Real Estate Archives - The Fed-Up-With-This Papers

10 Reason Why I Love Long Term Real Estate Investing

I love long term real estate investing, it’s really all I think about. The funny thing is, I currently own only 1 rental property and it has already changed my life. I have other investments, 401k, roth IRA, my wife has a pension, and I have a brokerage account, but real estate is just the by far the best investment vehicle in my opinion. Here’s a few reason why.

1) I’m making a ridiculous return on investment.

How would you like to make a 30% return on your money? Well that’s my cashflow return on my single investment property! We purchased the home for $100,000 with about $20,000 down and around another $5,000 out of pocket for some minor updating. The all in monthly payment comes out to about $1,000 a month and rents for $1,700!

This property is self managed. I only rent to military tenants so I don’t have to worry about damages, and most of the appliances in the home are newer. So I only save $100 a month for capital expenditures and surprises. Vacancies are also a non-issue as I typically have 10 applications in the first week of listing the home. This leaves a $600 profit each month, or $7,200 a year which is just about $30% of my original $25,000 investment.

2) Appreciation

The bonus factor. Most real estate investors will tell you that you shouldn’t purchase a home banking on appreciation, instead treat it like a bonus. The reality is homes appreciate, sure the housing crash happened, but home prices came back up. Two years after purchasing the home, it appraised for $160,000! Not a bad bonus.

3) Getting my money back

If you’re not familiar with BRRRR it stands for (Buy, Renovate, Rent, Refinance, Repeat). Not too long after the property was rented I decided to do a refinance, and the property appraised high enough that I was able to pull the original $20,000 down payment out of the home equity. I’ll be using those funds to purchase my second rental property, hopefully sooner rather than later.

4) Mortgage paydown

This is like a savings account that someone else puts money in for you. I don’t even factor this into my return on investment, but in just 2 years my tenants have paid down about $3,000 of the loan’s principal. That’s not much to write home about, but it’s still pretty awesome knowing that one day this house will be paid off and I won’t have put a dime into making it happen.

5) Not everyone does it

My wife and I are the only ones in our entire family who own an investment property. We’re the only ones out of all our friends who own investment property. There’s something very cool about that, we took the path less traveled. Friends and family often ask us how it’s going, they’re always amazed when we tell them about it. “how are your tenants?”…. good I guess we haven’t heard from them in 6 months.

6) Tax advantages

We have a Rockstar of an accountant, I recommend you get one as well. The first year we owned the rental we collected $8,400 of cash flow minus a $600 oven we decided to replace. My accountant found $18,000 worth of losses! Now my wife and I both work and make enough from our W2 that we can’t apply that $18,000 to our W2 income, but it means the $8,400 we made from the rental was 100% tax free. You know when you get a bonus or a commission check at work, it feels like taxes are double? Well that’s because that bonus falls into the highest end of your tax bracket, normally that $8,400 would as well, that’s why it’s so amazing. You’d have to probably make $14,000 on the books to have the same net take home.

7) It’s pretty darn passive

Now it’s not 100% passive, there are a couple times a year I get a call from my tenants, usually for little things I can handle myself. I rent to young military couples who just haven’t learned how to do basic repairs like a leaking toilet bowl flap, or a loose hand rail on the steps. These are quick easy fixes for me. The property is 9 minutes door to door which also makes it easier.

Listing the property and meeting with interested tenants also takes a little work, along with filling out the needed documents for the county. Reality is, I probably spend an average of 10 hours a year on the property. Considering the amount of wealth its generating I could spend 100 hours on it and it would still be worth it.

8) I have control of my real estate

The thing I hate most about the stock market, is even if you’re right the market can still decide you’re wrong. You can do all the due diligence in the world, but if herd mentality takes over you could find yourself in big trouble. There’s also nothing you can do to a stock to improve it’s value. With real estate I can decide what areas I want to focus on, I can put extra work and money into it to make it more valuable. I just feel like it’s mine to control.

9) It’s extremely rewarding

My father in law is very successful and I respect the hell out of him. When I told him my plan with the property he had his doubts, normally I listen to him but I knew I was right. I ran all the numbers, and knew when it came to real estate I knew more than him. I can still remember when I was finished renovating the place brining my in laws over to show them and how impressed they were. Then when our first military tenants signed the lease for exactly what I was hoping to get in rent, my father in law thought I’d never be able to get my asking price. After the first year when everything went right, my father in law admitted he didn’t think it would work and that he was extremely impressed. You’re not going to get that kind of rewarding feeling by maxing out your 401k and it's just another reason why I love long term real estate investing.

