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September 15, 2011

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Definitely planning to become a real estate tycoon. We have one property so far and it will take many more to live off the income (or smart leverage), but we've done a good job keeping our expenses down while our monthly savings amount has grown from maybe $2k a few years ago to $5k today through raises and passive income. We'd love to be able to buy a 10-or-more-unit apartment building, perhaps with some partners in an LLC.

Other than real estate, my wife and I are always thinking about ways to earn money on the side. I created a smartphone app and she's done some hiring consulting work, though both of these were one-off projects (though my app continues to bring in modest revenue even on a dying platform).

@Jonathan,

So you wrote your app for PALM huh? Who would have thought that HP buying a company that behaved stupidly could behave even more stupidly.

Be careful of the 10-unit with partners strategy, its fraught with pitfalls and what do you really gain over buying a duplex, tri-plex or quad-plex yourself? Buy a 12-plex with a 3 other partners and you only own 3 of those units anyway. I would much sooner own a tri-plex myself than a 12-plex with 3 other partners who I have to argue with about decisions and about who is supposed to do what and who is not carrying their weight and how to get the one partner out who wants out early or is going through divorce and bankruptcy and their X is wanting their share and, and, and. No Thanks!

Haha, thanks Apex, I get your point. Individually or with family would definitely be a preference. I say a bigger building because I have heard that different financing rules apply to multi-family (5 or more unit) buildings, such as using the expected income for qualification rather than only my personal income.

And yes, I developed for palm...fortunately, I made the app to see if I could (learned as I went) and because I wanted it for personal use. It wasn't til I nearly finished it that I even considered selling it. Also, I still have a palm phone and still use the app all the time.

I agree with Apex on avoiding partners. I'm like you in that I plan to buy more rental properties in the future but I plan to take my time and avoid over leveraging. I will do so by buying a property only after paying a significant portion of the mortgage.

I am a part time worker in IT, so I could be unemployed in the blink of an eye. (I am usually a SAHM, but go back to work when they ask me to help out on projects. Current project expected to be done in a few months.) So, I work along on my blog, and try my best to allocate our assets to maximize returns.

Would love to get some real estate, and am contemplating that as we speak.

I've been in the real estate investment game for the last 25 years.Got started when I was still in the auto parts business and saw the handwriting on the wall for independent stores.The rental business was great up till about six years ago and has been spiraling downwards since.It's gotten very difficult to find good tenants with even half way decent jobs.All my units are in an old once industrialized city of 60k population.Manufacturing jobs are gone now it's either burger flippers or bed pan changers.

I would suggest to Jonathan to not be eager to enter into partnerships.Have not seen many that work well.

Our most fun side job was becoming vendors at conformation dog shows.We started out very small and grew at a very rapid pace.We had a 20'x 30' tent as our store and traveled to about 30 states peddling our goodies.Wife drove a 24'truck and I drove a 39'motorhome and we still needed for companies to drop ship goods to our locations.I was able to pay off the diesel motorhome in just four years with that business.We spent about a dozen years doing that.Sometimes three locations in one weekend.Our setup took about six hours and if it was a good show the tear down about three.It was hard work but paid very well.We'd still be doing that if it were not for bad knees and hips.It would not be as profitable today with the economy though.
We did that while still operating our rental business.Back in those days rentals did not turn as often,evictions were not frequent and units were left in relatively good shape.Today it's a totally different ballgame though.We do almost all the work on our units ourselves with the exception of roofs and carpet.Over the years I've tried a number of handymen only to have to redo much of the work myself so now I save the expense of using them.We've also slowed down a bit on the hours we can put in.We are both 63 and do get tired sooner than in our younger days.

I would suggest that anyone wanting to get in the rental game have at least a minimal knowledge of how to do repairs,have an iron gut,realize that installing new carpeting is a tool and the number one rule to not rent to friends or relatives.I also recommend that one should start with at least six units.That way it helps keep the averages up and cash flow going.I've seen many wannabe landlords with only one or two units take the tubes and even lose their personal homes after a 10k trashing.If I were twenty five years younger I'd be buying more as there a many houses selling for under 10k.They do need a lot of work,but if they can be fixed for under another 8 or 10k than it would be a good steal.In the old days my rule of thumb was to never buy anything over 55 times rent ( duplexes),today it would be perhaps 25 times rent.

Ray

Regarding partnerships, I'm definitely aware of the potential complications. I know a number of experienced real estate investors, many of whom have properties through partnerships (as well as individually). The key to a successful partnership is making sure that the goals of the investment are clearly discussed and understood/agreed upon upfront. It also helps if there are "exit clauses" for partners wishing to leave (i.e., they must shop their position to other members first, perhaps the other members get first right of refusal on sale of position, etc.) Anyway, a partnership isn't my preference, but it's something I would definitely consider with the right people and under the right circumstances.

@Ray,

It sounds to me like your rentals are in a dying industrial city. Obviously Detroit is a disaster, but so are places like Cleveland and other cities that are heavily industrial and manufacturing based.

I understand the model you went after and that is one you are familiar with. I know of people doing a similar model in some of the gutted areas of my city as well. However there is more than one way to skin a cat and frankly because of all the negatives that you mention I have no interest in going after that market at all? 10K house, I don't want anything to do with it. 55 or the unbelievable 25 times monthly rent on a sale price? No way, I don't want those dives and the neighborhoods they are in.

