since 1983.

I say on and off because I would hire a local landscaper to do it for a few years, and eventually a tenant would ask me if he can do it. My philosophy is I start off renting the place at 10% below market, and raise the rents very little which allows me to turnover a property in a matter of days if someone leaves, then have tenants stay years and years, thus alleviating much of the turnover cost. I may lose a few dollars in rent, but in the long run, I come out ahead financially.

Getting back to landscaping, I originally had tenants do it, but they don’t do a good job of it. Finally, I got complaints from neighbors the grass was almost two feet high, so I hightailed it out there to take a look, spoke to the tenant who explained that his lawnmower broke, he couldn’t get it fixed, and he tried to hire some kids down the block, but when their dads saw the grass, said “no way would I let my son mow that and break my mower”.

So I called back the lady across the street, one of the loudest complainers to thank her for letting me know and asked her for a favor whether she can recommend a landscaper. She did, I hired him, and he did my lawn for a number of years.

Then he got a bit expensive, the jobs got sloppy, so I hired another guy. Some tenants were shocked that my 10% below market rent includes the landscaping. I told them it’s my choice, I like to keep the house looking good, and the neighbors happy.

Currently, my tenants do the landscaping, and I only allow it if I feel the tenant is capable. The tenant had been with my for over 5 years, and the one 2 tenants ago was with me for eleven. About three years ago, he asked me if he can do the lawn for me, saying he was very happy with my place. I know he was happy because I charged 10% below to begin with, and didn’t raise the rent for 3 years.

Anyway, I told him that he plans to do it, he would also have to do the “edging” professionally, and he tells me he has the equipment as he did landscaping for his previous landlord. I said I need the bushes trimmed, weed treatment in the spring, and cleanup in the fall, which I pay the landscaper extra. If he can do all of that, I’ll hold off raising the rent.

And if you can believe this, with the rent check, he usually sends a typewritten letter bringing us up to date on his family, the neighbors etc., that is the local news. And when he did his spring cleaning and weed treatment this year, he sent along photograghs of himself doing it, with his monthly report.

Through the years, I had tenants, but never one like this one. The one that came closest was two tenants ago, the same house. One year, I notice all the gutters crooked, and cracks in the sheetrock needing repairs. But I forgot about it, and several months later, I went back to take a look, it was all repaired, and I was about to call a contractor. He told me it was no big deal, and his wife said he was bored with nothing to do.

I run out once or twice a year to take a look. We just had a hurricane coming through, and we called our tenant and ask that he makes sure all the gutters are clean and clear. What was very nice of this tenant is Sunday night, after the storm passed, he called and left a message saying he gone out to clean the gutters again after the storm to make sure there are no problems. I mentioned that in the last hurricane, I had to get roof tiles replaced, and he happily told me he checked right after the storm, and all the roof tiles are on tight.’

I primarily buy 2 to 4 families, and at it’s peak, a dozen years ago, I owned five of them, plus a SFH, and, a condo, coming to well over 20 tenants if I count separate garage and driveway tenants. I was thinking of buying more, but my wife did not want to handle any more tenants, and I did not want to hire property managers as we have done well managing it ourselves. So it appears personally handling tenants is 20 units for us without getting burnt out. Our rule of thumb is take the total number of units, divide by three, and there’ll be the number of units turning over each year.

I looked at 6 families and up, but real estate taxes are higher, I have to get a commercial mortgage, and the rates are higher and terms shorter. Usually, with 6 families, I have to give a tenant 50% off the rent to be the property manager. With 3 families, I give someone $50 break off on the rent to haul the garbage cans out, and a little more for sweeping up the sidewalk.

By starting in 2003, prices really soared in my area, and I decided to clean up and since sold a few. That is to get into my retirement mode. Properties I picked up for $150K, I sold between $450K, and $750K. We went through a real estate crash here in 1986-1993, I spoke to my CPA and investor friends, and they all tell me to take some money off the table. By 2007, when I last sold, I remarked to my CPA that prices can tumble in another year or two, and each property can easily drop $100K to $150K. It was going up 100K a years for about 3 years.

And a word here about ROI you asked on one of your other posts. Here, I make my money on appreciation, and the ROI is to me the icing on the cake.

Sure enough, I checked just this week, and a property I sold for $750K in 2007 now has an estimated Zillow market value of $627K, with a low range of $525K. It was around $450K in the year 2003. I recall my CPA saying “if the price drops $125K, it’ll take you another ten years to make that back in rents, and you’ll pay it with income tax rates”. My answer was “George, you also forget the place also needs $50K in rehab”. LOL. The house was built in 1957, and my plumber tells me after 50 years, replace all the pipes or I’ll be calling him every other month for leaks. That alone will cost me $25K.

In fact, adding in the rehab costs, I’m about $50K to $75K ahead of the game by selling it, with the lowest capital gains rates around.


#77

Re: Plugged toilets and 2am phone calls… - Posted by john M

Posted by john M on August 29, 2011 at 11:09:43:

Chris,

What kind of ROI are you looking for when you are buying and holding
properties for cash flow? Do have a minimum to make it worth your
while?


#78

Re: Real estate vs. a business - Posted by arlanj

Posted by arlanj on August 24, 2011 at 08:47:30:

I have no idea about Wichita rentals, but I travel there regularly and would imagine that it would be similar to Oklahoma. People need rentals. On Trulia.com there are boatloads of houses under $50,000. Infact, many under $20,000.

Start buying. There couldnt be a better time.


#79

Re: Real estate vs. a business - Posted by Bob Smith

Posted by Bob Smith on September 05, 2011 at 04:14:54:

Under the new tax law Obama signed, it will be subject to FICA if
your income is too high.


#80

Re: Plugged toilets and 2am phone calls… - Posted by jim

Posted by jim on September 19, 2011 at 17:34:46:

Hi, chris. so good to read your post. where do you find that many low priced properties with good cash flow?

I live near oakland in the san francisco bay area. the real cheap places in the rough part of oakland costs $90-100K, needs about 10k repair, with about $1200 rent.

I wish I could find lower priced ones. where in florida are you? I would love to have as good cash flow as yours, but don’t know how feasible it is to manage them remotely. thanks in advance for your help.