patrick.net

cc0 says

I'm not going to say I'm in the same boat, but I am older, have paid off all my debts, and am still renting. I haven't purchased any rentals yet (in this area it's difficult because good cash-flow properties are being bought in cash transactions and usually above asking) but have you considered purchasing your properties in a corporate structure and then paying rent to the corporation you own?

What would be the advantages or drawbacks to something like that? Let's assume that the mortgage interest deduction is simply not going to be a factor on a primary residence because prices simply aren't that high.

I have considered it, but I must confess I am no expert here. my first thoughts are that the drawback is likely a higher interest rate, expense of setting it up and maintaining the corporate shell, and potentially more difficulty getting financing. The advantages could include the ability to write off many more of your expenses from a tax perspective, and for me in particular, when i move up to a bigger house it would then be very straight forward to maintain the same financing structure and convert it into a rental. I am dying to talk to a professional about this though, in terms of the cost comparison, and how to go about doing it properly.

That's not how it's typically done.

Have you researched all the costs associated with it, all the work you'll have to put into it being a land lord? All the laws and regulations? Don't gamble. All that late night tv talk is just there to sucker you into buying their cd/book.

double post

FortWayne says

That's not how it's typically done.

Have you researched all the costs associated with it, all the work you'll have to put into it being a land lord? All the laws and regulations? Don't gamble. All that late night tv talk is just there to sucker you into buying their cd/book.

Quality Auto Repair Since 1979

can you elaborate? Whats not how it's typically done? Don't gamble? Aren't all investments a gamble, isn't that how you acquire wealth? Please then, what path should I take?

again, to reiterate. I'm not talking about going out and buying a $400k home for a rental, getting buried in debt etc etc....

The "rental" in question would be around $80k. On an $80k rental, tell me what you would expect your total costs associated to be? And again, the area's rents go for $1000 - $1400/month. Taxes are 1.2%

UAVMX says

Thank you for your insight, that was a very helpful post. With mutual funds, lets say I want to pull 20% out for a downpayment. Are there penalties? Is there a certain amount of time you have to hold onto them, etc? Is the fund itself the one that's paying you? Or are your shares being sold on the market to someone else that wants to buy them. It sounds like mutuals are a good way to get very diversified.

Do you own real estate as an investment?

You're quite welcome. I can't say for 100% sure for all funds but its typical that if you do put money into 401k's, mutual funds, etc that there are usually stiff penalties for pulling anything out. So its generally not a good idea. There are details that pertain to each fund. It would be best to consult with people who sell these funds. The way they work in general is that you can buy either one or several mutual fund products. These are all packaged, sliced, and diced in a zillion different ways with different levels of risk and types of companies. These are all rated via their past performance on sites like morning star that shows how well they have performed per name of mutual fund. But there is really no way to determine how well a fund will do. These ratings give you some sort of guesstimation.

Here's the thing: It is generally recommended that the average person commit 10% of their income into retirement funds. The earlier you start the more chances you have to reap the rewards of compounded interest because most of your overall value will come much later- as in in 20-30 years when you start having 7-10% increases in large sums of money then the total value begins to accumulate at an accelerated rate. So let's imagine that you did the bare minimum and invested 10% of your income. You mentioned you made $100k a year. So then that works out to be $10k a year. By the time you were 36 you would have 100k in retirement funds. generically applying the long-term historical return to that sum, 100k with 8% annual appreciation means that 100k =108k the next year, 116,000 the next year and 125,000 the next. So in other words things start to compound fairly quickly. But then keep in mind this is over the long term- as in 20-40 years. Yes, there will be doldrums. There will be prolonged periods of meager growth. Its more or less controlled betting but the odds are fairly good in your favor. Like I said- talk to a financial adviser because I'm a mere plebian on the internet.

I don't own real estate primarily because I live in the Bay Area where starter homes are 4 times as much as a nice house back in NC where I'm from. I grew up with rental houses that my parents owned and even though I'm not saying I won't consider rentals in the future right now the idea doesn't sounds appealing after having dealt with my folk's rental properties all while growing up. At some point we will probably move to a cheaper area and just buy something straight up. We're in our early 30's and also make fairly good 6-figure incomes. We've simply been saving and investing for around 7-8 years in preparation for a move and to locations that will probably not have as good of job prospects- hence why we're saving as much as possible so we could buy a house and have no debt which would put less strain on us financially in case we do have to do something else for a living.

edvard2 says

I can't say for 100% sure for all funds but its typical that if you do put money into 401k's, mutual funds, etc that there are usually stiff penalties for pulling anything out.

