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December 02, 2013

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Great investment. I'm envious that you get such a good return on rentals in your market. THe renovated unit looks great too.

Great job at getting this far. It is really a great building.

I have a few buildings and I bought these on fire sales. I am so spoiled that I need a minimum 20% Net Profit (ROI) before I will consider them.

I have done this 7 times now and I am tired now of managing. I see that you have handed it to a manager already, which I have not done, and I am paying a toll by running around like crazy. I do not life a hammer or carry a screw driver for anything, but I still need to rent units out, evict people (rare), pick up rent, send out notices, update leases, handle complaints/issues (evaluate/estimate/fix) etc etc.

So, all in all, the returns are so good that I will only notch down 2% to 5% by having a part-time manager.

I am going to print out your #1 and #2 story and learn from it.

Hopefully you put all of these numbers into an ROI XLS file to monitor it closely.

Maybe you can write in the future about how you do the accounting on this business, what kind of legal setup have you done, and what kind of coverages do you have (should you have) on the properties (insurance).

Thanks for sharing the full details.

Regards,

Kenny

I am sort of curious about what your post on being an out of state landlord will say. I suspect you won't really have a feel for what it's like until you've been in OK for a year or so.

I have a friend who was a landlord who ended up moving out of state and being an out of state landlord proved to be a disaster for him...although he definitely didn't have an FMF mindset regarding money, so it probably would have been a disaster for him no matter what, as he really didn't fully assess the situation when he bought his properties.

My BF has out of state properties and it seems to work for him...but he's more of a "live wire" type personality who likes being busy.

Keep these updates coming.

I have two rentals and sold one since our real estate market got so hot and I needed to focus on my career more. And we're about 2-3 years away from paying off the one we still own.

Does it make you uneasy to take out a mortgage since you've been mortgage free for so long? I understand how it improves your return and opens up the potential for buy another property but it also increases your risk exposure and decreases your cash flow.

At $37k cash flow and probably saving your own person money for the next one, it will only be a few years before you can buy another one like it. And the next one after that would be even shorter because you would have cash flow from even more properties to help save for it. etc etc. I think it would awesome if you waited and invested and started to build a debt free real estate empire.

Mark --

I'm curious too. :)

So far, it's been a roller coaster ride. Some days I want to sell them all and other days I'm holding them forever. Time will tell what I do.

FMF, I would be very interested to read a post related to your comment, "my income is at a point where taxes are killing me". My husband and I moved up to the 33% tax brakcet this year and after aggregating all taxes we pay (property, federal, SS, etc), our effective tax rate is 30% of our gross. I would love a way to reduce that number but believe I'm maxing out all of our options. We max out 401ks & HSA's, itemize, we're above the income threshold so we have to contribute to a non-deductible IRA and do roth conversions. We are not business owners and currently do not own rental property. We had planned to buy a rental property at the end of this year but with how "hot" the real estate market has been in our area, I'm afraid we'd be taking on more work without incremental benefit (tax savings/return) since we'd be buying at such high values.

LH --

Unfortunately (or fortunately, depending on how you look at it), a high income means high taxes. There are some steps you can take to lower taxes a bit (such as the things you are doing above), but after that there aren't many options.

LH

You didn't list charity donations or 529's as a tax deduction. There are a few more tools at your disposal.

Caution, you cannot do a non-deductible IRA and max out your 401ks at the same time as you say you're doing.

@Luis,

Yes you can. There is no income and no work based retirement plan that places any limits on non-deductible IRA contributions.

You are confusing that with deductible IRA contributions. If you are covered by a work retirement account or have income that exceeds a certain amount then you cannot make deductible contributions to an IRA. But you can always make non-deductible contributions.

@MTIM,

Loans do not decrease cash flow, they increase it. Yes they decrease cash flow on any given individual property but if you take out a loan so that you have a pile of money sitting in the bank to look at then that doesn't make any sense.

You take out loans to free up cash for other properties.

If instead of owning one property free and clear you own two properties with 50% loans on each or 4 properties with 75% loans on each you increase return on investment, cash on cash return and cash flow.

You decrease cash flow per property and you increase risk somewhat but if the cash flow per property is still solid where is the real risk?

Leverage's only downside is risk of default on the loan. If you can manage that, everything else is upside in the current interest rate environment.

Luis, Thank you for your insight. Charitable donations I include under itemized deductions. As far as 529's go... I looked into starting one this year for future children (putting it in my name now & transfering later) but its my understanding there is no tax break now... but the money and associated earnings are tax free when used for education expenses (ie. a child's college). Anyone with a 529 have input on the tax advantages?

Thanks!

LH --

Many 529's allow for a state income tax deduction if you contribute to your state's 529 plan. I used to get one every year when I lived in Michigan.

Ah, that's what it is... I live in a no state income tax state.

Thanks for sharing this information with so much detail FMF! Very interesting read..I have not done real estate, yet, but hearing your stories make it seem possible even if there are some speedbumps along the way!

Hello,

I really thank you for your detailed info on your investments. Many investors are not willing to take the time to do this for others.

One suggestion I have: for the utilities, perhaps you could try to use Ratio Utility Billing Software (RUBS) and charge the tenants the utilities that are not separately metered. The leases would obviously have to provide for that, which may take a year to fully convert, but it's my opinion (I'm in CA) that people don't give "included utilities" the full value they deserve. In other words, I don't believe if you save a tenant $100 in utilities, you can rent the apartment for $100 more. That's why I believe in RUBS and all the national REITS are doing this at their buildings. It's a pretty easy calculation to do in excel (utility costs / units), but if you want to include it in your accounting software, I believe Appfolio does it. There is probably also separate software dedicated to RUBS.

Thanks again and PLEASE keep posting!

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