A coworker of mine does it in small towns around where he grew up. Denison, Red Oak, etc. He buys 2-3 bedroom, 1-2 bathroom houses for $15-25k. Sticks some money in them and rents them out for $500/mo (rough numbers). He has 6 or 7 now and bank rolls pretty well. Low cost of entry, relatively low risk, the investment isn't all in one property. It will be a great passive income for him in retirement.
OT: Early Retirement
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A coworker of mine does it in small towns around where he grew up. Denison, Red Oak, etc. He buys 2-3 bedroom, 1-2 bathroom houses for $15-25k. Sticks some money in them and rents them out for $500/mo (rough numbers). He has 6 or 7 now and bank rolls pretty well. Low cost of entry, relatively low risk, the investment isn't all in one property. It will be a great passive income for him in retirement.
I only have two houses for rental property. I would like to have a few more but I got into this pretty late in life. I decided I didn’t want to put all of my money into the markets and wanted some in hard assets like real estate. It isn’t for everyone and yes it can be a little risky. Look at it this way - let’s say I charge 600 a month for a nice 2 bedroom and my expenses for insurance, payments and taxes are about 475. The cushion is for repairs, empty months, etc. However, the tenants are making my payments for me with their rent. Rental property generally does not appreciate as quickly as most residential. The key, to me, is to buy it at the right price. I bought one three years ago for 50k and I could easily sell it for 100. Lucked into that one. If they are not going to make you a little cash then don’t do it and if you don’t like dealing with renters who have every life problem imaginable.
I think an apartment complex would be good. Rental property is considered commercial loan so you need 20% down, little higher interest rate and refinance every five years generally. College towns look appealing, we have three smaller colleges in this town but I would not rent to college kids.
I have a friend who has 130 units nearly all paid for. Add up if you average 500 a month x 130 units. Commercial can be good as well but I know less about that. If you can do some of the work yourself it really helps. Don’t be a slum loaned, too many of them.
Anyone read the book Rich Dad Poor Dad? It compares those who put money into wasteful things like fancy cars, etc rather than things that have value, I.e. real estate.
Generally speaking we all fall in to one of theses two groups: the “haves” or the “have nots”.
The “haves” are those folks who are covered by a defined benefit pension plan from their employer. Standard fare with governmental organizations or non-profits. Once common in the corporate world but now a rarity there. That responsibility was shifted mostly to the employee via defined contribution plans (I.e, 401(k)’s) year’s ago in the for-profit world (because the cost of a defined benefit pension plan is exhorbitant).
The “have nots” then are those people only covered by Social Security benefits (which was never intended to replace a pension plan) and where their ability to someday stop working is incumbent upon their ability to 1) earn enough to be able to live under their means, and 2) save and invest to create a large enough pool to supplement Social Security and provide cash flow to support a retirement lifestyle (and hopefully not run out of money).
There is a very large disparity right now between the private and public sectors in terms of providing for employee retirement security. Many people are clueless to this fact and it’s one of the root causes of budget shortfalls in public education, for example.
Bottom line: live UNDER your means, save, and invest as much and as soon as you can. There’s some really great advice on how to do that that’s already been posted (Dave Ramsey is great). See you at the Akron game!
The “haves” are those folks who are covered by a defined benefit pension plan from their employer. Standard fare with governmental organizations or non-profits. Once common in the corporate world but now a rarity there. That responsibility was shifted mostly to the employee via defined contribution plans (I.e, 401(k)’s) year’s ago in the for-profit world (because the cost of a defined benefit pension plan is exhorbitant).
The “have nots” then are those people only covered by Social Security benefits (which was never intended to replace a pension plan) and where their ability to someday stop working is incumbent upon their ability to 1) earn enough to be able to live under their means, and 2) save and invest to create a large enough pool to supplement Social Security and provide cash flow to support a retirement lifestyle (and hopefully not run out of money).
There is a very large disparity right now between the private and public sectors in terms of providing for employee retirement security. Many people are clueless to this fact and it’s one of the root causes of budget shortfalls in public education, for example.