Hmmm, okay, so I guess the money that I would be putting into the stock market I have to consider it not available...not liquid. I do want to put some into something that's liquid now, so I can "hopefully" make money on it to use towards a DP.
edvard2 says

Here's the thing: It is generally recommended that the average person commit 10% of their income into retirement funds.

Well, Like I've said, I'm 26, I already have over $60k in retirement (401k and pension. I could have had 100k, but again, I do a balanced approach of paying off debt, building my life (furnishing a home, hobbies, etc

I tend to be around 10%, but again, I wanted to save up $20k in cash for emergencies so it hasn't always been that much (that's just sitting in a 1% account right now) Some of that would be nice to invest. That's about 6-8 months of expenses, which is probably more then needed.

UAVMX says

Does that include owning the property outright, collecting the positive cash flow and having the 100% equity that you can use, or sell the house, etc? The thing that entices me about real estate is that it would be not only a cash flow, but a long term savings account that someone else is paying.

That only matters if you get adequate return on equity. If not, you're taking a risk that may not be justified by the risk/reward curve, and you'd be better off in another investment. Simply being cashflow positive is a naive way to look at an investment.

UAVMX says

But then what do I do with my money in the mean time until prices come down to where it needs? I would need something more liquid, and my 1% ING account is doing me no good...

Why is buying a rental property better than the other choices?

cc0 says

but have you considered purchasing your properties in a corporate structure and then paying rent to the corporation you own?

For what purpose? Why would you pay rent to the corporation? How would the corporation get financing? Chances are that you'd still need to personally guarantee the loan.

UAVMX says

With mutual funds, lets say I want to pull 20% out for a downpayment. Are there penalties? Is there a certain amount of time you have to hold onto them, etc? Is the fund itself the one that's paying you? Or are your shares being sold on the market to someone else that wants to buy them. It sounds like mutuals are a good way to get very diversified.

You should learn more about this.

One question I have, however, is that if you are concerned with pulling 20% for a down payment, why wouldn't you put those funds in something safer than stocks or rental housing? Shouldn't you put it in a savings instrument?

UAVMX says

Hmmm, okay, so I guess the money that I would be putting into the stock market I have to consider it not available...not liquid. I do want to put some into something that's liquid now, so I can "hopefully" make money on it to use towards a DP

you can borrow from your 401k for DP on a primary. you can borrow up to 50% of the value of the 401k and you have to pay it back over 10 years (to yourself). there are stiff penalties for a withdrawal, but borrowing from yourself for a DP is not a withdrawal. stocks are completely liquid. you can buy and sell whenever you want. There are however tax implications of holding for less than or more than a year, and there are the longer term thoughts about whether it is a good time to buy/sell or not. Mutual funds may have penalties for early withdrawal as well, which is why i suggested ETFs. they are basically a stock you can buy or sell whenever you want, that are basically a slice of a much broader portfolio (kind of like taking a mutual fund, and selling shares on the stock exchange). Also, as I mentioned earlier, you can get a brokerage account with Margin that will allow you to borrow money against the stocks you hold. I would not recommend this unless you really know what you are doing (and I'm sure some here will rage against the idea), but it is another liquidity option available when investing in equities. It makes sense for me as my portfolio throws off significant cash flows, I want to sit on the equities for longer to benefit from appreciation, and my personal cash flows can quickly repay it. as a young person like yourself with good income, I have less saved up due to less time working, but a very strong cash flow to play with.

corntrollio says

Why is buying a rental property better than the other choices?

That's what I'm trying to determine. This topic started out if it made sense to buy a rental before a primary...but now it has turned into more of "what approach to invest" which is fine, and great. It has really opened my eyes.

The one thing that entices me (more then stocks) about a rental property is having some additional monthly income (if done properly). And as mentioned before, its taking on some debt in order to make more money (if done properly)

corntrollio says

You should learn more about this.

I'm trying!! I'm really a person that researches the HELL out of everything. Every purchase, every move I research. Thus, why I'm here debating this out loud. Where and how do you recommend I can research more about stocks/mutual funds, etc?

corntrollio says

cc0 says

but have you considered purchasing your properties in a corporate structure and then paying rent to the corporation you own?

