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A place for Get Rich Slowly readers to ask questions
and exchange ideas
It is currently Fri Aug 01, 2014 5:32 pm




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 Post subject: rental income the grs way!?!?
PostPosted: Fri Jan 24, 2014 3:18 am 

Joined: Wed Jan 15, 2014 10:56 am
Posts: 20
I have been very blessed to have are relatively large inheritance. Nothing I can retire off of but enough to mean that at 24 I am able to have a sizable down payment on a rental property. The idea has always intrigued me as I like the idea of using (some) leverage to create relatively passive income in my later years. The problem is that I am relatively conservative, wanting to put in a large down payment on a small duplex and slowly build from their trying to stay as close to debt free as possible. The are a lot of books on real estate, most are get rich quick schemes. I cant seem to find any reputable PF people who have good books to check out. anyone here know of any?

as a side note I will likely be investing out of state, and likely use a management company.
any advice or personal stories?

thanks, nick


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 Post subject: Re: rental income the grs way!?!?
PostPosted: Sun Jan 26, 2014 1:06 pm 

Joined: Sun Jan 26, 2014 11:49 am
Posts: 34
Hello Nick,

Congrats on the inheritance, now comes the difficult part, making sure you do the right thing with it. It sounds like you are set on a rental property (not a bad idea). The most important thing you can do is "your homework". Make sure you view the property you get, run all the number for the worst case scenario, etc. As for books, Rich Dad Poor Dad discussed real estate. I also like 0 down for the 2000's, but that book isn't aligned with your large down payment idea. I have been doing real estate for awhile, and I'm not sure if I would get a rental property if I was in your case, just because their are larger returns with less hassle in other things I am doing. Are you short on time? Is that why you will have a management company?

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 Post subject: Re: rental income the grs way!?!?
PostPosted: Sun Jan 26, 2014 7:56 pm 

Joined: Wed Jan 15, 2014 10:56 am
Posts: 20
Thanks for the response. I am short on time but I also live in a very expensive area without many multi family homes. It would be difficult to manage a home that isnt in my area. And I don't plan on investing everything into real estate especially right away. But i already invest in stocks and bonds and so this seems like a good way to diversify (in addition to being a good long term wealth building strategy)


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 Post subject: Re: rental income the grs way!?!?
PostPosted: Sun Jan 26, 2014 8:12 pm 

Joined: Sun Jan 26, 2014 11:49 am
Posts: 34
I see. Well a rental property will definitely take up some time, so you are correct in wanting a property manager. Just be careful to pick a good one who doesn't over charge. You should definitely invest in some type of real estate to help keep you diversified. Maybe look into some other real estate investments? You don't necessarily need to buy a rental to be invested in real estate. Keep us updated.

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 Post subject: Re: rental income the grs way!?!?
PostPosted: Sun Feb 09, 2014 11:25 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5310
Nick, let me ask you a few questions -

Why do you think real estate is a good investment for you? The purpose of any investment is to earn a return. Some people invest in growth stocks and hope for the value of their stock to increase before they sell at a later date. Some people buy dividend-paying stock or bonds to get a monthly or quarterly cash payment but don't expect the value of the investment to change much at all over time.

When you invest in real estate you might be doing either, and the types of properties and approach you take would be quite different. If your goal is monthly "passive" income then you generally want to keep debt service (and other) expenses low. Often when people talk about real estate investments they mean buying something, waiting or fixing it up, then selling at a higher price later. In that situation it usually makes sense to hang onto cash and finance as much as possible with debt. I think you will find that most of the real estate books and get rich quick schemes follow the second approach.


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 Post subject: Re: rental income the grs way!?!?
PostPosted: Mon Feb 10, 2014 2:36 am 

Joined: Wed Jan 15, 2014 10:56 am
Posts: 20
I am looking to build a strong source of passive (ish) income. my goal is to get to a point where my monthly expenses can be covered by the income from multi unit homes. Ive never liked the lack of certainty i feel with dividend funds. The thought of someone else deciding how much i will make in dividends based on factors I cant control seems too unreliable. I do plan on putting down 30-50 percent and then using the extra income to pay off the mortgage asap as I am very debt adverse. Most rental income strategies seem to be based on over leveraging and getting just enough cash flow to make a down payment on another home. that does not sound like a stable strategy to me but since it seems to be the one that sells I have a hard time finding good info on the "conservative" approach

thanks for the response


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 Post subject: Re: rental income the grs way!?!?
PostPosted: Mon Feb 10, 2014 6:14 am 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1716
Location: Ottawa, Canada
"Rental income," "Passive," LOL that's a good one.


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 Post subject: Re: rental income the grs way!?!?
PostPosted: Mon Feb 10, 2014 9:23 am 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5310
Nick,

Let's say you are looking at a $400,000 duplex. If you can borrow at 4% with 25% down and collect $1500 rent for each side your net income is $36000-4%(300000)-other expenses=$24000-OE. For kicks let's say OE=$4000 so your net is $20000 per year. You have invested $100000 so your return is 20%.

