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I've done the math my way for Sacramento SFR rental property debt free, not managed by a property management company and allowing a hefty budget for repairs at 20-25% of gross rents. I calculate 2 numbers. The first is cash flow as a percentage of current market value. The second is a present value calculation of current market value in relation to original purchase price.
Depending on the current fair market values used for the math, I get an average of 3.5% for each calculation or a 7% total return the way I do my math.
Location: Formerly Pleasanton Ca, now in Marietta Ga
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Quote:
Originally Posted by WorldKlas
But you would have to earn more money on the equity you took than the interest you pay to have made “pulling the money out” worthwhile
Why would I have to earn more money on what I pulled out?
I bought for 50K, put 10k for repairs so I am into the property for 60K total out of my pocket.
House appraises for 90K and a 75%LTV loan gives me 67.5K loan so I get my 60K out of pocket back plus another 7.5k extra.
I now have none of my money invested into the house, but even after servicing the new loan I still cash flow $3600 per year.
Having an asset I have no money into paying me $3600 a year is an infinite return.
Now if I wanted I would take the 67.5K and buy another and then cash refinance out and then buy another and keep repeating.
If your dti allows, you could repeat this 10 times or more.
10 houses with 25% equity stake and not one dime of my own money means I built up $225K of equity for free and a cash flow of $36K a year. More than likely the 36K a year will be tax free or close to it because of deductions.
This is nothing new. Some real estate investors have been doing this for years.
Location: Formerly Pleasanton Ca, now in Marietta Ga
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Quote:
Originally Posted by sandlines
I feel you should get at least 10% a year on rent. Being a landlord is work. It may not be much work depending on the tenant, but it is still work. You also face certain risks such as a small chance of being sued and vacancy. I know most tenants are fine but you occasionally hear about nightmare tenants.
If I couldn't get 10%, I would rather have my money in stocks. Stocks rise about 10% a year. It is much less work holding stocks, you don't have to deal with tenants and the money is very liquid. You don't have to fix the roof or paint the walls. Your stocks are not going to call you at 2am because a pipe broke.
I've been a landlord for 30 years. Never once have I had a tenant call at 2 am for a broken pipe or leaky toilet.
i too have been a landlord for 30 plus years . i can say never once did i have to evict my stocks or take my stocks to court . lol ..
the issue really is real estate is a profession and job like any other job .it is not truly passive investing . in fact the equity markets and bonds is where i put the money i make in real estate . that way while i work for money actively through real estate my money works for me passively through my market investments in funds .
But you would have to earn more money on the equity you took than the interest you pay to have made “pulling the money out” worthwhile
Exactly. This is a point that so many gloss over. Borrowing out the equity is not something to be viewed in isolation, one must also consider what is done with the money. Is it invested in more real estate? In stocks?
Location: Formerly Pleasanton Ca, now in Marietta Ga
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Quote:
Originally Posted by ncole1
Exactly. This is a point that so many gloss over. Borrowing out the equity is not something to be viewed in isolation, one must also consider what is done with the money. Is it invested in more real estate? In stocks?
Please reread what I explained. The numbers don't lie.
It doesn't need to be reinvested at all unless you choose to do so to get another property.
If you don't understand what was done then you definitely should not be investing in real estate as math may not be your strong point.
In my case I got everything I invested back plus extra and an asset that cash flows and gives me a tax deduction that I didn't have before.
Location: Formerly Pleasanton Ca, now in Marietta Ga
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Quote:
Originally Posted by mathjak107
i too have been a landlord for 30 plus years . i can say never once did i have to evict my stocks or take my stocks to court . lol ..
the issue really is real estate is a profession and job like any other job .it is not truly passive investing . in fact the equity markets and bonds is where i put the money i make in real estate . that way while i work for money actively through real estate my money works for me passively through my market investments in funds .
Maybe it was a job for you because you didn't know how to set up your real estate. I know you are way more knowledgeable than I will ever be when it comes to stocks and things, but based on what you have posted in the past you seem much less so in real estate .
Maybe my definition of passive is incorrect. I do spend a few hours a month now managing all my properties. Mostly checking my bank accounts, writing checks to vendors, and doing a little book keeping for taxes at the end of the year. I don't go out and physically work on my properties or run them. I pay someone else to do that. If I did it myself my roi would be closer to 17% instead of 13%.
In a three year span of investing in rentals I was able to retire making more than I did while working living a lifestyle I could only dream of.
I am assuming that you don't spend a few hours each month on your markets and equities moving money into and around and monitoring trends and status or doing research . It seems to me you would have to spend time doing so but apparently based on your definition of passive you don't so much as look as look at or spend time tracking any of it.
If you do research, move money in and out of investments, even check balances and performance, then you are spending time on it and it is not passive like you say since my few hours a month in real estate according to you are not passive.
selecting tenants , dealing with maintenance issues is not passive .
the worst part is eventually one of the big three gets most landlords no matter how good you screen tenants
divorce-illness-job loss are things usually not on the radar and the tenants can make their problems your problems way to easy .
with real estate nothing is ever a problem ,until it is a problem . then it can be a horror many times to deal with .
our commercial real estate was managed by douglas elliman so that was as close to passive as we could go . but and she stayed and now struggled . we spent almost 6 months tied up in court with no rent and legal fees getting her out .. if you live in a pro tenant jurisdiction these things can turn nasty .
it is moments like that you learn real estate is not as simple and passive as click and the stock is gone .
for 30 years our portfolio has never taken more than 30 seconds a week unless i want to do some trading which is separate from our serious dough .
in retirement i want only passive , trouble free ,LIQUID investments . ..
Please reread what I explained. The numbers don't lie.
It doesn't need to be reinvested at all unless you choose to do so to get another property.
If you don't understand what was done then you definitely should not be investing in real estate as math may not be your strong point.
In my case I got everything I invested back plus extra and an asset that cash flows and gives me a tax deduction that I didn't have before.
Your explanation has a lot of merit and I have always understood this kind of thinking and have often considered doing the same. Initially you used your cash (as I also have for my 11 properties) and as these assets appreciated, you were able to recapture your initial investment nut on selected properties by then getting equity loans on a few; and those properties now support themselves. So you have some properties now that generate income and continue to appreciate with none of your initial investment tied up in them. I get it 100%.
For each such property, you now have an asset that supports itself and even provides revenue. The question is.... had you not chosen to mortgage the property, how much MORE would you be earning? And are the funds you recaptured by getting those mortgages now giving you at least as much in earnings as you would have gotten from not mortgaging the property?
The issue — what does the recaptured cash do for you now — is a basic consideration when doing what you have done. Even if you are not getting as much income if you had kept the properties unmortgaged, I understand there is great value from having your funds more liquid.
I wrestle with this issue myself frequently as I evaluate methods to capitalize on my investments and provide myself the highest income stream in retirement.
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