For what purpose? Why would you pay rent to the corporation?

That's my question. Why would you pay rent to a bank(/mortgage)? If you own the property, you pay taxes and improvement costs. If you rent the property, those are corporate expenses. The rent ultimately ends back up in your pocket, minus income taxes, but surely you could lock yourself into a 50 year fixed lease at reasonable rates.

corntrollio says

How would the corporation get financing? Chances are that you'd still need to personally guarantee the loan.

Assuming you get a loan. Financing is rather immaterial as to whether or not the idea is fundamentally sound.

UAVMX says

Where and how do you recommend I can research more about stocks/mutual funds, etc?

Maybe something like Bogleheads. There are plenty of places to read about the basis of mutual funds. What you're asking are very basic questions and you need to understand more before asking more questions.

UAVMX says

The one thing that entices me (more then stocks) about a rental property is having some additional monthly income (if done properly). And as mentioned before, its taking on some debt in order to make more money (if done properly)

If done properly means you get sufficient return for the risk. You should look at something like Mr. Landlord or other online resources regarding landlording. The participants on Mr. Landlord tend to want 10% return, including all costs.

cc0 says

That's my question. Why would you pay rent to a bank(/mortgage)? If you own the property, you pay taxes and improvement costs. If you rent the property, those are corporate expenses. The rent ultimately ends back up in your pocket, minus income taxes, but surely you could lock yourself into a 50 year fixed lease at reasonable rates.

Your question is incoherent. What mechanism are you suggesting here to buy a property through a corporation?

Are you suggesting that you adequately capitalize a corporation, then you purchase a house through the corp, and then you rent the house to live in personally through the corporation? Why would that help you get a 50-year lease? You're not making any sense. If you have a coherent deal structure in mind, please describe it.

Read somewhere (can't find the article now) that rental costs (insurance, repairs, vacancies, taxes, etc) typically eat up about 40% of your monthy rents on the long timeline. So if you're collecting $1000/month, you actually have $600 to pay a mortgage.

Others who actually have rental properties please feel free to chime in with their experiences here.

Some folks try to argue that their costs are lower, but that's because they are doing lots of the work themselves (maintenance, finding renters, etc). Calculate the hours, and calculate the income, and many part-time landlords find they are working for less than minimum wage. They're betting solely on property appreciation, which is probably dead for a while. They would have been better off working at McDonalds.

If you're thinking strategically (and I think you are), you must account for the value of your time. Your goal is not to work as a property manager, your goal is to have LOTS of properties with others managing them for you. So build in the cost of hiring real workers (even if you do it yourself initially) when planning how much you're willing to pay for any given property. It sounds like the properties you describe do indeed cashflow, though maybe not quite at the rate you were hoping.

UAVMX says

Hmmm, okay, so I guess the money that I would be putting into the stock market I have to consider it not available...not liquid. I do want to put some into something that's liquid now, so I can "hopefully" make money on it to use towards a DP.

I can't be 100% sure but after looking around there tends to be less of a penalty for selling your mutual funds. On other hand there is generally a stiff penalty for withdrawing from 401ks and Roth IRAs.UAVMX says

Well, Like I've said, I'm 26, I already have over $60k in retirement (401k and pension. I could have had 100k, but again, I do a balanced approach of paying off debt, building my life (furnishing a home, hobbies, etc

If you have 60k now then you're well on your way and truthfully in better shape than most Americans. I believe the last time I looked the average boomer has less than 40k saved at this point- which is really... really... bad because at that point they basically can't retire. If you continue as you are doing PLUS you have a pension you should be ok.

My Mother also has a pension and will give her around 40k a year. That doesn't sound like much but assuming she lives from age 60-100 that works out to be around the equivalent of having saved 1 million dollars. If you can absolutely totally count on your pension than that's a great thing in the grand scheme of things.

I have about the same amount as you in retirement. My wife is more the heavy investor and has several times that amount in funds. On the other hand I am fairly cash-heavy because that will be used for a future primary residence. So we too are trying to be balanced in our financial situation. Our goal is to limit ourselves to financial liability and avoid all debt if possible. Some people would say that saving lots of cash is totally stupid. But like I said before- its whatever makes you feel comfortable. If buying rental property is what makes you feel the most at ease and you're able to turn an income out of it then that's just as good a choice as others.