If you pay cash your investment is $400,000 and return is $32000 or 8%.

Now, some would say that you have more at risk in the first case. I disagree. In each case you stand to lose the property and it's value does not depend on whether a loan exists. You do have more flexibility in the second case.

I'm not suggesting you should leverage yourself. I'm simply demonstrating why most real estate investor use leverage. Looked at another way, debt aversion has a cost of 12% per year.


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 Post subject: Re: rental income the grs way!?!?
PostPosted: Tue Feb 11, 2014 5:55 am 

Joined: Wed Jan 15, 2014 10:56 am
Posts: 20
DoingHomework wrote:
Nick,

Let's say you are looking at a $400,000 duplex. If you can borrow at 4% with 25% down and collect $1500 rent for each side your net income is $36000.


This way my idea on how to get there. Purchase one $100,000 duplex and rent it out putting 25% down and pay it off as quickly as possible with extra rental income. then purchase a second one worth the same amount and use the combined income of both properties to pay it off as well then take the one duplex worth $200,000 and use all of the combined income to pay it off as well. this way i can use leverage but keep from being dangerously aggressive. does this strategy make sense?

kombat wrote:
"Rental income," "Passive," LOL that's a good one.


This is one of my major concerns. I hear that you should treat rental properties more like a business than an investment and be ready to put in a lot of time and effort. what if you use a property management company? How much will that reduce the time and effort? I expect to still have to put some time is but i dont want to get too over my head


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 Post subject: Re: rental income the grs way!?!?
PostPosted: Tue Feb 11, 2014 8:57 am 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5310
nick wrote:
This is one of my major concerns. I hear that you should treat rental properties more like a business than an investment and be ready to put in a lot of time and effort. what if you use a property management company? How much will that reduce the time and effort? I expect to still have to put some time is but i dont want to get too over my head


A management company will take anywhere from around 20% to over 50%. The 20%ers will do almost nothing for you.

Even with the best management you will still need to pay the double rates for the plumber at 3 AM when your idiot tenants try to flush the diaper. You will also have any number of other headaches that others here can tell you about.

Personally, I would not say that being a landlord is always bad, and I am one. But I would definitely say it is far more work than any other type of investment. If you value your time in the equation you would probably make less than minimum wage for your landlording efforts. If you are comfortable with that then that's fine. But if you are looking to earn a decent return on your inheritance you might want to think about other options.


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 Post subject: Re: rental income the grs way!?!?
PostPosted: Thu Feb 13, 2014 4:10 am 

Joined: Wed Jan 15, 2014 10:56 am
Posts: 20
so if you were in my shoes would you choose not to invest in rental properties at all?


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 Post subject: Re: rental income the grs way!?!?
PostPosted: Thu Feb 13, 2014 7:11 pm 

Joined: Thu Feb 13, 2014 5:24 pm
Posts: 36
Location: North Carolina
Hey Nick, I highly recommend the rich dad poor dad videos on youtube and the books concerning rental property. I will however give you a word of advice in terms of debt. (Which you'll also hear in the 'new rules of money' series on youtube from Robert Kiyosaki concerning good debt versus bad debt)

My advice is this. Real estate is such a powerful investment tool BECAUSE of leverage. It wouldn't be nearly so great if it were not. So in this instance, you generally want as much cashflowing leveraged properties as you can get. Sometimes it makes more sense to put more cash out on a deal, and of course, its possibly less stressful. But you're also shooting yourself in the foot in when it comes to total return, longterm gain, and inflation.

In fact, owning a property outright (no debt on it, no mortgage) is actually very dangerous and makes you a target for lawsuits. (this piece of advice comes directly from my mentor, one of the top real estate coaches in Greensboro NC, my area)

It would be my sincere advice to rethink your position on debt (when it comes to good debt, that is - debt that makes you money)


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 Post subject: Re: rental income the grs way!?!?
PostPosted: Thu Feb 13, 2014 10:02 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5310
Xanatosnemos wrote:
It would be my sincere advice to rethink your position on debt (when it comes to good debt, that is - debt that makes you money)


Wouldn't that same debt become a horrible burden if the property suddenly became unrentable and Nick couldn't pay his bills?


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 Post subject: Re: rental income the grs way!?!?
PostPosted: Thu Feb 13, 2014 10:40 pm 

Joined: Thu Feb 13, 2014 5:24 pm
Posts: 36
Location: North Carolina
Buying rental property properly takes into account vacancies and repair costs. It needs to still cashflow after considering those costs and expenses (And insurance mortgage and legal costs etc etc etc, all the expenses)

If it still cashflows after that, you have a good deal and the good months should cover the bad.

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 Post subject: Re: rental income the grs way!?!?
PostPosted: Sat Feb 15, 2014 1:02 am 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5310
Xanatosnemos wrote:
Buying rental property properly takes into account vacancies and repair costs. It needs to still cashflow after considering those costs and expenses (And insurance mortgage and legal costs etc etc etc, all the expenses)

If it still cashflows after that, you have a good deal and the good months should cover the bad.


But what if you are wrong?


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