10) Early retirement

About 4 years ago I realized my new goal in life needed to be early retirement. People work so hard to move up the corporate ladder which is great, but honestly what is the point? I think every human on this planet should be spending every day trying to come up with a way to retire early. Real estate is proven to be one of the best, most tried and true ways of making that happen.

Think about it, let’s say you’re 35 years old. You decide you want to retire in your mid 40s and you need $10,000 a month to live comfortably. Well, going off “the 4% rule” you’ll need $3 million dollars so you can live off 4% a year. The other option would be to simply purchase 1-2 rental properties a year for the next 10-11 years. So lets say after 11 years you own 14 properties and each one cashflows $500 a month, that’s $7,000 a month. Remember what I said above though, you are not going to be paying taxes on that $7,000 where the $10,000 you will be. Also, as the homes appreciate you could refinance them and pull out large lump sums of cash if you really wanted to. Or pay them off faster and receive a larger monthly payment without a mortgage. Buying 1 property a year isn’t terribly difficult, especially once you hit your 7^th or 8^th year, now your real estate income is essentially buying the next property for you anyway.

At the moment we’re going through the Covid-19 crazy housing boom. I’m confident the housing market will start to cool, until then finding a property is proving to be a challenge in my area. The ironic part, I was putting an offer in on a home in early March, then the president came on TV and admitted the virus was way worse then they thought, so I backed off from putting in an offer… man was that a mistake. The little $140,000 fixer upper I was looking at is probably worth $280,000 right now.

I can’t wait to get another property, I’d like to have a minimum of 5 within the next 3 years. I’m so envious of the people I see on Instagram who add like 14 properties to their portfolio a year. I’ll get there one day!

Buying a Home vs Renting a Home, By The Numbers

I’d like to start by saying owning a home is not for everyone, and some homeowners get very unlucky leaving a bad taste in their mouth. With that said, if you’re considering buying a home vs renting a home, buying beats renting every time in the long run.

To prove this, I’ve decided to look at hypothetical numbers that show cost of ownership for a homeowner vs renting going all the way into retirement years. I’ve also figured opportunity costs and how that could impact long term gains if invested.

For the renter, I’m starting with $1,200 a month in rent. Rents increase over time, so every 3 years we’ll increase the rent by $100 per month.

For the home owner, I’m assuming a purchase price of $200,000 with taxes and insurance equal to $1,200 a month and a $40,000 down payment. We’ll also need to consider the fact that property taxes only go up.

A LOOK A 30 YEARS OF RENTING

Renting $1200 for first 3 years ($43,000),

Goes up to $1300 for 3 years ($46,800)

Goes up to $1400 for 3 years ($50,400)

Goes up to $1500 for 3 years ($54,000)

Goes up to $1600 for 3 years ($57,600)

Goes up to $1700 for 3 years ($61,200)

Goes up to $1800 for 3 years ($64,800)

Goes up to $1900 for 3 years ($68,400)

Goes up to $2000 for 3 years ($72,000)

Goes up to $2100 for 3 years ($75,600)

This is now the 30 year mark. The Renter has paid $593,800 and we still have 12 years until retirement if we started at age 25.

At 30 years the homeowner’s house is now paid off. They only have taxes/insurance moving forward, yet the renter's rents are still only going up. The homeowner has paid an estimated $450,000 total when figuring in increasing property tax.

WHAT DO THE NEXT 12 YEARS LOOK LIKE?

With the homeowner’s house paid off, let’s take a look at how the numbers stack up.

Home owner is paying $500 a month for 5 years ($30,000)

Home owner is paying $550 a month for 5 years ($33,000)

Home owner is paying $600 a month for 2 years ($14,400)

Rent goes up to $2200 for 3 years ($79,200)

Rent goes up to $2300 for 3 years ($82,800)

Rent goes up to $2400 for 3 years ($86,400)

Rent goes up to $2500 for 3 years ($90,000)

So all in, over a 42 year period the home owner paid $527,400 and his home is worth $460,000 having kept up with 2% inflation rate.

The renter after 42 years has paid $932,200 and has NOTHING to show for it.

But what if you invested the original $40,000 down payment at 7% over 42 years instead of buying a house??? That's $685,000!

Well first of all, that still means you’re $247,200 in the hole and have nothing to show, vs the homeowner who paid $527,000 over 42 years and has a $460,000 house to show and a housing payment 1/5^th of your rent. But we also need to figure what if the homeowner was investing the difference between their housing payments and the renter’s payments.

In year 3 the homeowner would have started investing $1,200 a year as that’s the difference between their payments and the renter’s payments.

Year 6 they’d be investing $2,400 a year.

Year 9 they’d be investing $3,600 a year.

Year 12 is $4,800 a year.

Year 15 is $6,000 a year.

Year 18 is $7,200 a year.