You'll have to make these decisions yourself because all of us on here have our own opinions- which are just that- opinions, and you know what they say about opinions...

corntrollio says

Are you suggesting that you adequately capitalize a corporation, then you purchase a house through the corp, and then you rent the house to live in personally through the corporation? Why would that help you get a 50-year lease?

Sure. I'm assuming you have multiple rental properties but one would do. The corp purchases the house in cash, you pay $5000/year in rent, collect the depreciation, and write off any taxes and improvements (assume cost is $5000/yr). Corp's income is $0 and you get new flooring every year with untaxed money. Or, if you have two properties, you can pay $2000/yr in rent and pay for improvements with the $3000/yr income from the other property, netting profits of $0.

The simplest scenario as an example is probably: you own 100 properties in the corporation and live in 1 of them. Maybe you pay $20/mo on a 50 year lease; maybe you don't pay rent at all. I don't know. That's what I'm asking ... pros/cons of doing that instead of buying a primary residence.

edvard2 says

I can't be 100% sure but after looking around there tends to be less of a penalty for selling your mutual funds. On other hand there is generally a stiff penalty for withdrawing from 401ks and Roth IRAs

Yeah, I'm aware of the penalties on 401k, etc.Drone says

Read somewhere (can't find the article now) that rental costs (insurance, repairs, vacancies, taxes, etc) typically eat up about 40% of your monthy rents on the long timeline. So if you're collecting $1000/month, you actually have $600 to pay a mortgage.

That's really interesting, but I would like to see some data to back it up. That would play a big part of the equation. Or some first hand NO BS information from landlords on this site.

Also, when doing all these equations stocks vs RE....I think the aspect that gets overlooked: that for my intial lets say $10k investment (on an $80k house....I'm not only getting cashflow (return, again if the numbers work) but the rest of the mortgage is being paid off....not by me, so you end up with lets say in 30 years a $150k that appears....off your $10k down payment, right? That's not looking for an insane amount of appreciation over time. Or is the argument that because RE follows inflation historically, that $150k, is really equivalent to your original $80k mortgage. So $10k investment over 30 years is really only netting you (not including cash flow over the years) $80k. That still works out to 12% right?

cc0 says

That's what I'm asking ... pros/cons of doing that instead of buying a primary residence.

So basically you don't know anything about this structure (or even if it's plausible), but you're making up some weird deal structure and asking us if it's plausible? Ask your accountant or lawyer, especially since you don't seem to know anything about depreciation, capitalizing expenses, corporate tax, passive activity rules, etc.

Improvements are capital expenditures, not expenses. They go into your basis.

Maybe you can even buy a unicorn with your rental income through the corporation so you have 0 income!

corntrollio says

So basically you don't know anything [...] and asking us if it's plausible? Ask your accountant or lawyer, especially since you don't seem to know anything [...]

Maybe you can even buy a unicorn with your rental income through the corporation so you have 0 income!

Well, on this point I'll agree with you: If you're looking for information or advice, don't look here.

Thanks

I had to skip down and comment after reading about half of this thread. I've seen some good advice and some horrible advice. I'm a 10 year mortgage broker and a 13 year real estate (mostly single family homes) investor.

First, for those comparing the return on the stock market of 7-8% to 3-4% for homes they are leaving out critical information. UAVMX you hit it on the head when you said "some debt can be good". Fixed interest rate debt at 4.75% when you can get a yield of anything above that is what they call being "positively geared" and that is a very good thing. For instance say you buy a house for $100,000 and put $25,000 down (25% is the amount you will want to put down to get the best fannie/freddie loan interest rates possible). If that house goes up by 3% and the value goes to $103,000 was your yield 3%? No it was 12%. That is because your equity hasn't gone from 100 to 103 but rather has gone from 25 to 28 for a 12% return. This number, while theoretical, blows away the stock market returns of 7-8% mentioned (which are unlikely going forward anyway).

Now don't get me wrong appreciation of the property is not the most important way that you can profit, actually it is the least important. The first area of profit in real estate is in the cash flow it brings you. If you rent your hypothetical house for $1,000 and use my rule of thumb of 1/3 of rent towards costs, then your yield on the property will be 8%. (2/3 of $12,000 is $8,000/year). Thus if you can leverage at any mortgage rate of less than 8% you should definitely borrow. I'll let you calculate what your "cash on cash" yield is using $25,000 down and $8,000 profit a year (don't forget to subtract interest!). The second area you profit is the forced savings of paying down the mortgage over time. Only after these two areas should you calculate or think about appreciation.

