This article originally posted on Wealth Lion, but I wanted to have it here.
The piece reflects my plans and thoughts when I first got into real estate investing (which was about a year and a half at this point). Things have changed a bit, so be sure to read all the way to the end.
Before I share the financial performance of my two rental properties (in upcoming posts), I wanted to detail my objectives for investing in rental real estate in the first place. Here's what I'm trying to accomplish:
- At some point in time, I'm going to slip into early semi-retirement (downsizing my job and earning/living on much less, but freeing up lots of time), and I'd like to have a good portion of my annual expenses covered by something other than my salary.
- After that, I'll want to retire fully some day and will need some income to see me through. I'm not banking on Social Security and I'd like an income plan that lets me live on earnings alone and spending nothing of my principal.
- I want to diversify my holdings -- not have everything in stock and bond mutual funds.
- My financial objective is to earn 10% (before taxes and depreciation) on money invested in rental real estate. This includes ALL monies invested. For example, if I buy a place for $80,000 and invest another $20,000 fixing it up, I want the operations from the place to earn at least $10,000 annually after all expenses are covered ($100k * 10%).
- Because I'm buying while the market is relatively low compared to past valuations, it's likely that I'll get some decent capital appreciation. That said, I am not counting on this to make the deals work. Any appreciation I eventually realize will be gravy.
Now that you know my objectives, here is the general framework of my strategy (I say "general" because I'm willing to bend it a bit if the right deal comes along):
- Identify value properties that have decent cash flow. For example, many of the properties I consider already earn 5% to 6% as they are.
- Look for properties where, for a reasonable investment, rents can be significantly increased.
- Buy the places, make the improvements, increase the rents, and fill them up.
I know it sounds simple, but it takes a lot of work and effort to make these happen.
So those were my plans as of 18 months ago. Since then a lot has changed:
- I'm moving from Michigan to Oklahoma for a new job. The time commitments required from my new job may make managing real estate impractical.
- Prices have gone up dramatically for rental real estate. As you'll see in future posts, I did buy three properties in Michigan, but buying more at "cheap" prices is out the window.
- Since prices have gone up dramatically, I could sell the properties, make a tidy profit, and change up my retirement income strategy.
It's hard to say at this point what I'll actually do, but whatever it is, I'll tell you about it. :)