Year 21 is $8,400 a year.

year 24 is $9,600 a year.

Year 27 $10,800 a year.

Year 30 is $21,000 a year. (the year the mortgage is paid off)

Year 33 is $22,600 a year.

Year 36 is $23,800 a year.

Year 39 is $25,000 a year.

Year 42 is $26,200 a year.

I'm not going to even try to figure out how compounding interest works its magic on those numbers over time. I did start doing the calculations and it approaches $2,000,000. Even if we say it averaged $7,000 a year for 42 years that’s over $1,800,000 so I’m sure we’re in the right ballpark.

Where do we end up?

The home owner has paid $527,000. They own a $460,000 home and are paying $600 a month to live in their home moving forward. They also have around $2,000,000 in investments.

The renter has paid $932,200 over the past 42 years. They do not own their home and need to continue to pay $2,500 a month for their rental. They also only have $685,000 in investments from the investment of the original $40,000 they didn’t use for a down payment.

We also need to take into consideration no other costs were considered. Owning a home over 42 years is going to require at least 1 new roof, a hot water heater, HVAC replaced, an updated kitchen and a number of other costs. Even if this costs $100,000 the home owner is still miles ahead of the renter.

OTHER THINGS TO CONSIDER

Nothing is going to be this cookie cutter. Every situation is different. If you have a job that may require you to move a lot, you could be better off renting. Realtor fees, moving and storage expenses can really chew into gains. Older homes can come with a lot of additional expenses that can add up over time.

Are you handy? If you don’t know how to turn a wrench home ownership can get very expensive. Easy fixes like changing out a sink faucet may only cost a DIY guy $30, if you call a plumber or handy man you could be looking at $200. Again, these things can really add up.

With all things considered, buying is still going to be the right financial choice 99% of the time.

Comment below and let me know your thoughts.

15 Tips to Get Started Investing in Real Estate

Two years ago my wife and I purchased our first investment property, and it’s been the best financial decision of our lives! With just $18,000 down we now have a property that brings in an extra $700 every month!

There are many advantages to owning real estate as a long-term investment vehicle. For one, it can provide additional cash flow every month which could lead to an early retirement much faster and easier than traditional investments. Your tenants will pay down your mortgage, you’ll get TONS of tax advantages, and real estate almost always appreciates in value making it a great hedge against inflation.

Our rental property costs us about $1,000 every month here in NJ where property taxes are very high, but it rents for $1,700 to wonderful military tenants. Our rental is also right next to a little stream, so we have flood insurance of $700 a year, but that stream makes the property that much more desirable.

If you’re just starting out and wondering were to begin here are some tips I wish I could've told my younger self. Just follow these tips to get started investing in real estate.