Regarding the loan you will want to put 25% down and get a 30 year fixed rate loan. On your first purchase only a few banks will let you count rental income on the property towards qualifying. It sounds like with the money you make income won't be your problem. After you show the income on your tax return for even 1 year then the vast majority of lenders will allow you to count the income towards qualifying for another loan (whether it be another rental or a primary residence purchase).

Regarding paying down your other debt. Not in a million years should you pay down student loans that are at 2% when you are borrowing at 4.75% on a mortgage so that you can make 8% yield on a property. Borrow low invest high people. Think of your wealth as a big water resevoir on a hill. Your job to become wealthy is to build pipes in and out of your tank. You want small slow pipes going out (interest leaving) and big fast pipes coming in (interest you are earning). They are two sides of the same coin. Now if you were carrying credit card debt at 14% annually what should you do? That's right pay it off. IT IS THE RATE/YIELD THAT MATTERS. It is all that matters. Repeat that to yourself 100 times and you'll go far.

Read RobertoAribas note up towards the top of the page, he got a lot of stuff right. One thing he got wrong is that not every expense is deductible on a rental. Things that last more than a year are to be capitalized and added to the basis which increases your depreciation but can't be expensed in the first year. Still recent rules have allowed accelerated depreciation. Just know that as good as the investment your looking sounds, it's likely even better as your income will be tax advantaged as most of it will be sheltered by the "phantom" deduction of depreciation. If you are making 6 figures and you have excess depreciation you won't be able to deduct it against your ordinary income. However, with the numbers you are talking about it is unlikely that you will have much depreciation left over as what you have discussed sounds pretty high yield to me.

Here's some rules of thumb to make you rich: 1) Don't pay more than 100 GRM (Gross rent multiplier) on a property. If you can do better great. This means that if it rents for $1400/month you want to pay no more than $140,000. The less you pay obviously the better. 2) Bigger properties will have higher yields. Some expenses like fixing a toilet, closing costs, eviction fees, ect are the same no matter how much rent you are getting. Thus they are a smaller expense relative to your income the more income you are getting. Also for the work you will have to do you want more absolute return for the time you will invest.

From the questions you've asked I think you are well on the right track. Good luck with property investing. Last bit of advice is to try to buy so many you can hire a property manager. Managing rental property sucks! Once you can outsource that job you will have a lot more fun!

cc0 says

Well, on this point I'll agree with you: If you're looking for information or advice, don't look here.

Answer me this: If this is such a great idea, why doesn't everyone do this with their primary residence?

Where'd you get the idea and why do you think improvements would work as you suggest? Your idea seems to hinge on buying properties cash, for one thing.

I will not ever, never, rent out a house without a professional property manager. If you can't figure in the 10% fee in the equaqtion, don't due it. I also recommend home warranty for all the appliances, another expense that can keep you from losing $4000 on a replacment AC.

I would call the property manager's in the area I am thinking of investing, and ask them what the best rent return is for the price of the house. In Las Vegas, the best return is a 3 bed, 2 bath single story which sells for $90,000 and can rent for $1000 a month.

BrettB says

This number, while theoretical, blows away the stock market returns of 7-8% mentioned (which are unlikely going forward anyway).

Again- using short-term performance as a metering gauge for future long-term performance, ignoring 100+ years of data isn't an accurate means to judge performance. I'll repeat: 10 years is not long term. Historical performance clearly shows that stocks will perform much as they always have. For a perfect example of this read the lower part of this post.

I can just as easily make the argument that since the 90's the housing market has been completely based on irrational, artificial economics. Most would probably agree to that degree. Thus its much more likely safer to bet that stocks will continue to perform much as they have for the past 100+ years versus assuming real estate will perform like it did for the short 15 year span it did compared to the previous 90 years where it barely eeeked out a 2-4% appreciation. Meantime real estate for all practical purposes has barely budged since 2006. We're going on 6 years into the bust and nothing has happened. Thus I can sit back and with more confidence state that the housing boom- or bubble- was a total fluke and any form of reliance on that kind of performance is unrealistic. Hence a more likely scenario of a return to historical norm- which is a good thing.