Bottom line: live UNDER your means, save, and invest as much and as soon as you can. There’s some really great advice on how to do that that’s already been posted (Dave Ramsey is great). See you at the Akron game!
I agree with this, but... there's always a but... this goes back to another topic that I broached earlier. Of course, one could always live under their means, live in a tiny one bedroom apartment in a less than desirable neighborhood, take public transportation, never travel, etc. (obviously I'm taking it to an extreme), but then you are in essence saving every penny for when you're old. That's the million dollar question for me. Shouldn't one enjoy the fruits of their labor to some degree at least when they are young, able-bodied, etc.? I think it's finding that balance of rewarding your hard work along the way, but always putting away a set budgeted percentage for later in life.
Unrelated, I'm quite intrigued about the notion of opening or buying a franchise location of a successful business. I think this would help with the question of "what do I do when I retire?" So I'm trying to save up money to have enough to open a store, whether it's an ice cream store, a flower shop, a barber shop, etc. I think it would give me reason to still pop in, weigh in on some decisions (since I do that in my current job), yet still also enjoy time to go play a round of golf or two a week. Ideally, it is also churning out some income that would allow me to hold off collecting Social Security.
I am 53 and could retire right now if I could get cheap health insurance. I suppose I could still swing it but I didn't get to this point by wasting money on overpriced things like health insurance. 
My wife is trying to get her company to insure family members. It may happen next year. If so, I am gravy. Anyway, I live in a $250,000 house and have a nice car with no debts. I pay cash for everything. I make high five figures. I was single most of my life and never had kids (that is probably the biggest reason I can retire). I married my wife 3 years ago so there wasn't always a dual income. I lived modestly and saved. And saved some more. Maxed out my 401k and Roth as much as I could. Then invested the rest in mutual funds. I probably have more money than I will ever need but I know my wife will be secure when I am gone. She is 12 years younger than me. I never traveled much when I was single but now we take 3 or 4 trips a year. I just wish I could get more vacation. I want the time off more than the money at this point.
My wife is trying to get her company to insure family members. It may happen next year. If so, I am gravy. Anyway, I live in a $250,000 house and have a nice car with no debts. I pay cash for everything. I make high five figures. I was single most of my life and never had kids (that is probably the biggest reason I can retire). I married my wife 3 years ago so there wasn't always a dual income. I lived modestly and saved. And saved some more. Maxed out my 401k and Roth as much as I could. Then invested the rest in mutual funds. I probably have more money than I will ever need but I know my wife will be secure when I am gone. She is 12 years younger than me. I never traveled much when I was single but now we take 3 or 4 trips a year. I just wish I could get more vacation. I want the time off more than the money at this point.Could retire if I wished; don’t believe I ever will. love what I do. Would be perfectly content keeling over in my office.
This was not the route I have taken, but have several colleagues and friends who have become financially independent through investing in commercial and residential properties. I’ve had a few myself but have never become a bulk of my income.
Believe the key is to get started fairly young (in your 30s like you). Start small and slowly build up a property portfolio. Doesn’t take a ton of cash to get started. There are many lending institutions that will provide “positive cash flow loans”. A positive cash flow loan is simply a loan where a bank or lending institution will except a small down payment as long as the income property you are purchasing shows a positive monthly cash flow above the mortgage and insurance payment. Depending on where you live, this is generally not difficult to find. Once you get sufficient equity in a couple of properties through market appreciation, you can leverage those using the equity to purchase more elaborate higher end real estate. Slowly over the years build up your portfolio of properties.
Don’t pay attention to the naysayers that say rental properties (especially residential) are a total time suck, and a pain in the ***. They certainly can be, which is why I highly recommend having a property management firm handle your properties. This is what I, am most of my friends and colleagues have done. A decent property management company will screen prospective tenants, run credit checks, handle emergency repairs (at your expense of course), maintain all security deposits in interest-bearing accounts as prescribed by law, and collect and deposit rental proceeds. My experience has been that it is pretty much hassle free for the property owner. They generally do all this for 5 to 8% of the monthly rental revenue, which is a small price to pay.
IMO, this is the most direct road to financial independence if your a person who doesn’t have an advanced degree or some rare and extremely marketable skill.