I buy at close to 80-100 times monthly rent. The units are less than 10 years old. I come in and turn them over to a rental with almost zero cost and zero labor. I have no problems finding tenants and good ones. They do not damage the property, they pay their rent on time almost all the time (had a couple lates but they always pay). They stay relatively long term, multiple years. The units and the tenants give me very few problems. And I make probably $400-500 cash flow per month. I currently have 10 units and make about 65K cash flow annually on them. Have been doing this for 3 years and its not getting harder, its getting easier.

I don't know what market you live in but the type of thing I am doing may not be available where you are if the economy is too devastated by manufacturing decline. But when you buy really cheap properties in cheap neighborhoods it is not surprising that you have low income tenants who are low quality and have a hard time paying rent and don't keep the property up that well.

I know there can be good money in that business. Lots of people tend the think that's the only way to make money in the rental business and your post seems to indicate that kind of thinking. I am here to say that there are other ways to do it that still make very good money and have far less of the issues you discuss. I know because I have been doing it for 3 years. I know that doesn't compare to your 25 years, but there is more than one path to choose and the extremely cheap house in a less than ideal neighborhood is not the only path to profitability in rental real estate.

As I've mentioned in other posts, I'm a partner in a moonlighting gig in engineering/consulting as well as some real estate. The consulting biz has been going for about 5 years now with continuous growth. Our projections for 2011 are ~$500k in sales with a 30-40% profit margin. This sounds great but it does cost you hundreds of hours of hard work and sacrifice.

FMF's steps are right on. My biz partner is retiring from his day job in 10 days to do this side biz part time. He is 60 now and just wants to do something to keep him busy and make a little spending cash. My only advice is that you must be ready to work as success isn't just handed over to you. It takes discipline and sacrifice.

I'm the sole owner of the real estate for rental and have no plans of expanding. The only interest there may be to pursue tax shelters using the real estate as losses and depreciation write offs.

I have seen a lot of people who retired early or simply left their corporate jobs to concentrate on their business, which actually started as a sideline to earn a little extra but became their main source of income in the end. Same on my end, I used to be a part-time writer/contributor for a website, now I have my own website and writes for other sites too. This has become my mainstream income for more than 2 years now.

Apex,
All of my units are 1978 or newer.They were only 8 to 10 years old when I started buying.Yes I'm in a stricken area in Northern Ohio.When I started buying the jobs were great and well paying.There were auto plants,steel plants and all the ancillary businesses that went along with them.As the good paying jobs left,so did the good paying tenants.This used to be a blue collar middle class neighborhood,now the average income is very low.
The housing crash further destroyed the city.Many landlords lost their units to repos and most have sat empty just deteriorating.Many of these landlords were wannabe's that could not evaluate a worth on the property.Everyone wanted to be a landlord,money was easy and bidding on property was nuts.I lost bids on houses to fast food workers.Then there were the property owners that firmly believed in as much leverage as possible.They pulled every dime out of houses they could,bought new vehicles every year and considered Vegas as a second home.I only bought what I could steal.I bought from long distance landlords that had moved from the area,those that were still in at 13 points and those that were discouraged.Most of my units were bought at 70 cents on the dollar or less.

All the boarded up repo's are killing the area as well.Houses that were bringing 80k just 6 years ago are able to be had for 10k today.They do need work as they have sat empty and many have been vandalized but 20k or less can make them well.

I've had at one time 43 units.Sold some outright,sold others on land contracts to good landlords and am down to 17 units today.Rents are depressed.Today's rents are down to what I got in the late 90's.I am willing to take a bit less in rents over having a unit vacant and prone to vandalism and copper theft.Today,at least today,they are all full for the first time in years.90% of the rents are on time,no drugs as I screen very thoroughly and evictions are down over the last few years.They are also all paid for as I always paid extra on every mortgage.All of my mortgages were through a local bank that did not sell paper and fannie may was not a concern.
Cash flow could be better.It's down to about 170k per year now that I have so many fewer units left.But since I owe no money I can live with that.Over the years they have all had roofs replaced,hot water tanks replaced every 8 years and carpet replaced as needed. I also refuse to pay even a dime in interest on the credit cards I use so that in itself is a money maker.

We've had from time to time professional deadbeats that knew every trick in the book on how to get free rent.Fortunately the magistrate is a good guy and knows their tricks as well and boots them out.

Landlording is still a good business,but a hands on business if one wants to make serious dough.Wannabe's get weeded out fast and at a high cost to them.Location is important,but the area can change just like mine did.It went from middle class to lower middle-low in a few very short years because of the industrial bailout.Thats what happens in cities and states that are not business friendly.When companies leave,people leave with them.

Being the age I am,I'm satisfied with what I have.My only personal bill is for health insurance which has skyrocketed since Obamacare started.It's doubled in the last three years from $480. to $900.per month.Thank goodness for HSA's.

Between the properties and my mutual fund investments we are comfortable for the rest of our lives. I used the same mutual fund program database that Oldlimey did and it did very well for me.Don't trade often anymore and do not look for high fliers,just nice steady capital preservation.

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