On the other hand I'll use my other point which is that let's take away the names of the investment for a minute. Let's us pretend you bought 2 things. Now one item lost 45% of its value fairly quick while the other began a slow and steady decline, eventually stopping at a 30-50% total loss in value. The first item dramatically fell but then was back up close to its original value in 2 short years. If you had picked the first one that is precisely what happened with the stock market. At one point the DOW was kissing the 6,000 mark. After all that calamity with everyone panicking and wringing their hands its approaching the 12,000 mark.

let me put it this way: If you had bought a house in 2005- or at the peak, how great would it be is as we speak that house was right now back to its 2005 value? It'd be fantastic in fact but the reality is that home values have fallen and have stayed down for years and will probably stay this way for a prolonged period.

You want to know who's making a ton of money right now? Its all those stock investors that bought the crap out of stocks when they were falling in value- when things were seemingly at their worst. Those are the folks who didn't panic, looked at historical averages, and bought up some low priced investments.

But either way, this has been talked exhaustively. People invest in what they feel comfortable with. That's all there is to it.

Over the long haul, nothing beats owning hard assets such as real estate. But you must hang on for long term, through good and bad times. But if you want quick profits, there are a lot of other ways that are easier.

cc0 says

Sure. I'm assuming you have multiple rental properties but one would do. The corp purchases the house in cash, you pay $5000/year in rent, collect the depreciation, and write off any taxes and improvements (assume cost is $5000/yr). Corp's income is $0 and you get new flooring every year with untaxed money. Or, if you have two properties, you can pay $2000/yr in rent and pay for improvements with the $3000/yr income from the other property, netting profits of $0.

I don't think you know what you are talking about. If you don't show profit in a few years IRS will come down on you very hard. It's worse than dealing with the Board of Equalization.

UAVMX says

can you elaborate? Whats not how it's typically done? Don't gamble? Aren't all investments a gamble, isn't that how you acquire wealth? Please then, what path should I take?

again, to reiterate. I'm not talking about going out and buying a $400k home for a rental, getting buried in debt etc etc....

The "rental" in question would be around $80k. On an $80k rental, tell me what you would expect your total costs associated to be? And again, the area's rents go for $1000 - $1400/month. Taxes are 1.2%

No, gambling isn't how you make money on a long term commitment. Long term you should invest, short term is where gambles are.

You wouldn't go out onto a street pick a random woman because price tag looks all right and marry her with no information about her. Same with housing, it's a huge commitment, not something to gamble on.

Too many unknowns there man, you really need to put research into how much your specific property will cost you, how much work will it take to keep it running. How much rent you can collect, budget for times when it won't be rented out at all, falling apart. Management, unless you'll do it yourself.

Look, if it was easy money everyone would do it. It's not something you jump into because some jackass on late night tv told you it's an investment. Especially when you are looking to buy in an area you know nothing about.

BrettB says

If that house goes up by 3% and the value goes to $103,000 was your yield 3%? No it was 12%. That is because your equity hasn't gone from 100 to 103 but rather has gone from 25 to 28 for a 12% return.

that's what I think a lot of people are missing...is how much you actually put down is your investment.

That'BrettB says

Regarding paying down your other debt. Not in a million years should you pay down student loans that are at 2% when you are borrowing at 4.75% on a mortgage so that you can make 8% yield on a property

My student loans are at 6% fixed....car loan is 3.9. That would eat into essentially any investment I make wouldn't it? But again, some cash flow would help pay it down faster.

BrettB says

The second area you profit is the forced savings of paying down the mortgage over time. Only after these two areas should you calculate or think about appreciation.

This is also something I was trying to bring up that I think people don't see or account for. But how do you calculate that into the equation?

Again, with the people arguing the peek of RE, and lack of appreciation...I COMPLETELY agree. I don't see RE ever jumping like it did again. I'm not looking at this as a short term, gain as much as possible. I'm looking at is as a long term, don't really care about appreciation, more about the cash flow and forced savings.

I guess we need to actually crunch some numbers to work this out....I will put together a quick spreadsheet.

Okay, crunched some quick numbers. Tell me what I'm missing, or how to adjust it.