Sorry for the long winded response, just my two cents. Good luck.
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Agree with the property management company, but my oldest daughter and I are in the process of creating our own to handle the rental properties.
There a lot of people on the coast now investing in the midwest - Homes are cheap but rental income is still attractive. If the mortgage meltdown showed us anything its that Homes are not luxury items. Either they will rent or buy but Homes are still the american way to live. Even when values went down rental income either stayed the same or increased.
I am not however of any "positive cash flow " loans and to my knowledge there are none of these - you may be thing of the negative amortizing arms that were popular for investors prior to 2008.
Today it is pretty hard to screwup on a renter - with the housing shortage their rental history must be good or they find it hard to rent a place so typically renters today are little more behaved
cash flow loans are popular short term loans and nothing like a negative amortization loan.
They can be expensive, the rates are typically higher, but if you need quick cash for an investment opportunity they are usually easier to get
They can be expensive, the rates are typically higher, but if you need quick cash for an investment opportunity they are usually easier to get
Most lenders who fund mortgages on commercial property offer such loans. Some better than others. They aren’t called “positive cash flow loans” per say though that is essentially what they are. They simply count the future cash flow from your proposed rental property towards your income, helping you qualify for a commercial loan with a much lower down payment.
https://www.newcastle.loans/mortgag...uture-rental-income-to-qualify-for-a-mortgage
You can use the expected rental income to offset the monthly mortgage payment of the property you are buying.
The market rent is determined by the appraiser, not by the amount on a lease (you don't even need a lease or renter in place). The appraiser will include either; for a one-unit property: Single-Family Comparable Rent Schedule (Form 1007), or for two- to four-unit properties: Small Residential Income Property Appraisal Report (Form 1025) with your appraisal report. The appraiser will list the fair market rent (as determined by comparable rental properties in the area) for the subject property on this form.
Fannie Mae allows you to use 75% of the market rent amount to calculate the subject property's net cash flow.
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I tried the rental property game and broke even. It was a hassle. Never tried a firm to handle it. Probably should have.
I do fix ups and sell on residential that I live in for 3 years. Fix it up while it is my primary live in and then sell it and I don't have to pay cap gains.
If I end up doing this more I will most likely buy a very nice RV and just live in that while renovating from now on. Trying to renovate the space I am occupying is a YUGE pain in the donkey.
I do fix ups and sell on residential that I live in for 3 years. Fix it up while it is my primary live in and then sell it and I don't have to pay cap gains.
If I end up doing this more I will most likely buy a very nice RV and just live in that while renovating from now on. Trying to renovate the space I am occupying is a YUGE pain in the donkey.
Should have definitely tryed a management firm. Have tried it with and without, and there is no comparison. Currently have three rental properties in Denver, and I live in California. Virtually never deal with them unless there’s a major repair that I need to approve. They do take 1/2 of one months rent when it comes time to find a new tenant, which is why I have a minimum of a two year lease.
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That 20% down is where finding a lender that considers the positive cash flow towards your income. Providing you have adequate cash flow you can get your down payment down to 10 to 15% (possibly lower if you have an excellent credit history).
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I may have to get back in it using a firm, Nebraska is a great place for them, population is steady and economy is steady.
I was also looking into doing AirBnB homes in Lincoln for football games during the season. High rent for the time utilized and not being lived in constantly can extend the life of your property. But there might be some laws about this style of business coming down the pipe which may make it not as appealing.
Well, I have 800 plus credit so that is not a problem. I probably should explain that the 20% could be anything from cash to equity in other rentals to equity in your own home. It keeps interest rates lower and is basically a standard commercial loan. I have established contacts with two competitive banks and tell them what I am looking at and they make me offers. They don't care what I rent them for or how I conduct my business as long as they get paid.
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Airbnb would be cool. Have no practical experience with it, but would still highly recommend using a vacation rental management company. It’s what they do, and it’s there full-time job, so they’re generally pretty good at it. Your time is far better spent doing what you do well.
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People who make their money by one of those 3 methods rarely keep it. Money is as much about knowing how to manage it as it is making it.