Do Your Research
There are a ton of wonderful websites out there to learn about real estate investing. I highly recommend Biggerpockets.com, a wonderful online investment community focused on real estate. It’s important to learn as much as you can because investing in real estate is not as simple as buying a home off Zillow and renting it every month.
Don't Suffer From Analysis Paralysis
If there’s anything I’m guilty of it’s analysis paralysis. I researched long term real estate investing for probably 2 years before we finally pulled the trigger. You will get to the point where you know everything you need to get started. I would keep reviewing the same things over and over and over. I ran hypothetical numbers hundreds of times. In the end I suppose it all worked out, but at some point you need to get off the internet and start making things happen.
The 1% Rule (buy right and never lose)
The 1% rule is very simple, but a great way to judge an opportunity at a glance. Essentially it just says that you need to get 1% of the purchase price in rent each month in order to make the purchase worth considering. Now this will depend on your location, as property tax will play a huge roll in this. For example here in NJ you should really shoot for 1.15%. So if you're looking at a $150,000 house you should be able to get $1,500 a month in rent, or $1,725 here in NJ.
Know Your True Expenses (Cap ex, property manager, vacancies, damages)
This comes with doing your research, but there’s more costs to owning an investment property then just the mortgage, taxes and insurance. You’ll have to put money aside for vacancies, damages, property management and capital expenditures. This will vary depending on your location, the property, and your skill level. For example, we self manage the property so we don’t need to worry about 10% for a property manager. We have military tenants who are very respectful so damages are minimal and vacancies are typically short. And for capital expenditures the property has newer HVAC, roof, oven and Dryer, so we’re limited on what major items will need to be replaced. These are all things you’ll need to consider depending on the property and your skill level.
Reach Out To The Township and Ask Questions
There are plenty of things I didn’t know when I started, but I learned along the way. If you call the township housing division and let them know you plan on buying a rental property and just want to know what forms or inspections you need to do they’ll let you know. We needed a fire inspection, a landlord form, a sale inspection, and HVAC inspection. It sounds like a lot but it really wasn’t bad and we just took care of everything along the way.
Let Everyone Know You’re In The Market (look for off market deals)
Our first property ended up being an off market purchase from a friend of the family. I let everyone know I wanted to buy an investment property. This person caught word and let me know they were getting ready to retire and move out of state. The home was in great shape but just needed some little updates. Because it’s off market the seller saves on realtor fees and doesn’t need to worry about trying to sell. The home appraised for $140,000 but because we were willing to work around the sellers schedule, buy as-is and save them on real estate agent fees we got it for $97,500.
Avoid a Fixer Upper at First
Fixer uppers are high risk high reward. They can open a whole new can of worms that you might not be ready for. They can be very tempting but until you really learn the ropes it’s best to avoid them at first or it might end up being your first and last real estate investment.
Know How To Turn a Wrench
Real estate investing is not for everyone. For those of us that know how to turn a wrench and do a little DIY work it’s almost a no brainier. In 2 years I’ve had to replace 1 toilet flapper, unclog 1 drain, and clean 1 dryer vent. Before we rented the place out I also refinished the hardwood floors on the top floor, painted everything, fixed a whole in the wall, and power washed the patio. This was a little sweat equity that could have cost a pretty penny if I had to hire someone.
Treat it Like a Business and Build a Team
Find a plumber, and electrician, a handy man, a mortgage broker, an accountant. Save this info, have these people on file and treat them almost like employees. You need a go to team you can trust.
A Penny Saved is a Penny Earned
We removed carpet on the third floor and refinished the hardwood, this left a noticeable gap between the trim and the floor. Instead of going to the hardware store for all new trim we went to a local habit for humanity and were lucky enough to score trim for pennies on the dollar. Every penny you save is a penny you earn. Look for auctions in the area, jump on sales, use coupons. Fun Fact, you can buy coupons for Lowes Home Improvement off email and get them delivered via email in seconds. You spend $2 for the coupon but could save $100 on your purchase!
Don’t Fall In Love With the Property
This is tricky, you want to love the property but not be IN LOVE with the property. You need to remember it’s an investment. If you’re going to put money into it you need to be getting money out of it. Don’t do something because you love the home and think it’ll be nice. If it’s not going to add value you shouldn’t do it.
Put As Little Down As Possible (Maximize your ROI)
The trick with long term real estate investing is leverage. The less you can put down the greater your return on investment to your initial down payment. Most lenders are going to want 20-25% down but you can find some that’ll give you 15% with a slightly higher rate (don’t worry you’re going to get rid of that higher rate anyway).
Buy a Place With Equity, Refinance and Repeat
There is a strategy called BRRRR which stands for Buy, Rehab, Rent, Refi, Repeat. You should look for a place that isn’t a fixer upper, but maybe needs some little touch-ups. You want to get it for less then market value, and low enough that when you fix it up a little you’ve added enough value that you can hopefully do a cash out refi that will eliminate PMI if you put down less then 20%. This will also give you back your down payment to roll into the next property, and let you get the lowest interest rate possible.
Get a Good Accountant
My real estate accountant cost me $1,000 this year, but he saved me probably $3,500 worth of taxes. Did you know that your investment property can be depreciated over 27 years, but everything inside of it can be depreciated in the first 5 years (oven, fridge, sink, toilets, etc.) yea neither did I… hence the good accountant.
GO FOR IT!
I often read online the hardest part is just getting the courage to go for it. You’d be amazed how true this is. If you’ve done your research, looked at all the numbers and it makes sense, you’ll just need to go for it at some point. Was I scared? You bet! Was it stressful at times? Not as much as you’d think. Would I do it again? I plan on buying 1 every year for the next 10 years and retiring in my mid 40's. You could too if you follow these tips to get started investing in real estate
Bonus: Military tenants are the BEST!Not everyone lives near a military base, but if you do, consider targeting these renters. The pros outweigh the cons by a huge margin. They have good jobs that you don't have to worry about them losing. They are respectful of the property. You can get their CO's information and if they don't pay or are being disrespectful, you let the CO know and they'll handle it (never an issue). They get a housing stipend to pay rent. And there's always military personal looking for off base housing. The only real con is that they can get orders and leave with very little notice. This is hardly an issue as there's likely a new military family ready to take their place in your home ASAP. Consider partly furnishing your home for the military tenants, it gives you a leg up so they don't have to worry about buying a big couch or dining table

I always recommend starting with a single family home. They are easy to rent, easiest to get loans for, and easiest to work on. Get your feet wet, treat it as a business and grow. Before you know it you could be buying a small 12 unit apartment building, quitting your job, hiring a property manager, retiring and traveling the world living of your real estate investments.