Property in question (never seen it, but use it for this example)

http://www.redfin.com/CA/Victorville/15134-Luna-Rd-92392/home/4151464

Purchase Price $80,000
Closing Costs @ 1% $800.00
Downpayment @10% $8,000.0
Net Mortgage $72,800.0
Monthly Income (min) $1,000

Monthly Annual
Mortage @4.75 $379.76 $4,557.12
Insurance $63 $750
Tax at 1.2% $80.00 $960.00
Maintenance @ 2% $133.33 $1,600.00
Lost Rent, 1 month $83.33 $1,000

Expenses $738.93 $8,867.12
Income $1,000 $12,000

Net $261.07 $3,132.88

Again, this is more of the worst case in terms of rent (could be more like $1200 -$1400. And using 2% as maintenance (which I would do most of it myself at least to begin with)

Also, if you calculate in a property manager at 10% (which is probably high, that would reduce it another $100 a month. So not an amazing cash flow, but in the worst case scenario, it's there.

Heres a link to a rental for $1200, similar size house

http://inlandempire.craigslist.org/apa/2564721009.html

And to go a little further, looking at it with 30 year's of owning and assuming NO appreciation in the house value

30 year cash flow $57,986.40
house owned outright $80,000

total $137,986.40

If my downpayment was $8000, how do I calculate my return on investment?

This is including the 10% management fee for the entire period. (its on my excel sheet, not sure how I can upload it for people to play with it)

http://www.money-zine.com/Calculators/Investment-Calculators/Return-on-Investment-Calculator/

According to this, my ROI would be

Return on Investment (%) 1862%
Simple Annualized ROI (%) 62%

UAVMX says

http://www.money-zine.com/Calculators/Investment-Calculators/Return-on-Investment-Calculator/

According to this, my ROI would be

Return on Investment (%) 1862%

Simple Annualized ROI (%) 62%

Exactly. Go buy now or be priced out forever before your ROI turns from 1862% to a mere 1% per year. All of us are total idiots out there, when we can be making 1000%+ ROI we instead do everything else. But all there is to being rich and happy is simply buying a house, it's a free credit card.

FortWayne says

UAVMX says

http://www.money-zine.com/Calculators/Investment-Calculators/Return-on-Investment-Calculator/

According to this, my ROI would be

Return on Investment (%) 1862%

Simple Annualized ROI (%) 62%

Exactly. Go buy now or be priced out forever before your ROI turns from 1862% to a mere 1% per year. All of us are total idiots out there, when we can be making 1000%+ ROI we instead do everything else. But all there is to being rich and happy is simply buying a house, it's a free credit card.

Quality Auto Repair Since 1979

how about instead of sarcasm, some input into the numbers and what/where doesn't it work? Obviously that number doesn't seem correct, so what am I missing?

If you put $8000 into a down payment, and all your costs are covered by the rent, and it thirty years you have ended up with that cashflow (on the conservative side of the numbers) and house paid off....What's your return? what are the other costs? I guess you could also include taxes on your income, but that shows up for any investment

I think you might want to do some research into seeing if there are indicators about how long it takes to rent out a piece of property in your area. For example the house we rent in the Bay Area sat empty for almost 4 months before we signed the lease. There's a few down the street from us right now that have been vacant for a month or 2. So in other words what would the cash flow scenario be if this were the case and you didn't have any income on these for who knows?- 2,3, or 4 months or more. That isn't to say you won't get lucky and find renters each time every time. But its a realistic possibility as well.

edvard2 says

I think you might want to do some research into seeing if there are indicators about how long it takes to rent out a piece of property in your area. For example the house we rent in the Bay Area sat empty for almost 4 months before we signed the lease. There's a few down the street from us right now that have been vacant for a month or 2. So in other words what would the cash flow scenario be if this were the case and you didn't have any income on these for who knows?- 2,3, or 4 months or more. That isn't to say you won't get lucky and find renters each time every time. But its a realistic possibility as well.

Yes, that is my concern. I need to see if the rental market in the area is flooded. According to some people I've spoken with, they get their places rented very quickly. I will talk with some property managers in the area. I think it would hurt the most in the intial renting of the property. If it sits vacant for the FIRST 3-4 months, obviously there hasn't been any income and its all coming out of my pockets. But once you get the first year rented, and stash all the profits into savings of some sort, it should be enough to cover multiple months of basic costs

Can someone shed insight/thoughts, etc into the numbers I have posted?

this is in inland empire? oh man. Im not a big fan because there are no jobs there. when you said buying in next town over I assumed it would still be close to jobs.
One suggestion is buying in an area you know. That will help guage the rental potential.

