Real Estate Mogul

I’ve developed a bit of a rough, back of the envelope, 10 year, real estate investment plan. Basically, I’ve decided I want to own 5 houses. 4 to rent out, 1 for me to live in. I want to acquire them all by continuing to buy cheap foreclosures, with all cash, and rehabbing them myself into rent-able condition. Then manage the properties myself for the next decade or so, living well off ~50% of the net rents and reinvesting the other ~50% into securities. Then hopefully, before I’m 40, I can sell off my 4 rentals and put all the proceeds into securities, getting out of the land-lording business all together. So, how to get these first 5 houses…

Well, I already have one. Rented out to happy tenants who mail the check each month and since moving in, have never called me even once.

I’ll be closing on my second rental property before the end of the month. I’m hoping to have it all fixed up and rented out by the beginning of summer. It might take me a little while to get it rented because I have to deal with a septic system modification. Which means lots of bureaucracy, red tape, and licensed contractors. But I think the house will ultimately be worth the headache because it’s on a private, flat, level lot on a quiet street, about 1 mile from the center of a small town and only about 4 miles from several big box stores. It has a small creek running alongside one border of the lot. And it’s about 18 miles from my parent’s, my brother’s, and my sister’s houses (not too far, not too close ;-)). It’s also smack in the middle of a large rail trail network meaning it’s in a great spot for cycling since you can ride a bike on about 50 miles of paved paths through the woods that take you to various towns in the area and one medium-sized city as well. And it’s about a 1hr 30m drive to Boston, or 20m drive to a train station that can take you into the city.

I plan on finding a tenant who wants to lease the place for about 12 months, starting this summer.

I’d like to move into the house myself, and I’m itching to get going on building a big permaculture garden, but I’m going to continue living in my apartment for another 12-24 months or so because it’s in a location I like living in, it makes it convenient to get to school and to my new job, plus it’s nice, and it’s cheap.

I have some reserves left over to buy a third property, but after buying and rehabing two houses with all cash, capital will be starting to dwindle a bit.

So I have a partner lined up who wants to buy a property with me. We’re going to go into it splitting the purchase price and rehab costs 50/50. The hope is to purchase another one of these $20k-$40k single family homes, rehab it ourselves with cash, make it a desirable, mortgagable house. And then relist it for somewhere between $100k-$150k depending on how everything turns out. At that price level it will be one of the cheapest ready-to-move-in houses on the market in the area and I’m hoping we will be able to sell it within about 6 months of completing the rehab work. I’m hoping to purchase this, my 3rd property, sometime this summer, after the rental house I’m buying right now is all squared away.

I ought to walk away from the sale of the 3rd house with about $50k in my pocket before the end of the year. Which is enough to buy two more foreclosures which gets me to owning 4 rentals, just one house shy of my ultimate goal.

Then it’s just a matter of saving the rents up and working at my easy-going job until I’ve got another $20k-$30k to buy the 5th and final house. Hopefully I can get all that done by the summer of 2013 or so. The entire process should be fairly enjoyable.

At that point I think I could quit doing paid work, move into one of my houses, and declare myself “retired”. I’ll have a mortgage-free house to live in. Plus I’ll have 4 rentals, with no mortgages, grossing around $3,600/month. Land-lording overhead costs should be quite low. -With taxes and insurance making up the bulk of it. Repairs won’t run me too much though since I have the skills to take care of the majority of things that will need to be repaired or renovated from time to time. I don’t expect too many vacancies either since part of my landlording strategy is to keep rents below the market rate, which lets me have my pick of tenants, plus it essentially ‘traps’ them because any other option they could take, including buying their own house with a mortgage, would wind up increasing their housing costs. I expect, after expenses, I’ll be netting around $2,600/month from rents. I also expect to keep my personal expenses, with a mortgage-free house and all the other cost savings that come with having some gardens, storage space and room for tools, to right around $1k/month. Which means I ought to be able to save an additional $1,500/month to reinvest into securities.