Investment rental property is a very solid way. Caution - this goes against most advice you have been given, but keep in mind, there is a top 10% of wealthy people for a reason and most follow a different path than the majority.
First, retirement is not an age, it is simply a number. Figure up how much net income you need every month to pay all your bills and provide the type of living you desire, and once that is coming in passively, you’re retired.
How do you get that passively? No question, it will take some capital – at least $50,000 and preferably $100,000 to really accelerate. That is where you take the advice of scrimping and saving and doing whatever it takes to accumulate that type of money in as short of a time period as possible. Then what do you do with it once you accumulated it?
Owning real estate offers five different ways to increase your wealth.
1. Cash flow - the return you get after paying your principal & interest on your loan, taxes and insurance.
2. Leverage - if you want to buy $100,000 worth of Apple or Amazon stock, if you go to your banker and ask them how much they will loan you on that, they will laugh. If you want to buy hundred thousand dollars of real estate, they will typically loan you up to $80,000 for the investment. This would allow you to buy up to five houses with $100,000 or $500,000 worth of assets.
3.Principal Paydown - every time a resident living in your property makes the rent payment, you make your loan payment from this money, and a portion of each payment goes to principal that reduces your loan and increases your equity from the amount the house is worth versus the amount remaining owed.
4.Market appreciation – real estate typically doubles in value every 20 years, so if buy at the right time, this will add to your return.
5.Tax Advantages – The government allows you to depreciate property over 27 1/2 years, so every year on your taxes you can reduce the amount of taxes you pay via depreciation, even though the property may have went up in value. Another advantage is the 1031 exchange. Down the road, if you decide to sell the property and you have a sizable capital gain, you can move it into another property and defer the taxes.
Investing in traditional investments, like stocks and mutual funds, you can earn on only 1 of the above options - market appreciation. Two of the options above if you choose dividend stocks, then you can add cash flow.
An example to illustrate this a little bit more. For example - you want to buy a $100,000 rental property that will rent out for $1100 per month. Your monthly principal and interest payment is $433 per month. Your insurance would be $100 per month and taxes would be $200 per month.
1.Cash flow – your cash flow would be the difference between your principal, interest, taxes, insurance – also referred to as PITI – less your monthly rent. Your cash flow would be $367 per month. What kind of rate of return is this? You only actually used $20,000 of your own money and borrowed $80,000, but the resident is making the payment for the $80,000, so all you have out-of-pocket is your $20,000 down payment. $367 times 12 months equals $4,404. This equals a 22% return on your money.
2.Leverage – this would allow you to take the $100,000 and put it into five $100,000 properties versus buying a stock investment, giving you $22,020.00 annual cash flow.
3.Principal Paydown - every time one of your residents would make a rent payment, you send that money into the bank for the payment. In the first year of payments, approximately $1200 of principal would be paid down per house. Take that over five houses, and your net worth will have increased by $6000 assuming the house has not changed in overall value. That is equivalent to just over a 1% return.
4.Market Appreciation - Over time, houses typically appreciate between 3 to 4% annually. If you put 3.5% into an a compound calculator, that will double the value of your property in 20 years.
5.Tax advantages – on your annual taxes, you are going to report that you made $4,400 per house. At a 35% tax rate – assuming federal and state income tax – you would owe the government $1,540. But the government allows you to depreciate the house. You cannot appreciate the land, so assuming the lot is worth $20,000, you figure the house on it is worth $80,000. You divide that by 27.5 years and that equals $2,909. Also, you paid $4,055 of interest expense. The interest expense is in your name, but you didn’t pay it, the resident paid it with their rent. But beings it’s in your name, you get to deduct it. If you subtract your $4,404 of income less $6,964 of interest and depreciation expense, you show over $2,500 tax loss on your taxes. That would be an overall tax savings of $896 if you take it off against your other income assuming the 35% tax rate. If you bought five houses, just take those numbers times five.
So, if you add up all the income potential annually that this investment would give you, you would have the following:
$ 4,404 - cash flow
$ 1,200 - increase in equity from principal paydown
$ 3,500 - appreciation
$ 896 - tax savings
$10,000 - in total annual return
Divide this by your $20,000 down payment and you have a 50% overall return on your investment.