The only thing i noticed about your numbers is that they seem pretty conservative. Remember that your renter is also paying down your mortgage so the principal part that they're paying can also be viewed as cash flow.

UAVMX says

Purchase Price $80,000
Closing Costs @ 1% $800.00
Downpayment @10% $8,000.0
Net Mortgage $72,800.0
Monthly Income (min) $1,000

Monthly Annual
Mortage @4.75 $379.76 $4,557.12
Insurance $63 $750
Tax at 1.2% $80.00 $960.00
Maintenance @ 2% $133.33 $1,600.00
Lost Rent, 1 month $83.33 $1,000

Expenses $738.93 $8,867.12
Income $1,000 $12,000

Net $261.07 $3,132.88

your closing costs look light to me. don't forget inspections, financing fees, points, title search, title transfer fees, etc. for the properties i look at I usually expect 10-15k in closing costs.

you are also forgetting PMI considering you are putting down less than 20%, for me, this would be around .5% of your loan amount per year.

on the upside, you also don't seem to have account for your tax savings here either. if you itemize, your tax paid and interest are itemizable.

toothfairy says

The only thing i noticed about your numbers is that they seem pretty conservative. Remember that your renter is also paying down your mortgage so the principal part that they're paying can also be viewed as cash flow.

Conservative on the income or expense side? I'm trying to make the worst case scenario, very conservative on the earnings.

Rich4 says

your closing costs look light to me. don't forget inspections, financing fees, points, title search, title transfer fees, etc. for the properties i look at I usually expect 10-15k in closing costs.

you are also forgetting PMI considering you are putting down less than 20%, for me, this would be around .5% of your loan amount per year.

on the upside, you also don't seem to have account for your tax savings here either. if you itemize, your tax paid and interest are itemizable.

Ah yes, good point, PMI forgot that, I will add it. In terms of closing costs, do they depend on the financed amount? I guess the inspections don't. So on an $80k mortgage, you think 10k in closing is reasonable?

No I'm not considering tax benefits. Based on my standard deduction, it will be hard to do more then that on an 80k mortgage. Maybe long term there will be some, but again, this is a conservative trying to weed out the worst case.

Thank you for the pointers

UAVMX says

Purchase Price $80,000
Closing Costs @ 1% $800.00
Downpayment @10% $8,000.0
Net Mortgage $72,800.0
Monthly Income (min) $1,000

Monthly Annual
Mortage @4.75 $379.76 $4,557.12
Insurance $63 $750
Tax at 1.2% $80.00 $960.00
Maintenance @ 2% $133.33 $1,600.00
Lost Rent, 1 month $83.33 $1,000

Expenses $738.93 $8,867.12
Income $1,000 $12,000

Net $261.07 $3,132.88

anyone care to comment on my numbers that I've run?

Thanks E-Man.

I think that's the problem when people compare RE to Stocks. It's not apples to apples because they only count the appreciation. Granted, a lot of people thought by taking a negative cash flow, who cares, it will appreciate. But that's not what a REAL RE investor does. So with a positive cash flow, and keeping it rented, it seems like it will blow the stock market out of the water....My calculations show insane % earned over 30 years

So then that begs the question why isn't everyone doing it? Why are some people in the stock market strictly?

UAVMX says

So then that begs the question why isn't everyone doing it? Why are some people in the stock market strictly?

Because you can get into the stock market with only a few dollars or open an IRA with a few hundred dollars and then dollar cost average in very little money every month (you can only put in a measly 5K or 6K a year if you're over 50), or your employer has a convenient direct deposit 401K plan and probably has a match program which takes only takes a few bucks (couple thousand every pay period) out of most pay checks. To purchase rental property beyond the average Joe's primary residence would mean that people would have to save and plan ahead more for a rental/investment property, and unfortunately, most Americans aren't programmed that way.

I have always maxed out my 401K, Roth IRA, savings as well as purchased real estate. That diversification has served me and other investors I know very well.

I guess that makes sense Lurking. The time and capital needed for a house is more then the stock market.

I think I might get started in the stock market (outside of my 401k) since time is money in that regard. Then a little later in life, I can do RE, since you don't need as much time to make money on it.

I plan on being very diverse, but would like to have RE as a good chunk of income. I've been doing a ton of research on investing for income