I’m trying to keep the number of rental houses to the minimum number I need to meet my financial goals. I don’t want to have to do any more work than I absolutely have to. Especially when I’m talking about being a landlord for ~10 years, the fewer properties to manage, the better. One thought I had was to sell all my properties in these small towns and use the proceeds to buy one high-value single family home or duplex in Boston or Cambridge. Essentially getting me the same rental income but with 1/4 or 1/2 of the tenants to manage. But we’ll see about that when the time comes.

If I find the buying, rehabbing, and selling project works out well, I may continue to rehab 3 or 4 more properties in the following years, just to pad my coffers and give my securities’ investing a jump start. Because I know these cheap foreclosures won’t be around forever.

The main reason I want to have an income above and beyond my necessities is so that as I age my stash will grow exponentially. So that 20-30 years from now when I’m in my 50′s and 60′s my net worth will be well up into seven figure territory.

I’m not completely averse to using financing to buy houses faster. But if I can do it this quickly without having to bother with loan origination fees, interest payments, and all the red tape that comes with buying property on credit, then why not? After my rental network is all setup I may look into tapping some of the equity in order to invest in securities, or to trade up my properties to higher value rentals, but I’ll analyze those options later.

 

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9 Comments

  1. Posted January 9, 2012 at 4:52 pm | Permalink

    once you have the 1st two houses up and rented, it should be easy to get a mortgage against one, or both. If, for instance, one is worth $100k any bank will be thrilled to lend you 60-70k. and this $$ is tax free and the interest is a deductible expense.

    In fact, suppose you acquired say 10 houses over the next few years. Each worth, let’s say 100k.

    Each year you could ‘harvest’ one by taking a 50k (50%) mortgage. That tax free money is your year’s income. the next year, do the same with another house and so on for ten years.

    at the end of 10 years perhaps your 1st house grown to be worth $170k. you will have paid down something like 15k, leaving a 35k mortgage. Finance again at 50% for 85k pay off the 35k and you have 50k tax free again.

    of course your houses might rise faster or more slowly in value but you can simple adjust the ‘harvest’ time accordingly. Your other ventures should easily fill in any lean years.

  2. Patrick
    Posted January 9, 2012 at 8:46 pm | Permalink

    Party like it’s 2005!

  3. Posted January 9, 2012 at 11:17 pm | Permalink

    @jcollinsworth “once you have the 1st two houses up and rented, it should be easy to get a mortgage against one, or both.”

    I’m not sure how easy it is. The problem is that the bulk of my income will all be from rents that I don’t even have a tax return for yet. And last year my income was pretty much just 1 rental and some capital gains on my reserves. Last time I talked to a mortgage broker was about a year ago and he told me in his experience, lately, banks don’t like to give mortgages or HELOCs based on rental income because it’s difficult to verify without a couple of years of tax returns. Though maybe I talked to the wrong guy?

    Mortgage interest is only deductible if it’s your primary home that you live in, or a secondary home that you live in at least 14 days a year. Which, if they were rentals, wouldn’t qualify, so I’d only get the tax benefit for the mortgage for the one house I live in.

    I’m not too optimistic about how quickly real estate is going to appreciate over the next couple of decades. Definitely I’m adding a lot of value right off the bat by just fixing the places up, but I’m pretty much assuming any gains beyond that will pretty much just match inflation. I’d be happy to be wrong. I suppose, though, a lot of it depends on what kind of home buying/financing incentives an unpredictable congress will put out there.

    I’m also leery of being over-leveraged. That’s how a lot of landlords lost their shirts the past few years. A couple bad tenants and who don’t pay, and manage to avoid eviction for 6 months, could start a domino effect of missed mortgage payments and foreclosures.

    Though, again, I’m not dead set against a modest amount of leverage. I’ll analyze the numbers more in depth when the time comes.

    @patrick Yee-Ha! Though I think I’m more like the responsible clean-up crew for the party I missed out on.

    I hear people all the time say, “You can’t make money buying and selling houses anymore.” And I just think, “Well, maybe YOU can’t…”

    Of course it’s much different today than it was a few years ago. No more no-money down mortgages and then reselling the place in 12 months, having done nothing, for a 40% profit. It actually requires that you have had the discipline to save the capital to buy the places outright, the skills to fix them up, and the risk tolerance to buy places with problems even though everyone’s telling you not to.