Assuming you did five houses, you take your $22,000 tax free gain and parlay that into another rental property and let the numbers snowball exponentially.
On the topic of rental property, I try to get a deal when I buy by paying cash and doing like a 1 week close, I have only bought listed properties and I get a discount maybe 6-8% under mkt (and these are few and far between on decent properties). I see those signs everywhere we pay cash for homes, anyone have experience how much of a discount under mkt those people try to get, I placed an add on craiglist stating Id pay cash for homes but didnt even get one response over about a 3 month period.
Fannie and Freddie for that matter allow you 75% of future rents if you have a documented history of successfully renting 2 yr history on a schedule E is required I believe. Normally lenders will require a lease which is checked by a appraiser rent analysis. Commercial properties are different anything goes
The real problem with rentals is the capital gains and depreciation recapture tax when you decide to sell you can do a like kind exchange upon sale but you are just kicking the can down the road
True, but in the exchange you are buying a higher valued property and therefore a higher rent income, if you were smart. Mo money is mo money.
You'll always pay taxes, might as well be when you're dead.
Kick the can until you kick the bucket. That's what all the politicians are doing...
In Chicago agents take a full month’s rent and there’s no such thing as demanding 2 year lease. You’d lose your market. So you just pray people stay on.
Sure it’s all depending on the market. Such a shortage in some communities property managers and tenants alike fight over properties.
Technically you are kicking the can down the road with the like kind exchange, but if you continue to own the property until your passing, the taxes will evaporate in your estate as the laws currently written today. My plan is to exchange the rentals to farm ground, which is extremely passive and requires little management, and let the taxes disappear in the estate. Then my heirs will receive a stepped up basis of the value of the property. They can continue to earn income and use it to grow their investment portfolio or they can turn around and sell it with no capital gains and blow the money after I’m gone.
All my single family homes are in Dallas Texas. I subscribe to the motto “live where you want to live, but invest where the numbers make sense“. Unfortunately, Chicago is high tax and not business friendly. Consider taking your equity and investing in a more investor friendly market.
Sounds good for me however I plan on using the funds our child will get plenty anyhow. I do think people need to really look at the taxes before jumping on the real estate train. It's one thing to generate cash flow it is quite another to invest because values are increasing. Selling an investment property is expensive
- The most important thing you can do is form an LLC or some form of legal corporation and protect your personal assets.
Another opinion that is not “popular” - but that wealthy people follow. Debt (on appreciating assets) is good and will accelerate your wealth faster than being out of debt. Consumer debt is bad.
Real life example.
10 years ago, I had almost no debt. With less than a year to pay off my house and scream “I’m debt free”, I started to calculate how exciting my new debt free life would be. My home mortgage P&I payments were roughly $600 per month. Once my house was paid off, I would have $7,200.00 of “extra” money. It didn’t take too long to figure out that would not do much for my retirement, so I borrowed $150,000.00 of equity out of my home and bought single family homes. My home loan payments went from $600 to $750 per month. Over the next couple year, I bought 12 rental houses averaging just over $4,000 per year per house of tax free income. So let’s see the results of being in debt:
$150,000 in debt on home PLUS over $900,000 of debt on rental homes = $48,000 (less $1,800 extra home payments) in tax free income EVERY year.
Out of debt = $7,200.00. Invested at 20% return = $1,440 taxable income per year. After taxes you keep less than $1,000 of it.
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I would add that the interest on you mortgage is tax deductible. Having a mortgage allows me to live in a little nicer house than I would live in if I was living debt free.
i don't know if it still applies or is even true but i read for years that people spend more money on their house than anything else. so if you are trying to save money than buying a less expensive house and not moving up to a better house when your income increases is one of the best ways to save for the future.
even with a tax deduction many people spend hundreds of thousands on interest on their homes over their lifetime.
we bought a $175000 house 20 yrs ago and never moved up like most of our neighbors.
now our mortgage is paid off and we minimized interest over our life
Retired at 52. That did not work. To much energy and felt that I had to much yet to do. Plus I had traveled a lot during my career and now I was totally invading my wife's space. I was not ready, and she wasn't either.
Retirement Issue: Once retired, you now have time to go do the things that you had not done yet because of the career. Now that you are out doing things, it cost Money. So in retirement our monthly cash flow out went Up. We were spending more money. Hadn't really planned that into our retirement budget properly.
Other item was that we did not plan for a Tax Free Retirement income like we should have. Building on that now.
Other Items: Plan to retire without any debt. Work with an Advisor to help you get there. We had gotten our portion of the kids College Debt paid off. And...we always disregarded our Social Security income in our retirement planning. We use that as a bonus.
Shocker to some...That your Social Security above a certain annual income level is taxed. I am sure that everyone on this board already knew that, but I have been surprised over the years at the high number of people who are not aware of that.
A lot of you guys who recently retired. Remember it is a different world and economy now. I bought my home in 97 for $87,000. I was told five years ago when I refinanced that it would sell for no less than $240,000 in today's market. The typical millennial will NEVER retire.
My dad always says to me that your house is a place you live, not an investment. If you expect your home to appreciate greatly in value and turn you a big profit, it probably won't. Especially once you factor in how much you spend in upkeep and the interest you pay on your mortgage.
I would probably never have rental properties, but they were the path to my parents' retirement. Neither had a college degree. My dad learned HVAC in the Navy. They started with one roach-infested dump of a duplex off North Cotner in Lincoln. Over the course of 30 years, they bought and sold different properties. The Highlight was late 1990's with 20 units: two 6-plex apartments and eight houses.
The rental income pays the mortgage on the properties, so eventually you build up assets. But this comes with some major caveats:
1) You need to be able to do the work yourself. My dad was able to do the HVAC, electric, and some plumbing himself. My mom painted and cleaned. With 20 units, that meant they had 1-2 units to deal with every month. It ate up all of their evenings and weekends. Some tenants would have to be evicted after several months of non-payment, and would trash the place on the way out. They'd frequently have to completely re-carpet the places. I can't tell you how many times I had to help them haul out carpet or paint an entire apartment to get it ready. If you have to pay market rate for these services it is going to hit your bottom line hard.
2) Management companies cost money. If you don't work as your own landlord, you're going to give up quite a bit of profit. That means lots of late-night calls for lost keys and noisy neighbors. LOTS. On the other hand, in retirement my parents did move their remaining properties to a management company, and the company has squeezed every dime of rent possible out of the units. At that point they just didn't want the hassle.
3) My folks really didn't start to pull away profit-wise until my dad got his real estate license in the early 90's. At that point, he'd get a 1-2% commission on all of the buying and selling they were doing. They started flipping houses, mostly 1950's places in Lincoln that had pristine hardwood flooring under carpet. They'd pull the carpet, polish the wood floors, update the kitchen/bath, and sell for a quick $30k pop. Paying a realtor every time would have been a killer.
The rental income pays the mortgage on the properties, so eventually you build up assets. But this comes with some major caveats:
1) You need to be able to do the work yourself. My dad was able to do the HVAC, electric, and some plumbing himself. My mom painted and cleaned. With 20 units, that meant they had 1-2 units to deal with every month. It ate up all of their evenings and weekends. Some tenants would have to be evicted after several months of non-payment, and would trash the place on the way out. They'd frequently have to completely re-carpet the places. I can't tell you how many times I had to help them haul out carpet or paint an entire apartment to get it ready. If you have to pay market rate for these services it is going to hit your bottom line hard.
2) Management companies cost money. If you don't work as your own landlord, you're going to give up quite a bit of profit. That means lots of late-night calls for lost keys and noisy neighbors. LOTS. On the other hand, in retirement my parents did move their remaining properties to a management company, and the company has squeezed every dime of rent possible out of the units. At that point they just didn't want the hassle.
3) My folks really didn't start to pull away profit-wise until my dad got his real estate license in the early 90's. At that point, he'd get a 1-2% commission on all of the buying and selling they were doing. They started flipping houses, mostly 1950's places in Lincoln that had pristine hardwood flooring under carpet. They'd pull the carpet, polish the wood floors, update the kitchen/bath, and sell for a quick $30k pop. Paying a realtor every time would have been a killer.