  4. jennypenny
    Posted January 10, 2012 at 6:37 am | Permalink

    So you’re going to study for and take the bar, rehab the house you’re closing on this month, look into buying another house with a partner, rehab that house, and work the job you just started?? Seems like a lot to take on–most people would just be focused on passing the bar.

    Don’t forget to add picking out a nice house for me to rent to your plans ;)

  5. Posted January 10, 2012 at 7:28 am | Permalink

    @jennypenny Do you prefer carpeting or wood floors? ;-)

    I’ve been busier before.

    Actually, some of the law students I’m in class with who also work high-stress office jobs and have families are probably much busier than I am.

    I could easily put off the house stuff until after the bar, but really it doesn’t take up all that much time. Just spending 10-15 mins a couple times a week checking out the new listings, then maybe every other Saturday lighting a cigar and going for a drive to check them out. Then getting home and faxing in some offers. It’s more like a day off.

    And rehabbing the current house will be more of a 2-3 day a week thing as well for maybe 2-3 months.

    And I do plan on devoting my full attention to the bar for about the last 6 weeks leading up to it. Plus, my job shouldn’t really count towards making me “busy” because it’s actually just more bar/school study time. I’m just in an office instead of at my desk at home.

    So it’s really not as bad as it might sound. The fact that school is all over with in July makes it easier to put up with too. If I thought I’d have to keep this up for 30 years I don’t think I’d be able to find the motivation to do it.

  6. Posted January 10, 2012 at 11:33 am | Permalink

    you are probley right about lenders at the moment, but in a few years you’ll be both financially stronger and they much more willing. especially with 50% equity remaining in the property.

    This would be a way to convert taxable rent money income into tax free mortgage income.

    It’s been awhile since I’ve fooled with RE. Interest is no longer deducatbel as a business expense to landlords?

    Love your line: “I’m more like the responsible clean-up crew for the party I missed out on.”

    exactly and I salut you for it.

    BTW, when you get JennyPenny’s house done come on up to NH and do one for me. Hardwood floors, please.

  7. Posted January 13, 2012 at 7:33 am | Permalink

    “I’m trying to keep the number of rental houses to the minimum number I need to meet my financial goals. I don’t want to have to do any more work than I absolutely have to.”

    Have you considered hiring a property manager? I’ve considered a similar path as you to build passive income, but had the same thought as you about not wanting more work than I need. But if work-reduction is the restricting variable rather than capital, I thought a property manager might solve my scalability issues.

    I’m curious if you’ve considered it, and why you decided against it.

  8. Posted January 14, 2012 at 9:54 pm | Permalink

    I have considered it. And I have a friend who uses a property manager and hasn’t had any complaints. Except that his overhead is a lot higher than mine. It’s not just that he has to pay the property manager, but because he doesn’t do any repairs himself, every minor thing requires a licensed contractor. So instead of doing stuff himself, there’s not just one, but two middle men involved in completing a task. When you factor all that in, the returns don’t look quite as attractive.

    And even though you don’t have to manage tenants anymore, you do still have to manage the property manager. He generally needs approval to spend money, and you need to check up on him to make sure he’s not screwing you. And you have to trust he’s competent, knows how to pick good tenants, will pay all the bills on time, and knows when a contractor is over-charging or doing low-quality work.

    It seems like if that was the route I wanted to go then maybe just buying into a REIT would be a more convenient alternative. Though I could see if you could get a property manager who is trustworthy and good at what he does, it could work out fine.

    Plus, I want to diversify my holdings. Five is a good number for me because it allows enough cash flow to stash away a good amount of money each month, allowing me to slowly transition into other investments, rather than continuing to have all my assets in real property, while still allowing me plenty of free time so I can live a lifestyle closer to that of a retired person than that of a part-time worker.

  9. Posted January 15, 2012 at 5:35 pm | Permalink

    well said and this is why I no longer mess with direct RE ownership. I’d have to do the PM and pro fixer route and at that point a REIT looks better. and that’s what I have.

    but for those with the skills to DYI, there is more $$ in direct ownership.